Stewart Information Services Corp (STC) 2020 Q3 法說會逐字稿

Hello, and thank you for joining the Stewart Information Services Third Quarter 2020 Earnings Call. (Operator Instructions) 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 to 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 facts, actual results may differ materially from those projected. The risks 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 for 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 larger themes about our performance this quarter.

While it feels like much longer given everything that has happened in 2020, this quarter represents the completion of a full year financial results for Stewart since I took over as CEO in September of 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 over the past year. The terminated merger with Fidelity National last September 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 the very real and active real estate market. Through it all, our employees maintained their focus on delivering superior service in challenging conditions, while above all, in serving 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 is equally about those former customers being reintroduced to the value of the Stewart brand, new hires joining forces with our existing employees to actively move market share, and 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, a 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 mix to Stewart, with more coming 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 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. Residential activity was strong due to purchasing refinance, demand with the 30-year mortgage rates in the 3% area as the Fed continues to be accommodated. Commercial remains challenged by economic events. We continue to be mindful of the economic stress caused by the virus as well as mortgage prevalence, which when listed, will result in increase in closures and may elevate 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. A significant improvement from last year's quarter, which had an adjusted net income of $30 million, an adjusted diluted earnings per share of $1.28 as disclosed in Appendix A in the press release. Remember that last year's quarter results included a $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 (inaudible) title business, direct residential revenues increased $48 million or 30%, primarily due to increased purchase of refinancing transactions from existing and newly acquired title offices. Residential fee per file was approximately $1,900, which was lower than last year 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 open and closed orders improved 48% and 44%, respectively, compared to the prior year quarter, primarily due to the aforementioned refinancing and strong purchase demand. Our recent acquisitions contributed about 7% to both open and closed orders. Our agency business increased [widely] to $29 million or 11% on increased business activity, while agency remittance improved to 18.2% 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 in 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 title offices in early September. We welcome these new (inaudible) 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 our proven industry talent to strengthen our customer and business relationships.

In regard to operating expenses, which consist 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 continue with our management focus as well as reduced marketing and travel spend with the current COVID-19 environment.

Employee cost as a percent of operating revenues improved to 26% and 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 in the balance sheet are approximately $500 million over regulatory requirements, which along with the $100 million available line of credit, remain a solid foundation to support our customers, employees and the real estate markets.

Stockholders' equity attributable to Stewart is $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.

Congrats on great results. I think from my math here, from an adjusted standpoint, it 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.

Yes, so I wanted to ask a little bit about the newly acquired, the Western state offices. David, I think you said that helped lift orders by 7%. Was that for the full quarter or just for the September orders?

Yes, it was for the full quarter, John. And I also noted $10 million for the month in revenue. And keeping in mind that we closed around the first and then it is a smaller a little later.

Right. That's helpful. And then on the acquired offices, to what extent or how many of those were actually driving your agency revenue in the past? Is there going to be somewhat of a negative impact you see as the kind of mix shifts over to direct?

Yes. I would say we were not one of the bigger participants in that. So there 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's going to the Canada developments or Canadian developments versus just kind of conservatism around the kind of post moratorium shift? And maybe what happens with foreclosures next year?

Yes. I would say the bulk of it was to the latter point just to be mindful of what might be happening in the economy. As we've done over the last several quarters, we continue to look at product differences and make adjustments as appropriate. But I would say the majority was to be mindful of what's developing.

Yes, 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, just to tack on to that. At what point -- I guess, how much higher are you guys at this stage on the actuary estimate?

How higher (inaudible)

Well, we're over the midpoint, yes, as we've typically been.

Our next question comes from Bose George with KBW.

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 -- to support growth?

Dave, you want to take the balance sheet, then I'll come back to the...

Yes. Yes. So 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 of hundred million on top of that. I like to leave a little bit above regulatory cushion and just to have operating buffers and the like. But I think that's sort of how we think about capital for investment.

And I think we've talked about what we're looking to use that for (inaudible) growth core title and ancillary and things of that nature. And then you've seen that activity really for the last few months.

And on the other question. If you look at us, right, and as I've said a couple of times, we really got stuck where we were an inch deep and a mile wide. And what we're really trying to do is invest in strength and really be thoughtful at every local market and what our strategy is. And what you see is you can make a big difference on your stability and margins by getting to a certain share level. It kind of stabilizes. And obviously, we're being more operational -- quite disciplined in our operation, and we're being thoughtful with expenses and all that. But you really can actually be much more resilient in earnings and enhance margins if I can get more revenue in places where we have strong leadership positions.

And so we do -- we're going at this MSA by MSA. And we've had an opportunity to do some things to date. We're getting 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 a more disciplined way. But we're also being smart about structurally shifting our investment in places where we have strength.

So one of the interesting things that I'm happy with is our ability to grow the business while we probably shed $30 million, $40 million plus as we've re-directed some more profitable areas and shed places where we had chronic issues that we didn't think we could change. So it's good progress. We have more to do. There's no question we have more work to do. But I'm really -- I'm happy with the quarter, and I'm happy with the progress.

Okay. Great. That makes sense. And then actually, I 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 any trends in the market, we'd be down back 40 to 60 days, I would say. But I'm very -- it's interesting. I'm very pleased because we have a very targeted way, both to get back some of the folks that left us because of the transaction, which we made great progress. We're kind of where, I think, we wanted 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're being very thoughtful of 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 2, 3, 4 quarters. And so we really kind of get it going. And there's a number of investments that we've made that have hit the market. Recently, in fact, we hit the market between now and the end of the year that are just going to enhance those relationships. So I feel good about that.

Okay. Great. Actually let me just ask one more. It's a question that I've asked and others have asked before as well. But just wanted updated thoughts on where you think the margin can end up. I mean this is a quarter where your title margin now is getting a lot closer to the peers. Just any updated thoughts on how we should think about where that goes.

Yes, it's an unusual year with all the things going on for sure. When we started, I said fourth to say, okay, we ran between a 4.5 and 5 to the 3 years previous margin. And I felt very strongly that we could do the right things over the next 3 years to get to high single-digit. I would tell you that I have 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? Sure. We're trying to get better every day. And as we kind of get our structure and our portfolio together, we'll see. But 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 2 years as well as a (inaudible) margin as we move forward over the next 3 years.

That's with all the pretax margin.

Yes, exactly.

Because he was asking about title (inaudible)

I'm sorry.

That would be over pretax margin because that's what [people can see more].

Yes.

(Operator Instructions) We'll go now to Geoffrey Dunn with Dowling & Partners.

Fred, can you talk a bit about the commercial market, the recovery you've seen to date at both the local level and the national type accounts? But also your outlook, not necessarily through year-end, but into 2021. Obviously, we also see the same reports about idle office space, et cetera. What's that market looking like to you?

Yes, great question. David, why don't you start with that? And then I'll go jump on it.

Yes, Geoff, I mean, I guess we'll probably, as we have been for this year, and we said last quarter, we may not be as optimistic as 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.

Yes. And I would say if we see activity, then some of the smaller deals would start to happen in 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 in 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 in our growth. So we're trying to position ourselves to work pretty hard at being thoughtful about where we put investment and we think about the future. So I think you'll see everybody in the same ballpark of the results because it's kind of the market's driving this reduction. But I do think it's a long-term important part of what we are and what we're going to be.

Do you, in your caution, worry that (inaudible) kind of secular disruption to the commercial market?

I mean, again, it's probably too early to tell, right? I mean, you can flip a coin on whether people are going back to work or not. And there's equal studies saying [let's all] work from home and then everybody wants to get back to the office. I'd say it's too early to call.

Yes. I think there's a mix question, too, like we're going to see a dramatically different mix as we come out of it. [What's the] question to your point is it's permanent to whatever I think it is, right?

When you've had all this (inaudible) all day long, at some point, you want to go back to the office.

And we do have a follow-up question from John Campbell with Stephens Inc.

And speaking of working from home and wanting to 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 and activity.

Yes. 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.

Yes. I would say that if you think about all discretionary kind of stuff that's tied to -- what's hard about it is we also have extra cost of setting people up remotely, too. So this is -- but it's less -- I would say it's less than $10 million, but probably that's the right ballpark of discretionary that we got out 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 were running corporate about $5 million a quarter. Is that still kind of the same run rate?

Yes. It's around $5 million. Yes, it's in the press release. Isn't it like $ 6 million or so?

Yes (inaudible). I thought it was (inaudible).

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.