Stewart Information Services Corporation — FY 2012 Form 10-K
Business context and reporting period. Stewart provides title insurance and real-estate services, mortgage-process support, and related technology through title, mortgage services, and corporate segments. This filing covers the fiscal year ended December 31, 2012; quarterly information is unaudited. Amounts below are in U.S. dollars.
Financial performance
| Metric | FY 2012 | FY 2011 |
|---|---|---|
| Total revenue | $1,910.4 million | $1,634.9 million |
| Earnings before tax and noncontrolling interests | $89.3 million | $18.0 million |
| Net earnings attributable to Stewart | $109.2 million | $2.3 million |
| Diluted earnings per share | $4.61 | $0.12 |
| Cash from operating activities | $120.5 million | $23.4 million |
| Title loss provision / title operating revenue | 8.1% | 9.4% |
| Long-term debt | $71.2 million | $76.2 million |
| Total stockholders’ equity | $580.4 million | $463.5 million |
- Revenue rose 16.9%; title operating revenue increased 14.7% to $1.726 billion. Mortgage services revenue was $162.9 million on a consolidated basis, up 45.3%.
- Title-segment pretax earnings were $147.6 million versus $89.4 million; mortgage-services pretax earnings were $48.6 million versus $33.4 million. Corporate pretax loss was $106.9 million versus $104.8 million.
- Approximate consolidated pretax margin was 4.7% and net earnings attributable to Stewart were 5.7% of revenue. The net margin was substantially affected by a tax benefit, rather than solely by operating performance.
- At year-end, cash and investments totaled $748.8 million, including $456.6 million restricted by statutory requirements. Cash and cash equivalents were $208.5 million. The parent company held $10.7 million in cash.
- Debt included $64.7 million of 6% convertible senior notes due 2014 and $6.5 million of other notes payable. A $10 million credit line had no borrowings outstanding and was due to expire in June 2013.
Material changes and unusual items
- Stewart returned to substantial profitability as real-estate activity improved. U.S. existing-home sales increased 9.2%, new-home sales 19.9%, and mortgage originations 28.4% in 2012, according to industry data cited in the filing.
- Fourth-quarter 2012 revenue was $521.0 million and net earnings attributable to Stewart were $61.8 million, or $2.56 diluted EPS. Fourth-quarter 2011 revenue was $445.1 million and attributable earnings were $2.2 million, or $0.11 diluted EPS.
- The company released $36.6 million of a deferred-tax valuation allowance in Q4, contributing approximately $1.50 per diluted share. The remaining allowance was $12.1 million, primarily related to foreign tax credit carryforwards. The release was a significant, non-recurring contributor to reported earnings.
- Title loss provisions declined to 8.1% of title revenue from 9.4%; however, 2012 included $18.2 million in charges for large claims relating to prior policy years. The year-end estimated title-loss liability was $520.4 million, including known claims of $137.9 million and estimated future-reported claims of $382.5 million.
- Operating cash flow improved by $97.1 million, primarily reflecting higher earnings and improved claim-payment experience. Title-claim payments were $124.0 million, down from $134.3 million.
- After year-end, Stewart exchanged $20.7 million of convertible notes for 1,691,074 common shares plus accrued interest; $44.3 million remained outstanding. This reduced debt but diluted existing shareholders.
Outlook, commentary, and risks
- Management described housing indicators as improving and expected the recovery to contribute positively to the economy. It anticipated continued demand for mortgage-servicing outsourcing in 2013 and viewed newer, broader process-outsourcing offerings as more sustainable across market cycles. No numerical earnings or revenue guidance was provided.
- Management said operating cash flows and underwriter resources, subject to regulatory limits, were expected to fund operations and claims. Guaranty did not pay a dividend to the parent in 2012 and did not anticipate one in 2013, despite a legally permitted potential dividend of up to $85.8 million subject to regulatory approval.
- Liquidity is affected by insurance regulation: most consolidated cash and investments were held by regulated title-insurance subsidiaries, and statutory-restricted funds are unavailable for general purposes. The parent depends on subsidiary cash flows for its obligations.
- Key risks include real-estate and mortgage-volume downturns, higher interest rates, adverse title-claim development or agency escrow defalcations, competition and regulatory changes, technology and data-security risks, and difficulty accessing financing. A 100-basis-point change in title loss provision rate would have changed 2012 pretax results by approximately $17.3 million.
- Mortgage-services customer concentration is material: its largest customer generated 71.1% of segment revenue in 2012. The business is also exposed to changes in government programs and lender projects.
- The filing discusses several significant lawsuits and regulatory matters, including California investor claims, title-rate antitrust class actions, and an appeal in a Mexico property-policy dispute. Management stated it believed reserves were adequate and did not expect the matters to materially affect consolidated results; outcomes remain uncertain.
- Auditors issued unqualified opinions on the consolidated financial statements and internal control over financial reporting. Management also concluded disclosure controls and internal controls were effective at year-end.
Important facts for investors to verify
- How much of 2012 earnings growth is repeatable after excluding the $36.6 million tax valuation-allowance release and investment gains?
- Whether title-loss reserves remain adequate as claims develop, particularly large prior-year claims and potential agency escrow losses.
- Whether mortgage-services growth can persist as distressed servicing activity recedes, and whether customer concentration declines.
- How much of reported liquidity is practically available to the parent after statutory restrictions, claims needs, and insurer rating considerations.
- The effects of the post-year-end note conversion on share count, diluted earnings per share, and remaining debt obligations.
- Developments, reserves, and potential exposure in the disclosed litigation and regulatory matters.