Q4 2022 Stewart Information Services Corp Earnings Call
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Hello, and thank you for joining the Stewart information services fourth quarter and full year 2022 earnings call. At this time, all participants are in a listen only mode.
Do you have an opportunity to ask questions. During the question and answer session and instructions will be given at that time. Please note today's call is being recorded lastly, if you should require operator assistance. Please press star zero. It is now my pleasure to turn today's conference over to Brian <unk>, Chief Accounting Officer. Please go ahead.
Thank you for joining us today for Stewart's fourth quarter 2022 earnings conference call. We will be discussing the results that were released yesterday. After the close joining me today are CEO , Fred Eppinger and CFO David <unk>.
To listen online. Please go to the Stewart Dot Com website to access this conference call.
This conference call may contain forward looking statements that involve a number of risks and uncertainties. Please refer to the company's press release and other filings with the SEC for a discussion of the risks and uncertainties that could cause our actual results to differ materially.
During our call we have Scott.
Measures for a reconciliation of these non-GAAP measures please refer to the agenda.
The release, which is available on our website at Stewart Dotcom.
Now I'll turn the call over to Brian .
Thank you for joining us today and for Stewart's fourth quarter earnings Conference call.
David will review the quarterly financial results in a minute, but before that I would like to cover our overall view of Stuart and the current market.
As I've discussed before much of our efforts over the last few years to focus on fundamentally improving the company's operating approach to better position ourselves in our journey to become the Premier type of service company.
Long term goal remains to create a stronger and more resilient business that can thrive through the real estate cycles and economic condition.
We are focused on improving margins growth resiliency by improving our scale and attractive markets and enhancing our operational capabilities and our financial discipline, we have.
<unk> significantly improved our performance and our ability to manage through challenging markets, but we were impacted by the significant downturn in the purchase market we saw in the fourth quarter.
The challenges associated with higher interest rate environment increased materially during the fourth quarter as interest rates dropped out over just 7% and we are planning for this difficult market to continue into 'twenty, three and are managing our business for the balance of cost discipline and investment in skills and capabilities that will best position us.
For the long term.
Although interest rates have declined in early 'twenty three.
On a basis points, we'd see improving trends in January quarters.
Interest rates hold inventory and housing affordability are all fragrances, joining quickly turn it towards real estate market.
Through 'twenty, two we have been managing in a declining market starting with a significant decrease repo market and moving to a rapidly declining purchase market.
As a result, we have been taking material, but thoughtful and targeted expense actions throughout the year to ensure we maintain financial strength service, our business, well and position us for more normal market.
In the fourth quarter, we saw additional material decrease in the purchase market ending the year at a 46% decrease in closed orders and a 44% increase in open orders year over year for December our lowest point in the year. This translate us to take additional significant but targeted expense actions in the quarter to ensure we maintain their finance.
Flexibility.
We continue to manage our business with a long term view out or whether it maintains and strengthens the investments and improvements we have made over the last three years.
Simply improving our structure and long term financial performance.
We remain focused on our strategic plan of building, an improved competitive position by being more efficient in having a disciplined operating model their function as well throughout the cycles, we have emphasized growing scale and attractive markets across all lines of business that we have made significant progress in improving the customer experience and all of our channels.
While we are encouraged with our improvements across all four critical fronts.
Our technology customer experience and our financial model, we recognize work remains and that journey is not complete.
We will continue to invest opportunistically during this market, but we'll be mindful of maintaining our current strong financial position.
Essentially our long term goal remains to generate high single low double digit margins over the cycle. However, there will be quarters like the fourth quarter and the first quarter 'twenty, where margins will be challenged our adjusted margins for the quarter reflect the levels of investment talent and systems necessary to compete and win over the long term.
Disciplined management and seizing on growth opportunities as they arise are keys to improving store its financial position.
On the margin Bryan prior to beginning the journey and pre tax margins were at the low single digits as a normal market and in lower volume markets. We consistently lost money our efforts to improve scale in our direct operations improve our portfolio through acquisitions and real estate services and strength of our operating model has allowed us to better weather the margin.
Pressure, particularly in charge of markets.
The outflow of the journey, we identified areas that we needed to improve on in mortgage achieve our goal.
Then you guys can significantly improving our technology for title production process automation and centralization to improve operational efficiencies of capabilities. We have already made significant progress improving the customer experience across all channels and rolling out our agency technology platform, which typically adds as you either.
Use of connectivity with agents.
We continue to make excellent progress on these and other investments, but we know that more work needs to be done.
The current market will present opportunities to improve scale and targeted and attractive direct markets.
Additional services that complement our existing lender services.
Share growth in direct target MSA markets remains a key strategic objective.
The fourth quarter, we added key title services, which specialises, providing title services to reverse mortgage transactions at BCH H, a national provider of title services to institutional institutional investors and lenders.
Both companies are leaders irrespective fields that are important to our strategy as we increase our service offerings and scale.
The year ahead should see additional progress integrated completed acquisitions into our production and other systems, which improves our customer experience as well as the overall operating efficiencies.
Over the past several years.
In our agency business 2022, so our developments in key areas that position us now for increased scale with our growth markets and improve our share with the highest quality independent agents. We have made excellent progress with our deployment of technology and services that provide greater connectivity ease of use and risk reduction for Asia.
Partners as we move through 2023, our platform services for agents is as strong as it's ever been.
Additionally, our commercial operations for growth across all our business lines has been a key focus this year as these operations are important components of our overall strategy. We've made significant investments in talent during 2020 to aid in achieving these objectives. We are optimistic regarding the commercial markets long term.
Although we recognize there will be some headwinds the short term given changing financial markets.
Let me just finish by reiterating that we will manage expenses and investments with a practical balance between that operating discipline. The current short term market challenges.
<unk> Stewart.
Long term growth and performance.
<unk> financial footing should best position us to take advantage of the opportunities that this cycle will provide.
I will conclude by reiterating but positive long term view of the real estate market.
Ability to it 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 loyalty and support.
David will now update everyone on our results.
Good morning, and thank you Fred Let me also thank our associates for their amazing service that our customers for their steadfast support during the fourth quarter residential market was negatively impacted by 30 year mortgage rates have peaked over 7% consumer sentiment has moved forward due to the rate environment inflation and affordability.
In recession between serves commercial real estate is seeing the impact of higher rates and volatile markets as well.
Yesterday Stewart reported fourth quarter 2022, net income of $13 million and diluted earnings per share of 49 cents on total revenues of 656 million after adjustments primarily for annuity net unrealized gains and losses on equity securities.
Office closures severance regulatory and litigation expenses adjusted fourth quarter net income was 16 million or <unk> 60 per diluted share compared to $84 million or $3 <unk> per diluted share in the fourth quarter 2021.
Total title revenues for the fourth quarter decreased $255 million or 30%, primarily due to the volume declines driven by higher interest rates as a result, the title say its pre tax income was $27 million compared to $119 million in the prior year quarter.
On an adjusted basis, the segment's pretax income was $35 million compared to $120 million in the prior year quarter after adjustments for purchase intangible amortization and other items listed in appendix a of our press release adjusted pretax margin for the fourth quarter was five 9%.
<unk> to 14, 4% in last year's fourth quarter.
And our direct title business the.
Domestic commercial revenues decreased $26 million or 28%, primarily due to lower transaction volume and size average commercial fee per file was $15100 compared to $19700 for the prior year quarter domestic residential revenues decreased.
$94 million or 32%, resulting from lower purchase and refinancing transactions. However, residential fee per file increased 45% to approximately $4500 from $20 $400 last year due to the higher purchase mix total international revenues.
So were $16 million or $30, 44% lower primarily due to lower transaction volumes at our Canadian operations.
Total opened and closed orders declined by 48% and 51% respectively in the fourth quarter compared to last year, primarily to the economic environment.
Similar to our direct title revenues revenues from our agency operations decreased $133 million or 30% compared to last year's quarter. The average agency remittance rate slightly decreased to 17, 6% compared to 18% last year, primarily as a result of geographically.
Mix.
On title losses total title loss expense in the fourth quarter decreased $12 million or 36%, primarily driven by lower title revenues as a percent of title revenues. The title loss expense was three 7% compared to 4% in the fourth quarter 2021 for the.
Full year 2022, our title losses were three 8% of total revenues compared to four 2% in 2020 one based on the current economic environment, including a possible recession, we expect 2023 title losses to be at least that 2021 levels.
Regarding our real estate solutions segment fourth quarter pre tax income decreased to 400000 from 5 million last year, primarily due to lower transaction volumes, resulting from the economic environment pretax margin for the fourth quarter was 47% compared to 64, 1%.
In the fourth quarter 2021, after adjusting for purchase intangible amortization and other items listed in the appendix a adjusted pre tax margin for the segment was 12, 8% in the fourth quarter compared to nine 1% in the prior year quarter.
Regarding operating expenses, which consist of employee and other operating costs total operating expenses for the quarter decreased primarily due to lower costs related to revenues and lower incentive compensation based on lower results employee cost as a percent of operating revenues were 30% in the fourth quarter.
<unk> compared to 23% in the prior year quarter, primarily due to lower operating revenues.
Other operating expenses as a percent of operating revenues were 23% and 22% in the fourth quarter 'twenty, two and 'twenty, one respectively. Excluding office closures regulatory and litigation expenses. The other operating expense ratio was 21% in the fourth quarter 22 compared to <unk>.
2% in the prior year quarter.
On other matters, our financial position is strong to support our customers employees and the real estate market, our total cash and investments as in December 31, 2022, or approximately $430 million over regulatory requirements and we also have a fully available $200 million line of credit facility total stock.
Holders' equity attributable to Stewart was 136 billion at our book value per share was approximately $50, which is 5% higher than December 31, 2021 Lastly.
Lastly, net cash provided by operations for the fourth quarter decreased to $25 million compared to 133 million last year's quarter, primarily due to the lower net income in the fourth quarter of 2022, we're always grateful for and inspired by our customers and associates, we advocated for everybody's safety across fair.
And are confident of our support our real estate markets I will now turn the call back over to the operator for questions.
At this time, we will open the floor for questions if you'd like to ask a question. Please press the star key followed by the one key on your Touchtone phone if at any time, you would like to remove yourself from the question queue starts hampered our first question is coming from John Campbell from Stephens.
Good morning, John Hey, guys good morning.
Good morning.
If I strip out the one timers here I'm showing the personnel cost is down maybe a little bit less than half the rate of revenue. Other operating expense is down sharper than revenues I know, it's important that you guys retain staff to avoid that share loss and I know you've invested to garner share and so you don't want to lose that on the other side of the market.
And my question here is the <unk>.
<unk> movement in our revenues and expenses by those line items does that is that kind of a preview of what's to come youre basically cutting the other operating expense faster than the salaries.
A little bit John .
The reality is we're lagging a little bit so.
We have done on both lines, we've done a material amount of stock over the last three quarters.
But when I saw that get kind of which I mentioned actually look at the last earnings call at the end of the third and into the fourth week.
We took about $25 million with action.
Thoughtfully targeted surgical, but we took about $25 million of action in the fourth quarter.
I would say that was probably 20 personnel five possible.
So the balance.
Changes in shifts during the year kind of what we did.
And and.
So that's what you saw and obviously you can see in the restructuring result.
Some of that stuff with the office closures.
77 stuff, but.
So the balance has been kind of that coming in at so what we see obviously the first quarter is our toughest quarter always and the order count obviously, we see the open orders to without so much.
But we kind of dealt with the first quarter is going to be like in some ways.
So I thought that was appropriate.
Two.
But to your point otherwise, we are being thoughtful about just because my views.
You got to look at me.
Terrible quarters, we've got to get through but we built great capabilities across the organization and I got to make sure. We can take advantage of the market. When it comes back and we will and I want to make sure the momentum phase of the skills day, and so we're trying to be really quite thoughtful about it and I feel very good about how the team.
<unk> managed through it.
John its Dave just one other thing on the other expense line and whether it may be a difference in the percentages here.
There are a lot of the real estate services has third party data and other costs in it and so that varies a lot more closely to revenue than maybe the employee was all of that is true.
Okay. So that's a great. That's a great point and then on the on the implied direct title kind of fee per file I'm, having a little bit of trouble back into that if I take just the direct revenue divided by the closed orders I think it's about a 40% lift year over year I know there is mix shift there, but if I look at that sequentially, it's kind of a similar mix shift.
It was a 10% move sequentially I'm thinking maybe the.
Recent acquisitions might be skewing that a bit so maybe if you could talk to that help explain that.
Yes, I think for that kind of a different story and you're probably talking geographic mix.
Stuff like that.
Those acquisitions.
The reverse steeper falls quite that high.
To close late in the year. So you wouldn't see any impact to that so is that just more geographic mix shift.
Okay. That's helpful. Thank you guys.
Thanks, Jeff.
And once again that is star one if you'd like to ask a question.
Okay.
And it looks like we have another question from John Campbell.
Yes. This is Mike Joe today guys.
Yeah.
If you could touch on the BCA th business. That's something obviously you guys acquired in late December if you could maybe talk to how that impacts the P&L and I'm thinking that probably falls in the real estate solutions segment. But then also if you could talk give a little bit of color on the synergy potential and kind of how that complements the strategy.
Okay.
Yes, John .
Actually as a title operation so it's going to be in the title segment.
The way to think about that as their primary customer base is sort of the institutional investor side. So think about single family rental think about build around that kind of thing.
And so I think much like we did with the reverse business.
With FMC, we're sort of looking for market segments, where you can differentiate and that have growth potential with what's happening sort of in the economy with demographics and the like and.
So people and I'm sure you've done some work on it and sort of size that single family rental institutional maybe 10% to 15% of the total real estate market at some point.
So this is one of the premier providers, there and it's just the opportunity to go after that market segment.
Okay and then this is somewhat related to <unk>, but if you could go back to FMC I think you had talked about in the past.
That was maybe going ahead and other orders and then maybe I think you said last quarter, maybe that was purchased is it a mix now if you could talk about the impact to other orders that was picked up a good bit sequentially and then also on <unk>, if that's going to head on purchase or other.
Yes.
F N C. As in other with BCA change I think we're going to need to take a hard look at that because some of it could be other and so this purchase and so there's probably going to be a bit of a split there.
Okay. That's helpful. Thank you guys.
Thanks, Sean.
Okay.
Yeah and that looks like that is our allotted time for question and answer session. I will now turn the program back over to Brian .
I think there's some more of that in the.
Q.
If there's anybody in the queue.
Yes, it actually looks like a couple of just queued up and we have.
Bose George from K B W.
Hey, Bose.
Hey, good morning.
Just wanted to follow up on the question from John on expenses.
The benefit of the cuts that you did this quarter flow through is there a way for us to kind of think about what the margin ranges for next for 2023.
Assuming the market remains roughly in line with consensus expectations.
Yes, I mean, I think again.
It's going to be very different by quarter, because the first quarter, it's going to be.
The.
Much more dictated by the <unk>.
Poor order.
Take in the fourth quarter and I think after that we believe is going to improve pretty materially.
Personnel stuff we've done.
In my view gives us obviously at some level, we have excess capacity in the system.
Still given where we are.
What we're doing and so that as the market improves obviously those ratios improved materially.
Through the year, if you have the capacity stay steady state as the volume increases so we feel pretty good about where we are and where we're going to end up and if you look at this year. The year in total gives you like if you look at kind of how we manage that.
12 months, even though it was a declining business and you look at the <unk>.
That ratio is.
<unk> basis, you get a pretty good sense of how we can manage the business right. So.
I feel pretty good about what we've done and where we are what give US advantage. We have as you know is our portfolio is a little different but we don't have a bag or investment income that goes to the revenue line that changes these ratios.
Look at us on a comparison basis, we've actually managed.
Pretty well apples to apples is just that we have a little different.
Portfolio that others have and obviously.
The big guys are three times four times, our size is a little bit of overhead at the top but I would say on a relative basis. The actions, we've taken and the level of actions. We've taken is very comparable actually.
Okay, Great that's helpful. Thanks.
But I was just curious what are the thing on that I mean I think.
The one thing to think about is even though we have taken all of those actions I think some of the ratio of relationships that you saw in the fourth quarter, where maybe you guys were a little bit lower than the actual on the employee side.
Some of that May continue because we don't get quite the dollar for dollar.
I think the first.
First quarter sales.
Very challenging just like before.
Because of the we're at the bottom right here.
What's interesting, though that I'm sure you've seen it what's exciting or app.
Orders were up for us a J with 28% both in orders.
And commercial orders are up 20% or something.
Your first quarter was driven what the fourth quarter.
So overall, it's really good that that lag right. So I feel like we're kind of we're bouncing off the bottom here, which is excellent.
The first quarter and the other thing about us to remember is we're more seasonal than all the other competitors because we have the least in California, and Florida, everybody else is huge positions in California, we don't.
No.
A little bit of a double whammy of a bad fourth quarter.
A weakish first quarter, because we're big in northeast, we're bringing we've gone we've taken like Alaska stuff. So we have a little bit more of a seasonal.
But again I would say that I feel like we called it right because we can see that.
The trend has come in.
And so this balance of a little bit back so that's good.
Okay, Great. That's very helpful. Thanks, and then actually can you remind us what drives that noncontrolling interest line. It's not it has come down very modestly despite the big move down in income.
Yes, so that's where we don't have 100% ownership.
All of our businesses and it varies from period to period. So we had done.
Ill go.
A slight majority.
Purchase like a couple of years ago, and then we've been staging into that and so that was helping that one and then we had a couple of new entities in the fourth quarter. So that might have kicked the ratio off a little bit.
In general we're we're trying to minimize the partial ownership, but theres going to be period fluctuations and so a lot of that was historically.
Beginning of the trial.
By and get rid of that and have 100% ownership, but one of the recent acquisitions.
For real good strategic reasons, we did a little bit of a minority ownership for aligning incentives. So that's why it bounced a little bit lost you that getting huge or anything thats not going to.
Okay.
Great and then actually just one more just the legal and regulatory settlement was that kind of just the one off any color on that yes. It was it was it.
It was it was with New York anti poaching if you will.
Hi, everyone.
Everybody in the industry is tires.
Kind of.
<unk> looked at it that it came out of actually I believe.
Our transaction with fidelity and some search they did about anti poaching and so we settled a third player to settle.
On that and we just wanted to get it behind us, but I think it's a one off but something thats.
Okay.
Great. Thanks, a lot.
Our next question comes from Geoffrey Dunn from Dowling and partners.
Hey, Jeff Gordon Thank you Martin.
So just first with respect to the near term and then it sounds like activity is picking up.
You don't necessarily get those revenues completely in the first quarter, but you certainly have the expenses of processing those orders.
As it shapes up it sounds like Directionally, we're looking at maybe a more compressed margins sequentially.
And I guess my main question is do you think you can make money in the first quarter.
Great question, I think it's been a challenging quarter.
Our most challenging quarter.
I think we again, we've got a pretty aggressive job managing all our expenses.
And.
But again I think for square is giving you the most challenge.
Okay and then.
Investment income it looks like you had a pretty good uptick this quarter. After so much movement beforehand, David did you repositioned the portfolio differently or is it just the lagged impact from rates.
Yes.
Yeah, Jeff It's David here I mean, a lot of that is just the benefit we're getting in the money markets right now I mean, you can get.
So paulson money markets, where you were getting that and so it's just the earnings on the excess cash I think we're keeping the investment portfolio relatively short on the duration side over indexing, our ways to grow that business, but that's mainly the effect of money market rates.
And then as you know.
Money is so good right now right, it's a very unique niche.
Uhm, how quickly it moved and how good short money is.
And again.
It shows a little bit of our GAAP and that we don't have.
Depository for our escrow so our investments are going to come mostly from our investment portfolio and a little bit from the $10 31 business, but we don't get the benefit.
Our $2 billion of escrow, but it is a very unique time right. It kind of a best time, it's a little counter cyclical in a tough market right now with investments.
Okay.
My last question is on commercial.
I think a lot of people think of it as like a normalization year for commercial bug problems.
Problems that can be very painful when youre coming off of record results.
Can you talk to maybe what you think of normalization.
The hotspots what are the areas that seem like we're actually starting to get impacted on an economic basis.
The minus is relative to the normalized.
Yeah, I forget it for us for future seeing as well.
I think the first quarter was interesting because I think it's going to be slow in some places, but the orders were up so the tail.
I think the year is going to shape up pretty pretty good.
I think there's some geography stuff going on right now so I think new Yorkers.
A little bit slower for us was interesting given our mix energy is very strong and so for US we have some advantages in that what we're seeing is really.
Really nice pick up and growth in the energy sector.
And obviously, there's the obvious sectors that are going to struggle a little bit more than others.
Office has got to be struggle, but in general we think it's got a pretty good market and commercial I do think the comparison in last year's first quarter was really good. So I think theres, a theres going to be a comparison in the first quarter, but I think overall for the year, it's going to be solid solid commercial year.
But there is puts and takes to your point there is no question right now.
Okay. Thank you thank.
Thank you.
And it appears we have no further questions I'll now turn the program back over to Fred <unk> for any closing remarks, well I want to just thank everybody for joining us on this quarter's earnings call. Thank you.
And this does conclude.
Today's conference you May now disconnect have a great day.
Okay.
Thanks.
Okay.
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