Stewart Information Services Corporation (STC) Q3 2020 Earnings Report, Transcript and Summary

Hello and thank you for joining the Stewart Information Services Third Quarter 2020 Earnings Call. At this time, all participants are in a listen-only mode. Later, you’ll have an opportunity to ask a question during the question-and-answer session. Instructions will be given at that time. Please note this call may be recorded. [Operator Instructions] It is now my pleasure to turn today’s conference over to Nat Otis, Head of Investor Relations. Please go ahead.

Thank you, Catherine. Good morning. Thank you for joining us today for Stewart’s third quarter 2020 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. 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 risk and uncertainties with 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 statement 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.

Thanks, Nat. And thank you all for joining us today and your interest in Stewart. In a minute, Dave will go through this quarter’s financial results in more detail, but before I would like to touch on a few other things about our performance this quarter. Well, it feels like much longer given everything that has happened in 2020 this quarter represents the completion of a full year of financial results for Stewart since I took over as CEO in September 2019. For that reason, I’d like to take a moment to reflect on a few things. First and foremost, I am proud of how this company and its employees have handled the change and turbulence of the past year. The terminated merger with Fidelity National at September it feels like a minor speed bump when compared to the upheaval experienced by our country, our communities, our customers, employees and their families because of COVID-19, as well as a very real and active real estate market. Through it all, our employees maintain their focus on delivering superior service in challenging conditions, while above all, ensuring the safety of their customers and coworkers. I constantly refer to what is taking place here at Stewart as a journey, because it highlights that the work to achieve our mission will take time. That said our results this quarter and year-to-date, show that real progress has been made on the journey to become the premier title services company. Our growth is not simply the result of macro tailwinds of low rates and positive real estate market, but it’s equally about those formal customers being reintroduced to the value of the Stewart brand. New hires joining forces with our existing employees to actively move [Technical Difficulty] everyone here at Stewart going the extra mile to deliver added value and a better experience for our customers. Along with a focus on target growth is the foundation of greater operating discipline with this quarter’s record operational profitability reflection of our hard work in this area thus far. I believe that much more progress can be and will be made as we move into 2021 and beyond. In many ways, we remain structurally disadvantaged versus our peers with respect to business mix, scale and geography. That said, I am pleased with our first steps in addressing these differences, acquisition in core title and ancillary services have brought official scale and mixed to Stewart with more to come on the horizon. And new hires have reminded us that Stewart is now an attractive destination for talent both from our industry and adjacent industries. We have made good progress so far, but there’s much more to be done. David will go -- will now go through our financials for this quarter in more detail.

Thank you, Fred, and good morning. Let me also thank our associates for their amazing and inspirational service and our customers for their support during these unique times. The third quarter saw a continuation of the trends that unfolded in the second quarter. Our financial activity was strongly, dealer purchasing refinance demand with the 30-year mortgage rates and the 3% area as the Fed continues to be accommodative, commercial remains challenged by economic events. We continue to be mindful of the economic stress caused by the virus, as well as mortgage forbearance, which were lifted [ph] will result in increased foreclosures and they all have the title losses. Moving to Q3 results. Yesterday, Stewart reported total operating revenues of $591 million, net income of $56 million and diluted earnings per share of $2.21. The significant improvement from last year’s quarter, which had an adjusted net income of $30 million and adjusted diluted earnings per share at $1.28 as disclosed in Appendix A of the press release. Remember that last year’s quarter results included the $50 million FNF merger termination fee, along with some impairment charges and merger expenses. Our title revenues for the quarter improved to $563 million or 13% from last year, driven by another strong performance from residential and agency operations, partially offset by lower revenues from commercial services. Pretax income for the title segment was $82 million, a 66% improvement from the third quarter of last year. Pretax title margin also improved to 14.5% as result of this revenue growth and the continued discipline in running our business that Fred mentioned earlier. With respect to our direct business, direct residential, direct title business, direct residential revenues increased $48 million or 30%, primarily due to increased purchase and refinance transactions from existing and newly acquired title offices. Residential fee per file is approximately $1,900, which is lower than last year also due to a higher refinance mix. Domestic commercial revenues decreased $13 million or 26% as a result of fewer commercial transactions and a lower average fee per file of $9,700. Total opened and closed orders improved 48% and 44%, respectively, compared to the prior year quarter, primarily due to the affirmation refinancing and drive purchase demand. Our recent acquisitions contributed about 7% to both open and closed orders. Our agency business increase revenue $29 million or 9% on increased business activity, while agency remittance improved to 18.3% versus 17.8% from last year. Regarding title losses, total title loss expense increased $7 million or 35%, primarily due to increased title revenues, as well as increased provisions in our domestic business due to the current economic environment and unfavorable loss development and certain coverages within our Canadian operations. As a percentage of title revenues, our title loss expense was 5.1% versus 4.2% in the prior year quarter. As previously announced, we acquired some hire losses in early September. We welcome these new associates to the Stewart family and are very excited about the early results which generated $10 million of revenue in the month. These acquisitions are consistent with our strategy of improving our scale and competitive position in priority markets and have proven industry talent to strengthen our customer and business relationships. In regard to operating expenses, which consists of employee and other operating costs, total operating expenses increased primarily due to higher employee incentive compensation, consistent with our improved operating results, partially offset by lower operating costs as we continued our management focus, as well as reduce marketing and travel spend with the current COVID-19 environment. Employee cost as a percent of operating revenues improved to 26% from 28% last year, while other operating expenses declined to 16.7% and 17.3% last year. On other matters, our financial position remains very strong. Our total cash and investments on the balance sheet are approximately $500 million, open regulatory requirements, which along with $100 million available line of credit provide a solid foundation to support our customers, employees and real estate markets. Stockholders’ equity attributable to Stewart was $944 million with a book value of approximately $35 a share at September 30, 2020. Lastly, excluding the $50 million FNF merger fee in the prior year quarter, net cash provided by operations improved from $66 million to $91 million in the third quarter of this year. I’ll now turn it back over to the Operator for questions.

[Operator Instructions] We’ll go first to John Campbell with Stephens, Inc. Your line is open.

Hey, guys.

Good morning, John.

Good morning and congrats. Hi. Good morning. Congrats on great results. But I think from my math here from a justice standpoint, looks like you guys almost put up enough EPS to match in this quarter to almost match what you did in 2018. So really, really nice results. Congrats.

Thank you, John.

Yeah. So I would have asked a little bit about the newly acquired the Western State Offices. David, I think you said that helped lift orders like 7%, was that for the full quarter or just for the September orders?

Yeah. It was for the full quarter, John, and I also noted $10 million for the month in revenue. And keeping in mind that we close around the first [ph] and then there was a smaller one a little later.

Right. That’s helpful. And then on the acquired offices, how -- to what extent or how many of those were actually driving agency revenue in the past? Is there going to be somewhat of a negative impact that agency has a kind of mix shifts over that, correct?

Yeah. I would say we were not one of the bigger participants in that. So it shouldn’t be a big negative.

Okay. And then on the reserves, I don’t know if you can unpack this maybe a little bit, but as far as the strengthening, can you kind of suss out what would -- what’s going to Canada developments, maybe in the developments versus just kind of conservatism around kind of post-moratorium shift and maybe what happened with foreclosures next year?

Yeah. I would say the bulk of it was to the latter point. Just to be mindful of what might be happening in the economy. There is -- as we’ve done over the last several quarters, we’ve continued to look at product differences and make adjustments as appropriate. But I would say, the majority was to be mindful of what’s developing.

Yeah. I just -- I think it’s a good position to be kind of conservative right now, given the trends to your point. So it’s really about IBNR.

And then, I guess, last one here, I’ll just tack on to that. What -- I guess, how much hire you guys at this stage on the actuary estimate?

I am hiring naturally investment [ph].

Over the midpoint as we’ve typically been.

Okay. Great. Thanks, guys.

Thank you. Appreciate it.

Our next question comes from Bose George with KBW. Your line is open.

Good morning.

Yeah. Good morning and strong quarter. Actually, a couple of questions, first, in your comments, Fred, you noted or alluded to more to come on the acquisition side? Can you just sort of lay out how you’re thinking about that? And also just touch on the balance sheet, your debt to capital is sub 10%, you clearly have a lot of cash. How much -- how should we think of sort of cash available for you to support growth?

Dave, why don’t you take the balance sheet then I’ll come back to the…

Yeah. So, Bose, I think, we’ve touched on the capital thought process in the past. I think, obviously, the money on the line of credit is available and there’s, probably, a good couple hundred million on top of that, like to leave a little bit above regulatory cushion and just to have operating buffers and alike. But I think that’s sort of how we think about capital for investment. And I think we’ve talked about what -- where we’re looking to use that for, right, I think, growth core title and ancillary and things of that nature. And you’ve seen that activity really for the last few months.

Yeah. And on the other question, Bose, I -- if you look at us, right, and I said a couple of times, we really got stuck where we were an inch deep in a mile wide and what we’re really trying to do is invest in strength and really be thoughtful in every local market, what our strategy is. And what you see is, you can make a big difference on ability in margins by get to a certain share level. It kind of stabilizes. And obviously, we would be more operation -- get more discipline in our operation and we will see thoughtful expenses and all that. But you really can actually be much more resilient to earnings and plant margins, if I can get more revenue in places where we have strong leadership positions. And so we’re doing -- we’re going after MSA by MSA and we’ve had an opportunity to do some things to-date, we’ll get some more in the pipeline to do. I would also say on the ancillary side, we have some opportunity to build some scale in some targeted areas and we’re attacking that pretty effectively. So, again, I feel like, we’re doing the basics really well. We’re trying to be more focused on our ability to manage our business in a thoughtful and kind of more disciplined way. But we’re also being smart about structurally shifting our investment in places where we have strengths. So one of the interesting things that I’m happy with is our ability to grow the business while we’ve probably shed $30 million, $40 plus million as we’ve redirected to more profitable areas and check places where we had chronic issues that we didn’t think we could change. So, it’s the products, we have more to -- there’s no question, we have more work to do. But I really -- I am happy with the quarter and I’m happy with the progress and so.

Okay. Great. That makes sense. Thanks. And then actually just wanted to ask the premiums in the quarter, on the direct side, it was up very meaningfully, on the agent side it was up a little more modestly. Can you just talk about the differential? And also just remind me, is there any lag on the agent revenue?

There is. There is a little bit of lag behind the way it’s reported. So many trends in the market would be down back 40 days to 60 days, I would say. But I’m very -- agency is interesting, I’m very pleased because we have a very targeted way about to get back some of the folks that left us because of the transaction, which we made great progress and we are kind of where I think we want it to be. But we also had some investments we needed to do on our value proposition, connectivity, ease of use, et cetera. And we’re knocking those things off and we’re seeing really nice progress. And again, on that business we will be in very thoughtful geography, location by location, obviously, splits differ, profitability differs in the agency business and we’re very, very targeted about our growth. So I like the progress a lot, but that’s a place you’ll see continued progress, I believe, over the next two quarter, three quarters, four quarters and so we’re really kind of getting going. And there’s a number of investments that we made that are have hit the market, recently we are going to be hit the market between now and the end of the year, that is going to enhance those relationships. So I feel good about that.

Okay. Great. Actually, let me just ask one more as a question that I’ve asked another past before as well, but just I wanted updated thoughts and where you think the margin can end up, I mean, this is the quarter where your titled margin…

Yeah.

…now it’s getting a lot closer to the peers. Just any updated…

Yeah.

… thoughts on how we should think about where that goes?

Yeah. I – it’s an unusual year with a lot of things going on, for sure. I -- when we started, I set forth to say, okay, we ran between a 4.5 and 5 for the three years previous margin and I felt very strongly that we could do the right things over the next three years to get to high single digits. I would tell you that, I am more confidence today in that than I’ve ever had before. But I still believe that’s kind of right. I think we could have accelerated some of our progress here. It’s hard to completely see. But I think that’s kind of still where I am. Could that change Stewart? We’re trying to get better every day and as we kind of get our structure and our portfolio together, we’ll see. But it’s --that’s what we’re shooting for. That’s what we believe will happen. So that allows our shareholders to get what I believe above average growth for the next three years, as well as a twofer on the margin as we move forward over the next three years. So…

That’s great.

I think we all agree that’s margin.

Yeah.

Yeah.

Exactly.

You are asking about prior [ph].

I’m sorry, but I’d told you over…

Yeah. Yeah. Exactly.

So that sort of people can see more.

Yeah. so that -- yes. So the -- yeah, the pretax side of margin growth. Okay. Great. Thanks a lot and nice quarter.

Thank you. Appreciate it.

[Operator Instructions] We’ll go now to Geoffrey Dunn with Dowling & Partners. Your line is open.

Good morning.

Yeah. Good morning. Fred, can you talk a bit about the commercial market, the recovery you have seen today, that’s also the local level and the national type accounts. But also your outlook, not necessarily through year end, but into 2021, obviously, we all see the same reports about title office space, et cetera. Now, what’s that market look like to you?

Yeah. Great question. David, why don’t you start with it, I want to -- then I will go jump on it.

Yeah. Geoff, I mean, I guess, we’ll probably as we have been for this year and it was our last quarter, we may not be as optimistic in some of our competition there. I think we’re planning for a longer recovery. I think we could see some pickup in activity sort of going into next year with workouts and move into special servicing and that kind of thing and maybe in selected markets. But in general, it doesn’t seem like there’s a big pickup in activity and we’re planning for a longer recovery there.

Yeah. And I would say, if we see activity, there are some of the smaller fields or started happening some of the secondary cities. But I would also just say, because I think this is a longer term, for us this is an important opportunity. So we are right now very focused again on some targeted markets and we’re looking at what the opportunity is and going to try to be selective and how we really invest and position ourselves as this thing comes out. I would also say that in Canada, we think this is a material opportunity for us long-term. So for me, we’re cautious about what we see, but it’s also an important part of where we’re going to go on our growth. So we are trying to position ourselves and work pretty hard at being thoughtful about where we put investment and we think about the future. So, if you -- I think you’ll see everybody in the same ballpark, as a result, because it’s kind of the markets driving this reduction, but I do think it’s get the long-term important part of what we are and what we’re going to be.

Do you -- in your caution word that’s been here kind of secular disruption to the commercial market.

I mean, again…

It’s probably too early to tell, I mean, you can flip a coin on whether people are going back to work or not. I mean, there’s equal study is saying, it’s all work-from-home and then everybody wants to get back to the office. I’d say it’s too early to call.

Yeah. I just think, I think, there’s a mixed question too, right, we are going to see a dramatic different mix as we get -- as we come out of it. I hope the question to your pointed it is permanent or whatever it can get, right.

Okay.

When you bet on things like all day long at some point you want to be able to actually thought like…

All right. Thank you, guys.

Thanks, Geoff. Appreciate it.

And we do have a follow-up question from John Campbell with Stephens, Inc. Your line is open.

Hey, guys.

Hi, John.

Thank you very much for let me squeeze one more in.

Yeah.

Speaking of working component, I am wondering eventually get back to the office. I’m just curious about on the other operating expense line. David, I don’t know if you can suss out how much or what maybe the run rate savings are from less T&E and less kind of travel activity?

Yeah. It’s a good question. There’s a lot in that line. I would say, we’re probably down a good $10 million for the year run rate there.

Yeah. I would say that, I would say that, if you think about all discretionary kind of stuff that’s tied to, what’s hard about it, we also have extra costs of setting people up remotely, too. So this is…

Yeah.

But it’s less, I would say, less than $10, but probably that’s the right ballpark of discretionary that we got out but -- because of the situation.

Okay. That’s helpful. And then the $60 million of cost savings you guys called out, how much of that was impacting corporate and if, I know, at one point you guys are running corporate about $5 million a quarter. Is that still kind of the same run rate?

Yeah. It’s about $5 million. Yeah. It’s in the press release, isn’t it like $6 million or so.

Yeah.

Yeah. Oh! Exactly.

Yeah.

Okay.

Okay. Thank you, guys.

Yeah. Thank you.

And this will conclude our question-and-answer session. I would now like to hand the call back to our speakers for any closing remarks.

That concludes this quarter’s conference call. Thank you for joining us today and your interest in Stewart. See you next quarter.

Thank you.

This does conclude today’s program. Thank you for your participation. You may disconnect at any time.