Q4 2020 Stewart Information Services Corp Earnings Call

The old and Dirty.

Hello, and thank you for joining the Stewart information services fourth quarter and fiscal year end 2000, and 'twenty earnings call. At this time all participants are in a listen only mode. Later, you'll have an opportunity to ask questions. During the question and answer session and instructions will be given at that time. Please note. This call may be recorded lastly, if you should require operator assistance. Please press star.

And then zero. It is now my pleasure to turn today's conference over to Nat Otis head of Investor Relations you may begin.

Thanks, Aaron and good morning, Thank you for joining us today for Stewart and fourth quarter 2020 earnings Conference call. We will be discussing results that were released yesterday, our CEO, Fred Eppinger and CFO David <unk>.

To listen online. Please go to the Stewart Dot Com website to access the link for this conference call I will remind participants that this conference call may contain forward looking statements and involve a number of risks and uncertainties because such statements are based on and expectation of future financial operating results and are not statements of fact actual results may differ materially from those projected.

The risks and uncertainties with forward looking statements are subject to include but are not limited to the risks and other factors detailed in our press release published yesterday morning, and and state in the statement regarding forward looking information and risk factors and other sections of the company's form 10-K and other filing.

Filings with the SEC, Let me now turn the call over to Brad.

Net and thank you for joining us today for Stewart fourth quarter to $2 20 earnings call and for your interest and Stewart.

I will have day, we'd go through the details on this quarter's results and the minute, but first let me take a little time to reflect on 2020.

Good day was a tremendously challenging year with the vast understate families and companies alike faced uncharted territory right.

Thank you to all people everywhere stepped up and carried on and I couldnt be more proud of how everyone here at Stewart navigated through the countless personal and 2019.

Our employees delivered superior service to our customers, while keeping family and coworkers and customers safe I can share hope is that 2021 starts everyone back on the growth of personal and professional and economic security.

Stewart you started off just as I was finishing my first 100 days as CEO, we have begun to lay the foundation of our journey to become the Premier title services company with an intense focus on meaningful improvement and 22020.

Beginning with some strong improvement and the first quarter book very quickly. The market was up ended by Covid on TV before recovering and and thriving as changing demographics strong underlying fundamentals and low interest rates brought about a historic chump and transaction volumes.

And then it has taught US anything it is the value of home and safety have never been more important and.

In conjunction with a significant increase transaction increased transaction activity was the acceleration and acceptance of remote and virtual closings didn't pay and debt to the pandemic related to health and safety concerns.

So we met those challenges head on and that said instead of simply putting our long term plans and holes, we were able to take advantage of the elevated market activity, while still putting in place critical building blocks for our future, we restructured our organization and reallocated investment we strengthened our geographic footprint with several core title acquisitions, we had.

And valuable real estate services assets with our acquisitions of U S appraisal and project, we bolstered our technology footprint with northern and can we added valuable leadership expertise and both our direct and agency businesses and we rolled out new customer centric services to make the closing process more safe effective and efficient.

And I am pleased with what we've accomplished but by no means is our work done on.

Although Stewart has been a valued and well respected brand for many many years structurally the company was has washed its market share decline and important markets through reduced investment and distraction additional changes have and are taking place and we now look to 2021 and beyond to continue our journey.

Further improvements on our operations and continued investment and talent as necessary and restocking and revenue ship team is in process Stewart has now become the destination for entrepreneurial and industry leaders.

We will also continue to look to acquire assets that strengthen our local market position and make us more attractive partners to our customers.

And so the fourth quarter and very pleased with our progress this quarter not only have we managed an extremely busy and challenging environment well our investments and improvements are taking hold and we are now much more consistently winning and the market and demonstrating and improved resilience that will position us for future success.

Overall I'm very encouraged by our progress we have made in 2020 towards becoming the Premier title services company.

While the degree of uncertainty lies ahead the macro environment for housing lending presents lots of opportunities for us. Thank.

Thank you very much and David will now update everyone on the results for the quarter.

Thank you Fred and good morning, Let me also thank our associates for their amazing and inspirational service and our customers for their support during these unique times. The fourth quarter saw a continued strong residential real estate market driven by strong purchase and refinance demand as the 30 year mortgage rates exited.

The quarter below 3%.

Commercial saw strong customer activity around year end, although the outlook remains challenged by economic conditions.

Economic and as virus cases and us.

And appear to be moderating.

Okay.

As we await the patients we continue to be mindful of the impact of these challenged economic conditions, including the high levels of mortgage forbearance, which why lifted will result in increased defaults and may elevate title losses.

Regarding Q4 results yesterday, and Stewart reported for the fourth quarter of 2020, net income of $60 million and diluted earnings per share of $2 22 sales on total operating revenues of $728 million.

And on adjusted basis Q4, net income was 56 million and diluted earnings per share of $2 and non sets, which are significantly better compared to last year's quarter, which had an adjusted net income of $21 million and adjusted diluted earnings per share of 87 assets.

As disclosed in appendix a of our press release.

And our title revenues for the quarter increased to 184.

Compared to last year.

Driven by strong performance since the operations and with the improved revenues and Tinsley.

Continued discipline and managing our business. The title segment generated pretax income of $95 million or more than three times last year's quarter.

Pretax profit margin also improved to 13, 6% compared to 4% from the fourth quarter 2019.

With respect to our direct title business direct residential revenues increased $91 million or 61%, primarily due to increased purchase and refinance transactions from existing and newly acquired title offices residential fee per file for the fourth quarter was approximately two.

<unk> thousand and slightly lower than last year due to a higher refinance mix.

Domestic commercial revenues improved $3 million or six per sale as a result of increased customer activity and a higher average fee per file of 12900.

Both total opened and closed orders and improved 64% compared to last year, primarily due to the continued strong and refinancing and purchase activity.

Recent acquisitions contributed approximately a third of both improvements and opened and closed orders.

In regard to our agency business fourth quarter revenues increased $78 million or 29%.

On increased business activity, while agency remittance improved to 18, 2% versus $17 seven from last year on.

On title losses, total title loss expense increased $18 million or 61%, primarily due to the increased title revenues and higher provisions in our domestic business as a result of the current economic environment.

As a percent of title loss revenue a title revenues our title loss expense for the fourth quarter was six 8% versus five 7% and the prior year quarter on a full year basis. The ratio was five 3% for 'twenty and 'twenty compared to $4 six last year and we expect.

'twenty, one title losses to approximate <unk> levels.

And regards to operating expenses, which consist of employee and other operating costs total operating expenses increased primarily due to higher employee incentive compensation and so.

System with improved operating results and increased search attorney fees split and.

Premium taxes and line with increased title revenues offset by lower other operating.

And costs due to continued management focus as well expenses and the current COVID-19 environment.

Employee cost as a percentage of op.

Operating expenses improved to 25% from 30% last operating expense is slightly.

And 1% from $18 four last year.

On other matters, our financial position remains strong our total cash and investments on the balance sheet or approximately $620 million over regulatory requirements, which along with $100 million available on our line of credit remains solid foundations to support our customers associates.

And real estate markets.

Holders' equity attributable to Stewart increased to 1 billion at December 31, 2021.

Book value per share of approximately $38.

Net cash provided by operations improved to $135 million and the fourth quarter from $59 million last year.

Let me conclude with we enter 'twenty, one confident and our support of real estate markets Grateful for our associates and customers and hopeful for everyone's improves safety and prosperity.

Now I'll turn it over to the operator for questions.

Certainly at this time, if you would like to ask a question. Please press. The Star then one on your Touchtone phone.

May withdraw your question and at anytime by pressing the pound Keith again Star then one to ask a question today, we ask that you. Please utilize your handset for optimal sound quality.

We will take our first question from Jonathan Excuse me Bose George with <unk>. Your line is open.

Good morning, Greg.

And a very good year.

And so I wanted to start off with your question debt.

Last quarter and Scott.

And how things have gone this route.

Sure Chris.

Very successful.

Let me clean and their expectations for normalized.

But I don't think so I mean again, when we started our overall company and preferred risk, but more on fire. So we were about half what we should have and we were and the 5%.

Margins for the overall company I believe we can double that I've talked about high single digits and that low double kind of that 10 range and and I continue to believe that kind of what our goal is the question. I think is are we a little bit ahead of schedule and I would say, we probably are on some of our journey getting there and on.

And confident that we have made significant improvement I think obviously this year boosted by an extraordinarily attractive market makes the numbers look maybe a little bit better than in a normalized world.

And we're still on track for what I think we can do and again I think for US right I think.

The games that we're <unk>, we have the opportunity to improve our margins, but will also I believe we'll outgrow the market as well.

And Thats really what our focus will be.

Okay that makes sense. Thanks, and can you just talk about the acquisition.

Landscape just obviously the one you did this year.

On the larger ones seem to be very successful in terms of what it is.

It has done for the company and it would seem like that's the other way to get your margin longer term above that 10% sales target that you thought you'd noted earlier. So can you just talk about how you're thinking about acquisitions and yes, again I think one of our things I talked about from the beginning as debt, we were an inch deep and a mile wide and what we would do and as we.

And given our capital investment and our expense investment and an appropriate way and so we've shed a lot of things and we have also doubled down and some areas and one of the most important things and our business around the execution is having critical mass at the local market level, particularly on the direct business and so we need to make sure we position ourselves and every market to be a lot.

<unk> and that means that we need to get to critical mass share. So we can execute effectively through a cyclical business.

And so we have a very strong pipeline.

Gross.

We've done a review of the 140 Msas, we have a point of view on our strategic position and every market apart and home channel.

Where we want to be share wise, where we have investment and our efforts there both organically and on acquisitions, but I fully expect that Youll see continued targeted acquisition to change our structural position and bond markets and.

And so forth.

And we have we're having excellent conversations with a number of people on.

Comfortable that we can.

Okay, great. Thanks, a lot.

Okay.

And our next question.

And thank you your line is open.

Hey, guys to $6 price.

And EPS over six months of EPS. This year, just incredible I remember, one and the management team and the and the board.

One is dreaming of $5 and EPS targets plan.

Tied to that so great year by you guys.

Moving onto the additional scale and the non title business I know that was one of your kind of key.

And I know you guys have.

Integration costs right now you've got kind of a red hot housing market and kind of help you let transactions, but I don't know maybe.

And David Whats, what do you think is kind of a normalized margin for that ancillary services business up and kind of strip out commercial I mean is it a kind of low double.

I think John and ultimately, we're trying to build a durable real estate business services business across the cycle.

Margins will be consistent with the company overall I think if you're if you're trying to understand sort of what happened in the quarter.

And if you think about the cycle right and you've got sort of origination and you've got capital markets and you've got service and and.

So and this quarter originations, obviously was off the chart.

There wasn't a lot of capital markets activity, because that typically lags originations when there's low quality issues and distressed loan sales and the like and then of course with.

Force.

Forbearance and delinquency.

Impacting net gross loans sales and there wasn't default title work and so.

And then the other thing that happened is that the banks are basic and fully curtailed home equity.

And the fourth quarter as capital markets and home equity.

And what the virtually nothing on.

And there wasn't really much to balance of origination work.

And then you also had.

From from the acquisitions and so that's some of the puts and takes that you see.

C C. There, but I think over time.

As the market stabilizes and we do more business and each of those services. Then you should see the margins approach. The overall company and your general and your General point clarify as you asked the question I think is true so I feel pretty good on the journey and our ancillary businesses and frankly, our centralized title as well, it's still a little bit of work in progress.

Right, where plants and these assets together, we're consolidating some of the businesses. We are working on the operating models on thrilled about what we've acquired the skills that people are off and so on.

I feel like we're going on we're right, where we need to be and we're moving and the right direction. So you'll see both growth and improvement in that category, but.

But theres nothing we have and expected I mean, I feel pretty good about where we are with it to date.

Yes.

Looks to me that I mean from a timing standpoint, you guys and if I can think on these assets right ahead of that a couple of these assets trying to have a big surge in the market. So I imagine some of them already paid for themselves. So nice work there.

On the higher reserves.

And just one quick question there.

That more and I don't know on how you categorize that was that more kind of expectation on what's what might be ahead or is that more kind of paying for paas and any way to kind of break that out.

And as appropriate number half David.

And so there's more specifically.

And somebody who's live their life.

Running a big reserve balance sheet view as always when you go into a period like this and you look at the.

Potential risks ahead, you have to be conservative and my view is completely prudent and appropriate for us.

As a manager and insurance company to be prudent about it and obviously that's not what's happening today that you are thinking about.

We happen and the future so I think on.

And the company right now and as we said next year will be about the same level and we were this year, but it made all the sense in the world to us to make sure we.

Made some assumptions that we are both conservative and position us well.

For the future zone.

And there has been a great. Thanks Scott.

Thank you.

And as a reminder, if you'd like to ask a question. Please press. The Star then one on your touched on some will go next to Geoffrey Dunn with Dowling and partners. Your line is open.

Good morning, good morning, guys.

So Friday and David I wanted to revisit the M&A topic on a couple of different angles first given what happened in 2020 I have to imagine that potential acquisition targets about lofty opinion of their valuations.

And so is it something where you are seeing real opportunities now or is that something that maybe gets delayed a little bit now.

Value opinions become a bit more realistic and then on the other side and the equation. How are you thinking about financing future M&A and you have and your line of credit obviously your debt to capital capacity, but you also continued to have a pretty good equity multiple here and you turnaround expense your last equity raise.

And immediately.

Is it worth exploring another equity raise to establish dry powder and anticipation of your pipeline.

Before we go to the capital David and you could take a capital let me just.

To me and some really great question, frankly about People's expectations.

And we walk away and say no a lot more than we say, yes, let me just be clear so.

We have lots of conversations were very proactive we understand both fit is really important for us and frankly and a lot of markets leadership as part of the equation for us as we grow our business.

And so.

And there is always a sensitivity because this is a strong market right and so.

Run rate for the business and how.

And how does it work we have not had a problem to date.

And finally, the things that makes sense for both parties and we wanted to make sense for both corn and bean.

Patient is everything I'm, not we're not any big.

And to do something that we need to do.

And tomorrow, so we're going to be thoughtful about the valuations I would tell you on that encouraged though because of the strategic fit that we have.

And with a number of these parties that the conversations continue to be positive and and we'll find the right things overtime and the right areas to.

To build our business and I would say the other thing about us because.

Of who we are a lot of the acquired assets entities.

Entities have better upside and there was a year ago and our future by being part of us because of who we are and how they will become part of us. So.

That is really helpful. When you are having some of these conversations.

Particularly when you talk about and local market opportunities so David.

And I'll, let Jeff Thanks.

The question.

Everybody knows we obviously think about all the options I think on the equity side that that is available.

It's just a function of matching that against the right opportunity I think the priorities that we think about or as I mentioned, we have about $600 million over statutory and regulatory right and that obviously not all of that is available because you need some operating buffers buffers and the like but they probably got at least a couple of hundred million there.

<unk> got the line of credit available and then.

Debt and equity markets, and so I think going to available capital first and then.

Other markets are open and just try to match it against the right opportunity.

Okay. Thanks.

Thanks.

Okay.

And there are no additional questions at this time I'd like to turn the program back over to CEO Fred aperture.

Well. Thank you everyone for joining us this quarter and I appreciate your interest and Stewart.

Thank you.

Thank you for your participation. This does conclude today's program you may disconnect at any time.

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