Stewart Information Services Corporation — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018; unaudited. Amounts are in U.S. dollars unless noted.
Business context and results
Stewart provides title insurance and real-estate settlement services through its title segment, alongside ancillary services and corporate operations. Results are exposed to housing and mortgage activity, commercial transactions, claims experience, interest rates, and foreign exchange.
For the quarter, operating revenues were $499.2 million, nearly unchanged from $498.0 million a year earlier. Including investment income and net investment and other gains, total revenues were $507.6 million, up 1.2% from $501.6 million.
Key financial metrics
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Income before tax and noncontrolling interests | $24.8 million | $18.6 million | $52.8 million | $57.6 million |
| Net income attributable to Stewart | $17.6 million | $10.9 million | $36.2 million | $33.6 million |
| Diluted EPS attributable to Stewart | $0.74 | $0.46 | $1.53 | $1.43 |
| Operating cash flow | Not separately provided for quarter | Not separately provided for quarter | $43.7 million | $48.0 million |
Q3 title-segment pretax income was $36.0 million versus $24.6 million, with a reported pretax margin of 7.3% versus 5.0%. Ancillary services and corporate reported a pretax loss of $11.2 million, compared with a $6.0 million loss.
For the first nine months, operating cash flow was $43.7 million; investing activities used $4.1 million and financing activities used $38.8 million. Cash and cash equivalents were $149.7 million at September 30, 2018. Total cash and investments were $835.7 million, of which $339.2 million was net of statutory reserves; statutory funds are not generally available for other purposes.
Notes payable totaled $106.4 million. The line-of-credit balance was $98.9 million, with $23.6 million remaining available, net of an unused letter of credit. The company reported a 15.7% debt-to-equity ratio excluding Section 1031 notes. Stockholders’ equity was $676.7 million; book value per share was $28.50.
Changes versus comparable periods
- Q3 Stewart-attributable net income rose 60% and diluted EPS increased from $0.46 to $0.74. Pretax income rose to $24.8 million from $18.6 million.
- Q3 title-segment pretax income improved mainly on lower title operating expenses and higher investment income and gains. Title losses and related claims expense declined 15% to $21.5 million; the loss ratio fell to 4.4% from 5.2%.
- Direct title revenue fell 2% in Q3 to $213.1 million: non-commercial activity weakened, while commercial revenue increased. Agency revenue rose 2%; international title revenue fell 12%, primarily due to lower Canadian volumes.
- Opened and closed orders each declined 13% in Q3. Refinance closed orders fell 27%, purchase closed orders 5%, and commercial closed orders 19% year over year.
- Nine-month total revenues increased modestly to $1.438 billion, but pretax income declined to $52.8 million from $57.6 million. Net income attributable to Stewart nonetheless increased, aided in part by lower income tax expense.
- Nine-month other comprehensive loss was $17.5 million, versus income of $10.8 million in 2017, reflecting unrealized investment losses and foreign-currency translation losses.
Outlook, notable items, and risks
- Management expected the merger with Fidelity National Financial (FNF) to close in Q1 or Q2 2019, subject to outstanding regulatory approvals and customary closing conditions. Stockholders approved the merger on September 5, 2018. Consideration is subject to election proration and potential reductions tied to required divestitures.
- The merger agreement provides for a $33 million Stewart termination fee in specified circumstances and a $50 million reverse termination fee payable by FNF in specified regulatory-failure circumstances. Third-party advisory expenses related to the strategic alternatives review and merger were $6.8 million in Q3 and $9.7 million for the first nine months.
- Management expected the 2018 title-loss provisioning rate to be 4.0%–4.5%. It cited lower claims experience and a favorable prior-year reserve adjustment; ultimate claims may differ materially from estimates.
- Management described housing conditions as challenging: existing-home sales declined about 2% year over year in Q3, while higher interest rates and reduced refinance activity weighed on lending. Fannie Mae industry data cited by Stewart projected total lending to fall 10% in Q4 versus Q3, primarily due to seasonal declines in purchase lending.
- The company said it expected adequate liquidity for operations and claims, but statutory investment and cash requirements, insurance regulation, and restrictions on subsidiary distributions constrain access to some funds. It may need additional borrowing or equity funding if available cash proves insufficient.
- Other risks include housing and mortgage-market changes, competition, technology execution, acquisition integration, litigation and regulatory matters, fraud, and merger delay or failure. Management said ordinary-course legal and regulatory matters were adequately reserved and were not expected to materially affect results.
- Adoption of the new lease standard was expected January 1, 2019; management estimated $90–$100 million of undiscounted future minimum lease payments and expected a material increase in reported assets and liabilities, with an insignificant income-statement and cash-flow effect.
Important facts for investors to verify
- Progress and conditions for the FNF merger, including regulatory approvals, timing, election proration, divestiture-related consideration adjustments, and transaction costs.
- Whether order trends—especially refinancing, purchase, commercial, and Canadian activity—improve or continue to weaken.
- Claims development, reserve adequacy, and whether the expected 4.0%–4.5% provisioning range is achieved.
- Liquidity available after statutory restrictions, the underwriter’s regulatory position, and remaining borrowing capacity.
- Effects of higher interest rates and foreign-exchange movements on investment valuations, comprehensive income, and operating results.