Stewart Information Services Corporation — FY 2018 Form 10-K
Reporting period: Year ended December 31, 2018; the filing also reports fourth-quarter results. Stewart provides title insurance and real-estate settlement services, with a smaller ancillary services and corporate segment. Amounts are in U.S. dollars.
Financial performance and position
- FY revenue: $1.908 billion, down 2.5% from $1.956 billion in 2017. Operating revenues were $1.888 billion, down 2.4%. Lower residential, refinancing and international activity outweighed growth in domestic commercial title revenue.
- FY earnings: Pretax income before noncontrolling interests was $72.5 million, down from $75.1 million. Net income attributable to Stewart was $47.5 million versus $48.7 million; diluted EPS was $2.01 versus $2.06. The effective tax rate was 22.1%, compared with 23.5%.
- Fourth quarter: Revenue was $469.9 million versus $525.7 million. Net income attributable to Stewart was $11.4 million ($0.48 per diluted share), compared with $15.1 million ($0.64). Pretax income before noncontrolling interests increased to $19.7 million from $17.5 million. Title segment pretax income was $29.5 million, up 9%, and its pretax margin was 6.4% versus 5.2%.
- Segments and operating trends: FY title segment revenue was $1.856 billion versus $1.899 billion, while pretax income rose to $108.3 million from $103.4 million. Ancillary services and corporate reported a $35.8 million pretax loss, wider than the $28.3 million loss in 2017. Total closed orders fell 13%; closed refinance orders fell 24% and purchase orders fell 7%.
- Cash flow: Cash provided by operations was $84.2 million, down from $108.1 million. Investing activities provided $9.4 million, compared with $103.0 million used in 2017; financing activities used $47.8 million. Cash and cash equivalents ended the year at $192.1 million.
- Liquidity and debt: Cash and investments totaled $851.0 million, of which $351.1 million was net of statutory reserves. Much of the balance is held in regulated insurance subsidiaries and is subject to restrictions. Notes payable totaled $108.0 million, including $98.9 million drawn on a $150 million credit facility; $48.6 million remained available after a letter of credit. Debt-to-equity excluding Section 1031 notes was 15.5%. Stewart paid $1.20 per share in dividends for the year.
- Claims and reserves: Title loss provisions were $71.5 million, or 3.9% of title operating revenue, versus $96.5 million and 5.1% in 2017. Estimated title losses declined to $461.6 million from $481.0 million. Management said reserves were above the actuarial midpoint; estimates remain sensitive to claim development and large losses.
Changes, outlook and material matters
- Higher mortgage rates and weaker refinancing activity pressured volumes: 2018 mortgage originations declined to $1.626 trillion from $1.826 trillion, and refinancing’s share fell to 28.4% from 35.6%. Stewart cited an industry forecast for 2019 of modest purchase-lending growth offset by further refinancing declines, with home-sales volumes expected to remain similar to 2018. These are industry forecasts, not company guidance; the filing provides no specific company earnings or revenue guidance.
- Management cited cost controls, automation, process centralization and technology investment as priorities for improving margins. Average employee count declined 7% in 2018, and year-end headcount was approximately 5,400.
- FY results included $12.7 million of merger and strategic-review advisory expenses, $1.2 million of litigation expense relating to a 2013 lender-services acquisition, and $1.4 million of title-segment office closure and severance charges. A new accounting standard also moved equity-security fair-value changes into earnings; FY investment and other gains were $0.1 million, including $2.2 million of unrealized equity-security losses.
- Pending FNF merger: The proposed transaction offered elections for $50 cash, 1.2850 FNF shares, or $25 cash plus 0.6425 FNF shares per Stewart share, subject to proration and possible reductions for required divestitures. Stewart shareholder approval had been obtained, but regulatory clearances remained outstanding. The NYDFS disapproved FNF’s application to acquire control of Stewart’s New York-domiciled underwriter on January 31, 2019; the parties said they were seeking to address the regulator’s concerns. The agreement’s stated end date was March 18, 2019, subject to extensions. Failure to close could trigger costs, restrictions and, in specified circumstances, a $33 million Stewart termination fee.
- Other principal risks include real-estate and mortgage-market cyclicality, adverse title-loss development, regulatory constraints on insurer dividends, cybersecurity and escrow-fund fraud, and interest-rate and credit risk in the investment portfolio. A 100-basis-point rate increase was estimated to reduce debt-security fair value by about $24.4 million.
- Adoption of the new lease accounting standard on January 1, 2019 was expected to increase reported assets and liabilities by approximately $100 million, with no expected 2019 income-statement or cash-flow impact. KPMG issued unqualified opinions on the financial statements and internal control over financial reporting.
Investor verification checklist
- Check subsequent filings for the merger’s regulatory status, any extensions or termination, required divestitures, and final consideration terms.
- Assess whether lower refinancing and transaction volumes persist and whether purchase and commercial activity offset those declines.
- Review title-loss reserve development, large claims, escrow losses and actual claim payments against the $461.6 million reserve.
- Distinguish total cash and investments from amounts available to the parent, given statutory reserve and dividend restrictions; monitor Guaranty’s 109% liquidity ratio and credit-facility covenants.
- Track merger-related and other unusual costs, equity-security valuation effects, and the balance-sheet impact of lease accounting adoption.