Q2 2023 Stewart Information Services Corporation Earnings Call
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Hello, and thank you for joining a steward information services second quarter 20 twenty-three earnings call. At this time, all participants are any listen only mode.
<unk>, you'll have an opportunity to ask questions. During the question and answer session instructions will be given at that time. Please note today's call is being recorded lastly, if you're sure acquire upgrade or assistant Please press star zero.
My pleasure to turn today's conference over to Brian Police Chief Accounting Officer. Please go ahead.
Thank you for joining us today for Spirit second for 2023 earnings Conference call. We will be discussing results that were released yesterday. After the players joining me today are cen, Fred F injure and CSA with David Hi C.
Please go to the Stewart Dot Com website to access the wait for this conference call. This conference call may contain forward looking statements and I bought a number of risks and uncertainties. Please refer to the company's press release and other filings with the S. C. C for a discussion of the risks and uncertainties that could cause our actual results to differ materially.
During our call we will discuss them.
For reconciliation of these non-GAAP measures. Please refer to the appendix in today's earnings release, which is available on our website at <unk> Dot com let.
Let me now turn the call over to Fred.
Thank you for joining us today for.
For Stuart second quarter 2023 earnings conference call.
David won't need to use it.
The financial results in a minute, but before we get into the financial results separate released yesterday.
Update you on our view of the market and I continued progress on important initiatives that we believe will set Stewart up for success in the long term.
During the last three or four years, we we are focused on fundamentally improving Stewart's operating performance and watching us on a journey to become the Premier title services company.
While the current economic environment pose a significant challenges.
Improved our business, creating a stronger more resilient business that will thrive overfull real estate cycle.
But we also know that he was more that we can do.
And it is critical for us to really focus on improving margins growth and resiliency through.
True scale attracted markets and enhancing our operational capabilities.
A difficult market such as the current one it is often easier.
Focus on achieving these long term goals. However, I'm very pleased with our progress on these initial enterprise initiatives during the second quarter.
Progress toward improving our long term performance.
Given the continued volatility in the market, we have Dallas does burst into these initiatives would need to manage expenses very thoughtfully cause.
Cause he's discussed before we are not surprised challenging economic environment continued into the second corps, although interest rates declined early in the second quarter. They increased throughout the remainder of decor and the 30 years War.
Get your interest rate and that'll help us around seven per cent.
The expected to increase in rates is offset some of the typical seasonal increases residential order volumes that are expected during the summer months.
Fortunately, we have seen modest increases in the transaction volumes or the second quarter. After experience a historic low in the first quarter to the interview homes is strong although listings for existing homes remains very though we expect the challenges of this environment to continue throughout 2023.
The advantage cause carefully throughout this market, while focusing on our long term strategy, which requires a careful balance between investing in initiatives and managing expenses it'd be careful not to take actions that we felt would threaten our competitive position in long term value creating opportunities.
We leave that the real estate cycle, we've done it in 2024 and the best path for for Stuart to get through this period as to the best of our people everything focused.
Long term improvements they have all the energy through the challenge of course.
We remain focused on a long term strategy enhancing our operating bottled investments in technology to enhance customer experienced improve efficiency of our operations and building scale in targeted areas.
We recognize that the strategic investments will cause it cost ratio streaming elevated in a market with exceptions all transactions lives. We lead these long term investments coupled with thoughtful near children management will improve our structure financial performance the long term.
And Ah direct operations going scale and attractive markets remains a priority routine.
Routinely reevaluating markets, where we have the opportunity pre share and enhance our leadership strength.
The market uncertainty, we haven't had more selective in our decisions in order to ensure our deployment capital makes sense for the long term.
Position you have commercial operations for growth across all of his life has been a key focus of your journey.
Those operations are an important component of our overall strategy.
We are making investments a tablet so that we have the leadership in place to achieve these objectives were investing in technology to support the commercial operations to allow us to better serve our customers have you ever made optimistic about commercial but as we discussed last chord of commercial environment rebates certainly in the short term due to changing financial markets Sir.
Commercial sector, such as energy would be very strong for us I wish you hadn't really challenges in sectors like office multifamily.
We believe that focus will create longterm growth through the commercial workers.
And the agency visit severe allergic our technology to drive market Cherokee. So we have made excellent progress on a deployment of technology services to provide a significantly improved agent experience for Stewart.
Various includes greater connectivity ease of use cause risk reduction or agent partners. We are pleased that our platform of services for agents is as strong as it's ever been.
D C beautiful progress at target market, such a Florida and agency commercial and others.
Kate component of our investors is focused on improving our technology for the title production process automation centralization to prove operational efficiencies and capabilities.
They've already made significant progress improving the customer experience across all channels that are rolling on our agency technology platform, which would give it give the enhances easy to use of connectivity with agents.
Other area priority as we work to improve our operating efficiencies the centralization of Digitization quite titles plans.
During the quarter.
Difficult progress roadmap of integrating completed acquisitions into a production in other systems, which improve our customer experience as well as the overall operating efficient citizen efficiencies that we are building building while it for the past several years.
Integrating the rebating required companies as a top priority for the balance of 23.
Mmk and struck financial position is always important but even more during a market like this I slept financial position like we currently have allows us to make competition opportunistic investors.
But actually I want to call it needs to generate high single double digit margins over the cycles.
Over the cycle, there will be high and low quarters as evidence of the first quarter. However, the modest increases the transaction volumes margins improve significantly as indicated by our second quarter results in.
In addition, the investments we had been discussing once fully implemented she'll allow us to achieve low double digit watches it was like.
While we were encouraged by approve it as a tablet technology customer experience.
Get your models work remains to be done to the journey a doctor. Please.
They focus on our strategic plan until they've been improved competitive physicians by building more efficient and having a discipline to upgrade models that are functions well throughout all the real estate cycles.
We have emphasized one scale attractive markets across all lines of our business and we have made significant progress in improving customer experience at all the channels.
<unk> is always important and we've been eating more focused on retaining talent to this market. So that we have the right to your place is a cycle improves.
Our efforts are you able to resolve to increased you over with your market share gains each of our direct agency and commercial businesses.
Let me conclude by reinforcing that we had been managing their expenses and investments with a sensible balance between operating discipline and current short term market challenges and strengthening Stewart for the long term growth performance.
Strong financial footing should best positioned to take advantage of the opportunities that this cycle will provide.
Finally, I'd like positive long term view, the real estate market need do any of the Stewart to become preventing a title service company is not waver.
Our associates have worked hard throughout these challenges tons of it I appreciate all the it accomplished.
And I also want to thank our customers for their continued loyalty and support.
David with now up to either be one of the results.
Good morning, everyone and thank you Fred before anything else I would also like to thank our associates for their wonderful service and our customers for their support.
Our second quarter improved sequentially to the first quarter, However, low housing inventory high mortgage rates lower commercial and residential real estate.
Real estate activity and economic conditions continue exists in the market contributing to lower second quarter operating results as compared to last year's quarter.
Yesterday suit reported net income of 16 million or 58 cents per diluted share on total revenues of 549 million after adjusting for net realizing unreal lives gains and losses and other items detailed in appendix a press release, the second quarter adjusted net income was 19.
Or 69 cents per diluted share compared to $70 million in the second quarter net income of 70 million second quarter 2022.
Ordering the second quarter title segment total revenues.
Decreased 278 million or 37% pretax income decreased to 35 million compared to $94 million last year. After justin's her purchase intangible amortization and other items.
Segments pre tax income was 37 million or 8% margin compared to $105 million or 14 per cent margin and last year's quarter.
On our direct title business total open and closed borders declined by 18% and 29% respectively compared to last year, primarily due to the current real estate market the.
Domestic commercial revenues decreased 26 million or 38% due to lower transaction volume in size average commercial fee per file was approximately.
7600, compared to 13100 and last year's quarter.
Mastic residential revenues declined 50 million or 21% due to lower purchase and refinancing transactions. However, average residential fever file was up 11 per cent to 330 300 versus 2900 due to hire purchase mix total international operating rat.
<unk> declined 18 million or 35%, primarily due to lower transaction volumes that are Canadian operations.
As a result of lower commercial and residential activity in the market second quarter revenues from our agency operations decreased 201 million or 49%. The average agency remittance raised slightly improved to 17.7% versus 17.1 last year, primarily as a result of June .
Mix.
Investment income increased due to a higher rates and due to our working with our bank partners to better utilize escrow balances where appropriate.
In regard to tidal losses total title loss extends in the second quarter decreased 7 billion or twenty-five percent, primarily due to lower titled revenues as a percentage of revenues title us expense was 4.2% compared to 3.5 per cent in last year's quarter, which benefited from last.
Here's favorable claims experience for the full year twenty-three, we expect title losses to average in the low four per cent of titled revenues.
For the real estate solutions segment pre tax income was $3 million in the second quarter compared to 6 million last year, primarily due to lower revenues driven by the real estate and economic environment pretax margin for the second order was 4.6 compared to 7.4 per cent and then after adjusting for.
Purchase intangible amortization.
And catch up state sales tax expenses related to an acquisition adjusted pretax margin was 14.4%, which was comparable to over 14.7 in the prior to your core.
Related to our consolidated operating expenses are employed cost ratio increased 34% versus 25 in last year's quarter, primarily due to lower operating revenues.
Lower operating revenues also led to other operating expense ratio of 24% versus 19% last year.
On other matters, our financial position remained solid as support our customers associates in the real estate market.
At June 30th 2023, a total cash and investments are approximately 370 million over statutory premium reserve requirements and we also have a fully available 200 million line of credit facility.
It'll stockholders equity attributable to Stewart was approximately 1.36 billion with a book value per share of approximately $50.
Lastly night cash provided by operations was 35 million compared to that cash.
Provided of 83 million in last year's Florida due to lower net income.
Greatly appreciate our customers and associates, we advocate for everybody's safety and prosperity.
<unk> confidence.
For real estate markets I'll now turn it back to the operator for questions.
At this time, if you would like to ask <unk>.
Question. Please press the start.
On the phone.
A member of yourself for me can you buy a crushing start too well once again I'm not a start you blame you. If you would like to ask a question I'm Gonna take my first question posed Joyce George what keeps telling you. Your line is open.
Hey, I'm wondering morning, alright good.
Good morning, I just wanted to ask first about investment income is that new level of investment income something we can run right or if not like how should we think about that number going forward.
Yeah, but I was just David here, So I think the way to think of it if you're looking at about like the increase of this quarter versus last year's quarter you.
Probably about 70% of that is coming from these escrow activities that we just initiated and so that that would be ongoing and then you know the rest is really the difference in better rates, particularly on short term balance as I. You know I think that's probably relatively stable and will vary with balances but.
But the extra component is definitely incremental.
Okay, Great and then in terms of the agent premiums can you just remind us is there a lag in that in that number so given the magnitude of the decline versus what happened to direct is that just reflect the lagging a bit of a catch up after.
Give me just a little bit of of lack in their biography or agency revenues, both and we looked at a number of things about it. This same kind of difference this gap occurred and and the <unk>.
Second quarter of 21, as well and we caught up over there so.
We don't see any <unk>.
Sure shift or anything like that when we look at the at the agency level.
<unk>, so I'm pretty comfortable depth, what kind of kind of even out here over the next few months. So okay uhm, okay, great. Thanks very much.
<unk>.
Well take our next question from so him finds out with B T. I can't your line is open.
Hi, Good morning, guys first one is just on the purchase orders. It looks like you know your declines were literally better than your peer that announced results today as well is there something specific going on there is there a shared take that we should be thinking about are you or is this sort of your acquisition sort of kicking in now and you're getting a benefit of that.
Yeah. So.
We've looked over the last.
Five quarters.
Each of our businesses has gained sure we don't know this quarter.
Yet until the five come in but we've we've had nice momentum.
And share growth. It's it's really irrelevant, we haven't had any acquisitions, Canada comparative <unk> gets affected it.
Commercials lumpy Ah Buffy both both agency indirectly seem really five consistent quarters of of share games, which is good. So I I you know it's not.
Not huge but it's it's a step in the right direction.
Got it and then I'll need to expenses or any sort of tightness and with margins Friday you know.
Performing this quarter was strong, but if we if we sort of assume laddish volume Betsy next quarter on a sequential basis is Daniel reason.
Margins can at least a flat to hire next quarter or are there any expense items, we should be thinking about I'm just trying to figure out. If you know, it's just sort of the peak four margin <unk> sort of see something higher as we go into next Bridgeville no unusual expenses. So like the incremental 20 million, we're spending as I talk about.
The improvement initiatives are kind of evenly spread there's no extraneous kind of thing I can think of that would spike in the next two quarters switched it's gotta be exclusively driven by volume the.
Revenue volume and and again, we have made improvements operations on margin, but a lot of improvements you don't you don't really see unless the volume goes up [laughter], if you'd only because it's it's kind of.
You have excess capacity in the system as you get more efficient.
And so it's gotta be pretty steady I think at driven mostly by volume.
And the only.
Oh I'd take about volume is you know the pattern and something like commercial.
It is heavily skewed to like the fourth quarter at the end of the year December in particular, which drives.
You know change of that particular business, but everything else is pretty you know.
The general walked a framework of how our revenues.
Thoughts here.
Got it and then I guess just on commercial and we're hearing sort of makes things right in the market I I guess I just wanted to get your views on how your <unk> back happier.
<unk> right I mean, obviously and.
Financial.
Things that are going on I'm, putting a little bit of pressure I have new investment. If you will and there are some obviously some segments that are very good like we were seeing some really nice.
Energy and some of the factors like obviously and things like that you know office is talk as tough so it's gonna be down you don't see any.
Pattern to that as far as you can jump to the next quarter or something.
We feel like it's the orders are kind of standing at a lower right up for level right now, but we again. This is other places you know, we we've invested a lot and we're continuing to and.
We believe we can continue to deal with that business, but we got it there's some headwinds here in the short term as far as the law.
It's it's David here, maybe if I just look as Fred said, if I just look at our transaction types for the quarter.
There's nothing really in the office sector I mean, there's probably some smaller stuff with the the bigger transactions as Fred said, a really energy dominates or some industrial hospitality multi use that kind of thing. So it's probably fair to characterize the decline in office has been offset by the other segments.
[noise].
Got it alright, thanks, a lot guys. Thank.
Thank you.
We will take our next question from John Campbell, which Stephens Inc. Your line is open.
Hey, Jonathan morning, Hey, guys you money.
Back on the investment income I mean, it sounds like you guys do expect that two Q level would be a pretty good run right I'm guessing that's probably holds for consensus but just looking at my motto I mean, if I run right that that's that's 60 cents over 60 cents a V. P. S. Upside you know you guys just reported roughly that same amount in two Q. So obviously, that's pretty meaningful I just wanna get.
I better sense for the sustainability of that step Bob So David you talked to I think 70 per cent of the left coming from escrow actions you guys are taken with bank partners I'm, hoping you can probably a little bit of color there or what exactly did you do that drove such a large impact and what allows you to make that move now versus not doing it in the past.
Yeah, I mean, I think the well it depends on if you're comparing quarter to quarter, which is probably the better comparison than that earlier answer I gave which like 70 per cent is due to the escrow and 30 per cent just due to better rates Poles and so you should we should probably.
We see you know call it a coupla million dollars a month benefit from the escrow activities and.
And really what that is and it's taken a few months, it's not like we'd started on it yesterday, it's the stuff you've been seeing in one of our competitors right. It's just with rates rising and they didn't really rise to a level, where you could make the significant earnings cause the banks are always a little late in raising.
<unk> until towards the end of the year.
So you know it's really bad.
It worked for the last few months to get call at roughly.
900 million or so that's gross deployed and in the states that allow it and.
With any of the disclosures that are needed and so that's why it takes a little while you have to work with the bags you have to.
Make sure all the regulations are met in some instances you have to make sure you have disclosures right, but that that's all essentially been done at the end of the second quarter and that's why we should get the benefit going full so John your observations of good though so.
When we first started this journey three years ago, we looked at should we buy a bag because we could because we didn't have it back we didn't have access to returns on the rest grows and we couldn't because of our scale couldn't make it work, but the value of short money back and was so little bags were not really interested in Patrick.
With you and we were smaller too so now that we've grown and the value of money obviously, the the return on short funny with so much better than the deposits are so valuable our banking partners I've got a really great job stepping up with us.
And we would have had to cash or some portion of that earnings on our ashcroft. So.
My view is that with an important thing for us to do with that money.
Came more valuable with something we had to go after him and the team did a nice job doing it but but it gave me we try to get out there a couple of ways early on in it just for US It was really hard to to execute against you know buying a banker or getting gas as interested as it was this year. So.
<unk> I'm glad we were able to get it done.
Yeah, absolutely I mean macros seems a little bit shaky still on the commercial side regime cause like it wants to pick up a little bit but that's a great addition, the earnings Mexican Congrats there second question here on the order mix you know since you guys acquired F. N C N B C. H H, obviously, there's been some moving parts there I'm, hoping I'll just get a little bit more.
<unk> clarity on the other order line, just maybe as a starting point just roughly the mix of default versus B C. H H and F. M. C and also how we should be thinking about that blended fee per file for other.
Yeah, John for US that's primarily the the reverse stuff from from F. N C.
The fever files, there I mean, those deals aren't quite as big as as a typical purchase business other cheaper file it's gonna be a little less than that 3300 3400 that.
We report for purchase we don't have much of a default business and so that's why that's predominantly FMC reverse.
Okay and is there are typically much seasonality in that line and then also kind of what's a good closing ratios that can be kind of sporadic or is the last two quarters kind of a good average to think about.
Well, yeah, I mean that mark so there's been a little bit of dislocation of that market. So it's not as seasonal right well. If you think about what why do people typically go get reverse mortgages well you know they have their you know typically old area. There's an age requirement and then they have a lot of equity in their house and it's.
It's sort of a pseudo retirement product.
The reason, there's that a little bit there hasn't been as much activity maybe is there could be going forward, even though there's a lot of equity at built up equity in the Population's aging is because the market's been a little dislocated right you had a G which was the largest originated required by finance.
America, you had the capital markets you know the primary execution is the F. H, a heck of a product and so the capital markets that hadn't been as smooth.
On that that's for the most part stabilizing and you can see that with you know people are starting to advertise again, you see Tom Selleck every now and then on T V.
Yeah, He's a G pitch guy and and so you know you should expect the gradual improvement there, but it but I think that markets still a little fragile with all the things that have been going on but you should expect a gradual improvement.
Okay, great. Thanks for taking my questions.
You.
And we all take our next question from Geoffrey Dowling apartment.
<unk>.
Thanks, Good morning.
I Wonder if all upon John's question about an AI and just make sure I have all the details here so incrementally.
To what we already see on your balance sheet, you are effectively able to deploy about 900 million of escrow funds into interest bearing accounts is that the way to think about the the math.
Correct in terms of the notion of the balances the the tricky part is what are you multiply that by.
Right and and that has to be worked out with all of the individual bags and so you can't just like go taking money market rate and apply it to it and it's also offset by things like service charges and and that kind of thing and so you know our rates are typically in the three and a half maybe a little better just depends.
How things are going and you know as as we get more mature and the program you would expect that to maybe come up a little and then we decided to work when it raised yesterday. So so I think that might be a framework to think about.
Okay, and and doing those moves was there any.
Opportunity cost on the expense side, meaning you gave up expense credits to get the NII.
Well, it's a it's an embedded in the transaction right. So yeah. So I mean before we were offset a wire costs and things like that to your point, but we weren't getting much more.
Now, we're getting something incremental but those costs are still being offset that's why I say you can't just take money market and apply it to the balances right yeah.
And then my last question is in terms of sensitivity. Obviously, we got another 25 bps yesterday, who knows if I'll get anything else in the fall.
Based on the three and a half as it may be correct to say you.
You know <unk>.
60% of twenty-five burp change kind of flows into your incremental yield.
It depends on how persuasive we are when we call. These guys [laughter] yeah.
We might need some of your smoothness on that one but yeah.
Alright, but in terms of if all else held equal about 12 million run right this quarter.
Should react positively to any additional right actions, including yesterday.
Yeah, well keep in mind for the quarter.
Forget if we chatted about this or not but it's in the quarter right. That's why the quarter to quarter comparison, it's really the delta in the second quarter versus the second quarter.
To think about because of second quarter happens to have a title plant dividend Dennis.
So you can't just you can't just work off the 12, you have to work probably more off the Delta and that's why I say, it's about it's about a 2 million a month benefit from the <unk>.
Okay, and and what is the title plant dividend this corner.
Well it was about 2 million and each border.
So sorry that I don't play a dividend.
It was about two in the second quarter of.
22 in about the same in the second quarter twenty-three. So it's a one time yeah. We are we are the owner of a part owner of and we get a tap once a year, whereas Davidson and that's just a one time thing whereas that that.
Really that's the way I understand a million run rate going into three Q.
Correct. Yeah. That's that's why you can't just take the 12 and apply it right yeah.
Okay. Thank you.
And once again that a start and why don't you would like to ask a question well take a follow up question from.
You guys just one follow up on real estate solutions business. So you go out and look at revenue this quarter on a year over year based in Australia was down about.
13% ourselves and that's better than the first quarter, which was not about 38 and it looks like it outpaced orders essentially so can I ask the question is you know <unk> fried you've talked about Hey, you know, there's some sensitivity to volumes, obviously, but it sounds like there's some subscription kicking in as well is that the right way to think about it I'm just going for.
Lauren.
So here.
It has a mixed exactly so cause a mix in there or something like our data business is more stable and frankly, we have some services.
Businesses that are having some real good share gains so.
So so it's so.
With the combo right, so it's a little bit.
Obviously lose with volume, but it's a little bit dampened because of that yeah. Okay. Well. So so you got like just to give a little more color on that you have.
The date of businesses as Fred said, so crowded which is M for research in real estate, which is propstream. So.
Those are more stable because they're not as transactionally, driven and then they're actually doing better in the market. So I think that's where you're seeing the improvement.
Which is which go right with the volume decrease it like those are very.
Challenged like the rest of the market.
Yeah, I mean, I I just wanted to ask because the the step change quarter record on a given year basis was pretty significant just in terms of declines.
So yeah. So I guess it does sound like some sure take care okay. Thank you.
Thank you.
And we have no further questions on the line at this time I'll tend to proclaim back over to management, sorry, any additional are closing remarks.
I just want to thank everybody for joining us for this second quarter call. Thank you.
That concludes today's program. Thank you for your participation disconnect at any time.
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Okay.
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