Stewart Information Services Corporation — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. Stewart provides title insurance and real-estate settlement services, with ancillary appraisal, search and valuation operations. Amounts below are in millions unless noted.
Financial results
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Operating revenue | $506.8 | $466.5 | $952.5 | $856.9 |
| Total revenue, including investment income and investment gains/losses | $516.1 | $472.1 | $956.0 | $870.6 |
| Income before taxes and noncontrolling interests | $49.0 | $29.4 | $58.3 | $22.1 |
| Net income attributable to Stewart | $34.1 | $19.3 | $39.3 | $12.5 |
| Diluted EPS | $1.44 | $0.81 | $1.66 | $0.53 |
- Q2 operating revenue rose 9%; Stewart-attributable net income rose 77%. Six-month operating revenue rose 11%, and attributable net income more than tripled.
- Title segment Q2 pretax income was $54.8 million, up 40%, with a 10.9% pretax margin versus 8.4%. Ancillary services and corporate reported a $5.8 million pretax loss, improved from a $9.7 million loss.
- Q2 direct title revenue fell 4% to $218.2 million, while gross agency revenue grew 20%. Increased refinancing activity supported residential business; lower commercial and international activity weighed on direct revenue. Closed orders increased 32%, with refinance closed orders up 173% and purchase orders down 18%.
- Employee costs were 27.1% of operating revenue in Q2 versus 30.0% a year earlier; other operating expenses were 14.7% versus 18.4%. Title loss expense was $21.5 million, and the loss ratio increased to 4.3% from 4.1%.
Cash flow, balance sheet and liquidity
- Six-month operating cash flow was $50.1 million, versus cash used of $8.4 million in 2019. Investing used $38.4 million, including $33.4 million for acquisitions; financing used $29.6 million. Cash declined $19.8 million to $310.8 million.
- At June 30, total debt was $101.7 million and stockholders’ equity was $787.3 million. Notes payable declined from $110.6 million at year-end 2019. The company reported a 12.9% debt-to-equity ratio excluding Section 1031 notes.
- Cash and investments totaled $976.7 million, including statutory-reserve amounts; management reported $433.1 million net of statutory reserves. These reserves are not available for general use or current claim payments. The company also reported $289.8 million of cash and investments available for underwriter operations, claims and acquisitions.
- The unsecured credit facility was amended in May: commitment increased from $150 million to $200 million and maturity extended to May 2025. At June 30, $98.9 million was drawn and $98.6 million was available, net of an unused letter of credit.
- Title-loss reserves were $456.0 million, including $394.4 million for incurred-but-not-reported claims. Book value per share was $32.96, compared with $31.52 at December 31, 2019.
Changes, outlook and risks
- COVID-19: Stewart continued operating as an essential business and cited digital closing tools, including remote notarization and electronic signatures. Management said market and operating effects remained uncertain and could adversely affect results, asset values and transaction volumes.
- Q2 results included $4.6 million of title-segment investment gains, $2.8 million of severance expense, and $0.5 million of ancillary/corporate investment gains. Prior-year Q2 included $3.7 million of advisory costs related to the terminated FNF merger. Investment fair-value changes materially influenced comparisons.
- Stewart completed its acquisition of U.S. Appraisals at the end of May, contributing $7.1 million of Q2 revenue. Acquisition-related goodwill was recorded at $29.9 million, based on preliminary purchase accounting. The company also acquired title offices.
- Management described liquidity as strong and expected operating cash flows and available underwriter funds, subject to regulation, to fund operations and claims. It noted that additional borrowing or equity funding could be needed in some circumstances. No company-specific earnings guidance was provided.
- Industry forecasts cited in the filing projected Q3 2020 existing and new home sales down 2% and 3% year over year, respectively, but sequentially higher; mortgage originations were forecast up 12% year over year and down 24% sequentially. These are external forecasts, not Stewart guidance.
- Key exposures include pandemic duration and economic conditions, mortgage rates and refinancing trends, commercial transaction volumes, title-loss reserve uncertainty, regulatory restrictions on insurer cash, foreign exchange, litigation, and access to financing. Management said ordinary-course litigation and regulatory matters were adequately reserved and not expected to have a material adverse effect.
Important facts for investors to verify
- Whether strong refinance volumes persist as rates, purchase activity and pandemic conditions change.
- U.S. Appraisals’ final purchase accounting, contribution to segment performance, and integration costs.
- Title-loss reserve adequacy and subsequent claim experience, particularly for large and prior-policy-year claims.
- How much reported profit improvement reflects operating performance versus investment gains and prior-year merger-related costs.
- Availability of cash for corporate use after statutory reserves and regulatory limits, and the credit facility’s borrowing conditions.