Stewart Information Services Corp. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019. Amounts below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise. The company provides title insurance and settlement services, with ancillary search and valuation operations.
Financial results
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Total revenues, including investment income and gains | $472.1 | $492.9 | $870.6 | $930.1 |
| Operating revenues | $466.5 | $485.2 | $856.9 | $919.4 |
| Income before taxes and noncontrolling interests | $29.4 | $31.3 | $22.1 | $28.1 |
| Net income attributable to Stewart | $19.3 | $22.4 | $12.5 | $18.6 |
| Diluted EPS attributable to Stewart | $0.81 | $0.95 | $0.53 | $0.79 |
- Q2 operating revenue declined about 4%; Stewart-attributable net income fell about 14%. Six-month operating revenue declined about 7%, and attributable net income fell about 33%.
- Q2 title-segment pretax income rose 3% to $39.0 million, with pretax margin increasing to 8.4% from 7.9%. Excluding equity-security fair-value changes, title-segment pretax income was $39.4 million, up 10% year over year.
- Q2 ancillary services and corporate revenue fell 39% to $8.4 million and pretax loss widened to $9.7 million. Excluding $3.7 million of merger advisory costs, the segment’s pretax loss was $6.0 million.
- Title loss expense was $18.8 million in Q2 and $34.5 million for the first six months. The six-month loss ratio was 4.1%, versus 4.2% in 2018.
Cash flow, balance sheet and liquidity
- Cash and cash equivalents were $201.2 million at June 30, 2019, versus $192.1 million at year-end 2018. Six-month operating cash flow was negative $8.4 million, compared with positive $7.4 million a year earlier; investing cash flow was positive $38.3 million and financing cash flow was negative $22.8 million.
- Total cash and investments were $841.6 million, including $510.1 million held for statutory reserves and unavailable for other purposes; management reported $331.5 million net of those reserves. The filing also reports $251.5 million of cash and investments available for underwriter operations, including claims payments.
- Notes payable were $105.4 million, including a $98.9 million line-of-credit balance; $48.6 million remained available under the line, net of an unused letter of credit. Excluding Section 1031 notes, the company’s debt-to-equity ratio was 14.8%, below its stated internal 20% limit. Total stockholders’ equity was $700.8 million; book value per share was $29.56.
- Estimated title-loss liabilities were $450.2 million, including $63.3 million for known claims and $386.9 million for IBNR claims. Operating lease liabilities were $114.0 million following adoption of the new lease standard; adoption added approximately $99.8 million of operating lease assets and liabilities at January 1, 2019, with no reported impact on 2019 earnings or cash flows.
Changes, outlook and risks
- Direct title revenue increased 2% in Q2, but fell 5% for the first six months. Independent agency gross revenue declined 7% in Q2; six-month closed orders declined 8%, including lower purchase and commercial orders but higher refinance orders.
- Management attributed lower revenue mainly to agency and ancillary-service declines and weaker transaction volumes. Cost reductions, including lower employee costs, helped the title segment’s Q2 profitability. Q2 results included $3.7 million of FNF merger advisory expenses and $0.4 million of net investment and other gains; Q2 2018 included $2.4 million of such gains.
- Management expected 2019 title-loss expense to be 4.0%–4.2% of title revenues. It described cost management, automation and systems consolidation as ongoing priorities. The filing gives no consolidated earnings or revenue forecast. Its cited industry outlook anticipated improved second-half mortgage originations, principally from refinancing, and lower mortgage rates; this is industry commentary, not company guidance.
- The proposed merger with Fidelity National Financial remained subject to FTC and outstanding state regulatory approvals, including Texas and New York. FNF extended the merger agreement deadline to September 18, 2019. Approval conditions could delay, increase the cost of, or prevent the transaction.
- Other risks include uncertain title-loss reserves and claim timing, real-estate and mortgage-market conditions, agency remittance rates, regulatory matters, litigation, foreign exchange and restrictions on transferring regulated-subsidiary funds. Management said ordinary-course litigation and regulatory matters were adequately reserved and were not expected to materially affect results. No material changes to the annual-report risk factors were reported.
Investor verification priorities
- Check the merger’s regulatory status and any subsequent deadline, conditions or termination developments.
- Track purchase, refinance and commercial orders, agency revenue and remittance rates, and whether lower volumes continue to affect earnings.
- Review title-loss reserve development, claim payments and the 4.0%–4.2% loss-ratio expectation against reported results.
- Assess operating cash generation and the availability of cash held at regulated subsidiaries, distinguishing statutory reserves from deployable liquidity.
- Monitor line-of-credit usage, Section 1031 borrowings, lease obligations and merger-related costs.