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Stewart Information Services Corp. (NYSE:STC)
Q4 2020 Earnings Call
Feb 11, 2021, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Hello, and thank you for joining the Stewart Information Services Fourth Quarter and Fiscal Year-End 2020 Earnings Call. [Operator Instructions] Later, you'll have an opportunity to ask questions 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. You may begin.

Nat Otis -- Director of Investor Relations / Senior Vice President-Finance

Thanks, Aaron. Good morning. Thank you for joining us today for Stewart's fourth 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 risks and uncertainties of forward-looking statements are subject to include, but are not limited to, the risks and other factors detailed in our press release published yesterday morning and in a 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.

Frederick Henry Eppinger -- Chief Executive Officer

Thanks, Matt, and thank you for joining us today for Stewart's fourth quarter 2020 earnings call and for your interest in Stewart. I will have David go through the details of this quarter's results in a minute, but first, let me take a little time to reflect on 2020. To say it was a tremendously challenging year would be a vast understatement. Families and companies alike faced uncharted territory. Despite it all, people everywhere stepped up and carried on. I couldn't be more proud of how everyone here at Stewart has navigated to accomplish personal and professional challenges brought on by COVID-19. Our employees delivered superior service to our customers, while keeping family, coworkers and customers safe.

My sincere hope is that 2021 starts everyone back on the road to personal, professional and economic security. At Stewart, the year started off just as I was finishing my first hundred days as CEO. We had begun to lay the foundation of our journey to become the premier title services company with an intense focus on meaningful improvement in 2020. We began with a strong improvement in the first quarter, but very quickly, the market was upended by COVID-19 before recovery, and then thriving as changing demographics, strong underlying fundamentals and low interest rates brought about a historic jump in transaction volumes.

If the pandemic has taught us anything, it is the value of home and safety have never been more important. In conjunction with a significant increase in transaction activity was the acceleration and acceptance of remote and virtual closings due to the pandemic-related health and safety concerns. Stewart met those challenges head on. That said, instead of simply putting our long-term plans on hold, we were able to take advantage of the elevated market activity while still putting in place critical building blocks for our future. We restructured our organization and reallocated investment. We strengthened our geographic footprint with several core title acquisitions. We added valuable real estate service assets with our acquisitions of U.S. Appraisals and Pro-Tech. We bolstered our technology footprint with NotaryCam.

We added valuable leadership expertise in both our direct and agency businesses. And we rolled out new customer-centric services to make the closing process more safe, effective and efficient. I am pleased with what we've accomplished, but by no means is our work done. Although Stewart has been a valued and well-respected brand for many, many years, structurally, the company has watched its market share decline in important markets through reduced investment and distraction. Additional changes have, and are, taking place and we now look to 2021 and beyond to continue our journey. Further improvements in our operations and continued investment in talent is necessary, and restocking of our leadership team is in process. Stewart has now become the destination for entrepreneurial industry leaders.

We will also continue to work to acquire assets that strengthen our local market position, and make us more attractive partners to our customers. As for the fourth quarter, I'm very pleased with our progress this quarter. Not only have we managed this extremely busy and challenging environment well, our investments and improvements are taking hold, and we are now much more concisely winning in the market and demonstrating an improved resilience that will position us for future success. Overall, I'm very encouraged by our progress we've made in 2020 toward becoming the premier title services company. While a degree of uncertainty lies ahead, the macro environment for housing and lending presents lots of opportunity for us.

Thank you very much. And David will now update everyone on the results for the quarter.

David C. Hisey -- Chief Financial Officer

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 fourth quarter saw a continued strong residential real estate market, driven by strong purchase and refinance demand as the 30-year mortgage rate exited the quarter below 3%. Commercial saw strong customer activity around year-end, although the outlook remains challenged by economic conditions. Economic stress increased around year-end, as virus cases and hospitalizations trended up and appear to be moderating.

As we await the calming effects of mass vaccinations, we continue to be mindful of the impact of these challenged economic conditions, including the high levels of mortgage forbearance, which when listed, will result in increased defaults and may elevate title losses. Regarding Q4 results yesterday, Stewart recorded for the fourth quarter 2020, net income of $60 million and diluted earnings per share of $2.22 on total operating revenues of $728 million. On an adjusted basis, Q4 net income was $56 million, and diluted earnings per share of $2.09, which were significantly better compared to last year's quarter, which had an adjusted net income of $21 million and adjusted diluted earnings per share of $0.87 as disclosed in Appendix A of the press release.

Our title revenues for the quarter increased $184 million or 36% compared to last year, driven by strong performance from our residential, commercial and agency operations and acquisitions during the year. With the improved revenues and continued discipline in managing our business, the title segment generated pre-tax income of $95 million, or more than three times last year's quarter. Pretax title margin also improved to 13.6% compared to 4% from the fourth quarter 2019. With respect to our direct title business, direct residential revenues increased $91 million or 61%, primarily due to increased purchase and refinance transactions from existing newly acquired title offices. Residential fee per file for the fourth quarter was approximately $2,000, slightly lower than the last year due to a higher refinance mix.

Domestic commercial revenues improved $3 million or 6% as a result of increased customer activity and a higher average fee per file of $12,900. Both total open and closed orders improved 64% compared to the last year, primarily due to the continued strong refinancing and purchase activity. Our recent acquisitions contributed approximately a third of both improvements in open and closed orders. In regard to our agency business, fourth quarter revenues increased $78 million or 29% on increased business activity, while agency remittance improved to 18.2% versus 17.7% from last year.

On title losses, total title loss expense increased $18 million or 61%, primarily due to the increased title revenues and higher provisions in our domestic business as a result of the current economic environment. As a percent of title loss -- or title revenues, our title loss expense for the fourth quarter was 6.8% versus 5.7% in the prior-year quarter. On a full year basis, the ratio was 5.3% for 2020 compared to 4.6% last year, and we expect 2021's title losses to approximate 2020's levels. 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 improved operating results and increased search, attorney fee split and premium taxes in line with increased title revenues.

These increases were partially offset by lower other operating costs due to continued management focus, as well as decreased marketing and travel expenses in the current COVID-19 environment. Employee costs, as a percentage of operating expenses, improved to 25% from 30% last year. Similarly, other operating expenses slightly improved to 17.9% from 18.4% last year. On other matters, our financial position remains strong. Our total cash and investments on the balance sheet are approximately $620 million over regulatory requirements, which along with $100 million available on our line of credit, remain a solid foundation to support our customers, associates and real estate markets. Stockholders' equity attributable to Stewart increased to $1 billion at December 31, 2020, with book value per share of approximately $38.

Net cash provided by operations improved to $135 million in the fourth quarter from $59 million last year. Let me conclude with we enter 2021 confident in our support of real estate markets, grateful for our associates and customers and hopeful for everyone's improved safety and prosperity.

Now I'll turn it over to the operator for questions.

Questions and Answers:

Operator

Certainly. [Operator Instructions]. We will take our first question from Bose George with KBW. Your line is open.

Bose George -- KBW -- Analyst

Hey guys, good morning.

Frederick Henry Eppinger -- Chief Executive Officer

Good morning.

Bose George -- KBW -- Analyst

Congratulations on a very good year. Actually, I wanted to start up with a question that I asked last quarter as well. But given how things have gone this year, it's been very successful, are there any changes in your expectations for normalized margins going forward?

Frederick Henry Eppinger -- Chief Executive Officer

Well, I don't think so. Again, when we started our overall company, I think we referred to this but in the last -- so we were about half what we should have been. We were in the 5% largest overall company. I believe we can double that. I talked about high-single-digits and that low level, kind of that 10% range. And I continue to believe that's kind of what our goal is. The question I think is, are we a little bit ahead of schedule? And I would say we probably are on some of our journey getting there. And I'm confident that we've made significant improvement.

I think, obviously, this year, boosted by an extraordinarily attractive market makes the numbers look maybe a little bit better than in a normalized world. But we're still on track for what I think we can do. And again, I think for us, right, I think the game is that we're a two-fer. We have the opportunity to improve our margins, but we'll also, I believe, will outgrow the market as well. And that's really what our focus will be.

Bose George -- KBW -- Analyst

Okay. Now, that makes sense. Thanks. And can you just talk about the acquisition landscape, just obviously the one you did this year? The larger one would seem to be very successful in terms of what it has done for the company. And it would seem like that's the other way to get your margins longer term above that 10%, say, the target that you noted earlier. So can you just talk about how you're thinking about acquisitions?

Frederick Henry Eppinger -- Chief Executive Officer

Yes. Again, I think one of our things I talked about from the beginning is that we were an inch deep and a mile wide. And what we were doing is we weren't managing our capital investment and our expense investment in an appropriate way. And so we've shed a lot of things, and we've also doubled-down in some areas. And one of the most important things in our business around the execution is having critical mass at the local market level, particularly on the direct business. And so we need to make sure we position ourselves in every market to be a leader. And that means that we need to get critical mass share, so we can execute effectively through a cyclical business.

And so we have a very strong pipeline as we're looking at the local markets and where we think we have to do things. We've literally done a review of the 140 MSAs. We have a point of view on our strategic position in every market, the part channel, where we want to be share-wise, where we think we can be effective. And we're focusing our investment and our efforts there, both organically and in acquisitions. But I fully expect that you'll see continued targeted acquisition to change our structural position in a lot of markets. And so far, it's done well and as I said, we're having excellent conversations with a number of people. So I'm comfortable that we can advance the agenda in that way.

Bose George -- KBW -- Analyst

Okay, great. Thanks a lot.

Operator

And our next question comes from John Campbell with Stephens Inc. Your line is open.

John Campbell -- Stephens Inc -- Analyst

Hey guys. So $6 in EPS, over $6 of EPS this year, just incredible. I remember when the management team and the Board was once dreaming of $5 in EPS. And I know they had some big kind of comp targets planned kind of tied to that. So great year by you, guys. On the building out of the additional scale in the non-title business, I know that was one of your kind of key initiatives up front, Fred.

Frederick Henry Eppinger -- Chief Executive Officer

Yes, yes.

John Campbell -- Stephens Inc -- Analyst

I know you guys have integration costs right now, and you've got kind of a red-hot housing market kind of helping lift transactions. But I don't know, maybe, David, what do you think is kind of a normalized margin for that ancillary services business as you kind of strip out commercial? Is it kind of low-double-digits? Is that a good way to think about it?

David C. Hisey -- Chief Financial Officer

Yes, I think, John, ultimately, we're trying to build a durable real estate services business across the cycle. I think that margins will be consistent with the company overall. I think if you're trying to understand sort of what happened in the quarter, if you think about the cycle, right, you've got sort of origination, you've got capital markets and you've got servicing. And so in this quarter, originations obviously was off the chart. There wasn't a lot of capital markets activity because that typically lags originations when there's loan quality issues and distressed loan sales and the like. And then of course, with forbearance and delinquency impacting that, there really wasn't a lot of distressed loan sales and there wasn't default title work.

And so, and then the other thing that happened is that the banks have basically curtailed home equity lending. And so what you really saw happen in the fourth quarter is capital markets and home equity search went to virtually nothing. There wasn't really much default work. There was a huge amount of origination work. And then you also had some amortization kicking in from the acquisition. And so that's some of the puts and takes that you see there. But I think over time, as the market stabilizes and we do more business in each of those services, then you should see the margins approach the overall company level.

Frederick Henry Eppinger -- Chief Executive Officer

And your general point, or as you asked the question, I think, is true. So I feel pretty good with the journey in our ancillary businesses and frankly, our centralized title as well. It's still a little bit of work in progress, right? We're pulling some of these assets together, we're consolidating some of the businesses. We're working on the operating models. I'm thrilled about what we've acquired; the skills, the people are awesome. So I feel like we're going, we're right where we need to be, and we're moving in the right direction. So you'll see both growth and improvement in that category, but there's nothing we haven't expected. I feel pretty good about where we are with it to date.

John Campbell -- Stephens Inc -- Analyst

Yes, it looks to me that, from a timing standpoint, you guys have [Indecipherable] these assets right ahead of -- a couple of these assets right ahead of a big surge in the market. So I imagine some of them indiscernible themselves, so nice work there. On the higher reserves, just one quick question there. Was that more -- I don't know how you categorize that. Was that more kind of an expectation of what might be ahead, or is that more kind of paying for passion? Is there any way to kind of break that out?

Frederick Henry Eppinger -- Chief Executive Officer

I think it's appropriate. I'm going to have -- David can answer this more specifically. But as somebody who has lived their life running a big reserve balance sheet type businesses, my view is always when you go into a period like this and you look at the potential risks ahead, you have to be conservative. In my view, it's completely prudent and appropriate for us, as a manager of an insurance company, to be prudent about our reserve position during this period.

And obviously, it's not what's happening today that you're thinking about. It's what can potentially happen in the future. So I think our conservative stance is the right thing for the company right now. And as we said, next year, we'll be at about the same level as we were this year. But it made all the sense in the world to us to make sure we made some assumptions that were both conservative and position us well for the future.

John Campbell -- Stephens Inc -- Analyst

100% agree. Thanks, guys.

Frederick Henry Eppinger -- Chief Executive Officer

Thank you.

Operator

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

Geoffrey Dunn -- Dowling & Partners -- Analyst

Good morning guys.

Frederick Henry Eppinger -- Chief Executive Officer

Good morning.

Geoffrey Dunn -- Dowling & Partners -- Analyst

So Fred and David, I wanted to revisit the M&A topic on a couple of different angles. First, given what happened in 2020, I have to imagine that potential acquisition targets have a lofty opinion of their valuations. So, is it something where you are seeing real opportunities now, or is that something that maybe gets delayed a little bit as value opinions become a bit more realistic? And then on the other side of the equation, how are you thinking about financing future M&A? You have a line of credit. Obviously, you've got the capital capacity. But you also continue to have a pretty good equity multiple here and you turn around and spent your last equity raise immediately. Is it worth exploring another equity raise to establish dry powder in anticipation of your pipeline?

Frederick Henry Eppinger -- Chief Executive Officer

Well, before we go to capital, David, you could take the capital. Let me just -- for me, it's a really great question, frankly, about people's expectations. We walk away and say no a lot more than we say yes, let me just be clear. So we have lots of conversations, we're very proactive. We understand that both fit is really important for us. And frankly, in a lot of markets, leadership is part of the equation for us as we grow our business. And so there is always a sensitivity because this is a strong market, right? And so you've got to come to agreement on what's a more normal run rate for the business and how does it work.

We have not had a problem to date with finding things that make sense for both parties, and we want it to make sense for both parties. But to your point, being patient is everything. I'm not -- we're not in any big hurry to do something that we need to do tomorrow. So we're going to be selective and again, we're going to be thoughtful about the valuation. I would tell you I've been encouraged though because of the strategic fit we have with a number of these parties, that the conversations continue to be positive. And we'll find the right things over time in the right areas to build our business.

And I would say the other thing about us, because of who we are, a lot of the acquired -- entities have better upside in their careers, in their future, by being part of us because of who we are and how they've become part of us. So that is really helpful when you're having some of these conversations, particularly when you talk about local market opportunities. So David, is there a capital?

David C. Hisey -- Chief Financial Officer

Yes, not always, Geoff. Thanks for the question. As everybody knows, markets are open right now until we obviously think about all the options. I think on the equity side, that is available, I think it's just a function of matching that against the right opportunity. I think the priorities that we think about, or as I mentioned, we have about $600 million over statutory or regulatory right now. Obviously, not all of that is available because you need some operating buffers and the like. But you probably got at least a couple of hundred million there. You've got the line of credit available and then debt and equity markets. And so I think we go to available capital first, and then other markets are open and just trying to match those against the right opportunity.

Geoffrey Dunn -- Dowling & Partners -- Analyst

Okay, thanks.

David C. Hisey -- Chief Financial Officer

Thanks.

Operator

And there are no additional questions at this time. I'd like to turn the program back over to CEO Fred Eppinger.

Frederick Henry Eppinger -- Chief Executive Officer

Well, thank you, everyone, for joining us this quarter, and appreciate your interest in Stewart. Thank you.

Operator

[Operator Closing Remarks].

Duration: 23 minutes

Call participants:

Nat Otis -- Director of Investor Relations / Senior Vice President-Finance

Frederick Henry Eppinger -- Chief Executive Officer

David C. Hisey -- Chief Financial Officer

Bose George -- KBW -- Analyst

John Campbell -- Stephens Inc -- Analyst

Geoffrey Dunn -- Dowling & Partners -- Analyst

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