Stewart Information Services Corporation — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; comparison is with Q1 2019. Unaudited consolidated results. Stewart provides title insurance and real-estate transaction services, with ancillary search and valuation businesses.
Financial performance
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Operating revenues | $445.8 million | $390.4 million |
| Total revenues including investment income and realized/unrealized gains or losses | $439.9 million | $398.5 million |
| Income (loss) before taxes and noncontrolling interests | $9.3 million | $(7.2) million |
| Net income (loss) attributable to Stewart | $5.2 million | $(6.8) million |
| Diluted EPS | $0.22 | $(0.29) |
| Cash used by operating activities | $11.4 million | $39.9 million |
Operating revenues increased 14%. Direct title revenue rose 23% to $198.3 million, while agency title revenue rose 13% to $242.0 million. Ancillary services revenue declined 62% to $5.5 million, primarily because of lower search-service orders from several customers. Higher refinancing activity contributed to growth: opened refinance orders increased 177% and closed refinance orders increased 140% year over year.
Title-segment pretax income was $14.8 million versus a $0.4 million loss; its pretax margin was 3.4% versus (0.1)%. Consolidated results included $11.1 million of net realized and unrealized investment losses, mainly $10.6 million of unrealized losses on equity securities, compared with $3.4 million of net gains in Q1 2019. Management said title-segment pretax income, excluding those investment effects and specified non-operating expenses, would have been $25.9 million (5.8% margin), versus a $3.3 million loss (negative 0.9% margin) in Q1 2019.
Employee costs increased 5%, but fell to 30.4% of operating revenues from 33.1%. Other operating expenses declined 7%; title-loss expense increased 19% in line with higher revenues, while the loss ratio remained 4.2% in both periods. Investment income increased 10% to $5.2 million.
Financial position, cash flow and liquidity
- At March 31, cash and cash equivalents were $293.6 million; investments in debt and equity securities were $612.4 million. Total cash and investments, including statutory-reserve amounts, were $925.2 million; management reported $409.5 million net of statutory reserves.
- Statutory reserves included $497.5 million of securities and $18.3 million of cash, which are not available for other purposes. Statutory and regulatory limits also constrain certain transfers and dividends from regulated subsidiaries.
- Notes payable were $102.6 million, down from $110.6 million at year-end. The line-of-credit balance was $98.9 million, with $48.6 million available after an unused letter of credit. Debt-to-equity, excluding Section 1031 notes, was approximately 13.9%; management cited an internal 20% limit.
- Stockholders’ equity attributable to Stewart was $731.8 million, down from $747.3 million at year-end. Book value per share was $30.90 versus $31.52.
- Operating cash use improved from $39.9 million to $11.4 million, principally reflecting earnings, better receivable collections and lower claim payments, partly offset by payments of accrued liabilities. Investing activities used $3.3 million; financing activities used $18.8 million. Cash declined $37.0 million to $293.6 million.
- Quarterly dividends were $0.30 per share. Stewart reported a $30.0 million dividend from its regulated title insurer to the parent during the quarter.
Outlook, management commentary and risks
- COVID-19 had no significant effect on Q1 operations, according to management, but the pandemic disrupted real-estate activity and operations. Stewart continued to operate as an essential business and used remote notarization, electronic signatures and virtual underwriting.
- Management said Q2 and Q3 would be challenging. New orders opened in early Q2 were below March levels, although orders in the first three weeks of April were slightly above the comparable 2019 period. Management cited uncertainty around transaction volumes, unemployment, tighter lending standards and constrained capital; it did not provide company-specific earnings or revenue guidance.
- Management said cash and investments, borrowing capacity and the balance sheet provided financial flexibility, and expected operating cash flows and available underwriter funds to support operations and claims. However, much of the cash and investments is held by regulated subsidiaries and subject to statutory restrictions.
- Key risks include the duration and severity of COVID-19, lower real-estate transaction volumes, investment-value declines, foreign-exchange movements, title and escrow claims, regulatory constraints, and possible impairment of goodwill or other long-lived assets. The company stated it could not determine the pandemic’s eventual financial impact.
- Estimated title losses were $447.6 million at quarter-end, including $387.4 million of incurred-but-not-reported reserves. Reserve estimates involve significant judgment and actual ultimate claims may differ materially. The company reported ordinary-course litigation and regulatory inquiries, but did not expect them to materially affect results or financial condition.
- Q1 2020 included adverse equity-security fair-value movements; Q1 2019 included $2.0 million of advisory costs related to the terminated FNF merger, $0.8 million of litigation expense and $0.7 million of office-closure costs. The company adopted the CECL credit-loss standard on January 1, 2020 with no material impact.
Most important facts for investors to verify
- Whether Q2 and subsequent order volumes, closings and fee per file recover or deteriorate as pandemic conditions evolve.
- How much reported liquidity is actually deployable after statutory reserves, subsidiary restrictions and operating needs.
- Whether investment losses, including equity-security volatility and bond credit-spread movements, persist or affect capital and earnings.
- Whether title-loss reserves remain adequate as claims develop, especially large claims, escrow fraud and prior-policy-year exposures.
- Whether ancillary-services revenue weakness and planned technology and cost initiatives affect segment profitability and cash generation.