Hello and thank you for joining the Stewart Information Services Third Quarter 2022 Earnings Call. At this time all participants are in a listen-only mode. Later you will 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.

[Operator Instructions] It is now my pleasure to turn the conference over to Mr. Brian Glaze, the Chief Accounting Officer. Please go ahead, sir..

Thank you for joining us today for Stewart's third quarter 2022 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 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 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 for Stewart's third 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 in the current market.

As I discussed before, much of the efforts over the last 2.5 years have focused on fundamentally restructuring the company's operating approach to better position ourselves on our journey to becoming the premier title services company.

The long-term goal has been to create a stronger and more resilient business that can perform better through all real estate cycles and economic conditions. We have focused on improving margins, growth and resiliency by improving our scale, our operating capabilities and our financial discipline.

While the third quarter was very challenging, I am pleased with how we are managing in this rapidly changing environment. We saw our economic headwinds coming early in the year, and it is now clear that the back half of '22, likely the first half of '23 will be a very difficult environment for our industry.

While we will be taking additional actions as needed to improve our structural resource allocation, we remain focused on our long-term goals in building an improved competitive position in a more efficient and effective operating model that functions well throughout the real estate cycle.

We've made significant progress in improving our talent, our technology and customer experience and financial models, but more work needed to be done. The market has transitioned, as you know, to a higher interest rate environment, rates rising at an unprecedented speed.

We are currently over 7% compared to a 3% or 4% early in the year, putting significant pressure during the third quarter of housing affordability and driving a significant reduction in purchase orders as inventories remained low and our home prices that we received. We have been compared for work and continue to adjust to these market changes.

Consolidating adjusted margins came in just under 8% for the quarter and adjusted title margins declined to just about 10%. I am pleased with the improvements we have made to our operating structure and allowed them to remain relatively strong.

Margins in our real estate services businesses remained in the mid-single digits, and our adjusted margin exit amortization is positively above 10%. As a comparison, Stewart's pretax operating margins prior to beginning non-restructuring journey was in the low to mid-single digits in a normal market and in low-volume quarters for difficult years.

Like the first quarter, we consistently lost money. Our efforts to improve scale in our direct operations, improve portfolio for acquisitions in real estate services and improvement to our operating model and all allowed us to strengthen our margins, particularly in challenging markets.

Obviously, there will be continued pressure for this market, but we are better positioned to manage this challenge while maintaining strong customer service. I'd like to reiterate that even though the market has transitioned, our journey continues.

We remain focused on investing to make structural improvements containing critical scale inquiring markets and investing in operating long improvements to improve customer service as well as reducing the cost of delivery.

Our efforts to enhance the customer experience through technology investments that meaningfully change the ease of use and expand our product offerings and our agencies, lender and direct businesses made significant progress this quarter, and our efforts will continue.

We are also balancing financial discipline with maintaining a high level of customer service, which Stewart is recognized for the industry. To achieve our goal of becoming the premier title services company, we recognized that we must make thoughtful investments even in the current environment.

We continue to evaluate opportunities to improve scale and target direct markets and add additional services that perform in our existing lender services. We currently have available significant capital resources to deploy as these opportunities arise.

Our recently announced acquisition of FNC Title Services is a nationally recognized provider of title services for the reverse mortgage transaction and the most recent example of our commitment to investing in the long-term growth of Stewart. I'd like to well on the employees of FNC to our Stewart family.

Regarding our direct operations, share growth in target MSA markets remains a key strategic objective. As I have mentioned before, we closed on more than 20 regional title companies during the past two years and continue to evaluate opportunities to deploy available capital.

We made significant progress this quarter integrating these acquisitions into our production and other systems, which improves the customer experience as well as the overall operating efficiency that we have been building on for the past several years.

Most importantly, we are managing our businesses in a disciplined manner for both the current environment and the long-term strength of Stewart. In our agency business, we believe our opportunities to improve scale in our growth markets and improve our share with the highest quality independent agents is as strong as it's ever been.

I'm pleased with the continued significant progress on our deployment of technology and services that provide better connectivity, ease of use and risk reduction for our agent partners.

As the industry accelerates the implementation of online and paperless transactions, we are identified ways to better support our agents as they undergo this critical transition. We have been investing in our commercial operations to set them up for growth as they are an important part of our overall strategy.

We are optimistic regarding the commercial markets overall, although we recognize there may be some headwinds in the short-term given the changing financial markets.

Overall, we will manage our expenses and investments very careful in this challenging market to ensure we are financially strong so that we can opportunistically take advantage of any opportunities that arise now or as we return to the more normal real estate market.

I'll conclude by reiterating my positive long-term outlook on the real estate market and our ability of Stewart to become the premier title services company. And I would also like to thank our associates for 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. Through the home buying season, the residential market has been negatively impacted by 30-year mortgage rates now in the 7% area.

Consumer sentiment has worsened due to inflation, affordability and recession concerns, commercial real estate began to see the impact of rates and volatile capital markets. Yesterday, Stewart reported net income of $29 million and diluted earnings per share of $1.08 on total revenues of $716 million.

After adjustments primarily from net unrealized gains and losses on equity securities and office closure and severance expenses, adjusted net income for the third quarter was $37 million or $1.37 per diluted share compared to $86 million or $3.17 per diluted share in last year's quarter.

Compared with last year's quarter, total title revenues for the third quarter decreased to $120 million or 16%, primarily due to lower market activity driven by higher interest rates. The title segment's pretax income for the third quarter was $52 million compared to $119 million in the third quarter of 2021.

While on an adjusted basis, the segment's pretax income was $63 million compared to $119 million in the prior year quarter. Adjusted pretax margin for the third quarter was 9.6% compared to 15.4% last year. In regard to our direct title business, domestic commercial revenues were down $4 million or 5% primarily as a result of reduced transaction size.

Average fee per file was $13,700 compared to $15,400. Domestic residential revenues decreased $45 million or 18% due to lower purchase and refinance transactions. However residential fee per file increased 12% to approximately $3,300 compared to $2,900 last year due to higher purchase mix.

Total international revenues decreased to $11 million or 20% compared to last year, primarily due to lower transaction volumes in our Canadian operations and weaker foreign currency exchange rates against the U.S. dollar. Total open and closed orders declined 40% and 39%, respectively, primarily as a result of the elevated interest rate environment.

Consistent with the softer market, the third quarter revenues from our agency operations decreased $61 million or 15% compared to last year. The average agency remittance rate was slightly decreased to 17.6% compared to 17.9% last year due to geographic mix.

On title losses, total title loss expense in the quarter decreased $5 million or 16%, primarily due to lower title revenues. As a percent of title revenues, the title loss expense was 3.9% compared with 4% last year. For the full year 2022, we anticipate our title losses will be approximately 4% of title revenues.

Regarding our real estate solutions segment, pretax income increased 21% compared to last year due to the effect of our acquisitions. Pretax margin for the third quarter was 4.8% or 13.1%, including purchase intangible amortization compared to 4.3% and 10.8%, respectively, in last year's quarter.

In regard to operating expenses, which consist of including other operating costs, total operating expenses for the quarter decreased primarily due to lower revenue-related costs partially offset by higher salaries and increased employee count due to acquisitions.

We incurred approximately $4 million of office closure costs and severance as we evaluate the resources needed to serve the markets.

Employee costs and other operating expenses as a percentage of operating revenues was 27% versus 21% last year -- sorry for the third quarter, employee cost was 27% and other operating 21% compared to last year's 24% and 18%, respectively, primarily because of lower revenues in the third quarter of 2022.

On other matters, our financial position continues to provide strong support for our customers, employee of the real estate market in the current economic environment. Our total cash and investments as of September 30, 2022, approximate $457 million of the regulatory requirements, and we also have a fully available $200 million via credit facility.

At the end of the third quarter, total stockholders' equity attributed to Stewart was approximately $1.34 billion, and our book value per share was approximately $50, which is 4% higher than year-end.

Lastly, net cash provided by operations for the third quarter was $49 million compared to $107 million from last year's quarter, primarily due to lower net income in the quarter. We are always grateful for and inspired by our customers and associates.

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

[Operator Instructions] Our first question comes from John Campbell with Stephens. Your line is open sir, please go ahead..

Good morning, John..

Hey guys, good morning.

On the FNC Title acquisition, David, is that, are the reverse mortgage orders, are they running through other or refi?.

Well, we're going to have to look at that, John. That one was actually on October 1, none of that's reflected in any of our numbers. But they are most like purchase. So I think we'll have to look at that presentation going forward..

Okay.

So I guess picking up a level, could you maybe size up expected earnings contributions and any kind of early thoughts on the accretion potential?.

Yes. I mean I think that you might actually come in when we announce it. I think the way to think about that is much like some of the other title acquisitions we do. I mean this one was in the $40 million revenue and probably north of $10 million in pretax contribution..

Okay. Sounds like a pretty healthy business. And then some of your competitors provided an adjusted EPS metric where you guys -- where they're backing out the purchase amortization. You guys have obviously been very acquisitive, you'll probably continue to be acquisitive. So that's a -- you've seen a pretty big step-up.

So I wanted to check on the purchase amortization, what that was in the quarter? And then how much do you expect that to step up next quarter with FNC acquisition?.

Yes. Well, we're going through the purchase accounting on FMC. On the title items, we typically have mainly goodwill and so you don't see as much amortization because this would have some customers, you could see a little bit more than on traditional title deal. I think as a general matter, we're running about $30-plus million in purchase amortization.

We are aware of your comment, and that's something that we're taking a hard look at probably in terms of how we might disclose that..

I think, John, it makes a lot of sense, especially In the real estate services business, if we think about it that way because it's a material part of those deals. And it's why I referred to the margin here active amortization in those businesses is significantly north of 10%, right? So that's what affects it for us.

And we'll -- we really need to consider more explicit disposal there..

Yes, that would be very helpful. And then one final question. On the office closures and severance costs, I saw the $4.2 million charge. Any way to size up kind of what that estimated annual run rate savings is going to be? And then it sounds like you guys -- there's further access probability on the comp.

So I just wanted to get additional commentary on that as well..

Yes. I mean it will be similar to that, obviously, I mean, I think we continue to reevaluate where we need to serve the markets, both from a footprint perspective on offices and then from a people perspective. And Fred, I don't know if you have any other....

Yes, John, probably for the last couple of years, I've tried to build more scale for the company because we were pretty spread out in subscale and talking about MXGP model life. So we've been sprinting at that we've made tremendous progress we saw from the numbers and how much money we make in the first quarter now and stuff like that.

We're a much better and stronger company, but there were certain offices that I think are attractive markets and attractive locations, and we've given it a shot to try to build those scales. And I just had looked at the outlook for the last -- for the next couple of years, we made the decision to say with a few of these we cut back on.

And so I think we've done most of the office work. We have a couple of places that we're considering because we have potential transactions to change the profile, but I don't see a lot of office closures ahead of us. Unless, again, we did some kind of transaction that we have redundancy et cetera.

So -- but again, as you know, our whole premise is that if we can get our scale at the MSA level and we can get the scale of the real estate services business, we can manage through the cycle more effectively. So that's why we kind of made the call on a couple of those. I didn't see where we could get there as good as we want to be..

Okay, all very helpful. Thank you, guys..

Yeah..

[Operator Instructions] We'll go next to Geoffrey Dunn with Dowling & Partners..

Thanks, good morning. I have a few questions. First, I wanted to dig into the title expenses.

Whether it's sequential or year-over-year, your personnel costs came down but obviously lagged the revenue decline, which is typical as you adjust to the market, but was a little more surprising was operating expenses, even trying to back out the charge looked like they might have been flat sequentially.

So are you -- is there something going on in that line that maybe there's a lag effect there? Are the acquisitions a bit of a challenge? And/or are you may be thinking about the longer run and maybe not cutting as expenses as aggressively as you might normally if you were in that structural position you wanted to be? So can you just maybe elaborate what's going on in those lines a little bit more?.

Yes, Geoff, it's David. So on the personnel side I think your latter comment is probably accurate. I think we're trying to balance our service capabilities with rapidly changing market. And so there probably is a little bit of a lag to the extent it's going to be any other action. I think with respect to other operating.

Most of that is -- and we're going to take a hard look at all that stuff much like we did going into the pandemic, and we got travel and promotional and stuff like that, and there may be some opportunities there. But the vast majority of that number is in third-party costs when we're buying data and other things for our real estate services business.

And so with some of the acquisitions and everything coming on stream, it's not really stepping down as much because you've actually got increases year-over-year in some of those revenues. But I think we're going to definitely take a hard look at all those expenses as a whole..

Again, a really good question actually. So the way I think about it is twofold. And just to your point of lag, we're chasing some of it a little bit and it's very purposeful. So on the lender space, particularly in the centralized title space, a lot of what happens when the market shrinks is that the lenders decrease their panel.

And I want to be very careful about our service metrics so that we -- and what we believe is we do have a winning side of that with every one of our major customers, which is going to be important to us both now and into the future as things come back. And so we purposely have lagged some of the actions.

And the same is true in some of the offices where to me one of the most unique things about this quarter was that in August, we had a little bit down in rates and our orders pumped up a little bit, and then it did a sprint from 5 to 7 and that's a very rapid decrease and to outdrive the decrease in orders pretty rapidly.

And the other thing it did is our close rate of orders to pay pretty materially in that same period. So in an office, you saw some offices go from 70 to 50. And so that shrinkage of work that was very quick, right, is something that you're chasing a little bit.

You're lagging a little bit, and we have to be thoughtful again about how we do that and how we service it.

On the other stuff, I would tell you, and I mentioned this in a couple of calls, we still have -- this year, we spent incrementally about $20 million on significant improvements, data management and that's the stuff going on, some integrations that we have. We have some centralization that's going to help us on our delivery costs.

We bought a company in India as you do know to kind of rebalance kind of our service offerings.

So we've got a number of investments that are mid-flight or coming better in there that we're continuing that are going to help us tremendously in the long run, but they are -- I think they might be sort of incremental to what you would normally see because we were a little bit behind in some of those areas.

So I'm pretty comfortable about how we're managing costs. I would say we are lagging. We've taken lots of actions, and we're going to -- I think it will take a lot more. And again, one of the other things I would say about kind of margins in general.

This period is -- this is -- like a 20-year event, right? And so what you're seeing is we were just kind of dropped pretty dramatically. And we just got to be thoughtful as we take actions that were not affecting our capabilities to be prepared for when the market comes back, right.

In our experience, we got to just manage ourselves through it, we will. And again, I just feel like we're still strong, right? I can look at the P&Ls office by office, I can look at the way we manage our cost categories and work on. We just have to manage ourselves through and it's going to be a little bit more challenging.

And again, we're at the part of the cycle where the margins could be a little less. So I'm comfortable with where we are. But to your point, we have to manage it all. We have to really focus on it and make sure we're on top of it..

Okay. And then to follow up on I want to ask about commercial. You did note that you're starting to see some impact from the increase in rates and obviously, I think we saw the average deal size come down year-over-year.

Can you elaborate a little bit more on what you're seeing today in the commercial market implications for the pipeline, not only into Q4 but into '23. I think we're still on track for potentially a record year, but it's more about what's coming down the pipe here.

So can you talk about what you're seeing today and what the implications you think at this point are for next year?.

Yes. I mean we're bullish on commercial in general. But it's true that what's happening in the financial part, there's been some pause, retrading or revalue. I mean, obviously, this changes the economics of a lot of commercial projects when you see this kind of change.

So there's -- there might be a little bit of them, I'll call it, retrading or pausing or delaying certain projects. But we've seen orders be strong, right? I mean we think the commercial segment is going to be, in general, strong over the next couple of years here.

It's just -- it's a little bit choppy as people are kind of restructuring and resetting. But it's -- we like it. The other interesting thing for us is we have been pretty aggressive and thoughtful about investors we just picked up a team and headed Northwest.

And this is a classic case where there's some disruption from our competitors that are having because of a challenging time. It creates some opportunity and given our surplus strength at our position strength. I look this to be as an opportunity for us if we stay focused.

So we generally like the market and Dave can talk about the factors and obviously, different by sector, but we're still -- if you could hold it on much better. And to your point, the front of your sort rate, the overall year is better. But it's still a relatively solid position for us..

Yes. Just to drill on that a little bit more, Geoff, I mean it's performing obviously relatively better than it was just down just out a little bit. So I think that's what Fred's comment on it being strong. I think where we're seeing activity is in the energy space, in industrial and apartments are also classified in commercial.

So there's a lot of activity in those different segments, less so in the office every now and then there's a retail deal, things like that, so there's still good activity across the asset classes. We will focus on a few than others.

But some of these deals from in the capital markets, right? And because of that volatility, it's been a little choppier, as Fred said..

So maybe paraphrase softening nearer term, but no red flag downturn sides?.

Yes. And again, I would say exactly. And I would say for us, it's still a major focus for growth, right? I mean, for us, it's a place where we're investing in capability because again, it's -- people will run to strength during this kind of cycle. And so the bigger players who have the more skills then have some advantages here..

Okay, all right, thank you..

And with no other questions holding, I'd like to turn the conference back to management for any additional or closing comments..

I just want to thank everybody for their attention today and giving us your time as we went through the quarter. So thank you so much. I appreciate it..

And that will conclude today's program. We thank you for your participation. You may disconnect at this time..