Stewart Information Services Corporation — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. Stewart provides title insurance and settlement services through direct and agency operations, alongside search and valuation services. Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Operating revenues | $507.9 | $499.2 | $1,364.7 | $1,418.7 |
| Total revenues, including investment and other gains | $559.5 | $507.6 | $1,430.1 | $1,437.7 |
| Income before taxes and noncontrolling interests | $91.1 | $24.8 | $113.2 | $52.8 |
| Net income attributable to Stewart | $66.1 | $17.6 | $78.6 | $36.2 |
| Diluted EPS attributable to Stewart | $2.78 | $0.74 | $3.31 | $1.53 |
| Cash provided by operating activities | — | $107.3 | $43.7 |
Q3 operating revenue rose 2%, while total revenue rose 10%; the difference largely reflects a $50.0 million gain from FNF following termination of the merger agreement. The gain was partly offset by a $2.7 million impairment charge on an equity-method investment. Q3 results also included $1.0 million of merger-related advisory costs. Excluding the termination fee and merger-related expenses, the ancillary services and corporate segment had a $7.4 million pretax loss, versus a $5.6 million loss a year earlier.
For the first nine months, operating revenue declined 4%, while net income attributable to Stewart increased to $78.6 million, also reflecting the termination fee. Operating cash flow increased year over year, which management attributed primarily to higher net income including that fee, partly offset by higher claim payments and lower receivable collections.
Business drivers and material changes
- Q3 title-segment revenue increased 3% to $499.2 million; pretax income rose 37% to $49.5 million and pretax margin improved to 9.9% from 7.3%. Direct title revenue grew 15%, mainly on higher domestic non-commercial activity and commercial transaction sizes. Independent agency gross revenue fell 7%.
- Lower mortgage rates supported refinancing activity: Q3 domestic closed refinance orders increased 112%, while purchase closed orders were essentially flat. Domestic commercial fee per file increased 22% to approximately $12,600; residential fee per file declined 4% to approximately $2,200.
- Ancillary services revenue declined 35% in Q3 and 21% for the nine months, as search and valuation orders fell at several significant customers.
- Amounts retained by agencies declined 7% in Q3 and 8% for the nine months, broadly reflecting lower agency revenues. Employee costs rose 4% in Q3 but fell 3% for the nine months; average employee counts were down approximately 5% and 8%, respectively.
- Title-loss expense was $21.1 million in Q3 and $55.5 million for the nine months. The loss ratio was 4.2% in both 2019 periods, versus 4.4% and 4.3% in the comparable 2018 periods. Claim payments increased 11% for the nine months.
Liquidity, debt, and balance sheet
- At September 30, 2019, cash and cash equivalents were $321.0 million; investments in debt and equity securities were $599.2 million. Total cash and investments were $942.8 million, of which $425.6 million was net of statutory reserves. Statutory-reserve funds included $439.9 million in securities and $77.4 million in cash and are not available for other purposes.
- Notes payable were $105.4 million and stockholders’ equity was $759.9 million. The outstanding line-of-credit balance was $98.9 million, with $48.6 million available after an unused letter of credit. Excluding Section 1031 notes, the debt-to-equity ratio was approximately 13.6%, below the company’s stated internal 20% limit.
- Operating cash flow was $107.3 million; investing activities provided $53.4 million and financing activities used $33.0 million for the nine months. The company paid $21.3 million in common dividends, or $0.90 per share. Q3 dividend was $0.30 per share.
- Estimated title-loss reserves totaled $452.4 million, including $388.2 million for incurred-but-not-reported claims. Book value per share was $31.78, compared with $28.40 at December 31, 2018.
Management said it believes liquidity and capital resources are sufficient for ongoing operations, including claims payments, while noting that insurance-regulatory restrictions constrain transfers from the principal underwriter. The underwriter’s liquidity ratio was 114%; it paid no dividend to the parent during the first nine months of 2019.
Outlook, risks, and other notable items
- The company expected its 2019 title-loss expense ratio to remain approximately 4.2%. This is a specific operating expectation, not comprehensive earnings guidance.
- Management cited industry expectations for Q4 2019 mortgage originations of approximately $556 billion, up 45% year over year, including refinancing originations expected to more than double and purchase originations estimated up 11%. It expected 30-year mortgage rates to average 3.6% in Q4 2019 and full-year 2020.
- Key sensitivities include real-estate transaction volumes and home prices, mortgage rates and refinancing mix, agency remittance rates, title-loss reserve estimates and claim payments, regulatory requirements, technology execution, foreign exchange, and litigation. Title claims are inherently uncertain; ultimate payments may differ materially from current reserves.
- Stewart and Fidelity National Financial mutually terminated their merger agreement on September 9, 2019; FNF paid a $50.0 million termination fee. The company adopted lease accounting Topic 842 on January 1, 2019, recognizing operating lease assets and liabilities; management reported no impact on 2019 income or cash flows.
- Ordinary-course litigation and regulatory matters were not expected by management to have a material adverse effect; the company believes it has adequate reserves. It reported no material change to risk factors from its 2018 Form 10-K and no material change in internal control during the quarter.
Important facts for investors to verify
- How much reported earnings and operating cash flow depended on the one-time $50.0 million merger termination fee, and how the underlying title business performs without it.
- Whether the refinancing-driven order growth persists and offsets weaker agency and ancillary-services activity.
- Whether title-loss reserves remain adequate given higher nine-month claim payments and the long duration and uncertainty of claims.
- The amount of cash and investments available for general corporate use after statutory reserve requirements, and the practical availability of underwriter distributions or credit capacity.
- Progress on cost reductions, technology investments, and recovery in search and valuation orders from significant customers.