Stewart Information Services Corporation (NYSE:STC) Q4 2023 Earnings Call Transcript
Stewart Information Services Corporation (NYSE:STC) Q4 2023 Earnings Call Transcript February 8, 2024
Stewart Information Services Corporation isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Hello, and thank you for joining the Stewart Information Services Fourth Quarter 2023 Earnings Call. At this time, all participants are in a listen-only mode. Later, you will have an opportunity to ask questions during the question-and-answer session. Instructions will be given at that time. Please note today's call is being recorded. [Operator Instructions] It is now my pleasure to turn the conference over to Brian Glaze, Chief Accounting Officer. Please go ahead.
Brian Glaze: Thank you for joining us today for Stewart's fourth 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.
Fred Eppinger: Thanks, Brian, and thank you for joining us today for Stewart's fourth quarter 2023 earnings conference call. Yesterday we released financial results for the quarter and Dave will review these in a minute. Before doing so though, I'd like to update you on my view of the market and our continued progress on important initiatives that we believe will set Stewart up for long-term success. While we have thoughtfully managed through this very difficult economic [Technical Difficulty] expenses and invested carefully, we have continued to invest in a number of critical areas to materially improve our business. Our focus has been on creating a stronger and more resilient enterprise that will thrive over a full real estate site cycle.
As we close 2023, we are operating in an environment that saw mortgage interest rates reach a high of 8% during the fourth quarter before falling to around mid 6% near the end of the year. Mortgage rates and rate volatility continue to impact transaction volumes and we find ourselves at historic lows for sale of existing homes. At an industry level, the historically low purchase volumes combined with low existing home listing inventory has kept home prices elevated. As I have said before, we see 2024 as a transition year towards a more normal market for existing home sales during 2025 and believe the next six months will likely be very challenging given the macroeconomics laid on top of a typical seasonal impact. While the current environment has been difficult, I am very pleased with the progress our teams have made in improving the underlying financial and operating performance of the company during 2023.
There is more work to be done and it is critical we remain focused on improving margins, growth, and resiliency through improved scale and attractive markets and enhancing our operation capabilities, but I want to thank our teams for their dedication to making significant progress on these enterprise initiatives during the last twelve months. During the year and continuing this quarter, we successfully strengthened our financial position, giving us the flexibility to continue investing in the long-term success of Stewart and to take advantage of opportunities as they arise. During the fourth quarter, we continue to manage costs thoughtfully and have taken targeted actions where appropriate. We continually evaluate our cost structure to ensure that we are making sound long-term decisions on expenses.
We have also been very careful not to take actions that we felt would threaten our competitive position and long-term value creating opportunities. The most prudent path forward for Stewart as the market begins to normalize in late 2024 and into 2025 is to continue investing in our people and remaining focused on our long-term improvement plan. I believe we've done a good job of balancing strong financial discipline with targeted investments and we will continue to be very diligent with our expense management during this difficult moment in the cycle. We remain focused on enhancing our operating model, investments in technology to enhance our customer experience, and improve efficiency of our operations, and building scale in targeted areas.
Some of the investments in technology have focused on improving our title production processes as well as our data management and access. These strategic investments are resulting in cost ratios that are somewhat elevated given we are in a market with historically low transaction volumes. However, we are setting Stewart up for better overall performance in the future. We believe that these long-term investments coupled with thoughtful near-term expense management will improve our structure and financial performance in the long term. During the current environment, we have been prudent with our acquisition-related investments and have been routinely reevaluating markets in our direct operations where we have the opportunity to increase share and enhance our leadership capabilities.
This has ensured that our deployment of capital provides acceptable long-term returns. We will maintain this cautious approach to investments through the first half of 2024. During the fourth quarter and throughout 2023, our commercial operations have performed well in a challenging market. While certain sectors were and will be challenged in the near term due to challenging financial markets, sectors such as energy remain extremely strong for us and we see ongoing challenges in sectors like office. Growth in all sectors of our commercial operations remains an important component of our overall strategy, and positioning our commercial operations for growth across all our business lines has been key focus of our journey. We are making investments in talent, so that we have the leadership in place to achieve these objectives.
We are also investing in technology to support the commercial operations to allow us to better serve our customers and more efficiently manage our business. We believe our strategies will create long-term growth in the commercial markets for us. Our agency business finished the fourth quarter with another solid performance as we have been leveraging our agency technology to drive market share gains. During the fourth quarter and throughout the year, we have made excellent progress on our deployment of technology and services that provide a significantly improved customer experience for our agents. This enhanced experience includes greater connectivity, ease of use, and risk reduction for our agent partners. We are pleased that our platform of services for agents is as strong as it has ever been and we will continue to focus on growing share in our target markets such as Florida, Pennsylvania, and the overall commercial market.
Our real estate solutions maintained solid financial results in the fourth quarter and throughout '23, particularly given the market headwinds. We are focusing on driving share gains as we leverage our improved portfolio of services to better and more deeply serve our lender clients. While we are not immune to the market during downturn in these businesses, we've been able to offset some of the challenges with share gains. An important achievement during 2023 was our focus on improving our technology for the title production process automation and centralization to improve operational efficiency and capabilities. Our investments have already resulted in significant progress toward improving the customer experience across all the channels. And another area of priority work, as we work to improve our operating efficiency is the centralization and digitization of our title data.
We are pleased with the progress that we made on that this year. This progress at more normal production levels will result in considerable improvement in our delivery costs. Improving our financial strength by growing margin has been a significant focus of our journey. We have made good progress in our effort and we are aware that the returns remain depressed during this phase of the cycle. Our investments should allow us to achieve low double-digit pre-tax margins as we turn to a more normal 5 million unit purchase market. While we are encouraged by our improvements in talent, technology, customer experience, and our financial model, we know that our journey is not complete. We remain focused on our strategic plan of building an improved competitive position by being more efficient and having a disciplined operating model that functions well throughout all the real estate cycles.
We have emphasized growing scale and attractive markets across all the lines of business and we have made great strides in improving the customer experience in all our channels. Attracting and retaining key talent is always important and we've been even more focused on retaining talent through this market, so that we have the right team in place as the cycle improves. I am pleased with our efforts -- that our efforts are yielding results through increased year-over-year market share gains in each of our direct agency, commercial, and real estate service businesses. Let me conclude by reiterating that we have been managing the balance of our expenses and investments throughout -- thoughtfully to be mindful of necessary operating discipline for the current market challenges, while also dedicated to strengthening Stewart for long-term growth and performance.
Our solid financial footing should best position us to take advantage of the opportunities that this cycle will provide. Finally, I remain positive on the long-term view of the real estate market and the ability of Stewart to become the premier title services company. Our associates have worked diligently throughout these challenging times and I appreciate all they have accomplished. I also want to thank our customers and our agency partners for their continued loyalty and support. David will now update everyone on the results.
David Hisey: Good morning, everyone, and thank you, Fred. As always, I'm thankful of our associates for their outstanding service and our customers for their continued support, more so during the challenging current market. Although mortgage rates dropped after the Fed's December meeting, comments in the January meeting caused rates to rise through today, causing a continuation of a choppy market. 2023 had the lowest existing single-family home sales in over 15 years and commercial real estate activity was also challenged. As a result, operating results were lower than the prior year. Yesterday, Stewart reported fourth quarter 2023 net income of $9 million or $0.32 per diluted share on total revenues of $582 million. After adjustments for net realized and unrealized gains and losses, acquired intangible asset amortization, and other expenses, detailed in expenses [indiscernible] our press release, fourth quarter adjusted net income was $17 million or $0.60 per diluted share compared to adjusted net income of $23 million or $0.84 per diluted share in the fourth quarter of 2022.
In the title segment, total operating revenues in the fourth quarter decreased $79 million or 14%, while fourth quarter pre-tax income slightly improved primarily due to higher investment income and expense management. After adjustments for purchase intangible amortization and other items, the title segment's pretax income was $31 million compared to $35 million for the fourth quarter 2022. Adjusted pretax margin was about 6% for both quarters. On our direct title business, total opened orders in the fourth quarter increased by 10% primarily due to acquisitions in 2023, while closed orders decreased by 3% compared to the prior year. Domestic commercial revenues decreased by $11 million or 16%, primarily due to lower commercial transactions.
Average commercial fee per file was approximately $14,800 compared to $15,100 from the prior year quarter. Domestic residential revenues decreased $18 million or 10% as a result of 5% lower purchase and refinancing volumes and lower fee per file. Average residential fee per file in the fourth quarter was $3,200 compared to $3,500 last year, primarily due to transaction mix. Total international operating revenues declined $1 million or 4% primarily due to overall lower transaction volumes. Similar to the lower commercial and residential activity in the market, agency revenues in the fourth quarter decreased by $49 million or 16% compared to the prior year, while the remittance rate was roughly comparable. On title losses, total title loss expense in the fourth quarter was 5% lower compared to prior year primarily from lower title revenue.
As a percentage of title revenues, the fourth quarter title loss expense was 4.1% compared to 3.7% in the fourth quarter of 2022 which benefited from 2022's favorable claims experience. For the year, title loss expense averaged 4.1% compared to 3.8% last year. We expect title losses to be in the low to mid 4% range in 2024. Regarding the real estate solutions segment, fourth quarter pre-tax income improved $1 million compared to last year, primarily due to increased revenues from our credit-related data business, which more than offset declines from our transactional businesses. Pre-tax margin was 2.3% compared to 0.7% last year. On an adjusted basis, pre-tax income and margin was comparable to the prior-year quarter at roughly 12%. On our consolidated expenses, our employee cost ratio was 32% compared to 30% last year, primarily driven by lower operating revenues.
Other operating expenses were 23%, which was comparable to last year. Regarding income taxes, the effective tax rate for the fourth quarter was 39%, which was higher than our historical tax rate, primarily due to the effect of non-deductible expenses on lower domestic pretax income. We expect our tax rate to return to historical levels as domestic operations normalize. On other matters, our financial position remains solid to support our customers, employees, and the real estate market. Our total cash and investments at December 31, 2023, was approximately $415 million in excess of statutory premium reserve requirements. We also have a fully available $200 million line of credit facility. Total stockholders’ equity at December 31, 2023, was approximately $1.38 billion with a book value of approximately $50 per share similar to last year.
Net cash provided by operations in the fourth quarter improved to $41 million compared to $25 million last quarter -- last year quarter, primarily as a result of lower payments on claims and accounts payable, partially offset by lower net income in this year's quarter. Lastly, we greatly appreciate our customers and associates and remain confident in our service to the real estate markets. I'll now turn the call back over to the operator for questions.
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