Stewart Information Services Corporation — Q1 2017 Form 10-Q
Business context and reporting period. The unaudited quarter ended March 31, 2017, compared with the quarter ended March 31, 2016. Stewart provides title insurance and settlement services through direct and agency operations, alongside a smaller ancillary services and corporate segment. Results are seasonal; the first quarter is typically the least active for title insurance.
Financial results and key metrics
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Total revenues, including investment income and gains | $443.0 million | $438.2 million |
| Operating revenues | $438.1 million | $432.7 million |
| Income (loss) before taxes and noncontrolling interests | $5.9 million | $(15.7) million |
| Net income (loss) attributable to Stewart | $4.1 million | $(11.2) million |
| Diluted earnings (loss) per share | $0.17 | $(0.48) |
| Cash used by operating activities | $19.2 million | $31.8 million |
| Cash and cash equivalents, quarter-end | $122.6 million | $108.8 million |
- Title segment revenue was $425.8 million, up 3.0%; pretax income was $12.3 million versus a $0.6 million loss, with a 2.9% pretax margin versus negative 0.1%.
- Ancillary services and corporate revenue fell 30.2% to $17.2 million; pretax loss narrowed to $6.4 million from $15.1 million.
- Direct title revenue increased 0.8% to $187.4 million; agency title revenue rose to $233.3 million from $224.6 million. Ancillary services revenue declined to $17.3 million from $22.0 million.
- Title loss provisions were $20.7 million, or 4.9% of title revenues, versus $23.1 million, or 5.6%. Estimated title loss reserves were $460.1 million at quarter-end.
- Quarter-end notes payable were $100.8 million, down from $106.8 million at December 31, 2016. Debt-to-equity was approximately 15.5%, below the company’s stated 20% internal limit. The $125 million line of credit had $92.9 million drawn and $29.6 million available, net of a letter of credit.
- Cash and investments totaled $801.6 million, including statutory reserves; the company reported $298.2 million net of statutory reserves. These reserves are subject to insurance requirements and are not available for other purposes. Stockholders’ equity was $649.1 million; book value per share was $27.38.
Material changes versus the prior comparable period
- Stewart returned to profitability, supported by stronger title-segment results and lower employee, other operating, title-loss, and depreciation and amortization expenses.
- Q1 2017 included a $1.7 million income tax benefit related to previously unrecognized research and development tax credits. Excluding this discrete benefit, management reported a 36.7% effective tax rate.
- Q1 2016 included charges related to exiting delinquent loan servicing, a life-insurance settlement, and litigation, as well as investment and other gains/losses. These items make the year-over-year profit comparison less directly comparable.
- Closed orders declined 6.3% overall: refinance orders fell 21.7%, while purchase orders increased 3.9%. Centralized title revenue declined 17.6%, primarily due to lower refinancing activity; international revenue increased 20.7%, mainly on growth in Canada.
- Cash decreased $63.2 million during Q1 2017, versus a $70.3 million decrease in Q1 2016. Financing cash use increased year over year, including debt repayments and dividends.
Outlook, commentary, risks and contingencies
- No specific earnings or revenue guidance was provided. Management said it expected operating cash flows and cash available from underwriters, subject to regulatory restrictions, to fund operations and claims. It also cited cost management, outsourcing, automation, and systems consolidation as margin-improvement priorities.
- Management noted a favorable housing backdrop in Q1, but lower refinance lending and orders. Results remain sensitive to real estate activity, mortgage rates and availability, home prices, transaction mix, and seasonality.
- Title reserves involve significant estimation uncertainty; ultimate claim payments may be materially higher or lower than current estimates. The company also identified risks from large claims, escrow losses, agency conduct, regulation, litigation, and access to financing.
- Insurance regulations restrict use of statutory reserves and transfers from the principal underwriter. The company reported a 106% statutory liquidity ratio for that underwriter at December 31, 2016, against an internal objective of at least 100%; the filing does not provide a March 31, 2017 ratio.
- The company was party to ordinary-course title claims and class actions, as well as premium-tax and other regulatory matters. Management believed reserves were adequate and did not expect these matters to materially affect consolidated results or financial condition. Unused letters of credit totaled $5.6 million; management did not expect payments under its guarantees.
- Management reported no material changes to market-risk disclosures or risk factors and stated that disclosure controls and internal control over financial reporting were effective at March 31, 2017.
Important facts for investors to verify
- Whether title loss reserves remain adequate as claims develop, particularly the $386.6 million estimate for incurred-but-not-reported losses.
- Whether purchase activity and international growth can offset continued weakness in refinancing and ancillary-services revenue.
- How much reported profitability depends on the one-time $1.7 million tax benefit and whether cost reductions are sustainable.
- The availability of insurer-held liquidity to the parent, given statutory restrictions, and subsequent line-of-credit usage and debt repayment.
- Developments in title-industry litigation, premium-tax proceedings, and other regulatory inquiries.