Stewart Information Services Corporation — Q2 2015 Form 10-Q
Business context and reporting period. The unaudited quarter and six months ended June 30, 2015 cover Stewart’s title insurance and related services, mortgage services, and corporate operations. Results are seasonal and sensitive to real estate activity, mortgage rates, refinancing volumes, claims experience, and regulatory changes.
Financial performance
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue | $531.9 million | $446.8 million | $980.8 million | $840.4 million |
| Income (loss) before taxes and noncontrolling interests | $31.0 million | $11.5 million | $12.2 million | $(7.1) million |
| Net income (loss) attributable to Stewart | $17.1 million | $6.3 million | $4.7 million | $(5.8) million |
| Diluted earnings (loss) per share | $0.72 | $0.27 | $0.19 | $(0.26) |
| Operating cash flow | Not separately presented for the quarter | $5.6 million | $(31.8) million |
- Q2 revenue increased about 19% year over year; six-month revenue increased about 17%. Q2 title revenues rose 18.3%; mortgage-services operating revenue rose 29.7%, while the segment’s reported revenue rose 62.0%, reflecting acquired centralized title operations and other 2014 acquisitions.
- Q2 title-segment pretax income was $72.8 million, a 15.5% margin, versus $45.6 million and 11.2% a year earlier. Mortgage services reported a $3.3 million Q2 pretax loss; corporate reported a $38.4 million pretax loss.
- Q2 title-loss expense was $19.6 million, or 4.0% of title revenue. A net $7.3 million reduction in prior-year policy loss reserves benefited Q2; excluding net reserve adjustments, management said the title-loss ratio was 5.4%.
- At June 30, cash and cash equivalents were $164.6 million; total cash and investments were $754.1 million, including statutory reserves, and $279.8 million net of those reserves. Total assets were $1.34 billion and stockholders’ equity was $667.3 million.
- Notes payable were $82.7 million. The $125 million credit line had $78.0 million outstanding. Management reported debt-to-equity of about 12%, below its 20% internal limit. Cash declined $36.0 million in the first half to $164.6 million.
Material changes and management commentary
- Q2 results included approximately $7.7 million of cost-management and CFPB-preparation costs, plus a $4.5 million litigation charge. Q2 2014 included a $10.5 million litigation-settlement charge and approximately $3.2 million of acquisition-related costs.
- Management attributed title growth to higher refinancing and residential resale closings, and growth in domestic commercial and agency business. Closed orders increased 41.3% in Q2 year over year, including refinancing orders up 136.5% and purchase orders up 17.0%.
- Stewart is winding down legacy delinquent-loan servicing over the second half of 2015, citing declining industry volumes and pricing pressure. It expects $5–$7 million of related restructuring charges in Q3 and Q4 and expects the phased exit to weigh on mortgage-services margins.
- For 2016, management expects mortgage-services annualized revenue of $120–$140 million and EBITDA margins in the low teens. Management targeted $30 million of annualized cost savings by the end of Q3 2015 as outsourcing transitions are completed.
- Management described the housing market as improving: existing-home sales rose 8.3% year over year in Q2, and June annualized sales reached 5.5 million. It cautioned that the CFPB mortgage-disclosure rule could delay closings or reduce mortgage volumes, particularly during implementation. Its effective date was delayed from August 1 to October 3, 2015.
- Stewart increased its dividend to $1.00 per share annually, payable quarterly, and repurchased 719,756 shares for $26.4 million in Q2. It expected to return a total of $70 million to shareholders through dividends and repurchases by year-end 2015.
Liquidity, contingencies, and risks
- First-half operating cash flow improved by $37.4 million year over year, chiefly reflecting improved earnings and lower payments on accounts payable and accrued liabilities. Investing activities used $13.3 million and financing activities used $25.5 million, including $27.8 million of share repurchases and $5.7 million of dividends.
- Statutory premium-reserve investments were $474.2 million, and an additional $20.1 million of cash was designated for statutory reserves; these funds are unavailable for other purposes. The principal underwriter’s statutory liquidity ratio was 0.92:1 at March 31, 2015, below management’s internal 1:1 objective. Dividends from the regulated insurer are subject to regulatory limits and oversight.
- Estimated title losses were $481.0 million, including $111.1 million of known claims and $369.9 million of IBNR reserves. Management emphasized that ultimate claim liabilities are uncertain and may differ materially from current estimates.
- In one California matter, a June jury verdict awarded two plaintiffs approximately $4.5 million, including prejudgment interest; post-trial motions were pending. Stewart said it would defend the matter and did not expect the remaining claims to materially affect consolidated results or financial condition. A separate Credit Suisse title-policy dispute was scheduled for trial in September 2015. The filing also describes other ordinary-course litigation, class actions, and regulatory inquiries; management said reserves were adequate and did not expect material effects.
- Management said it believed liquidity was sufficient for ongoing operations, but noted potential needs to borrow or seek equity financing if cash and regulated-subsidiary distributions proved inadequate. Other identified risks include real-estate and mortgage-market changes, adverse title losses, successful execution of the servicing exit and cost savings, acquisition integration, regulation, litigation, and access to capital.
Important facts for investors to verify
- Whether the $30 million annualized savings target was achieved and whether the servicing wind-down stayed within the expected $5–$7 million charge range.
- Mortgage-services revenue, margins, and progress toward the 2016 outlook following the exit from delinquent-loan servicing.
- Changes in title-loss reserves, large claims, cash claim payments, and the adequacy of the $481.0 million estimated-loss reserve.
- Developments in the California verdict and Credit Suisse litigation, including any post-trial rulings, appeals, or settlement costs.
- Cash available after statutory restrictions, the underwriter’s liquidity ratio and dividend capacity, and funding of the remaining 2015 shareholder-return plan.
- Effects of CFPB rule implementation on transaction closings, mortgage volumes, and operating costs.