Business context and reporting period
Stewart Information Services Corporation (NYSE: STC) filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2020. The company provides title insurance and real-estate settlement services, with additional appraisal, search and valuation businesses.
Financial performance
Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted.
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Operating revenue | $590.7 | $507.9 | $1,543.2 | $1,364.7 |
| Total revenue, including investment gains/losses | $595.7 | $559.5 | $1,551.7 | $1,430.1 |
| Income before taxes and noncontrolling interests | $76.3 | $91.1 | $134.6 | $113.2 |
| Net income attributable to Stewart | $55.9 | $66.1 | $95.2 | $78.6 |
| Diluted EPS | $2.21 | $2.78 | $3.93 | $3.31 |
Q3 title-segment pretax income was $82.4 million, up 66%, and its pretax margin rose to 14.5% from 9.9%. Q3 title operating revenue increased 13%, led by residential purchase and refinancing activity. Ancillary services and corporate reported a $6.0 million pretax loss, versus $41.6 million income a year earlier.
Cash provided by operating activities for the first nine months was $140.9 million, compared with $107.3 million. Investing activities used $156.1 million, mainly reflecting $146.5 million of acquisition spending; financing activities provided $66.7 million, including $109.0 million of net stock-issuance proceeds. Cash and cash equivalents were $381.6 million at September 30.
Cash and investments totaled approximately $1.1 billion, including statutory reserves; management reported $496.7 million net of statutory reserves. Notes payable were $101.3 million and stockholders’ equity was $950.9 million. The company reported a 10.6% debt-to-equity ratio excluding Section 1031 notes. Its line of credit had $98.9 million outstanding and $98.6 million available, net of an unused letter of credit.
Changes versus prior periods
- Operating revenue rose 16% in Q3 and 13% for the first nine months. Closed orders increased 44% in Q3, with refinance closed orders up 101%; commercial closed orders fell 4%.
- Reported Q3 net income and EPS declined year over year, but the comparison is affected by Q3 2019’s $50.0 million FNF merger termination gain. Management said adjusted Q3 net income was $55.9 million, up 84% from $30.4 million in Q3 2019, and adjusted diluted EPS was $2.21 versus $1.28.
- Nine-month net income attributable to Stewart increased to $95.2 million from $78.6 million. The prior-year period also included the FNF termination gain.
- Title-loss expense rose 35% in Q3 to $28.4 million; the loss ratio increased to 5.1% from 4.2%. Estimated title-loss reserves were $466.8 million at quarter-end, including $405.4 million for incurred-but-not-reported claims.
- Goodwill increased to $382.2 million, primarily from acquisitions. The company issued 3.03 million shares in August for $109.0 million net proceeds.
Outlook, risks and contingencies
The filing provides no specific company earnings or revenue guidance. It cites external forecasts for Q4 2020 of higher home sales and mortgage originations year over year, with expected sequential seasonal declines in sales. Management said liquidity was sufficient for operations, claims and strategic investment, while noting that future debt or equity funding could be needed and might be unavailable or dilutive.
Management described low mortgage rates and strong purchase and refinance activity as supporting demand, but said commercial activity remained weaker. COVID-19 disruptions could adversely affect future operations and asset values; the company said the effects remained uncertain. Higher domestic loss-provisioning rates, mortgage forbearance-related risks and unfavorable Canadian claims development contributed to increased title-loss provisions. Claims reserves involve significant estimation uncertainty.
Statutory reserves are not available for general use or current claim payments, and transfers or dividends from regulated insurance subsidiaries are subject to legal and regulatory restrictions. Ordinary-course litigation, regulatory inquiries, guarantees and $5.2 million of unused letters of credit were disclosed; management did not expect these matters to materially affect results or require payments on guarantees.
Important facts for investors to verify
- Reconcile reported and management-adjusted comparisons, particularly the prior-year $50.0 million FNF termination gain and related expenses.
- Track residential purchase/refinance volumes against weaker commercial activity, and assess the sustainability of unusually strong order growth.
- Monitor title-loss provisions, reserve development, claim payments and the effects of economic conditions and mortgage forbearance.
- Review acquisition performance, purchase-accounting finalization and integration of U.S. Appraisals, acquired title offices and the post-quarter appraisal-services acquisition.
- Assess deployable liquidity separately from statutory reserves and consider regulatory constraints, acquisition spending, leverage and potential future capital needs.