Stewart Information Services Corporation — Q1 2014 Form 10-Q
Business and period: Title insurer and settlement-services provider, with mortgage services and corporate operations. Unaudited results cover the three months ended March 31, 2014, compared with Q1 2013; balance-sheet comparisons are with December 31, 2013. Amounts below are in millions except per-share data.
Financial results
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Total revenue | $391.4 | $423.7 |
| Pre-tax income (loss) | $(18.6) | $7.1 |
| Net income (loss) attributable to Stewart | $(12.1) | $3.2 |
| EPS attributable to Stewart | $(0.54) | $0.15 |
| Cash used by operating activities | $(50.2) | $(3.4) |
- Revenue fell 7.6%. Title segment revenue was $361.0, down from $382.4; mortgage services revenue was $26.6, down from $41.2. Corporate revenue was $3.8 versus $0.1.
- Title segment pre-tax earnings were $17.6 versus $30.3, a 4.9% pre-tax margin, down 300 basis points year over year. Mortgage services recorded a $1.6 pre-tax loss versus $9.8 of earnings. Corporate pre-tax loss widened to $34.6 from $33.0.
- Title losses and related claims expense was $22.8 versus $23.6; the provision was 6.3% of title operating revenue versus 6.1%. Employee costs rose 2.2%; other operating expenses rose 6.2%. The filing does not provide a consolidated operating-margin measure.
- Cash and cash equivalents were $120.3 at March 31, down from $194.3 at year-end. Total assets were $1,276.6 and stockholders’ equity was $652.6. Cash and investments totaled $713.6, including substantial amounts subject to insurance statutory and regulatory restrictions.
- Total debt was $31.5, including $27.1 of convertible senior notes; notes payable were $4.3. No borrowings were outstanding on the $50.0 unsecured credit line at quarter-end, but the company subsequently borrowed against it for acquisitions. Cash used in investing and financing was $17.2 and $3.0, respectively.
Changes and management commentary
- Management attributed the weak quarter to a severe contraction in mortgage activity: existing home sales fell 6.6% year over year and refinancing loans fell 70%. Harsh winter weather, higher interest rates, and new qualified-mortgage rules were cited; originations were estimated to be at a 17-year low.
- Direct title orders closed fell 28.7%, and the closing ratio was 62.3%. Commercial and other large-transaction revenue increased 23.4%, partly offsetting lower transaction volume.
- Mortgage services revenue declined as demand for default- and distressed-property services continued to fall. Management said new contracts were beginning to contribute, but would take several months to reach steady-state revenue and normalized margins.
- Q1 2014 included approximately $3.6 of costs related to a shareholder settlement and acquisition-related legal and due-diligence work. Q1 2013 included a $5.4 noncash charge from early retirement of convertible notes, partly offset by $1.7 of insurance-policy proceeds; this affects the year-over-year earnings comparison.
- Operating cash outflow increased substantially, which management attributed principally to weaker operating results, higher receivables, and cash payments of accounts payable and accrued liabilities.
Outlook, risks, and contingencies
- No specific earnings or revenue guidance was provided. Management expects to reduce operating expenses by $25.0 on a run-rate basis by the end of 2015 and expects to repurchase $70.0 of common stock during 2014–2015, subject to market, capital, liquidity, regulatory, and other conditions.
- April 2014 announcements covered acquisitions of Wetzel Trott, certain DataQuick Lending Solutions businesses, and an agreement to acquire LandSafe Title. Expected aggregate purchase price was $39.9; closings were completed or expected in Q2–Q3 2014, subject to customary conditions. Management expects integration to take several quarters.
- Estimated title-loss reserves were $495.3, including $380.1 of incurred-but-not-reported claims. Management noted that a 100-basis-point change in the title-loss provision rate would change quarterly provision and pre-tax results by approximately $3.6. Q1 included a $2.4 reserve accrual for legacy escrow losses related to mortgage fraud.
- Liquidity depends in part on regulated insurance subsidiaries. Statutory reserve investments and related cash totaled $468.3; dividends to the parent are restricted and may require regulatory approval. Management said current liquidity was sufficient, while noting that adverse operations, claims, or regulatory requirements could require borrowing or equity financing.
- Material litigation includes appeals following a defense verdict in a California loan-related bellwether trial, with further trials possible, and a Credit Suisse title-policy dispute involving coverage defenses and a punitive-damages claim. The company said it could not predict outcomes, but did not expect these matters to materially affect consolidated financial condition or results. Other policy, class-action, premium-tax, and regulatory matters are also disclosed; management believes reserves are adequate.
- Other principal risks include real-estate and mortgage-market weakness, title-loss development, agency fraud or defalcation, regulatory changes, litigation outcomes, and access to financing. The company reported no material changes to its risk factors or market-risk disclosures and concluded disclosure controls and internal control over financial reporting were effective.
Important facts for investors to verify
- Whether new mortgage-services contracts and acquisitions deliver expected revenue, normalized margins, and integration results.
- Whether transaction volumes recover and whether the company achieves the stated $25.0 expense run-rate reduction and planned share repurchases without straining liquidity.
- Title-loss reserve adequacy, including development of IBNR claims, large claims, and legacy escrow-fraud losses.
- Availability of cash held in regulated subsidiaries, compliance with statutory reserve requirements, and borrowing needs for acquisitions.
- Developments in the disclosed litigation and regulatory matters, particularly the Credit Suisse dispute and California appeals and follow-on trials.