Stewart Information Services Corporation — 2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015; the filing also reports fourth-quarter results. Stewart provides title insurance and real-estate transaction services, mortgage services, and related offerings in the U.S. and international markets.
Financial results and key metrics
| Metric | 2015 | 2014 |
|---|---|---|
| Total revenue | $2,033.9 million | $1,870.8 million |
| Pretax income | $9.7 million | $51.8 million |
| Net income (loss) attributable to Stewart | $(6.2) million | $29.8 million |
| Diluted earnings (loss) per share | $(0.26) | $1.24 |
| Cash from operating activities | $80.5 million | $64.0 million |
| Notes payable and convertible senior notes | $102.4 million | $71.2 million |
| Stockholders’ equity | $637.1 million | $700.5 million |
- Title operating revenue rose 10.2% to $1,888.4 million. Mortgage-services revenue declined 2.2% to $130.0 million. Investment income was $16.9 million.
- Title loss provisions were $106.3 million, or 5.6% of title operating revenue, compared with $81.3 million, or 4.7%, in 2014. Estimated title-loss reserves ended the year at $462.6 million.
- Title segment pretax income was $225.2 million on $1,805.3 million of segment revenue (about 12.5% margin), up from $184.0 million on $1,660.0 million (about 11.1%) in 2014. Mortgage services reported a $56.6 million pretax loss, versus $6.4 million of pretax income in 2014. Corporate reported a $158.9 million pretax loss.
- Net cash used in investing activities was $68.8 million and net cash used in financing activities was $25.6 million. Cash and cash equivalents were $179.1 million. Total cash and investments were $798.6 million, of which $500.5 million was subject to statutory reserves; management reported $298.1 million net of those reserves.
- The $125 million unsecured credit facility had $98.0 million outstanding at year-end and expires in October 2019. The company reported compliance with its debt covenants at December 31, 2015.
Material changes versus 2014
- Revenue increased 8.7%, but Stewart moved from attributable net income of $29.8 million to a $6.2 million loss. The $35.7 million non-cash mortgage-services goodwill impairment was a major unusual charge; $20.3 million of it did not generate a tax benefit.
- Higher title revenue reflected increased refinancing and residential resale activity, as well as acquired centralized title operations. International title revenue fell 9.1% in reported dollars, principally due to U.S.-dollar strength.
- Mortgage-services revenue fell 2.2% for the year; the segment’s results weakened substantially. Stewart cited lower demand and pricing pressure in delinquent-loan servicing and announced an exit from those operations.
- Operating cash flow improved by $16.5 million. Debt increased by $31.2 million, while equity fell by $63.3 million. Cash dividends paid increased to $18.0 million from $2.3 million; share repurchases were $28.0 million.
Fourth-quarter results and unusual items
- Fourth-quarter revenue was $497.4 million, compared with $522.3 million a year earlier. Net income attributable to Stewart was $2.6 million, or $0.11 per diluted share, versus $11.9 million, or $0.49, in fourth-quarter 2014.
- Title segment revenue was $453.3 million, up about 1% year over year; pretax income was $54.9 million, a 12.1% margin, versus $45.6 million and 10.2% in the prior-year quarter. Mortgage-services revenue was $42.2 million and the segment recorded a $12.5 million pretax loss.
- Fourth-quarter charges included $3.7 million in mortgage services, primarily related to the planned exit; $1.8 million in title, primarily severance and intangible impairment; and $1.7 million in corporate, primarily severance and residual contracts. Corporate also recorded $2.7 million of non-operating realized losses. Income-tax benefits were $2.2 million.
Outlook, management commentary and risks
- Management expected to complete the delinquent-loan-servicing exit by the end of first-quarter 2016. Exit costs were estimated at $5 million to $7 million; $3.5 million had been recorded through year-end 2015. Management expected the wind-down to continue to weigh on first-quarter 2016 mortgage-services revenue and profitability.
- The company said its cost-management program was complete and had achieved $30 million of annualized savings, exceeding its revised $25 million target. Management stated it believed operating cash flow and available underwriter funds, subject to regulatory restrictions, would be sufficient for operations and claims.
- The filing cited external forecasts for moderate 2016 home-sales growth of about 4% and a 30-year mortgage rate near 4.2% by year-end. These are industry forecasts, not company earnings guidance.
- Key risks include real-estate and mortgage-market cyclicality, interest-rate and financing changes, title-loss reserve uncertainty and large claims, regulatory requirements, competition, technology and cybersecurity threats, and dependence on regulated insurance-subsidiary dividends. A 100-basis-point change in the title-loss provisioning rate would have affected 2015 pretax results by approximately $18.9 million.
- Escrow and Section 1031 customer funds created contingent liabilities of approximately $1.3 billion and $1.0 billion, respectively; these funds were not included on the balance sheet. The filing also disclosed class actions, regulatory inquiries and other litigation, while stating that management believed reserves were adequate and did not expect material adverse effects. The Credit Suisse title-policy dispute was settled, with amounts paid by year-end.
- A January 2016 agreement proposed exchanging all 1,050,012 Class B shares for the same number of common shares plus $12 million in cash, subject to approvals. A separate repurchase program authorized up to $50 million over three years.
Important facts for investors to verify
- How subsequent claims development compares with the $462.6 million year-end title-loss reserve, particularly following $22.1 million of increases to existing large losses in 2015.
- Whether the delinquent-loan-servicing exit was completed on schedule and within the estimated $5 million–$7 million total charge, and how the remaining mortgage-services business performed.
- How much of reported cash and investments is available to the parent after statutory reserve requirements, regulatory limits and the underwriter’s liquidity and ratings needs.
- Whether the company maintained credit-facility covenant compliance and adequate headroom while funding dividends, repurchases and the proposed $12 million Class B exchange payment.
- The revenue and earnings exposure associated with the mortgage-services segment’s largest customer, which generated 41.1% of segment revenue in 2015, and the outcome of material litigation or regulatory matters.