Business context and reporting period
Stewart Information Services Corporation (NYSE: STC) filed this Form 10-K for the fiscal year ended December 31, 2017. The company provides title insurance and real-estate transaction services in the U.S. and internationally, with ancillary search and valuation services. It reports two segments: title, and ancillary services and corporate.
Financial performance and condition
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Total revenue | $1,955.7 million | $2,006.6 million | Down 2.5% |
| Pretax income | $75.1 million | $88.0 million | Down 14.7% |
| Net income attributable to Stewart | $48.7 million | $55.5 million | Down 12.3% |
| Diluted EPS | $2.06 | $1.85 | Up 11.4% |
| Cash from operating activities | $108.1 million | $123.0 million | Down 12.1% |
| Total assets | $1,405.9 million | $1,341.7 million | Up 4.8% |
| Stockholders’ equity | $678.8 million | $648.8 million | Up 4.6% |
Title operating revenue was $1,878.7 million, down 1.3%; ancillary services revenue was $55.8 million, down 33.8%, primarily following business-line divestitures. Investment income was $18.9 million, essentially unchanged. The title loss provision was $96.5 million, or 5.1% of title operating revenue, versus $91.1 million and 4.8% in 2016. Estimated title-loss reserves were $481.0 million at year-end, including $411.2 million for incurred-but-not-reported claims. Management noted that a 100-basis-point change in the loss provisioning rate would change 2017 provision expense and pretax results by approximately $18.8 million.
At year-end, cash and investments totaled $883.9 million, including amounts subject to statutory reserve requirements; the company reported $378.8 million net of statutory reserves. Notes payable were $109.3 million, including $98.9 million outstanding on a $125.0 million revolving credit facility; $23.6 million remained available after a letter of credit. The company reported compliance with credit covenants. Cash and cash equivalents were $150.1 million. Annual dividends were $1.20 per share.
Fourth-quarter results
Q4 2017 revenue was $525.7 million versus $525.8 million in Q4 2016. Net income attributable to Stewart was $15.1 million ($0.64 diluted EPS), compared with $16.7 million ($0.71). Pretax income was $17.5 million versus $23.0 million. The title segment generated $514.6 million of revenue and $27.0 million pretax income, a 5.2% pretax margin; the prior-year margin was 7.4%. Ancillary services and corporate reported $11.1 million revenue and a $9.6 million pretax loss.
Material changes versus the prior comparable period
- Annual closed orders declined 14%; refinance closed orders fell 33%, while purchase orders fell 4%. Direct title revenue declined 4%, with international title revenue up 11% and commercial title revenue up 9%.
- Ancillary services revenue fell 34% year over year, largely reflecting 2016 divestitures. The segment’s pretax loss narrowed to $28.3 million from $51.1 million.
- Employee costs declined 6%, partly due to an 8% reduction in average employee count. Despite lower operating revenue, title losses increased 6%, reflecting prior-year reserve reductions in 2016 and unfavorable development in certain prior policy years.
- Operating cash flow decreased by $14.9 million. Cash used in investing activities increased to $103.9 million, including $17.4 million for acquisitions; cash used in financing was $43.6 million.
Outlook, commentary, risks and unusual items
- The board’s strategic committee was reviewing alternatives announced in November 2017, including a business combination, sale of the company, or continuation as a standalone business. No outcome or timetable was assured. Q4 included $2.9 million of related advisory expenses.
- Management said cash flows and underwriter resources, subject to regulatory restrictions, were expected to fund operations and claims. The parent company relies on subsidiary distributions; insurer dividends and transfers are regulated. Guaranty’s statutory liquidity ratio was 107%, against an internal objective of at least 100%.
- The filing gives no company-issued financial forecast. It cites Fannie Mae’s 2018 industry projections of a 4.0% average 30-year mortgage rate and increases in new and existing home sales, but cautions that industry data may not predict Stewart’s results.
- 2017 results included $3.5 million of office closure costs, $2.4 million of Title365 integration costs, $1.7 million of executive severance and retention costs, and a net $6.6 million tax benefit related to the Tax Cuts and Jobs Act. Tax accounting estimates were provisional; management expected to finalize them before filing its 2017 tax return.
- Principal risks include sensitivity to housing and mortgage activity, title-claim reserve estimation, agency defalcations and escrow fraud, competition and technology disruption, extensive insurance regulation, cybersecurity, investment-market exposure, and dependence on regulated-subsidiary dividends. The company reported approximately $1.2 billion of contingent exposure for third-party escrow funds and $1.1 billion for Section 1031 exchange funds; these balances are excluded from the consolidated balance sheet.
- The company disclosed ordinary-course litigation and title-industry class actions and said it did not expect the matters discussed to materially affect results; outcomes remain uncertain. The financial statements and internal control over financial reporting received unqualified audit opinions, and management assessed internal controls as effective.
Most important facts for investors to verify
- Progress and costs of the strategic alternatives review, including any transaction announcement or change in direction.
- Title-loss reserve adequacy and subsequent claims experience, especially prior-year adverse development and the $481.0 million reserve balance.
- Whether title volumes, agency remittance rates and margins stabilize as refinance activity falls; confirm the trend in closed orders and title-segment pretax margin.
- Liquidity available outside statutory restrictions, subsidiary dividend capacity, credit-facility refinancing by October 2019, and covenant compliance.
- Final tax effects of the 2017 tax law and the reported contingent exposures relating to escrow and Section 1031 funds.