Stewart Information Services Corporation — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016. Amounts below are in millions of dollars unless stated otherwise. The company primarily provides title insurance and related services, with ancillary services and corporate operations. Beginning in 2016, it reorganized its reporting into these two segments.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $553.2 | $555.7 | $1,480.9 | $1,536.5 |
| Pretax income (loss) | $38.8 | $(5.6) | $65.0 | $6.6 |
| Net income (loss) attributable to Stewart | $26.4 | $(13.5) | $38.8 | $(8.8) |
| Diluted EPS attributable to Stewart | $1.12 | $(0.58) | $1.13 | $(0.37) |
| Operating cash flow | — | — | $64.0 | $65.6 |
Q3 consolidated pretax margin was approximately 7.0%; title-segment pretax margin was 9.5%, versus 9.3% a year earlier. Title-segment revenue was $529.8 million, up about 1.0% year over year. Ancillary services and corporate revenue was $23.4 million, down from $28.4 million; the segment recorded an $11.5 million pretax loss.
Nine-month revenue decreased about 3.6%, while Stewart moved from a prior-year attributable loss to profit. Q3 revenue was nearly flat, but earnings improved substantially. The comparison is significantly affected by Q3 2015 charges, including a $35.0 million goodwill impairment and other costs. Employee costs and other operating expenses declined, reflecting the cost-management program and lower staffing; the nine-month title-loss ratio also improved to 4.8% from 5.5%.
Balance sheet, liquidity, and cash flow
- At September 30, 2016, cash and cash equivalents were $161.8 million; available-for-sale investments were $643.7 million; and short-term investments were $40.1 million. Total cash and investments were $845.5 million, of which $356.5 million was net of statutory reserves. Statutorily reserved funds are not available for general use.
- Notes payable were $131.1 million, compared with $102.4 million at December 31, 2015. Debt-to-equity was 19.9%. The $125 million credit line had $118.0 million outstanding and $4.5 million available, net of an unused $2.5 million letter of credit.
- Stockholders’ equity was $658.4 million. Book value per share was $28.17, versus $27.30 at year-end 2015.
- For the first nine months, operating cash flow was $64.0 million; investing activities used $60.3 million and financing activities used $22.8 million. Cash declined $17.3 million to $161.8 million.
- Estimated title-loss reserves totaled $460.7 million, including $74.8 million for known claims and $385.9 million for incurred-but-not-reported claims.
Changes, outlook, and risks
- Management said it is focused on improving title closing effectiveness and customer experience, pursuing selected geographic growth, and continuing cost savings, outsourcing, automation, and systems consolidation. It expressed optimism about prospects and preparations for 2017, while cautioning that competition is increasing. No quantified earnings or revenue guidance was provided.
- Management cited housing-market activity and mortgage refinancing as important drivers. Q3 existing home sales rose about 1% year over year; refinancing orders closed declined 1.7% in Q3 and 17.0% over nine months. The strategic exit from delinquent loan servicing, completed in Q1 2016, reduced ancillary revenue.
- The company paid $12.0 million cash and issued 1,050,012 common shares to retire all outstanding Class B shares. It paid $0.90 per common share in dividends during the first nine months.
- A $4.6 million discrete tax benefit was recorded in Q3, principally relating to prior-year tax return adjustments and research and development credits. Nine-month 2016 investment and other gains included gains on investments and contingent consideration, partly offset by $1.3 million of office-closure costs.
- Title reserves involve significant estimation uncertainty. Claims, regulatory inquiries, premium-tax matters, and industry class actions remain ongoing; the company said it had adequate reserves and did not expect these matters to materially affect its financial condition or results. It also cited real-estate and mortgage-market changes, competition, regulation, technology execution, reserve adequacy, and access to financing as risks.
- Guaranty’s statutory liquidity ratio was 108%, against an internal objective of at least 100%. Insurance-subsidiary funds and dividends to the parent are subject to regulatory restrictions; Guaranty paid no dividend to the parent in the first nine months of 2016.
Important facts for investors to verify
- How much of the earnings improvement reflects sustainable operating progress versus the unusual Q3 2015 impairment and other comparison-period charges, and the 2016 discrete tax benefit.
- Whether title volumes, agency remittance rates, and margins hold up amid lower refinancing activity and competitive pressure.
- Whether the $460.7 million title-loss reserve remains adequate as claims develop, and the effect of reserve assumptions on future earnings and cash flows.
- Availability of parent-level liquidity given statutory restrictions, limited remaining credit-line capacity, debt levels, and the absence of subsidiary dividends in 2016 to date.
- Progress and costs of the company’s planned technology, outsourcing, automation, and cost-saving initiatives, as well as the resolution of legal and regulatory matters.