Q3 2023 Stewart Information Services Corp Earnings Call
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Please standby your program is about to begin if you need assistance during the conference today. Please press star zero.
Hello, and thank you for joining the Stewart information services third quarter 2023 earnings call. At this time, all participants are in a listen only mode.
You'll have the 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 and lastly, if you should require operator assistance again. Please press star zero. It is now my pleasure to turn today's conference over to Brian Glaze Chief accounting.
Sir Please go ahead Sir.
Thank you for joining us today for Stewart's third quarter 2023 earnings conference call. We will be discussing 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 the leaf through the conference call. This call.
This 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.
We're gonna call, we will discuss some non-GAAP measures for a reconciliation of these non-GAAP measures. Please refer to the appendix in today's earnings release, which is available on our website at Stewart Dot Com, Let me now turn the call over to Fred.
Thank you for joining us today for Stewart's third quarter 2023 earnings conference call.
Yesterday, we released financial results for the quarter and David will review these in a minute before doing so I'd like to update you on our view of the market and our continued progress on important initiatives that we believe will set Stewart up for long term success.
This quarter, we were proud to celebrate our 130 years in business as a pioneer in the title industry and also coming up on our 30 years as a listed company on the New York Stock Exchange.
These milestone milestones caused me to reflect on the last four years and looking back I see that we have made great strides in fundamentally improving stuart's operating and financial performance to better position ourselves for even more prosperous future.
Although the current economic at virus can she continues to post significant short term challenges, we have materially improved our business, creating a strong and resilient enterprise that will thrive over a full real estate cycle.
Even in light of the current economic environment, we continue to intensely focus on our journey to become the Premier title Service company.
We are managing through a challenging environment, where we believe mortgage rates will remain elevated into 'twenty 'twenty four.
Rates increased throughout the third quarter to around seven 5%, where they were previously in the high 6% range at the close of the second quarter higher mortgage rates continued to impact transaction volumes and we find ourselves at historic lows for sale of existing homes.
At an industry level, we are experienced historically low purchase volumes combined with low existing home listing inventory, which has kept pricing straw as we look forward. We see 2024 is a transition year to a more normal market in 'twenty five and believe the next six months will continue to be very challenging given the <unk>.
Pro economics laid on top of the typical seasonal impacts.
While we have significantly improved the underlying financial and operational performance of the company. There's more we can and will do and it is critical we remain focused on improving margins growth and resiliency through improved scale in attractive markets and enhancing our operational capabilities in.
In this challenging environment. It is easy to lose focus on achieving long career goals. However, I have been extremely pleased with the dedication we have shown and making progress on our enterprise initiatives during the third quarter and in our progress toward improving our long term performance.
Maintaining a strong financial position even in this current environment gives us flexibility to continue to pursue these investments and take advantage of opportunities as they arise.
We have continued to manage costs thoughtfully and have taken targeted cost actions, where appropriate we have been careful not to take actions. We felt with the threats are our competitive position and long term value, creating opportunities. We believe that the real estate cycle will begin to normalize later in 2024.
The best path forward for Stuart to get through this period is to continue investing in our people and remaining focused on our long term improvement plan I believe we have done a good job of balancing strong financial discipline with targeted investments and we will continue to be very diligent with our expense management during this difficult over the cycle.
Yeah.
We remain focused on enhancing our operating model investments in technology to enhance the customer experience and improve efficiency of our operations and building scale in targeted areas.
These strategic investments will cause our cost ratios to remain elevated in the market with low transaction volumes, but will set us up for better overall performance in the future. We believe that these long term investments coupled with thoughtful near term expense management.
Prove our structure and financial performance for the long term.
We routinely reevaluate markets in our direct operations, where we have the opportunity to increase share and enhance our leadership strength.
Given the market uncertainty, we've been more selective in our investment decisions to make sure. Our deployment of capital provides a long term returns and I believe we will maintain this conservative approach through the first half of 'twenty 'twenty four we made positive but the commercial market, even though we believe certain sectors. We are being challenged in the near term due to changing financial bar.
Sectors, such as energy remained strong for us, while we see ongoing challenges in sectors like office and multifamily properties.
Growth in all sectors of our commercial operations is an important component of our overall strategy and positions our commercial operations for growth across all business lines has been a key focus of our journey, we are making investments in talent. So that we have the leadership in place to achieve these objectives. We are investing in technology to support our commercial operations.
To allow us to better serve our customers and we believe our strategies will create long term growth in the commercial markets for us.
In our agency business.
We are leveraging our technology to drive market share gains both in this quarter and throughout the year, we have excellent progress on the deployment of technology and services that provide a significantly improved customer experience for our agents. This enhanced.
Parents includes greater connectivity ease of use and risk reduction for our agent partners. We are pleased that our platform of services for agents is as strong as it's ever been and we have become to see we've begun to see meaningful progress in our target markets, such as Florida, Pennsylvania, and the overall commercial market.
And real estate solutions, we are seeing share gains as we leveraged our improved portfolio of services to better and more deeply serve our lender clients. So while we are not immune to the market downturn. These businesses, we've been able to offset some of this with our share gains.
A significant portion of our investments is focused on improving our technology for the title production process automation and centralization to improve operational efficiencies and capabilities. Our investments have already resulted in significant progress to improving our customer experience across all channels. An example of this is what I just mentioned at our agency technology.
That book, which significantly Kansas enhances ease of use and connectivity with agents.
The other area of priority as we work to improve our operating efficiencies the centralization of Digitization of our title data.
We are pleased with the significant process progress we have made on this this year and in the boardroom production levels, we will see considerable improvement in our delivery costs.
We continue to integrate our acquired entities into production at other system. So this helps us to improve our overall customer experience that offers operating efficiencies that we've been building for the past several years integrating the rebating acquired companies is an important priority and we expect to complete the majority of our integration efforts by mid next year.
Improving our financial strength by growing margin has been a significant focus of our journey. We've made good progress with this effort. We are aware that returns remain depressed during this phase of the cycle. The investments I've mentioned, many of which are material have been implemented should allow us to achieve low double digit margins as we turn toward durable 5 billion.
I believe you did purchase Mark and specifically the initiatives that we prioritize this year should improve margin by about 200 basis points in a normal market.
While we are encouraged by improvements in talent and technology and customer experience and our financial model. We know that worked persists. The journey is not complete.
We remain focused on our strategic plan of building, an improved competitive position by being more efficient than having a disciplined operating model that functions well throughout all real estate cycles, we have emphasized growing scale in attractive markets across all our lines of business and we have made great strides at improving the customer experience at all our channels.
Retaining key talent is always important we've been even more focused on retaining tale to this market. So that we have the right team in place as the cycle improves our.
Our efforts are yielding results through increased year over year market share gains in each of our direct agency commercial and real estate service businesses.
Let me conclude by reiterating that we have been managing the balance of our expenses and investments thoughtfully to be mindful of necessary operating discipline for the current market challenges. While also remaining dedicated to strengthening Stewart's long term growth and performance.
Our solid financial footing should best position us to take advantage of the opportunities that this difficult cycle will provide.
Finally, I remain positive on the long term view of the real estate market and the ability of Stewart to be called the Premier title services company.
So states have worked diligently throughout these challenging times and I appreciate all they have accomplished.
I also want to thank our customers for their continued loyalty and support.
David will now update everyone of the results.
Good morning, everyone and thank you Fred.
Also like to thank our associates for their outstanding service and our customers for their continued support during the third quarter and through today. The real estate market continues to experience low housing inventory high mortgage rates and lower commercial and residential real estate activity contributing to lower third quarter operating results as compared.
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Third quarter last year yesterday Stewart reported third quarter net income of 14 million or 51 cents per diluted share on revenues of $602 million. Starting this quarter, we revised our presentation of consolidated non-GAAP measures relating to adjusted net income and adjusted.
EPS by excluding acquired intangible asset amortization from the calculation. This revised presentation that allows us to be consistent with how we present non-GAAP measures related to our title and real estate solutions segments. We don't believe this amortization is indicative of our operating performance.
After adjusting.
Justin for net realized and unrealized gains and losses acquired intangible asset amortization and other items detailed in appendix a of our press release adjusted net income for the third quarter was $24 million or 86 cents per diluted share compared to net income of $43 million or.
Dollar and 58 cents per diluted share in the third quarter 2022.
Regarding the title segment total revenues in the third quarter decreased to $126 million or 19%, while pretax income decreased by $16 million or 32% compared to the prior year quarter after adjustments for purchase intangible amortization and other items.
The segment's pretax income was $42 million or 8% margin compared to $65 million or 10% margin for the same quarter last year.
On our direct title business total opened and closed orders in the third quarter declined by seven and 10% respectively compared to last year, primarily due to the current real estate environment.
Commercial revenues decreased $9 million or 15%, primarily due to lower transaction volume while average commercial fee per file was approximately 14 point 14200 compared to 13700 from the prior year quarter.
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Domestic residential revenues declined 37 million or 18%, primarily due to lower purchase and refinancing volumes average residential fee per file in the third quarter was $3000 or 10% lower than last year's quarter.
Due to lower purchase mix.
Total international operating revenues decreased $5 million or 12%, primarily as a result of lower transaction volumes at our Canadian operations.
Given the lower commercial and residential activity in the market third quarter revenues from our agency operations decreased 75 million or 22% compared to the third quarter last year, while the average remittance rate was roughly comparable.
Regarding title losses total title loss expense in the quarter declined by $3 million or 13%, primarily due to lower title revenues as a percent upside of revenues third quarter title loss expense was four 3% compared to 3.9% in last year's quarter, which bear.
Fitted from favorable claims experience for the full year 2023, we still expect title losses to average in the low 4% of title revenues.
Related to the real estate solutions segment third quarter pretax income was $2 6 million compared to $3 4 million last year, primarily driven by a slight dip in revenues as strength in our credit related data businesses helped offset other transactional businesses pre tax margin.
Three 8% compared to four 8% in the third quarter 2022, after adjusting for purchase intangible amortization.
Adjusted pretax margin was 13% similar to the prior year quarter.
Our consolidated operating expenses are employee cost ratio was 31% in the third quarter compared to 27% last year, primarily as a result of lower operating revenues lower operating revenues also resulted in slightly higher other operating expense ratio of 22%.
Paired with 21% last year on taxes, our third quarter income tax expense was higher than our normal tax rate of 24% primarily due to additional tax expense, resulting from lower utilization of foreign tax credits as we completed and filed our federal tax return the impact.
This true up on EPS was roughly 13 cents per share we do expect our tax rate to return to historical levels.
Operator: Your program is about to begin. If you need assistance during the conference today, please press star zero.
On other matters, we continue to have a solid financial position to support our customers associates and the real estate market at the end of the third quarter. Our total cash and investments were approximately 380 million over statutory premium reserve requirements and we also have a fully available 200 million.
Operator: Hello, and thank you for joining the Stewart Information Services 3rd quarter, 2023 earnings call. At this time, all participants are in a listen-only mode. Later, you will have the 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 should require operator assistance, again, please press star zero.
All our line of credit facility total stockholders' equity attributable to Stewart at September 30th 2023 was approximately 1.35 billion with a book value of approximately $49 per share.
Brian Glaze: It is now my pleasure to turn today's conference over to Brian Glaze, Chief Accounting Officer. Please go ahead, sir. Thank you for joining us today for Stewart's third quarter 2023 earnings conference call. We will be discussing results that were released yesterday after the close. Joining me today are CEO Fred Eppinger and CFO David Hisey. To listen online, please go to the steward.com website to access the link to this conference call. This conference call may contain forward looking statements that involve a number of risks and uncertainties.
Lastly, net cash provided by operations in the third quarter was $60 million compared to $49 million during the prior year quarter, primarily due to lower claims and accounts payable payments.
Partially offset by lower net income.
We appreciate our customers and associates and remain confident in our support of the real estate markets I'll now turn it back to the operator for questions.
Brian Glaze: Please refer to the company's press release and other filings with the SEC for a discussion of the risk and uncertainties that could cause our actual results to differ materially. During our call, we will discuss some non-gap measures. For reconciliation of these non-gap measures, please refer to the appendix and today's earnings release, which is available on our website at steward.com.
Thank you at this time, if you would like to ask a question. Please press star one on your telephone keypad.
You may remove yourself from the queue at any time by pressing star keel. Once again that is star one to ask a question.
We will pause for a moment to allow questions to queue.
Thank you. Our first question will come from Bose, George with <unk> W. Your line is now open.
Fred Eppinger: Let me now turn the call over to Fred. Thank you for joining us today for Stewart's third quarter 2023 earnings conference call. Yesterday, we released financial results for the quarter and David will review these in a minute.
Morning boat.
Good morning can you give us an updated thoughts on your margin expectations for the next 12 to 18 months and just given your comments on 2020 for being a transition year. It was 2025, when we should think about a more normalized but at a double digit margin.
Fred Eppinger: Before doing so, I'd like to update you on our view of the market and our continued progress on important initiatives that we believe will set steward up for long-term success. This quarter, we are proud to celebrate 130 years in business as a pioneer in the title industry and also coming up on our 30 years as a listed company on the New York Stock Exchange. These milestones caused me to reflect on the last four years and looking back, I see that we have made great strides in fundamentally improving Stewart's operating and financial performance to better position ourselves for even more prosperous future.
Yeah. Thanks for the question. So that's exactly right. So if you remember at the beginning when I first got here, we talked about targeting high single digits double I think in about 'twenty to 'twenty. One we achieved that obviously 'twenty one outperformed because it was excess volume, but at a $5 million kind of unit purchase market I think we were in that.
905, 10 range. What's happened is we've done good work and I think we're now at the 11 have 12 margin.
Fred Eppinger: Although the current economic environment continues to pose significant short-term challenges, we have materially improved our business, creating a strong and resilient enterprise that will thrive over a full-wheeled state cycle. Even in light of the current economic environment, we continue to intensely focus on our journey to become the premier title service company. We are managing through a challenging environment where we believe mortgage rates will remain elevated into 2024. Rates increased throughout the third quarter to around 7.5%, where previously in the high 6% range at the close of the second quarter.
Margin range. When you are in that 5 million units.
Range, because we've done a lot of work the problem is obviously as the volume is so depressed now think about it as we have excess capacity and we cant really extract all that March so my.
My view is that 25 is like our point of view. If you look at forecast 25 is what we get back to that $5 billion kind of range and so that's where I think we'll you'll see our margins get better I think about the next two quarters is quite difficult.
Given where we are and where volumes are obviously with the spike we saw in rates.
Fred Eppinger: Higher mortgage rates continue to impact transaction volumes and we find ourselves at historic lows for sale of existing homes. At an industry level, we are experiencing historically low purchase volumes combined with low existing home listing inventory, which has kept pricing strong.
We're kind of still worse than the previous year, although that comes together as you know because last year at this time things started really cratering and.
So that'll come together a little bit.
To the first quarter, but.
So it's like a journey from here kind of kind of that first quarter through the transition and in next year, particularly second half of next year towards a more normal market at 25.
Fred Eppinger: As we look forward, we see 2024 as a transition year to a more normal market in 25 and believe the next six months will continue to be very challenging, given the macro-economics laid on top of the typical seasonal impacts. While we have significantly improved the underlying financial and operational performance of the company, there is more we can and will do, and it is critical we remain focused on improving margins, growth and resiliency through improved scale and attractive markets and enhancing our operational capabilities.
And again, we're not saying that I think I would say because we're not where there's other things. We're working on two other things to improve ourselves and we're not sitting on our hands, but right now you have pretty good transparency to that.
That's helpful. Thanks, a lot and then investment income that was up again pretty nicely this quarter.
Can you just talk about sort of the trajectory for that is is it is this quarter, a reasonable run rate or could that continue to trend up.
Right.
Fred Eppinger: In this challenging environment, it is easy to focus on achieving low curve goals. However, I am extremely pleased with the dedication we have shown in making progress on our enterprise initiatives during the third quarter and in our progress toward improving our long-term performance.
Yeah Bose I think as we talked about it in the last quarter. That's why we were really putting the escrow has to work and I think we had said that's about $2 million a month, which is what it remains and so you saw the full effect of that hit in the third quarter and then you saw a little bit of an uptick on the general investment income I think just mainly due.
Fred Eppinger: Conference. Maintaining a strong financial position, even in this current environment, is this flexibility to continue to pursue these investments and take advantage of opportunities as they arise. And the best path forward for Stewart to get through this period is to continue investing in our people and remaining focused on our long term improvement plan. I believe we have done a good job of balancing strong financial discipline with targeted investments and we will continue to be very diligent with our expense management during this difficult moment in the cycle.
The more favorable rate environment. So yeah, I would say that this is a pretty good run rate, where we stand now although the obviously it is also affected by the float right. Yeah. I mean, if if if balances if volumes were to continue to go down meaningfully you could have a negative impact on balances and that could change it a lot.
But the offset is we might be able to get a little bit higher rate, but but balances could could cause it to dip a little but I'd say as it stands it's a decent run rate.
Okay, great. Thank you.
Thank you. Our next question comes from Soham Bonzo with B T. J. Your line is now open.
Hey, guys. Good morning, Greg Good morning, how are you doing well I.
Fred Eppinger: We remain focused on enhancing our operating model, investments in technology to enhance the customer experience and improve efficiency of our operations and building scale and targeted areas. These strategic investments will cause our costs ratios to remain elevated in a market with low transaction volumes, but will set us up for better overall performance in the future. We believe that these long term investments coupled with thoughtful near term expense management will improve our structure and financial performance in the long term.
I guess just to start with.
With the move in rates recently I was just wondering where orders are sort of trending through October I think September was down 8% year over year. So just just sort of wondering on the run rate there now.
Yes, if rates have affected or accounts.
And so look I would I would describe it as a little bit of a shock to the system.
And so what you saw at the tail end of this quarter. They started dipping and that has continued.
Fred Eppinger: We routinely reevaluate markets in our direct operations where we have the opportunity to increase share and enhance our leadership strength. Given the market uncertainty, we have been more selective in our investment decisions to make sure our deployment of capital provides long term returns. And I believe we will maintain this conservative approach through the first half of 2024. We may positive on the commercial market, even though we believe certain sectors remain challenged in the near term due to changing financial markets.
Into this quarter.
And so as I mentioned, a couple of seconds ago I think the.
If you remember last year, a shock started about now and.
And it really started dropping towards the end of the year.
Were still below last year in the fourth quarter and so we are decreasing we're still below but I think that will come together a little bit toward the end of the year because last year went.
Went down so much.
Fred Eppinger: Sector such as energy remains strong for us while we see ongoing challenges in sectors like office and multifamily properties. Growth in all sectors of our commercial operations is an important component of our overall strategy. And positions our commercial operations for growth across all business lines has been a key focus of our journey. We are making investments in talent so that we have the leadership in place to achieve these objectives. We are investing in technology to support our commercial operations to allow us to better serve our customers.
But it's it's.
There was an impact to what happened in the last three weeks for sure.
So does that mean, we're sort of above or below that sort of 8%.
I get that the comps are going to get easier right.
Sort of flattish is the way to think about it then.
So flash against what I'm, saying, it's continue down.
Again, we've got both the seasonal impact and you've got the impact of rates so the fourth quarter.
Fred Eppinger: And we believe our strategies will create long term growth in the commercial markets for us. In our agency business, we are leveraging our technology to drive market share gains. Both in this quarter and throughout the year we have excellent progress on the deployment of technology and services that provide a significantly improved customer experience for our agents. This enhanced experience includes greater connectivity, ease of use, and risk reduction for our agent partners.
Orders are going to move down again.
Okay Alright.
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I think I understand okay.
Then I guess on market share you know I'm just curious on some of the drivers there it looks like refi Cherry picked up quite a bit and there was also a bit on purchase so Frank can you maybe just walk through what youre seeing on the ground and maybe who you think you're taking the share from sure so each of our businesses.
Fred Eppinger: We are pleased that our platform of services for agencies has strong as it's ever been. And we have begun to see meaningful progress in our target markets such as Florida, Pennsylvania, and the overall commercial market. In real estate solutions, we are seeing share gains as we've leveraged our improved portfolio of services to better and more deeply serve our leader clients. So while we are not immune to the market downturn of these businesses, we've been able to offset some of this with our share gains.
I have been positioned for growth right. So.
In agency, we were just up until about 15 months ago right. We were meaningfully behind on ease of use and integrations that caught up so theres 14 states in particular that we have targeted and we're starting to get good traction and a lot of them as we introduce we kind of reintroduce ourselves.
To agents or gain shelf space, maybe we have 5% share with them and now we go to Ted So what's happening is as we reintroduce ourselves to agents with a little bit better value proposition and we appointed new agents, we're getting nice share shift.
Fred Eppinger: A significant part of our investments is focused on improving our technology for the title production process automation and centralization to improve operational efficiencies and capabilities. Our investments have already resulted in significant progress to improving our customer experience across all channels. An example of this is the one I just mentioned in our agency technology platform which significantly enhances ease of use and connectivity with A, and other areas of priority as we work to improve our operating efficiency as a centralization and digitization of our title data.
And again its hard work and it's one at a time and I think we're in early innings of that but it's been I think six quarters or so where we've seen increases of share. The other thing thats a little unique about us is that we have as a percent less refi and some of the competitors and so as that market became more of a purchase market that helped us as well.
Fred Eppinger: We are pleased with the significant process progress we have made on this this year, and in the more normal production levels, we will see considerable improvement in our delivery costs. We continue to integrate our acquired entities into production and other systems. This helps us to improve our overall customer experience and offers operating efficiencies that we've been building loaded for the past several years.
But.
That's the story in agency and indirect it assets. It's essentially we're a lot better talent wise than we were two years ago. We did a bunch of acquisitions in core Kemet key msas and while the markets are bad we're better in many markets 30, or 40 markets and so we're holding our own.
Fred Eppinger: Integrating the remaining acquired companies is an important priority and we expect the complete majority of our integration efforts by mid next year. Improving our financial strength by growing margin has been the significant focus of our journey. We have made good progress on this effort and we are aware that returns remain depressed during this phase of the cycle. The investments I've mentioned, many of which have material have been implemented, should allow us to achieve low double digit margins as we turn toward normal $5 million, 5 million unit purchase market.
And we're actually winning a little bit there too I think that will get better as we as the market gets more normal and we get get to go back to buy more agencies, but right now, we're holding our own and getting a little bit because I think of the capabilities and skills in the markets. We had we were at call it one or the lender business.
Fred Eppinger: And specifically, the initiatives that we prioritize this year should improve margin by about 200 basis points in a normal market. While we are encouraged by improvements in talent to the technology and customer experience and our financial model, we know that work persists that the journey is not complete. We may focus on a strategic plan of building an improved competitive position by being more efficient and having disciplined operating model that functions well throughout all real estate cycles.
We just again it's been.
Really less than a year that we had a full portfolio of these products and services assembled and so what's happening. There is we're able to cross sell and deepen our relationship with a lot of these lenders because we have a broader portfolio and what's interesting is lender because we weren't in the top four before we were only about $30 million of revenue. When we started this journey so that has grown too.
$300 million business. So our positioning there is so much better so I see that kind of organically continuing as we become a legitimate alternative to the two big guys.
And then finally commercial that is also very organic so what we've done there is we've done a lot of the key markets we've done a lot.
Fred Eppinger: We have emphasized growing scale and attracted markets across all our lines of business and we have made great strides at improving the customer experience in all our channels. Retaining key talent is always important and we've been even more focused on retaining talent through this market so that we have the right team in place as the cycle improves. Our efforts are yielding results to increase the year-over-year marketer gains in each of our direct agency, commercial and real estate service businesses.
Hires in direct and that smaller commercial we've also done the same thing we pick the markets that we were interested in and we've made some investments as well there. The other thing that's interesting in commercial the market's obviously way down but one of our real strengths is energy and energy is up right. So if you look at it.
Energy was probably 13% of our business last year, it's probably 25% of our business now so we have a benefit of having a resilient mix because of our because of our areas of expertise, but we've also invested quite a bit.
Fred Eppinger: Let me conclude by reiterating that we have been managing the balance of our expenses and investments thoughtfully to be mindful of necessary and operating discipline for the current market challenges while also remaining dedicated to strengthening Stuart's long-term growth and performance. Our solid financial footing should best position us to take advantage of the opportunities that this difficult cycle will provide. Finally, I remain positive on the long-term view of the real estate market and the ability of Stuart to become the premier title services company. Our associates have worked diligently throughout these challenging times and I appreciate all they have accomplished. And I also want to thank our customers for their continued loyalty and support.
Commercial so again all of these businesses my view is over the long haul.
We're set up to gain share in that as the market comes back.
That's actually going to be more robust.
Because again it down markets people are a little bit reluctant to change allegiances.
So I think it's going to only get better if we can stay focused and make sure we keep enhancing kind of our value proposition.
I'm happy with the effort of the team, we where it gets a tough thing we're balancing really.
Thoughtful expense management, but also trying to be targeted on our investments to make sure we keep improving and it's it's it's showing some progress which is good.
Operator: We will now update everyone for the results.
David Hisey: Good morning everyone and thank you Fred. I would also like to thank our associates for their outstanding service and our customers for their continued support. During the third quarter and through today, the real estate market continues to experience low housing inventory, high mortgage rates, and lower commercial and residential real estate activity, contributing to lower third quarter operating results as compared to the third quarter last year.
Yes, no that's great to hear and then just one more I guess on commercial I'm wondering on the on the fee per file side. It was stronger than what your peer reported. This morning. So just can you just talk about the drivers is it the energy piece that you're talking about and then how.
How do you sort of see the fourth quarter about being here, yes. So just as a caution for us were not huge right. So it's very lumpy.
David Hisey: Yesterday, Stuart reported third quarter net income of 14 million or 51 cents per diluted share on revenues of 602 million. Starting this quarter, we revised our presentation of consolidated non-gap measures relating to adjusted net income and adjusted EPS by excluding acquired intangible asset amortization from the calculation. This revised presentation allows us to be consistent with how we present non-gap measures related to our title and real estate solution segments. We don't believe this amortization is indicative of our operating performance.
Based on what mix closes, but your insight is right. So if you look at some of the energy deals.
Large that drove some of that.
So again.
Alright.
Tend to be a little lumpy on that on the size because of just we just don't we're not that big so three deals can barely matter.
Yeah.
But again it.
As I look forward, it's a tough market right commercials down pretty significantly it's probably down if you look at industry data, probably 40, 50%, we're down less than that because we're being a little successful, but it is a down market and it will continue to be what's weird about commercial that's a little bit in my view something that we have to.
David Hisey: After adjusting for net realized and unrealized gains and losses acquired intangible asset amortization and other items detailed in appendix A of our press release, adjusted net income for the third quarter was 24 million or 86 cents per diluted share compared to net income of 43 million or $1.58 cents per diluted share in the third quarter 2022. Regarding the title segment, total revenues in the third quarter decreased to 126 million or 19 percent while pre-tax income decreased by 16 million or 32 percent compared to the prior year quarter.
Understand.
Would you stay at the risk so it tends to have a lot of closings in December.
And we have a lot of business that we have a lot of stuff in the pipe.
Files, but with this market uncertainty.
Good.
Percent close at the end of the year and so that's the one thing I'm watching.
Again, we've got lots of pipe, we've got lots of activity.
But it's a weird business where December by far is always our biggest month.
So we're obviously got a focus on that and we'll see how it turns up but in general I'm very comfortable with how we're attacking the market.
David Hisey: After adjustments for purchase and tangible amortization and other items, the segments pre-tax income was 42 million or 8 percent margin compared to 65 million or 10 percent margin for the same quarter last year. On our direct title business, total opened and closed orders in the third quarter declined by 7 and 10 percent respectively compared to last year primarily due to the current real estate environment. Domestic commercial revenues decreased 9 million or 15 percent primarily due to lower transaction volume while average commercial fee for file was approximately 14,000 to 100 compared to 13,700 from the prior year quarter.
Great. Thanks, a lot when the color guys.
Okay.
Once again, if you'd like to ask a question. Please press star one to join the queue. Our next question will come from John Campbell with Stephens, Inc. Your line is now open.
Hey, Jonathan Good morning, Jonathan.
Hey, I just wanted to check maybe on the other orders I mean, I think you had a it was over 100% sequential increase so pretty big step up there, hoping you can maybe help with the modeling there I think David in the past you've said that that that's not going to be two seasonal that won't really mirrored the purchase seasonality, but I'm curious about how to how to model that going forward.
And also if you could maybe help with the average fee per file of the other orders.
Yeah, No John I mean, that's that's where the the.
The home equity stuff in the institutional.
David Hisey: Domestic residential revenues declined 37 million or 18 percent primarily due to lower purchase and refinancing volumes. Average residential fee for file on the third quarter was $3,000 or 10 percent lower than last year's quarter due to lower purchase mix. Total international operating revenues decreased 5 million or 12 percent primarily as a result of lower transaction volumes that are Canadian operations. Given the lower commercial and residential activity in the market, third quarter revenues from our agency operations decreased 75 million or 22 percent compared to third quarter last year while the average remittance rate was roughly comparable.
Real estate business that we acquired at the end of last year, that's where those orders.
Go.
There, particularly the institutional real estate is a bit lumpy because it's all a function of the ball purchases in that securitization.
In terms of the average fee per file the reverse stuff tends to be more of like a purchase transaction and then some of the institutional stuff. When you buy the deal it's like a purchase transaction, but then the securitization tends to look more like a refi transaction and so it's.
It's pretty lumpy I would say.
Fee per file is probably going to be a little closer to.
David Hisey: Regarding title losses, total title loss expense in the quarter declined by 3 million or 13 percent primarily due to lower title revenues. As a percent of title revenues, third quarter title loss expense was 4.3 percent compared to 3.9 percent in last year's quarter which benefited from favorable claims experience. For the four year 2023, we still expect title losses to average in the low 4 percent of title revenues. Related to the real estate solution segment, third quarter pretax income was 2.6 million compared to 3.4 million last year, primarily driven by a slight dip in revenues as strength in our credit-related data businesses help offset other transactional businesses.
To purchase just because it's probably more heavily weighted bulk acquisition and then reverse.
But timing of Securitizations can sway that quite a bit.
Okay, how would you suggest maybe.
I get the lump the lumpiness, but it seemed like pretty steadily each month in the quarter we reported.
A fair amount higher than what <unk> seen on average last couple of quarters, but how should we think about modeling that I mean do you see just kind of continued momentum and then may be taking that down next year.
Yeah, I mean, you have to think about those individual markets and so if you think about reverse.
Last fall it was a little choppy because you had the capital markets issues and so securitizations work getting done as much but that's recovered and then there's also you know if you.
David Hisey: Pretax margin was 3.8% compared to 4.8% in the third quarter 2022. After adjusting for purchase and tangible amortization, adjusted pretax margin was 13% similar to the prior year quarter. On our consolidated operating expenses, our employee cost ratio was 31% in the third quarter compared to 27% last year, primarily as a result of lower operating revenues, lower operating revenues also resulted in slightly higher other operating expense ratio of 22% compared to 21% last year.
Myeloma test is if you watch the for the Tom Selleck commercials. When you see him on a lot that usually means reverse is doing pretty well, but when you don't see them.
Very good and we have seen les.
Lately.
Because I think that market has continued to come back on the institutional side is.
Still pretty choppy I mean, it's if you just think about the Brent price derived ratio and stuff like that it's pretty choppy I mean, my sense is that would continue to get better over time, but it's probably a slower recovery.
Okay. It makes sense and then just a two part question on the tax rate I mean, the 33% it sounds like that was the lower foreign tax credits.
David Hisey: On taxes, our third quarter income tax expense was higher than our normal tax rate of 24%, primarily due to additional tax expenses resulting from lower utilization of foreign tax credits as we completed and filed our federal tax return. The impact of this true up on EPS was roughly 13 cents per share. We do expect our tax rate to return to historical levels.
First from a GAAP standpoint, I think that was like a nine or maybe 10 cent EPS drag for you guys. It doesn't look like you added that back to your.
Adjusted EPS metric, so I guess first is that right.
Yeah, we did not.
We tend not to focus as much on the tax stuff, but if you were to normalize it youre right. It would it would be a big impact like you said.
David Hisey: On other matters, we continue to have a solid financial position to support our customers, associates in the real estate market. At the end of the third quarter, our total cash and investment through approximately 380 million over statutory premium reserve requirements. And we also have a fully available $200 million wine and credit facility. Total stockholders equity attributable to Stuart at September 30, 2023 was approximately 1.35 billion, with a book value of approximately $49 per share.
Okay. That's helpful and then secondly it.
It sounds like Youre viewing that you know the lower for foreign tax credit of a one time event, David just want to make sure you reiterate that.
The expectation that that's going to normalize moving forward.
No that's right I did say in my script that we expect the tax rate to come back to the to what it's been historically and we have had some lumpy periods. It just hasn't been as is evident.
Where we probably had two $3 million similar type of adjustments. It's just since we had a lower income base, it's more pronounced this quarter.
David Hisey: Lastly, net cash provided by operations in the third quarter was 60 million compared to 49 million during the prior year quarter, primarily due to lower claims and accounts payable payments partially offset by lower net income. We appreciate our customers and associates and remain confident in our support of the real estate markets.
Okay that makes sense. Thanks for the time guys.
Thank you I appreciate it John.
Thank you. This does conclude today's Q&A I'll now turn the call back over to our presenters for any additional or closing remarks.
Thank everybody for the interest in joining our call. Thank you very much I appreciate it.
Operator: 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 star one on your telephone keypad. You may remove yourself from the queue at any time by pressing star two. Once again, that is star one to ask a question. We will pause for a moment to allow questions to queue. Thank you.
Thank you ladies and gentlemen. This concludes today's event you may now disconnect.
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Okay.
Bose George: Our first question will come from both George with KBW.
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Fred Eppinger: Your line is not open. Morning, Bo. Good morning. Can you give us an updated thoughts on your margin expectations, yes, like for the next 12 to 18 months? And just given your comments on 2024 being a transition year, you know, is 2025 when, you know, we should think about it more normalized, whatever double visit margin. Yeah, Bo. Thanks for the question. So that's exactly right. So if you remember at the beginning, when I first got here, we talked about targeting high single digits double.
Oh, Oh Oh.
Oh.
Fred Eppinger: I think in about 20 to 21, we achieved that. Obviously, 21 outperformed because it was excess volume. But at a 5 million kind of unit purchase market, I think we were in that, you know, 9.5, 10 range. What's happened is we've done good work. And I think we're now in the 11.5, 12, margin range when you're in that 5 million units range because we've done a lot of work. The problem is obviously is the volume is so depressed now.
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Okay.
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Fred Eppinger: Think about it as we have excess capacity and we can't really extract all that margin. So my view is that 25 is like our point of view, whether you look at forecasts, 25 is when we get back to that 5 million kind of range. And so that's where I think you'll see margins get better. I think about the next two quarters is quite difficult given where we are and where volumes are, obviously with a spike.
Fred Eppinger: So we saw in rates where kind of still worse than the previous year, although that comes together as you know, because last year at this time things started really cratering. And so that'll come together a little bit into the first quarter. But so it's like a journey from here kind of that first quarter through the transition and next year, particularly a second half and next year towards a more normal and 25.
Fred Eppinger: And again, we're not, we're not, we're not, there's other things we're working on too, there's other things to improve ourselves, and we're not sitting on our hands, but right now you have a pretty good transparency to that.
Bose George: Yes, that's helpful. Thanks a lot.
David Hisey: And then, for Sean Investment income, that was, again, pretty nicely this quarter. Can you just talk about, you know, sort of the trajectory for that is, is this quarter of a reasonable run rate or could that continue to trend up, you know, with rate? Yeah, Bose, as we talked about in the last quarter, that's when we were really putting the escrow to work. And I think we had said that's about 2 million a month, which is what it remains.
David Hisey: And so you saw the full effect of that hit in the third quarter. And then you saw a little bit of an uptick on the general investment income. I think just mainly due to the, the more favorable rate environment. So yeah, I would say that this is a pretty good run rate where we stand now. Although, obviously, it's also affected by the flow rate. Yeah, I mean, if, if the, if balance is, if, you know, volumes were a continue to go down, meaningfully, you could have a negative impact on balances and that could change it a little bit. The offset is we might be able to get a little bit higher rate, but, but balances could cause it to dip a little, but I'd say as it stands, it's a decent run rate.
Bose George: Okay, great. Thank you.
Soham Bhonsle: Thank you, our next question comes from Soham Bonzell with B.T. ID through mine is now open. Hey guys, so morning. Good morning. Good morning, well. I guess just to start with with the moving rates recently, was just wondering where orders are sort of trending through October. I think September is down sort of 8% year of a year, so just sort of wondering on the bond rate there now. Yeah, the rates have affected or accounts.
Soham Bhonsle: And so it would look, I would describe it as a little bit of a shock to the system. And so what you saw at the tail end of this quarter, they started dipping and that is continued into this quarter. And so as I mentioned a couple seconds ago, I think the four, you know, if you remember last year, the shock started about now. And, and it really started dropping toward the end of the year.
Soham Bhonsle: So we're still below last year in the fourth quarter. And so we have decreasing we're still below, but I think that'll come together a little bit toward the end of the year because last year went down so much. But it's, you know, there's an impact. So what happened in the last three weeks? So does that mean we're sort of above or below that sort of 8% I get that the comps are going to get easier, right?
Soham Bhonsle: But sort of flat-ish is the way to think about it then. I'm surprised she gets what so I'm saying it's continued down. It's had to get both the seasonal impact and you got the impact of rates. So the fourth quarter of orders are going to move down again. Okay, all right. Okay, I think I understand. Okay. And then I guess on on market share, you know, I'm just curious on some of the drivers there looks like we five shared picked up quite a bit and there was also a bit on purchase.
Soham Bhonsle: So if I can maybe just walk through what you're seeing on the ground and maybe who you think you're taking the share from. Sure. So each of our businesses are by the position for growth, right? So in agency we were just up until about 15 months ago, right? We were immediately behind on ease of use and integrations. That caught up. So there's 14 states that in particular that we have targeted. And we're starting to get good traction in the lot of them.
Soham Bhonsle: As we introduce, we kind of reintroduce ourselves to agents or gain shelf space. You know, maybe we have 5% share with them. And now we go to 10. So what's happening is as we reintroduce ourselves to agents with a little bit better vibe proposition. And we appoint some new agents. We're getting nice share shift. And again, it's hard work. And it's one of the time. And I think we're early innings of that.
Soham Bhonsle: But it's been I think six quarters or so where we've seen increases of share. The other thing that's a little unique about us is that we have as a percent less refined in some of the competitors. And so as that market became more of a purchase market, that helped us as well. But that's the story and agency in direct. But in essence, it's essentially we're a lot better talent-wise than we were two years ago.
Soham Bhonsle: We did a bunch of acquisitions in poor chemical MSAs. And while the markets are bad, we're better in many markets, 30 to 40 markets. And so we're holding our own and we're actually winning a little bit there too. I think that will get better as we get the market to get more normal. And we'll go back to buying more agencies. But right now we're holding our own and getting a little bit because I think of the capabilities of skills in the markets we were in.
Soham Bhonsle: On the lender business, we just, again, it's been really less than a year than we had a full portfolio of these products and services assembled. And so what's happening there is we're able to cross out and deepen our relationship with a lot of these lenders because we have a broader portfolio. And what's interesting is lender is we worked at the top four before. We were only about $30 million a revenue when we started the journey.
Soham Bhonsle: So that has grown to a, you know, $30 million business. So our positioning there is so much better. So I see that kind of organically continuing as we become a legitimate alternative to the two big guys. And then finally commercial that is also very organic. So what we've been there is we've done a lot of in the key markets. We've done a lot of fires in direct and that small commercial. We've also done the same thing.
Soham Bhonsle: We've picked the markets that we were interested in. We've made to the investments as well there. The other thing that's interesting in commercial, the markets obviously weigh down. But one of our real strengths is energy and energy is up, right? So if you look at. Energy was probably 13% of our business last year, it's probably 25% of our business now. So we have a benefit of having a resilient mix because of our areas of expertise, but we've also invested quite a bit in commercial.
Soham Bhonsle: So again, all of these businesses, my view is over the long haul, we're set up to gain share and as the market comes back, I think that's actually going to be more robust, because again, when it down markets, people are a little bit reluctant to change a lot, the legacies. And so I think it's going to only get better if we can stay focused and make sure we keep enhancing kind of our value proposition, but I'm happy with the effort of the team, we're, we're, we're, it's a tough thing, you know, we're balancing really thoughtful expense management, but also trying to be targeted on our investments to make sure we keep improving, and it's, it's, it's showing some progress, which is good.
Soham Bhonsle: Yeah, no, that's great to hear. And just one more, I guess, on commercial, I'm wondering on the on the fee per file side, it was stronger than what's so, you know, your peer reported this morning. So can you just talk about the drivers, is it the energy piece that you're talking about, and then how do you sort of see the fourth quarter developing here? Yeah, so yeah, just a caution for us, we're not huge, right?
Soham Bhonsle: So it's very lumpy based on what Nick closes, but your insight is right. So if you look at some of the energy deals that were quite large, that drove some of that. So again, but it's, we're, we tend to be a little lumpy on that on the size because of this, you know, just we just don't, we're not that big, so three deals can really matter. But again, it, as I look forward at the tough market, right, commercials down pretty significantly, it's probably down, if you look at industry data, probably 40, 50%.
Soham Bhonsle: We're down less than that because we're being a little successful, but it's a down market and it will continue to be what's weird about commercial that's a little bit, in my view, something that we have to, you know, understand and understand the risk. So it tends to have a lot of closings in December, and we have a lot of business and we have a lot of stuff in the pipe and we have a lot of files, but with this market uncertainty, you know, could a different percent close at the end of the year.
Soham Bhonsle: And so that's the one thing I'm watching, because again, we've got lots of pipe, we've got lots of activity, but it's a weird business where you, December my far is always our biggest month, and so, you know, we're obviously got to focus on that. We'll see how it turns up, but in general, I'm very comfortable with power attack in the market. Thanks a lot for the call, guys. Once again, if you'd like to ask a question, please press star one to join the queue.
John Campbell: Our next question will come from John Campbell with Steven's ink. Your line is now open. Hey, John. Good morning, John. Hey, I just want to check maybe on the other orders. I mean, I think you had a, it was over 100% sequential increase. So pretty big step up there. I hope you can maybe help with the modeling there. I think David in the past, you said that that that's not going to be too seasonal.
John Campbell: That won't really mirror the, you know, the purchase seasonality. But I'm curious about how to, how to model that going forward and then also if you can maybe help with the average fee per file of the other orders. Yeah, John. I mean, that's where the home equity stuff and the institutional real estate business that we acquired at the end of last year. That's where those orders go. You know, their particularly the institutional real estate is a bit lumpy because it's all a function of, you know, all purchases and then securitizations.
John Campbell: In terms of the average fee profile, the reverse stuff tends to be more like a purchase transaction. And then some of the institutional stuff when you buy the deal, it's like a purchase transaction, but then the securitization tends to look more like a refi transaction. And so it's pretty lumpy. I would say, you know, fee profiles probably going to be a little closer to purchase just because it's probably more heavily weighted bulk acquisition and then reverse, but timing of securitizations can sway that quite a bit.
John Campbell: Okay, how would you suggest maybe? I mean, I get the lumpiness, but it seemed like, you know, pretty steadily every month in the quarter reported, you know, a fair amount higher than what you've seen, you know, average less couple quarters, but how should we think about modeling that? I mean, do you see just kind of continue momentum and then maybe taking that down next year? Yeah, I mean, you have to think about those individual markets.
John Campbell: And so if you think about reverse, you know, last fall, it was a little choppy because you had the capital markets issues and, and so securitizations weren't getting done as much, but that's recovered. And then there's also been, you know, if you, my list of test is if you watch the, for the Tom Sellett commercials, when you see him on a lot, that usually means reverse is doing pretty well. But when you don't see him, it's not doing very good, but and we have seen Tom lately, because I think that markets continue to come back.
John Campbell: The institutional side is still pretty choppy. I mean, it's, you know, there, if you just think about the rent, price to rent ratio and stuff like that, it's pretty choppy. I mean, my sense is that would continue to get better over time, but it's probably a slower recovery. Okay, make sense.
John Campbell: And then just a two-part question on the tax rate. I mean, the 33%, it sounds like that was the lower foreign tax credits. But first, from a gap standpoint, I think that was like a nine or maybe 10 cent EPS drag, but you guys, it doesn't look like you added that back to your, the reported adjusted EPS metric. So I guess first is that right? Yeah, we did not. We, realize that you're right.
John Campbell: It would, it would be a big impact, like you said. Okay, that's helpful. And then secondly, it sounds like you're viewing that, you know, the lower foreign tax credits at one time of that. David just want to make sure you reiterate that that expectation that that's going to normalize moving forward. No, that's right. I did say my script that we expect the tax rate to come back to the, to what it's been historically.
John Campbell: We have had some lumpy periods. It just hasn't been as, as evident where we probably had two three million dollar similar type adjustments. It's just, since we had a lower income base, it's more pronounced as quarter. Thanks for the time, guys. Thank you. Appreciate it, John. Thank you.
Operator: The steps conclude today's Q&A. I'll now turn the call back over to our presenters for any additional or closing remarks. Well, I want to thank everybody for the interest in joining our call. Thank you very much. Appreciate it. Thank you, ladies and gentlemen. This concludes today's event. You may now disconnect.