Hello, and thank you for joining the Stewart Information Services first quarter 2022 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. If you would like to ask a question, you may do so by pressing the star and one key on your touchtone phone. Please note that this call is being recorded. Lastly, if you should require operator assistance, please press star zero. It is now my pleasure to turn today's conference over to Mr. Nathaniel Otis, Head of Investor Relations. Sir, please go ahead.
Great. Thank you. Thank you for joining us today for Stewart's first quarter 2022 earnings conference call. We'll be discussing results that were released yesterday after the close. Joining me today are CEO Frederick 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 with forward-looking statements 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.
Thank you for joining us today for Stewart's first quarter 2022 earnings conference call. David will go over the quarterly financial results in a minute, but before that, I'd like to touch on a little bit of the big picture. Over the past two years, much of the work here at Stewart has centered around initiating and carrying out a structural retooling of the company's operations to position ourselves better on our journey to what we call becoming the premier title service company. The goal has always been to create a sustainable business that would succeed through all types of real estate cycles and economic conditions. We focused on improving margins, growth, and our resiliency. We did this by improving our scale, our operational capabilities, and our financial discipline.
I would add that during this time, we also focused on enhancing the customer experience through technology investments that have meaningfully changed our ease of use in our agency, lender, and direct businesses. I believe the first quarter demonstrates that we have made significant progress on our journey. It was not long ago that Stewart consistently lost money in the first quarter. In 2022, even as the market normalized, we delivered record results. The backdrop of rising interest rates, normal seasonality, and uncertainty of the spring selling season is weighing on the start of 2022. But this is the market environment we've been preparing for. The expectation has always been that today's market would be different than 2021, and 2023 will be different than 2022. We will be prepared for each of these as we continue our efforts to build a better and more resilient Stewart.
I say this for two important reasons. First and foremost, we are confident in our ability to manage in this transitional period and remain bullish on the long-term prospects for the markets we operate in. Second, it is important to understand that just because the market has transitioned, our journey continues. We will remain laser-focused on strengthening the foundational tenet of our structural improvement, attaining adequate scale in priority markets, aided by leading technology support and innovation to help drive superior and consistent service delivery to our customers. We have taken great strides in addressing a lack of scale in various markets over the last couple of years. On the direct side, we have executed more than 20 regional title transactions and added significant bench strength and talent. We have changed market presence in Arizona, Illinois, Michigan, Texas, California, Colorado, and Washington to our advantage, just to name a few.
In addition, in markets that we determined adequate scale could not be accomplished without excess investment, we simply closed or sold operations, often to an agent partner. On the agency side, we've invested in technology and services that provide greater connectivity, ease of use, and risk reduction for our agent partners. As the industry accelerates the implementation of online and paperless transactions, we are there to help support our agents as they undergo this critical transition. We believe our opportunity to grow scale in our growth markets and improve our shelf space with winning independent agents is just beginning. Why is this so important? How does scale in one MSA translate into Stewart becoming the winning title services company and increasing shareholder value? Let me briefly explain.
As in all industries, customers are the lifeblood of success and growth, maybe more so in title insurance as we make our money on each real estate transaction with no recurring revenue stream. Industry volumes vary by quarter given all of the reasons we have just discussed. Delivering great consistent service while matching resources to revenues in a disciplined way is the special sauce in our industry. Historically, Stewart has been subscale in many of the key markets, both in direct and from an agency standpoint. An inch deep and a mile wide is a phrase I often use. This placed significant pressure on our local people and operations as order activity fluctuated. An office of four people acting by themselves can't ramp up quickly enough to take advantage as volumes increase, negatively impacting customer service.
Conversely, when order activity wanes, business goes elsewhere because of inconsistent customer service through the cycle, while profitability also dips due to lack of operational leverage to pull. This is why the scale is a priority in our priority MSAs is the building block of our success and why we will continue to opportunistically look for core title acquisitions that match our profile, as well as work to add technologies and service that help deepen our agency partnerships and increase share with winning agents in our target markets. We have made great progress over the past two years as we used our MSA market assessments to help guide us and bolster our operations. Clearly, more work needs to be done, but we will continue to grow and enhance our competitive position in each market.
Even with the changing market conditions, we believe opportunities will continue to arise to build share in our target markets, allowing us to profitably grow throughout the cycle. Let me just finish by reiterating my positive long-term view of the real estate market and our ability at Stewart to become the premier title services company. I would also like to thank our associates for all their hard work and our customers for their continued support. David will now update everyone on the results.
Thank you, Frederick. Good morning. Let me also thank our associates for their amazing service and our customers for their trusted support. As we enter the traditional home buying season and with the rates and recent increases in 30-year mortgage rates to the 5% area, the residential and commercial real estate markets are moving to more traditional seasonal and economic influences. Residential real estate markets continue to see demand driven by favorable demographics and the importance of home. Commercial real estate is seeing activity across most asset classes, industrial, multifamily, office and retail, with energy poised to benefit from needed supply and environmental focus. There are several watch items that could impact future business performance, including Fed and government policy in action, particularly with moderating inflation, an uncertain consumer and jobs environment, and the impact of global conflict on supply chains, particularly food and energy.
As Frederick noted, we are focused on managing our business in the areas that will have the most meaningful and durable impact on our long-term operating performance. Gaining scale in attractive direct markets, improving scale and geographic focus in our agency and commercial operations, broadening and deepening lender services offerings, and throughout our business, improving service and digital capabilities to provide seamless end-to-end user experience. For the first quarter, Stewart reported net income of $58 million and diluted earnings per share of $2.11 on total revenues of $853 million. As disclosed in Appendix A of the press release, adjusted net income for the first quarter was $56 million, which was 8% higher compared to last year's quarter. The adjustments to our first quarter net income were primarily related to netting unrealized gains on equity securities investments.
As mentioned in our press release, we revised the presentation of our operating segments effective in the first quarter to reflect a third segment. The increased size of our real estate solutions operations, which were previously combined with our corporate operations, warrants disclosure as a separate segment. Our corporate and other segment includes primarily corporate operations, while title remained substantially unchanged. Total title revenues for the quarter increased $97 million or 15% compared to last year's quarter, primarily due to improved results from our agency and commercial operations. The segment's pre-tax income improved to $83 million, which was $6 million or 7% higher than last year's quarter.
Title pre-tax margin for the first quarter this year was 11.4% compared to 12.2% last year, primarily due to the effect of significantly lower refinancing volume and investments we are making in the segment to improve title production and title data. With respect to our direct operations, domestic commercial revenues improved $27 million, driven by increased transaction volume across most asset classes and a 47% higher average fee per file of $12,700 for the first quarter of 2022. Domestic residential revenues increased $4 million or 2% due to higher purchase transactions and improved scale, offsetting a lower refinancing volume. Residential fee per file for the quarter, first quarter of 2022 was $2,600, which was 37% better than last year's average fee per file due to the higher purchase mix.
Total international revenues improved CAD 7 million or 20% compared to last year, primarily due to increased transaction volumes in Canadian operations. Total open and closed orders in the first quarter decreased 26% and 24% respectively, primarily due to the expected lower refinancing transactions consistent with the market trend. This was partially offset by 31% and 4% higher commercial and purchase closed transactions in this year's first quarter versus last year's quarter. Our agency operations had another strong quarter, generating revenues of $404 million, which is 17% higher than last year. The average agency remittance rate slightly improved to 18.1% compared to 17.1% in last year's quarter.
On title losses, total title loss expense for the first quarter was comparable to last year's quarter as the effect of higher title revenues was offset by overall favorable claims experience. As a percent of title revenues, the title loss expense in the first quarter was 4% compared to 4.6% in the first quarter last year. In regard to operating expenses, which consists of employee and other operating costs, total operating expenses increased mainly due to the increased variable costs related to revenue and higher employee count. Employee costs as a percentage of operating revenues improved to 24% from 25% last year, while other operating expenses increased to 22% from 18% last year, primarily because of the increased size of our real estate solutions operations, which typically have higher other operating expenses.
On other matters, our financial position provides a solid foundation to support our customers, employees in the real estate market. Our total cash and investments on the balance sheet are approximately $560 million over regulatory requirements. We have a fully available $200 million line of credit facility. At the end of the quarter, stockholders' equity attributable to Stewart was approximately $1.312 billion. Our book value per share was approximately $49, an increase of 2% from December 31, 2021. Lastly, net cash provided by operations for the quarter was $35 million compared to $47 million from last year's quarter, primarily due to higher payment of operating liabilities outstanding at the end of December, partially offset by higher net income in the quarter. We are always grateful for and inspired by our customers and associates.
We advocate for everyone's improved safety and prosperity and are confident in our supportive real estate markets. I'll now turn the call back over to the operator for questions.
At this time, if you would like to ask a question, please press the star and one on your touch-tone phone. You may remove yourself from the queue at any time by pressing the pound key. Once again, that is star one to ask a question. Our first question will come from Bose George with KBW.
Hey, everyone. Good morning. Actually, first, just wanted to ask, in terms of the acquisitions that, you know, have closed recently, is the accretion from them all now fully reflected in the numbers this quarter, or is there sort of more that we should think about as we model?
Yeah, Bose, you know, we did close a lot in the fourth quarter, so I think we're still seeing the full effect of those come online. We still have our integrations and, you know, finishing all the acquisition accounting. I think it's fair that there's still some movement coming this year, because we did such a big amount in the fourth quarter.
Okay. In terms of the movement, we should, I mean, see it as some level of accretion still to come in terms of more revenues and expenses still coming on.
Right. I mean, we don't have, you know, a number of them closed during the quarter as an example, so we don't have even a full quarter's of activity for some of them.
Yeah.
Yeah.
Okay. Okay, great. Thanks. Then actually, the release mentioned this, the real estate brokerage acquisition, which was subsequently sold. Was that, you know, something that you guys had mentioned before? I just don't recall that.
No, Bose, I don't think we mentioned. I mean, this was just an opportunity to facilitate a transaction for an owner of a title agency, and that's what we did. We hadn't really mentioned that before.
Okay. Great. Makes sense. Thanks. Just one more. Can you just talk about, you know, commercial and purchase trends in the quarter? The second quarter, rather?
Yeah. I mean, I think we're seeing the effects of, you know, what most people are seeing in commercial, right, as the economy opened over the last year. You know, you've really started to see improvement across all the asset classes. I think, you know, some of the industry information, Real Capital Analytics put out a report that, you know, first quarter sales activity was quite high across the asset classes. We're seeing that, you know, pretty much throughout the assets and the country. You know, you even have New York opening up a bit now as well.
Yeah. It's been broad-based for us on the commercial side. I think we've mentioned this at the previous call. As we look forward, we're pretty bullish on commercial.
Okay. Great. Thanks a lot.
Great. Thanks.
Thank you. Once again, that is star one to ask a question. Our next question comes from Geoffrey Dunn with Dowling & Partners.
Morning.
Thanks. Good morning.
Fred, obviously, you've done, I think you said 20 regional acquisitions. Can you give an example of how improved scale in MSA has shifted profitability in a certain location? Like in Illinois, you've done a couple.
Yeah.
Can you give me an example of how obviously it's hard to model individual deals, but they aggregate. Can you give us just some
Yeah.
Some numbers around what scale building does for you?
Yeah. Again, what a great example, Southern Colorado Springs, where we were a small operation. We probably had, on a marginal contribution, say we were in the 5%-6% range. What would happen is we'd get crushed during the first quarter 'cause of seasonality. We didn't have enough volume, and we couldn't adjust any of the resources there. Plus, we would be the one in town where people would pick off talent because we didn't have kind of the breadth of operation. Now we're probably the leader on the purchase market in Colorado Springs. The stability that comes with that is tremendous. Our retention of people went up.
Our margin, because of our ability to actually manage the business and the cycle and through the four quarters went up. Our ability to actually think about things like centralization and operational enhancements on how we manage the business has improved. That business, you know, it flips from an underperforming one to kind of a superior performing one and with more consistency quarter to quarter. Once you do that, once you get to scale, you can also then do fill-in acquisitions in micro geographies and instantly have an accretive position from doing that. Same with kind of your data access, right?
Your data access is more cost effective because you have more volume and things like starters are easier to access because you have a broader reach in the marketplace and more data. It's like if I talk about, like, retail banking. In retail banking, if you get a certain percent of deposits in a local market, your margins just fundamentally change. In title, it's the same way. You get up to that, you know, 10% share in a market, for us, it changes both the stability of the margins and our ability to kind of grow from that platform. So much of this is what I talk about consistent service.
Because again, if you're trying to manage the cyclicality in our business, it's really hard by doing it in a four-person office, right? You can't affect the downside or manage the downside. If you have 40 people, that's a very different ability to manage. We have looked at every MSA, 180 or so we think about, and say, "Who are the leaders? How do we reposition ourselves? Where are the best segments to compete in?" Some we do both at agency and direct. Some we primarily do one or the other. You know, you look at what is the best structural position you can be in that market, and that's what we've tried to do. This isn't ad hoc, right?
I mean, you can't always get the resources you need, but when you can, it's targeted, right? On how we try to do it. So again, it's, you know, we've done a lot of it. I would also say that, again, what's different among us is there was a lot of operational and just blocking and tackling things we did organically, right? We managed ourselves a little bit differently and more effectively, whether it's on search costs or how we manage operations or how we manage data, or how we do integrations. So it's the combination of the scale stuff we've done and the operational improvements for the company. I feel like we've made good progress. I mean, I wouldn't say we're all the way where we could be.
I think we have more to go, but we've made good progress.
Okay. Just a follow-up on M&A. I think up till, you know, even a month or two ago, we were hearing that companies were still trying to sell themselves off of 2021 results. Are you seeing more sellers come into the market right now and more rational valuations? Or is it still in a transition period and potential sellers hanging on to 2021 type of expectations?
Yeah. Again, I think it's a mix of all. People, you know, understand the market is different and have adjusted. I mean, for the most part, you know, it has adjusted. One of the things that drove the prior market was some of these new entrants that were trying to create revenue, that bought a lot of these refi shops, that had great, you know, fees. It kind of clouded valuations a little bit because they were silly at some level. Not the big players, not the more traditional players, but there were some others. All of that stuff is out of the system, right? There was some financial buyers because of how attractive the market. That's out of the system. What you have now, in my view, is a more rational conversation.
Now, the good operations are still, you know, depending on your margin, you're worth different things based on how well you run, et cetera. There are some that still have inflated views of value and so, you know, transactions don't happen. My view is realism of where we are is absolutely starting in the market. Again, you know, for us, it's different. You know, this is not something you just do for a quarter. This is a lot of the transactions that occur now is stuff that we started talking to two years ago. I mean, this is about really building the relationships and understanding what the opportunities are, and being focused on the right match and the right people. Like, to your point, it's a good question.
I think the valuations will be appropriate, right? So.
All right. Thanks, Frederick.
Yeah. Thank you.
Thank you. Our next question comes from John Campbell with Stephens.
Morning, John.
Hey, good morning. This is A.J. Rice stepping in for John today.
Oh, A.J.
Hey, guys. Quick question here. I know you guys are definitely still got an appetite for M&A, but with the stock pullback, I think you guys are also getting a pretty good price to buy some of the company here. How are you thinking about the balance of the two in this current environment here?
Yeah. For us, the best use of our capital continues to be to build our business, in my view. That's kind of what we're focused on. We've obviously been with dividend. We did a dividend increase, and we're trying to be thoughtful for our shareholders to make sure we're providing that as well. Right now, our focus has been continuing to build our business. As you know, every transaction we've done essentially in the title space has been accretive and helpful. That's kind of been our focus and will continue to be our focus here in the short to medium term.
Okay. One follow-up here. It's been a while since we've dug in on this, and obviously, I'm guessing things might have changed a bit with the series of recent acquisitions, but can you guys provide the latest high-level rundown on your cost base and specifically fixed versus variable costs for salaries and other operating expenses? Just bigger picture, how do you think about protecting margins against decline in overall originations?
Yeah. Let me take the second one. Again, in the last two and a half years, we've taken a lot of actions. When we started this journey, we were 4% margin, right? So we are thoughtful about managing our resources during the cycle and what we need to do to manage our business. We're confident that we will have improved. We'll sustain our improved margins in the business, and we'll manage ourselves thoughtfully through the cycle. We did it. We did it in the first quarter. We've done it for the last two and a half years, and we'll continue to do it. As far as and I'll have David comment on some of your other questions. You know, we feel very good about how we've been managing our overall expenses and our investments.
I also want to remind folks, we're not gonna stop investing in our business. We are on a journey to be the best. We've got some really interesting things we're doing right now, on product enhancements, on integrations, on data management that are enhancing both our effectiveness as a business and our cost position in the future. We're balancing both current investments and our operations, I think, like we've always done. It's, you know, again, in my mind, you just have to manage your business and manage your resources as you see the business unfold. I want to make one other point. Our view is it's choppy right now, right? There's no question.
As we look out and look at demographics, and we look at all the trends, and we look at all the forecasts, I think the next two years are still gonna be very good years for Title. I talked about the purchase levels, et cetera. We believe that there was still a relatively strong market position for the next couple of years. We, you know, it is obviously choppy now, and we've got to make sure we manage ourselves effectively. David, is there any other comments on the-
Yeah. I think the general comment is that although we're sensitive to fixed and variable, we really run each business, you know, the way it needs to be run. The fixed versus variable component varies a lot by business. For example, in the real estate services businesses, solution businesses, we've got a lot of outside data and other information that's highly variable against a very small employee base. Whereas you've got over in sort of the direct title operations because of facilities and the scale, geographic reach and the like, it's a little bit more fixed, right? Each of the businesses is run consistent with the revenues and the cost structure of those businesses to produce the results that we've shown.
I think as a general matter, you know, you probably have somewhere in the 30+% in a fixed, then you've got some, you know, semi-variable. But a lot of our expenses, you know, probably a good 60, 50, 60% are variable, right? Because they're all transactional. You've got bonuses, premium taxes, you know, different things like that, data, as we talked about. So yeah, I think that's how we generally think about it.
Awesome. Thank you so much, guys.
Yep. Thank you.
Thank you. Our next question comes from Ryan Gilbert with BTIG.
Hey, good morning, Ryan.
Hi. Good morning. Thanks for taking my questions. I wanted to go back to the question on 2Q trends and I guess also your comment around the market being choppy right now, and maybe you could just drill in on how purchase and refi volumes in the residential market has trended in April. You know, I think the big question outstanding right now for investors is the extent to which higher mortgage rates are going to ding homebuyer demand, and it doesn't seem like that's shown up in your numbers yet in 1Q 2022, with purchase volume up 4% year-over-year. I think any color on how 2Q is trending so far would be really helpful.
Yeah. Hi, Ryan. It's David here. You know, I think in general, you know, you've had a recently in the last, let's just say several weeks, you know, a rise in the 30-year mortgage rate to over 5%. That's definitely had a bit of an impact, even on the purchase market. Yeah, I think we're still seeing pretty good activity, but it's still somewhat transitional. I guess the other thing I would note is that, and you can see it in the most recent MBA application data, less than 10% of all applications are ARMs, and there's still probably a good 100 basis points spread in the 4% area on a 7- or 10/1 ARM, which is a pretty good purchase product. Yeah, I think it's early.
There's been a little bit of a negative impact, but I think the market's still transitional. Then I think the other important thing, which I don't think investors really ever focus on, is we're more sensitive to title premium, not unit volume, right? So if you think about what are the components of title premium, it's really the notional value of the transaction and then the total transaction volume. So if you look at on that basis, even though you have units coming down, you have total volume, you know, notional value holding or rising because of increases in home prices, which creates a pretty good title premium environment.
Yeah.
Yeah, that's.
Yeah. Yeah, go ahead. I'm sorry.
Yeah, I was just gonna follow up on the revenue per order, you know, up significantly in 1Q2022, and I think the comps get a little harder as we move into, you know, the rest of the year. How should we think about your growth rate and revenue per order? I think even on a mix-adjusted basis, it's, you know, up in the mid-20s%.
Yeah. I mean, we could probably see a little bit more, Ryan, because, you know, we started to see the mix significantly shift in the first quarter to be more predominantly purchased. You know, as you go to almost 100, you know, call it 90%+ purchase, right, there's still a little bit of a room to go on fee per file. You know, we probably don't have anywhere near as much as we saw over the last year, but there could be some additional room on fee per file.
Okay, great. Last one for me. I think, you know, generally we see a sequential improvement in pre-tax margin as we roll into 2Q from 1Q. Do you still feel like that's going to be the case this year? How do you feel about your double-digit pre-tax margin goal in 2022, you know, given the increased drop-off we've seen in the market?
Yeah. I think the goal is the same. I think we're trying to manage ourselves to that double-digit goal through the year. I think it's early in the quarter to know exactly where it's gonna unfold, but the trends that David said, that's what we are, you know, what we're seeing, and we feel pretty good about our ability to manage through this, so.
Okay, thanks very much.
Thank you.
Thank you. Our last question will come from Geoffrey Dunn with Dowling & Partners.
Thanks. I just wanted to follow up with respect to, you know, the, again, building scale and M&A. Your agency commission ratio, about 82% stands out versus some of the other peers. I'm curious if that comes into the thought process in terms of improving overall agency profitability. Is there, you know, M&A opportunity to reduce that, or is that not the right way to be judging kind of the overall agency platform's profitability?
Yeah. Again, we are very happy with our net margins in agency. For us, it's a well-run business, but you're absolutely right. Our geographic mix is very unique at Stewart. It's why we're so focused. If you think about all our major competitors, they have significant share in a state like Florida, right? Where the splits are much more attractive. We are nobody there still. A lot of the scale that we're building is about state-specific growth, right? And share. A lot of that is getting the right mix. You'll hear me talk a lot about Georgia and Florida and Pennsylvania because of our percentage of share, but also the overall profitability in those locations.
A lot of that split number is because our major competitors have big positions in Florida, just math. I would tell you from a net point of view, we run our agency business very well. I'm very happy with our margins and how we've managed the business, but we are working on growth in our state mix because we do think there's some opportunity there. There's no you know, you can just tell, can you tell? Our state mix and the other thing, and you guys all know, but it's when we talk about seasonality, it is so much more dramatic. Why I'm so happy with the way we're managing ourselves in the first quarter is our seasonality is more dramatic than the other bigger players. Why? Because we're not really in California or Florida in a significant way.
We are the smallest player by a mile in those two places. Just think about the weather, where we are, which is the Northeast and Midwest. The upside for us on so many dimensions is to continue to grow share in the MSAs in California and Florida, right? I mean, so again, it. We have good upside. It demonstrates we've been managing ourselves pretty well with our mix. Your split point is a great example of how it just. The numbers are different because of our geographic spread.
All right. That's all folks. Thank you.
Thank you.
All right. Thank you. At this time, I would like to turn the floor back over to Mr. Otis and the presenters for any additional or closing remarks.
This is Fred. Thank you so much for everybody's attention, and thank you for joining us on this quarter's earnings call. Thank you.
Thank you, ladies and gentlemen. This concludes today's conference, and we appreciate your participation. You may disconnect at any time.