Stewart Information Services Corporation — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017. Amounts below are in U.S. dollars; financial statement amounts are generally shown in millions unless noted.
Business context and results
Stewart provides title insurance and real-estate transaction services through direct and agency operations. It reports Title and Ancillary Services and Corporate segments. The quarter reflected strong commercial and agency revenue, offset by weaker residential and refinance activity, staff departures in some retail markets, and lower ancillary-services revenue following business divestitures.
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Total revenue | $485.5 | $489.4 | $928.5 | $927.7 |
| Operating revenue | $481.2 | $483.6 | $919.3 | $916.3 |
| Income before taxes and noncontrolling interests | $33.1 | $41.9 | $39.0 | $26.2 |
| Net income attributable to Stewart | $18.6 | $23.6 | $22.7 | $12.4 |
| Diluted EPS attributable to Stewart | $0.79 | $0.49 | $0.96 | $0.02 |
| Cash provided by operating activities | Not stated quarterly | Not stated quarterly | $16.5 | $18.5 |
Key financial metrics and period comparisons
- Revenue mix: Q2 direct title revenue declined 2% to $231.7 million; agency title revenue increased 4% to $234.4 million. Ancillary-services revenue fell 29% to $15.1 million. For the first half, total revenue was nearly flat year over year.
- Profitability: Q2 pretax income declined 21% and Stewart-attributable net income declined 21%. The Title segment reported Q2 pretax income of $39.5 million, down 23%, with an 8.4% pretax margin versus 11.0%. The 2016 quarter included a $5.4 million favorable policy-loss reserve reduction; excluding it, 2016 Title pretax income was $45.9 million and the 2017 decline was 14%.
- EPS comparability: Q2 2016 reported EPS included a $12.0 million cash payment related to the Class B share exchange in the EPS calculation. Management said Q2 2016 diluted EPS would have been $1.00 without that payment, or $0.86 also excluding the reserve reduction, versus $0.79 in Q2 2017. First-half 2016 EPS was likewise affected by the payment; reported net income attributable to Stewart was $12.4 million.
- Margins and claims: Title-loss expense was 5.2% of title revenue in Q2 2017 versus 3.7% in Q2 2016, with the difference largely reflecting the prior-year reserve benefit. First-half ratios were 5.1% and 4.6%, respectively. Agency remittance rates declined to 17.9% for Q2 and 18.0% for the first half.
- Cash flow: First-half operating cash flow was $16.5 million, down from $18.5 million, primarily due to lower receivable collections, partly offset by higher net income. Investing used $43.7 million, including $18.1 million for acquisitions; financing used $13.7 million. Cash and cash equivalents declined $38.6 million from year-end to $147.2 million.
- Liquidity and debt: Cash and investments totaled $825.1 million, including statutory reserves; management reported $322.7 million net of statutory reserves. Notes payable were $116.3 million and stockholders’ equity $666.4 million. Debt-to-equity was 17.5%, below the company’s stated internal 20% limit. Of the $125 million credit line, $108.9 million was outstanding and $13.6 million remained available net of a letter of credit.
- Other balance-sheet data: Estimated title-loss liabilities were $465.3 million, including $395.5 million of incurred-but-not-reported reserves. Book value per share was $28.07, up from $27.69 at December 31, 2016.
Management commentary, outlook, and risks
- Management attributed lower residential revenue partly to departures of retail managers and staff, particularly in Texas, Arizona, and the Pacific Northwest, which affected customer relationships. It said it was recruiting experienced personnel and refining margin-improvement initiatives to stabilize and rebuild affected markets.
- Closed orders fell 13% in Q2; refinance orders declined 36%, while purchase orders fell 3%. Management also cited lower demand for centralized refinance and default services. Domestic commercial title revenue increased 17%, and international revenue increased 8% in Q2.
- The Ancillary Services and Corporate segment’s Q2 pretax loss narrowed to $6.3 million from $9.4 million, mainly through lower employee and operating costs. Revenue declined following late-2016 divestitures of loan-file review, quality-control, and government-services businesses.
- On June 2, 2017, Stewart acquired Title365’s retail branch division in Southern California, adding more than 250 employees and 15 offices. Preliminary purchase accounting added $17.6 million of goodwill and remained subject to completion.
- No quantified earnings or revenue guidance was provided. Management expected operating cash flow and cash available from underwriters, subject to regulatory restrictions, to fund operations and claims. It said additional borrowing or equity financing might be needed for strategic goals, acquisitions, or unforeseen circumstances.
- Liquidity is affected by statutory reserve requirements and restrictions on transfers and dividends from regulated insurance subsidiaries. Statutory reserves are unavailable for current claims; the principal underwriter’s statutory liquidity ratio was 106% as of March 31, against an internal objective of at least 100%. The parent held only $3.9 million of cash at quarter-end.
- Key risks include real-estate and mortgage-market changes, lower refinancing volumes, title-loss reserve uncertainty, employee retention and rebuilding affected offices, regulatory restrictions, litigation, acquisition integration, technology execution, and access to financing. The company reported ordinary-course litigation, title-industry class actions, and premium-tax and other regulatory inquiries; it did not expect these matters to materially affect results, based on its reserves and assessment.
Important facts for investors to verify
- Whether retail staffing and customer relationships recover in the affected markets, and whether purchase revenue stabilizes.
- Whether the higher title-loss ratio persists and how actual claims experience compares with the $465.3 million reserve estimate.
- Whether refinance activity, order volumes, and agency remittance rates improve or further pressure title margins.
- Available liquidity after statutory restrictions, credit-line usage, and the ability of regulated subsidiaries to fund parent-company needs.
- Final purchase accounting and integration outcomes for Title365, alongside continued cost savings and technology investment.
- The effect of the Class B exchange payment and the 2016 reserve release when comparing reported EPS with underlying year-over-year performance.