Stewart Information Services Corporation — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021. Unaudited interim results; comparisons are with the corresponding 2020 periods. Stewart provides title insurance and settlement services, alongside ancillary services.
Key financial results
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Operating revenues | $802.0 million | $506.8 million | $1,483.4 million | $952.5 million |
| Total revenues, including investment income and realized/unrealized gains | $818.8 million | $516.1 million | $1,507.4 million | $956.0 million |
| Income before taxes and noncontrolling interests | $129.5 million | $49.0 million | $203.5 million | $58.3 million |
| Net income attributable to Stewart | $94.8 million | $34.1 million | $149.1 million | $39.3 million |
| Diluted EPS | $3.50 | $1.44 | $5.51 | $1.66 |
| Cash from operating activities | — | $150.5 million | $50.1 million |
Q2 operating revenue grew 58% year over year, while Stewart-attributable net income rose 178%. Management reported adjusted Q2 net income of $86.0 million, or $3.17 per diluted share, excluding net realized and unrealized gains/losses and severance expenses; it compared with $32.5 million, or $1.37 per share, on the same basis in Q2 2020. Q2 2021 results included $11.7 million of pretax net gains, including $7.3 million from building sales and $3.7 million of unrealized equity-security gains. Q2 2020 included $5.1 million of such gains and $2.8 million of severance expense.
Business performance and material changes
- Title segment: Q2 revenue was $753.1 million versus $504.4 million; pretax income was $125.7 million versus $54.8 million. Pretax margin improved to 16.7% from 10.9%. Direct title revenue increased 62%, and gross agency revenue increased 41%. Purchase orders and commercial activity strengthened; refinance orders opened fell 18% in Q2.
- Ancillary services and corporate: Q2 revenue was $65.7 million versus $11.7 million, largely reflecting acquisitions. The segment reported pretax income of $3.8 million, compared with a $5.8 million loss. Acquired businesses contributed revenue, while the legacy valuation-services business faced lower home-equity volume.
- Recent acquisitions included Cloudvirga, a digital customer engagement platform, title companies Thomas Title & Escrow and Prima Title, and ancillary-services businesses. Goodwill increased to $550.0 million from $431.5 million at year-end, principally due to acquisitions.
- Q2 title-loss expense rose 56% to $33.6 million; the loss ratio increased to 4.5% from 4.3%. Estimated title-loss reserves were $525.0 million at June 30, including $458.0 million for incurred-but-not-reported claims.
Cash, debt and liquidity
At June 30, cash and cash equivalents were $400.5 million, investments in debt and equity securities were $711.4 million, notes payable were $127.7 million, and stockholders’ equity was $1,136.1 million. Cash and investments totaled $1.13 billion including statutory reserves, or $595.2 million net of those reserves. Statutory reserve funds are not available for general use or current claim payments. Cash from operations increased to $150.5 million for the first half, mainly on higher earnings and lower claim payments; investing activities used $173.7 million, including $131.9 million for acquisitions.
The line of credit commitment was increased from $200 million to $350 million. At quarter-end, $123.9 million was outstanding and $223.6 million was available, net of an unused letter of credit. Management reported an approximately 11% debt-to-equity ratio excluding Section 1031 notes. Stewart paid $17.7 million in dividends during the first half ($0.66 per share). Management said liquidity and capital resources were sufficient for ongoing needs, while noting that future funding needs could require borrowing or equity financing.
Outlook, risks and other notable matters
- No company-specific earnings guidance was provided. Management described a strong housing market but noted low inventory and supply constraints. Industry forecasts cited in the filing anticipated lower mortgage originations in Q3 and Q4 2021 versus 2020 as refinancing normalizes, and modestly lower home sales in Q3.
- Management emphasized cost management, automation, technology investment, and acquisition-led growth. Employees had not fully returned to workplaces amid COVID-19; the company was developing a safe-return plan.
- Key sensitivities include real-estate activity, mortgage rates and financing availability, home prices, purchase/refinance mix, agency remittance rates, claims and reserve estimates, regulation, technology execution, acquisitions, and COVID-19 effects. Title-loss reserves involve substantial estimation uncertainty.
- Ordinary-course litigation, regulatory inquiries and guarantees were disclosed; management did not expect them to have a material adverse effect and said reserves were adequate. Unused letters of credit totaled $4.9 million. No material changes to the risk factors in the 2020 Form 10-K were reported.
Important facts for investors to verify
- Whether elevated housing demand and purchase activity persist as refinancing volumes normalize and supply constraints affect sales.
- Acquisition performance, integration costs, and the final purchase-accounting values, which were preliminary.
- Future title-loss experience and reserve adequacy, particularly against the $458.0 million IBNR estimate.
- How much reported earnings reflects recurring operations versus investment gains and the building-sale gain.
- Availability of subsidiary cash for parent-company needs, given statutory reserve requirements and insurance-regulatory limits.