Stewart Information Services Corporation — Q1 2016 Form 10-Q
Business context and period: Unaudited results for the three months ended March 31, 2016, compared with Q1 2015. Stewart provides title insurance and settlement-related services, with ancillary services and corporate operations reported as its second segment. Results are seasonal; the first quarter is typically the weakest for title activity.
Financial results
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Revenue | $438.2 million | $448.9 million |
| Loss before tax and noncontrolling interests | $15.7 million | $18.9 million |
| Net loss attributable to Stewart | $11.2 million | $12.4 million |
| Loss per diluted share | $0.48 | $0.52 |
| Cash used by operating activities | $31.8 million | $26.9 million |
| Cash used by investing activities | $40.1 million | $8.4 million |
- Revenue mix: Direct title operations generated $186.0 million versus $189.8 million; agency operations, $224.6 million versus $213.2 million; ancillary services, $22.0 million versus $40.8 million. Investment income rose to $5.1 million from $3.9 million.
- Segments: Title revenue was $413.2 million, up 1.5%, and pretax loss was $1.0 million (0.2% negative margin), versus a $11.4 million loss (2.8% negative margin). Ancillary services and corporate revenue fell to $25.1 million from $42.0 million; pretax loss widened to $14.7 million from $7.5 million.
- Claims: Title loss expense was $23.1 million versus $33.1 million; the loss ratio was 5.6% versus 8.2%. The prior-year quarter included $11.8 million of reserve strengthening. Estimated title-loss reserves were $466.4 million at March 31, including $387.3 million of IBNR reserves.
- Liquidity and debt: Cash and cash equivalents were $108.8 million, down from $179.1 million at year-end 2015. Cash and investments totaled $777.1 million, of which $285.8 million was reported as net of statutory reserves; much of the portfolio is legally restricted for insurance requirements. Notes payable were $115.9 million; debt-to-equity was 18.4%. The company had drawn $108.0 million of its $125.0 million credit line.
- Capital and distributions: Stockholders’ equity was $628.5 million; book value per share was $26.91. The company paid a $0.30-per-share dividend and reported no common-stock repurchases during the quarter.
Material changes, outlook and risks
- Revenue declined 2.4% year over year, primarily reflecting lower ancillary-services activity and weaker refinancing volumes. Closed orders fell 12.9%; closed refinance orders fell 24.1%. Agency revenue increased 5.4%, while commercial title revenue increased 3.9%.
- Management said the adverse operational effects of the CFPB integrated mortgage disclosure requirements moderated in Q1 and were not expected to materially affect operations going forward. It cited continued focus on cost control, outsourcing, automation and process consolidation. No quantified earnings or revenue guidance was provided.
- The delinquent loan-servicing exit was completed by quarter-end. Q1 exit-related charges were $2.8 million; cumulative charges were $6.4 million, within the company’s prior $5–$7 million estimate. Other Q1 items included $3.6 million of litigation expense, $2.2 million of costs related to the Class B conversion and a life-insurance settlement, and a $1.6 million net gain from changes in acquisition-related contingent consideration estimates.
- Management cited real-estate and mortgage activity, interest rates, refinancing volumes, title claims and reserve estimates, regulatory matters, litigation, technology execution, and access to financing among the principal uncertainties. It stated that liquidity was sufficient for ongoing needs, while noting that insurer dividend capacity is subject to regulatory limits and that additional financing could be needed under adverse circumstances.
- The company reported ordinary-course title-policy litigation and regulatory inquiries, including premium-tax matters, and said it believed reserves were adequate and outcomes would not materially affect results. It also had $5.6 million of unused letters of credit and stated it did not expect payments under its guarantees. Disclosure controls and internal control over financial reporting were assessed as effective; no quarterly changes to risk factors were reported.
- After quarter-end, on April 27, 2016, shareholders approved and the company completed the exchange of all 1,050,012 Class B shares for the same number of common shares plus $12.0 million in cash.
Investor facts to verify
- Whether refinancing and other order-volume trends stabilize, and whether agency and commercial growth can offset weakness in centralized title activity.
- Future title-loss reserve development and claim payments, particularly the sensitivity of the $466.4 million reserve to large claims and revised estimates.
- Cash available for parent-company needs after statutory reserve requirements, and the credit-line balance, covenants and repayment terms.
- Progress and remaining costs from the delinquent loan-servicing exit, alongside the effect of restructuring and efficiency initiatives on margins.
- The final accounting and ongoing implications of the post-quarter Class B share exchange and $12.0 million cash payment.