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.

[Operator Instructions] 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 Stewart'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 Hisey. To listen online please go to stewart.com website to access fully for this conference call.

This conference call may contain forward-looking statements that involve a number of risks and uncertainty. 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 four quarter earnings conference call. Dave will review the quarterly financial results in a minute, but before that I would like to cover our overall view of Stewart in the current market.

As I discussed before much of our efforts over the last few years is 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 cycle and economic conditions. We are 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 in challenging market, 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 2023, and are managing our business with a balance of cost discipline and investing in skills and capabilities that will best position us for the long term.

Although, interest rates have declined in early 2023 by 100 basis points and we've seen improving trends in January quarters. Interest rates, home inventory and housing affordability are all cadences to quickly turn it to a normal real estate market.

Through 2022, we have been managing in a declining market, starting with a significant increase in bull 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 normal market.

In the fourth quarter, we saw an additional material increase 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 maintained our financial flexibility.

We continue to manage our business with a long-term view, however, we have maintained strengthens, the investments and improvements we have made over the last few years, ultimately improving our structured and long-term financial performance.

We remain focused on our strategic plan of building an improved competitive position by being more efficient in having a disciplined operating model that functions well throughout the cycle.

We have emphasized growing scale in attractive markets across all lines of business that 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 the 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 position.

Financially, our long-term goal remains to generate high single to low double-digit margins over the cycle. However, in the living 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 in talent and systems necessary to achieve over the long-term. Disciplined management and seizing on growth opportunities as they arise are keys to improving stores financial position.

On the margin front prior to getting the [indiscernible] pre-cash margins were below the single-digits in the normal market and lower volume markets we consistently lost lot money.

Our efforts to improve scale in our direct operations improve our portfolio from acquisitions and real estate services and strength in our operating model have allowed us to better weather the margin pressure particularly in challenging environments.

At the outflow of the journey, we identified areas that we needed to improve on in order to achieve our goal. Since then we have invested significantly improving our technology for tighter 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 our agency technology platform, which typically has the – ease of use of connectivity with agents. We continue to make excellent progress on these and other investments, but we know that what work needs to be done.

We believe the current market will present opportunity to improve scale targeted and attractive direct markets which is to add additional services that complement our existing lender services. Share growth in direct target MSA markets remains a key strategic objective.

During the fourth quarter, we added FNC Title Services, which specializes providing Title Services to -- for reverse mortgage transactions and BCHH the national provider of Title Services to institutional investors and lenders.

Both companies are leaders in their respective fields that are important to our strategy to increase our service offerings and scale.

[indiscernible] additional progress integrated completed acquisitions into our production and other systems, which improves our customers' 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 to increase scale in our growth markets and improve our share with the highest quality independent agents.

We have made excellent progress on our deployment of technology and services that provide greater connectivity, ease of use and risk reduction for our agency partners. As we move through 2023, our platform of services for agents is as strong as it's ever been.

Positioning our commercial operations for growth across all our business lines has been a key focus this year as these operators are important components to our overall strategy. We made significant investments in talent during 2022 and aid in achieving these objectives.

We are optimistic regarding the commercial market long-term, although we recognize there may be some headwinds 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 expense of the current short-term market challenges and strengthening Stewart for the long-term growth and performance.

A strong financial footing should best position us to take 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 our 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 settlement has been forward due 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 2022 net income of $30 million and diluted earnings per share of $0.49 on total revenues of $656 million.

After adjustments primarily from net unrealized gains and losses on equity securities and office closure, severance regulatory and litigation expenses adjusted fourth quarter net income was $60 million or $0.60 per diluted share compared to $84 million or $3.05 per diluted share 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 service pretax income was $27 million compared to $119 million in the prior year quarter.

While on an adjusted basis the segment's pretax income was $35 million compared to $120 million in the prior year quarter. After adjustments for purchase intangible, amortization and other items listed in the appendix of our press release, adjusted pretax 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 due 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 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 solutions segment. Fourth quarter pretax income decreased to $400,000 from $5 million last year, primarily due to lower transaction volumes resulting from the economic environment.

Pretax margin for the fourth quarter was 0.7% compared to 6.1% in the fourth quarter 2021. After adjusting for purchasing tangible, amortization and other items listed in Appendix A, adjusted pretax 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 cost related revenues and lower incentive compensation based on lower results.

Employee cost, 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 2022 and 2021 respectively.

Excluding office closures, regulatory and litigation expenses, the other operating expense ratio was 21% in the fourth quarter 2022 compared to 23% in the prior year quarter. On other matters, our financial position is strong to support our customers' employees in the real estate market.

Our total cash and investments as of December 31, 2022, are approximately $430 million in the regulatory requirements and we also have a fully available $200 million line of credit facility. Total stockholders' equity attributable to Stewart is $1.36 billion and our book value per share was approximately $50 which is 5% higher than December 31, 2021.

Lastly, net cash provided by 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 it and inspire our customers and associates.

We advocate everybody safety and prosperity and are confident in our supported real estate markets. I'll now turn the call back over to the operator for questions..

[Operator Instructions] Our first question is coming from John Campbell from Stephens. .

Good morning, John..

Hi, guys. Good morning. If I strip out the one-timers here, I'm showing the personnel cost is down maybe a little bit less than half the rate of revenue. Other operating expense is down sharper than revenues, I know it's important that you guys retain staff to avoid that share loss.

And I know, you've invested to garner share and so you don't want to lose that on the other side of the market.

So my question here is the 4Q movement in revenues and expenses, by those line items? Is that kind of a preview of what's to come? You're basically cutting the other operating expense faster than the salaries?.

A little bit, John. So the reality is that we're lagging a little bit. So we've done on both lines, we've done a material amount of stuff in the past three quarters. But when I saw this gift, kind of -- I mentioned actually a little bit in last earnings call, at the end of the third and into the fourth.

We took about $25 million with action thoughtfully targeted in surgical like, we took that old action in the fourth quarter. I will say that will be probably 20 personnel five open order. So the balance changes in shifts kind of during the year kind of what we did. And so that's what you saw.

And obviously you can see in the restructuring result of some of that stuff, with the office closures and some of this relevant stuff. But -- so the balance has been kind of that going in.

And so what we see obviously, the first quarter is our toughest quarter always, and the order count obviously, we see the open orders to announce -- we kind of know what the first quarter is going to be like in some ways.

And so, I thought it was appropriate to -- but to your point, otherwise we are being thoughtful about this because in my view is that two or three terrible quarters, we're going to get through, but we built great capabilities across the organization. And I got to make sure, we can take advantage of the market when it comes back and we will.

And I want to make sure the momentum stays and the still stay. And so, we're trying to be really quite thoughtful about it. And I feel very good about how the team is has managed through it. .

John, this is Dave. Just one other thing on the other expense line, whether it may be a difference in the percentages there. A lot of the real estate services has third-party data and other cost and so that varies, a lot more closely to revenue than maybe the employee one. .

That's a great point. And then on the implied direct title kind of fee per file, I'm going a little bit of trouble back into that. If I take just the direct revenue divided by the closed orders, I think it's about a 40% lift year-over-year. I know there's a mix shift there.

But if I look at that sequentially, it's kind of a similar mix shift and that was a 10% move sequentially. I'm thinking maybe the kind of recent acquisitions might be skewing that, a bit. So maybe if you could talk to that, help explain that. .

Yes. I think for that kind of a difference, John, I mean you're probably talking to geographic mix and stuff like that. Those acquisitions, the reverse fee for file isn't quite that high. And the other one closed later in the year, so we wouldn't see any impact of that. So that sense is that's just more geographic mix shift. .

Okay. That’s helpful. Thank you, guys..

Thanks, John.

[Operator Instructions] And it looks like we have another question from John Campbell. .

Yes, this is my show today guys. If you could touch on the BCHH business. That's something obviously, you guys acquired in late December. If you can maybe talk to how that impacts the P&L? I'm thinking that probably falls in the Real Estate Solutions segment.

But then also if, you could talk -- give a little bit of color on the synergy potential and kind of how that complements the strategy. .

Yes, John that actually is a title operation, so it's going to be in the title segment. I think the way to think about that is their primary customer base is, sort of the institutional investor side to think about single-family rental, think about build and run that kind of thing.

And so, I think much like we did with the reverse business with FNC, we're sort of looking for market segments where you can differentiate in the half growth potential with what's happening sort of economy with demographics and the like.

And some people and I'm sure you've done some work on it and sort of size that sort of family [indiscernible] institutional or maybe 10% to 15% of the total real estate market at some point. And so this is one of the premier providers there. And it's just an opportunity to go after that market segment..

Okay. And then this is somewhat related to BCHH, but if you could go back to FNC, I think you had talked about in the past that was maybe going to hit in other orders. And then maybe I think you said last quarter maybe that was purchased.

Is it a mix now? If you could talk about the impact to other orders that was -- that picked up a good bit sequentially and then also on BCHH if that's going to hit on purchase or other?.

Yes. It's -- FNC is another. With BCHH I think we're going to need to take a hard look at that because some of that could be other and so it's purchased. And so there's probably going to be a bit of a split there. .

Okay. That's helpful. Thank you guys..

Thanks, John..

It looks like that is our allotted time for question-and-answer session. I will now turn the program back over to Fred. .

I think there is some more in the queue. Question there in the queue..

It actually looks like a couple just queued up, and we have Bose George from KBW. .

Hi, Bose. Good morning..

Hey, good morning. Just wanted to follow-up on the question from John on expenses.

As the benefit of the cuts that you did this quarter flow through is there a way for us to kind of think about what the margin range is for next -- for 2023 assuming sort of the market remains roughly in line with consensus expectations?.

I mean, I think again, [indiscernible] in the first quarter is going to be much more indicated by the poor order intake in the fourth quarter. And I think after that we believe it's going to improve pretty materially.

The personnel stuff we've done in my view gives us -- obviously at some now that we have excess capacity in the system still given where we are and what we're doing. And so that as the market improves, obviously, those ratios improved materially through the year, if you have the capacity steady state as the volume increase those.

So we feel pretty good about where we are and we're going to end up.

And if you look at this year's year in total it gives you -- like if you look at kind of how we manage the full 12 months even though it was a declining business and you look at the way that ratio is on an annual basis you get a pretty good sense of how we can manage the business, right? So I feel pretty good about what we've done and where we are.

The one disadvantage we have as you know is our portfolio is a little different, but we don't have a bag of investment income that goes to the revenue line that changes these ratios. So if you look at us on a comparison basis, we've actually managed pretty well apples-to-apples. It's just that we have a little different portfolio that others have.

And obviously the big guys were three times, four times our size there's a little bit of overhead at the top. But I would say, on a relative basis the actions we take in, the level of actions we've taken its very comparable actually..

Okay, great. That's helpful..

Just one other thing on that, I mean, I think the one thing to think about is even though we have taken all those actions, I think some of the ratio of relationships that you saw in the fourth quarter where maybe you guys were a little bit lower than actual on the employee side.

Some of that may continue, because we don't get quite the dollar-for-dollar, but maybe things that..

I think the first quarter will be very challenging just like the fourth, because we're at the bottom right here. And what's interesting though, that I'm sure you've seen it. What's exciting or -- orders are up for us to January 28% both in orders and commercial orders are up by 20% or something.

But your first quarter has driven what the fourth quarter invest higher-quality. So while it's really good that lags, right? So I feel like we're kind of we're bouncing off the bottom here which is excellent.

But the first quarter -- and the other thing about us, remember is we're more seasonal than all the other competitors, because we have the least in California and Florida, everybody else's huge positions in California. We don't.

So we had a little bit of a double win, of that fourth quarter and a weakish first quarter because we're big into our [indiscernible]. We're big in [indiscernible]. So we have a little bit more of a seasonal lag.

But again, I would say that, I feel like we call it right, because we can see the kind of the trends coming and things balancing a little bit back. So it's good..

Okay. Great. That's very helpful. Thanks. And then, actually can you remind us what drives that non-controlling interest line. Now, it's come down very modestly, despite the big move down in income..

Yes. Yes, that's where we don't have 100% ownership in some of our businesses. And it varies from period-to-period. So we had done a slight majority purchase like a couple of years ago and then we've been staging into that. And so that was helping that line.

And then, we had a couple of new entities in the fourth quarter so that might have kicked the ratio off a little bit. But in general, we're trying to minimize the partial ownerships, but there's going to be periods of fluctuation.

So a lot of that was historic we did at the beginning I would try to buy and get rid of that and have had some ownership but one of the recent acquisitions for real good strategic reasons we get a little bit of a ownership to lining incentives.

So that's why it bounced a little bit, but I don't see that getting huge or any base that's not going to jump..

Okay. Great.

And actually just going to add one more, just the legal and regulatory settlement was that kind of just a one-off? Any color on that?.

Yeah. It was with New York on anti-poaching if you will. Everybody in the industry is tired kind of we have looked at is that it came out of actually I believe, our transaction with Fidelity and some service they did about anti-poaching. And so we settled I think in the third player to settle on that. We just want to get it behind us.

But I think a one-off [indiscernible]..

Yeah. Okay. Got it. Great and thanks a lot..

Our next question comes from Geoffrey Dunn from Dowling & Partners..

Hi guys. Good morning..

Hi. Good morning..

Good morning..

So just first with respect to the near term, it sounds like activity is picking up. You don't necessarily get those revenues completely in the first quarter but you certainly have the expenses of the processing those orders. So as it shapes up, it sounds like directionally we're looking underneath more compressed margins sequentially.

And I guess my main question is do you think you can make money in the first quarter?.

Great question. I think it’s a very challenging quarter, right, definitely our most challenging quarter. I think we've -- again, we've done a pretty aggressive job managing all our expenses. But again, I think first quarter is the most challenge..

Okay. And then investment income, it looks like you had a pretty good uptick this quarter after I've seen much movement beforehand.

David, did you reposition the portfolio differently, or is this just a lagged impact from the – you know money yields going up?.

Yes, Geoff. It's David here. I mean a lot of that's just the benefit we're getting in the money markets right now. I mean you can get the 4%-plus in money markets where you weren't getting that. And so, it's just the earnings on the excess cash.

I think we're keeping the investment portfolio relatively short on the duration side and over indexing our ways to grow the business but that's mainly the effect of money market rates..

Yes. As you know, the short money is so good right now, right? It's a very unique situation. How quickly it moved and how good short money is. And again, it shows a little bit of our gap and that we don't have a depository for our escrow. So, our investments are going to come really from our investment portfolio and a little bit from the 10/31 business.

But we don't get the benefit of our $2 billion of escrow but it is a very unique time right? It's kind of the best time. It's a little countercyclical in a tough market right now with investments..

And my last question is on commercial. I think a lot of people think of it as like a normalization year for commercial, but probably that can be very painful when you're coming off about the results.

But can you talk to -- beyond maybe what you think as normalization, what remained the hotspots? What are the areas that seem like they're actually starting to get impacted on an economic basis? What are the pluses and minuses relative to the normalized level?.

Yes. Again for us what's interesting is that, -- I think the first quarter is interesting because I think it's going to be slow in some places but the orders are up so the tail, I think the year is going to shape up pretty good. I think there's some geography stuff going on right now. So I think US is a little bit slower.

But for us, what's interesting given our mix, energy is very strong. And so for us, we have some advantages in that what we're seeing is really nice pickup in growth in the energy sector. And obviously, there's the obvious sectors that are going to struggle a little bit more than others, like on office, is going to struggle.

But in general, we think it's going to be a pretty good market in commercial. I do think the comparison last year's first quarter was really good. So I think the there's going to be a comparison in the first quarter. But I think overall for the year, it's going to be a solid commercial year. But there is the puts and takes to your point.

There's no question..

Okay. Thank you..

Thank you..

It appears we have no further questions. I'll now turn the program back over to Fred for any closing remarks..

Well, I want to thank everybody for joining us on this quarter's earnings call. Thank you..

And this does conclude today's conference. You may now disconnect. Have a great day..