Q1 2021 Stewart Information Services Corp Earnings Call
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Hello, and thank you for joining the Stewart information services first quarter 2021 earnings call. At this time all participants are in a listen only mode. Later, you will have an opportunity to ask the question. During the question and answer session and instructions will be given at the.
Time. Please note this call maybe recorded lastly, if you should require operator assistance. Please press star zero and it is now my pleasure to turn today's conference over to Nat Otis head of Investor Relations. Please go ahead.
Thank you Brittany and good.
Thank you for joining us today for Stewart first quarter, 2020 One earnings conference call. We will be discussing the results were released yesterday. After the close joining me today are CEO of Fred Eppinger, and CFO, David IC the list.
Please go to the Stewart Dot Com website drag Festival link for this conference call I will remind participants of this conference call may contain forward looking statements that involve a number of risks and uncertainties because such statements are based on the expectation of future financial operating results and are not statements of fact actual results may differ materially from those project.
And the risks and uncertainties of forward looking statements are subject to include but are not limited to the risks and other factors detailed in our press release published yesterday evening and then the statement regarding forward looking information risks and.
And other fact section and other sections of the company's form 10-K, and other filings with the SEC, Let me now turn the call over to Fred.
Good morning, everybody and thank you for joining us today for Stewart's first quarter of 2021 earnings call and for your interest and Stewart.
Before I turn it over to David to go through the details of the quarter's results I wanted to touch on a few topics as we move into 2021.
And I am very very pleased with the progress this quarter and we clearly capitalized on the historic market strength, but we also continue to improve our underlying financial strength and resiliency of the company.
It grew share and a number of critical markets. We added some service capabilities and leveraged our improved technology platform.
As we look ahead, we envision the Stewart that not only it takes advantage of the high points of the cycle, but and five but can also thrive to being true to the entire business cycle. The.
The foundation of this future of lives in a more strategic and disciplined operational approach to investments and the company culture and its focused on moving quickly to adapt and to capitalize on opportunities to improve and grow the company.
While our journey is not finished the work our employees accomplished last year and throughout the first quarter addressing the challenges of the pandemic conditions driving structural changes and integrating more of that more valuable talent and the asset additions have all fundamentally changed our company.
The results to date are encouraging and illustrate that we are on the right path.
Given what we've accomplished to date and and our view of the market outlook. We are very bullish on the companys opportunities for the next two or three years as we look at 21 and 'twenty. Two you on there's a level of uncertainty over the endurance of the cycle, even as we continue to experience strong market demand, we know the refinancings will be.
And to slow at some point, even though the overall residential market is healthy and is expected to remain that way for some time as resale transactions driven by pent up demand and favorable homeowner demographics will continue to show strength and this kind of market there will be winners and losers and we are positioning ourselves to be one of the winners and on.
The core euro of 125 year old customer centric brand and to live.
Superior service and underwriting towards customers and partners.
But I also like to think of watches of 125 year old startup of <unk>.
Footprint for delivery of decision, making are all improving every day. We also understand the technology is changing our industry and our company and we continue to focus intensely on improving the customer experience through innovation and connectivity.
By creating a fully integrated platform, we are delivering the safer more effective and efficient closing process for our customers kind of of partners.
Whether through our upfront transaction management, App and platform Stewart now or our automated underwriting tool Stewart of salary or virtual real estate closings with our notary can and senior closer of companies. We're securing transfer of funds through our partnership of certified we are meeting our customers' technology needs without sacrificing our core fiduciary.
And to appropriately underwrite the transaction.
Our journey to be the Premier title Service company continues clearly and more to do but and this quarter. We made significant progress toward a more resilient and growing enterprise one position to succeed and grow share and a variety of environments.
David will now update everyone on the results of the quarter.
Thank you fried and good morning, Let me also thank our associates for their continued inspiration and service and our customers for their steadfast and forward.
The Europe and with the strong residential real estate market driven by the powerful demand favorable interest rates and improving economic conditions on the medical front of the virus news and generally improving as vaccinations increase although the variance and vaccine distribution challenges and or the pace of recovery.
Even with that and for the economy. There continues to be of high mortgage delinquency and forbearance and the effect of which led to play out.
Let me provide some broader context consistent with Fred's comments before I review of the quarter's results, although interest rates and the economy provide some volatility to the operating environment, our strategic areas of focus gaining scale and attract and direct markets improving agent service capabilities and geographic.
The focus on scaling lender services are beginning to have a meaningful and durable impact on the other zones.
Overtime, we will see the benefits of our commercial initiatives as that market returns for.
For the first quarter 2021 of the Stewart reported net income of 54 million and diluted earnings per share of $2 in one sense on total operating revenues of 681 million on an adjusted basis. The Q1 net income improved by 38 million compared to $13 million from last year's quarter.
And as we disclosed in the appendix a of the the press release.
Compared to last quarter of total title revenues increased to 185 million or 42 per said with solid performance for our residential and the agency operations.
The title segment generated 77 million of pretax income more than four times last year's quarter as the rebel salt of improved revenues and our continued management of focus pretax title margin also improved to 12, 2% compared with three and four 4% last year.
Yes.
With respect to our direct title business direct residential revenues increased 83 million or <unk> 63 per se, primarily due to increased transaction activity and residential fee per file was approximately flat and 1900, it's just slightly below last year.
Domestic commercial revenues were down 12 million or 29 for sales due to the lower transaction volume and lower average fee per file, which was 8700 and this quarter versus the 11004 hundred and last for last year's for.
Total opened orders increased 29 per said, while closed doors and for 66 per cent.
Compared to the last year, primarily due to the strong market.
Similar to our direct title business. Our agency operations had another strong quarter with revenues of 346 million, which was 104 million or 43% higher than last year's quarter.
And our agency remittance rate improved to 17, 9% versus 17, six and the prior year quarter.
On title losses, total loss expense increased 10 million or of 54% primarily due to higher tired of revenues as a percentage of title losses. The title loss expense was four six per cent compared to the fourth quarter two for the last year's quarter.
In regard to operating expenses, which consist of employee and all other operating costs total operating expenses increased consistent with our revenue relative to any more employees of the associated cost increase of the appraisal expenses from our recently acquired ancillary services business and higher outside the tidal surge.
And daily and tax expenses. These increases were partially offset by lower other operating costs due to continued management of focus as we reduce marketing and travel expenses employee cost as a percentage of operating revenues improved to 25 per cent from 30% last year.
While other operating expenses and increased to 18% from 16% last year, primarily due to the appraisal to pass through costs and our recently acquired appraisal services businesses.
Excluding these businesses other operating expense ratio would've been 13 per se.
For the first quarter 2020, one as we get the 16 last year.
On the other matters, our financial position continues to be very strong our total cash and investments on the balance sheet of approximately 590 million of them on regulatory requirements, which along with 220 million available on our recently Upsized line of credit provide a solid foundation and supporting our.
The mers employees and real estate markets stockholders' equity attributable to Stewart increase of one point out of 4 billion at March 31, 2021 or the book value per share of approximately $39.
And lastly, net cash provided by operations improved to $47 million compared to the cash use of the operations of the lab and last year's first quarter.
Well the photos went up and we remain confident and our support of real estate markets Grateful for our associates and customers and advocates for everyone's improves safety and prosperity and now I'll turn it back to the operator for questions.
And at this time, if you would like to ask a question. Please press star and one on your Touchtone phone.
You may remove yourself from the queue at any time by the question. The pound key once again that is star and one of you would like to ask the question.
And we will take our first question from Bose.
George with K B W. Please go ahead.
Hey, good morning.
The first question.
And so it is just on the residents of direct premiums fell apart and I think it was 10% over the fourth quarter of the ATP and style and a pretty body of sleep.
Is there something to call out in terms of.
The differences between book and some of those channels.
I missed that.
Between the agency I'm, sorry of always can you help me with asking the figures like the fear it correctly what was the.
Yes.
I was looking at the the decline in the direct and there was glad of 10% decline in just on the residential masks some of the rent premiums over the last quarter and.
And the agent the decline and it was almost classes of stock.
For about 1% over the last quarter.
And I'm just curious you know why the difference of that was on the two channels.
Yes, David.
Yeah.
Okay.
Are you adding.
What was the you were having the commercial.
And pulled out the most.
And so because we're putting on the promotional of its more like 1% decline versus the 1%. So it's on.
And the commercial was done and so that's pulling that out.
And you'd like it was about a ton of versus one.
I mean look and follow up for that on if you'd.
Good luck.
Yeah, because what we saw right as this has been and all of them for us.
This was the <unk>.
Strongest direct first quarter, we've ever had oh the cat. It was very very very strong obviously versus the last first quarter.
Traditionally it's been a seasonal first quarter of seasonal about the share we were incredibly strong the agency grow for us. It's a combination of a couple of things right. So the agency growth for us got stronger all through last year, and we got away from the transaction. So the comparison from the first quarter.
Last year to this year on agency is extraordinarily strong because we have so much momentum.
And just kind of getting the agents back that we had that we kind of lost a little better and the fidelity situation, but also the new growth initiatives. We have some so agency is of great comparison quarter to quarter, and which gives you the really robust growth.
And so it doesn't give you didn't have the same kind of drag and the first quarter of direct that we had and agency from the hangover. So maybe there again, if you're asking the deltas between the two there might be something there, but I am of both businesses I'm incredibly encouraged by the both our share and most of the target markets that we focused on has been.
Uh huh.
So we are kind of winning and most of the markets. We're focused on and so it feels pretty good across the business right now.
Okay, great. Thanks, and then can you just talk about the.
And the latest thoughts on acquisition.
Do you feel like that remains part of the car.
And in terms of getting the margins up for you have you done do you think of some of what you want to do on that side.
I think again and I think we're very focused we continue to focus on what I would call it the local market strategies and.
And we still have a number of markets, where I would like us to have a greater share and it becomes it's all around the more consistency through the cycles to be able to manage your margins as well as your consistency of service and so I wouldn't say, we're going to continue to be focused on a number of markets and the top 140 msas that.
And we believe we should gain the gain share and some of that will be acquisitions, and we still have a robust.
Pipeline of acquisitions and in front of us, but some of it is organic as well. We have you know one of the interesting things that has happened to the company.
And we have a lot of momentum right now and our ability to attract our ability to attract talent has never really been better. So we're seeing a lot of folks come to the company as well so it'll be a combination of organic growth and some of these target markets as well as.
And some acquisitions and and again one of the things. We're trying to do is not just a gain share for March and it's also a broaden our capabilities and service capabilities. So, particularly on the agency side, we want to continue to be able to provide additional services. So we we will increase you know some of our focus.
On that as well so you saw that would be a S K acquisition.
And that we just did which provided us additional services to provide for our agents. So again it's.
You know I think it's kind of continue as part of the strategy.
Okay.
And just sneaking one legit.
The the loss ratio and a bit.
Normalized number and.
And the last quarter the increase.
Yeah.
Oh yeah.
What was the perfect bump up and.
And the reserves.
Yeah.
Yeah. So if you remember last year you know, we believe that we wanted to take a conservative position and the fourth quarter and particular as we looked out and said to be able and there's some risk out here. If you look at the balance of last year I think the balance of last year was something like a 5.3 or something like that and so I think that.
It's roughly the.
A number of debt we were planning to the total but the fourth quarter of five three and losses look good you know it it's early and the year. We are that's it's kind of that's the number of that.
Resulted for the first quarter, but I still think that you know the way we thought about it last year and that 5% range is probably kind of continue to be what we got to think about it. This year, but there is no. We don't see any issues, we don't see any trends that of problems of problematic or anything like that and I think it's conservative just to leave it at you know where we where are we.
And the first quarter.
Okay, great. Thanks, a lot and nice quarter.
Thank you.
And for you. Our next question is coming from John Campbell with Stephens, Inc. Please go ahead.
Hey, guys. Good morning, Congrats on the continued success.
Thanks, Joe and good morning, and good morning.
Yeah, So I'm getting a fair amount of questions on my side and I forgot I got to take a shot on it but you know obviously there is some noise out there with the large competitor of yours and I'm sure. You guys are probably hearing the same thing, but just curious about your appetite around kind of larger transformational title insurance, you know share of grabs and and then your ability or maybe capacity to do something of size.
Yeah, I mean again, obviously, we don't really talk about it.
On the company and I.
Calls.
But I would tell you as it is.
Both of that for US we're trying to build this up market by market.
And segment by segment.
And and we're really thinking about scale and size.
And that way, it's not really of top down and look it's really a thought of uplift and so we're constantly looking for opportunities and our businesses to either enhance our capabilities will give us the scale. So that the stability of our economics are better.
And that'll.
That'll be part of what we do for the foreseeable future.
And and we don't feel like we need the company and we don't feel like we need any transformational thing or anything I mean, I feel like this journey that were on you can see the traction. We have you can see how we can close the gap between us and the major competitors and I would like us to be better yes, no question and we will continue to focus on.
On a market by market level to make sure. We're the best there is.
And we will do some acquisitions and fill ins and and try to acquire capabilities, but we might be we don't we don't mean anything true.
Transformational to change the you know the the kind of the.
The outlook for this company and be able to continue to outgrow the market.
And outperformed the market over the next two or three years, we just kind of focus on ourselves and and build on our business. So.
Okay.
Thanks for that and then on on title I mean, youre hitting on all on all cylinders at this point, but if you look at the ancillary services business. I think you guys had the the revenue of 10 times higher versus last year. So I mean, the turnaround has been really impressive. So nice work there, but can you guys talk about the kind of updated products that you have today and then maybe if you could just talk to the <unk>.
Roadmap and kind of frame up what you think the desired and state and might look like.
Yeah, so and so and I'll I'll take a couple of pieces of that so for my perspective, you know when you think about the potential evolution of the of.
The title process.
We really felt that having really terrific.
Remote notary capability and know the route network was going to be and incredibly valuable part of what the company did and coping on both control of the quality and the access to that and the integration of that into the overall process and so we've obviously invested in that and invested pretty significantly and so.
And there will be product and innovation in that area for us of as we take those assets signature and notary Cam and and think about that combined entity to make us better on.
On the if you then go to the appraisal side again, we thought that was a critical part of the of the roadmap for us to have more scale and the technology platform for and involved in the World. We also think that's a business that's consolidating because of the needs to be a lot more innovative and technology savvy.
And we think we've set ourselves up there to really continue to grow that business and cover the whole market space pretty effectively. So you know the overall ancillary approach for us.
Was really to get this instead of having a very small scale and a bunch of little things to really build some scale and a number of areas, where we could be of winter right and to both kind of <unk>.
Help our overall position with our clients, but to also be very successful and those individual businesses. So I think we of the scale. It's right on track as far as the margins and stuff is a little bit more consolidation of work, we're doing and some of the acquisitions, we did which will enhance the margins a little of it even more but I feel.
Good day, where we position ourselves as far as the road map.
For US you know again I feel like we have a good portfolio of services, but we continually are looking at are there places that we should own versus buy and some of the services areas and so we will continue.
The kind of exam and some of the south of products at some of the datasets and.
Areas. So that we can continue to have and robust ancillary the set of businesses that support the company but.
And this is an area of as you said is we really were focused on because if you look at our competitors and that was always a health to them and their margins for Stewart. He was always a drag it was always.
And underperformer, we had a lot of cats and dogs that we lose one customer and then lose a lot of money and so we now have set that up I think to both support our core business, but also to be of really accretive part.
Of our earnings going forward and it and again do I want to grow that business of short we do know that as the business. So we're gonna and continue to focus on so.
Okay. That's of Great rundown and one quick follow up and then maybe this is for David but.
If you look at that segment, you know backing up the corporate expense and then taking out the I guess, the net net realized gains I'm getting to like a 4% margin and kind of underlying for the ancillary services just within just the.
Just thanks for your services. So just curious about where you think you maybe take that margin is it kind of mid teens low teens.
Yeah, John and I think we had talked about that on the card of calls. So I think we're trying to drive it first is here and the overall sort of corporate target that we've laid out and that I think depending on the mix of as Fred mentioned of those businesses.
And you can attach will you see that going well you know we've made a good amount of progress going from I think we were losing money and the ancillary to now and making money and to your point of.
For plus per se, but that if you look at it and sort of ex amortization and so on a cash basis. It is a bit higher than that yeah and just.
Continuing to focus on and bring in all of those businesses together and.
And making it as good as it can be and so our beach our view of it and we can see transparency to it is that it's going to be accretive to our overall company. So the company goals as I've talked about we think that's going to be at least the.
Neutral to that and potentially helpful and the pretty short for so we can kind of see the transparency of that getting to that nine and 10 level that we talk about for the company and whats.
And you're seeing now as everything is basically origination driven and so there's a lot happening and the notary businesses, there's a lot happening and the appraisal businesses, but some of the other businesses for example capital market search for the margins are actually quite high and there's not a lot of activity. So I think we and talked about that.
On the prior call when we see a more normalized environment and true.
Transactions in each area of capital markets and foreclosure of delinquency, yeah that should actually help the.
The situation.
Okay. That's very helpful. Thank you guys.
Yeah.
And once again, if you would like to ask a question. Please press star and one on your Touchtone phone.
And we will take our next question from Geoffrey Dunn with Dowling and partners.
Thanks, Good morning good.
Good morning, Jeff.
Could you give us a bit of and update on the commercial market U S commercial market some rebound in the back half of the year.
It seems like maybe some of the coupon activity you might've got pulled into Q4.
But just discussed the overall health of the overall mix of larger deals versus local deals and and and your outlook pipeline going into the.
The middle of this year.
And then take a day, yeah I'm sure for the Jeff and thanks for the question, but yeah, I mean, I don't think all of it all looks really changed for a while we said before we see commercial coming back a little slower I think in the cell.
Sector mix is and <unk>.
And then the heavy industrial overseas zone, so matter of G C, a little bit of movement and hospitality and at the office, but for.
That's why we think that the market this year and starts to improve a little.
But it's still going to be challenging and so we haven't really changed our outlook for what we said for the last couple of calls for for her yeah, and again I think that the.
You noticed for the business is very lumpy. So our analysis of last year is the.
The quote unquote, we gained share and commercial.
I don't really believe that I think what happened and some of our business got pulled into the fourth quarter.
Because of our particularly our antics of a lot of our energy business got pulled into the first quarter and so it's kind of lumpy.
I think about it is that we're competing pretty effectively we're holding share, but it's really bumpy because of the small for us and we did not have we did not see our January and February was quite slow and it just it just feels like a lot of our business got pulled into the fourth quarter March was much better.
If the better so.
David's point of our outlook for the industry is it is a relatively soft year right.
And I don't think we have the there's other people of other views, but that's kind of our view and we think we're kind of we've been holding share.
If I look at the last four quarters, together and get and what do the analysis this quarter too, but it it's.
It's for US, it's very lumpy because of our size and get out of it if you look at on average.
Revenue per ticket of whatever of our average.
Fee for file.
And it was down because we didn't we didn't have.
The mix of large this quarter was actually much less and last quarter.
Okay, and if you look at it and then when you look at the industry data right the RCA and the other the other day to other people that expense on.
Predicting this by sector and market. They have this year being relatively soft as well. So you know that's all of us and for our view of there could be other views as Fred mentioned that could be specific to their clients and book of business, but of RV is more consistent with the more yeah, and I and I want to leave you with what I have said before.
Sure.
And Miss out really aggressively so we've invested a lot and commercial book on Pier Canada.
Europe and so we're focused on.
Some very targeted geographies and and necessity sectors.
And I feel very good about where were.
We really have acquired some talent or for wind up so as it comes back we should be able to capitalize on it going forward and so it is an important part of our future for sure.
Okay and.
And then I wanted to talk about tech investment at the end in the beginning comments you rattled off some of your you know your automated underwriting capabilities and platforms. Obviously, you invested and the notary Cam last year to enhance your digital.
The clothing and.
Where is your tech investment focus with respect to Digitization and automation as we look out on 'twenty one 'twenty two.
But the more of the internal development as well as I guess on your targeted areas you already said, you're evaluating what you need to own the person's retina, but.
And I'm, particularly curious on on how your tech spend is directed over the next year or two.
Yeah. It really is and we have a lot of the pieces pulled together, but as I've said before are the Stewart accelerate we continue to invest we're very proud of what we're doing on the automated underwriting side, our stature as big as anybody and including the startups and our industry and the effectiveness of that but we're using additional data.
And to apply that to a broader array of particularly on the purchase of the area. So we're continuing to push ourselves and the investments there and the front ends we're always looking at connectivity and the of the efficiency of the front end of the process and we're going to continue to do that and continue to refine what we're doing.
And so on the.
On the notoriety and the kind of remote notary again, and my view theirs, where product ties and a little bit, particularly for the agency channel.
And we're enhancing those products, making the little bit easier for agents to order and integrate them into their system. So again for us all the pieces on the channel on the chain, we're actually continuing and we're not stopping.
And of our evolution of our innovation and as I said you know we had some separate conversations about this and my view is we're ahead of adoption and the industry but.
But we know that it's going to continue the customer experience has got to get better.
And we're going to continue to invest on on the various pieces of the of the chain, but again I feel really good about what we've assembled and what we have.
And how quickly it's being used and and integrated into our operations. So you know again. This is one of those never and some ways and never ending.
And that you know you gotta keep investing and innovating to make sure that you're on top of it but you know the.
The big and the bigger players because of the data access that we all have have a huge advantage to be able to apply these tools and make the experience better and.
And we are all you know I know, we're all run and add it and it's.
It's kind of continue to get better and I feel really good about our position so.
Okay. Thank you.
And thank you.
And it appears we have no further questions at this time I will turn the program back over to our presenters.
Well I want to thank everybody for joining us for the first quarter and I really appreciate your interest and Stewart. Thank you.
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