Stewart Information Services Corporation — 2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014. The filing also reports fourth-quarter results. Stewart provides title insurance and real-estate transaction services, mortgage services and related technology in the U.S. and international markets.
Financial performance
| Metric | 2014 | 2013 |
|---|---|---|
| Total revenue | $1,870.8 million | $1,928.0 million |
| Pretax earnings | $51.8 million | $101.1 million |
| Net earnings attributable to Stewart | $29.8 million | $63.0 million |
| Diluted EPS | $1.24 | $2.60 |
| Cash provided by operating activities | $64.0 million | $87.2 million |
| Title loss provision | $81.3 million; 4.7% of title operating revenue | $106.3 million; 5.9% |
- Revenue declined 3.0%, principally because fewer real-estate transactions closed amid weaker housing activity. Title operating revenue was $1,714.4 million, down from $1,810.0 million; mortgage services revenue rose to $132.9 million from $103.5 million, with acquisitions contributing to growth.
- Fourth-quarter revenue was $522.3 million versus $450.2 million a year earlier. Net earnings attributable to Stewart were $11.9 million versus $17.5 million; diluted EPS was $0.49 versus $0.72.
- In Q4, title segment revenue increased 6.3% year over year to $449.3 million. Title pretax earnings were $45.6 million (10.2% margin), versus $48.8 million (11.5%) a year earlier. Mortgage-services revenue was $70.1 million, and the segment reported $7.4 million pretax earnings, including a $7.4 million realized gain.
- Cash and cash equivalents were $200.6 million; total assets were $1,392.5 million and stockholders’ equity was $700.5 million at year-end. Total debt was $65.6 million, including $60.0 million drawn under a new $125.0 million unsecured facility maturing in October 2019. The company reported compliance with its credit covenants.
- Cash and investments totaled $805.7 million, including statutory-reserve amounts; management reported $309.8 million net of statutory reserves. Parent-company cash was $15.2 million. The principal underwriter’s statutory liquidity ratio was 0.96:1, below management’s 1:1 internal objective.
Changes, unusual items and capital allocation
- Pretax earnings fell by about half year over year. Management cited lower housing-market activity, higher expenses and unusual items. The filing describes $19.2 million of litigation-related matters, approximately $15.8 million for shareholder-settlement-related costs, advisory expenses, acquisition integration and cost-management projects, and $2.7 million of impairment charges; other expense disclosures categorize some of these costs differently.
- Title loss provisions declined, and the estimated title-loss liability was $495.4 million at year-end, down from $506.9 million. The 2014 estimate included adverse development and large-claim provisions, as well as a reserve reduction and recovery on a prior large claim. Management cautions that reserve estimates are uncertain; a 100-basis-point change in the loss ratio would affect pretax results by about $17.1 million.
- Stewart completed three acquisitions for $40.0 million, primarily funded by borrowings, expanding mortgage-lender services such as valuation, settlement, title and closing, and loan quality-control work. Management said the acquisitions’ estimated $5.0 million of annualized synergies had been achieved.
- The company repurchased about 685,000 shares for $22.0 million in 2014 under a $70.0 million program. It paid a $0.10-per-share annual dividend for 2014; in February 2015, it announced an increase to $1.00 annually, payable quarterly beginning in Q2 2015.
- The remaining $27.2 million of convertible notes was exchanged at maturity in October 2014 for approximately 2.1 million common shares. Long-term debt rose from $2.7 million to $60.2 million, principally reflecting the new credit-facility borrowing.
Outlook, risks and contingencies
- Management expected continued improvement in the housing market in 2015 and cited an external forecast for 5.8% growth in total home sales. This is not company earnings guidance. Management targeted at least $25.0 million of annualized structural cost savings by the end of 2015 and reported approximately $10.0 million achieved; implementation expenses were expected to continue through 2015.
- New CFPB mortgage-disclosure rules were scheduled to take effect August 1, 2015. Management warned of a potential industry-wide transaction slowdown in Q3 2015 during implementation.
- Key risks include housing and mortgage-rate cycles, refinancing volumes, title-claim severity and reserve adequacy, agency fraud or escrow defalcation, regulation and compliance, cybersecurity, investment-market losses, acquisition integration, and dependence on regulated-subsidiary dividends. A downgrade of the principal underwriter’s financial-strength ratings could also affect competitiveness.
- The company settled claims by approximately 500 plaintiffs in litigation related to loans involving Hurst Financial for $10.53 million, without admission of liability. Claims by a small number of non-settling plaintiffs remained pending; a trial involving two plaintiffs began in January 2015. A separate Credit Suisse claim concerning a resort development in Idaho remained in litigation. Management said it could not predict that matter’s outcome.
- Stewart reported approximately $1.2 billion of third-party escrow funds and $1.1 billion of Section 1031 exchange funds for which it had contingent responsibilities; these accounts are not included on the balance sheet. It also disclosed $5.3 million of unused letters of credit.
- Management concluded disclosure controls and internal control over financial reporting were effective at year-end. KPMG issued unqualified opinions on the financial statements and internal control.
Important facts for investors to verify
- Reconcile operating cash flow: the audited cash-flow statement and MD&A report $64.0 million for 2014, while the Selected Financial Data table reports $53.3 million.
- Review the detailed reconciliation of 2014 unusual charges and realized gains, including the differing cost classifications in the filing.
- Assess whether title-loss reserves adequately reflect large claims, adverse development and escrow-fraud exposure, and whether the underwriter’s liquidity ratio improves to management’s 1:1 objective.
- Track acquisition integration, the mortgage-services segment’s margins, and delivery of the $25.0 million annualized cost-savings target.
- Monitor the remaining litigation, CFPB-rule implementation effects, and the timing and funding of the increased dividend and remaining share repurchases.