News and Events

Stewart Reports Third Quarter 2017 Results

Stewart Reports Third Quarter 2017 Results

  • Net income attributable to Stewart of $10.9 million, compared to $26.4 million in the prior year quarter
  • Hurricanes had approximately $4 million impact in pretax profits
  • John Killea named President to drive strategic execution
  • John Magness joined Stewart as Chief Corporate Development Officer to focus on revenue growth
  • Board announces ongoing review of strategic alternatives

 

HOUSTON, November 6, 2017 -- Stewart Information Services Corporation (NYSE: STC) today reported net income attributable to Stewart of $10.9 million ($0.46 per diluted share) for the third quarter of 2017 compared to net income attributable to Stewart of $26.4 million ($1.12 per diluted share) for the third quarter of 2016. Pretax income before noncontrolling interests for the third quarter of 2017 was $18.6 million compared to pretax income before noncontrolling interests of $38.8 million for the third quarter of 2016.

 

Total revenues for the third quarter of 2017 were $501.6 million compared to total revenues of $553.2 million for the third quarter of 2016, a decline of 9 percent. Total operating revenues for the third quarter of 2017 were $498.0 million compared to total operating revenues of $545.4 million for the third quarter of 2016, also a decline of 9 percent.

 

“Our third quarter title revenues were adversely affected by business disruptions caused by hurricanes Harvey and Irma and retail staff departures as indicated during last quarter’s call,” noted Matthew Morris, Stewart chief executive officer. “However, Stewart has taken swift, aggressive actions to address these disruptions.”

 

“Our employees worked tirelessly after the hurricanes to quickly restore full operations and mitigate the financial impact. We successfully recruited strong, new revenue-generating associates, which have offset $20-$25 million of the $70 million in departed annual revenues related to staff departures. And the recent acquisition of Title365 generated new business which we expect to result in $40-$50 million in annual revenue. These combined actions are expected to fully replace the departed revenue by 2018’s selling season, and our ongoing recruiting efforts and targeted acquisitions should further bolster our top line.”

 

Leadership Changes

Today, Stewart also announced that John Killea, chief legal officer & chief compliance officer, has been appointed to the additional role of president of Stewart Information Services Corp. Morris continued, “John Killea is a proven leader in the industry. His deep experience and intimate knowledge of our company uniquely positions him to expand his responsibilities as we execute on our strategic priorities.”

 

“In addition, we are very pleased to announce that John Magness has joined Stewart as chief corporate development officer. John brings nearly 35 years of leadership experience in the title and real estate industry and will play a key role in ensuring Stewart continues to provide the high quality services our customers have come to expect.” Most recently, Magness served as president of Old Republic Title Companies, Inc.

 

Review of Strategic Alternatives

The Company also announced that the Board of Directors has previously formed a strategic committee which has been pursuing the full range of strategic alternatives available to Stewart. These alternatives include, among other things, business combinations, the sale of the Company, and continuing to execute on Stewart’s standalone business plan. The Company has retained and will be assisted in the strategic review process by Citi as financial advisor and Davis Polk & Wardwell LLP as legal advisor.

 

The Board plans to complete this process in an expeditious manner. There can be no assurance that this process will result in a particular outcome. The Company does not intend to provide updates on its review until it deems further disclosure is appropriate or required.

 

“The Board is committed to exploring the full range of strategic alternatives available to the Company,” said Thomas Apel, chairman of the Stewart board of directors. “Throughout this process, we will continue executing our current plan and providing the comprehensive service and solutions our customers need for real estate transactions.”

 

Selected Financial Information

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

 

 

Third quarter

 

Nine Months

 

 

2017

2016

 

2017

2016

 

 

 

 

 

 

 

 

Total revenues

501.6

553.2

 

1,430.1

1,480.9

 

Pretax income before noncontrolling interests

18.6

38.8

 

57.6

65.0

 

Income tax

4.7

9.0

 

15.5

16.8

 

Net income attributable to Stewart

10.9

26.4

 

33.6

38.8

 

Net income per diluted share attributable to Stewart

0.46

1.12

 

1.43

1.13(1)

 

(1) As previously reported, during the second quarter 2016, the Company 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 first nine months of 2016 was $1.64. Under U.S. GAAP, the $12.0 million payment was recorded as a reduction to retained earnings, similar to a preferred stock dividend, and 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):

 

 

Three months ended September 30,

 

 

2017

2016

% Change

 

 

 

 

 

 

Total revenues

488.6

529.8

(8)%

 

Pretax income

24.6

50.3

(51)%

 

Pretax margin

5.0%

9.5%

 

 

 

Pretax income during the third quarter of 2017 declined $25.7 million compared to third quarter of 2016, while total title revenues declined $41.2 million. In addition to the factors mentioned above, title revenues declined due to lower commercial revenues, fewer purchase orders closed and a significant decline in refinancing orders industry-wide. Included in the segment’s results for the third quarter of 2017 are approximately $1.4 million of Title365 integration costs. Also included in the third quarter of 2017 results were $1.3 million of realized losses, compared to $2.1 million of realized gains in the third quarter of 2016.

 

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

 

 

Three months ended September 30,

 

 

2017

2016

% Change

 

 

 

 

 

 

Non-commercial:

 

 

 

 

Domestic

141.7

162.2

(13)%

 

International

30.4

29.3

4%

 

Commercial:

 

 

 

 

Domestic

39.2

45.2

(13)%

 

International

5.5

4.4

25%

 

Total direct title revenues

216.8

241.1

(10)%

 

 

Non-commercial domestic revenue includes revenues from purchase transactions and centralized title operations (processing primarily refinancing and default title orders), which decreased 11 percent and 32 percent, respectively, in the third quarter of 2017 compared to the prior year quarter as a result of declines in purchase and refinancing orders closed. Commercial revenues declined 10 percent from the prior year quarter primarily as a result of lower commercial orders closed and reduced average fee per file. Total international title revenues increased 7 percent in the third quarter of 2017 compared to the prior year quarter mainly due to transaction volume growth from our United Kingdom operations and a stronger Canadian dollar relative to the U.S. dollar. Revenues from independent agency operations in the third quarter of 2017 declined 5 percent compared to the third quarter of 2016. The independent agency remittance rate decreased to 17.5 percent in the third quarter of 2017 from 18.0 percent in the third quarter of 2016 mainly due to the geographic mix of our agency business (reduced revenues in higher-remitting states and increases in lower-remitting states); third quarter of 2017 revenues from independent agencies, net of retention, decreased 7 percent from the prior year quarter.

 

Ancillary Services and Corporate Segment

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

 

 

Three months ended September 30

 

 

2017

2016

% Change

 

 

 

 

 

 

Total revenues

13.0

23.4

(45)%

 

Pretax loss

(6.0)

(11.5)

48%

 

 

The decline in the segment’s revenues in the third quarter of 2017 compared to the prior year quarter was primarily due to the divestitures of the loan file review, quality control and government services lines of business at the end of 2016.

 

The segment’s pretax results improved to a $6.0 million pretax loss, compared to a pretax loss of $11.5 million in the prior year quarter. The segment’s results for the third quarter of 2017 and 2016 included approximately $6 million and $8 million, respectively, of expenses attributable to parent company and corporate operations.

 

Expenses

Employee costs for the third quarter of 2017 decreased $14.5 million, or 9 percent, from the third quarter of 2016 as a result of a reduction in employee counts tied to volume declines (primarily in our ancillary services and centralized title operations), the aforementioned staff departures in direct operations, and ongoing cost management efforts. Average employee counts for the third quarter of 2017 decreased approximately 7 percent from the third quarter of 2016. As a percentage of total operating revenues, employee costs for the third quarter of 2017 were 28.1 percent, improving 20 basis points from 28.3 percent in the prior year quarter.

 

Other operating expenses for the third quarter of 2017 decreased $5.6 million, or 6 percent, from the third quarter of 2016 primarily as a result of reduced outside title search fees, driven primarily by lower title search revenues from the ancillary services and centralized title operations. Other operating costs for the third quarter of 2017 included approximately $1.4 million of Title365 integration costs. As a percentage of total operating revenues, other operating expenses for the third quarter of 2017 were 17.8 percent, compared to 17.2 percent in the third quarter 2016.

 

Title loss expense decreased to $25.4 million in the third quarter of 2017, compared to $26.4 million in the third quarter of 2016. Title losses were 5.2 percent of title revenues in the third quarter of 2017 compared to 5.0 percent in the third quarter 2016.

 

Depreciation and amortization expenses decreased to $6.6 million in the third quarter of 2017 compared to $7.1 million in the third quarter of 2016, primarily due to lower amortization expense in the current year quarter resulting from the disposal of certain intangible assets in connection with the divestitures of several lines of the ancillary services business during the fourth quarter of 2016.

 

Other

Net cash provided by operations in the third quarter of 2017 was $31.5 million, compared to $45.5 million in the third quarter of 2016. The decline was primarily due to the lower net income generated during the third quarter 2017, higher payments on accounts payable and lower collections on accounts receivable, partially offset by lower claim payments.

 

Third Quarter Earnings Call

Stewart will hold a conference call to discuss the third quarter of 2017 earnings at 8:30 a.m. Eastern Time on Monday, November 6, 2017. To participate, dial (866) 831-8713 (USA) and (203) 518-9713 (International) - access code STCQ317. Additionally, participants can listen to the conference call through Stewart’s Investor Relations website at www.stewart.com/en/investor-relations/earnings-call.html. The conference call replay will be available from 10:00 a.m. Eastern Time on November 6, 2017 until midnight on November 13, 2017, by dialing (800) 723-0532 (USA) or (402) 220-2655 (International) - the access code is also STCQ317.

 

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 (UNAUDITED)

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

 

 

Three months ended
 September 30,

 

Nine months ended
 September 30,

 

 

    2017

    2016

 

2017

2016

 

Revenues:

 

 

 

 

 

 

Title revenues:

 

 

 

 

 

 

Direct operations

      216,830

       241,109

 

     635,921

       664,128

 

Agency operations

      268,545

       282,269

 

     736,301

       732,320

 

Ancillary services

        12,674

         22,059

 

       45,096

         65,276

 

Total operating revenues

      498,049

     545,437

 

  1,417,318

  1,461,724

 

Investment income

          4,567

          4,520

 

       14,179

         14,445

 

Investment and other (losses) gains - net

        (1,047)

          3,253

 

      (1,436)

          4,706

 

 

      501,569

       553,210

 

   1,430,061

   1,480,875

 

Expenses:

 

 

 

 

 

 

Amounts retained by agencies

      221,460

       231,586

 

     605,192

       598,915

 

Employee costs

      140,054

       154,529

 

     419,184

       457,166

 

Other operating expenses

        88,489

         94,043

 

     255,593

       268,210

 

Title losses and related claims

        25,428

         26,365

 

       70,591

         66,612

 

Depreciation and amortization

          6,578

           7,082

 

       19,397

         22,728

 

Interest

             963

             797

 

         2,492

          2,237

 

 

      482,972

      514,402

 

   1,372,449

   1,415,868

 

Income before taxes and noncontrolling interests

        18,597

         38,808

 

       57,612

       65,007

 

Income tax

          4,686

          9,041

 

       15,536

16,779

 

Net income

        13,911

         29,767

 

42,076

         48,228

 

Less net income attributable to noncontrolling interests

          2,967

         3,392

 

8,475

         9,450

 

Net income attributable to Stewart

        10,944

         26,375

 

33,601

38,778

 

 

 

 

 

 

 

 

Net earnings per diluted share attributable to Stewart

0.46

1.12

 

1.43          

1.13

 

Diluted average shares outstanding (000)

23,564

23,611

 

 23,571

23,596

 

 

 

 

 

 

 

 

Selected financial information:

 

 

 

 

 

 

Net cash provided by operations

31,517

45,527

 

48,048

63,986

 

Other comprehensive income (loss)

3,873

(2,936)

 

10,763

10,448

 

               

 

 

Monthly Order Counts:

 

 

 

 

 

 

 

 

 

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

 

Refi

 8,062

10,157

 8,936

 27,155

 

Refi

 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

 

 

 

 

 

 

 

 

 

 

 

 

 

Opened Orders 2016:

Jul

Aug

Sept

Total

 

Closed Orders 2016:

Jul

Aug

Sept

Total

 

Commercial

 3,508

 4,284

 4,074

 11,866

 

Commercial

 2,442

 3,187

 2,520

 8,149

 

Purchase

20,612

22,650

19,853

 63,115

 

Purchase

 17,405

18,481

 17,051

52,937

 

Refi

 14,077

15,492

13,282

 42,851

 

Refi

 8,063

10,100

10,198

28,361

 

Other

 881

 1,176

 1,366

 3,423

 

Other

 1,193

 1,630

 1,263

 4,086

 

Total

39,078

43,602

38,575

 121,255

 

Total

29,103

33,398

31,032

93,533

 

                                   

 

 

 

STEWART INFORMATION SERVICES CORPORATION

CONDENSED BALANCE SHEETS

(In thousands of dollars)

 

 

September 30, 2017 (Unaudited)

 

 

December 31, 2016

Assets:

 

 

Cash and cash equivalents

168,746

     185,772

Short-term investments

23,434

       22,239

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

679,682

     631,503

Receivables – premiums from agencies

33,754

       31,246

Receivables – other

58,901

50,177

Allowance for uncollectible amounts

(8,555)

      (9,647)

Property and equipment, net

69,029

      70,506

Title plants, at cost

74,237

75,313

Goodwill

231,428

     217,094

Intangible assets, net of amortization

10,673

       10,890

Deferred tax assets

3,856

3,860

Other assets

57,760

52,771

 

1,402,945

1,341,724

Liabilities:

 

 

Notes payable

138,557

106,808

Accounts payable and accrued liabilities

95,283

115,640

Estimated title losses

475,845

462,572

Deferred tax liabilities

20,889

7,856

 

730,574

692,876

Stockholders' equity:

 

 

Common Stock and additional paid-in capital

182,055

180,959

Retained earnings

483,861

471,788

Accumulated other comprehensive income (loss)

1,882

(8,881)

Treasury stock

(2,666)

(2,666)

Stockholders’ equity attributable to Stewart

665,132

641,200

Noncontrolling interests

7,239

7,648

Total stockholders' equity

672,371

648,848

 

1,402,945

1,341,724

 

 

Number of shares outstanding (000)

23,766

23,431

Book value per share

28.29

27.69

 

 

 

 

STEWART INFORMATION SERVICES CORPORATION

SEGMENT INFORMATION

(In thousands of dollars)

 

 

Three months ended:

September 30, 2017

 

September 30, 2016

 

Title

Ancillary Services and Corporate

Consolidated

 

Title

Ancillary Services and Corporate

Consolidated

Revenues:

 

 

 

 

 

 

 

Operating revenues

485,373

12,676

498,049

 

523,239

22,198

545,437

Investment income

4,567

-        

4,567

 

4,520

-        

4,520

Investment and other (losses) gains - net

(1,328)

281

(1,047)

 

2,057

1,196

3,253

 

488,612

12,957

501,569

 

529,816

23,394

553,210

Expenses:

 

 

 

 

 

 

 

Amounts retained by agencies

221,460

-        

221,460

 

231,586

-        

231,586

Employee costs

132,331

7,723

140,054

 

137,519

17,010

154,529

Other operating expenses

79,249

9,240

88,489

 

78,917

15,126

94,043

Title losses and related claims

25,428

-        

25,428

 

26,365

-        

26,365

Depreciation and amortization

5,534

1,044

6,578

 

5,120

1,962

7,082

Interest

-        

963

963

 

1

796

797

 

464,002

18,970

482,972

 

479,508

34,894

514,402

Income (loss) before taxes

24,610

(6,013)

18,597

 

50,308

(11,500)

38,808

 

 

 

 

 

 

 

 

 

Nine months ended:

September 30, 2017

 

September 30, 2016

 

Title

Ancillary Services and Corporate

Consolidated

 

Title

Ancillary Services and Corporate

Consolidated

Revenues:

 

 

 

 

 

 

 

Operating revenues

1,372,133

45,185

1,417,318

 

1,395,964

65,760

1,461,724

Investment income

14,179

-        

14,179

 

14,445

-        

14,445

Investment and other (losses) gains - net

(1,455)

19

(1,436)

 

454

4,252

4,706

 

1,384,857

45,204

1,430,061

 

1,410,863

70,012

1,480,875

Expenses:

 

 

 

 

 

 

 

Amounts retained by agencies

605,192

-        

605,192

 

598,915

-        

598,915

Employee costs

390,688

28,496

419,184

 

405,327

51,839

457,166

Other operating expenses

225,946

29,647

255,593

 

223,382

44,828

268,210

Title losses and related claims

70,591

-        

70,591

 

66,612

-        

66,612

Depreciation and amortization

16,081

3,316

19,397

 

15,642

7,086

22,728

Interest

5

2,487

2,492

 

1

2,236

2,237

 

1,308,503

63,946

1,372,449

 

1,309,879

105,989

1,415,868

Income (loss) before taxes

76,354

(18,742)

57,612

 

100,984

(35,977)

65,007

 

 

 

 

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 gains and losses, certain significant litigation expenses and other non-operating costs such as consulting 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 three and nine months ended September 30, 2017 and 2016 (dollars in millions).

 

 

 

Three Months Ended

September 30,

 

Nine Months Ended

September 30,

 

2017

2016

% Change

 

2017

2016

% Change

 

 

 

 

 

 

 

 

Revenues

501.6

     553.2

 

 

1,430.1

   1,480.9

 

Less: Net realized losses (gains)

1.0

      (3.3)

 

 

1.4

      (4.7)

 

Adjusted revenues

502.6

     549.9

(9)%

 

1,431.5

   1,476.2

(3)%

 

 

 

 

 

 

 

 

Net income attributable to Stewart

10.9

    26.4

 

 

33.6

    38.8

 

Noncontrolling interests

3.0

        3.4

 

 

8.5

        9.5

 

Income taxes

4.7

      9.0

 

 

15.5

      16.8

 

Income before taxes and noncontrolling interests

18.6

    38.8

 

 

57.6

    65.1

 

Litigation expense

-

-

 

 

-

       3.6

 

Other non-operating charges

     1.4

1.2

 

 

     1.4

3.8

 

Prior policy year reserve adjustments, net

-

-

 

 

-

(5.4)

 

Net realized losses (gains)

 1.0   

      (3.3)

 

 

 1.4   

      (4.7)

 

Adjusted income before taxes and noncontrolling interests

21.0

    36.7

 

 

60.4

    62.4

 

Depreciation and amortization

6.6

       7.1

 

 

19.4

       22.7

 

Interest expense

1.0

       0.8

 

 

2.5

       2.2

 

 

 

 

 

 

 

 

 

Adjusted EBITDA

28.6

      44.6

(36)%

 

82.3

      87.3

(6)%

 

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