Stewart Information Services Corporation (NYSE: STC) — 2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020. The filing also reports fourth-quarter results. Stewart provides title insurance and real-estate transaction services, alongside appraisal, search, valuation, and online closing services.
Financial performance
| Metric | 2020 | 2019 | Change / context |
|---|---|---|---|
| Total revenues | $2.288 billion | $1.940 billion | Up 18%; operating revenues were $2.272 billion, up 21% from $1.877 billion. |
| Income before taxes and noncontrolling interests | $218.5 million | $117.0 million | Up 87%. |
| Net income attributable to Stewart | $154.9 million | $78.6 million | Up 97%. |
| Diluted EPS | $6.22 | $3.31 | Up 88%. |
| Cash from operating activities | $275.8 million | $166.4 million | Improved by $109.4 million. |
| Cash used in investing activities | $231.4 million | Cash provided: $7.0 million | 2020 included $199.5 million of net cash paid for acquisitions. |
| Cash provided by / (used in) financing activities | $54.3 million | $(37.8) million | Included $109.0 million of net proceeds from a common-stock issuance. |
| Cash and cash equivalents | $432.7 million | $330.6 million | At year-end. |
| Total debt | $101.8 million | $110.6 million | Includes $98.9 million outstanding on the line of credit. |
Fourth-quarter results
Q4 2020 net income attributable to Stewart was $59.7 million, or $2.22 per diluted share, compared with break-even net income in Q4 2019. Adjusted net income was $56.4 million, or $2.09 per diluted share, up 174% from $20.6 million, or $0.87 per diluted share. Pretax income before noncontrolling interests was $83.9 million versus $3.8 million.
- Title segment Q4 revenue was $690.2 million, up 36%; pretax income was $94.9 million and pretax margin was 13.6%, versus 4.0% a year earlier.
- Ancillary services and corporate Q4 revenue was $38.0 million, largely reflecting acquisitions; the segment recorded a pretax loss of $11.0 million.
Margins, segments, and other financial measures
- Title segment full-year revenue was $2.205 billion, versus $1.857 billion; pretax income rose to $246.9 million from $108.5 million.
- Ancillary services and corporate segment revenue was $83.1 million, roughly flat with 2019’s $83.0 million; it swung to a $28.4 million pretax loss from $8.5 million of pretax income. The 2019 result included a $50.0 million fee from termination of the proposed FNF merger.
- The title loss ratio increased to 5.3% from 4.6%. Title-loss provisions were $115.2 million, and the year-end estimated title-loss reserve was $496.3 million, including $427.4 million of IBNR reserves.
- Investment income declined to $18.6 million from $19.8 million. Net realized and unrealized investment losses were $1.7 million in 2020, compared with gains of $42.8 million in 2019, which included the FNF termination fee.
- Dividends were $1.20 per common share for the year. The company issued shares for net proceeds of $109.0 million.
Liquidity, debt, and capital resources
- Cash and investments totaled approximately $1.1 billion, or $621.2 million net of statutory reserves. The parent company held $3.6 million in cash at year-end; the company relies substantially on regulated subsidiaries for parent-level funding.
- Approximately $516.6 million of cash and investments was held for statutory reserves and was not available for other purposes, including current claims payments.
- The amended credit facility was extended to May 2025 and increased to $200 million. At year-end, $98.9 million was drawn and $98.6 million remained available, net of an unused letter of credit. Stewart reported compliance with its debt covenants.
- Management stated that operating cash flows and cash available from underwriters, subject to regulatory restrictions, were expected to fund operations and claims. Guaranty paid a $30 million dividend to its parent in 2020; dividends above the statutory threshold require regulatory approval.
Material changes, outlook, and risks
- Acquisitions: Stewart acquired title offices and appraisal-management and online-notarization businesses. These acquisitions contributed $109.2 million of 2020 revenue and $17.3 million of pretax income and were described as immediately accretive. Net cash paid for acquisitions was $199.5 million.
- Market conditions: Record-low mortgage rates supported a 67% increase in industry mortgage originations and a 125% increase in refinancing lending in 2020. Stewart’s closed refinance orders increased 123%, while purchase orders rose 8%; commercial closed orders declined 8%.
- 2021 outlook: Management cited external industry forecasts—not company guidance—of housing activity remaining strong but moderating. Forecasts included total lending down 21%, refinancing originations down 39%, purchase originations up 8%, and new and existing home sales up 10% and 7%, respectively. Stewart expected its 2021 title loss ratio to be comparable to 2020’s 5.3%.
- COVID-19: The company remained operational as title insurance was deemed essential in the U.S. Management warned that ongoing or worsening pandemic effects could disrupt transactions, operations, investment values, and future results; the ultimate impact was not clear.
- Key risks: Exposure to real-estate and mortgage cycles, refinancing volumes and interest rates; uncertainty in title-loss estimates and large claims; independent-agent fraud or defalcations; acquisition integration and goodwill impairment; cybersecurity and escrow-fund security; regulatory constraints and restricted subsidiary dividends; investment-market risk; and competition and technology disruption.
- Contingencies: Stewart reported approximately $1.4 billion of third-party real-estate escrow funds and $1.5 billion of Section 1031 exchange proceeds held off balance sheet, with related contingent obligations. Management did not expect ordinary-course litigation or disclosed regulatory matters to materially affect results.
- Unusual items: 2019 included the $50.0 million FNF merger termination fee and other significant charges, including impairments, reorganization severance, and office-closure costs. Q4 2020 included $4.4 million of pretax net realized and unrealized gains. Title-loss estimation was identified as a critical audit matter; the auditors issued unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Review the title-loss reserve assumptions, the $496.3 million reserve balance, and the impact of adverse claims development; a 100-basis-point change in the loss provisioning percentage was estimated to change 2020 pretax results by approximately $21.9 million.
- Assess how 2021 refinancing moderation and purchase-market activity may affect transaction volumes, revenue mix, and margins.
- Check acquisition performance, integration costs, and whether acquired businesses sustain the reported contribution and accretion.
- Distinguish statutory-reserve assets and subsidiary-held liquidity from cash available to the parent; verify dividend capacity and credit-facility availability.
- Evaluate the comparability of 2020 earnings with 2019, including the FNF termination fee and other unusual items, and review the basis of reported adjusted Q4 earnings.