Stewart Information Services Corporation — Q1 2019 Form 10-Q
Business and period: Stewart provides title insurance and real-estate settlement services through direct and independent-agency operations, with ancillary search and valuation services. This unaudited filing covers the three months ended March 31, 2019; comparisons are with Q1 2018 unless stated otherwise. Amounts below are in U.S. dollars.
Financial results and liquidity
| Metric | Q1 2019 | Q1 2018 / comparator |
|---|---|---|
| Operating revenues | $390.4 million | $434.2 million; down 10% |
| Total revenues, including investment income and gains/losses | $398.5 million | $437.2 million |
| Loss before taxes and noncontrolling interests | $7.2 million | $3.3 million loss |
| Net loss attributable to Stewart | $6.8 million; $0.29 per diluted share | $3.8 million; $0.16 per diluted share |
| Cash used by operating activities | $39.9 million | $28.9 million |
| Cash and cash equivalents | $164.5 million | $192.1 million at Dec. 31, 2018 |
| Notes payable | $105.0 million | $108.0 million at Dec. 31, 2018 |
- Title revenues declined as direct and agency activity weakened. Direct title revenue fell 13%; gross independent-agency revenue fell 9%. Total closed orders declined 15%, including commercial orders down 35%, purchase orders down 9%, and refinance orders down 11%.
- Title loss expense was $15.7 million, or 4.2% of title operating revenues, versus $19.0 million, or 4.5%, a year earlier. Employee costs fell 7%; other operating expenses fell 4%.
- Investing activities provided $24.6 million, while financing activities used $13.6 million. The company paid $7.1 million in common dividends, or $0.30 per share.
- Cash and investments totaled $815.6 million, including statutory reserves; management reported $311.9 million net of those reserves. The company had $98.9 million drawn on its line of credit and $48.6 million available, net of an unused letter of credit. Debt-to-equity, excluding Section 1031 notes, was approximately 15.4%.
- Statutory funds are not generally available for other purposes, and much of the company’s cash and investments is held by regulated insurance subsidiaries. Parent-company cash was $15.5 million.
Material changes and unusual items
- Q1 2019 included $3.5 million of net unrealized equity-investment gains, $2.0 million of FNF merger advisory expenses, $0.8 million of litigation expense relating to a 2013 lender-services acquisition, and $0.7 million of office-closure costs. Q1 2018 included $2.3 million of strategic-alternatives advisory expenses and $2.2 million of unrealized equity-investment losses.
- Excluding specified fair-value changes and office closures, the title segment recorded a $3.3 million pretax loss, compared with $7.3 million pretax income in Q1 2018. Ancillary-services and corporate revenue increased 19%; its pretax loss improved to $6.8 million from $8.4 million.
- The company adopted lease accounting Topic 842 on January 1, 2019, recognizing approximately $99.8 million of operating lease assets and liabilities at adoption. At March 31, operating lease assets were $103.9 million and liabilities were $115.3 million. Adoption had no impact on Q1 earnings or cash flows.
- Other comprehensive income was $13.8 million, mainly reflecting improved investment fair values and foreign-currency translation; this contrasted with a $9.8 million other comprehensive loss in Q1 2018.
Outlook, commentary, and risks
- Management expects 2019 title loss expense of 4.0%–4.2% of title revenues. It cited favorable claims experience and continued cost-management, automation, and systems-consolidation efforts to improve margins.
- Management reported weaker housing and mortgage activity: existing home sales declined about 7% year over year, and first-quarter one-to-four-family lending declined 11%. The company cited an industry forecast for home sales to stabilize and lending to rise 1% in 2019; this is not company guidance.
- The proposed merger with Fidelity National Financial remained subject to regulatory review. FNF extended the merger end date by three months, to June 18, 2019, and the parties were responding to an FTC Second Request and pursuing required approvals, including a new New York insurance application after a prior application was disapproved.
- Title reserves involve significant estimation uncertainty; ultimate claims may differ materially from recorded reserves. Cash flows, revenue, and margins are also exposed to real-estate and mortgage volumes, interest rates, commercial transactions, agency remittance rates, regulation, and seasonality.
- Management said it believed liquidity was sufficient for ongoing operations and anticipated obligations, but noted possible need for financing if available funds prove insufficient. Ordinary-course litigation and regulatory matters were not expected by the company to have a material adverse effect. No changes to the annual-report risk factors were reported.
Key facts for investors to verify
- Merger status, required antitrust and insurance approvals, and any further changes to the June 18, 2019 end date.
- Whether title order volumes and real-estate activity recover, and whether cost reductions offset lower revenues.
- Claims development and adequacy of the $454.1 million title-loss reserve, including payments on existing claims.
- Cash truly available after statutory restrictions, regulated-subsidiary distribution limits, and line-of-credit availability.
- How much reported performance depends on investment fair-value movements and merger, litigation, or office-closure costs.