Q3 2024 Stewart Information Services Corp Earnings Call

Operator: Hello, and thank you for joining the Stewart Information Services 3rd quarter of 2024 earnings call. At this time, all participants are in a listen-only mode. Later, you will have an opportunity to ask a question during the question-and-answer session. Instructions will be given at that time.

Hello, and thank you for joining the Stewart information Services' third quarter 2024 earnings call. At this time, all participants are in a listen only mode.

Speaker Change: Later, you will have an opportunity to ask a question during the question and answer session and instructions will be given at that time. Please note that today's call is being recorded lastly, if you should require operator assistance. Please press star zero. It is now my pleasure to turn today's conference over to Cat bass director of Investor Relations. Please go ahead.

Operator: Please note that today's call is being recorded. Lastly, if you should require operator assistance, please press star zero.

Kathryn Bass: It is now my pleasure to turn today's conference over to Kat Bass, Director of Investor Relations. Please go ahead. Thank you for joining us today for Stewart's 3rd quarter of 2024 earnings conference call. We will be discussing results that will release yesterday after the close.

Kathryn Bass: Joining me today are CEO Fred Eppinger and CFO David Hisey. To listen online, please go to the Stewart.com website to access the link for this conference call.

Kathryn Bass: This conference call may contain four 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.

Kathryn Bass: During our call, we will discuss some non-GAAP measures. For reconciliation of these non-GAAP measures, please refer to the appendix in today's earnings release, which is available on our website at Stewart.com.

Frederick Eppinger: Let me now turn the call over to Fred. Thank you for joining us today for Stewart's 3rd quarter of 2024 earnings conference call. Yesterday, we released financial results for the quarter, which David will review with you shortly.

Frederick Eppinger: I'd like to start the call by sharing our outlook on the overall housing market, followed by an update on the continued progress we've made in each of our core business lines.

Frederick Eppinger: Before jumping into these discussions, I wanted to take a moment to express our sympathies for the many people affected by Hurricane Helene and Hurricane Milton. Our thoughts are with the many communities impacted by these storms, and we have and we have and we will continue to find ways to support these communities in their efforts to rebuild. I am very pleased with the results for the quarter, given the continued contraction of the market. At the end of the quarter, we reached 37 consecutive months of year-over-year reduction in existing home sales. This quarter we saw existing home sales decrease another 3%.

Speaker Change: 11 months of year over year reduction in existing home sales. This quarter, we saw existing home sales decreased another 3%.

Frederick Eppinger: In this environment, we continue to focus on growing our business and improving our operations and our offerings. We feel our performance reflects the effort we have put in over the past four years on our journey. We remain dedicated to positioning ourselves well for the market recovery and feel confident that we will have significant upside in a more normalized market from the actions we have taken to improve the company.

Speaker Change: In this environment, we continue to focus on growing our business and improving our operations and our offerings. We feel our performance reflects the effort we have put in over the past four years on our journey.

Speaker Change: We remain dedicated to positioning ourselves well for the market recovery and feel confident that we will have significant upside in a more normalized market from the actions we have taken to improve the company.

Frederick Eppinger: This has been an interesting quarter for both the economy at large and housing in the US. While inventory has continued to improve over the past several months, the sentiment improved temporarily. The trends of historical low housing volumes lingers with just 2.5% of homes changing hands year-to-date through August. One of the lowest turnover rates we have experienced in the US in decades. Affordability remains a hardship and barrier to entry for many would-be buyers. September, the Federal Reserve cut interest rates for the first time in four years, which resulted in some temporary green shoots by way of mortgage applications.

Speaker Change: This has been an interesting quarter for both the economy at large in housing in the U S.

Speaker Change: While inventory has continued to prove improve over the past several months the sentiment improved temporarily the trends of historical low housing volumes lingers with just two 5% of homes changing hands year to date through August one of the lowest turnover rates, we have experienced in the U S in decades.

Speaker Change: Affordability remains a hardship and barrier to entry for many would be buyers in September the federal reserve cut interest rates for the first time in four years, which resulted in some temporary green shoots by way of mortgage applications, but we see things leveling back off as mortgage rates have settled in around the mid six level and typical seasonality plays.

Frederick Eppinger: But we see things leveling back off as mortgage rates have settled in around the mid-six levels, and typical seasonality plays out. All of this is on top of the upcoming elections, which lends to a continuation of the very choppy market.

Speaker Change: Al.

Speaker Change: All of this is on top of the upcoming elections, which lends to a continuation of the very choppy market.

Frederick Eppinger: We remain, however, our view remains, however, that 25 will be a transitional year leading to a more normal housing market in 26, which we define as 5 million of existing comb sold on an annual basis. Turning to our operations, we remain focused on building an improved competitive position by executing upon a disciplined operating model while also identifying efficiencies to prepare ourselves for the market rebound. We are dedicated to growing share and attractive markets across all our lines of business, and we have positioned each business to do so. We have a great advancements in improving our customers' experience in all channels, through upgrades in our technology, capabilities, and operations.

Speaker Change: We remain however.

Speaker Change: Our view remains however that 25 will be a transitional year, leading to a more normal housing market in 2006, which we define as a $5 million of existing clubs sold on an annual basis.

Speaker Change: Turning to our operations, we remain focused on building an improved competitive position by executing upon a disciplined operating model. While also identifying efficiencies to prepare ourselves for the market rebound we are dedicated to growing share in attractive markets across all our lines of business and we are positioned each business.

Speaker Change: To do so we have made great advancements in improving our customers experience in all channels through upgrades in our technology capabilities and operations. We have implemented technologies. It's our title production processes and are working on utilizing technology to prove our data management and access we can.

Frederick Eppinger: We have implemented technologies to enhance our title production processes, and are working on utilizing technologies to improve our data management and access. We continue to focus on attracting and retaining key talent, as we know, Stewart is becoming the best home for the industry-leading talent to grow with us as the market improves. We have been diligent in managing our direct operation segment to protect the heart corner of the market and our margin. As this segment most immediately feels the impact of a suppressed residential housing market. Strategically, our direct operations business remains focused on expansion efforts and targeted MSAs through both organic and inorganic means.

Frederick Eppinger: We keep a pulse on the markets we are in, as well as those we are not, to ensure we are operating to our fullest potential across the country. Chaffee housing market conditions have slowed acquisitions related to activity in recent history; however, we remain very positive about the future outlook for opportunities and maintain a warm pipeline and preparation for an improved market. Our top priority in this business is to grow our share in attractive markets. Our commercial services businesses have been a strong performer over the last several quarters, as we feel the positive effects of our efforts to grow our share in critical geographies and channels.

Frederick Eppinger: We have made a lot of investments in talent across our commercial operations so that we have the right people in place to maximize our growth potential. We are also investing in upgrading technology to support our business and to provide a better customer experience for our clients. We expect our commercial transaction momentum to continue, but we know near-term commercial market challenges may present themselves depending on some of the economic variables that we previously mentioned. Our agency team remains focused on driving share gains and attractive agency markets by adding new agent partners as well as growing our share with existing agents.

Frederick Eppinger: We are focused on improving our position, particularly in 15 target states, and have seen solid progress in a number of these states already. Our approved support services and enhance abilities around servicing commercial agents allows us to stand out to our agents. We will continue to build on these improvements to differentiate our service and offerings to better serve our agent partners.

Speaker Change: Solid progress with a number of these states already are improved support services and enhanced abilities around servicing commercial agents allows us to stand out to our agents. We will continue to build on these improvements to differentiate our service and offerings to better serve our agent partners.

Frederick Eppinger: Our real estate solutions business maintains solid financial results in growth in the third quarter. The real estate solutions team is focused on gaining share with the top lenders and cross-selling our products as we leverage our approved portfolio. The current market poses some challenge to our cross-selling initiatives, but overall we continue to see share gains for both existing clients and new client introductions. We expect continued momentum in this space as the market improves.

Speaker Change: Our real estate solutions business maintained solid financial results and growth in the third quarter real estate solutions team is focused on gaining share with the top lenders and cross selling our products as we leverage our improved portfolio of services.

Speaker Change: Current market poses some challenge to our cross selling initiatives, but overall, we continue to see share gains from both existing clients and new client introductions. We expect continued momentum in this space as the market improves.

Frederick Eppinger: Across the enterprise, we are thoughtfully banishing all lines of business and remain intentional with our investment and expense management. We have experienced the increase in other operating expense percentages driven by significant growth in two of our businesses: commercial and real estate solutions. In commercial, we encounter higher outside data and search fees to service our customers and real estate solutions. Other operating expenses are a higher percentage of extruded use of outside services and data. Today, we are very pleased with the margins we are achieving for our meaningful growth in agency services, data solutions, and commercial. Overall, we were very prudent in our expense management to ensure we achieve both deer and long-term goals.

Speaker Change: Across the enterprise, we are thoughtfully balance sheet, all lines of business and remain intentional with our investment and expense management, we have experienced an increase in other operating expense percentages.

Speaker Change: By significant growth in two of our businesses commercial and real estate solutions and.

Speaker Change: In commercial we encounter higher outside data search fees to service our customers in the real estate solutions. Other operating expenses are a higher percentage of VIX due to use of outside services and data.

Speaker Change: To date, we are very pleased with the margins, we're achieving from a meaningful growth and agency services.

Speaker Change: Data.

Speaker Change: <unk> and in commercial.

Speaker Change: Overall, we remain prudent in our expense management to ensure we achieve both near and long term goals.

Frederick Eppinger: Our leadership team has an execution-based mindset that we feel will allow us to achieve low double-digit pretext margins as we return to a more normal 5 billion unit purchase market.

Speaker Change: Our leadership team is an execution based mindset that we feel will allow us to achieve low double digit pre tax margins as we returned to a more normal 5 billion unit purchase market.

Frederick Eppinger: We remain very positive about the long-term outlook for the real estate market and our focus on our journey to become the premier title services company. We believe in the strength of the company and are committed to fortifying Stuart for long-term growth and performance.

Speaker Change: We remain very positive about the long term outlook for the real estate market and are focused on our journey to become the Premier title services Company. We believe in the strength of the company and are committed to fortifying Stewart for long term growth and performance.

Frederick Eppinger: To reiterate this view, in September, we announced that increase in our annual dividend from a dollar-nightish year to $2 a share. This is the fourth year where we have increased our dividend to shareholders. We have and will continue to position ourselves well to be able to capitalize on the opportunities that this housing market will provide. I want to thank our customers and agent partners for their continued trust. We are committed to doing the best to serve you with excellence.

Frederick Eppinger: Finally, I'd like to end my remarks by extending my thanks to our employees. We have not been where we are today without the dedication of our employees and their commitment to bettering our company. Your efforts have had a tremendous impact on Stuart, and we are pleased to share this quarter that we were named as one of the 2024 to 2025 best companies to work for by US News and World Report. Thank you for your loyalty and efforts on our journey.

David Hisey: David, I'll now turn over to you to provide the update on our results. Good morning, everyone. Thank you, Fred.

David Hisey: My deepest sympathies, as well to those impacted by the hurricanes. I appreciate the outstanding service of our associates and grateful for the continued support of our customers. As Fred noted, the market continues to be challenging; existing home sales struggle. The mortgage rates came down about 50 basis points from mid-August and September, but did not have a meaningful impact of volume and subsequently increased.

David Hisey: Yesterday, Stuart reported a third quarter net income of $30 million or $1.7 per diluted share on total revenues of $668 million. As presented in the appendix A of our press release, we use adjustments primarily for net realising on new outcomes and losses acquired in tangible examinization and other expenses for additional performance measures. On an adjusted basis, third quarter net income was $33 million or $1.7 per diluted share compared to $24 million or $0.86 per diluted share on the third quarter of 2023. In the title segment, total operating revenues improved $31 million or 6%, primarily driven by higher revenues from our domestic commercial and agency operations, while our non-commercial revenues were comparable to the prior year quarter.

Speaker Change: 6%, primarily driven by higher revenues from our domestic commercial and agency operations, while our non commercial revenues were comparable to the prior year quarter title segment pre tax income improved by $10 million or 27%, primarily driven by higher revenues.

David Hisey: Title segment pre-tax income improved by 10 million or 27% primarily driven by higher revenue. After adjustments for purchase and change way of monetization and other items, the Title Sex segments adjusted pre-tax income was 43 million, which was slightly better compared to the prior year quarter, while adjusted pre-tax margins were comparable. On our direct title business, total open orders in the third quarter improved by 8%, while total closed orders were 2% lower, primarily due to lower purchase orders resulting from the slower residential market, as previously noted. Our domestic commercial operations generated in other good performance was 16 million or 30% higher revenues, primarily due to higher transaction size and volume in the energy and multi-family sectors.

Speaker Change: After adjustments for purchase intangible amortization and other items the titles sex segment's adjusted pretax income was $43 million, which was slightly better compared to the prior year quarter, while adjusted pre tax margins were comparable.

Speaker Change: On our direct title business total opened orders in the third quarter improved by 8%.

Speaker Change: While total closed orders were 2% lower primarily due to lower purchase orders, resulting from the slower residential market. As previously noted our domestic commercial operations generated another good performance was $16 million or 30% higher revenues, primarily due to higher transaction size and volume.

Speaker Change: And the energy and multifamily sectors.

David Hisey: Average commercial feed for file improved 25% to 17,17,700 compared to 14,200 in the prior year quarter. Domestic residential feed for file improved slightly to $3,000. With our agency operations, gross agency revenues increased 17 million or 6%, while that revenues improved 2 million, primarily due to a slyer, slightly higher average retention rate due to geographic mix. On title losses, total title loss expense decreased 4%, primarily due to a favorable claim experience, which also resulted in a slightly lower title loss ratio for this quarter versus the prior year quarter. For the 4 year 2024, we expect our title losses to average around 4%.

Speaker Change: Average commercial fee per file improved 25% to 17 point.

Speaker Change: 17700, compared to 14200 in the prior year quarter domestic residential fee profile improved slightly to $3000.

Speaker Change: With our agency operations gross agency revenues increased 17 million or 6%, while net revenues improved $2 million, primarily due to a supplier slightly higher average retention rate due to geographic mix on title losses total title loss expense decreased 4% Prime.

Speaker Change: Merrily due to a favorable claim experience, which also resulted in a slightly lower title loss ratio for this quarter versus the prior year quarter for the full year 2024, we expect our title losses to average around 4%.

David Hisey: Regarding the real estate solution segment, pre-tax income improved by 5 million, driven by higher revenues in our current related data and valuation services business. Pre-tax margin was 7.7% in the third quarter compared to 3.8% in the prior year quarter. And that excluding acquisition and tangible adjusted pre-tax margin in the third quarter was 13.4, compared to 13% last year. A consolidated operating expenses are employee cost ratio improved to 30% from 31 last year, primarily driven by higher revenues. Our other operating costs ratio increased to 24% compared to 22%, primarily driven by increased credit information and services expenses in our real estate solutions business and higher outside search costs income.

David Hisey: Recall in our res businesses that they're very data dependent, so as their revenues increase, our other operating expenses and ratio due as well.

David Hisey: Our financial position continues to be strong and support of our customers and employees in the real estate market. At September 30, 2024, a total cash and investments were approximately 370 million in excess of statutory premium reserve requirements. In addition, we also have a fully available $200 million on a credit facility. Total stockholders' equity at 930, 2024 was approximately 1.4 billion with a book value of $51 per share. Our debt cash provided by operations in the third quarter was 76 million, which was 17 million higher than the prior year quarter, primarily due to improved netting.

Speaker Change: Isn't there.

Speaker Change: It is it is just because of the mix of business and it's a little biopsy, but this year because.

Speaker Change: We've obviously had outsized growth and it kind of broad based on the categories, but the category Thats. The biggest is our energy and alternative energy deals tend to be.

Speaker Change: Larger right and so that kind of.

Speaker Change: Skewed the average deal size a little bit.

Speaker Change: And but it is a little bit of a balancing number.

Speaker Change: Quarter to quarter.

Speaker Change: But again.

Speaker Change: Just from the mix I would look at but what closings. This month. It has a lot to or this quarter has a lot to do with the energy.

Speaker Change: Percent, okay, great. Thanks, and then if I look at your the order count that other segment ramped up relatively stronger than the purchase and refi can you remind me is there.

Speaker Change: Some sort of geography issues, there where stuff that might have gone through purchase and refi.

Speaker Change: Can it goes through there now are essentially yes.

Speaker Change: That's driven a little bit by our bulk business, which.

Speaker Change: If you have a big deal.

Speaker Change: <unk> and volumes in this quarter, we had.

Speaker Change: Ill.

Speaker Change: Cover a couple of large.

Speaker Change: Transactions, so it's a little bit bumpy.

Speaker Change: Because of the way those deals are.

Speaker Change: So on the single family rental.

Speaker Change: Business right those tend to be larger transactions. So there was a big bulk order that came in.

Speaker Change: Okay.

Speaker Change: Great. Thank you.

Speaker Change: Thank you very much.

Speaker Change: Yes.

Speaker Change: And once again as a reminder, that is star and one for your question.

Speaker Change: We will take our next question from John Campbell with Stephens, Inc. Please go ahead.

John Campbell: Good morning, Joe Good morning, good morning.

John Campbell: Fred back to your commentary around the normalized 5 million market in the past I think you've talked to like a 10% margin target with that type of backdrop I'm, hoping you can maybe revisit that target and also if you could clarify if that 10% target is on a GAAP basis, our adjusted with the add back of purchase amortization.

John Campbell: With Viking right, so but that could be a help in the next.

Speaker Change: Translate into existing home sales in the next quarter being a little bit better to David's point like it was almost you know the spin, but the sentiment when they first changed right. It actually a couple of weeks before that the sentiment was quite good and you could feel some of the activity.

Speaker Change: And then it kind of flipped on us about I don't know three weeks ago as the 10 year started back up and interest rate went back. So you can see it in the refi. We also saw a nice little pop in refi orders. My question is if you havent locked is that going to hold or if you.

Speaker Change: We haven't locked in or rain or whatever you're going to see a backup again, a little bit. So the way I would describe it is I feel like we're bouncing around the bottom.

Speaker Change: And so we could see a little bit of help records go the other way I do think in commercial and it's hard to know that until everybody reports, but I think what we're going to find for the first time in the quarter that theres going to be some growth in commercial.

Speaker Change: For us we've grown a lot, but I just feel like this is we're going to see a more positive commercial environment for sure.

Speaker Change: And I think that's going to continue but.

Speaker Change: But it's a great question, because there's a lot of moving pieces right now and I kind of I.

Speaker Change: I wasn't surprised when we saw the.

Speaker Change: The existing homes be down I think it was four and some change for this last month.

Because it's kind of it had the sentiment was better than the activity rate almost.

Speaker Change: But I saw that Richard think too and that's that's a hopeful sign.

Speaker Change: Yeah, that's a good point and I noticed on your purchase orders closing ratios lower than average cancellation rate. It seems like that's kind of embedded there.

Speaker Change: One more if I could squeeze in kind of back to <unk> question around the other orders if I look at just your purchase orders.

David Hisey: Parks.

David Hisey: Yeah, I just want to thank everybody for their time this morning and their interest to enjoy it. Thank you.

Operator: Thank you, and this does conclude today's program. Thank you for your participation. You may disconnect at any time. .

Speaker Change: [music].