Stewart Information Services Corporation (NYSE:STC) Q3 2023 Earnings Call Transcript

Stewart Information Services Corporation (NYSE:STC) Q3 2023 Earnings Call Transcript October 26, 2023

Operator: Hello, and thank you for joining the Stewart Information Services Third Quarter 2023 Earnings Call. [Operator Instructions] Please note today’s call is being recorded. [Operator Instructions] It is now my pleasure to turn today’s conference over to Brian Glaze, Chief Accounting Officer. Please go ahead, sir.

Brian Glaze: Thank you for joining us today for Stewart’s Third 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 Hisey. To listen online, please go to the stewart.com website to access the link for this conference call. 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. 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 stewart.com. Let me now turn the call over to Fred.

Frederick Eppinger: Thank you for joining us today for Stewart’s Third Quarter 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 on important initiatives that we believe will set Stewart 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 in fundamentally improving Stewart’s operating and financial performance to better position ourselves for even more prosperous future.

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 focus on our journey to become the premier title service company. We are managing through a challenging environment where we believe mortgage rates will remain elevated into 2024. Rates increased throughout the third quarter 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 sale of existing homes.

At an industry level, we are experiencing historically low purchase volumes combined with low existing home listing inventory, which has kept pricing strong. As we look forward, we see 2024 as a transition year to a more normal market in ’25 and believe the next 6 months will continue to be very challenging given the macroeconomics laid on top of the typical seasonal impacts. 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 in attractive markets and enhancing our operational capabilities. In this challenging environment, it is easy to lose focus on achieving long-period goals.

However, I’m looking extremely pleased with the dedication we have shown in making progress on our enterprise initiatives during the third quarter and in our progress towards 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 of opportunities as they arise. We have continued to manage costs thoughtfully and have taken targeted cost actions where appropriate. We have been careful not to take actions we felt it would threaten our competitive position and long-term value-creating opportunities. We believe that the real estate cycle will get to normalize later in 2024. And the best path forward for Stewart to get through this period is to continue investing in our people and remaining focused on our long-term improvement plan.

I believe we have done a good job of balancing strong financial discipline with targeted investments, and 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 model, investments in technology to enhance the customer experience and improve efficiency of our operations and building scale in targeted areas. These strategic investments 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. 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.

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 have been more selective in our investment decisions to make sure our deployment of capital provides long-term returns, and I believe we will maintain this conservative approach through the first half of 2024. We remain positive on the commercial market, even though we believe certain sectors remain challenged in the near-term due to changing financial markets such as energy remains 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 and positions our commercial operations for growth across all business lines has been a key focus of our journey.

We are making investments in talent so that 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 our deployment of technology and services that provide a significantly improved customer experience for our agents. This enhanced experience includes greater connectivity, ease of use and risk reduction for our agent partners. We are pleased that our platform of services for agencies as strong as it’s ever been, and we have — we’ve 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 clients. 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 point of our investments is focused on improving our technology for the title production process automation and centralization to improve operational efficiencies and capabilities. 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.

Another area of priority as we 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 [indiscernible] 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 acquired companies is an important priority, and we expect to complete the majority of our integration efforts by mid next year. Improving our financial strength by growing margin has been a significant focus of our journey.

We’ve made good progress with 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 material been implemented, should allow us to achieve low double-digit margins as we turn to a normal 5 million unit purchase market. And specifically, the initiatives that we prioritized this year should improve margin by about 200 basis points in a normal market. While we’re encouraged by improvements in talent within the technology, customer experience and our financial model, we know that work persists, that the journey is not complete. We remain focused on our strategic plan of building an improved competitive position by being more efficient and having a disciplined operating model that functions well throughout all real estate sites.

We have emphasized growing scale in attractive markets across all our lines of business, and we have made great strides in improving the customer experience at [indiscernible]. Retaining key talent is always important. We’ve been even more focused on retaining talent through this market so that we have the right team in place as the cycle improves. Our efforts are yielding results 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 performance.

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 support. Dave will now update everyone for the results.

David Hisey: 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 third quarter and through today, the real estate market continues to experience low housing inventory, high mortgage rates and lower commercial and residential real estate activity, contributing to lower third quarter operating results as compared to the third quarter last year. Yesterday, Stewart reported third quarter net income of $14 million or $0.51 per diluted share on revenues of $602 million. Starting this quarter, we revised our presentation of consolidated non-GAAP measures relating to adjusted net income and adjusted EPS by excluding acquired intangible asset amortization from the calculation.

This revised presentation allows us 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. After adjusting for net realized and unrealized gains and losses acquired intangible asset amortization and other items detailed in the Appendix A of our press release. Adjusted net income for the third quarter was $24 million, or $0.86 per diluted share compared to net income of $43 million or $1.58 per diluted share in the third quarter 2022. Regarding the Title segment, total revenues in the third quarter decreased $126 million or 19% while pretax income decreased by $16 million or 32% compared to the prior year quarter.

After adjustments for purchase intangible amortization and other items, the segment’s pretax income was $42 million or 8% margin compared to $65 million or 10% margin for the same quarter last year. On our direct title business, total opened and closed orders in the third quarter declined by 7% and 10%, respectively, compared to last year, primarily due to the current real estate environment. Domestic commercial revenues decreased $9 million 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. Domestic residential revenues declined $37 million or 18%, primarily due to lower purchase and refinancing volumes. Average residential fee per file in the third quarter was $3,000 or 10% lower than last year’s quarter due to lower purchase mix.

Total international operating revenues decreased $5 million or 12%, primarily as a result of lower transaction volumes at our Canadian operations. Given the lower commercial and residential activity in the market, third quarter revenues from our agency operations decreased $75 million or 22% compared to third quarter last year, while the average remittance rate was roughly comparable. Regarding title losses, total title loss expense in the quarter declined by $3 million or 13%, primarily due to lower title revenues. As a percent of title revenues, third 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 4% of title revenues.

Related to the Real Estate Solutions segment, third quarter pretax income was $2.6 million compared to $3.4 million last year, primarily driven by a slight dip in revenues and strength in our credit-related data businesses help offset other transactional businesses. Pretax margin was 3.8% compared to 4.8% in the third quarter 2022. 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 third quarter 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. On taxes, our third 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 position 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 million over statutory premium reserve requirements, and we also have a fully available $200 million line of credit facility. Total stockholders’ equity attributable to Stewart at September 30, 2023 was approximately $1.35 billion with a book value of approximately $49 per share. Lastly, net cash provided by operations in the third quarter was $60 million compared to $49 million during the prior year quarter, primarily due to lower claims and accounts payable payments partially offset by lower net income.

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.

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Q&A Session

Operator: [Operator Instructions] Our first question will come from Bose George with KBW.

Bose George: Can you give us an updated thoughts on your margin expectations like for the next 12 to 18 months? And just given your comments on 2024 being a transition year, is 2025 when we should think about a more normalized whatever double-digit margin?

Frederick Eppinger: Yes, Bose, 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 ’20 to ’21 we achieved that. Obviously, ’21 outperformed because it was excess volume. But at a 5 million kind of unit purchase market, I think we were in that 9.5%, 10% range. What’s happened is we’ve done good work, and I think we’re in the 11.5%, 12% margin range when you’re in that 5 million 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 like our point of view when you look at forecast, ’25 is when we get back to that 5 million kind of range.

And so that’s where I think you’ll see margins get better. I think about the next 2 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 together, as you know, because last year, at this time, things started really cratering. And so that will come together a little bit into the first quarter. But — so it’s like a journey from here kind of that first quarter through the transition in next year, particularly second half of next year towards a more normal market in ’25. And again, we’re not — the other thing I would say, Bose, we were 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 a pretty good transparency to that.

Bose George: That’s helpful. And then 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 with rates?

David Hisey: 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 million a month, which is what it remains. And so you saw the full effect of that hit in the third quarter. And then you saw a little bit of an uptick on the general investment income. I think it’s mainly due to the more favorable rate environment. So — yes, I would say that this is a pretty good run rate where we stand now, although obviously, it’s also elected by the float, right? Yes. I mean balances — if volumes were continue to go down meaningfully, you could have a negative impact on balances, and that could change it 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 a decent run rate.

Operator: Our next question comes from Soham Bhonsle with BTIG.

Soham Bhonsle: 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.