Stewart Information Services Corporation — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; unaudited. Stewart provides title insurance and related services, mortgage services, and corporate support. Comparisons below are with Q1 2014 unless otherwise stated. Dollar amounts are in millions unless noted.
Financial performance
| Metric | Q1 2015 | Q1 2014 |
|---|---|---|
| Revenue | $448.9 | $393.6 |
| Loss before tax and noncontrolling interests | $(18.9) | $(18.6) |
| Net loss attributable to Stewart | $(12.4) | $(12.1) |
| Loss per share, basic and diluted | $(0.52) | $(0.54) |
| Operating cash flow | $(26.9) | $(49.5) |
| Cash and cash equivalents at period-end | $153.1 | $120.3 |
- Revenue rose 14.0%, principally from 2014 acquisitions and new contracts. Title-segment revenue was $380.4 million, up 4.4%; mortgage-services segment revenue was $63.7 million, versus $25.3 million.
- Title-segment pretax earnings were $19.6 million (5.2% margin), versus $17.8 million (4.9%). The $11.8 million reserve-strengthening charge reduced the 2015 margin; management stated the margin would have been 8.3% excluding that charge.
- Mortgage-services pretax earnings were $2.7 million (4.2% margin), compared with a $1.9 million loss. Corporate pretax loss widened to $41.2 million from $34.5 million.
- Total expenses increased to $467.7 million from $412.2 million. Employee costs rose 14.5%, while depreciation and amortization increased 61.7%, largely reflecting acquisitions and systems investments.
- Net loss attributable to Stewart increased slightly, although loss per share improved as average shares outstanding rose to 24.0 million from 22.5 million. Comprehensive loss attributable to Stewart was $16.8 million, including a $6.5 million after-tax currency translation loss.
Balance sheet, liquidity and cash flow
- At March 31, cash was $153.1 million; short-term investments were $25.3 million and available-for-sale securities were $572.6 million. Total assets were $1.357 billion, stockholders’ equity was $682.8 million, and notes payable were $65.2 million.
- Cash decreased $47.4 million during the quarter. Investing cash use was $8.4 million, including $5.0 million of capital expenditures and $4.0 million paid for a subsidiary; financing cash use was $8.9 million, including $6.0 million of debt repayment and $1.4 million of share repurchases.
- Management reported cash and investments of $751.0 million, of which $270.6 million was net of statutory reserves. Statutory premium reserve investments were $480.5 million; these funds are not available for other purposes. Parent-company cash was $8.3 million.
- $60.0 million was outstanding under the $125.0 million unsecured credit line, which expires in October 2019. Debt-to-equity was approximately 10%, below the company’s stated internal 20% limit. The principal underwriter’s statutory liquidity ratio was 0.96:1 at December 31, 2014, below management’s 1:1 objective.
- Estimated title-loss reserves totaled $501.3 million, including $118.9 million for known claims and $382.4 million for incurred-but-not-reported claims.
Material changes and management outlook
- Management attributed the $11.8 million Q1 reserve strengthening to developments including adverse appellate rulings and several large prior-policy claims and escrow losses, principally involving policies issued in 2005–2007. It cautioned that reserve estimates are inherently uncertain and claims payments could increase during the remainder of 2015.
- Management reported more than $17 million of annualized savings achieved by quarter-end, raised its savings estimate from $25 million to $30 million, and said it remained confident the revised target would be achieved by year-end 2015.
- For mortgage services, management cited acquisition and contract-related growth, but noted that a significant contract renewed at lower pricing, reducing revenue beginning in Q2. It maintained a goal of double-digit segment margins in the latter half of 2015.
- Management described Q1 as seasonally less active for title insurance. Existing home sales increased 6.2% year over year, while the company’s international revenue declined 12.9%, primarily due to U.S.-dollar strength. Management said the Q1 housing and sales trends were encouraging for the remainder of 2015.
- The company increased its annual dividend from $0.10 to $1.00 per share, payable quarterly at $0.25 beginning in June 2015. It repurchased 38,425 shares for $1.4 million during the quarter.
Risks, contingencies and unusual items
- Q1 included approximately $7.3 million of costs, primarily in corporate, related to a shareholder settlement and the cost-management program. The 2014 quarter included approximately $3.5 million of shareholder-settlement, legal and acquisition due-diligence costs.
- Approximately 500 plaintiffs in the California Gearhart litigation settled for $10.53 million in 2014. In April 2015, the court ruled for defendants in a trial involving two non-settling plaintiffs; trial for remaining non-settling plaintiffs was scheduled for May 2015.
- In the Credit Suisse/Tamarack title-policy litigation, the company reported that summary judgment motions had been denied and a 20-day jury trial was scheduled to begin September 8, 2015. Stewart said it did not expect either matter to materially affect its consolidated financial condition or results, but outcomes remained uncertain.
- The CFPB mortgage disclosure rules were scheduled to take effect August 1, 2015. Stewart warned implementation could cause lower mortgage volumes or delays in processing and closings, particularly initially, and anticipated meaningful one-time compliance spending in 2015.
- Liquidity depends substantially on regulated insurance subsidiaries; statutory funds and transfers to the parent are subject to restrictions. Management said it expected available resources to fund operations and claims, while noting that additional borrowing or equity financing might be needed in some circumstances.
- Other risks include real-estate and mortgage-market conditions, title-loss reserve estimation, regulatory matters, litigation, acquisition integration, realization of savings, and access to capital. The filing reported no material change in risk factors from the 2014 Form 10-K.
Investor verification priorities
- Track title-loss reserve development and cash claims payments, especially the large prior-year claims and escrow losses behind the $11.8 million strengthening.
- Verify whether the revised $30 million annualized cost-savings target is achieved by year-end and whether mortgage-services margins improve as projected despite lower contract pricing.
- Assess the effect of CFPB-rule implementation on closing volumes, delays, and compliance costs.
- Monitor statutory liquidity and reserve requirements, restrictions on subsidiary dividends, and the company’s capacity to fund shareholder returns while maintaining underwriter capital.
- Follow outcomes and reserve adequacy for the remaining litigation and regulatory matters, and evaluate acquisition integration and revenue contributions.