Stewart Information Services Corporation — Q3 2011 Form 10-Q
Business context and reporting period
Unaudited results for the three and nine months ended September 30, 2011, compared with the same 2010 periods. Stewart provides title insurance and related services (Title) and real estate information services (REI). Management described housing and mortgage markets as weak, with fewer refinance transactions; growth in commercial activity and REI partly offset the pressure.
Key financial metrics
Amounts are in millions of dollars except per-share data. “Stewart earnings” means net earnings attributable to Stewart.
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Revenue | $418.5 | $430.1 | $1,189.8 | $1,222.9 |
| Net earnings (loss), attributable to Stewart | $4.5 | $(3.0) | $0.2 | $(22.6) |
| Diluted EPS attributable to Stewart | $0.22 | $(0.17) | $0.01 | $(1.23) |
| Cash from (used in) operating activities | Not separately presented for the quarter | $(4.9) | $14.4 |
- Q3 pretax earnings were $7.7 million versus a $1.3 million loss; nine-month pretax earnings were $7.0 million versus a $13.0 million loss.
- Q3 revenue fell 2.7%. Title operating revenue declined 3.0%, while REI revenue rose 14.3% to $22.5 million. For nine months, Title segment revenue was $1,113.4 million and REI revenue was $76.4 million.
- Title loss provisions were 9.0% of title operating revenue in Q3 (9.6% in Q3 2010) and 9.2% for nine months (9.0% in 2010). Nine-month provisions included $15.2 million for large claims.
- At September 30, cash and cash equivalents totaled $123.2 million, including $14.6 million of statutory-reserve cash. Cash and investments totaled $612.9 million, of which $410.8 million funded statutory premium reserves and $202.1 million was unrestricted, subject to regulatory requirements.
- Total debt was $78.0 million: $64.5 million of convertible senior notes due October 2014 and other notes payable. The company had no borrowings on its $10 million credit line. Stockholders’ equity was $465.0 million; book value was $24.10 per share.
- Nine-month capital expenditures were $13.8 million; acquisition cash outlay was $8.3 million. Cash and cash equivalents declined $31.3 million from year-end 2010.
Material changes versus the prior comparable period
- Stewart returned to quarterly profitability from a year-earlier loss, while revenue decreased. Nine-month results also improved substantially, though attributable earnings were only $0.2 million.
- Q3 direct title revenue increased 1.5%, but agency title revenue decreased 6.0%; fewer closings and weaker refinance activity weighed on the agency channel. Commercial and large-transaction revenue increased 12.4% in Q3 and 18.7% for nine months.
- REI revenue growth reflected expanded real-estate-owned services, including the July 2011 acquisition of a majority interest in PMH Financial. Loan-modification activity was easing from prior high levels.
- Employee costs increased 1.1% in Q3, principally due to PMH, while other operating expenses declined 5.3%. The company reported reducing headcount by more than 225 since September 2010, excluding PMH.
- Operating cash flow was $19.3 million lower year over year as reported, primarily because the 2010 period included a $50.9 million tax refund. Management said cash flow improved $31.6 million on a basis excluding that refund. Cash claim payments were $105.6 million versus $119.7 million for the nine-month periods.
Outlook, commentary, risks and unusual items
- Management anticipated improved operating results and cash flow for the remainder of 2011, citing agency remittance and premium-rate actions, cost reductions, and REI businesses. It also said it would pursue further rate or agency-split changes, cost reductions, and business expansion. No numerical earnings or revenue guidance was provided.
- Management stated that cash flows and available resources should fund operations and claims, but warned that a shortfall could require borrowing on less favorable terms or dilutive equity financing. Much of the company’s cash and investments is held by regulated insurance subsidiaries and is subject to statutory and regulatory restrictions.
- Title reserves totaled $489.9 million, including $129.6 million for known claims and $360.3 million for claims expected to be reported in the future. Management cautioned that ultimate losses may differ materially; a 100-basis-point change in the nine-month loss provision rate would change pretax results by approximately $11.0 million.
- Unusual nine-month items included a $3.9 million charge for a defaulted third-party loan guarantee, with no recovery recognized pending assessment, and a $1.2 million impairment charge on cost-basis investments. The period also included $2.5 million of realized gains from sales of debt investments.
- Legal matters include appeals following a favorable no-damages jury verdict in a Mexico title-policy case, California litigation concerning alleged loan-related losses, and title-insurance antitrust class actions. The company said it was defending the matters and did not expect them to materially affect its financial condition or results; outcomes remain uncertain.
- Other risks identified include weak real-estate activity and mortgage availability, unexpected title claims or agency fraud, regulatory and litigation outcomes, goodwill impairment if performance or market conditions worsen, and access to financing. Management reported no material change in risk factors or market-risk disclosures during the quarter.
Important facts for investors to verify
- Whether the reported improvement in earnings and underlying operating cash flow persists, given the prior-period tax refund and ongoing housing-market weakness.
- Whether large-claim development and the $489.9 million title-loss reserve remain adequate as claims emerge and are paid.
- How much statutory and other regulatory restrictions limit the practical availability of the reported cash and investment balances.
- Whether PMH Financial and broader REI growth can offset declining loan-modification activity and pressure in agency title revenues.
- Potential recovery, if any, on the $3.9 million loan-guarantee payment, and developments in the disclosed litigation and regulatory matters.
- The effects of the January 2011 issuance of 635,863 common shares to settle wage-and-hour litigation and the resulting share-count change.