Q1 2022 Stewart Information Services Corp Earnings Call
Stuart.
I think this for two important reasons first and foremost we are confident in our ability to manage in this transitional period and remain bullish on the long term prospects for the markets we operate in.
It is important to understand that just because the market has transitioned our journey continues we remain laser focused on strengthening the foundational tenet of our structural improvement obtaining adequate scale in priority markets and by leading technology support and innovation to help drive superior and consistent service delivery to our customers.
We have taken great strides in addressing a lack of scale in various markets over the last couple of years on the direct side, we have executed more than 20 regional title transactions and added significant bench strength and talent, we have changed market presence in Arizona, Illinois, Michigan, Texas, California, Colorado, and Washington to our <unk>.
<unk> just to name a few in addition in markets that we've determined adequate scale could not be accomplished without excess investment, we simply closed or sold operations often to our agent partner.
On the agency side, we've invested in technology and services that provide greater connectivity ease of use and risk reduction for our agent partners.
As the industry accelerates the implementation of online in People's transactions, we are there to help support our agents as they undergo this critical transition we believe our opportunity to grow scale in our growth markets and improve our shelf space with winning independent agents is just beginning.
Why is it so important why this August .
Scale of one MSA translate into Stewart, becoming for winning title services company and increasing shareholder value let.
Let me briefly explain.
As in all industries customers are the lifeblood of successive growth maybe more so in title insurance as we make our money on each real estate transaction with no recurring revenue stream.
Industry volumes vary by quarter, given all of the reasons, we have just discussed so delivering.
Consistent service, while matching resources to revenues in a disciplined way is the special sauce in our industry.
Historically.
It has been subscale in many of the key markets, both a direct and from an agency standpoint.
<unk> deep and a mile wide is a phrase I often use.
This place significant pressure on our local people in operations as we or as order activity fluctuated.
Office of four people acted by themselves can't ramp up quickly enough to take advantage as volumes increase negatively impacting customer service. Conversely, when order activity wanes business goes elsewhere because of inconsistent customer service through the cycle, while profitability also dips due to the lack of operational leverage to pull.
This is why the scale is.
And our priority Msas as the building block of our success and why we will continue to Opportunistically look opportunistically look for core title acquisitions that match, our profile as well as work to add technologies and service that help deepen our agency partnerships and increased share with winning agents in our target markets.
We have made great progress over the past few years as we used our MSA market assessments to help guide us and bolster our operations.
Nearly where work needs to be done, but we will continue to grow and enhance our competitive position in each market.
Even with the changing market conditions, we believe opportunities will continue to arise to build share in our target markets, allowing us to profitably grow throughout the cycle.
Let me just finish by.
Reiterating my positive long term view of the real estate market and our ability at Stuart to become the Premier title Services Company I would also like to thank our associates for all their hard work and our customers for their continued support.
David will now update everyone on the results.
Thank you Fred and good morning, Let me also thank our associates for their amazing service and our customers for their trust and support as we enter the traditional home buying season with a great. Some great recent increases in 30 year mortgage rates in the 5% area the residential and commercial real estate markets are moving in.
Our traditional seasonal and economic influences.
Residential real estate markets continue to see demand driven by favorable demographics and the importance of.
Commercial real estate is seeing activity across most asset classes of industrial multifamily office and retail with energy poised the benefit from needed supply and environmental focus.
There are several watch items that could impact future business performance, including fed and government policy and actions, particularly with moderating inflation and uncertain consumer and jobs environment and the impact of global conflict of supply chains, particularly food and energy.
As Fred noted we are focused on managing our business in the areas that we will have the most meaningful and durable impact on our long term operating performance gaining scale in attractive direct markets improving scale and geographic focus in our agency and commercial operations broadening and deepening lender services off.
<unk> and throughout our business improving service and digital capabilities to provide seamless end to end user experience.
For the first quarter still reported net income of $58 million and diluted earnings per share of $2 11 serves on total revenues of $853 million as disclosed in appendix a of the press release adjusted net income for the first quarter was $56 million, which was 8% higher compared.
For the last year's quarter, the adjustments to our first quarter net income were primarily related to net unrealized gains on equity securities investments.
As mentioned in our press release, we revised the presentation of our operating segments effective in the first quarter to reflect a third segment. The increased size of our real estate solutions operations, which were previously combined with our corporate operations warrants disclosure as a separate segment or corporate and other segment includes prime.
Maryland corporate operations wildfire remain substantially unchanged.
Total title revenues for the quarter increased $97 million or 15% compared to last year's quarter, primarily due to improved results from our agency and commercial operations. The segment's pretax income improved to $83 million, which was $6 million or 7% higher than last year's.
Quarter title pretax margin for the first quarter. This year was 11, 44% compared to 12, 3% last year, primarily due to the effect of significant lower refinancing volume and investments we are making in this segment to improve tire production entitled data for.
With respect to our direct operations domestic commercial revenues improved $27 million driven by increased transaction volume across most asset classes and a 47% higher average fee per file of 12700 for the first quarter of 2022.
Domestic residential revenues increased $4 million or 2% due to higher purchase transactions and improved scale offsetting the lower refinancing volume residential fee per file for the quarter first quarter of 2022 is 2600, which was 37% better than <unk>.
Last year's average fee per file through to the higher purchase mix total international revenues improved $7 million or 20% compared to last year, primarily due to increased transaction volumes and Canadian operations.
Total opened and closed orders in the first quarter decreased 26% and 24% respectively, primarily due to the expected lower refinancing transactions consistent with market trends. This was partially offset by 31% and 4% higher commercial and purchase closed transactions.
And this year's first quarter versus last year's quarter.
Our agency operations had another strong quarter generating revenues of $404 million, which is 17% higher than last year. The average agency remittance rates slightly improved to 18, 1% compared to 17, 1% with last year's quarter.
On title losses total title loss expense for the first quarter was comparable to last year's quarter as the effect of higher title revenues was offset by an overall favorable claims experience.
Percentage of title revenues the title loss expense in the first quarter was 4% compared to $4 six in the first quarter last year.
In regard to operating expenses, which consist of employee and other operating costs total operating expenses increased mainly due to the increased variable costs related to revenue and higher employee panel employee cost as a percentage of operating revenues improved to 24% from 25% last year while other.
Operating expenses increased to 22% from 18% last year, primarily because of the increased size of our real estate solutions operations, which typically have higher other operating expenses on other matters. Our financial position provides a solid foundation to support our customers employees and the real.
Este market, our total cash and investments on the balance sheet or approximately $560 million over regulatory requirements. We have a fully available $200 million line of credit facility at the end of the quarter Stockholders' equity attributable to Stewart was approximately 131 2 billion our book value per share.
There was approximately $49 an increase of 2% from December 31, 2021 of our operations for the quarter was 35 million compared to 47% from last year's quarter, primarily due to higher payment of operating liabilities outstanding and therefore.
Higher net income in the quarter.
We're always grateful for and inspired by our customers and associates, we advocate for Eric.
Everyone's improves safety and prosperity and are confident in our sport of real estate markets.
We have for questions.
Okay.
This time I would like to ask a question. Please press star one on your Touchtone phone.
Hey, remove yourself from the queue at any time by pressing the pound key.
That is star one to ask a question Ken.
And our first question will come from Bose George with CDW.
Hey, everyone. Good morning. Thanks.
Thank you first just wanted to ask in terms of the acquisitions that have closed recently is the accretion from them. All now fully reflected in the numbers this quarter or is there sort of more that we should think about as we model.
Yes.
We did close a lot its David here, we did close I think we're still seeing the full effect of those come online.
And then we still have our integrations and finishing.
The acquisition accounting so.
I think I think it's fair that Theres still some some movement coming this year, because we did such a big amount in the fourth quarter.
In terms of the movement.
See there is some level of accretion still too.
In terms of more reps.
Revenues and expenses still coming on.
Right I mean, we don't have.
For a number of them closed during the quarter as an example, so we don't have a feel for.
Yeah, Okay. Okay, great. Thanks, and then actually the really.
Mentioned, the real estate brokerage acquisition, which was subsequently sold was that something that you guys had mentioned.
No I don't I think we mentioned it was <unk>.
And opportunities.
To facilitate a transaction.
For an owner of a title agency in and that's what we did.
So we haven't really mentioned that before.
Okay, Great makes sense. Thanks, and then just one more can you just talk about.
Commercial and purchase trends in the quarter.
And second the second quarter revenue.
Yes.
I think we're seeing the effects.
Most people are seeing in commercial right as the economy opened over the last year.
You've really started to see improvement across all the asset coordination real capital analytics put out a report that first.
Across the asset classes.
We're seeing that.
Pretty much throughout the re assets in the country.
Yeah.
Even have new York opening up a bit now as well, yes, it's been broad base Roes for us on the commercials mentioned this at the previous call as we look forward, we're pretty bullish.
On commercial.
Okay. That's great. Thanks, a lot Greg.
Okay.
Thank you once again.
Its star one to ask a question.
Geoffrey Dunn with Dowling and partners.
Good morning, good morning.
Okay.
Obviously, you've done 20 regional acquisitions can you give an example.
How improved scale and MSA has shifted profitability in certain locations.
I know you've done a couple.
How is it can you give an example of how obviously, it's hard to model individual deals, but the aggregate.
Can you give us just some some yes.
He has the homebuilding does for you yes.
So again, what a great example, southern Colorado, Colorado Springs, where we were a small operation that we probably had on a marginal contribution say, where we are in the five 6% range.
And what would happen is we get crushed during the first quarter because of the seasonality we didn't have enough volume and we couldnt be just scanning of the resources there plus we would be the one in town where people would pick off talent, because we didn't have kind of a breath of operation now.
Now we are probably the leader on the purchase market in Colorado Springs.
And the stability that comes with that is tremendous so we're kind of our retention of people went up our margin because of our ability to actually.
Manage the business in the cycle and through the four quarters went up our ability to actually think about things like centralization and operational enhancements and how we manage the business has improved and so that that business.
It flips from an underperforming one to cut it.
Our superior performing one and with more consistency and again once you do that once you get to scale you cannot.
Also then do fill in acquisitions in micro geographies and instantly have.
Accretive position from doing that.
Same with the kind of good data access and data access is more cost effective because you have more volume in things like starters.
Our easier too.
To access because you have a broader reach in the market place and more data.
Again, like I talked about like retail banking.
The retail banking, if you get a certain percent of deposits in a local market your margins just fundamentally changed.
Get up to that 10%.
Percent share in a market.
For us it changes both the stability in our margins and our ability to kind of grow from that platform and then and so much of this is what I talked about consistent service.
Because again, if youre trying to manage the cyclicality in our business.
It's really required by doing it at a four person office right you can't affect.
The downside and manage the downside if you have 40 people that are very different.
The ability to manage so we have.
We've looked at every MSA 180, or so we think about it.
Say, who were the leaders how do we reposition ourselves.
We're the best segments to compete in some we do both agency and direct some we primarily do one or the other.
But then you look at what is the best structural position you can be in that market and that's what we've tried to do so this isn't.
This is an AD hoc right.
Can't always get the resources you need to target right on what we how we try to do it.
We've done a lot of it I would also say that.
Because it was a lot of operational and just.
Blocking and tackling things we did organically.
Vantage ourselves a little bit differently.
Effectively whether its on search costs are how we manage operations or how we manage data.
Or how we do integrations so.
It's the combination of the best scale stuff, we've done and the operational improvements for the company, but I feel like we've made good progress I mean, I wouldn't say, we're all the way we can be I think we have.
Okay, and then just a follow up on M&A I think up till.
Even a month or two ago, we were hearing that.
Companies are still trying to sell themselves often 21 results.
Are you seeing more sellers come into the market right now and more rational valuations.
Or is it still in a transition period and potential sellers hanging on to 'twenty, one type of expectations.
Again I think.
People.
I understand the market is different and have adjusted.
For the most part.
It is adjusted and what are the things that drove the prior market with some of these new entrants that we're trying to create revenue.
They had bought a lot of these refi shops.
Great.
And it kind of clouded valuations a little bit because they were selling at some level not the big players.
Traditional players, but there were some partners all of that stuff is out of the system right.
And there was some financial buyers because of how attractive the market isn't back out of the system. So what you have now in my view is a more rational conversation now the good operations are still.
Federated larger new with different things based on how well you run et cetera.
And there are some that still have inflated user value.
Transactions don't happen, but but my view is realism of where we are in the market.
And so again for us.
It's different.
Okay.
This is not a lot of the transactions that occur now is stuff.
So we started talking to two years.
It is about really building relationships and understanding what the opportunities are.
Could be focused on.
But I think to your point is a good question I think the evaluations will be appropriate.
Alright.
Thanks, Mike.
Yes. Thank you.
Thank you.
Our next question comes from John Campbell with Stephens.
Good morning, John Hey, Good morning. This is a J Hayes stepping in for John today.
Hey, guys.
Quick question here I know you guys are definitely still got it back I think you guys are also getting a pretty good price to buy some of the company here. So how are you thinking.
About the balance of the two during this this current environment here.
Yes for us.
The best use of our capital continues to be to build our business in my view.
And that's kind of what we're focused on we've obviously been.
With the dividend that we get a dividend increase and what we're trying to be thoughtful for our shareholders to make sure. We're.
Providing that as well, but but right now our focus has been continuing to build our business and as you know every transaction we've done essentially in the title space has been accretive and helpful.
And so that's kind of been our focus and we will continue to be a focus here in the short to medium term.
Okay, and then and then one follow up here it is.
Been a while since we've dug in on this and obviously I'm guessing things might have changed a bit with the series of recent acquisition latest high level run down on your cost basis, specifically fixed.
First variable costs for salary fences, and then just bigger picture how do you think about protecting margins against the decline in overall originations.
Yes, let me take that.
I'll take the second one.
<unk>.
And the last two and a half years, we've taken a lot of actions. When we started this journey we were 4%.
Right so.
Managing our resources during the cycle and what we need to do.
To manage our business and we are.
Confident that we will have.
Improved we will sustain our improved margins in the business and we will manage ourselves thoughtfully through the cycle and we did it we did in the first quarter. We've done it for the last two and a half years and will continue to to do it.
As far as.
David comment on some of your other question good about how we've been managing our overall expenses and our investments, but I also want to remind.
Folks, we were not going to stop investing in our business.
On a journey to be the best we've got some really interesting things we're doing right now.
Now our product enhancements of integrations on data management that are enhancing both our our effectiveness in the future but.
Add to.
Balancing both current investments in our operations I think like we have.
Always done, but you know.
Again from my behind you just have to manage your business as you see the business on.
Paul I want to make one other point.
Our view is there's no question, but when we look out and we look at all the forecast I think.
Good years for title IV.
I talked about the purchase levels et cetera. So we believe that there were still a relatively strong market position for the next couple of years, but.
Obviously choppy now where we've got to make David is there any further.
Okay.
The general comment is that.
Although we are sensitive to fixed and variable we really run each business.
The way.
Fixed versus variable component.
For example in the in the room.
Businesses, we've got a lot of outside data and other information thats highly variable against very small employee base.
Yeah.
Whereas you've got over and sort of the direct title operations because of the so traffic reach and the like it's a little bit more fixed right.
So each of the businesses run consistent with the revenues and the cost structure of those businesses.
That we've shown I think as a general matter probably have somewhere in the 30 plus percent and a fit.
<unk> got some semi variable.
Lot of our expenses.
Probably a good 60, 50% to 60% are there right because they are all transaction.
<unk> got bonuses free and different things like that data as we talked about.
So I think that's how I would generally think about it.
Awesome. Thank you so much guys.
Hi, Thank you.
Our next.
Question comes from Ryan Gilbert with <unk>.
Hey, good morning, Ryan.
Hi, good morning, Thanks for taking my questions.
I wanted to go back to the question on <unk> trends and on.
And I guess also your comment around the market being choppy right now and maybe you could just.
Drilling and refi volumes.
In the residential market has trended.
I think the big question outstanding right now for investors is the extent to which higher mortgage rates are going to Dan homebuyer demand and it doesn't seem like.
Yet in <unk> 'twenty, two with purchase volume up 4% year over year, but.
I think any color on how <unk> is trending so far would be really helpful.
Yes, Hi, Brian its David here, So I think that in general.
<unk> had a recent annualized lets just say several weeks.
Otherwise the 30 year mortgage rates over over five or so so that's definitely had a bit of an impact even on the purchase market.
We're still seeing seeing pretty good activity, but it's still somewhat transitional I guess the other thing I would note is that and you can see it in the most recent MBA application data less than 10% of all applications are our arms and there is still probably a good 100 basis points spread in the focus.
On the area on a seven or 10, one arm, which is a pretty good purchase products. So yes, I think it's early there has been a little bit of a negative impact, but I think the market is still transitional in that I think the other important thing, which I don't think investors really ever focus on us.
We're more sensitive to the title premium not unit volume right and so if you think about what are the components of auto premium there. It's really the notional value of the transaction and then the total transaction volume and so if you look at all of them on that basis, even though you have unit is coming down.
You have total.
Notional balance holdings are rising because of increases in home prices, which creates a pretty good title premiums environment.
Okay.
Yes, and yes.
Sure.
Yep Yep go ahead I'm sorry.
Oh, Yes, I was just kind of follow up on the on the revenue per order.
Up significantly in.
<unk> through 'twenty, two and I think the comps get a little harder as we move into the rest of the year. So how should we think about your growth rate and revenue per order I think even on a on a mix adjusted basis, it's up in the mid twenties.
Yes, I mean, we could probably see a little bit more Brian because we started to see the mix significantly shift in the first quarter to be more predominantly purchased so.
As you go to almost 100 binney.
90, plus percent purchased right, there's still a little bit of a room to go on fee per file but.
We probably don't have anywhere near as much as we saw over the last year, but there could be some additional room on fee per file.
Okay, Great last one for me I think generally we see a sequential improvement in pre tax margin as we roll into <unk> from <unk> do you still think like it feels like that's going to be the case this year.
And how do you feel about your double digit pre tax margin goal in 'twenty two given the increased choppiness, we've seen in the market.
Yes, I think the goal of thing.
We're trying to manage ourselves to that double digit goal.
Through the year I.
I think it is early in the quarter to know exactly where it's going to unfold, but the trends that David said are that's what we are what we're seeing and we feel pretty good about our ability to manage through this so.
Okay. Thanks very much thank.
Thank you.
Thank you our last question will come from Geoffrey Dunn with Dowling and partners.
Thanks, I just wanted to follow up with respect to.
Again building scale in M&A.
Your agency commission ratio of about 82% stands out versus some of the other peers.
And I'm curious if that comes into the thought process in terms of improving overall agency profitability.
And is there M&A opportunity to reduce that or is that not the right way to be judging kind of overall.
Agency platforms profitability, yes.
So again, we are very happy with our net margins in agency.
For us, it's a well run business, but.
Youre absolutely right. Our geographic mix is very unique it's Stuart it's why we're so focused if you. If you think about all of our major competitors they have.
Significant significant share in a state like Florida, where the splits are much more attractive we are nobody there still.
A lot of this scale that we're building is about state specific growth rate and share and so a lot of that is getting the right mix and so you'll hear me talk a lot about Georgia, and Florida, and Pennsylvania because of that.
Of our both our percentage of of share, but also the overall profitability in those locations and a lot of that split number is because our major competitors have big positions in Florida, just math, just but I would tell you from a net point of view, we run agency business fare pretty well I'm very happy.
With our margins and how we manage the business, but we are working on growth in our state mix, because we do think theres some opportunity there.
You can just tell candidates, but are significant and the other thing you guys all know but it's.
We talk about seasonality. It is so much more dramatic why I'm, so happy with the way we're managing ourselves in the first quarter is our seasonality is more dramatic than the other bigger players why because we're not really in California, or Florida in a significant way that we are the smallest player by a mile in those two places so just think about the weather.
Where we are which is the northeast Midwest and so the upside for us on so many dimensions.
To continue to grow share in the Msas in the California four right.
Again.
We have good upside, but it demonstrates we've been manage ourselves pretty well with our mix, but thats Youre split a point is a great example.
The numbers are different because of our geographic spread.
Alright Thats helpful. Thank you.
Thank you.
Thank you.
At this time I would like to turn the floor back over to Mr. Alderson, our presenters for any additional or closing remarks.
I'd like to hear this is a thread. Thank you so much for everybody's attention and thank you for joining us on this quarter's earnings call. Thank you.
Thank you ladies and gentlemen, this concludes today's conference and we appreciate your participation you may disconnect at any time.
Okay.
Okay.
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Yeah.
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