Stewart Information Services Corporation — Q2 2012 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2012. Financial statements are unaudited; amounts below are in millions of dollars unless noted.
Business context and performance
Stewart provides title insurance and settlement services, alongside real estate information (REI) services. Management attributed improved title results to higher closing volumes and operating leverage. Revenue growth in REI came mainly from servicing support and REO-related work, which carried lower margins than loan-modification services.
Key financial metrics
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Total revenue | $483.7 | $404.9 | $868.7 | $771.3 |
| Pretax earnings (loss) | $31.2 | $5.7 | $23.3 | $(0.7) |
| Net earnings (loss) attributable to Stewart | $24.9 | $5.9 | $12.8 | $(4.4) |
| Diluted earnings (loss) per share | $1.05 | $0.28 | $0.59 | $(0.23) |
| Operating cash flow | Not separately stated | Not separately stated | $19.4 | $(6.5) |
Q2 pretax margin was approximately 6.5%, versus 1.4% a year earlier; first-half pretax margin was approximately 2.7%, versus a small loss margin in 2011. Q2 title revenue was $443.2 million, up 15.9%; REI revenue was $40.5 million, up 79.5%. For the first half, title revenue was $795.7 million and REI revenue was $73.0 million.
Title-loss expense was $38.1 million in Q2 and $69.5 million for the first half. Title-loss provisions were 8.7% of title operating revenue in Q2 and 8.8% for the first half, down from 9.2% and 9.3%, respectively, in the comparable periods. Q2 cash claim payments fell 6.3% year over year; first-half payments fell 6.5%.
At June 30, cash and cash equivalents, including statutory reserve funds, totaled $157.6 million; short-term and available-for-sale investments totaled $492.3 million. The filing reports total cash and investments, including statutory reserves, of $649.9 million. Debt was $71.5 million, including $64.6 million of convertible senior notes due October 2014. Stockholders’ equity was $481.9 million. The $10 million bank credit line had no outstanding borrowings. Cash and investments are subject to statutory restrictions; parent-company cash was $8.7 million.
Material changes versus prior periods
- Total revenue rose 19.5% in Q2 and 12.6% in the first half year over year. First-half net earnings attributable to Stewart improved from a $4.4 million loss to $12.8 million of earnings.
- Title segment pretax earnings were $17.7 million in Q2, compared with a $4.3 million loss; first-half title pretax earnings were $0.9 million, compared with a $27.6 million loss.
- REI generated $13.5 million of Q2 pretax earnings, up from $10.0 million. First-half REI pretax earnings decreased to $22.4 million from $26.9 million despite revenue growth.
- First-half operating cash flow improved by $25.9 million, from cash use of $6.5 million to cash provided of $19.4 million. Receivables increased, which management expected to collect in Q3.
- Investment and other gains were $2.5 million for the first half, compared with a $1.1 million loss in 2011; the prior-year period included a $3.9 million charge on a defaulted loan guarantee.
Outlook, risks, and unusual items
- Management said order counts remained sustained through July and expected satisfactory Q3 results, while noting industry projections for lower mortgage originations in Q4. It expected REI revenue to increase in 2012 as awarded contracts matured, but said demand may fluctuate with lender projects and government programs.
- Management cited housing-market conditions, mortgage rates and refinancing, transaction mix, agency conduct or defalcations, title-loss reserve estimates, regulation, litigation, and access to financing as significant risks. It cautioned that title-loss reserves may differ materially from ultimate claims. The $510.7 million title-loss reserve included $132.6 million for known claims and $378.1 million for claims expected to be reported in the future.
- Guaranty’s cash and investment use, transfers, and dividends are regulated. Management stated that liquidity was sufficient for expected operating needs, but adverse conditions could require less favorable borrowing or potentially dilutive equity funding.
- A California jury verdict initially awarded approximately $6.5 million in the Van Buren matter; the court reduced the judgment to approximately $4.2 million, and Stewart Title Guaranty appealed in July 2012. The company also disclosed multiple title-industry class actions and other litigation and regulatory matters; management said it believed reserves were adequate and did not expect material effects.
- No goodwill or other long-lived asset impairment was recorded in the first half. Management’s June 30 goodwill assessment concluded impairment was not more likely than not. The company reported disclosure controls and internal control over financial reporting as effective, with no material control changes during the quarter.
Important facts for investors to verify
- Whether title order volumes, revenue per closing, and commercial activity sustain the Q2 improvement, particularly given management’s warning about weaker Q4 originations.
- Whether REI contract growth converts to earnings, given the shift toward lower-margin services and lower first-half segment pretax earnings.
- Development of title-loss reserves and claims, including large claims and agency-related defalcations; these estimates are a critical accounting judgment.
- Collection of the increased receivables and the availability of cash held by regulated insurance subsidiaries to support the parent company.
- Outcome of the Van Buren appeal and other litigation, as well as any effects of regulatory or premium-tax matters.