Stewart Information Services Corporation

Hello, and thank you for joining the Steward Information Services First 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, please press star zero. It is now my pleasure to turn today's call over to your Brian Glaze, Chief Accounting Officer. Please go ahead.

Thank you for joining us today for Stewart's first 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 Heise. To listen online, please go to the Stewart.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 FEC 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 for Stuart's first quarter 2023 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 Stuart and the current market. Our efforts at Stuart over the last three years have focused on fundamentally improving the company's operating performance to better position ourselves on our journey to becoming the premier title services company. The long-term goal remains to create a strong and resilient business that can thrive through all real estate cycles and economic conditions. We focus on improving margins, growth, and resiliency by improving our scale and attractive markets and enhancing our operational capabilities. In challenging markets like we are currently in, it is often difficult to advance long-term goals. However, I am pleased with our progress towards improving our long-term performance as we balance investments with the need to manage expenses carefully. As we discussed before, we anticipated the first quarter to be our most challenging. To prepare for this, we took significant actions to manage costs during the second half of 22 and again in the first quarter of 23. We have been careful not to take actions that we felt would threaten our competitization and long-term value-creating opportunities. We believe this is a historic cycle low, and the right answer to get us through this period is to continue to invest in our people and remain focused on a long-term improvement plan and manage through a couple of challenging quarters, which is what we are doing. Early in the first quarter, interest rates kicked down fairly significantly, which resulted in an increase in open orders. However, order volumes slowed again when rates quickly reversed again in February, peaking in mid-March. These challenging market dynamics, along with the impact of seasonality, led us to our lowest quarter closed order volumes in over 20 years and resulted in an overall loss to the quarter. As we moved into the second quarter, interest rates moderated slightly but remained elevated. We expect this difficult environment will moderately improve in the second quarter, but the challenging environment will continue into the second half of 23, and we will continue to manage our business with a careful balance of cost discipline and investments you expect will be the best position for the long term. Although interest rates have declined in the early second quarter, interest rates, home inventory, and housing affordability would mean hindrances to any quick return to a normal real estate market. We would be focused on our long-term strategies, enhancing our operating model, investment in technology, and customer experience, and improve efficiency of our operations in building scale and targeted areas. While we took additional expense actions this quarter, we recognize that these strategic investments will cause our cost ratios to remain elevated in this market. We believe that the long-term investments coupled with a thoughtful near-term expense management will improve our structure and financial performance in the long term. In our direct operations, we are making progress on our strategy to scale and attract the markets. Even during this challenging market, we've continued to evaluate a select number of opportunities to increase our scale and footprint. Given the market uncertainty, we will make very thoughtful decisions around deployment of capital. Positioning our commercial operations for growth across all our business lines has been a key focus in our journey, and these operations are an important component of our overall strategy. We've made investment in talent during the past year to aid in achieving these objectives, and we believe our focus will create long-term growth in the commercial markets, although we recognize changing financial markets may create headwinds in the short term. In our agency business, we have made excellent progress on our deployment of technology and services that provide greater connectivity, ease of use, and risk reduction for agent partners. As we move through 23, our platform of services for agents is as strong as it's ever been, and we've begun to see meaningful share growth in our target markets. On the topic of technology, we continue to invest significantly in improving our technology for the title production process automation and centralization to improve operational efficiencies and capabilities. We've already made significant progress in improving customer experience across all channels and rolling out our agency technology platform, which significantly enhances ease of use and connectivity with agents. Additionally, we have made significant progress integrating completed acquisitions into our production of other systems. which improves our customer experience as well as the overall operating efficiencies that we've been building on for the past several years. The remaining integrations will be an important focus for the remainder of 2023. Maintaining our current strong financial position while investing opportunistically during this market remains a top priority. Financially, our long-term goals remain to generate high signal, low double-digit margins over the cycles. However, there will be quarters like the first quarter and the fourth quarter of 2022 where margins will be challenged. We remain focused on our strategic plan of building an improved competitive position by being more efficient and having a disciplined operating model that functions well through all real estate cycles. We have emphasized growing scale in attractive markets across all businesses and we have made significant progress in improving the customer experience in all channels. While we are encouraged by our improvements in all our four critical funds, talent, technology, customer experience, and our financial model, we recognize work remains and our journey is not complete. However, we have seen the results of our efforts to increase year-over-year market share gains in each of our direct, agency, and commercial businesses. Let me finish by reiterating that we will both manage our expenses and investments with a practical balance between an operating discipline for the current short-term market challenges and strengthening Stewart for the long-term growth and performance. Strong Financial Footage should best position us to take advantage of the opportunities that this cycle will provide. I also would like to restate my positive long-term view on the real estate market and the ability of Stewart to become the premier title services company. A tremendous thank you to our associates and all their hard work and to our customers for their continued loyalty and support. David will now update everyone on our results. Good morning, everyone, and thank you, Fred. First, I would also like to thank our associates for their amazing service and our customers for their support. As Fred noted, the first quarter saw a continuation of a difficult real estate market and poor consumer sentiment. Low residential inventory, high mortgage rates, lower commercial real estate activity, and tough economic conditions all contributed to the situation. Yesterday, Stewart reported a net loss of $8 million or $0.30 per diluted share on total revenues of $524 million. After adjusting for net realized and unrealized gains and losses, he adjusted first quarter net loss was $7 million or $0.25 per diluted share, compared to a net income of $56 million in the first quarter of 2022. The lower results for the first quarter were primarily driven by significantly lower revenues caused by volume declines on lower home sales and refinances. Total title revenues in the first quarter decreased $265 million, or 37%, resulting in the title segment's pre-tax loss of approximately $1 million compared to pre-tax income of $83 million during the prior year quarter. After adjustments for purchase intangible amortization and other items listed in Appendix A of our press release, the segment's free tax income was $4 million, or 1% margin, compared to $81 million, or 11% margin, in 2022. In our direct title business, domestic commercial revenues decreased $24 million, or 42%, primarily due to lower transaction volume and size. Average commercial fee per file was approximately $8,300 for the first quarter, compared to $12,700 for the prior year quarter. Domestic residential revenues were down $70 million, or 32%, as a result of significantly lower purchasing and refinancing transactions. However, residential fee per file was approximately $3,400, which was 30% higher from last year due to a higher purchase mix. Total international revenues decreased 16 million, or 40%, primarily due to lower transaction volumes in our Canadian operations. Total open and closed orders declined by 37% and 45% respectively in the first quarter compared to last year. In line with our direct title revenues, first quarter revenues from our agency operations decreased 155 million, or 38 percent compared to last year. The average agency remittance rate decreased to 17.4 percent compared to 18.1 percent, primarily as a result of geographic mix. In regard to title losses, total title loss expense in the first quarter decreased 12 million, or 40 percent, primarily driven by lower title revenues. As a percentage of title revenues, the title loss expense was 3.9% compared to 4% last year. For the four-year 2023, we expect title losses to average from 4% to 4.2% of title revenues. For the real estate solution segment, pre-tax income decreased to $1.4 million for the first quarter from $7 million last year. primarily as a result of 30% lower revenues driven by lower transaction volume. First quarter pre-tax margin was 2.2% compared to 7.6% last year. After adjusting for purchasing tangible amortization, the adjusted pre-tax margin was 11.5% compared to 14.8% last year. The segment's total operating expenses in the quarter decreased 26 percent, primarily due to lower costs related to revenues and lower incentive compensation. Consolidated employee costs as a percentage of operating revenues increased to 33 percent compared to 24 percent in last year's quarter, primarily due to lower operating revenues in 23. Other operating expenses as a percent of operating revenues were 23%, which was comparable to last year. On other matters, our financial position remains strong to support our customers, employees, and the real estate market. At March 31, 2023, our total cash and investments were approximately $340 million over statutory premium requirements, and we also have a fully available $200 million line of credit facilities. Total stockholders' equity attributable to Stewart at the end of the quarter was approximately $1.35 billion, and our book value per share was approximately $50. Lastly, cash used in operations was $51 million compared to net cash provided by operations of $35 million last year, primarily driven by the first quarter's net loss. We are always grateful for our customers and associates. We advocate for everybody's safety and prosperity, remain confident in our support of real estate markets. I'll now turn the call back over to the operator for questions.