HOUSTON, July 21, 2016 /PRNewswire/ — Stewart Information Services Corporation (NYSE-STC) today reported net income attributable to Stewart of $23.6 million for the second quarter 2016 compared to $17.1 million for the second quarter 2015.
For purposes of calculating net income per share, the $12.0 million cash consideration paid relating to the successful completion of the previously announced Class B exchange agreement is deducted from net income attributable to Stewart, resulting in net income per diluted share of $0.49 for the second quarter 2016 compared to $0.72 for the second quarter 2015. Excluding the effects of this $12.0 million payment, adjusted net income per diluted share would have been $1.00 for the second quarter 2016 (see additional discussion in Selected Financial Information below).
Pretax income before noncontrolling interests for the second quarter 2016 was $41.9 million compared to $31.0 million for the second quarter 2015, an improvement of 35.1 percent.
Second quarter 2016 results include a $5.4 million net policy loss reserve reduction in the title segment due to favorable policy loss experience.
By comparison, second quarter 2015 results include:
“Our second quarter 2016 results reflected continued bottom line improvement in our core title operations as a result of our cost control measures and an improving title policy loss experience,” said Matthew W. Morris, chief executive officer. “Our overall pretax margin improved to 7.5 percent from the prior year’s quarter of 6.7 percent, excluding the effects of the policy loss reserve releases in both periods and 2015 non-operating charges, even as revenues decreased for the quarter. We continue to benefit from our cost management program, with total employee costs declining at a much higher rate (10.9 percent) than the decline in operating revenues (8.2 percent). Also, our ongoing risk mitigation efforts resulted in favorable title policy loss experience which not only yielded a net policy loss reserve reduction, but, importantly, also allowed us to reduce our loss provisioning rate beginning in the second quarter. During the quarter, total title revenues declined 6.1 percent due primarily to lower revenues from independent agencies, while ancillary services revenues declined 38.0 percent due to our previously announced exit of a portion of our ancillary services business, causing overall operating revenues to decline 8.2 percent. On a sequential basis from first quarter 2016 and excluding non-operating charges, pretax earnings improved $50.6 million on a $51.3 million increase in operating revenues, net of agent retention.”
“We are focused on generating growth and efficiencies in our title business while continuing to improve the profitability of our ancillary services offerings,” continued Morris. “We are beginning to see positive results from our enterprise sales initiatives in targeted retail markets and will continue to invest in those areas to generate smart organic revenue growth. Although we experienced a decline in closed refinancing orders during the quarter, we believe we are well positioned to benefit from the much improved outlook for refinancing transactions over the coming quarters.”
Selected Financial Information
Summary results of operations are as follows (dollars in millions, except per share amounts):
“Our title segment continues to show year-over-year improvement in pretax margin, expanding 120 basis points over the second quarter 2015,” continued Morris. “The decline in title revenues was driven primarily by lower revenues from refinance transactions and less independent agency revenues. We will maintain our focus on disciplined and accountable sales growth and cost management to further improve margins and reduce risks.”
Our title segment revenues, which include revenues from our centralized title services, were $467.9 million for the second quarter 2016, a decrease of 5.9 percent from the second quarter 2015 and an increase of 13.1 percent from the first quarter 2016. In the second quarter 2016, the title segment generated pretax income of $51.7 million, an 11.0 percent margin, compared to the second quarter 2015 pretax income of $48.5 million, a 9.8 percent margin, and the first quarter 2016 pretax loss of $1.0 million, a (0.2) percent margin.
Direct revenue information is presented below (dollars in millions):
Non-commercial domestic revenues include centralized title operations and purchase transactions, revenues from which decreased 33.6 percent and increased approximately 1.0 percent, respectively. Total international revenues increased 7.8 percent in the second quarter 2016 as compared to the prior year quarter due to volume growth on a local currency basis, partially offset by the strengthening of the U.S. dollar. Revenues from independent agency operations decreased 9.6 percent in the second quarter 2016 compared to the second quarter 2015 and were comparable to revenues from the first quarter 2016. The drop in independent agency revenues was a result of several factors, including changing geographic focus as well as a slower start to the commercial season impacting those agents with relatively high concentrations of commercial business. Independent agency remittance rates improved from 18.0 percent in the second quarter 2015 to 18.6 percent in the second quarter 2016.
Ancillary Services and Corporate Segment
Revenues generated by our ancillary services and corporate segment declined in the second quarter 2016 primarily due to the previously announced strategic wind-down of our delinquent loan servicing operations, completed in the first quarter 2016. Revenues decreased to $21.6 million in the second quarter 2016 from $34.7 million in the second quarter 2015 and from $25.1 million in the first quarter 2016. The segment reported a pretax loss of $9.8 million in the second quarter 2016 as compared with pretax losses of $17.5 million and $14.7 million in the second quarter 2015 and first quarter 2016, respectively. As mentioned earlier, the pretax loss for the second quarter 2015 included $7.7 million of aggregate costs related to our cost management program and preparations for the new integrated disclosure rules; we incurred no significant non-operating charges in the second quarter 2016. First quarter 2016 included $2.8 million of costs related to the exit of the delinquent loan servicing operations, $2.2 million of expenses associated with the Class B common stock exchange agreement and $3.6 million of litigation expense, partially offset by $1.6 million of net realized gain due to changes in estimated contingent consideration associated with prior year acquisitions.
With a continued focus on expense controls, employee costs for the second quarter 2016 decreased $18.7 million, or 10.9 percent, from the second quarter 2015. In addition to our successful cost management program, employee costs declined due to reductions in employee counts tied to volume declines. Employee costs increased $2.2 million, or 1.5 percent, from the first quarter 2016 as a result of seasonal revenue growth. Second quarter 2016 average employee counts decreased approximately 9.5 percent and 2.5 percent from the second quarter 2015 and first quarter 2016, respectively. Second quarter 2015 and first quarter 2016 employee costs included $2.6 million and $0.4 million, respectively, of severance charges, while there were no significant severance charges during the second quarter 2016.
Other operating expenses for the second quarter 2016 decreased $11.6 million, or 11.8 percent, from the second quarter 2015 and decreased sequentially $1.3 million, or 1.4 percent, from the first quarter 2016. During the second quarter 2015, we incurred an aggregate $5.1 million of other operating expenses related to the cost management program and preparations for the new integrated disclosure rules, as well as $4.5 million of litigation settlement expense. During the first quarter 2016, we incurred expenses of $2.2 million associated with the previously reported Class B common stock exchange agreement and $3.6 million of litigation-related expense.
As a percentage of title revenues, title losses were 3.7 percent in the second quarter 2016, 4.0 percent in the second quarter 2015 and 5.6 percent in the first quarter 2016. Title loss expense decreased 12.4 percent and 25.7 percent from $19.6 million in the second quarter 2015 and $23.1 million in the first quarter 2016, respectively, to $17.2 million in the second quarter 2016. The lower title loss expense is the result of a reduction in our current year reserving rates for general and large claims due to continued favorable policy loss experience as well as a net policy loss reserve reduction of $5.4 million relating to prior policy years. The second quarter 2015 also included a net policy loss reserve reduction of $7.3 million relating to prior policy years. The title loss ratio in any given quarter can be significantly influenced by changes in title revenues, insurance recoveries, new large claims incurred, escrow losses and adjustments to reserves for existing large claims.
Cash provided by operations was $50.3 million in the second quarter 2016 compared to $32.4 million for the same period in 2015. The increase in cash provided by operations was primarily due to higher net income and lower payments of claims, partially offset by lower collections on accounts receivable for the second quarter 2016.
During the second quarter 2016, we declared and paid a dividend of $0.30 per common share.
“The Stewart Board of Directors is committed to creating value for all shareholders” said Thomas G. Apel, chairman of the board of directors. “We have taken significant actions and instituted a number of important changes over the last several years that demonstrate our alignment with shareholders, including adding shareholder representatives to our board of directors, a cost management program, implementing and subsequently increasing a quarterly dividend, share repurchases, and the successful conversion to a single share class. Although we believe Stewart’s go-forward business performance will reflect the positive impact of these significant restructuring initiatives, the Board regularly considers a wide range of strategic options to maximize shareholder value.”
Second Quarter Earnings Call
Stewart will hold a conference call to discuss the second quarter 2016 earnings at 8:30 a.m. Eastern Time on Thursday, July 21, 2016. To participate, dial (877) 876-9177 (USA) and (785) 424-1666 (International) – access code STCQ216. 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 July 21, 2016 until midnight on July 28, 2016, by dialing (800) 695-1564 (USA) or (402) 530-9025 (International). The access code is also STCQ216.
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 stewart.com, subscribe to the Stewart blog at blog.stewart.com, or follow Stewart on Twitter® @stewarttitleco. Trademarks are the property of their respective owners.
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 impact of vetting our agency operations for quality and profitability; 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; 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, 2015, our quarterly reports on Form 10-Q, and our Current Reports on Form 8-K. We expressly disclaim any obligation to update 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.
Adjusted EBITDA and EPS (dollars in millions, except per share amounts)
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) net income after earnings from noncontrolling interests and before interest expense, income tax expense, and depreciation and amortization (EBITDA) and (2) adjusted EBITDA, reflecting non-operating costs such as severance, consulting and third-party provider transition costs, component exit-related costs and prior policy year reserve adjustments, and (3) adjusted earnings per share (EPS), reflecting adjusted EPS for non-recurring capital transactions. 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 first six months ended June 30, 2016 and 2015.
SOURCE Stewart Information Services Corporation