Stewart Information Services Corp. (STC) Q1 2021 Earnings Call Transcript

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Stewart Information Services Corp. (STC 1.12%)
Q1 2021 Earnings Call
Apr 22, 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 First Quarter 2021 Earnings Call. [Operator Instructions] It is now my pleasure to turn today's conference over to Nat Otis, Head of Investor Relations. Please go ahead.

Nat Otis -- Director, Investor Relations & Senior Vice President-Finance

Thank you, Brittany. Good morning. Thank you for joining us today for Stewart's First Quarter 2021 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 that 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 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 H. Eppinger -- Chief Executive Officer

Good morning, everybody, and thank you for joining us today for Stewart's first quarter of 2021 earnings call and for your interest in Stewart.

Before I turn it over to David to go through the details of the quarter's results, I want to touch on a few topics as we move into 2021. I am very, very pleased with the progress this quarter. We clearly capitalized on the historic market strength, but we also continue to improve our underlying financial strength and the resiliency of the company. We grew share in a number of critical markets, we added some service capabilities and leveraged our improved technology platform.

As we look ahead, we envision Stewart that not only takes advantage of the high point of the cycle, but can also thrive through the entire business cycle. The foundation of this future lies in a more strategic and disciplined operational approach to investments and a company culture that is focused on moving quickly to adapt and to capitalize on opportunities to improve and grow the company.

While our journey is not finished, the work our employees accomplished last year and throughout the first quarter addressing the challenges of the pandemic conditions, driving structural changes, integrating more valuable talent and asset additions have all fundamentally changed our company. Results to date are encouraging and illustrate that we are on the right path. Given what we've accomplished to date and our view of the market outlook, we are very bullish on the company's opportunities for the next 2 or 3 years. As we look at '21 and '22 beyond, there is a level of uncertainty over the endurance of the cycle even as we continue to experience strong market demand. We know the refinancings will begin to slow at some point even though the overall residential market is healthy and is expected to remain that way for some time as resale transactions driven by pent-up demand and favorable homeowner demographics will continue to show strength.

In this kind of market, there will be winners and losers and we are positioning ourselves to be one of the winners. At our core, we are a 125-year old customer-centric brand that delivers superior service and underwriting for its customers and partners. But I also like to think of us as a 125-year old start up, our footprint for delivery, our decision making are all improving every day. We also understand that technology is changing our industry and our company and we continue to focus intensely on improving the customer experience through innovation and connectivity. By creating a fully integrated platform, we are delivering a safer, more effective and efficient closing process for our customers and our partners. Whether through our upfront transaction management app and platform Stewart Now or our automated underwriting tool, Stewart Salary[Phonetic] or virtual real estate closings with our NotaryCam and Signature Closers companies. We're securing transfer of funds through our partnership with Certified, we are meeting our customer's technology needs without sacrificing our core fiduciary commitment to appropriately underwrite the transaction. Our journey to be the premier title service company continues, though we have more to do. But in this quarter, we made significant progress toward a more resilient growing enterprise, one position to succeed and grow share in a variety of environments. David will now update everyone on the results of the quarter.

David Hisey -- Chief Financial Officer

Thank you, Fred, and good morning. Let me also thank our associates for their continued inspirational service and our customers for their steadfast support. The year opened with a strong residential real estate market driven by powerful demand, favorable interest rates and improving economic conditions. On the medical front, virus news is generally improving as vaccinations increase although variance in vaccine distribution challenges hinder the pace of recovery. Even with an improving economy, there continues to be a high mortgage delinquency and forbearance, the effect of which need to play out.

Let me provide some broader context consistent with Fred's comments before I review the quarter's results. Although interest rates and the economy provide some volatility to the operating environment, our strategic areas of focus gaining scale in attractive direct markets, improving agent service capabilities and geographic focus and scaling lender services are beginning to have a meaningful and durable impact on our results. Over time, we'll see the benefits of our commercial initiatives as that market returns. For the first quarter 2021, Stewart reported net income of $54 million and diluted earnings per share of $2.01 on total operating revenues of $681 million.

On an adjusted basis, the Q1 net income improved by $38 million compared to $13 million from last year's quarter as we disclosed in Appendix A of the press release. Compared to last quarter, total title revenues increased $185 million or 42% with solid performance from our residential and agency operations. The title segment generated $77 million of pre-tax income, more than 4 times last year's quarter, as a result of improved revenues and our continued management focus. Pre-tax title margin also improved to 12.2% compared to 3.4% last year.

With respect to our direct title business, direct residential revenues increased $83 million or 63% primarily due to increased transaction activity; residential fee per file was approximately flat at $1,900, just slightly below last year. Domestic commercial revenues were down $12 million or 29% due to lower transaction volume and lower average fee per file, which was $8,700 this quarter versus $11,400 last quarter -- last year's quarter. Total open orders increased 29% while closed orders increased 66% compared to the last year, primarily due to the strong market. Similar to our direct title business, our agency operations had another strong quarter with revenues of $346 million, which was $104 million or 43% higher than last year's quarter.

Our agency remittance rate improved to 17.9% versus 17.6% in the prior year quarter. On title losses, total title loss expense increased $10 million or 54% primarily due to higher title revenues. As a percent of title losses, the title loss expense was 4.6% compared to 4.2% from last year's quarter. In regard to operating expenses, which consist of employee and other operating costs, total operating expenses increased consistent with our revenue growth due to more employees and associated costs; increased appraisal expenses from our recently acquired ancillary services business and higher outside title surge and premium impact expenses. These increases were partially offset by lower other operating cost due to continued management focus as we increase marketing and travel expenses.

Employee cost as a percent of operating revenues improved to 25% from 30% last year. While other operating expenses increased to 18% from 16% last year, primarily due to the appraisal of pass-through costs at our recently acquired appraisal services businesses. Excluding these businesses, other operating expense ratio would have been 13% for the first quarter of 2021 as against 16% last year.

On other matters, our financial position continues to be very strong. Our total cash and investments on the balance sheet are approximately $590 million over regulatory requirements, which, along with $220 million available on our recently upsized line of credit, provide a solid foundation in supporting our customers, employees and real estate markets. Stockholders' equity attributable to Stewart increased to $1.04 billion at March 31, 2021 with a book value per share of approximately $39.

Lastly, net cash provided by operations improved to $47 million compared to cash used in operations of $11 million in last year's first quarter.

Let me close with, we remain confident in our support of real estate markets grateful for our associates and customers and advocates for everyone's improved safety and prosperity. And now I'll turn it back to the operator for questions.

Questions and Answers:

Operator

[Operator Instructions] And we will take our first question from Bose George with KBW. Please go ahead.

Bose George -- Keefe, Bruyette, & Woods, Inc. -- Analyst

Hi, everyone. Good morning. First question is just on, the residential direct premiums fell by -- I think it was 10% over the fourth quarter, the agent premiums fell pretty modestly. So is there something to call out in terms of the differences between what we saw in those channels?

Frederick H. Eppinger -- Chief Executive Officer

I'm sorry, Bose. Can you help me with that because I couldn't hear it correctly?

Bose George -- Keefe, Bruyette, & Woods, Inc. -- Analyst

Yeah. Basically, I was looking at the decline in the direction -- there was about a 10% decline just in the residential national direct premiums over last quarter and the agent premiums that declined, it was almost flat just kind of about 1% over the last quarter, so I was just curious why the differences that we saw in the two channels?

David Hisey -- Chief Financial Officer

Bose, are you adding commercial --?

Bose George -- Keefe, Bruyette, & Woods, Inc. -- Analyst

Actually I took out the commercial because including the commercial, it's more like a 20% decline versus a 1%. So the commercial was down, so I pulled -- pulling that out, it seemed like it was about a 10% versus 1%. But I mean we can follow up with that afterwards if you like?

Frederick H. Eppinger -- Chief Executive Officer

Yeah. Because what we saw all right is this has been -- for us, this was the strongest direct first quarter we've ever had. It was very, very, very strong obviously versus the last first quarter, traditionally it's been a seasonal -- first quarter seasonal, but this year we were incredibly strong. The agency growth for us is a combination of a couple of things, right. So the agency growth for us got stronger all through last year as we got away from the transaction. So the comparison from first quarter last year to this year on agency is extraordinarily strong because we have so much momentum just kind of getting the agents back that we had that we kind of lost a little bit during the Fidelity situation, but also the new growth initiatives we have. So agency is a great comparison quarter-to-quarter, which gives you the really robust growth.

It doesn't -- you didn't have the same kind of drag in the first quarter of direct that we had in agency from the hangover, so maybe there -- again, if you're asking the deltas between the two, there might be something there. But on both businesses. I'm incredibly encouraged by the growth. Our share in most of the target markets that we focused on has been up. So we are kind of winning in most of the markets we're focused on. So it feels pretty good across the business right now.

Bose George -- Keefe, Bruyette, & Woods, Inc. -- Analyst

Okay. Great. Makes sense. Thanks. And then can you just talk about your -- the latest thoughts on acquisitions? Do you feel like that remains part of the puzzle in terms of getting the margins up? Or do -- have you done do you think a fair amount what you need to do on that side?

Frederick H. Eppinger -- Chief Executive Officer

Yes. I think -- again, I think we're very focused. We continue to focus on what I would call local market strategies. And we still have in a number of markets where I would like us to have a greater share. And it becomes -- it's all around more consistency through the cycle to be able to manage your margins as well as your consistency of service. And so I would say we're going to continue to be focused on a number of markets in the top 140 MSAs that we believe we should gain share and some of that will be acquisitions and we still have a robust pipeline of acquisitions in front of us, but some of it is organic as well.

We have -- one of the interesting things that has happened to the company is we have a lot of momentum right now and our ability to attract talent has never really been better. So we're seeing a lot of folks come to the company as well. So it will be a combination of organic growth in some of these target markets as well as some acquisitions. And again one of the things we're trying to do is not just gain share for margin, it's also broaden our capabilities and service capabilities. So particularly on the agency side, we want to continue to be able to provide additional services. So we will increase some of our focus on that as well.

So you saw that with the ASK acquisition that we just did, which provided us additional services to provide for our agents. So again, I think it's going to continue as part of the strategy.

Bose George -- Keefe, Bruyette, & Woods, Inc. -- Analyst

Okay. Great. Thanks. Can I just sneak in one more just on the loss ratio, what's kind of the normalized number? And just the change between last quarter, the increase versus now was that -- I mean, based on something you sell out there? Or just curious what's [Technical Issues]

Frederick H. Eppinger -- Chief Executive Officer

Yes. So if you remember last year, we believe that we wanted to take a conservative position in the fourth quarter, in particular, as we looked out and said, there's some risk out here. If you look at the balance of last year, I think the balance of last year was something like a 5.3% or something like that. And so I think that it's roughly the number that we were planning to -- the total at the fourth quarter, the 5.3%. Losses look good. It's early in the year. That's the number that resulted for the first quarter. But I still think that the way we thought about it last year in that 5% range is probably going to continue to be what we're going to think about it this year. But there is no -- we don't see any issues. We don't see any trends that are problematic or anything like that. But I think it's conservative just to leave it at where we fell in the first quarter.

Bose George -- Keefe, Bruyette, & Woods, Inc. -- Analyst

Okay, great. Thanks a lot. Nice quarter.

Frederick H. Eppinger -- Chief Executive Officer

Thank you.

Operator

Our next question is coming from John Campbell with Stephens, Inc. Please go ahead.

John Campbell -- Stephens, Inc. -- Analyst

Hey, guys, good morning. Congrats on the continued success.

Frederick H. Eppinger -- Chief Executive Officer

Yeah. Thanks and good morning. Good morning.

John Campbell -- Stephens, Inc. -- Analyst

Thank you. Yeah. So I'm getting a fair amount of questions on this. I figure I got to take a shot on it. But obviously, there's some noise out there with the large competitor of yours, I'm sure you guys are probably hearing the same thing, but just curious about your appetite around kind of larger transformational title insurance share grabs and then your ability or maybe capacity to do something of size?

Frederick H. Eppinger -- Chief Executive Officer

Yes. I mean, obviously, we don't really talk about another company in our calls. But I would tell you, as Bose asked, for us, we're trying to build this up market-by-market and segment by segment. And we're really thinking about scale and size that way. It's not really a top down look, it's really a bottom-up look. And so we're constantly looking for opportunities in our businesses to either enhance our capabilities or give us the scale so that the stability of our economics are better and that will be part of what we do for the foreseeable future. And we don't feel like we need -- as a company, we don't feel like we need any transformational thing or -- I mean, I feel like this juring [Phonetic] that we're on, you can see the traction we have, you can see how we've closed the gap between us and the major competitors. Would I like us to be better? Yes, no question. And we will continue to focus at a market-by-market level to make sure we're the best there is, and we'll do some acquisitions and fill-ins and try to acquire capabilities. But in my view, we don't need anything transformational to change kind of the outlook for this company and be able to continue to outgrow the market and outperform the market over the next 2 or 3 years. We just got to focus on ourselves and building our business. So --

Bose George -- Keefe, Bruyette, & Woods, Inc. -- Analyst

Okay. Thanks for that. And then on title, I mean, you're hitting on all cylinders at this point. But if you look at the ancillary services business, I think you guys had revenues 10 times higher versus last year. So I mean, the turnaround has been really impressive. So nice work there. But can you guys talk about the kind of updated products that you have today? And then maybe if you could, just talk to the product road map and kind of frame up what you think the desired in-state might look like?

Frederick H. Eppinger -- Chief Executive Officer

Yes. So -- and I'll take a couple of pieces of that. So from my perspective, when you think about the potential evolution of the title process, we really felt that having really terrific remote notary capability and notary network was going to be an incredibly valuable part of what the company did and being able to both control the quality and the access to that and the integration of that into the overall process.

And so we obviously invested in that and invested pretty significantly. And so there will be product innovation in that area for us as we take those assets, Signature and NotaryCam and think about that combined entity to make us better. On the -- if you then go to the appraisal side, again, we thought that was a critical part of the road map for us to have both scale and the technology platform for an evolving world. We also think that's a business that's consolidating because of the need to be a lot more innovative and technology savvy. And we think we've set ourselves up there to really continue to grow that business and cover the whole market space pretty effectively.

So the overall ancillary approach for us was really to get this instead of having a very small-scale and a bunch of little things, to really build some scale in a number of areas where we could be a winner, right, and to both kind of help our overall position with our clients, but to also be very successful in those individual businesses.

So I think we have the scale. It's right on track as far as the margins and stuff. There's a little bit more consolidation work we're doing in some of the acquisitions we did, which will enhance the margins a little bit even more. But I feel very good that we position ourselves. As far as the road map for us, again, I feel like we have a good portfolio of services, but we continually are looking at are there places that we should own versus buy in some of the services areas. And so we will continue to kind of examine some of the sub product sets, some of the data sets areas so that we can continue to have a robust ancillary set of businesses that support the company.

But this is an area, as you said, we really were focused on because if you look at our competitors that was always a help to them in their margins. For Stewart, it was always a drag. It was always an underperformer. We had a lot of cats and dogs that would lose one customer and then lose a lot of money. And so we now have set that up, I think, to both support our core business but also to be a really accretive part of our earnings going forward. And, again, do I want to grow that business? Sure, we do. That is a business that we're going to continue to focus on.

John Campbell -- Stephens, Inc. -- Analyst

Okay. That's a great run down. And one quick follow-up. Maybe this is for David. But if you look at that segment, backing out the corporate expense and then taking out the, I guess, the net realized gains, I'm getting to like a 4% margin kind of underlying for that ancillary services just -- within just ancillary services. So just curious about where you think you'd maybe take that margin? Is it kind of mid teens, low teens?

David Hisey -- Chief Financial Officer

Yes, John, I think we had talked about that in prior calls. So I think we're trying to drive it first to the overall sort of corporate target that we've laid out. And then I think depending on the mix, as Fred mentioned, in those businesses, we can potentially see that going well. We made a good amount of progress going from -- I think we were losing money in ancillary to now making money. And to your point, it's 4% plus. But then if you look at it sort of ex amortization, so on a cash basis it's a bit higher than that, just continuing to focus on bringing all those businesses together and making it as good as it can be.

Frederick H. Eppinger -- Chief Executive Officer

And so our view of it, and we can see transparency to it, is that it's going to be accretive to our overall company -- our company goals, as I've talked about, we think that's going to be at least neutral to that and potentially helpful in the pretty short quarter. So we can kind of see the transparency of that getting to that 9, 10 level that we talk about for the company.

David Hisey -- Chief Financial Officer

And what you're seeing now is everything is basically origination driven. So there's a lot happening in the Notary businesses. There's a lot happening in the appraisal businesses. But some of the other businesses, for example, capital market search, where the margins are actually quite high, there's not a lot of activity. So I think we have talked about that on our prior call. When we see a more normalized environment and transactions in each area, capital markets and foreclosure delinquency, that should actually help the situation.

John Campbell -- Stephens, Inc. -- Analyst

Okay. That's very helpful. Thank you, guys.

Frederick H. Eppinger -- Chief Executive Officer

Thank you.

Operator

[Operator Instructions] And we'll take our next question from Geoffrey Dunn with Dowling & Partners.

Geoffrey Dunn -- Dowling & Partners -- Analyst

Thanks. Good morning.

Frederick H. Eppinger -- Chief Executive Officer

Good morning, Geoff.

Geoffrey Dunn -- Dowling & Partners -- Analyst

Could you give us a bit of an update on the commercial market, U.S. commercial market? Strong rebound in the back half of the year. It seems like maybe some of the Q1 activity might have got pulled into Q4, but just discuss the overall health, the overall mix of larger deals versus local deals and your outlook pipeline going into middle of this year?

Frederick H. Eppinger -- Chief Executive Officer

Do you want to take it, David?

David Hisey -- Chief Financial Officer

Yes. Sure, Fred. So Geoff, thanks for the question. But, yes, I mean, I don't think our outlook has really changed from what we said before. We see commercial coming back a little slower. I think the sector mix has been heavy industrial. You're seeing some energy, seeing a little bit of movement in hospitality and office. But for us, we think that the market this year starts to improve a little, but it's still going to be challenging. And so we haven't really changed our outlook from what we said the last couple of calls for --

Frederick H. Eppinger -- Chief Executive Officer

Yes. And again, I think you know this, the business is very lumpy. So our analysis of last year is that "we gained share in commercial". I don't really believe that. I think what happened is some of our business got pulled into the fourth quarter. Because of our -- particularly our energy, a lot of our energy business got pulled into the first quarter. And so it's kind of lumpy. So the way I think about it is that we're competing pretty effectively. We're holding share, but it's really bumpy because it's small for us. And we did not have -- we did not see -- our January and February was quite slow, and it just feels like a lot of our business got pulled into the fourth quarter. March was much better. April's particularly better.

So to David's point, our outlook for the industry is a relatively soft year, right? Again, I don't think we have -- there's other people's other views, but that's kind of our view. And we think we're kind of -- we've been holding share. If I look at the last four quarters together, and again, we'll do the analysis this quarter too. But for us, it's very lumpy because of our size. If you look at our average revenue per ticket or whatever, our average fee per file it was down because we didn't have a mix of large, this quarter was actually much less than last quarter.

David Hisey -- Chief Financial Officer

And then when you look at the industry data, right, the RCA and other data, the people that spend time predicting this by sector and market, they have this year being relatively soft as well. So that's always been our view. There could be other views, as Fred mentioned, that could be specific to their clients and book of business, but our view is more consistent with the market.

Frederick H. Eppinger -- Chief Executive Officer

Yes. And I want to leave you with what I've said before. We're setting this up really aggressively. So we've invested a lot in commercial, both in here, Canada, Europe. And so we're focusing on some very targeted geographies in the sectors, and I feel very good about it. We really have acquired some talent. We're lined up. So as it comes back, we should be able to capitalize on it going forward. So it is an important part of our future for sure.

Geoffrey Dunn -- Dowling & Partners -- Analyst

Okay. And then I wanted to talk about tech investment. In the beginning comments, you rattled off some of your automated underwriting capabilities and platforms. Obviously, you invested in NotaryCam last year to enhance your digital closing end. Where is your tech investment focus with respect to digitization, automation as we look out on '21/'22? More of the internal development as well as, I guess, any targeted areas, you already said you're evaluating what you need to own versus rent maybe. But I'm particularly curious on how your tech spend is directed over the next year to two.

Frederick H. Eppinger -- Chief Executive Officer

Yes. It's really -- we have a lot of the pieces pulled together. But as I've said before, as Steward accelerate, we continue to invest. We're very proud of what we're doing on the automated underwriting side. Our stats are as big as anybody including the start-ups in our industry and the effectiveness of that. But we're using additional data to apply that to a broader array, particularly in the purchase area. So we're continuing to push ourselves in investments there. On the front ends, we're always looking at connectivity and the efficiency of the front end of the process, and we're going to continue to do that and continue to refine what we're doing.

So on the notarized and the kind of remote notary, again, in my view, there's -- we're productizing a little bit, particularly for the agency channel. We're enhancing those products, making them a little bit easier for agents to order and integrate them into their system. So again, for us all the pieces on the chain we're actually continuing. We're not stopping kind of our evolution or innovation. And as I said, we had some separate conversations about this. My view is we're ahead of adoption in the industry, but we know that it's going to continue. Customer experience has got to get better. And we're going to continue to invest on the various pieces of the chain.

But again, I feel really good about what we've assembled and what we have and how quickly it's being used and integrated into our operations. So again, this is one of those never, in some ways never ending in that you got to keep investing and innovating to make sure that you're on top of it.

But the bigger players because of the data access that we all have a huge advantage to be able to apply these tools and make the experience better. And we're all -- I know we're all running at it, and it's going to continue to get better, and I feel really good about our position.

Geoffrey Dunn -- Dowling & Partners -- Analyst

Okay. Thank you.

Frederick H. Eppinger -- Chief Executive Officer

Thank you.

Operator

And it appears we have no further questions at this time. I will turn the program back over to our presenters.

Frederick H. Eppinger -- Chief Executive Officer

Well, I want to thank everybody for joining us for the first quarter and I really appreciate your interest in Stewart. Thank you.

Duration: 32 minutes

Call participants:

Nat Otis -- Director, Investor Relations & Senior Vice President-Finance

Frederick H. Eppinger -- Chief Executive Officer

David Hisey -- Chief Financial Officer

Bose George -- Keefe, Bruyette, & Woods, Inc. -- Analyst

John Campbell -- Stephens, Inc. -- Analyst

Geoffrey Dunn -- Dowling & Partners -- Analyst

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