Stewart Reports Fourth Quarter 2018 Results

Stewart Reports Fourth Quarter 2018 Results

  • Consolidated pretax income of $19.7 million compared to $17.5 million in the prior year quarter
  • Title segment pretax income of $29.5 million compared to $27.0 million in the prior year quarter
  • Title segment pretax margin improved 120 basis points over the prior year quarter
  • Commercial and domestic residential fee per file increased 3 percent and 11 percent, respectively, compared to the prior year quarter

HOUSTON, February 14, 2019 -- Stewart Information Services Corporation (NYSE: STC) today reported net income attributable to Stewart of $11.4 million ($0.48 per diluted share) for the fourth quarter 2018, compared to net income attributable to Stewart of $15.1 million ($0.64 per diluted share) for the fourth quarter 2017. Pretax income before noncontrolling interests for the fourth quarter 2018 was $19.7 million compared to pretax income before noncontrolling interests of $17.5 million for the fourth quarter 2017.

Fourth quarter 2018 results included:

  • $3.0 million of third-party advisory expenses related to the Fidelity National Financial (FNF) merger transaction included in other operating expenses within the ancillary services and corporate segment,
  • $4.0 million of net unrealized losses relating to changes in fair value of equity securities investments,
  • $1.2 million of litigation expense related to a 2013 lender services acquisition included in other operating expenses within the ancillary services and corporate segment,
  • $1.0 million of executive severance expenses included in employee costs within the title and ancillary services and corporate segments, and
  • $0.8 million of office closure costs included in other operating expenses within the title segment.

Fourth quarter 2017 results included:

  • $2.9 million of third party advisory expenses relating to the strategic alternatives review included in other operating expenses within the ancillary services and corporate segment,
  • $3.5 million of office closure costs (primarily lease termination and litigation expenses) included in other operating expenses within the title segment,
  • $1.0 million of acquisition integration expenses included in other operating expenses within the title segment,
  • $1.7 million of executive severance and retention expenses included in employee costs within the title and ancillary services and corporate segments, and
  • $6.6 million of net income tax benefits related to the effects of the Tax Cuts and Jobs Act, which was enacted in December 2017.

”We are encouraged by our fourth quarter results which resulted in an improved pretax margin as we maintained direct title revenues and reduced expenses in the face of a challenging housing market,” stated Matthew W. Morris, chief executive officer. “Looking at 2019, interest rate concerns appear to be stabilizing, and we remain focused on completing our merger with FNF. I appreciate the continued efforts of our employees to deliver solid operating results as we work through this process.”

Merger Update

We continue to work through the regulatory process with FNF to satisfy all of the regulatory conditions for merger closing, including those of the Federal Trade Commission, the Texas Department of Insurance and the New York State Department of Financial Services (NYDFS). As previously disclosed, on January 31, 2019, the NYDFS provided written notice of its disapproval of FNF's application to acquire control of Stewart Title Insurance Company, our New York domiciled title insurance underwriter. Stewart and FNF are in the process of reaching out to the NYDFS to discuss the notice and seek to resolve the concerns raised therein, with which we and FNF respectfully disagree.

Selected Financial Information

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

 

Quarter Ended
December 31,

 

Year Ended December 31,
 

2018

2017

 

2018

2017

 

 

 

 

 

 

Total revenues

469.9

525.7

 

1,907.7

1,955.7

Pretax income before noncontrolling interests

19.7

17.5

 

72.5

75.1

Income tax expense (benefit)

4.8

(0.6)

 

13.5

14.9

Net income attributable to Stewart

11.4

15.1

 

47.5

48.7

Net income per diluted share attributable to Stewart

0.48

0.64

 

2.01

2.06

Title Segment

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

 

 

Quarter Ended December 31,

 

 

2018

2017

Change

 

 

 

 

 

 

Total operating revenues

457.3

506.4

(10)%

 

Investment income and other net gains

0.7

8.2

(91)%

 

Pretax income

29.5

27.0

9%

 

Pretax margin

6.4%

5.2%

 

 

 

Title operating revenues in the fourth quarter 2018 decreased 10 percent compared to the prior year quarter as direct title and independent agency revenues decreased 7 percent and 12 percent, respectively. Included in investment income and other net gains were $4.0 million of net unrealized losses relating to changes in fair value of equity securities investments in the fourth quarter 2018, as compared to $3.3 million of net realized gains from the sale of investments available-for-sale in the fourth quarter 2017. The segment’s pretax income improved to $29.5 million in the fourth quarter 2018, compared to $27.0 million in the fourth quarter 2017, as a result of the lower overall title operating expenses offsetting the segment’s reduced revenues.

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

 

Quarter Ended December 31,

 

 

2018

2017

Change

 

 

 

 

 

 

Non-commercial:

 

 

 

 

Domestic

123.3

134.0

(8)%

 

International

21.4

21.0

2%

 

Commercial:

 

 

 

 

Domestic

59.5

59.1

1%

 

International

6.1

12.4

(51)%

 

Total direct title revenues

210.3

226.5

(7)%

 

Included in the non-commercial domestic revenues for the fourth quarter are revenues from purchase transactions, which decreased $5.0 million, and centralized title operations (processing primarily refinancing and default title orders), which declined $5.7 million compared to the fourth quarter 2017. These declines were primarily due to the lower purchase and refinancing closed orders, which, in total, decreased 16 percent in the fourth quarter 2018 compared to the prior year quarter. Total fourth quarter 2018 commercial revenues decreased $5.9 million, or 8 percent, compared to the fourth quarter 2017.  Fourth quarter 2018 commercial fee per file increased 3 percent to approximately $10,300 due to increased transaction sizes, while domestic residential fee per file increased 11 percent to approximately $2,300 as a result of the mix shift to more purchase transactions. Commercial and domestic residential fees per file for the full year 2018 increased to $8,600 (22 percent) and $2,200 (8 percent), respectively, compared to last year.

Gross revenues from independent agency operations declined 12 percent in the fourth quarter 2018, as compared to last year’s quarter, primarily as a result of reductions in generally high agency volume states, which include New York, Texas, Florida and California. The independent agency remittance rate in the fourth 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 December 31,

 

 

2018

2017

Change

 

 

 

 

 

 

Total revenues

11.9

11.1

8%

 

Pretax loss

(9.8)

(9.6)

(2)%

 

Fourth quarter 2018 segment revenues improved 8 percent compared to the prior year quarter, primarily due to increased revenues from search services. Excluding the non-operating charges noted above for the segment, the fourth quarter 2018 pretax loss would have been $5.2 million, compared to $5.6 million in the prior year quarter. Additionally, the segment’s results for the fourth quarter 2018 and 2017 included approximately $5.5 million and $5.1 million, respectively, of net expenses attributable to parent company and corporate operations (excluding the charges).

Expenses

Employee costs for the fourth quarter 2018 were $139.1 million, 5 percent lower compared to $147.0 million in the prior year quarter. This decline primarily resulted from an approximately 9 percent decrease in average employee counts in the fourth quarter 2018, compared to the fourth quarter 2017, principally related to volume declines in our title and ancillary services operations, partially offset by additional employee costs from title office acquisitions in 2018. As a percentage of total operating revenues, employee costs for the fourth quarter 2018 were 29.6 percent, which was slightly higher compared to 28.4 percent in the prior year quarter due to lower operating revenues in the fourth quarter 2018.

Other operating expenses for the fourth quarter 2018 decreased 8 percent to $88.3 million from $95.9 million in the fourth quarter 2017. The decrease was primarily due to the reduced costs of services and outside search fees consistent with the decline in title revenues in the fourth quarter 2018, and the higher third-party advisory expenses and office closure costs recorded in the fourth quarter 2017, as discussed above. As a percentage of total operating revenues, other operating expenses for the fourth quarter 2018 were 18.8 percent compared to 18.5 percent in the prior year quarter. Excluding the non-operating charges discussed above, the other operating expenses ratio in the fourth quarter 2018 and 2017 would have been 17.8 percent and 17.1 percent, respectively.

Title loss expense for the fourth quarter 2018 decreased 53 percent to $12.3 million compared to $25.9 million in the fourth quarter 2017, primarily due to the Company’s favorable claims experience. Title losses, as a percentage of title revenues, were 2.7 percent in the fourth quarter 2018 compared to 5.1 percent in the prior year quarter; while the full year 2018 title loss ratio was 3.9 percent, compared to 5.1 percent in the prior year. At December 31, 2018, our title loss reserves were above the actuarial reserve midpoint.

Other

Net cash provided by operations in the fourth quarter 2018 decreased to $40.4 million, compared to net cash provided of $60.0 million in the prior year quarter, primarily due to the higher payment of accounts payable in the fourth 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

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

 

Quarter Ended

December 31,

 

 Year Ended December 31,

 

 

    2018

    2017

 

    2018

    2017

 

 

(Unaudited)

 

(Unaudited)

 

 

Revenues:

 

 

 

 

 

 

Title revenues:

 

 

 

 

 

 

Direct operations

       210,315

       226,472

 

       833,200

     862,392

 

Agency operations

       246,973

       280,055

 

    1,003,959

   1,016,356

 

Ancillary services

        11,933

        10,741

 

         50,723

       55,837

 

Total operating revenues

      469,221

      517,268

 

   1,887,882

   1,934,585

 

Investment income

          5,005

          4,753

 

         19,737

       18,932

 

Investment and other (losses) gains - net

       (4,292)

          3,643

 

               53

2,207        

 

 

       469,934

       525,664

 

    1,907,672

  1,955,724

 

Expenses:

 

 

 

 

 

 

Amounts retained by agencies

       203,079

       231,908

 

       827,046

      837,100

 

Employee costs

       139,080

       146,994

 

       562,469

     566,178

 

Other operating expenses

        88,278

        95,917

 

       345,307

     351,511

 

Title losses and related claims

        12,333

        25,941

 

         71,514

       96,532

 

Depreciation and amortization

          6,323

          6,481

 

         24,932

       25,878

 

Interest

          1,153

             966

 

          3,875

         3,458

 

 

       450,246

       508,207

 

    1,835,143

   1,880,657

 

Income before taxes and noncontrolling interests

        19,688

        17,457

 

 72,529

      75,067

 

Income tax expense (benefit)

 4,828

          (615)

 

         13,507

       14,921

 

Net income

 14,860

        18,072

 

         59,022

       60,146

 

Less net income attributable to noncontrolling interests

 3,487

          3,012

 

         11,499

      11,487

 

Net income attributable to Stewart

 11,373

        15,060

 

         47,523

       48,659

 

 

 

 

 

 

 

 

Net earnings per diluted share attributable to Stewart

0.48

0.64

 

2.01

2.06          

 

Diluted average shares outstanding (000)

23,699

23,598

 

23,685

 23,597

 

 

 

 

 

 

 

 

Selected financial information:

 

 

 

 

 

 

Net cash provided by operations

40,444

60,020

 

84,177

108,068

 

Other comprehensive (loss) income

(2,881)

(2,729)

 

(20,332)

8,034

 

Monthly Order Counts:

 

 

 

 

 

 

 

 

 

Opened Orders 2018:

Oct

Nov

Dec

Total

 

Closed Orders 2018:

Oct

Nov

Dec

Total

 

Commercial

 2,622

 2,559

 2,298

 7,479

 

Commercial

 2,129

 2,185

 2,063

 6,377

 

Purchase

18,687

14,910

12,697

 46,294

 

Purchase

 14,452

12,645

12,331

39,428

 

Refinancing

 6,929

 5,723

 5,391

 18,043

 

Refinancing

 4,756

 3,802

 3,821

12,379

 

Other

 550

 574

 504

 1,628

 

Other

 460

 542

 500

 1,502

 

Total

 28,788

 23,766

 20,890

 73,444

 

Total

 21,797

19,174

 18,715

59,686

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

                                   

STEWART INFORMATION SERVICES CORPORATION

CONDENSED BALANCE SHEETS

(In thousands of dollars)

 

December 31,

 

2018

2017

 

(Unaudited)

 

Assets:

 

 

Cash and cash equivalents

      192,067

150,079

Short-term investments

        22,950

24,463

Investments in debt and equity securities, at fair value

    636,017

709,355

Receivables – premiums from agencies

29,032

27,903

Receivables – other

47,044

55,769

Allowance for uncollectible amounts

(4,614)

(5,156)

Property and equipment, net

60,794

67,022

Title plants, at cost

74,737

74,237

Goodwill

248,890

231,428

Intangible assets, net of amortization

9,727

9,734

Deferred tax assets

4,575

4,186

Other assets

51,711

56,866

 

1.372,930

1,405,886

Liabilities:

 

 

Notes payable

      108,036

109,312

Accounts payable and accrued liabilities

        109,283

117,740

Estimated title losses

      461,560

480,990

Deferred tax liabilities

        14,214

19,034

 

         693,093

727,076

Stockholders' equity:

 

 

Common Stock and additional paid-in capital

186,703

184,026

Retained earnings

514,248

491,698

Accumulated other comprehensive loss

(24,771)

(847)

Treasury stock

(2,666)

(2,666)

Stockholders’ equity attributable to Stewart

673,525

672,211

Noncontrolling interests

6,312

6,599

Total stockholders' equity

679,837

678,810

 

1.372,930

1,405,886

Number of shares outstanding (000)

23,719

23,720

Book value per share

28.66

28.62

 

STEWART INFORMATION SERVICES CORPORATION

SEGMENT INFORMATION

(In thousands of dollars)

 

Quarter ended:

December 31, 2018

 

December 31, 2017

 

Title

Ancillary Services and Corporate

Consolidated

 

Title

Ancillary Services and Corporate

Consolidated

Revenues:

 

 

 

 

 

 

 

Operating revenues

457,288

11,933

469,221

 

506,442

10,826

517,268

Investment income

4,989

16

5,005

 

4,753

-        

4,753

Investment and other (losses) gains - net

(4,292)

-        

(4,292)

 

3,411

232

3,643

 

457,985

11,949

469,934

 

514,606

11,058

525,664

Expenses:

 

 

 

 

 

 

 

Amounts retained by agencies

203,079

-        

203,079

 

231,908

-        

231,908

Employee costs

132,290

6,790

139,080

 

137,629

9,365

146,994

Other operating expenses

75,274

13,004

88,278

 

86,814

9,103

95,917

Title losses and related claims

12,333

-        

12,333

 

25,941

-        

25,941

Depreciation and amortization

5,520

803

6,323

 

5,303

1,178

6,481

Interest

33

1,120

1,153

 

1

965

966

 

428,529

21,717

450,246

 

487,596

20,611

508,207

Income (loss) before taxes

29,456

(9,768)

19,688

 

27,010

(9,553)

17,457

 

 

 

 

 

 

 

 

 

Year ended:

December 31, 2018

 

December 31, 2017

 

Title

Ancillary Services and Corporate

Consolidated

 

Title

Ancillary Services and Corporate

Consolidated

Revenues:

 

 

 

 

 

 

 

Operating revenues

1,837,159

50,723

1,887,882

 

1,878,574

56,011

1,934,585

Investment income

19,721

16

19,737

 

18,932

-        

18,932

Investment and other (losses) gains - net

(1,174)

1,227

53

 

1,956

251

2,207

 

1,855,706

51,966

1,907,672

 

1,899,462

56,262

1,955,724

Expenses:

 

 

 

 

 

 

 

Amounts retained by agencies

827,046

-        

827,046

 

837,100

-        

837,100

Employee costs

533,525

28,944

562,469

 

528,317

37,861

566,178

Other operating expenses

293,817

51,490

345,307

 

312,761

38,750

351,511

Title losses and related claims

71,514

-        

71,514

 

96,532

-        

96,532

Depreciation and amortization

21,449

3,483

24,932

 

21,384

4,494

25,878

Interest

41

3,834

3,875

 

7

3,451

3,458

 

1,747,392

87,751

1,835,143

 

1,796,101

84,556

1,880,657

Income (loss) before taxes

108,314

(35,785)

72,529

 

103,361

(28,294)

75,067

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 year ended December 31, 2018 and 2017 (dollars in millions).

 

 

Quarter Ended

December 31,

 

Year Ended

December 31,

 

2018

2017

% Change

 

2018

2017

% Change

 

 

 

 

 

 

 

 

Revenues

469.9

525.7

 

 

1,907.7

1,955.7

 

Less: Investment and other losses (gains)

4.3

(3.6)

 

 

(0.1)

(2.2)

 

Adjusted revenues

474.2

522.1

(9)%

 

1,907.6

1,953.5

(2)%

 

 

 

 

 

 

 

 

Net income attributable to Stewart

11.4

15.1

 

 

       47.5

       48.7

 

Noncontrolling interests

          3.5

         3.0

 

 

       11.5

       11.5

 

Income taxes

          4.8

      (0.6)

 

 

       13.5

       14.9

 

Income before taxes and noncontrolling interests

         19.7

       17.5

 

 

       72.5

       75.1

 

FNF Merger / strategic alternatives expenses

3.0

2.9

 

 

12.7

2.9

 

Acquisition integration expenses

-

1.0

 

 

-

2.4

 

Other non-operating charges, net

3.0

5.2

 

 

2.8

5.2

 

Investment and other losses (gains)

4.3

(3.6)

 

 

 (0.1)

 (2.2)  

 

Adjusted income before taxes and noncontrolling interests

         30.0

       23.0

 

 

       87.9

       83.4

 

Depreciation and amortization

          6.3

         6.5

 

 

       24.9

       25.9

 

Interest expense

          1.2

         1.0

 

 

         3.9

         3.5

 

 

 

 

 

 

 

 

 

Adjusted EBITDA

         37.5

       30.5

23%

 

     116.7

     112.8

3%

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