Hello, and thank you for joining the Stewart Information Services First Quarter 2023 Earnings Call. [Operator Instructions] Please note today's call is being recorded. [Operator Instructions] It is now my pleasure to turn today's call over to 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 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 a 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..

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 to the current short-term market challenges and strengthening story for the long-term growth performance.

The strong financial footing should best position us to take advantage of the opportunities that this cycle will provide. I'd also like to restate my long-term view on the real estate market and the ability to become the premier title services company.

A tremendous thank you to our associates in 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 segment.

Low residential inventory, high mortgage rates, lower commercial real estate activity and tough economic conditions all contributed to this 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, the adjusted first quarter, that 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 low results for the first quarter were primarily driven by significantly lower revenues caused by volume to classify lower home sales and refinances.

Total title revenues in the first quarter decreased $265 million or 37%, resulting in the Title segment's pretax loss of approximately $1 million from pretax 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 pretax 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 purchase 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% compared to last year. The average agency rate decreased to 17.4% compared to 18.1%, 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%, primarily driven by lower title revenues. As a percentage of total revenues, the title loss expense was 3.9% compared to 4% last year. For the full year 2023, we expect title losses to average from 4% to 4.2% of title revenues.

For the real estate solutions segment, pretax 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 pretax margin was 2.2% compared to 7.6% last year after adjusting for purchase intangible amortization for the adjusted pretax margin was 11.5% compared to 14.8% last year. The segment's total operating expenses in the quarter decreased 26%, primarily due to lower costs related to revenues and lower incentive compensation.

Consolidated employee costs as a percentage of operating revenues increased to 33% compared to 24% 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 and employees in 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 facility.

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 of $51 million compared with 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 safety and prosperity, remain confident in our support in real estate markets. I'll now turn the call back over to the operator for questions..

[Operator Instructions] We will take our first question from Bose George with KBW..

Actually, I wanted to ask about the margin, and it might be a tough question.

But just given the tough -- the challenging backdrop on both residential and commercial and assuming that persists for much of this year, what can we think about in terms of the margins the business can generate?.

Yes. Bose, I'm still convinced that as we look out for the next 6 to 8 quarters, we will end up averaging kind of that high single digit, double digit. I did think the question is kind of how it evolves this year. And I think we all have a view that is going to improve material into the second half of the year.

I think if you think about it now, I would say over the last 6 weeks, I think it's going to be a more moderate improvement in the second quarter but it will improve. What's interesting for us is that closed orders were down 50% in January; 28%, I think, in February and then 40% in March, [indiscernible] in March.

And so I think we're much better confident I think we can manage ourselves. And I think the margins will improve dramatically through the year. I just think there'll be more moderate improvement in the second quarter than maybe we saw 6 weeks ago because of the volumes.

But again, if you look at last year where we had a tough fourth quarter, we ended at the 8%, I think we'll be a little less than that this year if the back half improves. But I think it's going to -- we have a lot of leverage here. But one of the things is we have capacity in the system.

And so as the volume comes in, we won't be adding a lot of resource, right? So we have a lot of leverage on where we are and the portfolio is a lot better. And because I look at a historic rate, that our order count is kind of where we are, I think we're both some of the bottom now, and we're poised to do updates through the rest of the year..

Okay. That's great. That's very helpful.

And then just on the real estate solutions segment, what's a good way to think about the run rate there? Like how much of that is transaction dependent versus not?.

Yes. This is Dave. It's pretty transaction-dependent. If you think about the mix of businesses, we've got the PropStream business, which is a subscription business so that's not as transaction-dependent on when people come in and out of that business depending on what's happening in the market. So that's less transaction-dependent.

But the other businesses, appraisal, credit, those are transaction-dependent. And so that was what you really saw in this quarter in some of those businesses. Transactions hit pretty hard. We have had some pretty good success in the credit business differentially in the market. And I think in general, that business is doing well relative to the market.

We're participating in the appraisal program, one of the tenders that were selected for that. So those are the kinds of things that will really help that business sort of be durable and better than some as the market improves. That's the way to maybe think about the puts and takes.

So I'd say a good amount, over half is transaction-dependent, and then you've got some stuff that's less transaction-dependent..

Okay, that's helpful.

And then just the increase in that segment over last quarter, was that just sort of some of the acquisitions kicking in?.

Well, we did have the small account check acquisition in the first quarter. We had a nominal benefit from that. But we did also have some customer wins, and so I think it was a combination of those..

Yes. We had -- we have some good momentum in a couple of those businesses around products that actually help lenders save money in the mortgage process. And so we're actually getting a little bit of growth happening in a couple of those businesses right now..

And we will take our next question from John Campbell with Stephens Inc..

Going back to the question, and this is for Fred or maybe David here, but can you talk to the levers to control in the model or you don't think you need to add much additional expense as the revenue rebuilds? Just trying to get a better grip on those incrementals.

It would be helpful if you guys maybe provide the all-in fixed cost level as it stands right now, or if you're not able to provide that, maybe just talk broadly to the mix of fixed first variable costs now and maybe how you expect that to shift from here..

Well, obviously, we have the strict fixed costs, right, during the 20% or 30% thing..

Yes, sort of 20% to 30% fixed, then you've got sort of the 40% to 50% 70% variable and then the 30% or 40% of true variable. And the challenge is always managing the variable..

Exactly. So what I would say, John, is the personnel lines, like if you're 50% point, you can't cut 50% of your resource, personnel, right? And so you're going to be really careful about how you're managing the resource and protect the capabilities of the institution.

So what I would say is that we've been very thoughtful and we've done a lot of actions. But the way I think about it is we have excess capacity in that semi-variable component that we've retained to take advantage of the market as it comes back.

And so therefore, what you see is in notorious in this business, right? And the way up, your margin is higher, right, because you're managing kind of that semi-variable, to Dave's point, in a fixed way and that will increase.

And then at some point, you hit in over time, if we hit in '21 if you don't have resources, it really gets exaggerated as far as your margin. So again, the way I look at it is that we're bouncing off the bottom here, we've done a very good job. I really applaud our team on being across the board, and we've thought about expenses in every dimension.

And as I look forward, that incremental revenue helps us tremendously on margin. I just think it's going to be a tad slower than we thought before.

I think the second quarter, what you're seeing is, well, 10 years down, that spread wide and the inventory is not a little bit hesitant to go up, although I saw that yesterday was a tad better about total level. But it's kind of a freeze over time. I'm still pretty encouraged by the end of the year, especially next quarter is a transition period.

And again, I'll reiterate what I said, we would have 30% in order count in March, and we made some, right? This company historically we haven't been able to do at this company. For 100 years, we've never been running in the first quarter.

So we have been fortunate enough to do that the last 3 years and you look at our portfolio and how we manage ourselves, and I think we have a lot of leverage on the way up here. We just got to keep managing ourselves, right? So it's a challenged market..

Makes sense. That's really good color. I appreciate that. And then on commercial, obviously, a lot of uncertainty out there. I think investor attention is really shifting towards commercial obviously. If you guys can maybe talk to the order pipeline, what you guys are seeing? I saw March, the open orders are down 40%.

Kind of what you're seeing if you've got any insight into April? And then if you could just talk broadly to the mix and the fee for file, maybe what you're expecting around fee per file, there's going to be continued pressure there as you close out in 2Q..

Go ahead, Dave..

Yes, John. I mean, it's -- I think what you're seeing is in our book is not inconsistent with what you're seeing in the market generally. You've got offices obviously challenged, although some market's not as challenged as others.

I think the major natural offices tend -- the major metrics tend to be a little more challenged primarily because they have some more work from home. And so we haven't seen like in New York in places like that, the bigger transactions come back, and you're seeing that in the longer fee for file.

I think as you get into some of the smaller markets, it's not as bad of a story on office, although there, you have to see what's going to happen with all the regional banks because they've been a big credit provider to that sector. We saw a lot of energy deals at the end of the year.

I think there's still a lot of activity there and we'll probably see some of those mature and close here over the coming year. And then it's sort of a mixed bag. I mean, you're seeing decent stuff in retail. Multifamily have been really strong. It's slipping a little bit but generally stronger than the rest.

And industrial's backed off a little bit, right, because there just isn't as much activity as we saw during the pandemic but still generally strong.

So I think it's the combination of those things and then what's happening in the capital markets and then people trying to adjust the cap rate change in the lifetime valuation that's causing that slowing. But one, if there is a slightly positive thing, deals are mainly getting pushed, not careful. And so we just have to see how that all develops.

And so hopefully, as there's more clarity on valuation in capital and financing, those will actually close, right? And that or maybe there's a better outcome. But should that situation not change, that will continue to be challenged..

Yes. So I think we're -- I don't think it's like the res market. I think it's -- again, we're planning on it being down a little bit. We were fortunate enough to gain share last year in commercial. We've done -- we've had some good progress. Our energy practice is as busy as it's ever been.

It's a little bit choppy, is lumping because of when the closings are. So one of the interesting things we have is we have probably a higher portfolio in our centralized commercial smaller deals. And I think the uncertainty around the regional banks is a little bit of a pause in some of that market.

And so there is a little bit, I think, kicking out of some of that. So we kind of think we're going to have -- this downturn is going to be real for a while, and we'll see, I think, the back half of the year some better results. But it's interesting to us. We are really busy in a couple of these segments as good as we've ever been.

And so it's interesting. I feel pretty good about the business by the end of the year and towards the end of the year. But it is kind of a very uncertain all the stuff for the bank this week it makes all that stuff a little bit uncertain..

But you also, John, have to think about it in the dimensions. It's not only sector-specific but it's type of activity. So new developments, sales and then refinances, right? And you do have that $1.5 trillion maturity ladder mainly this year and next year. That's going to provide some support to commercial.

And then it's just a question of what happens with that, right? You have a lot of restructure. You have some defaults.

As it looks like now with all the REITs and everybody reporting, even though people might be increasing reserves, a lot of those loans are still for [indiscernible], right which could be positive because it might mean you could actually refinance those and have to restructure the default..

Yes, that's helpful. That's great insight. I appreciate that guys. Last one for me, just a housekeeping question. But David, on the other orders, I know M&A is sort of influencing that but you've had a pretty big step-up there. If you could maybe talk to the seasonality of those other orders as well as what that kind of average fee per file is..

Others primarily are reversed basis through FMC. And yes, I mean, that's going to approximate more, not exactly because the transactions are a little bit smaller but it's going to be closer to a purchase transaction and a refinance transaction..

Okay.

And then -- and that's from a fee per file standpoint and seasonality standpoint?.

Well, it's not as seasonal, right, because it's -- you can do that -- if you have equity, it's more a function of getting a hold of a customer and closing the well. So it's not as seasonal. It's in markets like this where you have a lot of built-in equity is actually a good market.

It's just that market has been changing a lot with some of the originators being sold, repositioned, that kind of thing. You've also got new originators coming in. So I think it's more a function on the volume side of what's happening with the originators than it is the opportunity from an equity and an age perspective..

[Operator Instructions] We will take our next question from Geoffrey Dunn with Dowling & Partners..

So I'm not sure if I'm going to ask this right but from a commercial market, obviously, we're going through a big downturn cycle here. But with what's going on with office space, do you have concerns that there's any kind of secular shift happening? And I ask that more because of you mentioned about investing in commercial talent.

Is your commercial talent, for example, focused on certain sectors, and you could have made an investment in some of your specialized in office, and now that's not necessarily the right investment? Is that something we have to worry about if office doesn't come back? Or is your talent -- commercial talent more flexible across the various sectors that you cite?.

It's a good question because it is actually more flexible. For us, it's very geographical. So one of the things that this company was historically is we were very skewed to New York on the commercial side and we didn't have the breadth geographically. And so it actually is diversified away from office in some ways or office life developments.

And so I feel really good about it. In fact, we did some energy-focused acquisition because it's kind of one of our underwriting capabilities. It's obviously because of what's happening, there's some opportunity there. But it's been very much geographic.

And obviously, there's some obvious places, whether it's industrial or the warehouse or the data center stuff, there are some natural places that we focused on, given what the trends were. And so I feel pretty good about what we've done.

I would say the way I think about it, we primarily in certain geographies and our coverage and in growth markets that were important to cover, and that's how we thought about it. So I actually think we're pretty well positioned. But the other thing, since the pandemic, everybody expected it.

I mean, again, this isn't some new and the other thing, the secondary city versus the primary city, in my view, is also something that kind of -- you kind of knew when you anticipated as you thought about staffing approach. But one of the interesting things about us is we've always had a great reputation from an underwriting point of view.

We issued it because of our uncertainty of being "for sale" 3 years ago, and the notion of our we had a lot less capital back then. We weren't a relevant third player. We were but we were less better way to say it. We're now very relevant.

The question is, do we have the right capabilities in the right markets to impact the business? And by the way, I would also say that's true in the direct offices at the low end of commercial where we didn't have as many people dedicated to that segment as we needed to have and will have going forward because that's going to be a vibrant segment for most -- when you look at all our secondary cities, it's still the most powerful segment.

So again, I think we've been thoughtful about this, I'm not worried about necessarily office in or [indiscernible] The retail has been held up a little bit more expected retail is the other one. So I think everybody anticipated was you weren't going to belong into retail.

And so we were pretty thoughtful about how we thought that adding these sources..

Right. And then you've mentioned a few times balancing expense management with longer-term investments.

But how long can you sustain that balance? You could paint a scenario that maybe mortgage rates start loosening up, but if the consumer starts running into economic pressure, the estimates for originations this year, next year could still prove optimistic, and it looks like the spring selling season starting off soft.

At what point do you have to start cutting muscle? Or do you just kind of bear down and endure it?.

Yes. I feel -- again, I do feel like we're best to do. It's a great question. So about a couple of things I would refer you to. I [indiscernible] about $18 million to $20 million and I identify as discretionary investments in long-term stuff for the year.

That's about [indiscernible] a quarter so I could have made a little bit of money this quarter or close to. And as a apart of kind of the data management stuff we're doing.

We're doing some -- we kind of work on kind of centralization, and we've got some stuff we're doing on balancing where we do our search work and the cost of delivery of search work.

And if I look at those initiatives, if we give you probably a couple -- I believe, a couple of hundred basis points of improvement in margin over the next 18 to 24 months. And they're discretionary. But we're well into them. I think the right thing to do. In some cases, you could characterize them as we're catching up through our competition.

And that's what I was referring as discretionary. There's another way to think about it, which is we have taken -- we take a much weak action as anybody that we compete against. The issue with my view is that I don't think there's a lot of great alternatives to go for.

So I think there's always good hygiene and as things shift, as commercial gets weaker than there are some things that we could do on a targeted basis. But we've done kind of what I feel is appropriate. And it will be so if we went a lot further. Now again, the market is going to be down 50% continuously.

You got to rethink that, but the whole industry is going to have to hit that. So I don't -- again, we're a little easy because of the seasonality of us more so than others. But I think we've managed our expenses well. I think we're in a good place to actually have increasing margin through the rest of the year. So I feel okay with that.

The other point I would make is I mentioned in the last call, one place I feel like we just haven't done enough yet is our interest income on escrow. And when we first started the journey, we looked at the bank and as we do money was that quarter of point. So nobody was interested in deposits.

We are working hard at creating partnerships with a couple of banks to make sure that we're extracting on our couple billion dollars of escrow, some interest return, which again, changes our margin at this level of volume. And so I think we can do get that done by the end of the year and it kind of helps our profile relatively materially.

And so that's the one lever kind of, I believe, we need to aggressively act on that we have. As far as the portfolio stuff, one of the other questions today was our data business has been growing, and that is more stable at a low volume like this.

And so I think we're doing some things on the offensive side that will enhance our margins if the market stays at this low. So I actually think that in most all scenarios, we're going to enhance margins through the year. So I feel pretty good about where we are. But again, it's something we work at pretty hard.

And I [indiscernible] 20 because it's an exclusive decision we made. I think the right decision at the that is the tremendous because I think the improvement. I think somebody asked me on previous calls. The problem with that improvement is if we don't have volume, we don't get the full benefit of those improvements in efficiency.

But we'll get to higher volume soon here that those will be more transparent. So I feel like they want to take it..

And it appears that there are no further questions at this time. I'll turn the call back over to the management for closing remarks..

I want to thank everybody for joining us for this quarter's call. Thank you so much for your attention..

Thank you for your participation. You may disconnect..