Q2 2021 Stewart Information Services Corp Earnings Call
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Hello, and thank you for joining the Stewart information services second quarter 2021 earnings call. At this time all participants are in a listen only mode. Later, you will have the opportunity to ask questions. During the question and answer session and instructions will be given at that time.
Please note. This call may be recorded lastly, if you should need any of it.
If you should require any 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 Ashley good morning, Thank you for joining us today for Stewart second quarter 2021 earnings conference call and we'll be discussing results that were released yesterday. After the close joining me today are CEO, Fred Eppinger, and CFO, David Hiseq and so listen online. Please go to the Stewart Dot Com website to access the link for this conference call I will remind participants.
This conference call may contain forward looking statements that 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 evening and the statement regarding forward looking information risk factors 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.
Thank you and thank you for joining us today for storage second quarter 2021 of earnings call and I want to thank everybody for your interest and Stewart Dave.
Dave will take you through the details of this quarter's financial results and just a minute, but before then I want to touch on a couple of broader points.
When I began its stewart almost 2 years ago I discussed both the value of our people and brand as well as the financial strength of our core business.
Clearly was not a typical turnaround story, you had significant changes where necessary.
The compete effectively we needed to focus on the strategy founded on targeted scale operational improvement talent upgrades and acquisitions and core and ancillary business lines.
We realized that our journey to become the Premier title services company would not happen overnight, but we began and put in place the pieces.
<unk> necessary to build a resilient and long term success.
As you know the rebuild has been happening in the face of the pandemic and historic origination volume.
I want to once again applaud our associates, who have worked through these challenges, but our team understands our mission and is aligned to moving fast to achieve our long term goals, while taking care of our loyal customers.
And I bring this up today as we deliver on record earnings because of the improvements and process and investments and talent scale services and technologies. We have made do not complete and have begun to take hold and while we clearly benefited from extraordinary residential order activity and a nice uptick and our commercial businesses.
<unk> quarter, the contribution of our structural changes and operational discipline to our results as exciting to see.
While we are bullish on the real estate over the long term, we are realistic and our assessment that the current market will not last forever.
That said on a daily basis, we are making decisions and taking actions that will define us through the current market and the next full real estate cycle that is what drives us and that is what you are beginning to see and our results.
I am often asked the question how do you appropriately quantify the changes that Stewart has made so far and our journey.
With all of that we have been working on it can at times the challenging to measure all of the ways, we've improved our operations by being more efficient, adding talent unlocking existing expertise of eliminating redundancies, we scaling operations.
And of embracing new and improved technology.
But I feel comfortable that the picture that we think can lie ahead, if we execute on our plan is embedded and our performance and the first half of 'twenty 1.
In conclusion as always I want to thank our associates for all of their hard work and congratulate them on their results.
Our journey continues and we're a quarter closer to our goals.
Thank you and David now update everybody on our results this quarter.
Thank you Fred and good morning, Let me also thank our associates for their inspirational service and our customers for their steadfast support we continue to see of strong residential real estate market driven by demand favorable interest rates and in the economy getting back to normal the commercial real estate market is also benefiting from this.
Moving economy.
All of the economy is improving.
There are several watch items, including fat and government policy and action virus variance and anti vax sentiment and and improving yet historically high mortgage delinquency and forbearance, which need to play out.
These watch items can create operating volatility we continue to focus on the areas that will have the most meaningful and durable impact on our long term operating performance gaining scale and attractive direct markets, improving scale and geographic focus and our agency and commercial operations scaling and broadening lend.
And their services and throughout our business improving service and digital capabilities to provide a seamless end to end user experience.
For the second quarter 2021, Stewart reported net income of 95 million and diluted earnings per share of $3.50 on total operating revenues of $802 million.
On an adjusted basis second quarter, net income was $86 million and improvement of $54 million compared to $32 million from last year's quarter as disclosed in appendix a of the press release.
The main difference between our reported and adjusted net income being the gain on sale of certain buildings.
Compared to last year total title revenues for the quarter increased $248 million or 50% due to strong performances from our residential agency and commercial operations. The title segment generated $126 million of pre tax income and increase of $71 million from last year's quarter.
<unk> as a result of revenue growth and continued management focus and pre tax margin for the segment also improved to 17% compared to 11% from Q2.2020.
With respect to our direct title business residential revenues increased $76 million or 47% from increased purchase and refinancing transactions and residential fee per file for the second quarter was approximately.
$2100 of 15% improvement.
The over last year's fee per file due to a higher purchase mix. This year domestic commercial revenues improved $30 million or 97% due to increased transaction volume and higher average fee per file, which was 12000 and $600 versus 9800 for last year's quarter.
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Total international revenues increased $29 million and 118% Pri.
Primarily due to improved volumes and our Canadian operations.
Total opened orders increased 8%, while closed orders improved 27% compared to the last year, primarily due to the strong housing market.
Similar to our direct title business, our agency operations generated a solid quarter with revenues of $390 million, which was $113 million of 41% higher than last year.
The average agency remittance rate was settle or at 17, 5%.
On title losses total title loss expense increased $12 million of 56%, primarily as a result of the increased title revenues.
As a percentage of total revenues title loss expense was 4.5% compared to 4.3% last year.
In regard to operating expenses, which consist of employee and other operating costs total operating expenses increased primarily due to increased revenue and order activity.
Employee cost as a percent of operating revenues improved to 24% from 27 last year, while other operating expenses increased to 17% from 15 last year, primarily due to the pass through of appraisal and service costs and our increase the appraisal services businesses exclude.
<unk>. These businesses overall other operating expense ratio would've been 12 per cent for the second quarter 2021.
On other matters, our financial position remains very solid to support our customers employees and the real estate market, our total cash and investments on the balance sheet or approximately $600 million over regulatory requirements and we have approximately $225 million available on our line of credit facility shareholders'.
<unk> equity attributable to Stewart increased to $1.3 billion with book value per share of of approximately $42 and lastly, net cash provided by operations for the second quarter increased to $103 million compared to $61 million from last year's quarter.
We are grateful for and inspired by our customers and associates advocates for everyone's improves safety and prosperity and confident and our support of real estate markets I will now turn back to the operator for questions.
And at this time, Matthew I'd like to ask the question. Please press star 1 on your Touchtone phone.
We will take our first question is coming from Bose George with <unk>. Please go ahead.
Good morning, Bose Hey.
Hey, guys, Hey, guys good morning, great quarter.
Let me just start just asking about the margins when you look out and just re queue. Any reason to think that margins will change meaningfully from what you reported and then just any updated thoughts on where you think normalized margins could be.
And again, given the strength of what we have.
Seeing so far.
Right. So as you know when we started.
Margins for the overall company, where about 50% of the lead 2 guys of them and the business and our goal as I've said from the beginning with the double dose.
And the double the margins over the next 3 years.
And would get us to the kind of 10% 9 and 10%, allowing for the overall company what you've seen is.
Overall, we're ahead of that because of the strength of the market and obviously the market is historic.
But I think we've made really good progress and our underlying goal and so we're right on track of where I said, we would be.
And I think those are sustainable.
The market, obviously has helped beyond that right and we all know that at some level.
So I feel good about the margins I feel like we're much better company of.
And where we were and where we started and then the other part we said we were going to position ourselves to be able to grow as well.
And you've seen that as well and so again as the market helped us with growth GAAP, but we've grown and whatever it is $7 million to $800 million on a run rate basis and.
And believe we are positioned to continue to outgrow the market as well so I feel good on both sides, but I am fully aware that this extraordinary housekeep market has helped us look even better right as well to everybody else because what you have is.
And with between overtime, we are basically using all of our capacity right everybody is within the offices and so youre leveraging herein.
And force and your fixed cost to the Max right you couldn't sustain this.
For 2 or 3 or 4 years, because of the and the overtime and the stress in the system, but the the marginal contribution during this year's is terrific right and.
And I think if.
And you want a good job taking advantage of it but it's not.
Not that that part of this is not a sustainable.
Okay, well that makes sense and just specifically on the third quarter.
And I guess, you've got decent visibility into where volumes or do you think the margins there.
Any reason to think that comes down meaningfully from what you just reported.
Yes, we have.
Disclose and I'll have David talk a little bit about orders. If you saw what we showed in and both received orders and closed orders what we saw a nice shift.
The purchase right, which.
Which offset some of the decrease so obviously those open orders carry into the next quarter.
We feel like the some nice momentum going into the third quarter, but but everybody can see the refi market as it has changed although obviously recently we saw interest rates go down again, so it's a little bit of a crystal ball.
But we have some nice momentum and a business right now.
Yes, I think Bose the.
In terms of the both the closed and open orders are running closed around more of that.
And where they were in June and open maybe may be dropping a little bit.
We'll see if the decline in rates gets us to pick up a little and so I think the trend for the early part of the quarter certainly there could drop a little too as we get towards the end and depending on volumes.
Sort of the watch item.
And again I think.
Some of our other businesses International was terrific, but you know from the data price increases and Canada were 20 plus percent. So theres. Some things about this quarter that are extraordinary that we should just keep that in mind right. So I think we have good momentum, but this quarter was for a lot of reasons kind of a perfect storm as far.
Our us results.
Okay. That's perfect. Thanks, and just a quick 1 just on the international.
Is that.
Is there something lumpy there or should we sort of see some of that growth there is kind of sustainable.
Yes.
And so created and we've done a lot of interesting things I feel good about it we're investing we're 1 of the leaders obviously, there and we.
And we're balancing commercial a little bit of investment commercial there and I feel good about our future and how we're building it.
The market was very strong right, even though the orders for close the market was incredibly strong this quarter and as I said the price if you look at the stats the.
Price increases were incredible like 20, plus percent and a lot of locations and that is not a sustainable number right. So the.
The reality, it's good we're happy with our business, we have some nice momentum, but the again the results of my view at some point those net.
Got it and normalize right so.
And again I don't.
I think this quarters results and international were extraordinary and I am not sure Thats sustainable.
Okay, great. Thanks, a lot.
Our next question comes from John Campbell with Stephens. Please go ahead. Your line is open.
Morning, guys and good morning.
So, yes, I remember back and the and the Actavis days and obviously this predates you guys a good bit.
I think you had a goal or objective of about $5 of EPS from quick you put that up and the first half of this year, so and that was fantastic and nice work.
So I wanted to ask 2 questions here. So first on the reserves. So you guys had mentioned earlier this year expecting kind of the <unk>.
Loss provision rate.
Somewhat I guess hang around the the levels you guys saw last year I think it was 5.3% or something like that to you guys.
The run ahead of that.
Pretty pretty far and the first part of this year. So I'm just curious about what youre expecting for the back half.
So you want to go first David and I can.
Yes, John.
And I think.
It has been running a little lower I think the activity levels with the sort of the moratorium and the like on foreclosures and sort of definitely impacted the first part of the year I think you've got the FHFA moratorium expiring in July and I.
I think we'll just have to see how it goes I mean, obviously of the current pace continues it's going to look more like it has looked this year, but.
Yes, if we start to see some increased activity on the on the foreclosure front could spike up a little less of the year goes yes. So again I think our philosophy that we described at the fourth quarter and again in the fourth quarter and I just think it's appropriate right now for us to be may be conservative so hopefully conservative, but as you as David said with the board.
And obviously the run rate is a lot better.
And then we are.
The reserving for.
But outside of the conservative at this level, we feel very very confident at this level and we'll see how it unfolds.
Okay makes sense and then on the I'm.
And that's really the services business. It seems like you guys have something really kind of.
Positive spinning up there.
Back out the corporate cost from that segment.
And getting to about a 4% margin and I think last year you guys were negative the years part of that it was it was a pretty steep loss type business. The David just curious about.
The moving parts, there and where do you think that margin can go over the kind of near term and then longer term.
And you guys get that to a certain level of scale, where you think you could take those pretax margins.
Yes.
We're trying to get the consistent with the corporate margins that Fred described overall corporate pre tax margin and I think.
We have seen some improvement with some of the scale I think as we've talked about before there are sort of puts and takes going on there. So you don't have any foreclosure kind of activity right. There is a lot of title work and other valuation work that goes with that there's limited capital markets activity and most of its origination.
And then even on the origination front because theres so much demand for appraisers right that the cost of that creep. It up a low you can't always recover it. So there's a lot of puts and takes going on I think we're making progress and I think over time, we'll get closer to the corporate margins, particularly in a more normalized cycle, where you have.
Activity throughout each of the services, but thats sort of whats happening right now and I would say just in general that's all I agree with all of that and I would add if you remember we've talked about this a couple of times. So we had of legacy we had some multiple platforms.
And we said what youre going to see is a lot of those true Marsh and Scott come through with the beginning of next year.
Tail end of the first quarter, because we still have consolidation work on the platform.
And obviously, you've got to be careful with that because of the transition clients and stuff like that we're right on track of what we're doing what we got we like what we have we like the portfolio and as we kind of.
It gets ally and the operation and get the platform set up I'm not worried about us hitting those targets as we described so I would say we're right on track I didn't expect it to go faster that given the sensitivity we have about from some of the consolidation of platforms given the impact of clients right you've got to do that with your clients to get to the single platform. So.
We're in good shape.
Okay sounds great and then last 1 from me.
The town of title acquisition.
I mean, obviously that is kind of geared to the to the commercial side of things and it looks like you guys.
Those that I would imagine and June it looks like you had a pretty big pop sequentially from May to June and commercial orders and just curious about how much of an impact that was and.
So it was late it really wasn't any real impact we had a real bounce back and commercial we're feeling pretty good about it and we look forward to the end of the year, we feel like things have come back a lot has to come all the way back probably not but it's a nice big change what we have seen and we have a lot of momentum and our.
Commercial business, which is good.
And again net acquisition was smaller and more targeted they had some really interesting capabilities that we were interested in both geographically.
But also in some sectors.
And so it's a nice add but we really didnt mean anything this quarter.
Okay. That's helpful. Thank you guys.
Okay.
And this does the reminder that of Star and 1 well go next to Geoffrey Dunn with Dowling and partners. Please go ahead.
Hi, Good morning, good morning, and good morning.
I wanted to keep the commercial conversation going first quarter maybe.
And maybe like Stewart didn't bounce back as much of some of your peers on commercial this quarter it exploded and that it doesn't seem just back to pre COVID-19 that youre running stronger than pre COVID-19.
Can you talk more about the broader commercial market. What are you seeing how things are still the secondary markets are the primary markets coming back and what's going on the New York and then what's going on specifically with Stewart and the commercial market.
Where it seems maybe the gains this quarter.
We're ahead of at least 1 of your peers and last quarter, you were kind of lagging.
Yes.
General update that please yeah. That's great. So let me just talk about some trends and things and then I'll have David talk generally about the market but.
Obviously, the market's coming back which is the good thing we're seeing it.
And so the activity feels pretty good.
Pretty broadly and I think.
The subsectors that we can talk about the other obviously less and others, but it's a pretty broad base come back as far as the numbers, what's weird, it's a smallish business still for us.
And it's lumpy right. So if you remember the fourth quarter last year, we blew it away right. So.
For whatever reason I think some of our volume and the first quarter got pushed back pushed up and.
The fourth quarter and as I had mentioned when we looked at we did our analysis of share and commercial last year. It looks like we grew a little bit of share.
During Covid and we did a really good job of my view focusing our efforts on our 7 key markets and a couple of sectors, particularly energy.
And it put a lot of resource against that and we feel pretty good about the momentum pretty broadly.
The some vessel of better you can imagine we're.
Where some of the better areas are.
But we feel pretty good about the broad based off of.
The comeback and the momentum we have and the business and as I've said before and for me.
And as a place given our history and our distraction and.
And we're always good financially, but our capital strength right now is unprecedented historically this is the place we should invest and growth and share shift to us.
It really is 3 credible players and a lot of the big business and we should be getting more than our fair share right now and so it is an area that we're focused on investing and again, given our capital base and and what we see we think there's a long term opportunity and.
Thomas is the first step that's a little bit more visible.
But we plan on making and all other additional investments so I feel good about and I feel good about our momentum.
But its hard again, it's really lumpy for us I mean, it's just not.
Net.
The scale of this is such that a few deals moving from 1 quarter and other kind of could create.
That's a trend that's not real right.
But again as we look at orders and I feel pretty good about the rest of the year.
So David as of.
Yes, I mean, just maybe a couple of other quick things, Jeff. So I think just in general there seems to be capital returning to the commercial real estate.
Not only on the equity side, but that tends to be cheap and plentiful and I think on the on a sector basis, yes sort of.
Multifamily and industrial straw, the office of sort of by market and <unk>.
Or can San Francisco leasing and at least what we see still a little slower.
And as Fred had pointed out.
Some of the Sunbelt markets, Texas and the like.
The stronger and so I think that's what we're seeing and our our results and we'll just.
You have to see how things go but it does seem like there is higher interest and higher capital being committed to the sector.
Okay. Thanks, and then just a second question, it's more technical which we've had of refi dominated revenue market for several years.
And this quarter you saw really the start of a shift back to purchase can you talk about closing ratios on the purchase versus refi and then we can look at the numbers, but with all of the volatility it's hard to really nail down any differential but not only as you go the purchase can you maybe get a fee per file benefits, but do you get a closing ratio of benefit as well.
<unk>.
Go ahead and.
Generally its a little better right because you don't have people falling out shopping as much as you do and refi so yes.
Yes.
Obviously, there's a little benefit to that and hot and the big part obviously of the revenue per files of very different profile for us and.
And so it does help and a number of ways and 1 of the things I think we've mentioned and a couple of our work on forecasting we're pretty bullish on the next couple of years right I mean from a title perspective, and the demographics of millennials and stuff and the purchase market purchases such a better.
Thanks for the title business that refi and a bunch of ways that we see wallet and this is a record year and it could come down.
The next couple of years look pretty darn good historically over a long period of time.
Because of the strength of the purchase market and whether we can also about the inventory issues short term and this and that but.
So many of the trends are.
Relatively positive for the next.
Couple of years, and and we're seeing some of that play out and kind of little bit the extremes right now but.
And we feel relatively good about the purchase market looking out.
Okay. Thank you.
Yes.
And there appears to be no further question and I will turn the call back.
Thank you.
And the remarks.
I want to thank everybody for joining us on our call this quarter and appreciate your interest and Stewart. Thanks, So much.
Thank you and that does conclude today's program. Thank you for your participation you may disconnect at any time.
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