Stewart Information Services Corporation

Hello, and thank you for joining the Stewart Information Services First Quarter 2021 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. Please note, this call may be recorded. Lastly, if you should require operator assistance, please press star zero. It is now my pleasure to turn today's conference over to Nat Otis, Head of Investor Relations. Please go ahead.

Thank you, Brittany. Good morning. Thank you for joining us today for Stuart's first quarter 2021 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 Stuart.com website to access the link for this conference call. I will remind participants that this conference call may contain forward-looking statements that involve a number of risks and uncertainties. Because such statements are based on an expectation of future financial operating results and are not statements of fact, actual results may differ materially from those projected. The risks and uncertainties that forward-looking statements are subject to include but are not limited to the risks and other factors detailed in our press release published yesterday evening and then the statement regarding forward-looking information risks and uncertainties and other sections of the company's foreign 10K and other filings with the SEC. Let me now turn the call over to Fred.

Good morning, everybody, and thank you for joining us today for Stuart's first quarter of 2021 earnings call and for your interest in Stuart. Before I turn it over to David to go through the details of the quarter's results, I wanted to touch on a few topics as we move into 2021. I am very, very pleased with the progress this quarter. We clearly capitalized on the historic market strength, but we also continue to improve our underlying financial strength and the resiliency of the company. We grew share in a number of critical markets. We added some service capabilities and leveraged our improved technology platform. As we look ahead, we envision a steward that not only takes advantage of the high points of the cycle, but can also thrive through the entire business cycle. The foundation of this future lies in a more strategic and disciplined operational approach to investments and a company culture that is focused on moving quickly to adapt and to capitalize on opportunities to improve and grow the company. While our journey is not finished, the work our employees accomplished last year and throughout the first quarter, addressing the challenges of the pandemic conditions, driving structural changes, integrating more valuable talent and asset additions, have all fundamentally changed our company. The results to date are encouraging and illustrate that we are on the right path. Given what we've accomplished today and our view of the market outlook, we are very bullish on the company's opportunities for the next two or three years. As we look at 21 and 22 and beyond, there's a level of uncertainty over the endurance of the cycle even as we continue to experience strong market demand. We know the refinancing will begin to flow at some point even though the overall residential market is healthy and is expected to remain that way for some time as resale transactions driven by pent-up demand and favorable homeowner demographics will continue to show strength. In this kind of market, there will be winners and losers, and we are positioning ourselves to be one of the winners. At our core, we are a 125-year-old customer-centric brand that delivers superior service and underwriting for its customers and partners. But I also like to think of us as a 125-year-old startup. Our footprint, our delivery, our decision-making are all improving every day. We also understand that technology is changing our industry and our company, and we continue to focus intensely on improving the customer experience through innovation and connectivity. By creating a fully integrated platform, we are delivering a safer, more effective, and efficient closing process for our customers and our partners. Whether through our upfront transaction management app and platform StewardNow or our automated underwriting tool, Stewart Accelerate, or virtual real estate closings with our notary can and signature closer companies, or securing transfer of funds through our partnership with Certified, we are meeting our customers' technology needs without sacrificing our core fiduciary commitment to appropriately underwrite the transaction. Our journey to be the premier title service company continues. Clearly, we have more to do, but in this quarter, we made significant progress toward a more resilient Growing Enterprise, one position to succeed and grow, share in a variety of environments. David will now update everyone on the results of the quarter.

Thank you, Fred, and good morning. Let me also thank our associates for their continued inspirational service and our customers for their steadfast support. The year opened with a strong residential real estate market driven by powerful demand, favorable interest rates, and improving economic conditions. On the medical front, virus news is generally improving as vaccinations increase, other variants and vaccine distribution challenges enter the pace of recovery. Even with an improving economy, there continues to be a high mortgage delinquency and forbearance, the effect of which needs to play out. Let me provide some broader context consistent with Fred's comments before I review the quarter's results. Although interest rates and the economy provide some volatility to the operating environment, our strategic areas of focus, gaining scale and attracting direct markets, improving agent service capabilities and geographic focus, and scaling lender services are beginning to have a meaningful and durable impact on our results. Over time, we'll see the benefits of our commercial initiatives as that market returns. For the first quarter of 2021, Stewart reported net income of $54 million and diluted earnings per share of $2.01 on total operating revenues of $681 million. On an adjusted basis, the Q1 net income improved by $38 million compared to $13 million from last year's quarter, as we disclosed in Appendix A of the press release. Compared to last quarter, total title revenues increased to $185 million, or 42%, with solid performance from our residential and agency operations. The title segment generated $77 million of pre-tax income, more than four times last year's quarter, as a result of improved revenues and our continued management focus. Pre-tax title margin also improved to 12.2%, compared to 3.4% last year. With respect to our direct title business, direct residential revenues increased $83 million or 63%, primarily due to increased transaction activity. Residential fee per file was approximately flat at $1,900, just slightly below last year. Domestic commercial revenues were down $12 million or 29%. to the lower transaction volume and lower average fee per file, which was $8,700 this quarter versus $11,400 last year's quarter. Total open orders increased 29% while closed orders increased 66% compared to the last year primarily due to the strong market. Similar to our direct title business, our agency operations had another strong quarter with revenues of $346 million, which was $104 million or 43% higher than last year's quarter. Our agency remittance rate improved to 17.9% versus 17.6% in the prior year quarter. On title losses, total title loss expense increased $10 million or 54%. primarily due to higher title revenues. As a percent of title losses, the title loss expense was 4.6% compared to 4.2 from last year's quarter. In regard to operating expenses, which consist of employee and other operating costs, total operating expenses increased consistent with our revenue growth due to more employees and associated costs, increased appraisal expenses from our recently acquired ancillary services business, and higher outside title search and premium tax expenses. These increases were partially offset by lower other operating costs due to continued management focus as we decreased marketing and travel expenses. Employee cost as a percent of operating revenues improved to 25% from 30% last year. While other operating expenses increased to 18% from 16% last year, primarily due to the appraisal pass-through costs in our recently acquired appraisal services businesses. Excluding these businesses, other operating expense ratio would have been 13% for the first quarter of 2021, as against 16 last year. On other matters, our financial position continues to be very strong. Our total cash and investments on the balance sheet are approximately $590 million under regulatory requirements. which along with $220 million available on our recently upsized line of credit provide a solid foundation in supporting our customers, employees, and real estate markets. Stockholders' equity attributable to Stewart increased to $1.04 billion at March 31, 2021 with a book value per share of approximately $39. Lastly, net cash provided by operations improved to $47 million compared to cash use in operations of 11 in last year's first quarter. Let me close with we remain confident in our support of real estate markets, grateful for our associates and customers, and advocates for everyone's improved safety and prosperity. And now I'll turn it back to the operator for questions.

And at this time, if you would like to ask a question, please press star and one on your touchtone phone. You may remove yourself from the queue at any time by pressing the pound key. Once again, that is star and one if you would like to ask a question. And we will take our first question from Bo Stroy, George, with KBW. Please go ahead.

Hey, everyone. Good morning. Good morning. First question. It's just on the residential direct premiums fell about, I think it was 10% over the fourth quarter. The agent premiums fell pretty modestly. So is there something to call out in terms of the differences between what we saw in those channels?

I missed the question. I'm sorry, what was the help with that? If I hear it correctly, what was the difference?

Basically, I was looking at the with decline in the direction. There was about a 10% decline in just in the residential national direct premiums over last quarter. And the agent premiums, the decline, it was almost flat. It was just on, you know, about 1% over the last quarter. So, I'm just curious, you know, why the differences that we saw in the two channels.

Are you adding those?

Are you adding the commercial? Actually, I pulled out the commercial because including the commercial, it's more like a 20% decline versus a 1%. So, the commercial was down. So, pulling that out, it seemed like it was about a 10 versus 1. But, I mean, we can follow up for that after if you'd like.

Yeah, because what we saw, right, is this has been, you know, for us, this was the Thank you very much. from first quarter last year to this year on agency is extraordinarily strong because we have so much momentum just kind of getting the agents back that we had that we kind of lost a little bit during the fidelity situation, but also the new growth initiatives we have. So agency is a great comparison quarter to quarter, which gives you the really robust growth, which doesn't, you know, you didn't have the same kind of drag in the first quarter of direct that we had in agency from the hangover. So maybe they're Again, if you're asking the deltas between the two, there might be something there. But on both businesses, I'm incredibly encouraged by both our share and most of the target markets that we focused on has been up. So we're kind of winning in most of the markets we're focused on. So it feels pretty good across the business right now.

Okay. Great. Makes sense. Thanks. And then can we just talk about the latest thoughts on acquisitions? Do you feel like that remains part of the puzzle in terms of getting the margins up, or do you think it's very much what you need to do on that side?

Yeah, I think, again, I think we're very focused. We continue to focus on what I would call local market strategies, and we still have a number of markets where I would like us to have a greater share, and it's all around more consistency through the cycle to be able to manage your margins as well as your consistency of service, and so I would say we're going to continue to be focused on a number of markets in the top 140 MSAs that we believe we should gain share. And some of that will be acquisitions, and we still have a robust pipeline of acquisitions in front of us. But some of it is organic as well. One of the interesting things that has happened to the company is we have a lot of momentum right now, and our ability to attract talent, has never really been better. So we're seeing a lot of folks come to the company as well. So it'll be a combination of organic growth in some of these target markets as well as some acquisitions. And again, one of the things we're trying to do is not just gain share for margin, it's also broaden our capabilities and service capabilities. So particularly on the agency side, we want to continue to be able to provide additional services so we we will increase, you know, some of our focus on that as well. So you saw that with the AFK acquisition that we just did, which provided us additional services to provide for our agents. So again, it's, you know, I think it's going to continue as part of the strategy.

Okay, great. Thanks. Can you just speak in one more, just on the loss ratio, you know, what's kind of the normalized number and is this a change between last quarter, the increase versus now? Was that

Yeah, so if you remember last year, you know, we believe that we wanted to take a conservative position in the fourth quarter in particular as we looked out and said, you know, there's some risk out here. If you look at the balance of last year, I think the balance of last year was something like a 5.3 or something like that. and so I think that is roughly the number that we were planning to the total of the fourth quarter, the 5-3. Losses were good. If early in the year, that's the number that resulted for the first quarter but I still think that the way we thought about it last year in that 5% range is probably are going to continue to be what we're going to think about it this year. But we don't see any issues. We don't see any trends that are problematic or anything like that. But I think it's conservative just to leave it at where we fell in the first quarter.

Okay, great. Thanks a lot. Nice quarter.

Thank you.

And our next question is coming from John Campbell with Stevens, Inc. Please go ahead.

Hey, guys. Good morning. Congrats on the continued success.

Yeah, thanks. Good morning. Good morning.

Thank you. Yeah, so I'm getting a fair amount of questions on this. I figured I'd take a shot on it. But, you know, obviously there's some noise out there with a large competitor of yours. I'm sure you guys are probably hearing the same thing. But just curious about your appetite around kind of larger transformational title insurance, you know, share grabs, and then your ability or maybe capacity to do something of size.

Yeah, I mean, obviously we don't really talk about it. any other company in our calls. But I would tell you, as Bo's asked, for us, we're trying to build this up market by market and segment by segment. And we're really thinking about scale and size that way. It's not really a top-down look. It's really a bottom-up look. And so we're constantly looking for opportunities in our businesses to either – and a number of other people. And I think that's what we're trying to do. We're trying to enhance our capabilities or give us a scale so that the stability of our economics are better. And, you know, that'll be part of what we do for the foreseeable future. And we don't feel like we need, as a company, we don't feel like we need any transformational thing. I mean, I feel like this journey that we're on, you can see the traction we have. You can see how we've closed the gap between us and our major competitors. would I like us to be better? Yes, no question. And we will continue to focus at a market-by-market level to make sure we're the best there is, and we'll do some acquisitions and fill-ins and try to acquire capabilities. But we don't need anything transformational to change the outlook for this company and be able to continue to outgrow the market. and outperform the market over the next two or three years. We just got to focus on ourselves and building our business.

Okay. Thanks for that. And then on title, I mean, you're hitting it on all cylinders at this point. But if you look at the ancillary services business, I think you guys had the revenue 10 times higher versus last year. So, I mean, the turnaround has been really impressive. So, nice work there. But can you guys talk about the kind of updated products that you have today and then maybe – If you could, I'd just talk to the product roadmap and kind of frame up what you think the desired end statement might look like.

Yeah. So, and I'll take a couple pieces of that. So, from my perspective, you know, when you think about the potential evolution of the title process, we really felt that having really terrific, remote notary capability and notary network was going to be an incredibly valuable part of what the company did and being able to both control the quality and the access to that and the integration of that into the overall process. And so we obviously invested in that and invested pretty significantly. And so there will be product innovation in that area for us as we take those assets, signature and Notary Cam, and think about that combined entity to make us better. If you then go to the appraisal side, again, we thought that was a critical part of the roadmap for us to have both scale and the technology platform for an evolving world. We also think that's a business that's consolidating because of the needs to be a lot more innovative and technology savvy. and we think we've set ourselves up there to really continue to grow that business and cover the whole market space pretty effectively. So the overall ancillary approach for us was really to get this instead of having a very small scale and a bunch of little things to really build some scale in a number of areas where we could be a winner and to both kind of help our overall position with our clients but to all to be very successful in those individual businesses. So I think we have a scale. It's right on track as far as the margins and stuff. There's a little bit more consolidation work we're doing than some of the acquisitions we did, which will enhance the margins a little bit even more. But I feel very good that we position ourselves. As far as the roadmap for us, you know, again, I feel like we have a good portfolio of services, but we continually – are looking at are there places that we should own versus buy in some of the services areas. And so we will continue to kind of examine some of the subproduct sets, some of the data sets areas so that we can continue to have, you know, a robust ancillary set of businesses that support the company. But this is an area, as you said, we really were focused on because if you look at our competitors, That was always health to them in their margins. For Stewart, it was always a drag. It was always an underperformer. We had a lot of cats and dogs that would lose one customer and then lose a lot of money. And so we now have set that up, I think, to both support our core business but also to be a really accretive part of our earnings going forward. And, again, do I want to grow that business? Sure, we do. That is a business that we're going to continue to focus on.

Okay, that's a great rundown. And one quick follow-up, maybe this is for David, but if you look at that segment, you know, backing out the corporate expense and then taking out the, I guess, the net realized gains, I'm getting to like a 4% margin kind of underlying for that ancillary services just, you know, within just ancillary services. So just curious about where you think you'd maybe take that margin. Is it kind of mid-teens, low-teens?

Yeah, John, I think we had talked about that in prior calls. I think we're, you know, trying to drive it first to the overall, you know, sort of corporate target that we've laid out. And then I think depending on the mix, as Fred mentioned, of those businesses, you know, we can potentially do that going up. You know, we've made a good amount of progress going from, I think we were losing money in the ancillary to now making money. And to your point, it you know, four plus percent. But then if you look at it sort of X amortization, so on a cash basis, it's a bit higher than that. You know, just continuing to focus on bringing all those businesses together and making it as good as it can be.

And so our view of it, and we can see transparency to it, is that it's going to be accreted to our overall company. So our company goals, as I've talked about, we think that's going to be at least, you know, neutral to that and potentially helpful in the pretty short order. So we can kind of see the transparency of that getting to that 9-10 level that we talk about for the company.

And what you're seeing now is everything's basically origination-driven, so there's a lot happening in the notary businesses, there's a lot happening in the appraisal businesses, but some of the other businesses, for example, Capital Market Search, where the margins are actually quite high, there's not a lot of activity. So I think we've talked about that enough. When we see a more normalized environment and transactions in each area, capital markets and foreclosure delinquency, that should actually help the situation.

Okay, that's very helpful. Thank you, guys.

Thank you.

And once again, if you would like to ask a question, please press star and 1 on your touchtone phone. and we'll take our next question from Jeffrey Dunn with Dowling and Partners.

Thanks. Good morning. Good morning, Jeff. Could you give us a bit of an update on the commercial market, U.S. commercial market? Strong rebound in the back half of the year. It seems like maybe some of the Q1 activity might have got pulled into Q4. but just discuss the overall health, the overall mix of larger deals versus local deals and your outlook pipeline going into the middle of this year. I'm going to take it, Dave.

Yeah, sure, Fred. So, Jeff, thanks for the question. But, yeah, I mean, I don't think our outlooks really changed from what we said before. You know, we've seen commercial coming back a little slower. I think, you know, the sector mix is – You know, it's been heavy industrial. You're seeing some energy, seeing a little bit of movement in hospitality and office. But, you know, for us, we think that the market this year starts to improve a little, but it's still going to be challenging. And so we haven't really changed our outlook from what we've said the last couple of falls for commercial.

Yeah, and again, I think the... You know this. The business is very lumpy. So our analysis of last year is that, quote, unquote, we gained share in commercial. I don't really believe that. I think what happened is some of our business got pulled into the fourth quarter because of our – particularly our energy – a lot of our energy business got pulled into the first quarter. And so it's kind of lumpy. So the way I think about it is that We're competing pretty effectively. We're holding share, but it's really bumpy because it's small for us, and we did not see large January and February was quite slow, and it just feels like a lot of our business got pulled into the fourth quarter. March was much better. April's particularly better. So to David's point, our outlook for the industry is a relatively soft gear, right? Again, I don't think we have – there's other people with other views, but that's kind of our view, and we think we're kind of – we've been hold and share. If I look at the last four quarters together, and again, we'll do the analysis this quarter too, but it – you know, it's – for us, it's very lumpy because of our size, and, you know, if you look at our average – revenue per ticket or whatever our average fee for the file. It was down because we didn't have a mix of large. This quarter was actually much less than last quarter. Okay.

And if you look at the industry data, right, the RCA and other data, the people that spend time predicting this by sector and market, They have this year being relatively soft as well. So, you know, that's always informed our view. There could be other views, as Fred mentioned, that could be specific to their clients and book of business, but our view is more consistent with the market. Yeah, and I want to leave you with what I've said before.

We're setting this up really aggressively, so we've invested a lot in commercial both here, Canada, Europe, and so we're focusing on... some very targeted geographies and sectors. And I feel very good about it. We really have acquired some talent. We're lined up. So as it comes back, we should be able to capitalize on it going forward. So it is an important part of our future, for sure.

Okay. And then I wanted to talk about tech investment. In the beginning comments, you rattled off some of your automated underwriting capabilities and platforms. obviously invested in Notary Cam last year to enhance your digital closing end. Where is your tech investment focused with respect to digitization automation as we look out on 21-22? More of the internal development as well as, I guess, any targeted areas. You already said you're evaluating what you need to own versus rent maybe, but I'm particularly curious on how your tech spend is directed over the next year or two.

Yeah, it's really, you know, we have a lot of the pieces pulled together, but as I've said before, the Steward Accelerate, we continue to invest. We're very proud of what we're doing on the automated underwriting side. Our stats are as good as anybody, including the startups in our industry and the effectiveness of that, but we're using additional data to apply that to a broader array, particularly in the purchase area, so we're continuing to push ourselves on investments there. The front ends, we're always looking at connectivity and the efficiency of the front end of the process, and we're going to continue to do that and continue to refine what we're doing. So on the notarized and the kind of remote notary, again, in my view, we're productizing a little bit, particularly for the agency channel. We're enhancing those products, making them a little bit easier for agents to order and integrate them into their system. So, again, for us, all the pieces on the chain, you know, on the chain, we're actually continuing. We're not stopping kind of our evolution, our innovation. And like I said, you know, we had some separate conversations about this. My view is we're ahead of adoption in the industry, but we know that it's going to continue. The customer experience has got to get better, and we're going to continue to invest on the various pieces of the chain. Again, I feel really good about what we've assembled and what we have and how quickly it's being used and integrated into our operations. So, you know, again, this is one of those never, in some ways, never-ending in that, you know, you've got to keep investing and innovating to make sure that you're on top of it. But, you know, the bigger players because of the data access that we all have have a huge advantage to be able to apply these tools and make the experience better and we're all, you know, I know we're all running at it and, you know, it's going to continue to get better and I feel really good about our position, so. Okay, thank you. Thank you.

And it appears we have no further questions at this time. I will turn the program back over to our presenters.

Well, I want to thank everybody for joining us for the first quarter and I really appreciate your interest and story. Thank you.