☑QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2019
or
☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 001-02658
STEWART INFORMATION SERVICES CORPORATION
(Exact name of registrant as specified in its charter)
Delaware
74-1677330
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
1360 Post Oak Blvd.,
Suite 100
Houston,
Texas
77056
(Address of principal executive offices)
(Zip Code)
Registrant’s telephone number, including area code:(713) 625-8100
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, $1 par value per share
STC
New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes☑ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes☑ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
☑
Large accelerated filer
☐
Non-accelerated filer
☐
Emerging growth company
☐
Accelerated filer
☐
Smaller reporting company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑
On October 31, 2019, there were 23,706,719 outstanding shares of the issuer's Common Stock.
As used in this report, “we,” “us,” “our,” "Registrant," the “Company” and “Stewart” mean Stewart Information Services Corporation and our subsidiaries, unless the context indicates otherwise.
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (UNAUDITED)
Three Months Ended September 30,
Nine Months Ended September 30,
2019
2018
2019
2018
($000 omitted, except per share)
Revenues
Title revenues:
Direct operations
245,068
213,134
634,198
622,886
Agency operations
254,155
272,875
699,835
756,986
Ancillary services
8,628
13,227
30,708
38,790
Operating revenues
507,851
499,236
1,364,741
1,418,662
Investment income
4,752
4,781
14,631
14,732
Investment and other gains – net
46,905
3,623
50,730
4,345
559,508
507,640
1,430,102
1,437,739
Expenses
Amounts retained by agencies
208,973
224,966
576,559
623,967
Employee costs
143,815
138,288
412,967
423,389
Other operating expenses
87,826
90,811
251,030
257,029
Title losses and related claims
21,059
21,503
55,532
59,181
Depreciation and amortization
5,694
6,221
17,458
18,609
Interest
1,080
1,076
3,369
2,722
468,447
482,865
1,316,915
1,384,897
Income before taxes and noncontrolling interests
91,061
24,775
113,187
52,842
Income tax expense
(21,393
)
(4,371
)
(25,978
)
(8,679
)
Net income
69,668
20,404
87,209
44,163
Less net income attributable to noncontrolling interests
3,560
2,851
8,561
8,012
Net income attributable to Stewart
66,108
17,553
78,648
36,151
Net income
69,668
20,404
87,209
44,163
Other comprehensive (loss) income, net of taxes:
Foreign currency translation adjustments
(5,135
)
1,140
1,928
(4,490
)
Change in net unrealized gains and losses on investments
3,603
(1,910
)
17,985
(12,344
)
Reclassification adjustment for net losses (gains) included in net income
(92
)
(137
)
120
(617
)
Other comprehensive (loss) income, net of taxes:
(1,624
)
(907
)
20,033
(17,451
)
Comprehensive income
68,044
19,497
107,242
26,712
Less net income attributable to noncontrolling interests
3,560
2,851
8,561
8,012
Comprehensive income attributable to Stewart
64,484
16,646
98,681
18,700
Basic average shares outstanding (000)
23,616
23,556
23,608
23,537
Basic earnings per share attributable to Stewart
2.80
0.75
3.33
1.54
Diluted average shares outstanding (000)
23,773
23,699
23,780
23,677
Diluted earnings per share attributable to Stewart
2.78
0.74
3.31
1.53
See notes to condensed consolidated financial statements.
3
CONDENSED CONSOLIDATED BALANCE SHEETS
As of September 30, 2019 (Unaudited)
As of December 31, 2018
($000 omitted)
Assets
Cash and cash equivalents
320,960
192,067
Short-term investments
22,692
22,950
Investments in debt and equity securities, at fair value
599,193
636,017
Receivables:
Premiums from agencies
31,869
29,032
Trade and other
46,990
43,568
Income taxes
1,791
489
Notes
3,109
2,987
Allowance for uncollectible amounts
(4,401
)
(4,614
)
79,358
71,462
Property and equipment:
Land
3,512
3,991
Buildings
21,440
22,968
Furniture and equipment
209,488
216,498
Accumulated depreciation
(178,577
)
(182,663
)
55,863
60,794
Operating lease assets
100,671
—
Title plants, at cost
74,737
74,737
Investments on equity method basis
5,965
8,590
Goodwill
248,890
248,890
Intangible assets, net of amortization
6,303
9,727
Deferred tax assets
4,592
4,575
Other assets
39,967
43,121
1,559,191
1,372,930
Liabilities
Notes payable
105,371
108,036
Accounts payable and accrued liabilities
103,886
109,283
Operating lease liabilities
112,260
—
Estimated title losses
452,361
461,560
Deferred tax liabilities
25,429
14,214
799,307
693,093
Contingent liabilities and commitments
Stockholders’ equity
Common Stock ($1 par value) and additional paid-in capital
189,613
186,714
Retained earnings
571,390
514,248
Accumulated other comprehensive income (loss):
Net unrealized investment gains (losses) on debt securities investments
12,839
(5,266
)
Foreign currency translation adjustments
(17,577
)
(19,505
)
Treasury stock – 352,161 common shares, at cost
(2,666
)
(2,666
)
Stockholders’ equity attributable to Stewart
753,599
673,525
Noncontrolling interests
6,285
6,312
Total stockholders’ equity (23,711,652 and 23,719,347 shares outstanding)
759,884
679,837
1,559,191
1,372,930
See notes to condensed consolidated financial statements.
4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine Months Ended September 30,
2019
2018
($000 omitted)
Reconciliation of net income to cash provided by operating activities:
Net income
87,209
44,163
Add (deduct):
Depreciation and amortization
17,458
18,609
Provision for bad debt
889
510
Investment and other gains – net
(730
)
(4,345
)
Amortization of net premium on debt securities investments
3,790
4,617
Payments for title losses in excess of provisions
(11,266
)
(1,106
)
Adjustment for insurance recoveries of title losses
175
1,023
(Increase) decrease in receivables – net
(8,838
)
2,020
Decrease (increase) in other assets – net
2,910
(406
)
Increase (decrease) in accounts payable and other liabilities – net
6,753
(23,480
)
Change in net deferred income taxes
5,563
(1,693
)
Net income from equity investees
(1,996
)
(1,344
)
Dividends received from equity investees
1,964
2,187
Stock-based compensation expense
3,380
3,039
Other – net
28
(61
)
Cash provided by operating activities
107,289
43,733
Investing activities:
Proceeds from sales of investments in securities
20,899
32,500
Proceeds from matured investments in debt securities
44,685
25,258
Purchases of investments in securities
(2,187
)
(35,683
)
Net purchases of short-term investments
(193
)
(366
)
Purchases of property and equipment, and real estate – net
(11,957
)
(8,478
)
Cash paid for acquisition of businesses
—
(17,639
)
Other – net
2,111
327
Cash provided (used) by investing activities
53,358
(4,081
)
Financing activities:
Payments on notes payable
(26,179
)
(16,767
)
Proceeds from notes payable
23,514
9,583
Distributions to noncontrolling interests
(8,578
)
(8,665
)
Contributions from noncontrolling interests
25
—
Repurchases of common stock
(481
)
(687
)
Cash dividends paid
(21,257
)
(21,195
)
Purchase of remaining interest in consolidated subsidiary
—
(1,102
)
Cash used by financing activities
(32,956
)
(38,833
)
Effects of changes in foreign currency exchange rates
1,202
(1,229
)
Increase (decrease) in cash and cash equivalents
128,893
(410
)
Cash and cash equivalents at beginning of period
192,067
150,079
Cash and cash equivalents at end of period
320,960
149,669
See notes to condensed consolidated financial statements.
5
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY (UNAUDITED)
Common Stock
Additional paid-in capital
Retained earnings
Accumulated other comprehensive loss
Treasury stock
Noncontrolling interests
Total
($000 omitted)
Nine Months Ended September 30, 2019:
Balances at December 31, 2018
24,072
162,642
514,248
(24,771
)
(2,666
)
6,312
679,837
Net income attributable to Stewart
—
—
78,648
—
—
—
78,648
Dividends on Common Stock ($0.90 per share)
—
—
(21,506
)
—
—
—
(21,506
)
Stock-based compensation
4
3,376
—
—
—
—
3,380
Stock repurchases
(11
)
(470
)
—
—
—
—
(481
)
Net change in unrealized gains and losses on investments, net of taxes
—
—
—
17,985
—
—
17,985
Net investment realized loss reclassification, net of taxes
—
—
—
120
—
—
120
Foreign currency translation adjustments, net of taxes
—
—
—
1,928
—
—
1,928
Net income attributable to noncontrolling interests
—
—
—
—
—
8,561
8,561
Distributions to noncontrolling interests
—
—
—
—
—
(8,578
)
(8,578
)
Net effect of other changes in ownership
—
—
—
—
—
(10
)
(10
)
Balances at September 30, 2019
24,065
165,548
571,390
(4,738
)
(2,666
)
6,285
759,884
Nine Months Ended September 30, 2018:
Balances at December 31, 2017
24,072
159,954
491,698
(847
)
(2,666
)
6,599
678,810
Cumulative effect adjustments on adoption of new accounting standards
—
—
3,592
(3,592
)
—
—
—
Net income attributable to Stewart
—
—
36,151
—
—
—
36,151
Dividends on Common Stock ($0.90 per share)
—
—
(21,373
)
—
—
—
(21,373
)
Stock-based compensation
38
3,001
—
—
—
—
3,039
Stock repurchases
(17
)
(670
)
—
—
—
—
(687
)
Purchase of remaining interest in consolidated subsidiary
—
(946
)
—
—
—
(156
)
(1,102
)
Net change in unrealized gains and losses on investments, net of taxes
—
—
—
(12,344
)
—
—
(12,344
)
Net investment realized gain reclassification, net of taxes
—
—
—
(617
)
—
—
(617
)
Foreign currency translation adjustments, net of taxes
—
—
—
(4,490
)
—
—
(4,490
)
Net income attributable to noncontrolling interests
—
—
—
—
—
8,012
8,012
Distributions to noncontrolling interests
—
—
—
—
—
(8,665
)
(8,665
)
Balances at September 30, 2018
24,093
161,339
510,068
(21,890
)
(2,666
)
5,790
676,734
6
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY (UNAUDITED)
Common Stock
Additional paid-in capital
Retained earnings
Accumulated other comprehensive loss
Treasury stock
Noncontrolling interests
Total
($000 omitted)
Three Months Ended September 30, 2019:
Balances at June 30, 2019
24,065
164,235
512,467
(3,114
)
(2,666
)
5,840
700,827
Net income attributable to Stewart
—
—
66,108
—
—
—
66,108
Dividends on Common Stock ($0.30 per share)
—
—
(7,185
)
—
—
—
(7,185
)
Stock-based compensation
—
1,323
—
—
—
—
1,323
Stock repurchases
—
(10
)
—
—
—
—
(10
)
Net change in unrealized gains and losses on investments, net of taxes
—
—
—
3,603
—
—
3,603
Net investment realized gain reclassification, net of taxes
—
—
—
(92
)
—
—
(92
)
Foreign currency translation adjustments, net of taxes
—
—
—
(5,135
)
—
—
(5,135
)
Net income attributable to noncontrolling interests
—
—
—
—
—
3,560
3,560
Distributions to noncontrolling interests
—
—
—
—
—
(3,091
)
(3,091
)
Net effect of other changes in ownership
—
—
—
—
—
(24
)
(24
)
Balances at September 30, 2019
24,065
165,548
571,390
(4,738
)
(2,666
)
6,285
759,884
Three Months Ended September 30, 2018:
Balances at June 30, 2018
24,097
160,204
499,656
(20,983
)
(2,666
)
5,929
666,237
Net income attributable to Stewart
—
—
17,553
—
—
—
17,553
Dividends on Common Stock ($0.30 per share)
—
—
(7,141
)
—
—
—
(7,141
)
Stock-based compensation
(4
)
1,064
—
—
—
—
1,060
Stock repurchases
—
(15
)
—
—
—
—
(15
)
Purchase of remaining interest in consolidated subsidiary
—
86
—
—
—
(76
)
10
Net change in unrealized gains and losses on investments, net of taxes
—
—
—
(1,910
)
—
—
(1,910
)
Net investment realized gain reclassification, net of taxes
—
—
—
(137
)
—
—
(137
)
Foreign currency translation adjustments, net of taxes
—
—
—
1,140
—
—
1,140
Net income attributable to noncontrolling interests
—
—
—
—
—
2,851
2,851
Distributions to noncontrolling interests
—
—
—
—
—
(2,914
)
(2,914
)
Balances at September 30, 2018
24,093
161,339
510,068
(21,890
)
(2,666
)
5,790
676,734
See notes to condensed consolidated financial statements.
7
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1
Interim financial statements. The financial information contained in this report for the three and nine months ended September 30, 2019 and 2018, and as of September 30, 2019, is unaudited. This report should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.
A. Management’s responsibility. The accompanying interim financial statements were prepared by management, who is responsible for their integrity and objectivity. These financial statements have been prepared in conformity with U.S. generally accepted accounting principles (GAAP), including management’s best judgments and estimates. In the opinion of management, all adjustments necessary for a fair presentation of this information for all interim periods, consisting only of normal recurring accruals, have been made. The Company’s results of operations for interim periods are not necessarily indicative of results for a full year and actual results could differ.
B. Consolidation. The condensed consolidated financial statements include all subsidiaries in which the Company owns more than 50% voting rights in electing directors. All significant intercompany amounts and transactions have been eliminated and provisions have been made for noncontrolling interests. Unconsolidated investees, in which the Company typically owns from 20% through 50% of the voting stock, are accounted for using the equity method.
C. Restrictions on cash and investments. The Company maintains investments in accordance with certain statutory requirements for the funding of statutory premium reserves. Statutory reserve funds are required to be fully funded and invested in high-quality securities and short-term investments. Statutory reserve funds are not available for current claim payments, which must be funded from current operating cash flow. Included in investments in debt and equity securities are statutory reserve funds of approximately $439.9 million and $462.2 million at September 30, 2019 and December 31, 2018, respectively, In addition, included within cash and cash equivalents are statutory reserve funds of approximately $77.4 million and $37.7 million at September 30, 2019 and December 31, 2018, respectively. Although these cash statutory reserve funds are not restricted or segregated in depository accounts, they are required to be held pursuant to state statutes. If the Company fails to maintain minimum investments or cash and cash equivalents sufficient to meet statutory requirements, the Company may be subject to fines or other penalties, including potential revocation of its business license. These funds are not available for any other purpose. In the event that insurance regulators adjust the determination of the statutory premium reserves of the Company’s title insurers, these restricted funds as well as statutory surplus would correspondingly increase or decrease.
D. Recently adopted accounting standard. In February 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-02, Topic 842:Leases (Topic 842) which updates the current guidance related to leases to increase transparency and comparability among organizations. Most prominent among the changes in the standard is the recognition of right-of-use lease assets and lease liabilities on the balance sheet by lessees for those leases classified as operating leases. Additional financial statement disclosures are required to enable users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. Topic 842 is effective for annual and interim periods beginning after December 15, 2018. Topic 842 permits adoption using either a modified retrospective approach or an optional transition method. The optional transition method allows the application of the recognition and measurement requirements of the standard in the period of adoption and annual disclosures using the legacy lease guidance in Topic 840 for comparative periods.
The Company adopted Topic 842 effective January 1, 2019 using the optional transition method of adoption. In addition, the Company elected practical expedients permitted under the transition guidance of the standard, which among other things, allowed the carry forward of the historical lease classifications for existing leases. The adoption resulted in the recognition on the Company's January 1, 2019 consolidated balance sheet of approximately $99.8 million of operating lease assets and lease liabilities, and the reclassification of approximately $10.7 million of existing deferred rent liabilities from accounts payable and accrued liabilities to operating lease assets. There was no impact on the Company's 2019 consolidated statements of income and comprehensive income and cash flows. The accounting treatment for finance leases remained substantially unchanged.
8
E. Recent accounting standard not yet adopted. In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (Topic 326). Topic 326 significantly changes the impairment model for financial instruments by introducing the current expected credit loss (CECL) model, which requires the immediate recognition of estimated credit losses expected to occur over the remaining life of the financial instrument. Current practice generally requires the recognition of credit losses when incurred. Topic 326 also amends certain accounting treatments for available-for-sale debt securities. Topic 326 is effective for the Company's fiscal year beginning January 1, 2020 and subsequent interim periods. The Company is currently evaluating the impact of this new standard on the Company's consolidated financial statements.
F. Merger Agreement Termination. During March 2018, the Company entered into an agreement and plan of merger (Merger Agreement) with Fidelity National Financial, Inc. (FNF) (the Mergers), as disclosed in detail in Note 1-S of the Company’s 2018 Annual Report on Form 10-K and in Exhibit 2.1 to the Company's Current Report on Form 8-K filed on March 19, 2018 with the Securities and Exchange Commission. On September 9, 2019, the Company and FNF mutually terminated the Merger Agreement. In connection with the termination and as stipulated in the Merger Agreement, FNF paid the Company a reverse merger termination fee of $50 million, which is presented as part of Investment and other gains - net in the 2019 condensed consolidated statement of income and comprehensive income (refer to Notes 5 and 12).
NOTE 2
Revenues. The Company's operating revenues, summarized by type, are as follows:
Three Months Ended September 30,
Nine Months Ended September 30,
2019
2018
2019
2018
($000 omitted)
Title insurance premiums:
Direct
174,635
152,739
448,920
444,447
Agency
254,155
272,875
699,835
756,986
Escrow fees
38,666
32,649
100,570
95,984
Search, abstract and valuation services
20,922
24,105
63,109
71,006
Other revenues
19,473
16,868
52,307
50,239
507,851
499,236
1,364,741
1,418,662
NOTE 3
Investments in debt and equity securities.The total fair values of the Company's investments in debt and equity securities are as follows:
September 30, 2019
December 31, 2018
($000 omitted)
Investments in:
Debt securities
561,986
602,020
Equity securities
37,207
33,997
599,193
636,017
9
As of September 30, 2019 and December 31, 2018, the net unrealized investment gains relating to investments in equity securities held were $6.3 million and $2.9 million, respectively.
The amortized costs and fair values of investments in debt securities are as follows:
September 30, 2019
December 31, 2018
Amortized
costs
Fair
values
Amortized
costs
Fair
values
($000 omitted)
Municipal
53,315
54,964
61,779
61,934
Corporate
299,355
311,148
333,289
328,495
Foreign
186,523
189,308
200,667
198,938
U.S. Treasury Bonds
6,541
6,566
12,951
12,653
545,734
561,986
608,686
602,020
Foreign debt securities consist of Canadian government and corporate bonds, United Kingdom treasury and corporate bonds, and Mexican government bonds.
Gross unrealized gains and losses on investments in debt securities are as follows:
September 30, 2019
December 31, 2018
Gains
Losses
Gains
Losses
($000 omitted)
Municipal
1,650
1
482
327
Corporate
11,794
1
1,894
6,688
Foreign
3,325
540
1,402
3,131
U.S. Treasury Bonds
65
40
2
300
16,834
582
3,780
10,446
Debt securities as of September 30, 2019 mature, according to their contractual terms, as follows (actual maturities may differ due to call or prepayment rights):
Amortized
costs
Fair
values
($000 omitted)
In one year or less
53,152
53,176
After one year through five years
323,901
330,147
After five years through ten years
144,476
152,707
After ten years
24,205
25,956
545,734
561,986
Gross unrealized losses on investments in debt securities and the fair values of the related securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at September 30, 2019, were:
Less than 12 months
More than 12 months
Total
Losses
Fair values
Losses
Fair values
Losses
Fair values
($000 omitted)
Municipal
—
—
1
560
1
560
Corporate
1
992
—
—
1
992
Foreign
457
53,913
83
25,008
540
78,921
U.S. Treasury Bonds
40
2,334
—
—
40
2,334
498
57,239
84
25,568
582
82,807
10
The number of specific debt investment holdings held in an unrealized loss position as of September 30, 2019 was 44. Of these securities, 17 were in unrealized loss positions for more than 12 months. During 2019, the overall gross unrealized losses on debt securities improved compared to the prior year-end, primarily due to reduced interest rates and credit spreads which increased investment fair values. Since the Company does not intend to sell and will more likely than not maintain each investment security until its maturity or anticipated recovery, and no significant credit risk is deemed to exist, these investments are not considered as other-than-temporarily impaired. The Company believes its investment portfolio is diversified and expects no material loss to result from the failure to perform by issuers of the debt securities it holds. Investments made by the Company are not collateralized.
Gross unrealized losses on investments in debt securities and the fair values of the related securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at December 31, 2018, were:
Less than 12 months
More than 12 months
Total
Losses
Fair values
Losses
Fair values
Losses
Fair values
($000 omitted)
Municipal
91
13,366
236
11,645
327
25,011
Corporate
4,416
201,965
2,272
71,044
6,688
273,009
Foreign
158
11,424
2,973
137,793
3,131
149,217
U.S. Treasury Bonds
—
—
300
12,544
300
12,544
4,665
226,755
5,781
233,026
10,446
459,781
NOTE 4
Fair value measurements. The Fair Value Measurements and Disclosures Topic (Topic 820) of the FASB Accounting Standards Codification (ASC) defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal, or most advantageous, market for the asset or liability in an orderly transaction between market participants at the measurement date. Topic 820 establishes a three-level fair value hierarchy that prioritizes the inputs used to measure fair value. This hierarchy requires entities to maximize the use of observable inputs when possible.
The three levels of inputs used to measure fair value are as follows:
•
Level 1 – quoted prices in active markets for identical assets or liabilities;