Hello and thank you for joining the Stewart Information Services Second Quarter 2022 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 today's call is being recorded.

And it is now my pleasure to turn today's conference over to Brian Glaze, Chief Accounting Officer. Please go ahead..

Thank you, Shelby. Thank you for joining us today for Stewart's second quarter 2022 earnings conference call. We will be discussing results that were released yesterday evening. Joining me today our CEO, Fred Eppinger and CFO, David Hisey. To listen online, please go to stewart.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 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 in the statements regarding forward-looking information, risk factors and other sections of the company's Form 10-K and other filings with the SEC.

Let me now turn the call over to Fred..

Thank you for joining us today for Stewart's second quarter 2022 earnings conference call. David will go over the quarterly financial results in a minute, but before that, I'd like to cover our overall view of Stewart and our position in the current market. Excuse me.

As I have discussed before, much of the work here at Stewart over the last few years is focused on restructuring, refocusing, rebuilding the Company's operations to better position ourselves to be a more successful resilient company that ultimately can become to what we refer to as the premier title services company.

The goal is to create sustainable business that performs through all types of real estate cycles and economic conditions. We are focused on improving margins, generating growth and creating a stronger competitive position by improving our scale, improving our operation capabilities and our financial discipline.

As part of our journey, we are focused on enhancing the customer experience through technology, investments with a meaningfully changed our ease of use and expanded our product offerings in our agency, lender and direct business.

I am pleased with the progress we made and demonstrated in the second quarter as we maintain strong margins and continue to make progress on our operating priorities in a more challenging market. We've seen the market transition to a high interest rate environment.

The interest rate increases have put significant pressure on refinance transactions, which have been historically less, we've been less dependent on and to a lesser extent purchase transaction. So we expect that the current environment will continue throughout the second half of 2022.

Well, it's more challenging environment, Stuart, because of our significant improvements, is well prepared to successfully manage through these market changes. I'd like to emphasize that even though the market is transitioned, our journey continues.

We remain focused on our structural improvement, attaining critical scale in priority markets aided by leading technology support and innovation to drive superior and consistent service delivery to our customers.

To achieve our goal of becoming the premier title services company, we recognize that we must continue to make thoughtful investments even in this environment. In our direct operations, share growth remains our important goal in our overall strategy in target MSA markets.

Over the last couple of years, we have focused on more than 20 regional title companies, acquisitions of 20 regional title companies and always evaluating opportunities to deploy available capital.

We are hard at work integrating these acquisitions into our production and other systems to improve the customer experience as well as improve the overall operating efficiencies that we will be building on over the last few years. Above all, we are managing our business in a disciplined way given the current environment, that never stops.

In our agency business, we have made significant progress on our deployment of technology and service that provide greater connectivity, ease of use and risk reduction for our agent partners.

As the industry accelerates the implementation of online and paperless transactions, we are identifying ways to better support our agents as they undergo the critical transition. We believe our opportunity to grow scale in our growth markets and improve our share with winning independent agents is on a very solid path forward.

We are seeing revenue growth in our commercial operations and we are investing in these operations for the future as they are an important component of our overall strategy. We are optimistic regarding the commercial markets overall, although the tougher capital markets they create some temporary headwinds in some parts of the country.

To be clear, there is more work to be done as we maintain our focus on growing and enhancing our competitive position, improving scale and operating capabilities. We recognize that maintaining customer service level - service levels a fundamental part who Stewart is, while also managing expenses is more important than ever.

Even in the changing market conditions, we still see opportunities to invest and grow, share in our target market, allowing us to profitably grow throughout the cycle. Let me just finish by reiterating my positive long-term view of the real estate market and our ability to continue to grow and 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 support. David will now update everyone on the results..

Thank you, Fred and good morning. Let me also thank our associates for their amazing service and our customers for their trust and support. Moving into the middle of the home buying season, the residential market has been negatively impacted by 30-year mortgage rates persistently above 5% and slowing home sales and housing stores.

Consumer sentiment has worsen due to the inflation in the affordability and recession concerns, however employment rates remained steady. Commercial real estate saw good activity in the quarter, however rising rates in volatile capital markets are beginning to influence transactions.

For the second quarter still reported net income of $62 million and diluted earnings per share of $2.26 on revenues of $844 million.

After adjustments primary for net unrealized gains and losses on equity securities, which is equity sell off, our adjusted net income for the second quarter was $70 million or $2.58 per diluted share, compared to $86 million or $3.17 per diluted share in last year's quarter.

Total final revenues for the second quarter increased $17 million, up 2%, compared to last year's quarter primary due to better results from our agency and commercial operations which is partially offset by lower residential revenues on reduced transaction value.

The title segment's pre-tax income for the second quarter was $94 million, compared to $126 million prior-year quarter.

Segment's pre-tax margin for the second quarter was 12.3% compared to 16.7% in the second quarter of 2021, primary due to the effects of the fair value changes in the equity securities, lower residential volume and the investments we are making to grow revenue, improved customer service and reduce title production costs, as Fred mentioned in his opening remarks.

In regard to our direct title business, domestic commercial revenues improved $13 million or 25% as a result of higher transaction volume across most asset classes and a 17% higher than average fee per file of $13,100.

Domestic residential revenues increased to $11 million or 5% driven by lower purchase in the refinancing transactions in the second quarter of 2022. Residential fee per file for the quarter was approximately $2,900 versus $2,200 last year due to the higher purchase mix.

Total international revenues in the second quarter was $4.0 million or 8% lower compared to last year, primary lower due to lower transaction volumes in our Canadian operations. Opened and Closed orders in the second quarter both declined by 28%, primarily due to the elevated interest rate environment.

Our agency operations generated in the only follow-up quarter with revenues of $410 million, 5% higher than last year. The average agency remittance rate slightly decreased to 17.1% from 17.5% primarily due to geographic mix.

On title losses, total title loss expense in the second quarter decreased by $7 million or 21% from last year's quarter, primary due to our overall favorable claims experience, partially offset by higher total title revenue. As a percentage of total revenues, the title loss expense in the second quarter of 2022 was 3.5% compared to 4.5% last year.

For the full-year 2022, we anticipated title losses will be approximately 4% of title revenues. Regarding our Real Estate Solutions segment, which we began to break out last quarter, pre-tax income improved by $4 million compared to last year due to the acquisitions completed towards the end of last year.

Pre-tax margin was 7.4% for the second quarter 2022, 14.7% prior to purchase amortization, compared to 3.8% and 6.6% respectively in the second quarter of 2021. It's important to note that these businesses are also impacted by mortgage and real estate volumes, each one slightly differently.

And so, yes, you should expect to see some of what we see in title also in the real estate solutions business, the impact by the market.

In regard to operating expenses, which consist of employee and other operating costs, total operating expenses for the quarter increased, mainly due to increased variable costs related to revenue and higher employee count.

Employee cost as a percentage of operating revenues for the second quarter was 25%, compared to 24% last year, while second quarter other operating expenses were higher at 19% operating revenues, compared to 17% last year due to the increased size of our real estate solutions operations, which typically have higher other operating expenses due to third-party services.

Other matters our financial position provides strong support for our customers, employees in the real estate market. Our total cash and investments on the balance sheet are approximately $557 million over regulatory requirements and then fully available $200 million line of credit facility.

As of June 30, 2020 Stockholders' equity attributable to Stewart was approximately $1.35 billion and our book value per share was approximately $50, an increase of 5% from December 31, 2021.

Lastly, net cash provided by operations for the second quarter was $83 million, compared to $103 million in last year's quarter primarily due to lower net income in the second quarter of 2022. We are always great performance by our customers and associates.

We have to pay for everybody improved safety and prosperity and are confident in our support of the real estate markets. I'll now turn it back to the operator for questions..

We'll take our first question from Bose George with KBW..

Hi, good morning.

Actually, first I wanted to ask just about investment income, what's a good run rate for that number and the increase this quarter was that just reflecting the increase in market rates?.

Yes, Bose. That's a good question. So the - we have seen a slight increase due to the rise in rates. We also in the quarter - we get dividends from different title plans and things like that and so we had to going through some of that activity. So it's really a combination of some of those dividends in the interest rate environment.

Yes, I think, on your question on run rate, probably somewhere in the $5 million to $6 million, may be probably closer to - well, it just depends on what happens with rates from here but I think, $5 million to $6 million, probably a good number..

Okay. Great.

And then can you just talk about trends you're seeing in July in both in the purchase and in the commercial market?.

Let me see. Yes. So - this is David again. So commercial, the market I would say is probably transitioning a little bit like what we saw maybe six months or so, in residential, not to that degree because there's still a lot of activity.

So even though we continue to see increases in opened orders, we hear from customer feedback that transactions are taking a little longer to execute. And so, yes, I guess, I would just describe the market is still good, but transition starting to be impacted by the capital markets and interest rate environment..

Okay. Great. Thank you..

We'll take our next question from John Campbell with Stephens Inc..

Good morning, John..

Hey, guys. Good morning. Just a big picture question here, maybe for you Fred or David, either one of you guys. But you guys have talked about the 10% total company pre-tax margin in the past, and I know you've got some more pressure building on the purchase side of the market.

And there's obviously a lot of moving parts that kind of lead-up to that 10%.

But based on what you're seeing today and what you're kind of expecting, do you think you can manage that 10% mark this year and maybe even next?.

Yes. It's a great question. I mean that's exactly what I believe. Like we - if you look at the trend for us, we were - our margins were about 4.5% in '19, about 6.5% in '20. Obviously in '21, it was about 12.5% for the company.

And I would say likely 200 basis points in that number in '21 because it's so extremely a good number and the big company have been really staff up and we use a lot of overtime to same store sales were extraordinary and you couldn't sustain that from a work management point of view, but in just everybody margins and now we're settling into more normal market.

And so I believe there were that much better. I think we are double-digit, low double-digit kind of margin company maybe credibly a bit high single at some point. But I feel pretty good that we had a structural improvement in the institution. Now we have to manage ourselves, right, to do that, but we are solidly better company now..

Okay. That's helpful. And then, David on the reserve ratio, 3.5% this quarter, I think in the press release you had mentioned 4% for the full year, so maybe implying a little bit of a step-up in the back half.

Is that out of conservatism or are you seeing something maybe in the back book that leads you to kind of project that up for the back half?.

Yes. We are not only seeing any pickup in the claims rate or anything like that. I think it's just when we sort of look at will get action where the work and the fact that we're at the higher end of the range that might have influenced where we ended up in a second quarter.

We just state that, that's probably a more, a slightly more reflective of the native title losses, and so that's why we settled on the 4%..

Okay. That's helpful. And then if I could squeeze may be just one more here. I know, I think you guys sold the Coldwell Bain and so the non-title Rev stepped down a little bit sequentially. I think that was the driver of that, but I'm curious about what remains in the real estate solutions segment.

You can maybe help us kind of size up the mix between recurring and transactional revenue there that you see it today..

Yes. I mean, the businesses that are in that segment are valuation businesses. So like I said in my remarks, I mean, those are impacted by what happens in the origination market.

We've got and Informative Research that's a credit related business that has both things that are highly sensitive to origination, on the ordering of credit reports that credits provides other credit analytics and the like that aren't as sensitive but I would say it's predominantly sensitive in terms of its revenue mix.

Prop streams a little different, it's a subscription real estate service. I think it's not as sensitive. Some we have to see but the market has been a little tougher that kind of information's very valuable for both investors and realtors for their prospect and so it's probably not insensitive to volumes.

And then we have some --our tools around mobile and digital notary and that's all pretty sensitive to transactions, volume originations. So I would say in general, it's pretty sensitive. I think I'd just highlight that each of those businesses is a high quality business and driven by entrepreneurial and excellent management teams.

And so I think they will hold their own, if not better in the current market and we're seeing that in the numbers..

Okay. Great. Good work on the quarter, guys. Thank you..

Thank you..

We'll take our next question from Geoffrey Dunn with Dowling & Partners..

Thanks. Good morning..

Good morning..

Good morning..

A couple of questions. I wanted to revisit your comments on commercial. So rewind six months in resi, things are starting to take a bit longer. You're seeing more purchase deals pop up than re-fi.

Are there more legs from a mix shift standpoint with respect to the fee per file? Or are you also seeing that at kind of the deal size deal mix stabilize? So maybe if volumes do flow we don't get as much offset on the fee per file side..

Yes. It's a great question, Geoffrey. A great observation. Yes. I would just say that we, up until now, we've been seeing pretty good strength across all real estate asset classes.

Obviously the bigger transactions whether they are energy, multi-use, big multi-family, those are the kinds of things that are pretty active and that are driven a higher fee per file even then - also influencing at that in local markets it's been pretty good activity with smaller strip centers, buildings that kind of thing.

But the larger transactions clearly influence the fee per file more. I think looking forward, we're just going to have to see, I think you could see a little more pressure on the bigger transactions because they are the ones that typically finance in the capital markets.

In a sort of an interesting situation, right, that even that capital markets involve in financing costs are going up, at some point that should probably have an influence on cap ratio which may sort of help valuations a little bit.

So, I would say it's sort of early in whatever it might be transitioning in commercial but as it stands now and what we hear from customers the market volatility and the higher range are definitely influencing how people are thinking about deals..

Okay. Technical question with respect to your investment income. I've seen this I think at another company in the past.

Second quarter, is that typically when you're getting these title plant dividends, so maybe on a recurring annual basis next to $1 million $1.5 million in Q2 NII?.

That's right. It is typically the second quarter. And I'd say there's probably a little bit more activity but the number you said is in the goal part for sure..

And then last question. I think you mentioned that staffing was up, I don't know if that was on a year-over-year basis with acquisitions or if you added staffing in the quarter. Can you just talk about what your staffing trends have been and how you are setting the company up in the back half of the year.

Particularly, Fred, given all the work you've had, of getting all the right people in to the right places, getting everybody on the same page, building scale in certain markets.

It seems like maybe it might be a bit more challenging to address staffing after consequently two-year restructuring on maybe how the company approaches certain areas of the market.

So could you just elaborate on that?.

Yes, sure. So, obviously we build whether in the services business, we've actually built up quite a bit and in some of the title geographies we've built up kind of a year-over-year, things you see that.

Obviously, we have to be very thoughtful right about managing and we are taking targeted actions in various businesses where we have been to the balance staffing resources. But to your point, I feel good about where we are in our talent. We just have to be thoughtful about incremental investment and targeted investment right now.

It's a little bit uncertain the market, obviously and we just got to manage ourselves well. As far as our talent level, I couldn't be more pleased as far as how we are situated. David has referred to in some of our services businesses, I feel great about the quality of operations and what we're doing there.

So, again, it's one of those interesting times, right, it's a transition in market obviously, interest rates are up, also uncertain. And so we have to be very, very thoughtful how we invest and where we invest and how we manage our resources and we will. And again, it's a good on our margin. Obviously last year's extra ordinary.

You're going to have a decrease in margins, but I think we're a lot better. Like as I said from the beginning, we can sustain a high single-digit kind of low double-digit margin through the cycle, I feel really good about where we are and I think we can, so..

Okay. Thanks, Fred..

Our next question comes from Ryan Gilbert with BTIG..

Thanks. Good morning, everyone..

Good morning..

Morning. First question is on the residential purchase market, it looks like June orders were down maybe 11%, 12% year-over-year.

So when we think about your comment around the current environment continuing through the second half of 2022 is a low double-digit decline and sort of how you're framing - how you're framing this or is July tracking down more on year-over-year basis than 11% or 12%?.

Yes. I mean, I think, we're not in the month of July, Ryan, what we're seeing - if you just sort of compare the sequential months, it's down a little bit. June, as we said today, but it's not down double-digit level. I think we started to see how the rest of the year plays out. Yes. We saw the rate increase yesterday.

We still had pretty high mortgage spreads. They are well over 200 basis points, which is high relative to history. And so, but on the other hand, you've got a lot of people just sitting on the sidelines waiting to see how things play out.

So we didn't see the same level, month-over-month, but I think there's a big question mark for the rest of the year. And as Fred said, we're managing the business, assuming that there could be a little worse..

Okay. Got it. Thanks. And then how did fee per file trend through the quarter? It seems like home price appreciation has been more resilient than I would have expected given the slowdown in housing demand and higher interest rates..

Well, we are about on residential fee per file around $2,900. I think, we've started to see that slow down.

I mean, it was up significantly from $2,200 a quarter ago but with predominantly purchase mix now and I think we have seen some home price appreciation, but just reading headlines and see what's going on in the product prices are definitely stabilizing effect coming in a little bit on your market.

So I would probably say we're near the top on that based on rates fee high and mix of purchase and refi..

Okay. Got it. And then last one for me on agent mix. It's up on a year-over-year basis.

I guess just given some of the comments you made about deploying a new initiatives to support the agency business, should we expect your agency revenue as a percent of operating revenue to continue to increase throughout the year or do you think mix kind of stabilizes from here?.

It's a great question. So we have seen some nice traction for us in Agency. It's really two big initiatives, we get a lot of integrations and connectivity agents improving with ease of use. We have initiatives around from target growth states mix.

There are some real growth stated we'd like to shift to and we'd like to do a better job serving the commercial needs of agents. We've seen traction in both of those. So, we're not immune to the trends in the marketplace, so. But, I'd like our traction in that way.

And so I think in short-term you could see a real shift towards Agency, but remember we're also quite focused on growing our direct business. So I don't think it is going to be a material change between us in both places over multiple quarters. But I think, you're going to see some progress. Okay.

I'm seeing progress in the agency and I think we continue to see some more progress, so..

Okay. Great. Thanks very much..

Thank you..

It appears that we have no further questions at this time. I'll return the floor to the presenters for closing remarks..

Thank you so much. I thank everybody for joining us for our second quarter earnings call. Thank you so much..

That concludes today's teleconference. Thank you for your participation, you may now disconnect..