Stewart Information Services Corporation — Q1 2012 10-Q
Reporting period: Three months ended March 31, 2012; filed May 3, 2012. Interim financial statements are unaudited. Amounts below are in millions of dollars unless noted.
Financial performance
| Metric | Q1 2012 | Q1 2011 |
|---|---|---|
| Revenue | $385.0 | $366.4 |
| Loss before taxes and noncontrolling interests | $(7.9) | $(6.4) |
| Net loss attributable to Stewart | $(12.2) | $(10.3) |
| Loss per share, basic and diluted | $(0.63) | $(0.55) |
| Cash used by operating activities | $(20.3) | $(38.6) |
- Revenue increased 5.1%. Title revenue was $352.5 million, up from $335.0 million; real estate information (REI) revenue was $32.5 million, up from $31.4 million.
- Title segment pretax loss improved to $16.8 million from $23.3 million. REI pretax earnings fell to $8.9 million from $16.9 million; its pretax margin declined to 27.4% from 53.9%.
- Title losses were 9.0% of title revenue, versus 9.4% a year earlier. Employee costs rose 8.7% and other operating expenses rose 9.7%.
- Cash and cash equivalents, including statutory reserve funds, totaled $115.1 million at March 31, versus $140.8 million at year-end 2011. Total assets were $1.137 billion; stockholders’ equity was $457.6 million.
- Total debt was $72.0 million, including $64.6 million of convertible senior notes due October 2014. No borrowings were outstanding under the $10 million bank line; notes payable were $7.4 million.
- Cash and investments, including statutory-restricted amounts, totaled $615.9 million. Of this, $421.1 million funded statutory premium reserves; unrestricted cash and investments were $152.1 million. The parent company held $7.2 million in cash.
Changes and management commentary
- Operating cash outflow improved by $18.3 million year over year, primarily from better receivables collection timing and lower payments on claims and accrued liabilities. Cash still declined $25.7 million during the quarter.
- Direct title revenue rose 8.9%, supported by higher order volume and refinancing activity, while commercial and other large-transaction revenue fell 17.1%. Agency revenue increased 2.4%.
- REI revenue growth reflected more lower-margin servicing-support and REO work, less higher-margin loan-modification work, and the PMH Financial acquisition. Management cited startup costs for awarded contracts as an additional margin pressure.
- Management expects modest REI revenue growth during 2012 and REI pretax margins to stabilize at 25%–30% over the next several quarters. It cited personnel changes and standardized compensation as potential future benefits, without quantifying them.
- Management said it believes liquidity is sufficient for ongoing operations and claims payments, subject to regulatory restrictions on insurer funds. It may seek debt or equity funding if needed; such funding could be unavailable, less favorable, or dilutive.
Risks, contingencies, and unusual items
- Title-loss reserves were $502.2 million, including $129.3 million for known claims and $372.9 million for claims expected to be reported later. Management noted that a 100-basis-point change in the title-loss provision rate would change quarterly pretax results by approximately $3.5 million. Actual claims may differ materially from estimates.
- A California jury returned a verdict of approximately $6.5 million against a title subsidiary in the Van Buren matter; judgment had not yet been entered. The company planned post-trial motions and, if necessary, an appeal. Management did not expect the ultimate outcome to materially affect consolidated results.
- Other proceedings include title-insurance antitrust class actions and California claims related to loans arranged through Hurst Financial. Outcomes are uncertain; management said it is vigorously defending the matters and believes reserves are adequate.
- Guaranty’s dividends to its parent are subject to legal and regulatory limits. Although the filing cited a maximum 2012 dividend of $74.4 million subject to approval, that amount does not establish actual capacity to pay.
- Management identified housing and mortgage activity, interest rates and financing availability, claims severity, agency fraud or defalcations, regulation, litigation, and access to financing as key risks. It reported no material change in risk factors or market-risk disclosures during the quarter.
Investor verification points
- Track whether the title segment’s improving loss experience continues and whether reserves remain adequate as large claims are resolved.
- Verify that REI margins stabilize within management’s 25%–30% outlook as new contracts ramp up.
- Assess cash generation against claims payments, statutory reserve requirements, and the parent’s limited direct cash balance.
- Monitor the Van Buren verdict and other litigation for judgments, settlements, appeals, or reserve changes.
- Review debt repayment capacity and the October 2014 convertible-note maturity, including any financing or dilution implications.