Business context and reporting period
Stewart Information Services Corporation filed this unaudited Form 10-Q for the quarter ended June 30, 2014. It provides title insurance and related services, mortgage services, and corporate support. Unless noted otherwise, financial amounts below are in millions of dollars.
Financial results and position
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Revenue | $446.8 | $517.2 | $840.4 | $940.9 |
| Pretax earnings (loss) | $11.5 | $48.9 | ($7.1) | $56.0 |
| Net earnings (loss) attributable to Stewart | $6.3 | $26.9 | ($5.8) | $30.1 |
| Diluted earnings (loss) per share | $0.27 | $1.09 | ($0.26) | $1.25 |
| Cash from operating activities | Not stated for quarter | Not stated for quarter | ($31.9) | $43.1 |
- At June 30, cash and cash equivalents were $150.4, short-term investments $39.0, and available-for-sale securities $569.0. Total cash and investments were $758.4, including funds subject to statutory requirements; parent-company cash was $12.9.
- Total debt was $92.6, including $65.5 of notes payable and $27.2 of convertible senior notes due October 2014. The company had borrowed $60.0 under its $75.0 unsecured credit line, principally for acquisitions and working capital.
- Stockholders’ equity was $663.9. Estimated title losses were $494.1, comprising $116.9 of known claims and $377.2 of incurred-but-not-reported claims.
- Title segment pretax earnings were $44.9 in Q2, versus $73.2 a year earlier; its pretax margin was 11.2%, down 420 basis points year over year. Mortgage services reported a $1.4 pretax loss, versus $5.2 of earnings.
Material changes versus the prior comparable period
- Q2 revenue fell 13.6%; six-month revenue fell 10.7%. Q2 title segment revenue declined 15.3%, while mortgage services segment revenue increased 5.5% to $39.4. On the consolidated statement, the mortgage services revenue line was $29.9, down 3.6%; segment and consolidated line-item presentation differ.
- Management attributed weaker results mainly to lower refinancing activity and reduced agency revenue. Direct orders closed fell 20.0% in Q2 and 24.0% for the first half; refinancing transactions were 18.1% of Q2 opened orders versus 30.2% a year earlier. Agency revenue declined 22.2% in Q2.
- Q2 included a $10.5 litigation settlement charge in the title segment and about $3.2 of primarily acquisition-related corporate costs. Other operating expenses also included settlement, acquisition, and shareholder-settlement costs.
- Cash from operations shifted from $43.1 provided in the first half of 2013 to $31.9 used in 2014, which management attributed principally to weaker operating results and lower collections. Cash and cash equivalents declined $43.9 from year-end 2013.
- Title loss expense was $18.2 in Q2, down 24.8%; the period included a $6.5 reserve reduction for prior policy years. The first-half provision was $40.9 versus $47.7 a year earlier.
Outlook, commentary, risks, and unusual items
- Management said existing home sales fell 4.5% year over year in Q2 and refinancing loans fell 65.3%, citing winter weather and higher interest rates. Home sales rose 5.8% sequentially, less than industry forecasts.
- The company had initiated a cost-management program and targeted $25 million of annualized savings by the end of 2015, with most savings expected in 2015. It expected to modestly lower its title-loss provisioning rate beginning with policies issued in Q3, following favorable loss experience.
- Three acquisitions were substantially completed in Q2 for $38.9 net of assumed liabilities, with a further $0.5 due in Q3. Preliminary acquired goodwill was $41.3; purchase-price allocation remained subject to change. Integration was expected to take several quarters.
- Stewart agreed to settle claims involving approximately 500 plaintiffs for $10.53; a small number of plaintiffs did not settle and further trials were scheduled. In a separate insurer dispute, a jury awarded Stewart $31.1 before statutory interest and legal fees, but set aside a $15.0 exemplary-damages award; post-trial motions and the appeal period remained pending.
- Management believed liquidity was sufficient for ongoing operations, but statutory restrictions limit access to a substantial portion of insurer cash and investments. It noted possible needs to retain or raise capital to support insurer ratings and statutory capital. Key risks include real-estate and mortgage-market conditions, title-loss estimates, agency fraud or defalcation, regulatory matters, litigation, acquisition integration, and access to financing.
- The company said it did not expect the adoption of the new revenue-recognition standard to have a material effect. Disclosure controls and internal control over financial reporting were assessed as effective as of June 30, 2014; no material change in internal control was reported.
Most important facts for investors to verify
- Whether title and mortgage activity stabilizes after the sharp decline in refinancing and agency revenue, and whether acquisitions offset legacy-market weakness.
- Progress, timing, and realized savings from the $25 million annualized cost-reduction target.
- Title-loss reserve adequacy, including future claim severity, escrow-fraud losses, and the planned provisioning-rate reduction.
- Repayment or refinancing of the $27.2 million convertible notes due October 2014, credit-line availability, and liquidity available after statutory restrictions.
- Final acquisition purchase-price allocations and integration costs, plus the outcomes and financial effects of unsettled litigation and the Great American verdict.