Q3 2021 Stewart Information Services Corp Earnings Call
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Hello, and thank you for joining the Stewart information services third quarter 2021 earnings call.
At this time all participants are in a listen only mode.
Later, you will have the opportunity to ask a question during the question and answer session.
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It is now my pleasure to turn today's conference over to Nat Otis head of Investor Relations. Please go ahead.
Thanks Leah.
Good morning, Thank you for joining us today for Stewart's third quarter 2021 earnings Conference call. We will be discussing results were released yesterday. After the close joining me today are CEO, Fred Eppinger, and CFO, David hyphen to.
Well listen online. Please go to the Stewart Dot Com website to access the link for this conference call.
Remind participants this conference call may contain forward looking statements.
A number of risks and uncertainties because such statements are based on expectation of future financial operating results and are not statements of fact actual results may differ materially from those projected 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 in 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 Thanks for that and thank you all for joining us for today's third quarter earnings call and for your interest in Stewart.
In a minute David will take you through the details of this quarter's financial results, but before then I'd like to discuss through its operational solution to date and the continued execution of our long term strategy.
Two years ago, we started a journey here, it's toward the journey to become the Premier title services company we.
We knew when can we take some time, but we also knew we had a value brand strong balance sheet and associates that we're ready and willing to have to make an impact.
Between that and now we have navigated the dramatic impacts of COVID-19 life as well as historic real estate market that continues to have momentum.
So where are we on the journey and what are we what have been the main areas of focus and progress.
We've made significant improvement on our operational capabilities by adding greater scale in priority markets augmenting our core business with essential real estate technology and services and injecting new talent and energy into a 125 year old company.
Like to say, we are at 125 year old startup.
Initial goals of achieving double digit margin had been met and exceeded albeit with the help of a very robust market.
As David will discuss Stuart's operating revenues are up almost $240 million up 40% from last year and operating income was up over $30 million or 55% in a quarter in which the mortgage bankers Association forecasts have purchase originations down 12% year over year, and overall mortgage originations down 25%.
So we feel we are comfortably outperforming the market and creating some real value at.
At this stage of our journey, we can safely say much has structurally changed and improved but.
But we have more work to be done through acquisitions, we have grown in scale in many critical markets, where our size once hindered profitability and prevented the efficient managing of daily operations scaling.
Scale and flexibility are critical in our business that is both seasonal and cyclical.
We accelerated our restructuring in the midst of heavy transaction volume, we closed offices, where we foresaw challenges going forward.
We added some markets, we believe would be the centers of real estate activity in the future.
On the topic of talent, we're becoming a destination for some very special town.
Of the top people at Stuart what we call our senior leadership team, 50% are new or have been promoted.
Our aggressive entrepreneurial actions have attracted great talent not just from the title operations, but across the real estate services spectrum and in real estate technology, given our investment our commitment and nimbleness. Many talented leaders have joined US this investment and a proven and talent will support our journey for years to come.
Most importantly, we have become more valuable to our customers by building ease into the customer experience for our larger lender partners, we've added technology and services that bring greater efficiency and usefulness both in the current market and as well as the more digitally transform marketplace for our smaller customers. They see the value in our ability to make their day.
He likes easier to tools technology service and security.
The last component being a vital importance as wire fraud has become a critical issue for agents and the very reason we've partnered with certified.
I will leave you with you a couple of thoughts first while our operational performance has benefited from the historic real estate market. We are in here at Stewart, we're focused on building a business that will thrive through the full real estate cycle and also be able to take advantage of technology and Digitization further transforms the closing process.
We are intensely focused on driving the digital innovation required to deliver a superior closing process today and into the future and I am confident in our investments have positioned us for the current and future success.
Second while it is critical to build toward a vision of fully automated and digitized closing process in the future for now at its core title insurance remains a technology enabled but execution driven business and wish the clearing of title that removes risk from customers, who are ultimately, making the largest purchase of their lifetime.
Very important reality.
As always I want to thank our associates for all their hard work and congratulate them on their results. Our journey continues and we're a quarter closer to our goal.
Thank you and David and I will now update everyone on the results of the quarter.
Thank you Fred and good morning, Let me also thank our associates for their amazing service and our customers for their loyal support.
Although we are entering a seasonally slower real estate period real estate markets remain strong driven by demand and favorable interest rates commercial is showing a good recovery, particularly in industrial energy and multi family.
We're going to continue to be several watch items that could impact future business performance, including federal government policy and actions improving yeah, historically high mortgage delinquency and forbearance.
Lingering virus rising inflation and slower supply chains consistent.
Consistent with our strategy and Fred's comments, we continue to focus on the areas that will have the most meaningful and durable.
On our long term operating performance gaining scale in attractive direct markets improving scale geographic focus on agency and commercial operations.
And scaling lender services offerings and throughout our business improving service and digital capabilities to provide ease of use and better user experience.
For the third quarter of 2021, Stuart yesterday, we reported net income of 89 million and diluted earnings per share of $3.26 on total operating revenues of $830 million on an adjusted basis third quarter net income was $86 million, an increase of $31 million or <unk>.
55% compared to last year's quarter as disclosed in appendix a of the press release the adjustments to our third quarter net income were primarily driven by a gain related to an acquisition contingent liability adjustment.
Compared to last year total title revenues for the quarter increased $205 million or <unk>, 37% due to solid results from our residential agency and commercial operations. The title segment generated pretax income of about $119 million, which is $37 million higher than last year's quarter.
As a result of this revenue growth and continued management focus pretax margin for this segment also improved 90 basis points to 15% compared to last year.
With respect to our direct title business residential revenues increased $55 million or 23% driven by higher purchase transactions with improving scale residential fee per file was approximately $2400 and 24% improvement compared.
Last year's average fee per file due to a higher purchase mix.
Domestic commercial revenues improved 28 million or 76% due to increased transaction volume and higher average fee per file which was 15400 versus 9700 in last year's quarter total international revenues increased $17 million or <unk> 49 per se.
Primarily due to improved volumes in our Canadian operations.
Total opened and closed orders in the third quarter decreased 13% and 3%, respectively due to lower refinancing transactions consistent with the market trend.
Commercial loan purchase closed orders increased 11, 8%, respectively compared to the third quarter of 2020.
In line with our direct title business agency operations generated a strong quarter with revenues and through a 42% to $402 million versus 283 million last year.
Agency remittance rate for the third quarter was $17 nine compared to $18 two last year, while on a year to date basis. It was 17, 8% for both 'twenty, one and 'twenty.
On title losses total title loss expense increased 2 million or 7%, primarily as a result of higher title revenues, partially offset by favorable claims experience as a percentage of title revenues the title loss expense in the third quarter was 4%.
Compared to 5% in the prior year quarter.
In regard to operating expenses, which consist of employee and other operating costs total operating expenses increased primarily in relation to higher revenues.
<unk> cost as a percentage of operating revenues improved to 24% from 26 last year, while other operating expenses increased to 18% from 17 last year, primarily due to increased pass through appraisal and service costs. Excluding these costs our overall other operating expense ratio.
<unk> would have been similar to last year.
On other matters.
Regarding informative research the transaction closed at the end of September.
At that point the company had 85 million in run rate revenues and a 15 plus percent pretax margin with new customers to the Onboarding and a good pipeline of future business that should grow both the top and bottom line going forward.
Our financial position remains very strong to support our customers employees and the real estate market.
Our total cash and vessels on the balance sheet or approximately $585 million over regulatory requirements and we had about 74 million or existing line of credit facility stockholders' equity attributable to Stewart increased to $1 2 billion at September 30 of 2021 with a book value of approximately 40.
$5 a share.
Lastly, net cash provided by operations for the third quarter increased to $107 million compared to $91 million from last year's quarter.
We remain grateful for and inspired by our customers and associates advocates for everyone's improves safety and prosperity and confident in our support of real estate markets.
Now I'll turn the call back over to the operator for questions.
Thank you at this time, if you would like to ask a question press star one on your Touchtone phone.
We will take our first question from Bose George of K B W.
Good morning, Bose, Hey, guys good morning.
Good morning, Great quarter, let's see a couple of things first on the commercial.
That premium number was really high just curious anything sort of lumpy in there that we should think about in terms of its going to be kind of thinking about that in terms of the run rate perspective.
Oh, Hi, David Thanks for the question no I think there's a strong promotional across the board with the benefit of some of the segments that I mentioned and you know industrial multifamily and the like energy.
Yeah. So it was a good it sounds like it's bounce back right.
Starting to really be more.
Strong growth breath twice.
Yes.
Okay.
Our next question is from John Campbell of Stephens, Inc.
Hi, Good morning, John Good morning, Hey, This is AJ, hey, stepping in for John Campbell Oh, Okay.
Hey, I had a quick question on informative research first is this going to be captured in the ancillary services segment and second what's your expected accretion potential and if you can maybe just help frame up the overall revenue and potential income impact.
Yes it.
It will be in the ancillary segment I think we gave some of that in my comments right 85 run rate revenue, 15% pre tax margin. So you should be able to infer from that.
Okay, and then one follow up if I may I'm, what's your M&A appetite from here and how does that rank relative to dividends buybacks.
So we still see significant opportunity for us there.
<unk> said from the beginning our kind of assessment of the various Msas, we think there's structural opportunities for us to enhance our economics indirect and a number of markets. We also think there is some additional COO.
Capabilities and services that makes sense for us to actually enhance our offering.
To the lender market and frankly in the data area. We think there is some ability for us to continue to think for think about opportunities to get to deliver greater value to our various segments.
We are still thinking that our growth opportunity is in front of us.
As far as the other capital options.
Sauce, a couple of quarters back or increase our dividend, we think thats an appropriate thing to think about as particularly since our stock price has risen. So we will assess and consider that as well because I do think it's important for us to continue.
Continue to maintain a good yield for our for our shareholders.
But it's growth first a lot of our right now capital for US is growth first.
And then the others.
And once again to ask a question that is star one on your phone. Our next question is from Geoffrey Dunn of Dowling and partners.
Yeah.
Thanks. Good morning. Good morning, Yes. Good morning, first a number question the resi fee per file pretty big jump sequentially doesn't seem necessarily fully supported by the mix shift and HPA.
Which suggests maybe geography.
Been bulking up and more MSA areas investing in certain areas. So I'm trying to get an idea. If this shift is sustainable meaning that the geography is shifted enough that you've got the bump up in S. Beyond just the impact of purchase refi mix and HBO.
Yeah, I mean, I don't think theres anything that.
Abnormal in the numbers I'll have David follow up, but it's like the for us you're absolutely right. So.
Our growth rate.
<unk> and <unk>.
Geography has shifted a little bit based on where we've grown significantly so.
Places like.
Kind of the Arizona market.
And the Colorado market, we have.
Shifting increased pretty materially.
Stability to that geography, now, but I would say the mix shift is pretty dramatic for us as far as our purchase growth versus the refi as well as price increases in most of our markets.
You've seen that in our international side, too, where we've had a material impact from pricing increase so.
So again I don't see anything David.
Normal from what it is we're not sustainable I guess is the way he was raising.
Yeah, I think our sequential and sort of the residential was up a little around 8% or just a little under 200, if I don't know I think it is really driven by the mix of everything right. I think there was a little bit higher purchase percentage I think HP has been up and then I think it is probably a geography thing.
So you know when you sort of put all that together, 8% isn't really that significant.
Unless you are looking at some different numbers than we are.
And just a follow up to that.
Fred you mentioned price increases which is.
Not something I would be thinking about in these type of market conditions. So what is what is driving.
Your ability to increase pricing in various markets.
That's that's primarily in international.
Okay phenomenon for us, but if you look at the Canadian pricing environment.
Very robust this year.
And.
Many quarters.
So that hasnt affected affected our revenue growth.
The mix, if you will and.
In Canada, that's that's.
Really with a phenomenon has been most material.
Okay, and then I really wanted to focus on informative research I appreciate the numbers I assume those are run rate annualized numbers David.
Right.
Okay.
I'm guessing those numbers are kind of a static point in time, you mentioned growth opportunity here. So can you talk about the growth opportunity of the platform, but also the gross op growth opportunity with that platform wrapped into Stuart because obviously this was an area where I think you felt you had a whole.
And it's probably more than just that.
Some of the parts is probably more than an informative research on the phone.
Yes.
Those numbers were at a point in time they were as of the date of the acquisition, which we closed at the beginning of October.
Right after quarter end.
I think just with respect to the platform itself.
Few things to think about so first of all the front it ordering as everybody knows is one of the first things that done.
And the loan process right and Theres also capabilities that they have on the analytical side on lead generation and the like and so I think as you go into a market like the one we're going into where businesses harder.
Harder to come by those kind of.
Abilities are significant it puts you up at the beginning of the process and then when you are at the beginning of the process. It also puts you in a position to order all the other services that go with the mortgage Reits. So you're you're upfront. So you can be in a position on appraisal watering it can be.
We're in a position on tired of ordering some of our main worry services fit right in and so yeah, you're right I mean, the numbers I gave are in that business as it stands and that's how we always underwrite transactions, we want businesses that we bought in stand alone.
Then there are certainly a number of overall.
Overall benefits once it's plugged into the sewer network, we believe that.
The efficiency and effectiveness of the process the close process will be enhanced because of some of the things they do and the economics will be enhanced by some of the things they do and that's what we liked about the data they use the platform they have the integrations.
They've done a really.
Meet the objective of what we're trying to do broadly both enhancing that end to end process and improving the economics and to David's point. There is obviously, some synergy between customers and kind of opportunities in our products. So we like them very well.
We do think it was an important add for the company.
Okay, but to be clear this is a growth opportunity not a platform that didn't expect it to kind of trend with volumes.
We would hope that it is a growth opportunity, yes, absolutely yes, okay.
Okay. Thanks.
And that is star one on your phone to ask a question we have a follow up from Bose George of K B W.
Yeah.
Hey, guys I just wanted to follow up on and ask about the acquisition landscape. Both in the title side, but also in ancillary businesses, how would you sort of compare what youre seeing now versus.
Six months ago or a year ago.
Well again, I think on the title side.
It's kind of the same approach that we've been taking and we're trying to be thoughtful by the geographies are clear.
Clearly we had some significant holes when we started now there might be more.
<unk> is part of that mix, but.
But I feel like that is the same kind of thoughtfulness, we're trying to go through.
And as.
By the way as Refis dropped back.
For us, it's kind of easier to find the right kind of economic batches, because obviously, what we're going after is more the purchase business and that's the core of the value of what you see more and more every day here.
The ancillary for us are more selective we don't necessarily need any more in the portfolio as I said to do I'd have some.
Some capabilities, we're continuing to focus on and build sure.
But that one is before if you remember a year ago, we had some glaring problems in holes in that we didn't have scale in our services business and some of our capabilities were really lacking and we really needed what we did in notary and what we did an appraisal to really solidify that that business and so.
We don't the urgency on that side of the business is much different than it was before not to say that we don't have our eyes open for opportunities that can improve.
Delivery to our lender clients in particular so.
I think we're in a good place, but I would tell you that the pipeline for us is still robust.
And it's part of what we're trying to do.
Cause I just you know.
Again, we believe very strongly is that this is about consistent execution to the customer and scale allows you to get through the cycle and the seasonality so much better in a local market to deliver and as you digitize the business and you move for more efficiencies in your operating model scale also helps the path too.
So it just makes a lot of sense for us to continue down that road.
Okay, great. Thanks.
And this does conclude our question and answer session I'd be happy to return the call to our presenters for any concluding remarks.
Just wanted to say, thank you to everybody for joining us and look forward to talking to you next quarter.
Yes.
This does conclude today's call you may now disconnect your lines and everyone have a great day.
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