Stewart Information Services Q3 2023 Earnings Call Transcript

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Provided by Quartr
October 26, 2023

There are 7 speakers on the call.

Operator

Hello, and thank you for joining the Stewart Information Services Third Quarter 2023 Earnings Call. At this time, all participants are in a listen only mode. Later, you will have the opportunity to ask questions during the question and answer session. Instructions will be given at that time. Please note today's call is being recorded.

Operator

Star 0. It is now my pleasure to turn today's conference over to Brian Glaes, Chief Accounting Officer. Please go ahead, sir.

Speaker 1

Thank you for joining us today for Stewart's Q3 2023 earnings conference call. We will be results that were released yesterday after the close. Joining me today are CEO, Fred Eppinger and CFO, David Heinzstein. To listen please go to the stuart.com website to access the link to this conference call. This conference call may contain forward looking statements that involve a number of risks we will conduct a discussion of the risks we will conduct certain uncertainties that could cause our actual results to differ materially.

Speaker 1

During our call, we will discuss some non GAAP measures. For a reconciliation of these non GAAP measures, please refer to the appendix in today's earnings release, which is available on our website at steward.com. Let me now turn the call over to Fred.

Speaker 2

Thank you for joining us today for Stewart's Q3 2023 earnings conference call. Yesterday we released financial results for the quarter and David will review these in a minute. Before doing so, I'd like to update you on our view of the market and our continued progress some important initiatives that we believe will set Steward up for long term success. This quarter, we are proud to celebrate 130 years of business as a pioneer in the title industry and also coming up on our 30 years as a listed company on the New York Stock Exchange. These milestones caused me to reflect on the last 4 years and looking back I see that we have made great strides Fundamentally improving Stewart's operating and financial performance to better position ourselves for even more prosperous future.

Speaker 2

Although the current economic environment continues to pose significant short term challenges, we have materially improved our business, creating a strong and more resilient enterprise that will thrive over a full real estate cycle. Even in light of the current economic environment, we continue to intensely we are focused on our journey to become the premier title service company. We are managing through a challenging environment where we believe mortgage rates we remain elevated into 2024. Rates increased throughout the Q3 to around 7.5% where they were previously in the high 6% range at the close of the second quarter. Higher mortgage rates continue to impact transaction volumes and we find ourselves at historic lows for At an industry level, we are experiencing historically low purchase volumes combined with low existing home listing inventory, Which has kept pricing strong.

Speaker 2

As we look forward, we see 2024 as a transition year to a more normal market in 'twenty five I believe the next 6 months will continue to be very challenging given the macroeconomics laid on top of the typical seasonal While we have significantly improved the underlying financial and operational performance of the company, there is more we can and will do. And it is critical, we remain focused on improving margins, growth and resiliency through improved scale and attractive markets and enhancing our operational capabilities. In this challenging environment, it is easy to focus on achieving long term goals. However, I'm extremely pleased with the dedication we have shown in making progress we are pleased to report on our enterprise initiatives during the Q3 and in our progress toward improving our long term performance. Maintaining our strong financial position even in this current environment gives us flexibility to continue to pursue these investments and take advantage we have taken targeted cost actions where appropriate.

Speaker 2

We have been careful not to take actions we felt would threaten our competitive position and long term value creating opportunities. We believe that the real estate We'll begin to normalize later in 2024 and the best half forward for Stuart to get through this period is to continue investing in our people we remain focused on our long term improvement plan. I believe we have done a good job of balancing strong financial discipline with targeted investments, we will continue to be very diligent with our expense management during this difficult moment in the cycle. We remain focused on enhancing our operating investments in technology to enhance the customer experience and improve efficiency of our operations and building scale in targeted areas. These strategic investments this will cause our cost ratios to remain elevated in a market with low transaction volumes, but will set us up for better overall performance in the future.

Speaker 2

We believe that these long term investments coupled with thoughtful near term expense management will improve our structure and financial performance for the long term. We routinely reevaluate markets in our direct operations where we have the opportunity to increase share and enhance our leadership strength. Given the market uncertainty, we've been more selective in our investment decisions to make sure our deployment of capital provides long we will maintain this conservative approach through the first half of twenty twenty four. We remain positive on the commercial market, even though we believe certain sectors remain challenged in the near term due to changing financial markets, sectors such as energy remain strong for us while we see ongoing challenges in sectors like office and multifamily properties. Growth in all sectors of our commercial operations is an important component of our overall strategy it positions our commercial operations for growth across all business lines has been a key focus of our journey.

Speaker 2

We are making investments in we have the leadership in place to achieve these objectives. We are investing in technology to support our commercial operations to allow us to better serve our customers and we believe our strategies will create long term growth in the commercial markets for us. In our agency business, we are leveraging our technology to drive market share gains. Both in this quarter and throughout the year, we have excellent progress on the deployment of technology and services that provide a significantly improved customer experience for our agents. This enhanced experience includes greater activity, ease of use and risk reduction for our agent partners.

Speaker 2

We are pleased that our platform of services for agents is as strong as it's ever been we have begun to see meaningful progress in our target markets such as Florida, Pennsylvania and the overall commercial market. In Real Estate Solutions, we are seeing share gains as we leveraged our improved portfolio of services to better and more deeply serve our lender So while we are not immune to the market downturn of these businesses, we've been able to offset some of this with our share gains. A significant part of our investments is focused on improving our technology for the title production process automation and centralization to improve operational efficiencies and capability. Our investments have already resulted in significant progress to improving our customer experience across all channels. An example of this is the one I just mentioned in our agency technology platform which significantly enhances ease of use and connectivity with agents.

Speaker 2

Another area of priority as work to improve our operating efficiency is the centralization and digitization of our title data. We are pleased with the significant process progress we have made on this this year and in the more normal production levels, we will see considerable improvement in our delivery costs. We continue to integrate our acquired entities into production and other systems. This helps us to improve our overall customer experience and offers operating efficiencies that we've been building on for the past several years. Integrating the remaining acquiring companies is an important priority and we expect to complete the majority of our integration efforts by mid next year.

Speaker 2

Improving our financial strength by growing margin it has been a significant focus of our journey. We have made good progress on this effort and we are aware that returns remain depressed during this phase of the cycle. The investments I've mentioned, many of which have materially been implemented, should allow us to achieve low double digit margins as we turn to a normal $5,000,000 5,000,000,000 unit purchase market. And specifically, the initiatives that we prioritize this year should improve margin by about 200 basis we expect to be in a normal market. While we are encouraged by improvements in talent and in technology and customer experience and in our financial model, we know that work persists and the journey is not complete.

Speaker 2

We remain focused on our strategic plan of building an improved competitive position we have made great strides in improving the customer experience in all our channels. Retaining key talent is always important. We've been even more focused on retaining talent to this market so that we have the right team in place as the cycle improves. Our efforts are yielding results for increased year over year market share gains in each of our direct, agency, commercial and real estate service businesses. Let me conclude by reiterating that we have been managing the balance of our expenses and investments thoughtfully to be mindful of necessary operating discipline for The current market challenges, while also remaining dedicated to strengthening Stewart's long term growth and performance.

Speaker 2

Our solid financial footing should best position us to take advantage of the opportunities that this difficult cycle will provide. Finally, I remain positive on the long term view of the real estate market and the ability of Stewart to become the premier title services company. Our associates have worked diligently throughout these challenging times and I appreciate all they have accomplished. And I also want to thank our customers for their continued loyalty and David will now update everyone for the

Speaker 3

results. Good morning, everyone, and thank you, Fred. I would also like to thank our associates for their outstanding service and our customers for their continued support. During the Q3 and through today, the real estate market we continue to experience low housing inventory, high mortgage rates and lower commercial and residential real estate 3rd quarter net income of $14,000,000 or $0.51 per diluted share on revenues of 602,000,000 starting this quarter, we revised our presentation of consolidated non GAAP measures relating to adjusted net income and adjusted EPS to be consistent with how we present non GAAP measures related to our Title and Real Estate Solutions segments. We don't believe this amortization is indicative of our operating performance.

Speaker 3

After adjusting for net realized and unrealized gains and losses we expect to be approximately $4,000,000 or $0.86 per diluted share compared to net income of $43,000,000 or $1.58 we expect to be approximately $1,000,000 per diluted share in the Q3 2022. Regarding the title segment, total revenues in the 3rd quarter decreased 100 $6,000,000 or 19 percent, while pretax income decreased by $16,000,000 or 32% compared to the prior year quarter. After adjustments for purchase intangible amortization and other items, the segment's pretax income was $42,000,000 or 8% margin compared to $65,000,000 or 10% margin for the same quarter last year. On our direct title business, total opened and closed orders in the 3rd quarter declined by 7% and 10%, respectively compared to last year, primarily due to the we are in a real estate environment. Domestic commercial revenues decreased $9,000,000 or 15%, primarily due to lower transaction volume, while average commercial fee per file was approximately 14,200 compared to 13,700 from the prior year quarter.

Speaker 3

Domestic residential revenues declined $37,000,000 or 18%, primarily due to lower purchase and refinancing volumes. Average residential fee per file in the 3rd quarter was $3,000 or 10% lower than last year's quarter due to lower purchase mix. Total international operating revenues decreased $5,000,000 or 12%, primarily as a result of lower transaction volumes at our Canadian operations. Given the lower commercial and residential activity in the market, 3rd quarter revenues from our agency operations decreased $75,000,000 or 22% compared to Q3 last year, while the average remittance rate was roughly comparable. Regarding title losses, total title loss expense in the quarter declined by $3,000,000 or 13%, primarily due to lower title revenues.

Speaker 3

As a percent of title revenues, 3rd quarter title loss expense was 4.3% compared to 3.9% in last year's quarter, which benefited from favorable claims experience. For the full year 2023, we still expect title losses to average in the low this has helped offset other transactional businesses. Pretax margin was 3.8% compared to 4.8% in the Q3 20 After adjusting for purchase intangible amortization, adjusted pretax margin was 13% similar to the prior year quarter. On our consolidated operating expenses, our employee cost ratio was 31% in the Q3 compared to 27% last year, primarily as a result of lower operating revenues. Lower operating revenues also resulted in slightly higher other operating expense ratio of 22% compared to 21% last year.

Speaker 3

On taxes, our 3rd quarter income tax expense was higher than our normal tax rate of 24%, primarily due to additional tax expense resulting from lower utilization of foreign tax credits as we completed and filed our federal tax return. The impact of this true up on EPS was roughly $0.13 per share. We do expect our tax rate to return to historical levels. On other matters, we continue to have a solid financial positioned to support our customers, associates in the real estate market. At the end of the third quarter, our total cash and investments were approximately $380,000,000 over statutory premium reserve requirements and we also have a fully available $200,000,000 line of credit facility.

Speaker 3

Total stockholders' equity attributable to Stewart at September 30, 2023 was approximately 1 dollars 35,000,000,000 with a book value of approximately $49 per share. Lastly, net cash provided by operations in the 3rd quarter was $60,000,000 compared to $49,000,000 during the prior year quarter, primarily due to lower claims and accounts payable payments, we are now in line with our expectations. We appreciate our customers and associates and remain confident in our support of the real estate markets. I'll now turn it back to the operator for questions.

Operator

Thank you. Thank you. Our first question will come from Bose George with KBW. Your line is now open.

Speaker 2

Good morning, Bose. Hey, good morning.

Speaker 4

Can you give us an updated thoughts on your margin expectations like for the next both 18 months? And just given your comments on 2024 being a transition year, Is 2025 when we should think about a more normalized double digit margin?

Speaker 2

Yes, Bo, thanks for the question. So That's exactly right. So if you remember at the beginning, when I first got here, we talked about targeting high single digits double. I think in about 2020 to 2021, we achieved that. Obviously, 'twenty one outperformed because it was excess volume.

Speaker 2

But at a $5,000,000 kind of unit purchase market, I think we were 9.5%, 10% range. What's happened is we've done good work and I think we're now in the 11.5%, 12 margin range when you're in that 5,000,000 units range because we've done a lot of work. The problem is obviously is The volume is so depressed now. Think about it as we have excess capacity and we can't really extract all that margin. So my view is that 25 is Like our point of view is when you look at forecast, 25,000,000 is when we get back to that $5,000,000 kind of range.

Speaker 2

And so that's I think you'll see margins get better. I think about the next two quarters is quite difficult given where we are and Where volumes are obviously with the spike that we saw in rates, we're kind of still worse than the previous year, although that comes As you know, because last year at this time, things started really cratering. And so that will come together a little bit into the Q1. But So it's like a journey from here kind of that Q1 through the transition in next year, particularly second half of next year towards a And again, we're not you don't think I would say, Bose, we're not there's other things we're working on too. There's other things to improve ourselves and We're not sitting on our hands, but right now we have pretty good transparency to that.

Speaker 4

Yes, that's helpful. Thanks a lot. And then, Akshay on investment income, that was up Again, pretty nicely this quarter. Can you just talk about sort of the trajectory for that? Is this quarter a reasonable run rate or could that continue to trend up

Speaker 3

Yes, Bose. As we talked about in the last quarter, that's when we were really putting the escrows to work. And I think We had said that's about $2,000,000 a month, which is what it remains. And so you saw the full effect of that hit in the 3rd quarter. And then you saw a little bit of an uptick on the general investment income, I think just mainly due to the more favorable rate environment.

Speaker 3

So Yes, I would say that this is a pretty good run rate where we stand now. Although obviously it's also affected by the flow, right? Yes, I mean if balances If volumes were to continue to go down meaningfully, you could have a negative impact on balances and that could change A little bit the offset is we might be able to get a little bit higher rate, but balances could cause it to dip a little. But I'd say as it stands, it's

Speaker 4

Okay, great. Thank you.

Speaker 3

Thank

Operator

you. Our next question

Speaker 5

I guess just to start with the moving rates recently, I was just wondering where orders are sort of trending through October. I think September was down sort of 8% year over year. So just sort of wondering on the run rate there now.

Speaker 2

Yes. The rates have affected order counts. And so I would describe it as a little bit of a shock to the system. And so what you saw at Tail end of this quarter, they started dipping and that has continued into this quarter. And so As I mentioned a couple of seconds ago, I think the if you remember last year, the shock started about now And it really started dropping toward the end of the year.

Speaker 2

So we're still below last year in the Q4. So we're decreasing, we're still below, but I think that will come together a little bit toward the end of the year because last year went down so much. But There's an impact to what happened in the last 3 weeks for sure.

Speaker 5

So does that mean that we're sort of Above or below that sort of 8%. I get that the comps are going to get easier, right? But sort of flattish is the way to think about it then?

Speaker 2

I'm so flash against what? So I'm saying it's continued down. Again, we got both the seasonal impact And you got the impact of rates. So the 4th quarter orders aren't going to move down again.

Speaker 5

Okay. All right. Okay. I think I understand. Okay.

Speaker 5

And then I guess on market share, I'm just curious on some of the drivers there. It looks like refi share picked up quite a bit and there was also a bit on purchase. So Fred, can you maybe just walk through what you're seeing on the ground and maybe who you think you're

Speaker 2

Sure. So each of our businesses are in position for growth, Right. So in agency, we were just up until about 15 months ago, right, we were meaningfully behind On ease of use and integrations, that's caught up. So there's 14 states in particular that we have targeted And we're starting to get good traction in a lot of them as we introduce we kind of reintroduce ourselves to agents or gain shelf space. Maybe we have 5% share with them and now we go to 10%.

Speaker 2

So what's happening is as we reintroduce ourselves to agents with a little bit better value proposition And we have points of new agents. We're getting nice share shift. And again, it's hard work and it's one at a time. And I think we're in early innings of that, but it's been, I think, 6 quarters or so where we've seen increases of share. The other thing that's a little unique about us is that we have as a percent less refi than some of the Competitors.

Speaker 2

And so as that market became more of a purchase market, that helped us as well. But what I and that's the In direct, in essence, it's essentially we're a lot better talent wise than we were 2 years ago, we did a bunch of acquisitions in core key MSAs. And while the markets are bad, we're better in many markets, 30 to 40 markets. And so we're holding our own and we're actually winning a little bit there too. I think that will get better as we as The market gets more normal and we get into we'll go back to buying more agencies.

Speaker 2

But right now, we're holding our own and getting a little bit because I think of the capabilities and skills The markets we have we were in. On the lender business, we just again, it's been Really less than a year that we had a full portfolio of these products and services assembled. And so what's happening there is we're able to cross and deepen our relationship with a lot of these lenders because we have a broader portfolio. And what's interesting in lender is we weren't in the top 4 We were only about $30,000,000 of revenue when we started this journey. So that has grown to a $300,000,000 business.

Speaker 2

So our positioning there is so much better. So I see that kind of organically continuing as we become a legitimate alternative to the 2 big guys. And then finally, commercial, that is also very organic. So what we've done there is we've done a lot of in the key markets, we've done a lot of Tires in direct, that's smaller commercial. We've also done the same thing.

Speaker 2

We picked the markets that we were interested in. We've made some investments as well there. The other thing that's interesting in Commercial, the market is obviously way down, but one of our real strengths is energy and energy is up, right? So if you look at Energy was probably 13% of our business. Last year, it's probably 25% of our business now.

Speaker 2

So we have a Benefit of having a resilient mix because of our areas of expertise, but we've also invested quite a bit in commercial.

Speaker 3

So again, all of these businesses, my view is over

Speaker 2

the long haul, we're set up to gain share. And as the market comes back, I think that's actually going to be more robust, because again, in down markets, people are a little bit reluctant to change allegiances. And so I think it's going to only get better if we can stay focused and make sure we keep enhancing kind of our value proposition. But I'm happy with the effort of the team. It's a tough thing.

Speaker 2

We're balancing really thoughtful expense management, but also trying to be targeted on our investments to make sure we keep It's showing some progress, which is good.

Speaker 5

Yes. No, that's great to hear. And just one more, I guess, on Commercial. I'm wondering on the fee per file side, it was stronger than what your peer reported this morning. So can you just talk about the drivers?

Speaker 5

Is it the Energy piece that you're talking about and then how do you sort of see the Q4 developing here?

Speaker 2

Yes. So just as a caution, for us, we're not huge, right? So It's very lumpy based on what Nick closes, but your insight is right. So if you look at some of the energy deals that were quite large, That drove some of that. So again, but it's we tend to be a little lumpy on that on the size because of this we just We're not that big, so 3 deals could really matter.

Speaker 2

But again, as I look forward, it's a tough market, right? Commercial is down Pretty significantly, it's probably down if you looked at industry data, probably 40%, 50%. We're down less than that because we're being a little successful, But it's a down market and it will continue to be. What's weird about commercial that's a little bit, in my view, something that we have understand the risk. So it tends to have a lot of closings in December and we have a lot of business and we have a lot of stuff The pipe that we have a lot of miles, but with this market uncertainty, could a different percent close at the end of the year.

Speaker 2

And so that's the one thing I'm watching because again, we've got lots of pipe, we've got lots of activity, but it's a weird business where December by far is always our biggest month. And so we obviously got to focus on that. We'll see how it turns up. But in general, I'm very comfortable with How we're attacking the market.

Speaker 5

Great. Thanks a lot for the color guys.

Operator

Our next question will come from John Campbell with Stephens Inc. Your line is now open.

Speaker 3

Hey, gentlemen. Good morning, gentlemen.

Speaker 6

Hey, I just wanted to check maybe on the other orders. I mean, I think you had a it was Over 100% sequential increase, so pretty big step up there. Hoping you can maybe help with the modeling there. I think David, in the past, you've said that that's not going to be too seasonal. That won't really Mere the purchase seasonality, but I'm curious about how to model that going forward.

Speaker 6

And then also if you could maybe help with the average fee per file of the other orders? Yes. No, John,

Speaker 3

I mean that's where the home equity stuff and the institutional real estate Business that we acquired at the end of last year, that's where those orders go. There, particularly Real Estate is a bit lumpy because it's all a function of bulk purchases and unsecuritizations. In terms of the average fee per file, the reverse stuff tends to be more like a purchase transaction and then some of the institutional When you buy the deal, it's like a purchase transaction, but then the securitization it tends to look more like a refi transaction. And so it's pretty lumpy. I would say fee profile is probably going to be a little closer to purchase just because it's probably more heavily weighted bulk acquisition and then Reverse, but timing of securitizations can sway that quite a bit.

Speaker 6

Okay. How would you suggest maybe I mean, I guess the lumpiness, but it seemed like pretty steadily each month in the quarter reported A fair amount higher than what you've seen on average last couple of quarters, but how should we think about modeling that? I mean, do you see just kind of Continued momentum and then maybe taking that down next year?

Speaker 3

Yes. I mean, you have to think about those individual markets. And so if you think about reverse, Last fall, it was a little choppy because you had the capital markets issues and so securitizations weren't getting done as much, But that's recovered and then there's also been a if you my litmus test is if you watch the for the Tom Selleck commercials when you see him on a lot, That usually means reverse is doing pretty well. But when you don't see them, it's not doing very good. And we have seen Lately, maybe I think that markets continue to come back.

Speaker 3

The institutional side is Still pretty choppy. I mean, it's if you just think about the rent price to rent ratio and stuff like that, it's pretty choppy. I mean, my sense is that would continue to get better over time, but it's probably a slower recovery.

Speaker 6

Okay, makes sense. And then just a 2 part question on the tax rate. I mean, the 33%, it sounds like that was the lower foreign tax credits. But first, from a GAAP standpoint, I think that was like a $0.09 or maybe $0.10 EPS drag for you guys. It doesn't look like you added that back to your The reported adjusted EPS metrics, so I guess first, is that right?

Speaker 3

Yes, we did not. We tend not to Focusing much on the tax stuff, but if you were to normalize it, you're right, it would be a big impact like you said.

Speaker 6

Okay. That's helpful. And then secondly, It sounds like you're viewing that the lower foreign tax credit as a one time, but then David, just want to make sure you reiterate that that's the expectation that that's going to normalize moving forward.

Speaker 3

No, that's right. I did say in my script that we expect the tax rate to come back to what it's been historically. We have had some lumpy periods. It just hasn't been as evident, where we probably had 2 $3,000,000 similar type adjustments. It's just since we had a lower income base, it's more pronounced this quarter.

Speaker 6

Okay. That makes sense.

Speaker 4

Thanks for

Speaker 2

the time, guys. Thank you. Appreciate it, John.

Operator

Thank you. This does conclude today's Q and A. I'll now turn the call back over to our presenters for any additional or closing remarks.

Speaker 3

Well, I want to thank everybody for

Speaker 2

the interest in joining our Thank you very much. Appreciate it.

Operator

Thank you. Ladies and gentlemen, this concludes today's event. You may now disconnect.

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Key Takeaways

  • Stewart highlighted the challenging market environment, noting mortgage rates remained elevated around 7.5%, purchase volumes hit historic lows and housing inventory is scarce, with 2024 viewed as a transition year and 2025 expected to normalize.
  • The company is balancing disciplined cost management with targeted technology and people investments—including title data centralization and agency platform upgrades—to drive operational efficiency, enhance customer experience and improve margins by ~200 basis points in a normal market.
  • Stewart reported year-over-year market share gains across its direct title, agency, commercial and real estate solutions businesses, fueled by expanded service portfolios, improved tech integrations and strategic acquisitions in key markets.
  • For Q3 2023, Stewart delivered net income of $14 million (EPS $0.51) on $602 million in revenues, with adjusted non-GAAP EPS of $0.86 versus $1.58 last year, as title segment revenues and pretax income declined 19% and 32%, respectively, on lower transaction volumes.
  • The firm maintains a strong financial position with $380 million of cash and investments above reserve requirements, a fully available $200 million credit facility, $1.35 billion in shareholders’ equity (book value $49/share) and $60 million of Q3 operating cash flow.
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Earnings Conference Call
Stewart Information Services Q3 2023
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