Business context and reporting period
Stewart Information Services Corporation provides title insurance and real-estate transaction services through direct and independent-agency operations in the U.S. and internationally. Its other reported segment comprises ancillary services and corporate costs. This summary covers the unaudited quarter and nine months ended September 30, 2017, compared with the same 2016 periods.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Total revenue | $501.6 million | $553.2 million | $1,430.1 million | $1,480.9 million |
| Operating revenue | $498.0 million | $545.4 million | $1,417.3 million | $1,461.7 million |
| Income before taxes and noncontrolling interests | $18.6 million | $38.8 million | $57.6 million | $65.0 million |
| Net income attributable to Stewart | $10.9 million | $26.4 million | $33.6 million | $38.8 million |
| Diluted EPS attributable to Stewart | $0.46 | $1.12 | $1.43 | $1.13 |
| Cash from operating activities | Not separately reported for the quarter | $48.0 million | $64.0 million |
Q3 consolidated pretax margin was approximately 3.7%, versus 7.0% a year earlier; the title-segment pretax margin was 5.0%, versus 9.5%. For the first nine months, title-segment pretax income was $76.4 million, down from $101.0 million, while ancillary services and corporate reported a pretax loss of $18.7 million, improved from a $36.0 million loss. The 2016 nine-month EPS comparison reflects a $12.0 million Class B share-conversion payment deducted in the EPS calculation.
Q3 title revenue fell 8% to $488.6 million. Direct title revenue fell 10% to $216.8 million; agency revenue fell 5% to $268.5 million; ancillary-services revenue fell 43% to $13.0 million. Investment income was broadly unchanged, but investment and other results shifted to a $1.0 million loss from a $3.3 million gain. For the nine months, operating revenue decreased 3%, while title-loss expense increased 6% to $70.6 million; the prior-year period benefited from a $5.4 million reserve reduction.
Balance sheet, cash flow and liquidity
At September 30, cash and cash equivalents were $168.7 million; available-for-sale investments were $679.7 million and short-term investments $23.4 million. Total assets were $1.403 billion, notes payable $138.6 million and stockholders’ equity $672.4 million. Cash and investments totaled $871.9 million, including statutory-reserve amounts; management reported $369.5 million net of statutory reserves. Statutory reserve investments of $475.4 million, plus $26.9 million of statutory-reserve cash, are not available for other purposes.
Nine-month operating cash flow was $48.0 million, compared with $64.0 million; investing used $66.4 million and financing used $2.6 million. Cash declined $17.0 million to $168.7 million. The company paid $21.1 million in dividends. Its $125.0 million credit line had $108.9 million outstanding and $13.6 million available after a $2.5 million letter of credit. Excluding Section 1031 notes, debt-to-equity was approximately 17.4%, below its stated 20% internal limit. The principal underwriter’s statutory liquidity ratio was 110%, against a company objective of at least 100%. Parent-company cash was $0.2 million; transfers and dividends from regulated subsidiaries are subject to restrictions.
Material changes versus the prior period
- Q3 revenue declined 9% and Stewart-attributable net income declined 58%. Management cited lower commercial activity, fewer purchase closings, a sharp industry-wide refinancing decline, staff departures, and hurricane-related disruption from Harvey and Irma.
- The company estimated the hurricanes’ combined Q3 impact at about $4 million, with a greater effect on pretax income because many processing costs had already been incurred and affected-office staff were retained. Management estimated staff departures and hurricanes reduced residential revenue by about $25 million, most attributable to staff attrition.
- Q3 opened orders declined 16% overall: purchase orders fell 5%, refinance orders 37%, and commercial orders 10%. Closed orders declined 18% overall.
- International title revenue rose 7% in Q3, partly offsetting domestic weakness. Agency remittance rate fell to 17.5% from 18.0%, mainly due to geographic mix.
- Ancillary-services revenue contracted following late-2016 divestitures of loan file review, quality-control and government-services businesses; the segment’s pretax loss narrowed as costs declined.
- Cash from operations fell by $16.0 million year over year, primarily due to lower net income, higher payments on accounts payable and increased receivables, partly offset by lower claims payments.
Outlook, management commentary and risks
Management said new hires and Title365 acquisition revenue were expected to offset departed annual revenue by the 2018 selling season. It estimated recruited associates had offset $20–$25 million of roughly $70 million in annual revenue associated with departed staff, and expected Title365 to contribute $40–$50 million in annual revenue. These are management expectations, not reported results. The company continued to emphasize cost control, automation, outsourcing and systems consolidation.
Management cited Fannie Mae’s forecast that total mortgage originations would decline 8% in Q4 2017 from Q3 to $427 billion. It expected the independent-agency remittance rate to remain in the mid-to-high 17% range near term. The board’s strategic committee was reviewing alternatives, including business combinations, a sale of the company, or continuing as a standalone business; there was no assurance of a particular outcome and no timetable beyond an intention to proceed expeditiously.
Title-loss reserves totaled $475.8 million, including $69.0 million for known claims and $406.8 million for incurred-but-not-reported claims. Management noted that reserve estimates are inherently uncertain and actual ultimate losses may differ materially. Ordinary-course lawsuits, title-industry class actions, premium-tax disputes and regulatory inquiries were disclosed; management said it believed reserves were adequate and did not expect these matters to materially affect results. Unused letters of credit were $5.6 million, and the company did not expect payments under its disclosed guarantees.
The company expected to adopt the new revenue-recognition standard on January 1, 2018, with no material impact anticipated on most major revenue streams, subject to ongoing evaluation of certain fee arrangements. It expected the lease standard, to be adopted in 2019, to materially increase reported assets and liabilities but likely have an insignificant effect on operating results and cash flows. Other principal risks include real-estate and mortgage-market conditions, interest rates, title claims and reserve adequacy, employee retention, regulatory changes, agency conduct, acquisitions and integration, and access to financing. Management reported no material change to previously disclosed risk factors, and no material change in internal control during the quarter.
Important facts for investors to verify
- Whether recruiting and Title365 deliver the forecast revenue replacement by the 2018 selling season, and how acquisition integration costs develop.
- Whether title orders, especially purchase and refinancing closings, stabilize and whether hurricane-related business disruption has any continuing effect.
- Whether title-loss reserves remain adequate as claims emerge, particularly the $406.8 million IBNR balance and escrow-fraud exposures.
- How restricted statutory funds, subsidiary dividend limits and the 110% statutory liquidity ratio affect cash available to the parent and debt repayment.
- Whether the strategic review produces a transaction or standalone plan, and any resulting financing, regulatory or shareholder implications.
- The final accounting impact of the new revenue and lease standards, and the ongoing effect of acquisition-related debt and goodwill.