Business context and reporting period
Stewart Information Services Corporation filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2015. The company provides title insurance and related services, mortgage services, and corporate support. Comparisons below are to the corresponding 2014 periods unless noted.
Financial performance
Amounts are in millions of dollars, except per-share data and percentages.
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $556.6 | $508.1 | $1,537.3 | $1,348.5 |
| Pretax income (loss) | $(5.6) | $42.8 | $6.6 | $35.8 |
| Net income (loss) attributable to Stewart | $(13.5) | $23.7 | $(8.8) | $17.9 |
| Diluted earnings (loss) per share | $(0.58) | $0.97 | $(0.37) | $0.76 |
| Cash provided by operating activities | Not separately presented | Not separately presented | $65.6 | $15.3 |
Q3 revenue grew 9.5%; nine-month revenue grew 14.0%. Q3 net loss attributable to Stewart included $35.9 million of non-cash goodwill and intangible impairment charges, equal to $1.31 per diluted share per management, plus approximately $5.7 million of non-operating costs and $1.5 million of litigation charges. The impairment charge was associated with mortgage services; management said it would not affect liquidity, cash flows, debt-covenant compliance, or future operations. Income tax expense was $4.9 million in Q3 despite the pretax loss, partly because some goodwill impairment was not tax-deductible.
Segments: Q3 title revenue was $503.5 million, up 14.3%, with pretax income of $78.7 million and a 15.6% margin (versus 17.0% a year earlier; the prior-year quarter benefited from a large title-loss recovery). Mortgage services revenue was $49.9 million, down 20.6%; its $43.4 million pretax loss included the impairment and exit costs. Excluding those charges, the segment’s pretax loss was $6.9 million. Corporate pretax loss was $40.8 million.
Balance sheet and liquidity at September 30, 2015: Cash and cash equivalents were $211.3 million; total cash and investments, including statutory reserves, were $786.7 million, or $306.6 million net of statutory reserves. Notes payable were $82.1 million, versus $71.2 million at December 31, 2014; stockholders’ equity was $644.1 million, versus $700.5 million. Management reported a debt-to-equity ratio of about 13%, below its 20% internal limit. The $125 million credit line had $78 million outstanding. Operating cash flow of $65.6 million exceeded the prior-year $15.3 million, while financing used $35.1 million. Title-loss reserves totaled $478.6 million.
Material changes versus the prior comparable period
- Title operations benefited from higher residential purchase and refinance activity and increased agency revenue. Q3 closed orders rose 11.8%; refinance closings increased 38.1% and purchase closings 9.2%.
- Mortgage services faced falling demand and pricing pressure in delinquent loan servicing. Revenue and profitability weakened, prompting the exit of that business.
- Title-loss expense rose to $25.9 million in Q3 from $9.1 million. The company attributed much of the increase to prior-year reserve reductions and higher provisions for existing large claims. The nine-month title-loss ratio was 5.5%, versus 4.0%; excluding specified reserve adjustments, management reported 6.1% versus 6.9%.
- Goodwill and other intangible assets fell following a $35.9 million impairment. The mortgage-services goodwill impairment was based on a preliminary valuation; management expected to complete its review in Q4 and could adjust the charge.
- Other comprehensive loss was $13.9 million for the nine months, including $8.5 million of foreign-currency translation losses and $5.3 million of net unrealized investment losses.
Outlook, commentary, and risks
- Management planned to complete the delinquent loan servicing exit by the end of Q1 2016. Total exit costs were estimated at $5 million to $7 million; $0.6 million had been recorded in Q3, with most expected in Q4 2015 and Q1 2016. Management expected mortgage services to report pretax losses in both quarters during the wind-down.
- For 2016, management expected mortgage-services annualized revenue of $120 million to $150 million and upper-single-digit EBITDA margins. These are forward-looking estimates, not guarantees.
- The CFPB’s integrated mortgage disclosure rule took effect October 3, 2015. Management warned that implementation could cause mortgage-volume declines or processing and closing delays, particularly initially.
- Statutory premium reserves were approximately $480.1 million, with an additional $20.1 million of statutory reserve cash. These funds are not available for other purposes. The principal underwriter’s statutory liquidity ratio was 0.89:1 as of June 30, below the company’s internal 1:1 objective; distributions to the parent are subject to regulatory limits.
- Management stated that liquidity was sufficient for ongoing needs, but noted potential reliance on borrowing or equity financing if cash flows and regulated-subsidiary funds prove insufficient. Title-loss estimates are inherently uncertain and could differ materially from reserves.
- The company reported adequate reserves and no expected material adverse effect from the Credit Suisse/Tamarack title-policy litigation; settlement discussions were underway, with a final agreement expected in coming months. Other claims, class actions, and regulatory inquiries were also described as adequately reserved.
- The company had paid $11.3 million in dividends during the first nine months and repurchased $27.8 million of common stock. It expected about $3.2 million to remain to complete its $70 million capital-return program, including the anticipated Q4 dividend.
Important facts for investors to verify
- Whether the final Q4 goodwill valuation changes the $35.9 million impairment, and whether mortgage-services results and exit costs track management’s estimates.
- Progress and costs of the delinquent loan servicing wind-down, including the projected completion by the end of Q1 2016 and 2016 revenue and margin outlook.
- Developments in title-loss reserves and large claims, particularly the adequacy of the $478.6 million reserve and the outcome of the Credit Suisse matter.
- Underwriter liquidity and regulatory capacity to upstream cash, including progress toward the 1:1 internal statutory liquidity objective.
- Effects of the CFPB disclosure-rule implementation on transaction volumes, processing times, and operating costs.