Business context and reporting period
Stewart Information Services Corporation filed this Form 10-K for the fiscal year ended December 31, 2016, including fourth-quarter results. The company provides title insurance, closing and settlement services, and mortgage-related appraisal and valuation services in the U.S. and internationally. In 2016, it changed its reporting segments to title and ancillary services and corporate; prior-year segment figures were recast for comparison.
Financial performance and position
| Metric | 2016 | 2015 |
|---|---|---|
| Revenue | $2,006.6 million | $2,033.9 million |
| Income (loss) before tax and noncontrolling interests | $88.0 million | $9.7 million |
| Net income (loss) attributable to Stewart | $55.5 million | $(6.2) million |
| Diluted earnings (loss) per share | $1.85 | $(0.26) |
| Cash provided by operating activities | $123.0 million | $80.5 million |
| Notes payable | $106.8 million | $102.4 million |
| Total stockholders’ equity | $648.8 million | $637.1 million |
Fourth-quarter revenue was $525.8 million versus $497.4 million a year earlier. Net income attributable to Stewart was $16.7 million, or $0.71 per diluted share, compared with $2.6 million, or $0.11 per diluted share.
Title segment revenue was $1,922.4 million and pretax income was $139.1 million in 2016, versus $1,904.3 million and $119.0 million in 2015. Ancillary services and corporate revenue fell to $84.2 million from $129.6 million; its pretax loss narrowed to $51.1 million from $109.3 million. Fourth-quarter title pretax margin was 7.4%, versus 4.9% in the prior-year quarter; the ancillary services and corporate segment recorded a $15.1 million pretax loss.
Title loss provisions were $91.1 million, or 4.8% of title operating revenue, versus $106.3 million, or 5.6%, in 2015. The estimated title-loss reserve remained $462.6 million at year-end. Total assets were $1,341.7 million. Cash and investments, including amounts subject to statutory requirements, totaled $839.5 million; management reported $340.2 million net of statutory reserves.
Changes, outlook, and material matters
- Annual revenue declined about 1.3%, while title operating revenue increased and the ancillary business contracted following the exit from delinquent loan servicing, completed in the first quarter of 2016. Employee costs fell 8.2%, reflecting cost management and lower headcount.
- Operating cash flow rose $42.5 million, primarily due to higher net income and lower claims payments. Claims paid were $92.0 million, down from $123.6 million in 2015, which included a $22.5 million payment on a large prior-year claim.
- Management said it expects operating cash flows and funds available from underwriters, subject to regulatory restrictions, to fund operations and claims. It cited external forecasts for modest 2017 home-sales growth and higher mortgage rates; these are industry forecasts, not company earnings guidance. No specific company financial guidance is provided.
- The $35.7 million 2015 goodwill impairment did not recur; the company reported no goodwill impairment in 2016. 2016 also included $3.3 million of losses on sales of ancillary businesses and $3.4 million of office closure and early lease termination costs. Fourth-quarter results included $5.4 million of net realized losses and $2.4 million of tax benefits from previously unrecognized tax credits.
- The company exited delinquent loan servicing and sold loan file review, quality control, and government services operations. It paid $12.0 million and issued common shares to retire all outstanding Class B shares; the cash payment is treated similarly to a dividend in EPS calculations. Common dividends were $1.20 per share for 2016.
- Debt included $92.9 million outstanding on a $125.0 million unsecured credit facility maturing in October 2019, with $29.6 million available after the outstanding letter of credit. The company reported compliance with credit covenants and a 16.5% debt-to-equity ratio. Management stated liquidity was sufficient, while noting that future borrowing or equity financing might be needed in adverse circumstances.
- Material risks include real-estate and mortgage-cycle exposure, uncertain and long-tailed title claims, interest-rate and investment risk, regulation, agency fraud or defalcation, cybersecurity, and dependence on regulated-subsidiary dividends. Customer escrow and Section 1031 exchange funds create contingent liabilities of approximately $1.0 billion and $1.1 billion, respectively; these funds are not included on the balance sheet. The filing reports litigation and regulatory matters, but management did not expect them to have a material adverse effect.
- Management and the auditor reported effective internal control over financial reporting; the auditor issued an unqualified opinion on the financial statements. The filing also notes 2016 settlement agreements with activist shareholders.
Important facts for investors to verify
- Review the assumptions and sensitivity of the $462.6 million title-loss reserve, including the effect of large claims and adverse development in prior policy years.
- Assess how continued declines in ancillary-services revenue and the completed business exits affect the segment’s remaining costs and path to profitability.
- Confirm the availability of parent-company liquidity: most cash and investments are held by regulated underwriters, and distributions are subject to statutory and regulatory limits.
- Monitor credit-facility utilization, covenant compliance, interest-rate exposure, and the effect of higher rates on both borrowing costs and investment values.
- Review the terms and status of litigation, regulatory inquiries, activist-shareholder agreements, and contingent obligations associated with escrow and exchange funds.