Stewart Reports Fourth Quarter 2017 Results

Stewart Reports Fourth Quarter 2017 Results

  • Total revenues of $525.7 million, increased 5 percent sequentially; in-line with prior year quarter
  • Net income attributable to Stewart of $15.1 million, compared to $16.7 million in the prior year quarter
  • Commercial revenues of $71.5 million, increased 23 percent from the prior year quarter
  • Total cash from operations of $60.0 million, increased 2 percent from the prior year quarter
  • The Company continues its strategic alternatives review process

HOUSTON, February 8, 2018 -- Stewart Information Services Corporation (NYSE: STC) today reported net income attributable to Stewart of $15.1 million ($0.64 per diluted share) for the fourth quarter 2017 compared to net income attributable to Stewart of $16.7 million ($0.71 per diluted share) for the fourth quarter 2016. Pretax income before noncontrolling interests for the fourth quarter 2017 was $17.5 million compared to pretax income before noncontrolling interests of $23.0 million for the fourth quarter 2016.

Fourth quarter 2017 results included:

  • $2.9 million of third party advisory expenses recorded in other operating expenses in the ancillary services and corporate segment relating to our previously announced review of strategic alternatives,
  • $3.5 million of office closure costs, primarily lease termination and litigation expenses, recorded in other operating expenses in the title segment,
  • $1.7 million of executive severance and retention expenses recorded in employee costs in the title and ancillary services and corporate segments,
  • $1.0 million of acquisition integration expenses recorded in other operating expenses in the title segment, and
  • $6.6 million of net income tax benefits related to the effects of the recently-enacted Tax Cuts and Jobs Act.

 

Fourth quarter 2016 results included:

  • $5.4 million of net realized losses, primarily related to realized losses on the sale of assets related to certain ancillary services business lines, and
  • $2.4 million of income tax benefits related to previously unrecognized tax credits.

“We were pleased with the 5 percent sequential increase in revenues this quarter, as broad-based commercial strength and contributions from new business producers helped offset overall market weakness,” noted Matthew Morris, chief executive officer. “We continue to be encouraged by the success of our recruiting efforts in replacing revenue impacted by staff departures earlier in the year as well as expanding further in our high priority markets. While investing in this growth temporarily elevated our expenses in 2017, we enter 2018 with strong momentum and improving productivity, ready to take advantage of improving residential purchase trends and continued penetration in the commercial market.”

Review of Strategic Alternatives

In our third quarter 2017 earnings release, we noted that Stewart’s Board of Directors had formed a strategic committee to actively assess the full range of available strategic alternatives. That review continues and while there is no timeframe on its conclusion, its completion is of the highest priority. As noted in November, given the ongoing review, there can be no assurance that this process will result in any particular outcome.

Selected Financial Information

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

 

Quarter Ended Dec. 31,

 

Year Ended Dec. 31,

 

 

2017

2016

 

2017

2016

 

 

 

 

 

 

 

 

Total revenues

525.7

525.8

 

1,955.7

2,006.6

 

Pretax income before noncontrolling interests

17.5

23.0

 

75.1

88.0

 

Income tax (benefit) expense

(0.6)

2.8

 

14.9

19.6

 

Net income attributable to Stewart

15.1

16.7

 

48.7

55.5

 

Net income per diluted share attributable to Stewart

0.64

0.71

 

2.06

1.85(1)

(1) As previously reported, during the second quarter 2016, Stewart paid a $12.0 million cash consideration to the holders of our Class B Common Stock as part of the exchange agreement announced during that quarter. Excluding this cash payment, the adjusted net income per diluted share for the full year 2016 was $2.36. Under U.S. GAAP, the $12.0 million payment was recorded as a reduction to retained earnings, similar to a preferred stock dividend, but did not reduce the net income attributable to Stewart. However, the payment reduced the net income used in the calculation of basic and diluted earnings per share.

 

 

 

Title Segment

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

 

 

Quarter Ended Dec. 31,

 

 

2017

2016

Change

 

 

 

 

 

 

Total revenues

514.6

511.6

1%

 

Pretax income

27.0

38.1

(29)%

 

Pretax margin

5.2%

7.4%

 

 

 

Total title revenues for the fourth quarter 2017 were slightly higher than the prior year quarter, while pretax income declined $11.1 million for the fourth quarter 2017 compared to the fourth quarter 2016. The lower pretax income was primarily due to increased employee costs related to our investment in stabilizing and growing target markets, a lower agency remittance rate and slightly higher title loss expense as a percent of title revenues. Also included in the segment’s results for the fourth quarter 2017, as discussed above, are approximately $3.5 million of office closure costs and $1.0 million related to acquisition integration costs.

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

 

Quarter Ended Dec. 31,

 

 

2017

2016

Change

 

 

 

 

 

 

Non-commercial:

 

 

 

 

Domestic

134.0

148.3

(10)%

 

International

21.0

23.8

(12)%

 

Commercial:

 

 

 

 

Domestic

59.1

52.7

12%

 

International

12.4

5.4

130%

 

Total direct title revenues

226.5

230.2

(2)%

 

Non-commercial domestic revenue includes revenues from purchase transactions and centralized title operations (processing primarily refinancing and default title orders), which decreased 7 percent and 33 percent, respectively, in the fourth quarter 2017 compared to the prior year. Total commercial revenues improved 23 percent from the prior year quarter, driven by domestic strength across multiple geographies and an increased contribution from our international operations. Total international title revenues increased 14 percent in the fourth quarter 2017 compared to the prior year quarter driven by higher commercial revenues and stronger foreign exchange rates against the U.S. dollar, partially offset by lower non-commercial transaction volume.

Gross revenues from independent agency operations in the fourth quarter 2017 increased 1 percent compared to the fourth quarter 2016. The independent agency remittance rate decreased to 17.2 percent in the fourth quarter 2017 from 18.2 percent in the prior year quarter as a result of the geographic mix of our agency business (decreased revenues in higher-remitting states and increased revenues in lower-remitting states); revenues, net of agency retention, decreased 4 percent in the fourth quarter 2017 compared 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 Dec. 31,

 

 

2017

2016

Change

 

 

 

 

 

 

Total revenues

11.1

14.2

(22)%

 

Pretax loss

(9.6)

(15.1)

37%

 

The decline in fourth quarter 2017 segment revenues compared to the prior year quarter was primarily due to the divestitures from certain ancillary services lines of business at the end of 2016 and lower revenues generated by the valuation services operations in the current year quarter.

The segment’s pretax results for the fourth quarter 2017 improved to a $9.6 million pretax loss, which included $2.9 million of expenses relating to our strategic alternatives review, compared to the prior year quarter’s pretax loss of $15.1 million, which included net realized losses of $4.9 million primarily related to the sale of certain ancillary services business lines and early lease termination costs. This improvement was primarily due to the higher reduction in overall segment expenses relative to the decrease in revenues. The segment’s results for the fourth quarter 2017 and 2016 included approximately $8.8 million and $6.4 million, respectively, of net expenses attributable to parent company and corporate operations.

 

Expenses

Employee costs of $147.0 million for the fourth quarter 2017 were comparable to the prior year quarter. Salaries declined as a result of an approximately 7 percent reduction in average employee counts, primarily related to volume declines in our ancillary services and centralized title operations and staff departures in direct operations during the second quarter 2017. This decline was offset by higher commissions and incentive compensation during the fourth quarter 2017, driven by higher commercial revenues, increased value of performance-based stock compensation and increased recruiting efforts to replace departed staff in direct operations. As a percentage of total operating revenues, employee costs for the fourth quarter 2017 were 28.4 percent compared to 27.9 percent in the prior year quarter.

Other operating expenses of $95.9 million for the fourth quarter 2017 were also comparable to the fourth quarter 2016. Outside title search fees, costs of services within ancillary services and centralized title operations and bad debt expense decreased, offset by increased technology costs and third-party advisory fees. As a percentage of total operating revenues, other operating expenses for the fourth quarter 2017 were 18.5 percent compared to 18.2 percent in the fourth quarter 2016. As noted earlier, other operating costs for the fourth quarter 2017 included approximately $3.5 million of office closure costs, $2.9 million of expenses related to our strategic alternatives review and $1.0 million of acquisition integration costs; excluding these charges, the other operating expenses ratio for the fourth quarter 2017 was 17.1 percent, an improvement of 110 basis points from the prior year quarter.

 

Title loss expenses increased to $25.9 million in the fourth quarter 2017, compared to $24.5 million in the fourth quarter 2016. Title losses were 5.1 percent of title revenues in the fourth quarter 2017 compared to 4.8 percent in the fourth quarter 2016. Looking ahead in 2018, we expect our loss provisioning rate will be approximately 4.8 percent.

Depreciation and amortization expenses decreased to $6.5 million in the fourth quarter 2017 from $7.3 million in the fourth quarter 2016, primarily due to lower amortization expenses resulting from the disposal of certain intangible assets related to the divestitures of several lines of the ancillary services business during the fourth quarter 2016.

 

Other

Net cash provided by operations in the fourth quarter 2017 increased to $60.0 million, from $59.0 million in the prior year quarter, due primarily to lower claims payments, partially offset by the lower net income generated during the fourth quarter 2017.

 

Fourth quarter Earnings Call

Stewart will hold a conference call to discuss the fourth quarter 2017 earnings at 8:30 a.m. Eastern Time on Thursday, February 8, 2018. To participate, dial (866) 342-8591 (USA) and (203) 518-9822 (International) - access code STCQ417. Additionally, participants can listen to the conference call through Stewart’s Investor Relations website at http://www.stewart.com/en/investor-relations/earnings-call.html. The conference call replay will be available from 10:00 a.m. Eastern Time on February 8, 2018 until midnight on February 15, 2018, by dialing (800) 374-0328 (USA) or (402) 220-0663 (International) - the access code is also STCQ417.

 

 

 

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, 2016, 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

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

 

 

Quarter Ended Dec. 31, (Unaudited)

 

Year Ended Dec. 31,

 

 

    2017

    2016

 

2017

2016

 

Revenues:

 

 

 

 

 

 

Title revenues:

 

 

 

 

 

 

Direct operations

       226,472

       230,185

 

     862,392

 894,313

 

Agency operations

       280,055

       277,477

 

   1,016,356

 1,009,797

 

Ancillary services

        10,741

         18,995

 

       55,837

 84,271

 

Total operating revenues

      517,268

     526,657

 

   1,934,585

  1,988,381

 

Investment income

          4,753

          4,480

 

       18,932

 18,925

 

Realized investment and other gains (losses) - net

          3,643

        (5,373)

 

2,207        

 (666)

 

 

       525,664

       525,764

 

  1,955,724

 2,006,640

 

Expenses:

 

 

 

 

 

 

Amounts retained by agencies

       231,908

       227,107

 

      837,100

 826,022

 

Employee costs

       146,994

       147,187

 

     566,178

 604,353

 

Other operating expenses

        95,917

         95,776

 

     351,511

 363,986

 

Title losses and related claims

        25,941

         24,535

 

       96,532

 91,147

 

Depreciation and amortization

          6,481

           7,316

 

       25,878

 30,044

 

Interest

             966

             825

 

         3,458

 3,062

 

 

       508,207

       502,746

 

   1,880,657

 1,918,614

 

Income before taxes and noncontrolling interests

        17,457

       23,018

 

      75,067

 88,026

 

Income tax (benefit) expense

          (615)

          2,826

 

       14,921

19,605 

 

Net income

        18,072

         20,192

 

       60,146

 68,421

 

Less net income attributable to noncontrolling interests

          3,012

          3,493

 

      11,487

 12,943

 

Net income attributable to Stewart

        15,060

         16,699

 

       48,659

55,478

 

 

 

 

 

 

 

 

Net earnings per diluted share attributable to Stewart

0.64

0.71

 

2.06          

1.85

 

Diluted average shares outstanding (000)

23,598

23,492

 

 23,597

23,472

 

 

 

 

 

 

 

 

Selected financial information:

 

 

 

 

 

 

Net cash provided by operations

60,020

 58,976

 

108,068

 122,962

 

Other comprehensive (loss) income

(2,729)

 (15,372)

 

8,034

 (4,924)

 

               

Monthly Order Counts:

 

 

 

 

 

 

 

 

 

Opened Orders 2017:

Oct

Nov

Dec

Total

 

Closed Orders 2017:

Oct

Nov

Dec

Total

 

Commercial

 3,469

 3,512

 2,967

 9,948

 

Commercial

 2,310

 2,291

 2,549

 7,150

 

Purchase

20,050

 16,755

13,599

 50,404

 

Purchase

15,132

 14,015

 14,389

43,536

 

Refinancing

 8,802

 8,310

 7,084

 24,196

 

Refinancing

 6,504

 5,899

 6,011

18,414

 

Other

 1,322

 1,589

 1,115

 4,026

 

Other

 860

 661

 797

 2,318

 

Total

33,643

30,166

 24,765

 88,574

 

Total

 24,806

22,866

 23,746

71,418

 

 

 

 

 

 

 

 

 

 

 

 

 

Opened Orders 2016:

Oct

Nov

Dec

Total

 

Closed Orders 2016:

Oct

Nov

Dec

Total

 

Commercial

 3,542

 3,845

 3,832

 11,219

 

Commercial

 2,401

 2,564

 2,925

 7,890

 

Purchase

19,012

 17,971

 15,089

 52,072

 

Purchase

15,801

 14,812

15,861

46,474

 

Refinancing

12,625

 11,766

 8,995

 33,386

 

Refinancing

 9,596

 9,471

 9,425

28,492

 

Other

 956

 799

 861

 2,616

 

Other

 1,402

 1,206

 1,450

 4,058

 

Total

36,135

 34,381

 28,777

 99,293

 

Total

29,200

28,053

29,661

86,914

 

                                   

 

 

STEWART INFORMATION SERVICES CORPORATION

CONDENSED BALANCE SHEETS AS OF DECEMBER 31

(In thousands of dollars)

 

 

2017

 

2016

Assets:

 

 

Cash and cash equivalents

150,079

     185,772

Short-term investments

24,463

       22,239

Investments in debt and equity securities available-for-sale, at fair value

709,355

     631,503

Receivables – premiums from agencies

27,903

       31,246

Receivables – other

55,769

50,177

Allowance for uncollectible amounts

(5,156)

      (9,647)

Property and equipment, net

67,022

      70,506

Title plants, at cost

74,237

75,313

Goodwill

231,428

     217,094

Intangible assets, net of amortization

9,734

       10,890

Deferred tax assets

4,186

3,860

Other assets

56,866

52,771

 

1,405,886

1,341,724

Liabilities:

 

 

Notes payable

109,312

106,808

Accounts payable and accrued liabilities

117,740

115,640

Estimated title losses

480,990

462,572

Deferred tax liabilities

19,034

7,856

 

727,076

692,876

Stockholders' equity:

 

 

Common Stock and additional paid-in capital

184,026

180,959

Retained earnings

491,698

471,788

Accumulated other comprehensive loss

(847)

(8,881)

Treasury stock

(2,666)

(2,666)

Stockholders’ equity attributable to Stewart

672,211

641,200

Noncontrolling interests

6,599

7,648

Total stockholders' equity

678,810

648,848

 

1,405,886

1,341,724

Number of shares outstanding (000)

23,720

23,431

Book value per share

28.62

27.69

 

STEWART INFORMATION SERVICES CORPORATION

SEGMENT INFORMATION

(In thousands of dollars)

 

 

Quarter Ended:

December 31, 2017

 

December 31, 2016

 

Title

Ancillary Services and Corporate

Consolidated

 

Title

Ancillary Services and Corporate

Consolidated

Revenues:

 

 

 

 

 

 

 

Operating revenues

506,442

10,826

517,268

 

507,572

19,085

526,657

Investment income

4,753

-        

4,753

 

4,480

-        

4,480

Realized investment and other gains (losses) - net

3,411

232

3,643

 

(491)

(4,882)

(5,373)

 

514,606

11,058

525,664

 

511,561

14,203

525,764

Expenses:

 

 

 

 

 

 

 

Amounts retained by agencies

231,908

-        

231,908

 

227,107

-        

227,107

Employee costs

137,629

9,365

146,994

 

133,278

13,909

147,187

Other operating expenses

86,814

9,103

95,917

 

83,001

12,775

95,776

Title losses and related claims

25,941

-        

25,941

 

24,535

-        

24,535

Depreciation and amortization

5,303

1,178

6,481

 

5,535

1,781

7,316

Interest

1

965

966

 

3

822

825

 

487,596

20,611

508,207

 

473,459

29,287

502,746

Income (loss) before taxes

27,010

(9,553)

17,457

 

38,102

(15,084)

23,018

 

 

 

 

 

 

 

                           

 

 

Year Ended:

December 31, 2017

 

December 31, 2016

 

Title

Ancillary Services and Corporate

Consolidated

 

Title

Ancillary Services and Corporate

Consolidated

Revenues:

 

 

 

 

 

 

 

Operating revenues

1,878,574

56,011

1,934,585

 

1,903,536

84,845

1,988,381

Investment income

18,932

-        

18,932

 

18,925

-        

18,925

Realized investment and other gains (losses) - net

1,956

251

2,207

 

(39)

(627)

(666)

 

1,899,462

56,262

1,955,724

 

1,922,422

84,218

2,006,640

Expenses:

 

 

 

 

 

 

 

Amounts retained by agencies

837,100

-        

837,100

 

826,022

-        

826,022

Employee costs

528,317

37,861

566,178

 

538,606

65,747

604,353

Other operating expenses

312,761

38,750

351,511

 

306,384

57,602

363,986

Title losses and related claims

96,532

-        

96,532

 

91,147

-        

91,147

Depreciation and amortization

21,384

4,494

25,878

 

21,176

8,868

30,044

Interest

7

3,451

3,458

 

4

3,058

3,062

 

1,796,101

84,556

1,880,657

 

1,783,339

135,275

1,918,614

Income (loss) before taxes

103,361

(28,294)

75,067

 

139,083

(51,057)

88,026

 

 

 

 

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 realized 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 realized investment and other gains and losses, certain significant litigation expenses and other non-operating costs such as third-party advisory costs, component exit-related costs and prior policy year reserve adjustments (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 year ended December 31, 2017 and 2016 (dollars in millions).

 

 

Quarter Ended Dec. 31,

 

Year Ended Dec. 31,

 

2017

2016

Change

 

2017

2016

Change

 

 

 

 

 

 

 

 

Revenues

       525.7

     525.8

 

 

   1,955.7

   2,006.6

 

Less: Net realized (gains) losses

         (3.6)

         5.4

 

 

         (2.2)

         0.7

 

Adjusted revenues

       522.1

     531.2

(2)%

 

   1,953.5

   2,007.3

(3)%

 

 

 

 

 

 

 

 

Net income attributable to Stewart

         15.1

       16.7

 

 

       48.7

       55.5

 

Noncontrolling interests

          3.0

         3.5

 

 

       11.5

       12.9

 

Income taxes

         (0.6)

         2.8

 

 

       14.9

       19.6

 

Income before taxes and noncontrolling interests

         17.5

       23.0

 

 

       75.1

       88.0

 

Other non-operating charges

     8.7

-

 

 

     10.1

3.8

 

Litigation expense

0.4

-

 

 

0.4

       3.6

 

Prior policy year reserve adjustments, net

-

-

 

 

-

(5.4)

 

Net realized (gains) losses

 (3.6)   

      5.4

 

 

 (2.2)   

      0.7

 

Adjusted income before taxes and noncontrolling interests

23.0

    28.4

 

 

83.4

    90.7

 

Depreciation and amortization

          6.5

         7.3

 

 

       25.9

       30.0

 

Interest expense

          1.0

         0.8

 

 

         3.5

         3.1

 

 

 

 

 

 

 

 

 

Adjusted EBITDA

30.5

      36.5

(16)%

 

112.8

     123.8

(9)%

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