Stewart Reports Second Quarter 2018 Results

  • Title revenues of $471.5 million, an increase of $5.4 million, or 1 percent, compared to the prior year quarter.
  • Commercial revenues of $55.7 million, an increase of $4.3 million, or 8 percent, compared to the prior year quarter.
  • Net income attributable to Stewart of $22.4 million, an increase of $3.8 million, or 21 percent, compared to the prior year quarter.

HOUSTON, July 18, 2018 /PRNewswire/ -- Stewart Information Services Corporation (NYSE: STC) today reported net income attributable to Stewart of $22.4 million ($0.95 per diluted share) for the second quarter 2018, compared to net income attributable to Stewart of $18.6 million ($0.79 per diluted share) for the second quarter 2017. Pretax income before noncontrolling interests for the second quarter 2018 was $31.3 million compared to a pretax income before noncontrolling interests of $33.1 million for the second quarter 2017.

"Stewart delivered a solid second quarter of title revenue growth in the face of tighter residential inventories and rising interest rates," stated Matthew W. Morris, chief executive officer. "Continued commercial strength, home price appreciation and further agency traction helped to offset residential headwinds. While our senior management team has been focusing on the merger process, I want to thank our loyal associates who again produced strong operational results this quarter. Since the merger announcement, we have been focusing on three key areas – meeting our revenue goals, retention of our loyal associates and obtaining regulatory approvals."

Fidelity National Financial (FNF) Update
We announced last quarter that we had begun the regulatory approval process for Stewart's merger with FNF by submitting our preliminary Hart-Scott-Rodino 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. During the second quarter, we received an expected second request for additional information and documentary material from the FTC and are in the process of responding to this request. In addition, we have received approval from a majority of the states with which a Form E was filed and are awaiting approval from the remaining states.

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

 

Quarter Ended June 30,

 

Six Months Ended June 30,

 

2018

2017

 

2018

2017

           

Total revenues

492.9

485.5

 

930.1

928.5

Pretax income before noncontrolling interests

31.3

33.1

 

28.1

39.0

Income tax expense

5.6

11.0

 

4.3

10.9

Net income attributable to Stewart

22.4

18.6

 

18.6

22.7

Net income per diluted share attributable to Stewart

0.95

0.79

 

0.79

0.96

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

 

Quarter Ended June 30,

 

2018

2017

Change

       

Total operating revenues

471.5

466.0

1%

Investment income and other net gains

7.6

4.4

73%

Pretax income

37.7

39.5

(4)%

Pretax margin

7.9%

8.4%

 

Title operating revenues in the second quarter 2018 increased $5.5 million from the prior year quarter, driven by increased commercial and independent agency revenues, which were partially offset by lower residential direct title revenues. Pretax income declined $1.8 million in the second quarter 2018 compared to the second quarter 2017. The title segment incurred higher employee costs due to increased commissions and additional employee costs from acquisitions, which were partially offset by lower title losses and other operating expenses. Included in the segment's results were $4.0 million of net policy loss reserve reductions resulting from our midyear actuarial reserve review, partially offset by charges to policy loss expenses of $3.9 million related to two ongoing escrow litigation matters, and $1.8 million of net unrealized gains relating to changes in fair value of investments in equity securities (which were previously being recorded to other comprehensive income, but are now included in investment and other net gains due to an adoption of a new accounting standard in 2018).

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

 

Quarter Ended June 30,

 

2018

2017

Change

       

Non-commercial:

     

Domestic

145.7

153.1

(5)%

International

22.8

27.2

(16)%

Commercial:

     

Domestic

48.2

46.5

4%

International

7.5

4.9

53%

Total direct title revenues

224.2

231.7

(3)%

Included in the non-commercial domestic revenues were revenues from purchase transactions and centralized title operations (processing primarily refinancing and default title orders) which decreased $1.9 million (1 percent) and $5.5 million (46 percent), respectively, in the second quarter 2018 compared to the prior year quarter due to lower closed orders, primarily on refinancing activities. Total commercial revenues improved 8 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 second quarter 2018 decreased $1.8 million compared to the prior year quarter as a result of lower volumes, principally from our Canada operations, partially offset by the positive impact of the stronger foreign exchange rates against the U.S. dollar.

Gross revenues from independent agency operations in the second quarter 2018 increased $12.9 million compared to the second quarter 2017. The independent agency remittance rate in the second quarter 2018 remained comparable to the prior year quarter. Agency revenues, net of agency retention, improved 4 percent in the second quarter 2018, compared to the prior year quarter, as we maintain our focus on enhancing customer service and technology connectivity.

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

 

Quarter Ended June 30,

 

2018

2017

Change

       

Total revenues

13.7

15.0

(8)%

Pretax loss

(6.4)

(6.3)

(2)%

Second quarter 2018 segment revenues declined $1.3 million compared to the prior year quarter, primarily due to a 23 percent revenue decrease in the valuation services business which was partially offset by a 6 percent increase in the search services business. The segment's pretax results for the second quarter 2018 were comparable to the prior year quarter as a result of lower employee costs, which fully offset the revenue decline for the quarter. The segment's results for the second quarter 2018 and 2017 included approximately $6.3 million and $5.9 million, respectively, of net expenses attributable to parent company and corporate operations.

Expenses
Employee costs for the second quarter 2018 were $146.3 million, or 5 percent higher compared to the prior year quarter. Although average employee counts decreased approximately 6 percent in the second quarter 2018 (primarily related to continued volume declines in our ancillary services and centralized title operations), employee costs increased due to higher commissions and added costs attributed to previous acquisitions in the title segment. As a percentage of total operating revenues, employee costs for the second quarter 2018 were 30.1 percent compared to 29.0 percent in the prior year quarter.

Other operating expenses for the second quarter 2018 decreased 3 percent to $86.0 million from $88.8 million in the second quarter 2017. The decrease was primarily due to lower outside title search expenses and cost of services within our ancillary services business as a result of lower revenues, and reduced costs related to third party outsourcing. As a percentage of total operating revenues, other operating expenses for the second quarter 2018 were 17.7 percent compared to 18.5 percent in the prior year quarter.

Title loss expense for the second quarter 2018 was $18.7 million, a decrease of 24 percent from $24.5 million in the second quarter 2017. Additionally, title losses were 4.0 percent of title revenues in the second quarter 2018 compared to 5.2 percent in the prior year quarter, primarily as a result of our reduced loss provisioning rate due to lower loss experience. As earlier mentioned, during the second quarter 2018, we recorded $4.0 million of policy loss reserve reductions as a result of the actuarial reserve review, while we also incurred charges of $3.9 million related to two ongoing escrow litigation matters. We expect our loss provisioning rate will range between 4.0 to 4.5 percent for the year 2018.

Other
Net cash provided by operations in the second quarter 2018 slightly increased to $36.3 million, compared to net cash provided of $35.7 million in the prior year quarter, primarily due to the higher net income generated in the second 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 June 30,

 

Six Months Ended June 30,

 

2018

2017

 

2018

2017

Revenues:

         

Title revenues:

         

Direct operations

224,240

231,662

 

409,752

419,091

Agency operations

247,257

234,407

 

484,111

467,756

Ancillary services

13,732

15,118

 

25,563

32,422

Total operating revenues

485,229

481,187

 

919,426

919,269

Investment income

5,247

4,941

 

9,951

9,613

Investment and other gains (losses) - net

2,393

(676)

 

722

(389)

 

492,869

485,452

 

930,099

928,493

Expenses:

         

Amounts retained by agencies

203,793

192,558

 

399,000

383,733

Employee costs

146,278

139,346

 

285,101

279,131

Other operating expenses

85,953

88,786

 

166,220

167,103

Title losses and related claims

18,697

24,462

 

37,678

45,163

Depreciation and amortization

6,154

6,441

 

12,388

12,819

Interest

673

712

 

1,646

1,529

 

461,548

452,305

 

902,033

889,478

Income before taxes and noncontrolling interests

31,321

33,147

 

28,066

39,015

Income tax expense

5,602

10,993

 

4,307

10,850

Net income

25,719

22,154

 

23,759

28,165

Less net income attributable to noncontrolling interests

3,342

3,586

 

5,161

5,508

Net income attributable to Stewart

22,377

18,568

 

18,598

22,657

           

Net earnings per diluted share attributable to Stewart

0.95

0.79

 

0.79

0.96

Diluted average shares outstanding (000)

23,625

23,620

 

23,607

23,613

           

Selected financial information:

         

Net cash provided by operations

36,293

35,720

 

7,367

16,531

Other comprehensive (loss) income

(6,697)

3,465

 

(16,544)

6,890

 

Monthly Order Counts:

                 

Opened Orders 2018:

Apr

May

Jun

Total

 

Closed Orders 2018:

Apr

May

Jun

Total

Commercial

2,725

2,870

2,758

8,353

 

Commercial

2,170

2,435

2,363

6,968

Purchase

21,658

22,932

21,484

66,074

 

Purchase

14,921

16,865

17,283

49,069

Refinancing

7,362

7,456

6,797

21,615

 

Refinancing

4,899

5,050

4,633

14,582

Other

763

893

875

2,531

 

Other

959

884

693

2,536

Total

32,508

34,151

31,914

98,573

 

Total

22,949

25,234

24,972

73,155

                     

Opened Orders 2017:

Apr

May

Jun

Total

 

Closed Orders 2017:

Apr

May

Jun

Total

Commercial

3,205

3,817

3,766

10,788

 

Commercial

2,385

2,777

3,005

8,167

Purchase

21,461

23,127

23,235

67,823

 

Purchase

15,225

17,790

19,347

52,362

Refinancing

7,231

7,552

9,400

24,183

 

Refinancing

4,945

5,209

6,144

16,298

Other

1,522

1,595

1,306

4,423

 

Other

1,055

1,432

1,648

4,135

Total

33,419

36,091

37,707

107,217

 

Total

23,610

27,208

30,144

80,962

 

STEWART INFORMATION SERVICES CORPORATION

CONDENSED BALANCE SHEETS

(In thousands of dollars)

 
 

June 30, 2018
(Unaudited)

December 31,
2017

Assets:

   

Cash and cash equivalents

121,128

150,079

Short-term investments

23,642

24,463

Investments in debt and equity securities, at fair value

673,333

709,355

Receivables – premiums from agencies

30,242

27,903

Receivables – other

55,847

55,769

Allowance for uncollectible amounts

(4,842)

(5,156)

Property and equipment, net

66,823

67,022

Title plants, at cost

74,237

74,237

Goodwill

242,736

231,428

Intangible assets, net of amortization

11,138

9,734

Deferred tax assets

4,222

4,186

Other assets

59,393

56,866

 

1,357,899

1,405,886

Liabilities:

   

Notes payable

107,657

109,312

Accounts payable and accrued liabilities

94,057

117,740

Estimated title losses

475,460

480,990

Deferred tax liabilities

14,488

19,034

 

691,662

727,076

Stockholders' equity:

   

Common Stock and additional paid-in capital

184,302

184,026

Retained earnings

499,656

491,698

Accumulated other comprehensive loss

(20,983)

(847)

Treasury stock

(2,666)

(2,666)

Stockholders' equity attributable to Stewart

660,308

672,211

Noncontrolling interests

5,929

6,599

Total stockholders' equity

666,237

678,810

 

1,357,899

1,405,886

Number of shares outstanding (000)

23,745

23,720

Book value per share

28.06

28.62

 

STEWART INFORMATION SERVICES CORPORATION

SEGMENT INFORMATION (Unaudited)

(In thousands of dollars)

 

Three months ended:

June 30, 2018

 

June 30, 2017

 

Title

Ancillary
Services
and
Corporate

Consolidated

 

Title

Ancillary
Services
and
Corporate

Consolidated

Revenues:

             

Operating revenues

471,497

13,732

485,229

 

466,045

15,142

481,187

Investment income

5,247

-

5,247

 

4,941

-

4,941

Investment and other gains (losses) - net

2,381

12

2,393

 

(537)

(139)

(676)

 

479,125

13,744

492,869

 

470,449

15,003

485,452

Expenses:

             

Amounts retained by agencies

203,793

-

203,793

 

192,558

-

192,558

Employee costs

138,145

8,133

146,278

 

130,197

9,149

139,346

Other operating expenses

75,502

10,451

85,953

 

78,442

10,344

88,786

Title losses and related claims

18,697

-

18,697

 

24,462

-

24,462

Depreciation and amortization

5,249

905

6,154

 

5,321

1,120

6,441

Interest

2

671

673

 

2

710

712

 

441,388

20,160

461,548

 

430,982

21,323

452,305

Income (loss) before taxes

37,737

(6,416)

31,321

 

39,467

(6,320)

33,147

             
             

Six months ended:

June 30, 2018

 

June 30, 2017

 

Title

Ancillary
Services
and
Corporate

Consolidated

 

Title

Ancillary
Services
and
Corporate

Consolidated

Revenues:

             

Operating revenues

893,863

25,563

919,426

 

886,760

32,509

919,269

Investment income

9,951

-

9,951

 

9,613

-

9,613

Investment and other gains (losses) - net

722

-

722

 

(127)

(262)

(389)

 

904,536

25,563

930,099

 

896,246

32,247

928,493

Expenses:

             

Amounts retained by agencies

399,000

-

399,000

 

383,733

-

383,733

Employee costs

269,749

15,352

285,101

 

258,357

20,774

279,131

Other operating expenses

144,673

21,547

166,220

 

146,697

20,406

167,103

Title losses and related claims

37,678

-

37,678

 

45,163

-

45,163

Depreciation and amortization

10,566

1,822

12,388

 

10,547

2,272

12,819

Interest

8

1,638

1,646

 

5

1,524

1,529

 

861,674

40,359

902,033

 

844,502

44,976

889,478

Income (loss) before taxes

42,862

(14,796)

28,066

 

51,744

(12,729)

39,015

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 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 six months ended June 30, 2018 and 2017 (dollars in millions).

 

Quarter Ended
June 30,

 

Six Months Ended
June 30,

 

2018

2017

%
Change

 

2018

2017

%
Change

               

Revenues

492.9

485.5

   

930.1

928.5

 

Less: Investment and other (gains) losses

(2.4)

0.7

   

(0.7)

0.4

 

Adjusted revenues

490.5

486.2

1%

 

929.4

928.9

0%

               

Net income attributable to Stewart

22.4

18.6

   

18.6

22.7

 

Noncontrolling interests

3.3

3.5

   

5.2

5.5

 

Income taxes

5.6

11.0

   

4.3

10.8

 

Income before taxes and noncontrolling interests

31.3

33.1

   

28.1

39.0

 

Other non-operating charges

-

-

   

2.3

-

 

Loss reserve adjustments, net

(0.1)

-

   

(0.1)

-

 

Investment and other (gains) losses

(2.4)

0.7

   

(0.7)

0.4

 

Adjusted income before taxes and noncontrolling interests

28.8

33.8

   

29.6

39.4

 

Depreciation and amortization

6.2

6.4

   

12.4

12.8

 

Interest expense

0.7

0.7

   

1.6

1.5

 
               

Adjusted EBITDA

35.7

40.9

(13)%

 

43.6

53.7

(19)%

 



CONTACT: Nat Otis, SVP - Finance and Director of Investor Relations (713) 625-8360

 

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