Stewart Information Services Corporation

Hello, and thank you for joining the Stewart Information Services fourth quarter and full year 2022 earnings call. At this time, all participants are in a listen-only mode. Later, you'll have an opportunity to ask questions during the question and answer session. Instructions will be given at that time. Please note today's call is being recorded. Lastly, if you should require operator assistance, please press star zero. It is now my pleasure to turn today's conference over to Brian Glaze, Chief Accounting Officer. Please go ahead.

Thank you for joining us today for Stuart's fourth quarter 2022 earnings conference call. We will be discussing the results that were released yesterday after the close. Joining me today are CEO Fred Eppinger and CFO David Heisey. To listen online, please go to the Stuart.com website to access the link for this conference call. This conference call may contain forward-looking statements that involve a number of risks and uncertainties. please refer to the company's press release and other filings with the SEC for a discussion of the risks and uncertainties that could cause our actual results to differ materially. During our call, we 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. Let me now turn the call over to Fred.

Thank you for joining us today and for Stewart's fourth quarter earnings conference call. David will review the quarterly financial results in a minute, but before that, I would like to cover our overall view of Stewart and the current market. As I discussed before, much of our efforts over the last few years have focused on fundamentally improving the company's operating approach to better position ourselves in our journey to become the premier title service company. The long-term goal remains to create a stronger and more resilient business that can thrive through the real estate cycles and economic conditions. We have focused on improving margins, growth, resiliency by improving our scale and attractive markets and enhancing our operational capabilities and our financial discipline. We have significantly improved our performance and our ability to manage challenging markets, but we were impacted by the significant downturn in the purchase market we saw in the fourth quarter. The challenges associated with higher interest rate environment increased materially during the fourth quarter as interest rates topped out over just 7%, and we are planning for this difficult market to continue into 23, and are managing our business with a balance of cost discipline and investment in skills and capabilities that will best position us for the long term. Although interest rates have declined in early 23 by 100 basis points, and we've seen improving trends in January quarters, interest rates, home inventory, and housing affordability are all tendencies to any quick return to a normal real estate market. Through 22, we have been managing in a declining market, starting with a significant decreased repo market and moving to a rapidly declining purchase market. As a result, we have been taking material but thoughtful and targeted expense actions throughout the year to ensure we maintain financial strength, service our business well, and position us for a more normal market. In the fourth quarter, we saw an additional material decrease in the purchase market ending the year at a 46% decrease in closed orders and a 44% decrease in open orders year-over-year for December, our lowest point of the year. This trend led us to take additional significant but targeted expense actions in the quarter to ensure we maintain our financial flexibility. We continue to manage our business with a long-term view, however. one that maintains and strengthens the investments and improvements we have made over the last few years, ultimately improving our structure and long-term financial performance. We remain focused on a strategic plan of building an improved competitive position by being more efficient and having a disciplined operating model that functions well throughout the cycles. We have emphasized growing scale of attractive markets across our lines of business, and we have made significant progress in improving the customer experience in all our channels. While we are encouraged with our improvements on all four critical fronts, talent, technology, customer experience, and our financial model, we recognize work remains and the journey is not complete. We will continue to invest opportunistically during this market, but we'll be mindful of maintaining our current strong financial positions. Financially, a long-term goal remains to generate high-single, low-double-digit margins over the cycle. However, there will be quarters like the fourth quarter and the first quarter of 2023 where margins will be challenged. Our adjusted margins for the quarter reflect the levels of investment and talent in systems necessary to compete in the long term. Difficult management and seizing on growth opportunities as they arise are keys to improving Stewart's financial position. On the margin front, prior to beginning the journey, pre-tax margins were below single digits in the normal market, and in lower volume markets, we consistently lost money. Our efforts to improve scale in our direct operations, improve our portfolio of acquisitions and real estate services, and strengthen our operating model have allowed us to better weather the margin pressure, particularly in challenging markets. At the outset of the journey, we identified areas that we needed to improve in order to achieve our goal. Since then, we have been significantly improving our technology for title production, process automation, and centralization to improve operational efficiencies and capabilities. We have already made significant progress improving the customer experience across all channels and rolling out our agency technology platform, which significantly enhances ease of use and connectivity with agents. We continue to make excellent progress on these and other investments, but we know that more work needs to be done. We believe the current market will present opportunities to improve scale, targeted, and attractive direct markets, and to add additional services that complement our existing lender services. Share growth and direct target MSA markets remains a key strategic objective. During the fourth quarter, we added FNC title services, which specializes in providing title services for reverse mortgage transactions. and BCHA, which is the national provider of title services to international institutional investors and lenders. Both companies are leaders in their respective fields and are important to our strategy as we increase our service offerings and scale. The year ahead should see additional progress integrated completed acquisitions into our production and other systems, which improves our customer experience as well as the overall operating efficiencies that we've been building over the past several years. In our agency business, 2022 saw developments in key areas that position us now for increased scale in our growth markets and improve our share with the highest quality independent agents. We have made excellent progress in our deployment of technology and services that provide greater connectivity, ease of use, and risk reduction for our agent partners. As we move through 2023, our platform of services for agents is as strong as it's ever been. Conditioning our commercial operations for going across all our business lines has been a key focus this year, as these operations are important components of our overall strategy. We made significant investments in talent during 2022 with aid in achieving these objectives. We are optimistic regarding the commercial markets long-term, although we recognize they were fully suspended in the short-term, given changing financial markets. Let me just finish by reiterating that we will both manage expenses and investments with a practical balance between an operating discipline for the current short-term market challenges and strengthening steward for the long-term growth and performance. A strong financial footing should best be adjusted to taking advantage of the opportunities that this cycle will provide. I will conclude by reiterating my positive long-term view of the real estate market and the ability of Stewart to become the premier title services company. I would also like to thank our associates for all their hard work and our customers for their continued loyalty and support. David will now update everyone on the results. Good morning and thank you, Fred. Let me also thank our associates for their amazing service and our customers for their steadfast support. During the fourth quarter, residential market was negatively impacted by 30-year mortgage rates that peaked over 7%. Consumer sentiment has been forwarded to the rate environment, inflation, affordability, and recession concerns. Commercial real estate is seeing the impact of higher rates and volatile markets as well. Yesterday, Stewart reported fourth quarter inflation. 2022 net income of $13 million and diluted earnings per share of $0.49 on total revenues of $656 million. After adjustments primarily for net unrealized gains and losses on equity securities and office closures, severance, regulatory and litigation expenses, adjusted fourth quarter net income was $16 million or $0.60 per diluted share compared to $84 million or $3.05 per annum each year in the fourth quarter of 2021. Total title revenues for the fourth quarter decreased $255 million, or 30%, primarily due to the volume declines driven by higher interest rates. As a result, the title savings free tax income was $27 million compared to $119 million in the prior year quarter. While on an adjusted basis, the segment's pre-tax income was $35 million compared to $120 million in the prior year quarter. After adjustments for purchasing tangible amortization and other items listed in the appendix A of our press release, adjusted pre-tax margin for the fourth quarter was 5.9% compared to 14.4% in last year's fourth quarter. In our direct title business, Domestic commercial revenues decreased $26 million or 28%, primarily due to lower transaction volume and size. Average commercial fee per file was $15,100 compared to $19,700 for the prior year quarter. Domestic residential revenues decreased $94 million, or 32%, resulting from lower purchase and refinancing transactions. However, residential fee per file increased 45% to approximately $3,500 from $2,400 last year due to the higher purchase mix. Total international revenues were $16 million, or 34% lower, primarily due to lower transaction volumes in our Canadian operations. Total open and closed orders declined by 48% and 51%, respectively, in the fourth quarter compared to last year, primarily to the economic environment. Similar to our direct title revenues, revenues from our agency operations decreased 133 million or 30% compared to last year's quarter. The average agency remittance rate slightly decreased to 17.6% compared to 18% last year, primarily as a result of geographic mix. On title losses, total title loss expense in the fourth quarter decreased 12 million or 36%. primarily driven by lower title revenues. As a percent of title revenues, the title loss expense was 3.7% compared to 4% in the fourth quarter of 2021. For the full year 2022, our title losses were 3.8% of total revenues compared to 4.2% in 2021. Based on the current economic environment, including a possible recession, we expect 2023 title losses to be at least at 2021 levels. Regarding our real estate solution segment, fourth quarter pre-tax income decreased to $400,000 from $5 million last year, primarily due to lower transaction volumes resulting from the economic environment. Pre-tax margin for the fourth quarter was 0.7% compared to 6.1% in the fourth quarter of 2021. After adjusting for purchasing tangible amortization and other items listed in Appendix A, adjusted pre-tax margin for the segment was 12.8% in the fourth quarter, compared to 9.1% in the prior year quarter. Regarding operating expenses, which consist of employee and other operating costs, total operating expenses for the quarter decreased primarily due to lower costs related to revenues and lower incentive compensation based on their results. Employee costs as a percent of operating revenues were 30% in the fourth quarter compared to 23% in the prior year quarter, primarily due to lower operating revenues. Other operating expenses as a percent of operating revenues were 23% and 22% in the fourth quarter, 22 and 21 respectively. Excluding office closures, regulatory litigation expenses, the other operating expense ratio is 21% in the fourth quarter, 22, compared to 22% in the prior year quarter. On other matters, our financial position is strong to support our customers and employees in the real estate market. Our total cash and investments as of December 31, 2022 are approximately $130 million. other regulatory requirements, and we also have a fully available $200 million loan and credit facility. Total stockholders' equity attributable to Stewart was $1.36 billion, and our book value per share was approximately $50, which is 5% higher than December 31, 2021. Lastly, net cash variety of operations for the fourth quarter decreased to $25 million compared to $133 million last year's quarter, primarily due to the lower net income in the fourth quarter of 2022. We're always grateful for and inspired our customers and associates. We advocate for everybody's safety and prosperity and are confident in our support of real estate markets. I'll now turn the call back over to the operator for questions.