Business context and reporting period
Stewart Information Services Corporation (NYSE: STC) filed its Form 10-K for the fiscal year ended December 31, 2019. The company provides title insurance and real-estate transaction services through direct operations and independent agencies, plus mortgage-related search and valuation services. Its reportable segments are title and ancillary services and corporate.
Financial performance and position
| Metric | FY 2019 | FY 2018 |
|---|---|---|
| Total revenue | $1,940.0 million | $1,907.7 million |
| Income before taxes and noncontrolling interests | $117.0 million | $72.5 million |
| Net income attributable to Stewart | $78.6 million | $47.5 million |
| Diluted earnings per share | $3.31 | $2.01 |
| Cash provided by operations | $166.4 million | $84.2 million |
| Total assets | $1,592.8 million | $1,372.9 million |
| Notes payable | $110.6 million | $108.0 million |
| Stockholders’ equity | $753.8 million | $679.8 million |
- Operating revenues were $1,877.5 million, slightly below $1,887.9 million in 2018. The reported 2019 total includes $42.8 million of net realized and unrealized gains, including a $50 million merger termination fee.
- Title loss provisions rose to $84.4 million from $71.5 million; the provision rate increased to 4.6% of title operating revenues from 3.9%. Estimated title loss reserves were $459.1 million at year-end.
- Cash and investments totaled $999.2 million, including statutory reserves; management reported $476.1 million net of statutory reserves. Cash and cash equivalents were $330.6 million.
- Operating cash flow increased by $82.2 million, primarily reflecting higher net income, including the termination fee, partly offset by higher claims payments. Investing cash flow was $7.0 million provided; financing cash flow was $37.8 million used.
- The $150 million unsecured credit facility had $98.9 million drawn and $48.6 million available, net of an unused letter of credit. The company reported compliance with its covenants and a 13.6% debt-to-equity ratio excluding Section 1031 notes. Guaranty’s statutory liquidity ratio was 116%.
- Annual common dividends were $1.20 per share, or $28.3 million in total. There were no open-market repurchases; approximately 12,500 shares were repurchased for tax withholding on vested awards.
Material changes versus prior period
- Revenue rose 2%, while pretax income increased to $117.0 million from $72.5 million and net income attributable to Stewart rose to $78.6 million from $47.5 million. The $50 million FNF termination fee was a material, nonrecurring contributor to 2019 results.
- Direct title revenues increased 4% to $869.5 million, reflecting stronger domestic non-commercial activity and improved international results; domestic commercial direct revenue fell 6%. Agency revenues declined, and ancillary services revenue fell 26% to $37.5 million.
- Mortgage originations increased 24% and refinance share rose to 42% from 30.1%, amid lower average mortgage rates. Closed title orders increased 8%, including a 66% increase in refinance closings.
- Title-segment pretax income was nearly flat at $108.5 million versus $108.3 million. Ancillary services and corporate reported $8.5 million pretax income versus a $35.8 million loss, primarily reflecting the merger termination fee.
- During the fourth quarter, the company reported essentially break-even net income attributable to Stewart (a $31,000 loss), versus $11.4 million income a year earlier. Fourth-quarter pretax income was $3.8 million versus $19.7 million. The quarter included impairment, reorganization severance, office closure, settlement, escrow-loss and other charges.
- Cash and cash equivalents increased to $330.6 million from $192.1 million; total stockholders’ equity increased to $753.8 million from $679.8 million. Adoption of the new lease standard added operating lease assets and liabilities to the balance sheet.
Outlook, commentary, risks and contingencies
- Management said it began repositioning initiatives in the fourth quarter to improve long-term performance and resilience, including leadership and organizational changes, office closures, targeted investment in selected direct markets and commercial and non-title businesses, and efforts to improve execution and margins. No company-specific earnings or revenue guidance was provided.
- Management expects operating cash flows and available underwriter funds, subject to regulatory restrictions, to be sufficient for operations and claims. It cautioned that additional borrowing or equity funding may be needed in some circumstances.
- Fannie Mae forecasts cited in the filing anticipated a 6% decline in total mortgage originations in 2020, while projecting 30-year mortgage rates of 3.7%, new home sales growth of 6%, and existing home sales growth of 2%. These are external forecasts, not company guidance.
- Key risks include cyclical real-estate and mortgage activity, interest-rate and financing changes, competition, title-loss reserve uncertainty, agency fraud or escrow defalcations, regulatory constraints, technology and cybersecurity threats, investment-market losses, and dependence on regulated-subsidiary dividends.
- Title-loss estimates are a significant judgment area and were identified as a critical audit matter. Management estimated that a 100-basis-point change in the loss provisioning percentage would affect 2019 provision and pretax results by approximately $18.4 million.
- Statutory reserve funds are not available for general use or current claims payments. Guaranty paid no dividend to the parent in 2019; extraordinary dividends require regulatory pre-approval. The company disclosed approximately $1.3 billion of third-party escrow funds and $1.1 billion of Section 1031 exchange funds held off balance sheet, with corresponding contingent obligations.
- The filing reports ordinary-course litigation and regulatory inquiries; management did not expect their resolution to materially affect consolidated results. The company recorded 2019 impairment charges on title plants, buildings, intangible assets, equity-method investments and other assets; goodwill was not impaired.
Most important facts for investors to verify
- How much of 2019’s earnings and cash generation reflects the one-time $50 million FNF termination fee, and what are underlying results excluding it and other unusual charges?
- Whether higher title-loss provisions and the $459.1 million reserve remain adequate as claims develop, particularly for prior policy years and non-Canadian international operations.
- Whether the corporate repositioning, office closures and targeted investments improve margins without disrupting revenue or creating further impairment or restructuring costs.
- How statutory restrictions, claims needs and Guaranty’s liquidity position affect the parent’s access to cash, dividends and debt service.
- Whether 2020 mortgage-market conditions and refinance volumes track the external forecasts cited in the filing, and how they affect title and ancillary-services revenue.