Stewart Reports Results for the Second Quarter 2017

HOUSTON, July 20, 2017 /PRNewswire/ -- Stewart Information Services Corporation (NYSE:STC) today reported net income attributable to Stewart of $18.6 million ($0.79 per diluted share) for the second quarter 2017 compared to net income attributable to Stewart of $23.6 million ($0.49 per diluted share, see further discussion below) for the second quarter 2016. Pretax income before noncontrolling interests for the second quarter 2017 was $33.1 million compared to pretax income before noncontrolling interests of $41.9 million for the second quarter 2016. Of note, the second quarter 2016 results include a $5.4 million net policy loss reserve reduction. Excluding this reduction, the second quarter 2016 pretax income before noncontrolling interests and net income attributable to Stewart were $36.5 million and $20.2 million, respectively. In addition, for purposes of calculating second quarter 2016's net income per share, net income was reduced by a $12.0 million cash consideration paid in connection with the Class B share exchange. Excluding this payment, net income per diluted share would have been $1.00 (or $0.86 per diluted share excluding the net policy loss reserve reduction) for the second quarter 2016, as compared to $0.79 per diluted share for the second quarter 2017.

As of June 2, 2017, Stewart acquired the retail branch division of Title365 Company. Title365's retail division operates primarily in Southern California. This asset acquisition reinforces Stewart's commitment to providing innovative title solutions and focused, smart growth in key markets throughout the United States, as more than 250 employees and 15 Title365 offices are now operating under the Stewart name.

"We are very pleased that the Title365 retail team has joined the Stewart family," noted Matthew W. Morris, chief executive officer. "As a result of this acquisition, Stewart gains experienced leadership and scale in several high-growth target markets, and the team from Title365 will benefit from our global reach, financial strength and extensive resources. This acquisition aligns with our strategic plan for targeted growth in our direct operations."

"Our commercial operations delivered an exceptional quarter, validating our strategy to strengthen our balance sheet and invest in growing our commercial presence," continued Morris. "Buoyed by another excellent quarter in Canada, international operations continue to be a strong contributor to overall results."

"While our retail operations were affected by the loss of certain staff and management we initially referenced last quarter, we made several strategic hires and continue to aggressively recruit to rebuild and improve the affected markets. By the end of the fourth quarter 2017, we expect new hires along with the Title365 acquisition to largely offset short term revenue loss from the departures. This acquisition and our new hires underscore Stewart's commitment to investing in the long term future of the company by improving our operating model, targeting growth opportunities and driving a culture of excellence," concluded Morris.

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

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

As noted above, the second quarter 2016 results included a $5.4 million net policy loss reserve reduction which resulted from favorable policy loss experience. Excluding this credit, the segment's second quarter 2017 pretax income would have declined 14 percent from pretax income of $45.9 million (9.8 percent margin) in the second quarter 2016.

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

Non-commercial domestic revenue includes revenues from purchase transactions and centralized title operations. Revenues from purchase transactions decreased 7 percent in the second quarter 2017 compared to the prior year quarter, while revenues from our centralized title operations, which primarily process refinancing and default title orders, declined 24 percent due primarily to decreased refinancing transactions. Total international revenues increased 8 percent in the second quarter 2017 compared to the prior year quarter, mainly due to transaction volume growth from our Canada and U.K. operations, partially offset by the effect of a stronger U.S. dollar against the Canadian dollar and British pound. Revenues from independent agency operations in the second quarter 2017 increased 4 percent compared to the second quarter 2016. The independent agency remittance rate decreased to 17.9 percent in the second quarter 2017 from 18.6 percent in the second quarter 2016 due to the geographic mix of our agency business; second quarter 2017 revenues from independent agencies, net of retention, were $41.8 million, similar 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):

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

The segment's pretax results improved to a $6.3 million pretax loss, compared to a pretax loss of $9.4 million in the prior year quarter. This was driven by a $9.2 million, or 32 percent, decrease in the segment's total employee costs and other operating expenses, more than offsetting the revenue decline during the second quarter. The segment's results for the second quarter 2017 and 2016 included approximately $6 million and $7 million, respectively, of expenses attributable to parent company and corporate operations.

Expenses
As a result of ongoing cost management efforts, a reduction in employee counts tied to volume declines (primarily in our ancillary services and centralized title operations), and the aforementioned staff departures in direct operations, employee costs for the second quarter 2017 decreased $13.1 million, or 9 percent, from the second quarter 2016. Average employee counts for the second quarter 2017 decreased approximately 9 percent from the second quarter 2016. As a percentage of total operating revenues, employee costs for the second quarter 2017 were 29.0 percent, an improvement of 250 basis points compared to 31.5 percent in the prior year quarter.

Other operating expenses for the second quarter 2017 increased $2.3 million, or 3 percent, from the second quarter 2016 primarily as a result of increased outside search fees, driven by higher commercial and international revenues noted above. As a percentage of total operating revenues, other operating expenses for the second quarter 2017 were 18.5 percent, compared to 17.9 percent in the second quarter 2016.

Title losses were 5.2 percent of title revenues in the second quarter 2017 compared to 3.7 percent in the second quarter 2016; excluding the $5.4 million net policy loss reserve reduction mentioned above, the title loss ratio in the second quarter 2016 was 4.9 percent. Title loss expense increased to $24.5 million in the second quarter 2017, compared to $17.2 million (or $22.6 million after adjusting for the policy loss reserve reduction) in the second quarter 2016. The total estimated liability for title losses was $465.3 million at June 30, 2017.

Depreciation and amortization expenses decreased to $6.4 million in the second quarter 2017 compared to $7.3 million in the second quarter 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 2016.

Other
Net cash provided by operations in the second quarter 2017 totaled $35.7 million, compared to $50.3 million in the second quarter 2016. The decline was primarily due to the lower net income generated during the second quarter 2017 and lower collections on accounts receivable.

Second quarter Earnings Call
Stewart will hold a conference call to discuss the second quarter 2017 earnings at 8:30 a.m. Eastern Time on Thursday, July 20, 2017. To participate, dial (866) 952-8559 (USA) and (785) 424-1881 (International) - access code STCQ217. 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 20, 2017 until midnight on July 27, 2017, by dialing (800) 839-5130 (USA) or (402) 220-2693 (International) - the access code is also STCQ217.

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 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, 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.

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 non-operating costs such as severance, consulting and third-party provider transition 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 six months ended June 30, 2017 and 2016 (dollars in millions).

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SOURCE Stewart Information Services Corporation