Q2 2022 Stewart Information Services Corp Earnings Call
[music].
Please standby your program is about to begin if you need any assistance during your conference today. Please press star zero.
Hello, and thank you for joining the Stewart information services second quarter 2022 earnings call. At this time all participants are in a listen only mode. Later, you will have an opportunity to ask a question. During the question and answer session and instructions will be given at that time. Please note.
<unk> call is being 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 Brian Glaze Chief Accounting Officer. Please go ahead.
Thank you Shelly. Thank you for joining us today for Stuart second quarter 'twenty to 'twenty two earnings conference call, we will be just after the close.
Joining me today are CEO , Fred Eppinger, and CFO , David Hi.
Listen online. Please go to the Stewart Dot Com website to access the link for this conference call I will remind participants that this conference call may contain forward looking statements that involve a number of risks and uncertainties because such statements are based on an expectation of future financial operating results and are not statements of fact.
Actual results may differ materially from those projected.
Risks and uncertainties 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 statements regarding forward looking information risk factors and other sections of the company's Form 10-K, and other filings with the SEC.
Yes.
Let me now turn the call over to Brad.
Thank you for joining us today Stuart second quarter 2022 earnings Conference call.
David will go over the quarterly financial results in a minute, but before that I'd like to cover our overall view of Stuart and our position in the current market.
Yeah.
As I have discussed before much of the work here at Stewart over the last two years is focused on restructuring focusing rebuilding the company's operations to better position ourselves to be a more successful and resilient company that ultimately can be come to what we refer to as the Premier title services company.
Well as to create a sustainable business that performs through all types of real estate cycles and economic conditions. We are focused on improving margins generated growth and creating a stronger competitive position.
Our scale, improving our operational capabilities and our financial discipline.
As part of our journey, we are focused on enhancing the customer experience through technology investments as a meaningfully changed our ease of use and expanded our product offerings and our agency lender indirect business I am pleased with the progress we've made and demonstrated in the second quarter as we maintained strong margins and continue to make progress on.
Our operating priorities and a more challenging market.
We have seen the market transition to a higher interest rate environment. The interest rate increases have put significant pressure on <unk>.
Refinance transactions, which have been historically we.
<unk> been less dependent on and to a lesser extent purchase transactions and we expect that the current environment will continue throughout the second half of 2022.
The more challenging environment Stuart because of our significant improvement is well prepared to successfully manage through these market changes.
I'd like to emphasize that even though the market has transitioned our journey continues we remain focused on our structural improvement attaining critical scale in priority markets aided by leading technologies supporting innovation to drive superior and consistent service delivery to our customers.
To achieve our goal of becoming the Premier title services company, we recognize that we must continue to make thoughtful investments even in this environment.
In our direct operations share growth remains our important role in our overall strategy and target MSA markets over the last couple of years, we have focused on more than 20 regional title companies acquisitions of 20 retail title companies and are always evaluating opportunities to deploy available capital.
We are hard at work integrating these acquisitions into our production and other systems to improve the customer experience as well as improve the overall operating efficiencies that we will be building.
Over the last few years.
Above all we are managing our business in a disciplined way given the current environment that never stops.
In our agency business, we have made significant progress on our deployment of technology and service that provides greater connectivity ease of use and risk reduction for our agent partners as the industry accelerates the implementation of online paperless transactions.
<unk> ways to better support our agents as they undergo the critical transition we believe our opportunity to grow scale in our growth markets and improve our share with winning independent agents is on a very solid path forward.
We are seeing revenue growth in our commercial operations and we are investing in these operations for the future.
As they are an important component of our overall strategy.
We are optimistic regarding the commercial markets overall, although the tougher capital markets may create some temporary headwinds in some parts of the country.
Be clear there is more work.
Work to be done as we maintain our focus on growing and enhancing our competitive position improving scale and operating capabilities.
Recognize that maintaining customer service level.
Levels, a fundamental part of who steward is while also managing expenses is more important than ever.
Even if its changing market conditions, we still see opportunities to invest and grow share in our target market, allowing us to profitably grow throughout the cycle.
Let me just finish by reiterating my positive long term view of the real estate market.
Our ability to continue to grow and 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.
We will now update everyone on the results.
Thank you Fred and good morning, Let me also thank our associates for their amazing service that our customers for their trust and support moving into the middle of the home buying season. The residential market has been negatively impacted by 30 year mortgage rates persistently above 5%.
Although sales with housing stores consumer settlement has worsened due to the inflation and the affordability and the recession concerns. However in Florida rates remained steady commercial real estate saw good activity in the quarter, However, rising rates and volatile capital markets are beginning to influence.
Actions.
For the second quarter is still reported net income of 62 million and diluted earnings per share of $2 26 sets on revenues of 840, <unk>, primarily for net unrealized gains and losses on equity securities with Junes equity sell off adjusted net income for the second quarter was $70 million or $2.
58 cents per diluted share compared to $86 million or $3.17 per diluted share in last year's quarter.
So $517 million or 2% compared to last year's quarter, Our agency and commercial operations, which was partially offset by lower residential.
Revenues of reduced transaction volume.
Title segment order was $94 million compared to $146 million pre tax margin for the segment.
The quarter was $12 three.
3% compared to $16 31, primarily due to the effects of the fair value changes.
However, residential volume.
And the investments we are making to grow revenue improve customer service reduce title production costs as Fred mentioned in his opening remarks.
In regard to our direct title business grew $13 million or 25% as a result of higher transaction volume across most.
10% higher average fee.
Also $100.
Decreased $11 million or 5%.
So driven by lower purchase and refinancing trend in transactions in the second quarter of 2022.
Residential fee profile for the quarter was approximately 2900 versus 2200 last year due to the higher purchase Smith total international revenues.
In the second quarter were $4 million or 8% lower compared to last year, primarily due to lower transaction volumes in our Canadian dollars.
Ratios.
Total opened and closed orders in the second quarter, both declined by 28% primarily due to the elevated interest rate environment generated another solid quarter with revenues of 400.
10 million, 5% higher than last year. The average agency remittance rates slightly decreased to 17, 1% from 17, 5% primarily due to geographic mix.
Title losses total side of loss expense in the second quarter decreased by $7 million or 21% from last year's quarter, primarily due to our overall favorable claims experience, partially offset by higher total applied a revenue as a percentage of title revenues the title loss expense in the second quarter.
Of 2022 was three 5% compared to four 5% last year for the full year 2022, we anticipate our title losses will be approximately 4% of title revenues.
Regarding our real estate solutions segment, which we began to break out last quarter pre tax income improved by $4 million compared to last year due to the acquisitions completed towards the end of last year pre tax margin was seven 4% for the second quarter 2020 to 14, 7%.
Prior to purchase amortization compared to three 8% at six 6% respectively in the second quarter of 2021.
It is important to note that these businesses are also impacted by mortgage and real estate volumes each one slightly differently.
You should expect to see sort of what we see in title also in the real estate solutions business the impact by the market in regard to operating expenses, which consist of employee and other operating costs total operating expenses for the quarter increased mainly due to increased variable costs really.
<unk> revenue and higher employee counts.
Employee cost as a percentage of operating revenues for the second quarter was 25% compared to 24% last year, while second quarter. Other operating expenses were higher at 19%.
Operating revenues compared to 17% last year due to the increased size of our real estate solutions operations, which typically have higher other operating expenses due to third party services.
On other matters, our financial position provides strong support for our customers employees and the real estate market.
Our total cash and investments on the balance sheet of approximately $557 million over regulatory requirements and we have a fully available $200 million line of credit facility as of June 32020, Stockholders' equity attributable to Stewart was approximately $1 3 billion and our.
Book value per share was approximately $50 an increase of 5% from December 31 2021.
Lastly, net cash provided by operations for the second quarter was 83 million compared to $103 million in last year's quarter, primarily due to lower net income in the second quarter of 2022, we're always grateful for and inspired by our customers and associates. We advocated for everybody has improved.
Safety and prosperity and are confident in our support of real estate markets I'll now turn it back to the operator for questions.
Thank you at this time, if you would like to ask a question. Please press the star and one on your Touchtone phone.
You may remove yourself from the queue at any time by pressing star two.
Once again that is star and one to ask a question.
We will take our first question from Bose George with <unk>.
Good morning, everyone.
Hey, good morning. Thank.
Thank you first I wanted to ask just about investment income now what's a good run rate for that number and the increase this quarter was that just reflecting the increase in market rates.
Yes.
Thats a great question so the <unk>.
<unk> seen a slight increase due to the rise in rates.
We also in the quarter.
We get dividends from different title plants and things like that and so we had some growth in some of that activity. So it's really a combination of some of those dividends in the interim.
The interest rate environment.
I think on your question on run rate probably somewhere in the.
$5 6 million probably closer to.
Just it depends on what happens with rates from here, but I think sort of that five to six probably a good number.
Okay great.
And then can you just talk about trends youre seeing in July it doesn't the purchase and the commercial market.
Okay.
Yes so.
Say that again so in commercial.
At the the.
The market I would say, it's probably transitioning a little bit like what we saw maybe six months or so.
And residential not to that degree because theres still a lot of activity. So even though we continue to see increases in open orders, we hear from customer feedback that transactions are.
Taking a little longer to execute and so.
Sorry, we're just described the market is still good but.
<unk> started to be impacted by the capital markets and interest rate environment.
Okay.
Okay, great. Thank you.
We will take our next question from John Campbell with Stephens, Inc.
Good morning, John Hey, guys good morning.
Just a big picture question here, maybe for you or David either one of you guys, but you guys have talked to the 10%.
Total company pre tax margin in the past I know you've got some.
Pressure building on the purchase side of the market.
And there's obviously a lot of moving parts that kind of lead up to that 10%, but based on what youre seeing today and what youre kind of expecting do you think you can manage that 10% Mark this year and maybe even next.
Yes.
That's a great question I mean, that's exactly what I believe if you look at the trend for US we were our margins were about.
$4 five to $19 six and a half in 'twenty, obviously in 'twenty, one was about 12 and a half for the company.
And I always say is likely to 200 basis points in that number in 'twenty one because it was so extremely a good number Andy the good companies didn't really staff up used a lot of overtime and so your same store sales were extraordinary.
Couldn't sustain that from our work management point of view, but inflated just everybody's margins and now we're settling into more normal more normal market and so.
I believe there were that much better I think we are double digit low double digit kind of.
Margin company, maybe could be up high single some court, but I feel pretty good that we did had a structural improvement in any institution now we've got to manage ourselves to do that but.
But we are solidly better company now.
Okay. That's helpful and then David on the on the reserve ratio.
Three 5% this quarter I think in the press release you had.
Mentioned, 4% for the full year, so maybe implying a little bit of a step up in the back half.
Is that out of conservatism or are you seeing something maybe in the back book that lead you to kind of protect that up for the back half.
No we're not really seeing any pick up in the claims rate or anything like that I think it just when we sort of look at we'll get our actuarial work and the fact that we're.
At the higher end of the range.
That might have minor border.
We just think that that.
That's probably a more.
Sort of more reflective of the run rate of title losses, and so thats, where we settle in the 4%.
Okay. That's helpful and then if I could squeeze in maybe just one more here I know.
I think you guys hold the call will be in and so the non title Rev stepped down a little bit sequentially I think that was.
The driver of that but I am curious about what remains in the real estate solutions segments.
If you can maybe help us kind of size up the mix between recurring and transactional revenue there how you see it today.
Yes, well I mean, the businesses that are in that segment are evaluation businesses. So like I said in my remarks that those are impacted by what happens in the origination market. We've got informative research. That's a credit related business that has both vendors that are highly sensitive to.
Originations so lowering a credit report the data provides other.
Credit analytics, and the like that aren't as sensitive, but I would say, it's predominantly sensitive in terms of its revenue mix profit streams, a little different it's a subscription real estate service or they get.
It's not as sensitive.
So well see but the market is getting a little tougher back-patting informations very valuable for both investors and Realtors Windsor prospecting, so it's probably not as sensitive to volumes.
And then we have some of that around mobile and digital notary.
And Thats all.
Paul pretty sensitive to transaction volume at origination.
I would say in general.
Pretty sensitive I think I would just highlight that.
Each of those businesses is a high quality business.
Driven by entrepreneurial and excellent management teams and so I think they will.
They will hold or if not better than the current market and we're seeing that in the numbers.
Okay, Great your work on the quarter guys. Thank you.
<unk>.
We will take our next question from Geoffrey Dunn with Dowling and partners.
Thanks, Good morning.
Good morning, good morning.
A couple of questions I wanted to revisit your comments on commercial.
So rewind six months and Ravi you know things are starting to take a bit longer.
Are you seeing more purchase deals pop up in refi.
Sure.
Are there more legs from a mix shift standpoint with respect to the fee per file.
Or are you also seeing that.
The deal size deal mix stabilize.
So maybe if volumes do the fee per file side.
Yes.
Great question, Jeff Great I would just say that we are.
Up until now we've been seeing pretty pretty good strength across all of the real estate assets.
The cost is obviously the bigger transactions, whether they're big multifamily.
They are pretty active and it's driven a higher fee per file, but we are also fortunate that.
In local markets.
Strip centers build things that sort of thing.
Sure.
The larger transactions clearly influencing the fee per file forward.
I think we're just going to have to see I think you could see a little more pressure on the business.
There are transactions because those are the ones that typically financings in the capital markets.
And it sort of an interesting.
Markets are more volatile or financing costs are going up.
At some point that should probably have an influence on cap rates, which may sort of held valuation I would just say that it's sort of early in the and whatever.
But as it stands now.
From what we hear from customers.
The market volatility of the higher rates are definitely influencing how people think about deals.
Okay.
Technical question, when I think of another company in the past.
Second quarter or is that too.
Particularly when Youre getting these title plant dividend, so maybe on a recurring annual basis, an extra million million in half in Q2 NII.
That's right.
It is typically the second quarter.
But the number you said is.
It was in the ballpark for sure.
Okay, and then last question.
I think you mentioned that staffing was up I don't know if that was on a year over year basis with acquisitions. If you added staffing in the quarter can you just talk.
You are setting the company up.
In the back half of the year, particularly Fred.
Given given all the work you've had of getting all the right people into the right places.
Getting everybody on the same page building scale in certain markets. It seems like maybe it might be a bit more challenging to adjust staffing after effectively a two year restructuring on maybe how the company approaches certain areas of the market. So could you just elaborate on that yes, sure. So obviously rebuilt.
The services business, we've actually built up quite a bit and then some of the title the geographies we've built up.
Kind of a year over year thing so you see that.
Obviously, we have to be very thoughtful right now.
Managing and we've taken targeted actions in various businesses, where we need to to balance staffing resources, but.
To your point I feel good about where we are in our talent and we just have to be thoughtful about.
Incremental investments and targeted investment right now.
Little bit uncertainty in the market, obviously, and we just kept it manage ourselves well.
<unk> is our talent level I couldn't be more pleased as far as how we are situated David referred to some of our services business as I just feel great about the quality of those operations and what we're doing there. So again, it's one of those interesting times right.
With the transition in market, obviously interest rates reference also uncertain and so we have to be very very thoughtful how we invest and where we invest and how we manage our.
Resources, and we will now and again.
The question on our margin.
Obviously last year was extraordinary.
Youre going to have a decrease in margins, but I think <unk> as I said from the beginning we can sustain the high single digits kind of low double digit margin through the cycle.
I feel really good about where we are and I think we can.
Okay. Thanks.
Sure.
And again to ask a question. Please press star one.
That is star one if you would like.
To ask a question.
Our next question comes from Ryan Gilbert with BP.
Sure.
Thanks, Good morning, everyone.
Okay.
First question is on the residential purchase market it looks like.
June orders were down maybe 11%, 12% year over year.
So when we think about your comment around the current environment continuing through the second half of 2022 is a low double digit decline.
Sort of how you're how you're framing.
How you're how you're framing this ore is July tracking.
Down more on a year over year basis, then at 11 or 12%.
Oh go ahead.
Yes, I mean, I think it's we're not in the month of July volumes were.
If you just sort of compare the sequential months, it's down a little bit.
And as we've said today, but.
But it's not.
Digit level.
We've got to see how the rest of the year plays out.
Yeah, we saw the rate increase yesterday, we saw a pretty high mortgage spreads.
Well over 200 basis points, which is high relative to history.
And so.
But on the other hand, you've got a lot of people just sitting on the sidelines waiting to see how things play out. So so we didn't see the same level month over month, but.
I think theres, a big question Mark for the year for the rest of the year.
As Fred said, we're managing the business.
There could be.
Contributing a little worse.
Okay got it thanks.
And then how did that how did see per file trend through.
Through the quarter it seems like.
Home price appreciation has been has been more resilient than I would've expected given.
The slowdown in housing demand and higher interest rates.
While we were at about on residential fee per file or at around 2900, I think we've started to see that slow down I mean, it was up significantly from 2002.
<unk> hundred in a quarter ago, but with the predominantly purchase mix now and I think we have seen some home price depreciation.
<unk>, but just reading headlines and see whats going on prices are definitely stabilizing with coming in a little bit it depends on your market.
So I would probably say, we're we're near the near the top of that based on where HCI is a mix of purchase and refi.
Okay got it and then last one for me.
An agent mix.
It's up on that on a year over year basis, I guess, just given some of the comments you made about.
Deploying new initiatives to support the agency business should we expect your agency revenue as a percent of of operating revenue to continue to increase throughout the year or do you think mix kind of stabilizes from here.
Okay.
Question.
We have seen some nice traction for our for US and agency, it's really two big initiatives, we get a lot of integrations and connectivity to agents to Egypt.
Ease of use and we have initiatives around some targeted state mixed picture.
Both states wed like to ship to and we'd like to do a better job serving the commercial needs of agents.
<unk> seen traction in both of those so we're not immune to the trends in the marketplace.
But.
I'd like our traction in that way.
And so I think in the short term you could see a little shift towards.
Agency, but remember we're also quite focused on growing our direct business. So I don't think theres going to be a material.
Change between us in both places over any multi.
Multiple quarters.
But I think youre going to see some progress.
Okay.
I am seeing progress of agency and I think we continue to see some more progress.
Okay, great. Thanks, very much thank you.
Yes.
It appears that we have no further questions at this time, I wonder or closing remarks.
Well I just want to thank everybody for joining us for our second quarter earnings call. Thank you so much.
Okay.
That concludes today's teleconference. Thank you for your participation you may now disconnect.
[music].
Yes.
[music].