Stewart Information Services Corporation (NYSE: STC) — 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013. The filing also reports unaudited fourth-quarter results. Unless stated otherwise, amounts are U.S. dollars.
Business context and reporting period
Stewart is a title insurance and real estate services company operating through title insurance and related services, mortgage services, and corporate segments. Its business is sensitive to real estate transaction volumes, mortgage rates, refinancing activity, and title-loss experience.
Financial performance and position
| Metric | 2013 | 2012 | Change or context |
|---|---|---|---|
| Total revenue | $1,928.0 million | $1,910.4 million | Up 0.9% |
| Pretax earnings | $101.1 million | $89.3 million | Up $11.7 million |
| Net earnings attributable to Stewart | $63.0 million | $109.2 million | Down $46.2 million |
| Diluted EPS | $2.60 | $4.61 | Lower largely because 2012 benefited from a larger tax valuation-allowance release |
| Cash from operations | $87.2 million | $120.5 million | Down $33.3 million |
| Total assets | $1,326.1 million | $1,291.2 million | Up $34.9 million |
| Stockholders’ equity | $663.1 million | $580.4 million | Up $82.7 million |
| Debt | $32.9 million | $71.2 million long-term debt | Includes $27.1 million of convertible notes at year-end |
Title operating revenue was $1,796.4 million, up from $1,730.9 million. Mortgage services revenue fell 25.9% to $117.1 million. Title-loss provisions were $106.3 million, or 5.9% of title operating revenue, compared with $140.0 million, or 8.1%, in 2012. The title-loss reserve was $506.9 million at year-end.
For the fourth quarter, revenue was $450.2 million versus $521.0 million a year earlier; net earnings attributable to Stewart were $17.5 million versus $61.8 million, and diluted EPS was $0.72 versus $2.56. Title segment revenue declined 10.5% year over year, while mortgage services revenue declined to $25.6 million from $46.7 million.
Cash and investments, including amounts subject to statutory requirements, totaled $770.0 million. Cash and cash equivalents were $194.3 million. The company had an undrawn $25.0 million unsecured credit line expiring in June 2016. Cash from investing activities was negative $78.4 million and cash from financing activities was negative $18.2 million.
Material changes versus the prior comparable period
- Overall revenue edged higher, supported by title operations, while mortgage services revenue contracted as project-based default and distressed-loan work declined.
- Pretax earnings improved, but attributable net earnings fell because 2012 included a substantially larger tax benefit from releasing a deferred tax valuation allowance. The 2013 effective tax rate was 31.1%, compared with negative 37.3% in 2012.
- The title-loss ratio improved to 5.9% from 8.1%, reflecting lower provisioning and favorable development on non-large prior-year claims. The company also recorded additional provisions for large claims.
- Operating cash flow decreased, primarily due to payments on accounts payable, losses in excess of provisions, and accrued liabilities.
- In 2013, $37.8 million of convertible notes were exchanged for 3.1 million common shares. This reduced reported debt but increased the share count.
Outlook, management commentary, risks, and unusual items
- Management expected housing recovery to continue into 2014, supported by homebuilding and improving consumer confidence, but noted that higher mortgage rates and reduced refinancing activity had weakened title orders. This was commentary, not quantified financial guidance.
- Management was shifting mortgage services toward recurring loan origination, servicing support, and compliance offerings. New contract ramp-ups were taking longer than expected; cost reductions began in January 2014, targeting about 7% of mortgage-services employee costs on an annualized basis.
- Management stated that operating cash flows and underwriter resources, subject to regulatory restrictions, were expected to fund operations and claims. Guaranty paid no dividend to the parent in 2013 or 2012; a dividend above applicable limits requires Texas regulatory approval. The maximum dividend permitted after approval in 2014 was $94.7 million.
- Convertible notes mature in October 2014 unless converted. Contractual obligations also include $114.2 million of operating lease payments and $506.9 million of estimated title losses; claim-payment timing is uncertain.
- Title-loss estimates are a significant judgment area. Management said a 100-basis-point change in the loss ratio would change 2013 provisions and pretax results by approximately $18.0 million. Large claims, agency defalcations, and delayed claim development could alter reserves materially.
- Other risks include real-estate market volatility, competition, insurance regulation and rating changes, reliance on regulated subsidiary dividends, technology and cybersecurity incidents, and litigation. In the Tamarack/Credit Suisse matter, a court ruling negated certain policy defenses and allowed punitive damages to be asserted; Stewart said it was contesting the case and did not expect a material adverse effect. A jury found for Stewart entities in a California bellwether trial, but plaintiffs sought a new trial.
- Unusual 2013 items included a $5.4 million non-cash charge related to early retirement of notes, a $2.3 million gain on non-title insurance proceeds, and a $6.6 million release of valuation allowance relating to foreign tax credits. The filing reports no goodwill impairment in 2013.
Most important facts for investors to verify
- Whether mortgage-services contracts and the planned expense reductions can restore segment profitability as the business mix changes.
- How title-loss reserves develop, especially large claims, agency defalcations, and prior-policy-year estimates.
- Repayment or conversion of the $27.1 million notes due October 2014, and the resulting effect on debt and share dilution.
- Actual availability of subsidiary cash and dividends to the parent given statutory reserve and regulatory restrictions.
- Developments in the disclosed litigation and regulatory matters, including whether any outcome changes the company’s stated assessment of materiality.