Stewart Information Services Q2 2023 Earnings Call Transcript

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July 27, 2023

There are 6 speakers on the call.

Operator

Hello and thank you for joining the Stewart Information Services Second Quarter 2023 Earnings Call. Please note today's call is being recorded. It is now my pleasure to turn today's conference over to Brian Gliese, Chief Accounting Officer. Please go ahead.

Speaker 1

Thank you for joining us today for Stewart's Second Quarter 2023 Earnings Conference Call. We will be discussing results that were released yesterday after the close. Joining me today are CEO, Fred Eppinger and CFO, David Heisey. To listen online, please go to the stuart.com website to This conference call may contain forward looking statements that involve a number of risks and uncertainties. Please refer to the company's press release and other filings with the SEC for a discussion of the risks and uncertainties that could cause our actual results to differ materially.

Speaker 1

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

Speaker 2

Thank you for joining us today for Stewart's 2nd quarter 2023 earnings conference call. David will review the quarterly financial results in a minute. But before we get into the financial results that were released yesterday, I want to update you on our view of the market and our continued progress on important initiatives that we believe will set Steward up for success in the long term. During the last 3 to 4 years, we have focused on fundamentally improving Stewart's operating performance and launching off on a journey to become a premier are in a position to be a business owner. While the current economic environment poses significant challenges, we have materially improved our business, creating a strong and more resilient business are improving margins, growth and resiliency through improved scale in attractive markets and enhancing our operational capabilities.

Speaker 2

In difficult markets such as the current one, it is often indeed the least focus on achieving these long term goals. However, I'm very pleased with our progress on participants are in the 2nd quarter and are now in progress toward improving our long term performance. Given the continued volatility in the market, we have balanced and investors need to manage expenses very thoughtfully. As we've discussed before, we are not surprised that are in a challenging economic environment continued into the 2nd quarter. Although interest rates declined early in the 2nd quarter, they increased throughout the remainder of the quarter participants are in the 30 year mortgage interest rate now up is around 7%.

Speaker 2

As would be expected, the increase in rates has offset some of We expect the challenges of this environment to continue throughout 2023. We advantage cost carefully throughout this market focusing on our long term strategy, which requires a careful balance between investing in initiatives and managing expenses. We believe that the real estate cycle will be bound in 2024 and the best path forward for Stuart to get through this period is to invest in are in line with our long term improvement plan while managing through a few challenging quarters. We remain focused on our long term strategy, enhancing our operating model, investments in technology to enhance customer experience, improve efficiency of our operations and building scale in targeted areas. We recognize that these strategic investments will cause the cost ratios to remain elevated in the market with exception of low transaction lines.

Speaker 2

We believe that these long term investments coupled with thoughtful near term expense management will improve our structure and financial performance in the long term. In our direct operations, growing scale in attractive markets remains a priority. We are routinely evaluating markets where we have the opportunity to pre share and enhance our leadership strength. Given the market uncertainty, we have been more selective in our decisions in order to ensure our deployment of capital makes sense for the long term. Positioning our commercial operations for growth across all business lines has been a key focus of our journey as those operations are an important are in a position of our overall strategy.

Speaker 2

We are making investments in talent so that we have the leadership in place to achieve these objectives. We are investing in technology In our agency business, we are leveraging our technology to drive market share gains. We have made excellent progress on our deployment of technology and services to provide participants have significantly improved agent experience for Stewart. This experience includes greater connectivity, ease of use and risk reduction for our We are pleased that our platform of services for agents is as strong as it's ever been, and we've begun to see meaningful progress in Target Markets such as Florida, A significant component of our investments is focused on improving our technology for the tunnel production process automation participants are rolling out our agency technology platform, which significantly enhances ease of use and connectivity with agents. Another area of priority as we work to improve our operating efficiency is the centralization and digitization of our title plans.

Speaker 2

During the quarter, we made significant progress on our road map of integrating completed acquisitions into our production and are in the range of systems, which improves the customer experience as well as the overall operating efficiencies that we have been building on for the past several years. Maintaining strong financial position is always important, but even more during a market like this. Our strong financial position like we currently have allows us to make Financially, our long term goal remains to generate high single to low double digit margins over the cycle. Over the cycle, there will be high and low quarters as evidenced in the Q1. However, the modest increases in transaction volumes, margins improved significantly will be as indicated by our 2nd quarter results.

Speaker 2

In addition, the investments we have been discussing once fully implemented should allow us to achieve low double digit margins over the While we're encouraged by improvements in talent, technology and customer experience and our financial model, work remains to be done and the journey is not We remain focused on our strategic plan of building and improved competitive positions by building more efficient and having a disciplined operating model that functions well We have emphasized growing scale in attractive markets across all lines of our business, and we have made significant progress in improving participants are in the same store. Retaining key talent is always important and we have been even more focused on retaining talent through are in place as the cycle improves. Our efforts are yielding results from increased year over year market share gains in each participants with sensible balance between operating discipline and current short term market challenges and strengthening Steward for the long term growth performance. Strong financial footing should best position us to take advantage of the opportunities that this cycle will provide. Finally, my positive long term view of the real estate market and the ability of Stewart to become a Tribuneer Title Service Company has not waived.

Speaker 2

Our associates have worked David will now update everyone on the results. Good morning, everyone, and thank you, Fred. Before anything else, I would also like to thank our associates for their wonderful service and our participants for their support. Our 2nd quarter improved sequentially to the Q1. However, low housing inventory, high mortgage rates, Lower commercial and residential real estate activity and economic conditions continue to exist in the market, are in the range of $15,000,000 or $0.58 per diluted share on total revenues of $549,000,000 After adjusting for net Realizing unrealized gains and losses and other items detailed in Appendix A in the press release, the 2nd quarter adjusted net income was 19,000,000 are $0.69 per diluted share compared to $70,000,000 in the 2nd quarter net income of $70,000,000 Q2 2022.

Speaker 2

Regarding the 2nd quarter title segment, total revenues decreased $278,000,000 or 37 percent, Our pretax income decreased to $35,000,000 compared to $94,000,000 last year. After adjustments for purchase compared to $105,000,000 or 14% margin in last year's quarter. On our direct title business, total open and closed orders declined by 18% 29%, respectively compared to last year, primarily due to the current real estate market. Domestic commercial revenues decreased $26,000,000 or 38% due to lower transaction volume and size. Average commercial Domestic residential revenues declined $50,000,000 or 21% due to lower purchase and refinancing transactions.

Speaker 2

Participants. Our average residential fee per file was up 11% to 3,300 versus 2,900 participants are due to higher purchase mix. Total international operating revenues declined $18,000,000 or 35%, are in the range of $1,000,000 primarily due to lower transaction volumes in our Canadian operations. As a result of lower commercial and residential activity in the market, 2nd quarter revenues from our agency operations decreased $201,000,000 or 49%. The average agency remittance rate slightly improved 17.7% versus 17.1% last year, primarily as a result of geographic mix.

Speaker 2

Investment income increased due to higher rates and due to our working with our bank partners to better utilize In regard to title losses, total title loss expense in the 2nd quarter decreased $7,000,000 or are 25%, primarily due to lower title revenues. As a percent of title revenues, title loss expense was 4.2% compared to 3.5% in last year's quarter, which benefited from last year's favorable claims experience. For the full year 'twenty three, we expect title losses to average in the low 4% of title revenues. For the Real Estate Solutions segment, pre tax income was $3,000,000 in the 2nd quarter compared to $6,000,000 last year, participants are in the range of $1,000,000 primarily due to lower revenues driven by the real estate and economic environment. Pretax margin for the 2nd quarter was 4.6% compared to 7 are in the range of $0.4 and then after adjusting for purchase intangible amortization and catch up state sales tax expenses related to an acquisition, Adjusted pretax margin was 14.4%, which was comparable to the 14.7% in the prior year quarter.

Speaker 2

Related to our consolidated operating expenses, our employee cost ratio increased 34% versus 25% in last year's quarter, are primarily due to lower operating revenues. Lower operating revenues also led to other operating expense ratio of 24% were up 19% last year. On other matters, our financial position remains solid to support our customers and associates in the real estate market. At June 30, 2023, our total cash and investments were approximately $370,000,000 over statutory premium reserve requirements, And we also have a fully available $200,000,000 line of credit facility. Total stockholders' equity attributable to Stewart was approximately 1.36 participants with a book value per share of approximately $50 Lastly, net cash provided by operations was $35,000,000 compared to net cash participants provided of $83,000,000 in last year's quarter due to lower net income.

Speaker 2

We greatly appreciate our customers and associates. We advocate for everybody's safety

Operator

And we will take our first question from Bose George with KBW. Your line is open.

Speaker 2

Good

Speaker 3

morning. I just wanted to ask first about investment income. Is that new level of investment income something we can run rate or if not, like how should we think about that number going forward?

Speaker 2

Yes, this is David here. So I I think the way to think of it, if you're looking at like the increase of this quarter versus last year's quarter, probably about 70% of that is coming from these escrow activities that we just initiated. And so that would be ongoing. And then the rest is really the difference participants are in better rates, particularly on short term balances. I think that's probably relatively stable and will vary with balances.

Speaker 2

But the escrow component is definitely incremental.

Speaker 3

Okay, great. And then in terms of the agent premiums, can you just remind us, is there a lag in that number? So given the magnitude of the decline versus what happened with direct, does that participants reflect the lag and there's a bit of a catch up after?

Speaker 2

There is a little bit of lag in Our agency revenues closed, and we looked at a number of things about it. This is the same kind of difference, this gap So we don't see any share shift or anything like that when we look at the agency level activities. So I'm pretty comfortable that we'll are kind of easing out here over the next few months.

Speaker 3

Okay. Okay, great. Thanks very much.

Operator

We'll take our next question from Soham Bansal with BTIG. Your line is open.

Speaker 4

Hey, good morning, guys. First one is just on the purchase orders. Looks like your declines were a little bit better than your peer that announced participants are participating in the

Speaker 2

So we look over the last 5 quarters, each of our businesses has gained share. We don't know this quarter yet until the 5s come in, but We've had nice momentum in share growth. It's really irrelevant. We haven't had any acquisitions kind of the comparative time period that has affected it. Commercials were lumpy, but the both agency and direct, we see really five participants are in the same store.

Speaker 2

So it's not huge, but it's a step in the right direction.

Speaker 4

Participants. Got it. And then on the expenses and sort of tying this in with margins, Fred, the performance this quarter was strong. Participants But if we sort of assume flattish volumes, let's say, next quarter on a sequential basis, is there any reason That margins can at least stay flat to higher next quarter. Are there any expense items we should be thinking about?

Speaker 4

I'm just trying to Figure out if this is sort of the peak for margin this year

Speaker 2

or do we sort of see

Speaker 4

it and be higher as

Speaker 2

we go into the next quarter? There's no unusual expenses. Like the incremental $20,000,000 we're spending, as I talk about, for the improvement initiatives are kind of evenly spread. There's no extraneous Got it. I think I can think of that would spike in the next 2 quarters.

Speaker 2

So it's going to be exclusively driven by volume, the revenue volume. And again, we have made improvements in our operations on margin, but a lot of the improvements, participants You don't really see unless the volume goes up, because you know what I mean, because it's kind of like you have excess capacity in the system as you get more efficient. And so it's going to be pretty steady, I think, and driven mostly by volume. And the only I think about volume, as you know, the pattern in something like commercial is heavily skewed to like the Q4 and just participants are in the end of the year, in December in particular, which drives a change in that particular business. But everything else is pretty

Speaker 4

I guess just wanted to get your views on how you're seeing the back half here?

Speaker 2

Yes. Participants I mean, it's down, right? I mean, obviously, and the financial things that are going on are putting a little bit of are in the same period. And there are some obviously some segments that are very good. We were seeing some really nice Obviously, it looks like office is tough.

Speaker 2

So participants It's going to be down. We don't see any pattern to that. But as far as you jump into next quarter We feel like it's the orders are kind of steady at a lower level right now. Participants Again, we are this is another place, as you know. We've invested a lot that are in and we're continuing to, and participants We believe we can continue to build that business, but we got some headwinds here in the short term as far as logging in the market.

Speaker 2

And Simon, it's David here. If I just look as If I just look at our transaction types for the quarter, there's nothing really in the office I mean there's probably some smaller stuff with it. The bigger transactions as Fred said are really energy dominates. There's an industrial, Hospitality, multi use, that kind of thing. So it's probably fair to characterize that the decline in office has been offset by the other segments.

Speaker 4

Participants. Got it. All right. Thanks a lot, guys.

Speaker 2

Thank you.

Operator

We'll take our next question John Campbell with Stephens Inc. Your line is open.

Speaker 2

Hey, John. Good morning.

Speaker 5

Hey, guys. Good morning. Back on the investment income, I mean, it sounds like you guys do expect That 2Q level will be a pretty good run rate. I'm guessing this probably holds for consensus, but just looking at my model, I mean, if I run rate that, That's $0.60 over $0.60 of EPS upside. You guys just reported roughly that same amount in 2Q, so obviously that's pretty meaningful.

Speaker 5

I just want to participants A better sense for the sustainability of that step up. So David, you talked to, I think, 70% of the lift coming from escrow actions you guys have taken with bank partners. I'm hoping You can provide a little bit of color there. What exactly did you do that drove such a large impact? And what allowed you to make that move now versus not doing it in the past?

Speaker 2

Yes, I mean, I think, well, it depends if you're comparing quarter to quarter, which is probably the better Comparison than that earlier answer I gave which like 70% is due to the escrow and 30% is due to better rates, holes. So we should probably see, call it, a couple of $1,000,000 a month benefit from the escrow activities. And really what that is and it's taken a few months, it's not like we started on it yesterday. It's the You've been seeing one of our competitors, right? It's just with rates rising and they didn't really rise to a level You can make significant earnings because the banks are always a little late in raising rates until towards the end of the year.

Speaker 2

And so it's really been the work from the last few months to get roughly participants have to work with the banks, you have to make sure all the regulations are met. In some instances, you have to make sure you have disclosures, participants Right. But that's all essentially been done at the end of the second quarter, and that's why we should get the benefit going forward. So John, your observation Good. So when we first started this journey 3 years ago, we looked at should we buy a bank because we didn't have a bank, we didn't have access participants are very pleased with the return on the U.

Speaker 2

S. Grows and we couldn't because of our scale, couldn't make it work. But the value of short money back And we were smaller too. So now that we've grown and the value of money, obviously, the return on short money was so much better and the deposits were so valuable, Our banking partners have done a really great job stepping up with us, and we now have to capture some portion of that earnings on our escrow. Participants So in my view, it was an important thing for us to do.

Speaker 2

And as money became more valuable, it was something we had to go after. And The team did a nice job doing it. But again, we try to get at this a couple of ways early on. And it just for us, it was really hard to participants are execute against buying a bank or before getting banks as interested as it was this year. So I'm glad we're able to get it done.

Speaker 5

Yes, absolutely. I mean, the macro seems a little bit shaky still on the commercial side. Resi feels like it wants to pick up a little bit, but that's a great addition to the earnings mix. Congrats there. Second question here on the order mix.

Speaker 5

Since you guys acquired F and C and DCHH, Obviously, there's been some moving parts there. I'm hoping to get a little bit more color or clarity on the other order line. Just maybe as a starting point, just roughly the mix of default versus BCHH and FNC and also how we should be thinking about that blended fee per file for other?

Speaker 2

Yes, John, for us that's primarily the reverse from FNC. Participants are I mean those deals aren't quite as big as a typical purchase business. So the people file is going to be a little less than that 3,300, 3,400 that we report for purchase. We don't have much of a default business and so that's why that's predominantly FMC reverse.

Speaker 5

Okay. And Is there typically much seasonality in that line? And then also kind of what's a good closing ratio? Is that going to be kind of sporadic? Or is the last two quarters kind of a good average to think about?

Speaker 2

Participants Well, yes, I mean that marks, so there's been a little bit of dislocation in that market. So it's not participants If you think about why people typically go get reverse mortgages, well, they have they're Typically older, there's an age requirement, and then they have a lot of equity in their house and it's sort of a pseudo retirement product. The reason there's been a little bit there hasn't been as much activity maybe as there could be going forward even though there's a lot of equity At built up equity and the population of aging is because the market has been a little dislocated, right? You had AAG, which was the largest originator acquired by Finance of America. You had the capital markets, the primary execution is the FHA HACM product and so the capital markets hadn't been as smooth on that.

Speaker 2

That's for the most part stabilizing And you can see that with people are starting to advertise again. You see Tom Selleck every now and then on TV. He's an AG pitch guy. Participants And so you should expect a gradual improvement there, but I think that market is still a little fragile with all the things that have been going on, but you should

Operator

And we'll take our next question from Jeffrey Dunn with Dowling and Partners. Your line is open.

Speaker 5

Thanks. Good morning.

Speaker 4

Good morning.

Speaker 5

I I want to follow-up on John's question about NII and just make sure I have all the details here. So incrementally to what we already see on your balance sheet, You were effectively able to deploy about $900,000,000 of escrow funds into interest bearing accounts. Is that the way to think about the math?

Speaker 2

Correct. In terms of the notional balances. The tricky part is what do you multiply that by, participants Right. And that has to be worked out with all the individual banks. And so you can't just like go take a money market rate and participants apply it to it.

Speaker 2

It's also offset by things like service charges and that kind of thing. And so our rates are typically in the participants are going. And as we get more mature in the program, you would expect that may be come up a little and then we decided for a point of raise yesterday. So I think that might be a framework to think about.

Speaker 5

Okay. And in doing those moves, was there any opportunity cost on the expense side, meaning you gave up expense credits to get the NII?

Speaker 2

Well, it's embedded in the transaction, right? So Yes. I mean, before we were offsetting wire costs and things like that to your point, but we weren't getting much more. Now we're getting something incremental, but those costs are still being offset. That's why I say you can't just take money market and then apply it to the balances.

Speaker 5

Right. And then my last question is, in terms of sensitivity, obviously, we got another 25 bps yesterday. Who knows if we'll get anything else in the fall? Is it based on the 3.5 percent? Is it maybe correct to say 60% of a 25 bps Change kind of flows into your incremental yield?

Speaker 2

It depends on how persuasive we are when we call these guys. Participants Yes. We might need some of your smoothness on that one, but yes.

Speaker 5

All right. But in terms of if all else held equal, That $12,000,000 run rate this quarter should react positively to any additional rate actions including yesterday.

Speaker 2

Yes. Well, keep in mind for the quarter, and I forget if we chatted about this or not, but participants In the quarter, right, that's why the quarter to quarter comparison, it's really the delta in the second quarter versus the second quarter To think about because the 2nd quarter happens to have a title plant dividend in it. So you can't just work off the 12, you have to participants are working more off the delta. That's why I said it's about a $2,000,000 a month benefit from the escrow.

Speaker 5

Okay. And what is the title plan dividend this quarter?

Speaker 2

It was about $2,000,000 in each quarter. I'm sorry,

Speaker 5

the title plan dividend?

Speaker 2

Participants It was about 2 in the Q2 of 'twenty two and about the same in the Q2 participants are onetime. We are owner of a card owner, but we get that once a That's what David said. That's just a one

Speaker 4

time thing.

Speaker 1

That's not really that's

Speaker 5

why you're having a $10,000,000 run rate going into 3Q.

Speaker 2

Correct. Yes, that's why you can't just take the 12 and apply it.

Speaker 5

Got it. Okay. Thank you.

Operator

We'll take a follow-up question from Soham Bansal with BTIG. Your line is open.

Speaker 2

Participants. Hey,

Speaker 4

guys. Just one follow-up on the Real Estate Solutions business. So if I look at revenue this quarter on a year over year basis, right, it was down participants are in the Q1, which was on about 30%. And it looks like it outpaced orders essentially. So guys, the question is, Fred, you've talked about, hey, there's some sensitivity to volumes, obviously, but it sounds like there's some subscription kicking in as well.

Speaker 4

Is that the right way to think about it, just going forward?

Speaker 2

So there's a mix in there of Businesses, they're having some real good share gains. So it's a combo, right? So it's a little bit participants Obviously, it moves with volume, but it's a little bit dampened because of that. Participants So you got like just to give a little more color on that, you have the data businesses as Fred said, so credit which participants are in the range of $400,000,000 in real estate which is for upstream. So those are more stable because they're not as transactionally driven And then they're actually doing better in the market.

Speaker 2

So I think that's where you're seeing the improvement. They're being off that improvement is being off participants are satisfied by the transactional businesses, which are appraisal, notary, that kind of thing. Which go right with the volume

Speaker 4

I just wanted to ask because the step change quarter over quarter on a year over year basis was pretty significant just in terms of declines, right? So, yes, so I guess it does sound like some share take there. Okay, thank you.

Speaker 2

Thank you.

Operator

And we have no further questions on the line at this time. I'll turn the program back over to management for any additional or closing remarks.

Speaker 2

Just want to thank everybody for joining us for this Q2 call. Thank you.

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Key Takeaways

  • Stewart’s Q2 title revenues fell 37% and agency revenues plunged 49% on low housing inventory and 7% mortgage rates, delivering adjusted net income of $19 million ($0.69 per share) on $549 million of total revenue.
  • Despite near-term headwinds persisting through 2023, management expects a real estate rebound in 2024 and is balancing short-term expense discipline with strategic long-term investments.
  • The company is ramping up investments in technology—including an upgraded agency platform, production automation and digital title plant—and in talent to boost customer experience, operational efficiency and scalable growth.
  • Over the past five quarters, Stewart has gained purchase and agency market share, focused on expanding in attractive markets and strengthening commercial title operations.
  • A new escrow funding arrangement with bank partners is expected to generate about $2 million per month in incremental net investment income, supplementing returns from higher interest rates.
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Earnings Conference Call
Stewart Information Services Q2 2023
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