Stewart Information Services Corporation — Q2 2011 Form 10-Q
Business context and reporting period
Unaudited results cover the three and six months ended June 30, 2011, compared with the same 2010 periods. Stewart provides title insurance and related services and real estate information services (REI). Results remain exposed to housing transaction volumes, mortgage refinancing, real estate prices, and title claims.
Financial performance
Amounts below are in millions of dollars except per-share data. Balance-sheet comparisons are June 30, 2011 versus December 31, 2010.
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Revenue | $404.9 | $441.5 | $771.3 | $792.9 |
| Pretax earnings (loss), before noncontrolling interests | $5.7 | $18.0 | $(0.7) | $(11.8) |
| Net earnings (loss) attributable to Stewart | $5.9 | $9.4 | $(4.4) | $(19.5) |
| EPS attributable to Stewart, basic | $0.31 | $0.51 | $(0.23) | $(1.07) |
| Cash from (used in) operating activities | Not separately stated | Not separately stated | $(6.5) | $5.6 |
Q2 pretax margin was approximately 1.4% of revenue, versus 4.1% a year earlier; six-month pretax margin was approximately negative 0.1%, versus negative 1.5%. Title loss provisions were 9.2% of title revenue in Q2 (9.3% in Q2 2010) and 9.3% for the first half (8.7% in 2010). Management’s adjusted Q2 loss ratios, excluding specified large-claim charges, were 8.0% and 8.2%, respectively; these are non-GAAP measures.
At June 30, cash and cash equivalents were $122.7 million, short-term investments $39.8 million, and available-for-sale securities $460.2 million. The company reported aggregate cash and investments of $622.7 million, including $402.9 million funding statutory premium reserves; it identified $124.9 million of unrestricted cash and investments, excluding equity-method investments. Total debt was $71.7 million, including $65.0 million principal amount of 6% convertible notes due October 2014. A $10 million credit line was unused. Stockholders’ equity was $456.2 million; total assets were $1.129 billion.
Material changes versus prior periods
- Q2 revenue declined 8.3%; title segment revenue fell to $382.3 million from $414.9 million, while REI revenue fell 15.4% to $22.6 million. For the first half, total revenue declined 2.7%: title revenue decreased, while REI revenue rose 41.2% to $53.9 million, mainly on loan-modification demand.
- Q2 Stewart-attributable earnings declined to $5.9 million from $9.4 million, despite lower total expenses. A $3.9 million loss on a defaulted third-party loan guarantee and higher estimated reserves for certain large title claims weighed on results. First-half net loss attributable to Stewart improved from $19.5 million to $4.4 million.
- First-half operating cash flow was negative $6.5 million versus positive $5.6 million. The comparison was affected by a $50.9 million tax refund received in Q1 2010; excluding that receipt, management said operating cash flow improved $38.8 million. Q2 2011 operating cash flow was $32.1 million, over $40 million better than Q2 2010, according to management.
- Cash and cash equivalents declined from $154.5 million at year-end to $122.7 million. First-half capital expenditures increased to $11.1 million from $3.8 million.
Outlook, commentary, risks and unusual items
- Management expected improved 2011 operating results and cash flow from rate and agency-remittance increases, cost reductions, and REI operations. It anticipated further employee-cost reductions as a more efficient title production system is deployed. No numerical revenue or earnings guidance was provided.
- Management said it remained on track to return to a normal title loss ratio by the end of 2012. Claim payments fell 19.6% year over year in Q2; first-half incurred losses on known claims decreased 18.8% year over year. Title reserves totaled $498.5 million, including $136.7 million for known claims and $361.8 million for claims expected to be reported.
- In July 2011, after quarter-end, REI acquired a majority interest in PMH Financial, a provider of REO and other lender services. The filing gives no purchase price.
- The company paid $3.9 million in June on the guaranteed defaulted loan and recorded no anticipated recovery pending collateral and guarantor assessments. Q2 investment and other results also included $2.2 million of gains from sales of debt investments.
- Material uncertainties include weak housing and refinancing activity, high unemployment, title-claim reserve estimation, agency fraud or defalcations, litigation and regulatory matters, and potential limits on transferring insurer-held funds. Management said liquidity was adequate, but noted that external borrowing or equity financing might be needed if operating funds proved insufficient.
- Litigation: a jury returned a no-damages verdict for Stewart in the Citigroup Mexico title-policy matter; judgment was entered June 30, with post-judgment motions pending. Other California lending-related and multistate title-insurance antitrust class actions remained pending; management stated it did not expect these matters to materially affect results. The company reported $0.7 million of third-party debt guarantees and $3.5 million of subsidiary guarantees, principally letters of credit.
- Management reported disclosure controls as adequate and effective and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the reported improvement in operating cash flow persists after the prior-year tax-refund comparison effect and given statutory restrictions on insurer funds.
- Development of title loss reserves and claim-payment trends, especially large claims and agency defalcations; the filing notes that a 100-basis-point change in the loss provision rate would change first-half pretax results by approximately $7.1 million.
- Recovery prospects for the $3.9 million guaranteed loan payment and the financial terms and integration results of the PMH Financial acquisition.
- Whether rate increases, higher agency remittances, expense reductions, and REI demand offset weak residential transaction and refinance volumes.
- Updates on pending litigation, regulatory inquiries, and the ability to access financing if cash needs exceed available unrestricted resources.