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Stewart Reports Third Quarter 2018 Results

Stewart Reports Third Quarter 2018 Results

  • Title revenues of $486.0 million compared to $485.4 million in the prior year quarter
  • Commercial revenues of $52.0 million, an increase of $7.3 million, or 16 percent, compared to the prior year quarter
  • Net income attributable to Stewart of $17.6 million, an increase of $6.6 million, or 60 percent, compared to the prior year quarter

HOUSTON, October 25, 2018 -- Stewart Information Services Corporation (NYSE: STC) today reported net income attributable to Stewart of $17.6 million ($0.74 per diluted share) for the third quarter 2018, compared to net income attributable to Stewart of $10.9 million ($0.46 per diluted share) for the third quarter 2017. Pretax income before noncontrolling interests for the third quarter 2018 was $24.8 million compared to a pretax income before noncontrolling interests of $18.6 million for the third quarter 2017.

Third quarter 2018 results included $6.8 million of third-party advisory expenses in the ancillary services and corporate segment relating to the FNF merger transaction and $3.4 million of net unrealized gains relating to changes in fair value of equity investments. Third quarter 2017 results included $1.4 million of acquisition integration costs in the title segment.

”Stewart delivered solid third quarter results as increased fee-per-file levels in both commercial and residential operations offset lower order counts,” stated Matthew W. Morris, chief executive officer. “Even though order counts were down year-over-year as interest rates rose through the quarter, the growing mix of purchase transactions in our residential business and larger transaction sizes in our commercial business helped keep title revenues flat with the third quarter 2017. Our senior management team remains focused on the merger process as we continue to work with the FTC and the appropriate state regulators, and, as our results illustrate, all associates remain focused on delivering solid operating results.”

 

Fidelity National Financial (FNF) Update

Since announcing our agreement and plan of merger with FNF in March 2018, we initiated the regulatory approval process, which included the submission of our Hart-Scott-Rodino Act filings to the Federal Trade Commission (FTC) and the Form A filings to the states of Texas and New York, the domiciles of Stewart’s two main underwriters. Furthermore, the merger was approved by a majority of our stockholders during a special meeting held on September 5, 2018. We continue to work cooperatively with FNF, the FTC and state regulators in the ongoing review process, responding to data and information requests as they arise. Of note, in August, the Canadian Competition Bureau notified FNF that it had no opposition to the completion of the merger.

Selected Financial Information

Summary results of operations are as follows (dollars in millions, except per share amounts):

 

Quarter Ended Sept. 30,

 

Nine Months Ended

Sept. 30,

 

2018

2017

 

2018

2017

 

 

 

 

 

 

Total revenues

507.6

501.6

 

1,437.7

1,430.1

Pretax income before noncontrolling interests

24.8

18.6

 

52.8

57.6

Income tax expense

4.4

4.7

 

8.7

15.5

Net income attributable to Stewart

17.6

10.9

 

36.2

33.6

Net income per diluted share attributable to Stewart

0.74

0.46

 

1.53

1.43

Title Segment

Summary results of the title segment are as follows (dollars in millions, except pretax margin):

 

 

Quarter Ended September 30,

 

 

2018

2017

Change

 

 

 

 

 

 

Total operating revenues

486.0

485.4

0%

 

Investment income and other net gains

7.2

3.2

122%

 

Pretax income

36.0

24.6

46%

 

Pretax margin

7.3%

5.0%

 

 

 

Title operating revenues in the third quarter 2018 were comparable to the prior year quarter, as a result of higher commercial and independent agency revenues, which were partially offset by lower non-commercial direct title revenues. Pretax income improved $11.4 million in the third quarter 2018 compared to the third quarter 2017, primarily as a result of lower overall title operating expenses and higher investment income and other net gains. Included in the segment’s results were $2.2 million of net unrealized gains relating to fair value changes of equity securities investments, which were being recorded to other comprehensive income prior to the adoption of a new accounting standard in 2018.

 

Direct title revenues information is presented below (dollars in millions):

 

Quarter Ended September 30,

 

 

2018

2017

Change

 

 

 

 

 

 

Non-commercial:

 

 

 

 

Domestic

136.2

141.7

(4)%

 

International

24.9

30.4

(18)%

 

Commercial:

 

 

 

 

Domestic

45.2

39.2

15%

 

International

6.8

5.5

24%

 

Total direct title revenues

213.1

216.8

(2)%

 

Included in the non-commercial domestic revenues were revenues from purchase transactions, which were roughly flat year-over-year, and centralized title operations (processing primarily refinancing and default title orders), which were down $5.7 million in the third quarter 2018 compared to the third quarter 2017. Total commercial revenues improved $7.3 million, or 16 percent, from the prior year quarter due to our continued focus on delivering quality service and underwriting to our domestic and international commercial customers. Total international title revenues in the third quarter 2018 decreased $4.2 million, or 12 percent, compared to the prior year quarter, primarily as a result of lower volumes from our Canada operations. Third quarter 2018 commercial fee per file increased 43% to approximately $8,400 due to increased transaction sizes, while domestic residential fee per file increased 10% to approximately $2,200 as a result of the mix shift to more purchase transactions.

Both gross and net revenues from independent agency operations in the third quarter 2018 increased 2 percent, compared to the third quarter 2017, as we maintained our focus on enhancing customer service and technology connectivity. The independent agency remittance rate in the third quarter 2018 remained comparable to the prior year quarter.

Ancillary Services and Corporate Segment

Summary results of the ancillary services and corporate segment are as follows (dollars in millions):

 

 

Quarter Ended September 30,

 

 

2018

2017

Change

 

 

 

 

 

 

Total revenues

14.5

13.0

12%

 

Pretax loss

(11.2)

(6.0)

(87)%

 

Third quarter 2018 segment revenues increased $1.5 million compared to the prior year quarter, primarily due to a $1.2 million net unrealized gain resulting from a fair value change of an equity investment with previously no readily determinable fair value. The segment’s third quarter 2018 pretax results declined compared to the prior year quarter, primarily due to the $6.8 million of third-party advisory expenses incurred in the third quarter 2018 relating to the FNF merger transaction. Additionally, the segment’s results for the third quarter 2018 and 2017 included approximately $5.8 million and $6.1 million, respectively, of net expenses attributable to parent company and corporate operations.

Expenses

Employee costs for the third quarter 2018 were $138.3 million, which was 1 percent lower compared to $140.1 million in the prior year quarter. Average employee counts decreased approximately 8 percent in the third quarter 2018 compared to the third quarter 2017, primarily related to volume declines in our title and ancillary services operations. The reduced employee counts resulted in the 8 percent decrease in salaries and other employee benefits, which was partially offset by increased commissions on higher commercial title revenues and higher incentive compensation. As a percentage of total operating revenues, employee costs for the third quarter 2018 improved 40 basis points to 27.7 percent compared to the prior year quarter.

Other operating expenses for the third quarter 2018 increased 3 percent to $90.8 million from $88.5 million in the third quarter 2017. The increase was primarily due to the previously mentioned higher third-party advisory expenses related to the FNF merger transaction, partially offset by lower cost of services in our centralized title operations and reduced costs related to third party outsourcing. As a percentage of total operating revenues, other operating expenses for the third quarter 2018 were 18.2 percent compared to 17.8 percent in the prior year quarter. Excluding the charges related to the FNF merger transaction and the acquisition integration during the third quarters 2018 and 2017, respectively, the other operating expenses ratio in the third quarter 2018 would have been 16.8 percent, 70 basis points lower compared to the prior year quarter.

Title loss expense for the third quarter 2018 decreased 15 percent to $21.5 million, compared to $25.4 million in the third quarter 2017, primarily as a result of better claims experience. Additionally, title losses were 4.4 percent of title revenues in the third quarter 2018 compared to 5.2 percent in the prior year quarter. We expect our title losses to range between 4.0 to 4.5 percent of title revenues for the year 2018.

Other

Net cash provided by operations in the third quarter 2018 increased to $36.4 million, compared to net cash provided of $31.5 million in the prior year quarter, primarily due to the higher net income generated in the third quarter 2018.

About Stewart

Stewart Information Services Corporation (NYSE:STC) is a global real estate services company, offering products and services through our direct operations, network of Stewart Trusted Providers™ and family of companies. From residential and commercial title insurance and closing and settlement services to specialized offerings for the mortgage industry, we offer the comprehensive service, deep expertise and solutions our customers need for any real estate transaction. At Stewart, we believe in building strong relationships – and these partnerships are the cornerstone of every closing, every transaction and every deal. Stewart. Real partners. Real possibilities.™ More information is available at the Company’s website at stewart.com, or you can subscribe to the Stewart blog at blog.stewart.com, or follow Stewart on Twitter® @stewarttitleco.

Forward-looking statements. Certain statements in this news release are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements relate to future, not past, events and often address our expected future business and financial performance.  These statements often contain words such as "expect," "anticipate," "intend," "plan," "believe," "seek," "will," "foresee" or other similar words. Forward-looking statements by their nature are subject to various risks and uncertainties that could cause our actual results to be materially different than those expressed in the forward-looking statements. These risks and uncertainties include, among other things, the challenging economic conditions; adverse changes in the level of real estate activity; changes in mortgage interest rates, existing and new home sales, and availability of mortgage financing; our ability to respond to and implement technology changes, including the completion of the implementation of our enterprise systems; the impact of unanticipated title losses or the need to strengthen our policy loss reserves; any effect of title losses on our cash flows and financial condition; the ability to attract and retain highly productive sales associates; the impact of vetting our agency operations for quality and profitability; independent agency remittance rates; changes to the participants in the secondary mortgage market and the rate of refinancing that affects the demand for title insurance products; regulatory non-compliance, fraud or defalcations by our title insurance agencies or employees; our ability to timely and cost-effectively respond to significant industry changes and introduce new products and services; the outcome of pending litigation; the impact of changes in governmental and insurance regulations, including any future reductions in the pricing of title insurance products and services; our dependence on our operating subsidiaries as a source of cash flow; the continued realization of expense savings from our cost management program; our ability to successfully integrate acquired businesses; our ability to access the equity and debt financing markets when and if needed; our ability to grow our international operations; seasonality and weather; and our ability to respond to the actions of our competitors. These risks and uncertainties, as well as others, are discussed in more detail in our documents filed with the Securities and Exchange Commission, including our Annual Report on Form 10-K for the year ended December 31, 2017, and if applicable, our Quarterly Reports on Form 10-Q, and our Current Reports on Form 8-K. All forward-looking statements included in this news release are expressly qualified in their entirety by such cautionary statements. We expressly disclaim any obligation to update, amend or clarify any forward-looking statements contained in this news release to reflect events or circumstances that may arise after the date hereof, except as may be required by applicable law.

STEWART INFORMATION SERVICES CORPORATION

CONDENSED STATEMENTS OF INCOME (UNAUDITED)

(In thousands of dollars, except per share amounts and except where noted)

 

 

Quarter Ended      September 30,

 

Nine Months Ended September 30,

 

 

    2018

    2017

 

    2018

    2017

 

Revenues:

 

 

 

 

 

 

Title revenues:

 

 

 

 

 

 

Direct operations

 213,134

216,830

 

 622,886

635,921

 

Agency operations

 272,875

268,545

 

 756,986

736,301

 

Ancillary services

 13,227

12,674

 

 38,790

45,096

 

Total operating revenues

 499,236

498,049

 

 1,418,662

1,417,318

 

Investment income

 4,781

4,567

 

 14,732

14,179

 

Investment and other gains (losses) - net

 3,623

(1,047)

 

 4,345

(1,436)

 

 

 507,640

501,569

 

 1,437,739

1,430,061

 

Expenses:

 

 

 

 

 

 

Amounts retained by agencies

 224,966

      221,460

 

 623,967

     605,192

 

Employee costs

 138,288

      140,054

 

 423,389

     419,184

 

Other operating expenses

 90,810

        88,489

 

 257,029

     255,593

 

Title losses and related claims

 21,503

        25,428

 

 59,181

       70,591

 

Depreciation and amortization

 6,221

          6,578

 

 18,609

       19,397

 

Interest

 1,076

             963

 

 2,722

         2,492

 

 

 482,864

      482,972

 

 1,384,897

   1,372,449

 

Income before taxes and noncontrolling interests

 24,776

        18,597

 

 52,842

       57,612

 

Income tax expense

 4,371

          4,686

 

 8,679

       15,536

 

Net income

 20,405

        13,911

 

 44,163

42,076

 

Less net income attributable to noncontrolling interests

 2,851

          2,967

 

 8,012

8,475

 

Net income attributable to Stewart

 17,554

        10,944

 

 36,151

33,601

 

 

 

 

 

 

 

 

Net earnings per diluted share attributable to Stewart

0.74

0.46

 

1.53

1.43          

 

Diluted average shares outstanding (000)

23,699

23,564

 

23,667

 23,571

 

 

 

 

 

 

 

 

Selected financial information:

 

 

 

 

 

 

Net cash provided by operations

36,366

31,517

 

43,733

48,048

 

Other comprehensive (loss) income

(907)

3,873

 

(17,451)

10,763

 

Monthly Order Counts:

 

 

 

 

 

 

 

 

 

Opened Orders 2018:

Jul

Aug

Sept

Total

 

Closed Orders 2018:

Jul

Aug

Sept

Total

 

Commercial

 2,654

 2,655

 2,188

 7,497

 

Commercial

 2,112

 2,255

 1,842

 6,209

 

Purchase

20,880

21,095

 16,953

 58,928

 

Purchase

15,934

16,810

13,297

46,041

 

Refinancing

 6,786

 7,501

 6,154

 20,441

 

Refinancing

 4,319

 4,855

 3,972

13,146

 

Other

 755

 582

 488

 1,825

 

Other

 552

 552

 310

 1,414

 

Total

31,075

31,833

 25,783

 88,691

 

Total

22,917

 24,472

19,421

66,810

 

 

 

 

 

 

 

 

 

 

 

 

 

Opened Orders 2017:

Jul

Aug

Sept

Total

 

Closed Orders 2017:

Jul

Aug

Sept

Total

 

Commercial

 3,372

 3,851

 3,462

 10,685

 

Commercial

 2,352

 2,660

 2,631

 7,643

 

Purchase

20,804

21,515

 17,360

 59,679

 

Purchase

16,304

 17,173

 14,955

48,432

 

Refinancing

 8,062

10,157

 8,936

 27,155

 

Refinancing

 5,619

 6,404

 5,942

 17,965

 

Other

 1,790

 1,416

 1,359

 4,565

 

Other

 853

 1,127

 892

 2,872

 

Total

 34,028

36,939

31,117

 102,084

 

Total

25,128

 27,364

 24,420

76,912

 

                                   

 

STEWART INFORMATION SERVICES CORPORATION

CONDENSED BALANCE SHEETS

(In thousands of dollars)

 

 

September 30, 2018 (Unaudited)

 

December 31, 2017

Assets:

 

 

Cash and cash equivalents

      149,669

150,079

Short-term investments

        23,954

24,463

Investments in debt and equity securities, at fair value

    662,089

709,355

Receivables – premiums from agencies

31,656

27,903

Receivables – other

48,623

55,769

Allowance for uncollectible amounts

(4,925)

(5,156)

Property and equipment, net

64,471

67,022

Title plants, at cost

74,737

74,237

Goodwill

247,190

231,428

Intangible assets, net of amortization

10,843

9,734

Deferred tax assets

4,186

4,186

Other assets

57,936

56,866

 

1,370,429

1,405,886

Liabilities:

 

 

Notes payable

      106,440

109,312

Accounts payable and accrued liabilities

        97,233

117,740

Estimated title losses

      476,870

480,990

Deferred tax liabilities

        13,152

19,034

 

         693,695

727,076

Stockholders' equity:

 

 

Common Stock and additional paid-in capital

185,432

184,026

Retained earnings

510,068

491,698

Accumulated other comprehensive loss

(21,890)

(847)

Treasury stock

(2,666)

(2,666)

Stockholders’ equity attributable to Stewart

670,944

672,211

Noncontrolling interests

5,790

6,599

Total stockholders' equity

676,734

678,810

 

1,370,429

1,405,886

Number of shares outstanding (000)

23,741

23,720

Book value per share

28.50

28.62

 

STEWART INFORMATION SERVICES CORPORATION

SEGMENT INFORMATION (Unaudited)

(In thousands of dollars)

 

 

Three months ended:

September 30, 2018

 

September 30, 2017

 

Title

Ancillary Services and Corporate

Consolidated

 

Title

Ancillary Services and Corporate

Consolidated

Revenues:

 

 

 

 

 

 

 

Operating revenues

486,009

13,227

499,236

 

485,373

12,676

498,049

Investment income

4,781

-         

4,781

 

4,567

-      

4,567

Investment and other gains (losses) - net

2,396

1,227

3,623

 

(1,328)

281

(1,047)

 

493,186

14,454

507,640

 

488,612

12,957

501,569

Expenses:

 

 

 

 

 

 

 

Amounts retained by agencies

224,966

-        

224,966

 

221,460

-      

221,460

Employee costs

131,485

6,803

138,288

 

132,331

7,723

140,054

Other operating expenses

73,871

16,939

90,810

 

79,249

9,240

88,489

Title losses and related claims

21,503

-        

21,503

 

25,428

-      

25,428

Depreciation and amortization

5,362

859

6,221

 

5,534

1,044

6,578

Interest

-        

1,076

1,076

 

-        

963

963

 

457,187

25,677

482,864

 

464,002

18,970

482,972

Income (loss) before taxes

35,999

(11,223)

24,776

 

24,610

(6,013)

18,597

 

 

 

 

 

 

 

 

 

Nine months ended:

September 30, 2018

 

September 30, 2017

 

Title

Ancillary Services and Corporate

Consolidated

 

Title

Ancillary Services and Corporate

Consolidated

Revenues:

 

 

 

 

 

 

 

Operating revenues

1,379,872

38,790

1,418,662

 

1,372,133

45,185

1,417,318

Investment income

14,732

-        

14,732

 

14,179

-        

14,179

Investment and other gains (losses) - net

3,118

1,227

4,345

 

(1,455)

19

(1,436)

 

1,397,722

40,017

1,437,739

 

1,384,857

45,204

1,430,061

Expenses:

 

 

 

 

 

 

 

Amounts retained by agencies

623,967

-        

623,967

 

605,192

-        

605,192

Employee costs

401,234

22,155

423,389

 

390,688

28,496

419,184

Other operating expenses

218,543

38,486

257,029

 

225,946

29,647

255,593

Title losses and related claims

59,181

-        

59,181

 

70,591

-        

70,591

Depreciation and amortization

15,929

2,680

18,609

 

16,081

3,316

19,397

Interest

8

2,714

2,722

 

5

2,487

2,492

 

1,318,862

66,035

1,384,897

 

1,308,503

63,946

1,372,449

Income (loss) before taxes

78,860

(26,018)

52,842

 

76,354

(18,742)

57,612

Appendix A

Adjusted revenues and adjusted EBITDA

Management uses a variety of financial and operational measurements other than its financial statements prepared in accordance with United States Generally Accepted Accounting Principles (GAAP) to analyze its performance. These include: (1) adjusted revenues, which are reported revenues adjusted for any net investment and other gains and losses and (2) net income after earnings from noncontrolling interests and before interest expense, income tax expense, and depreciation and amortization and adjusted for net investment and other gains and losses and other non-operating costs such as strategic alternatives (FNF merger) expenses and other third-party advisory costs (adjusted EBITDA). Management views these measures as important performance measures of core profitability for its operations and as key components of its internal financial reporting. Management believes investors benefit from having access to the same financial measures that management uses.

The following tables reconcile the non-GAAP financial measurements used by management to our most directly comparable GAAP measures for the quarter and nine months ended September 30, 2018 and 2017 (dollars in millions).

 

 

Quarter Ended

September 30,

 

Nine Months Ended

September 30,

 

2018

2017

% Change

 

2018

2017

% Change

 

 

 

 

 

 

 

 

Revenues

507.6

501.6

 

 

1,437.7

1,430.1

 

Less: Investment and other (gains) losses

(3.6)

1.0

 

 

(4.3)

1.4

 

Adjusted revenues

504.0

502.6

0%

 

1,433.4

1,431.5

0%

 

 

 

 

 

 

 

 

Net income attributable to Stewart

17.6

10.9

 

 

       36.2

       33.6

 

Noncontrolling interests

          2.8

         3.0

 

 

         8.0

         8.5

 

Income taxes

          4.4

       4.7

 

 

         8.6

       15.5

 

Income before taxes and noncontrolling interests

         24.8

       18.6

 

 

       52.8

       57.6

 

Strategic alternatives/FNF merger expenses

6.8

-

 

 

9.7

-

 

Acquisition integration expenses

-

1.4

 

 

-

1.4

 

Loss reserve adjustments, net

-

-

 

 

(0.1)

-

 

Investment and other (gains) losses

 (3.6)

 1.0   

 

 

 (4.3)

 1.4   

 

Adjusted income before taxes and noncontrolling interests

         28.0

       21.0

 

 

       58.1

       60.4

 

Depreciation and amortization

          6.2

         6.6

 

 

       18.6

       19.4

 

Interest expense

          1.1

         1.0

 

 

         2.7

         2.5

 

 

 

 

 

 

 

 

 

Adjusted EBITDA

         35.3

       28.6

23%

 

       79.4

       82.3

(4)%

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