Hello, and thank you for joining the Stewart Information Services fourth quarter and full-year 2022 earnings call. At this time, all participants are in a listen only mode. Later, you'll 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. Lastly, if you should require operator assistance, please press star zero. It is now my pleasure to turn today's conference over to Brian Glaze, Chief Accounting Officer. Please go ahead.
Thank you for joining us today for Stewart's fourth quarter 2022 earnings conference call. We will be discussing the 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 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.
Thank you for joining us today and for Stewart's fourth quarter earnings conference call. David will review the quarterly financial results in a minute, but before that, I would like to cover our overall view of Stewart and the current market. As I discussed before, much of our efforts over the last few years have focused on fundamentally improving the company's operating approach to better position ourselves in our journey to become the pre-premier title service company. The long-term goal remains to create a stronger and more resilient business that can thrive through the real estate cycles and economic conditions. We have focused on improving margins, growth, resiliency by improving our scale in attractive markets and enhancing our operational capabilities and our financial discipline.
We have significantly improved our performance and our ability to manage in challenging markets, but we were impacted by the significant downturn in the purchase market we saw in the fourth quarter. The challenges associated with higher interest rate environment increased materially during the fourth quarter as interest rates topped out over just 7%, and we are planning for this difficult market to continue into 2023, and are managing our business with a balance of cost discipline and investment in skills and capabilities that will best position us for the long term. Although interest rates have declined in early 2023 by 100 basis points, and we've seen improving trends in January orders, interest rates, home inventory, and housing affordability are all hindrances to any quick return to a normal real estate market.
Through 2022, we have been managing in a declining market, starting with a significant decreased refi market and moving to a rapidly declining purchase market. As a result, we have been taking material but thoughtful and targeted expense actions throughout the year to ensure we maintain financial strength, service our business well, and position us for a more normal market. In the fourth quarter, we saw an additional material decrease in the purchase market, ending the year at a 46% decrease in closed orders and a 44% decrease in open orders year-over-year for December, our lowest point of the year. This trend led us to take additional significant but targeted expense actions in the quarter to ensure we maintained our financial flexibility.
We continue to manage our business with a long-term view, however, one that maintains and strengthens the investments and improvements we have made over the last two years, ultimately improving our structure and long-term financial performance. 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 the cycles. We have emphasized growing scale in attractive markets across all lines of business, and we have made significant progress in improving the customer experience in all our channels. While we are encouraged with our improvements on all four critical fronts: talent, technology, customer experience, and our financial model, we recognize work remains and the journey is not complete. We will continue to invest opportunistically during this market, but we'll be mindful of maintaining our current strong financial position.
Financially, our long-term goal remains to generate high single low double-digit margins over the cycle. However, there will be quarters like the fourth quarter and the first quarter of 2023 where margins will be challenged. Our adjusted margins for the quarter reflect the levels of investment in talent and systems necessary to compete and win over the long term. Disciplined management and seizing on growth opportunities as they arise are keys to improving Stewart's financial position. On the margins front, prior to beginning the journey, pre-tax margins were below single digits in a normal market, and in lower volume markets, we consistently lost a lot of money. Our efforts to improve scale in our direct operations, improve our portfolio of acquisitions in real estate services, and strengthen our operating model have allowed us to better weather the margin pressure, particularly in challenging markets.
At the outset of the journey, we identified areas that we needed to improve upon in order to achieve our goal. Since then, we've invested significantly in improving our technology for title production, process automation, and centralization to improve operational efficiencies and capabilities. We have already made significant progress improving the customer experience across all channels and rolling out our agency technology platform, which significantly enhances ease of use and connectivity with agents. We continue to make excellent progress on these and other investments. We know that more work needs to be done. We believe the current market will present opportunities to improve scale in targeted and attractive direct markets and to add additional services that complement our existing lender services. Share growth in direct target MSA markets remains a key strategic objective.
During the fourth quarter, we added FMC Title Services, which specializes providing title services for reverse mortgage transactions, and BCHH, the national provider of title services to international institutional investors and lenders. Both companies are leaders in their respective fields and are important to our strategy as we increase our service offerings and scale. The year ahead should see additional progress integrating completed acquisitions into our production and other systems, which improves our customer experience as well as the overall operating efficiencies that we've been building for the past several years. In our agency business, 2022 saw developments in key areas that position us now to increase scale in our growth markets and improve our share with the highest quality independent agents.
We have made excellent progress on our deployment of technology and services that provide greater connectivity, ease of use, and risk reduction for our agent partners. As we move through 2023, our platform of services for agents is as strong as it's ever been. Positioning our commercial operations for growth across all our business lines has been a key focus this year, as these operations are important components of our overall strategy. We made significant investments in talent during 2022 that aid in achieving these objectives. We are optimistic regarding the commercial market long term, although we recognize there are headwinds in the short term given changing financial markets.
Let me just finish by reiterating that we will both manage expenses and investments with a practical balance between an operating discipline for the current short-term market challenges and strengthening Stewart for the long-term growth and performance. A strong financial footing should best position us to taking advantage of the opportunities that this cycle will provide. I will conclude by reiterating my positive long-term view on the real estate market and the ability of 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 loyalty and support. David will now update everyone on our results.
Good morning, and thank you, Fred. Let me also thank our associates for their amazing service and our customers for their steadfast support. During the fourth quarter, residential market was negatively impacted by 30 year mortgage rates that peaked over 7%. Consumer sentiment has been poor due to the rate environment, inflation, affordability, and recession concerns. Commercial real estate has seen the impact of higher rates and volatile markets as well. Yesterday, Stewart reported fourth quarter 2022 net income of $13 million and diluted earnings per share of $0.49 on total revenues of $656 million.
After adjustments primarily for unmet unrealized gains and losses on equity securities and office closures, severance, regulatory, and litigation expenses, adjusted fourth quarter net income was $16 million or $0.60 per diluted share, compared to $84 million or $3.05 per diluted share in the fourth quarter of 2021. Total title revenues for the fourth quarter decreased $255 million or 30%, primarily due to the volume declines driven by higher interest rates. As a result, the title segment's pre-tax income was $27 million compared to $119 million in the prior year quarter. While on an adjusted basis, the segment's pre-tax income was $35 million compared to $120 million in the prior year quarter.
After adjustments for purchase and tangible amortization and other items listed in Appendix A of our press release, adjusted pre-tax margin for the fourth quarter was 5.9% compared to 14.4% in last year's fourth quarter. In our direct title business, domestic commercial revenues decreased $26 million or 28%, primarily due to lower transaction volume and size. Average commercial fee per file was $15,100 compared to $19,700 for the prior year quarter. Domestic residential revenues decreased $94 million or 32%, resulting from lower purchase and refinancing transactions. residential fee per file increased 45% to approximately $3,500 from $2,400 last year due to the higher purchase mix. Total international revenues were $16 million or 44% lower, primarily due to lower transaction volumes in our Canadian operations.
Total open and closed orders declined by 48% and 51%, respectively, in the fourth quarter compared to last year, primarily to the economic environment. Similar to our direct title revenues from our agency operations decreased $133 million or 30% compared to last year's quarter. The average agency remittance rate slightly decreased to 17.6% compared to 18% last year, primarily as a result of geographic mix. On title losses, total title loss expense in the fourth quarter decreased $12 million or 36%, primarily driven by lower title revenues. As a percent of title revenues, the title loss expense was 3.7% compared to 4% in the fourth quarter 2021. For the full-year 2022, our title losses were 3.8% of total revenues compared to 4.2% in 2021.
Based on the current economic environment, including a possible recession, we expect 2023 title losses to be at least at 2021 levels. Regarding our Real Estate Solutions segment, fourth quarter pre-tax income decreased to $400,000 from $5 million last year, primarily due to lower transaction volumes resulting from the economic environment. Pre-tax margin for the fourth quarter was 0.7% compared to 6.1% in the fourth quarter of 2021. After adjusting for purchased intangible amortization and other items listed in Appendix A, adjusted pre-tax margin for the segment was 12.8% in the fourth quarter compared to 9.1% in the prior year quarter.
Regarding operating expenses, which consist of employee and other operating costs, total operating expenses for the quarter decreased primarily due to lower costs related to revenues and lower incentive compensation based on lower results. Employee costs as a percent of operating revenues were 30% in the fourth quarter compared to 23% in the prior year quarter, primarily due to lower operating revenues. Other operating expenses as a percent of operating revenues were 23% and 22% in the fourth quarter of 2022 and 2021 respectively. Excluding office closures, regulatory litigation expenses, the other operating expense ratio was 21% in the fourth quarter 2022 compared to 22% in the prior year quarter. On other matters, our financial position is strong to support our customers, employees in the real estate market.
Our total cash and investments as of December 31st, 2022 are approximately $430 million over regulatory requirements. We also have a fully available $200 million line of credit facility. Total stockholders' equity attributable to Stewart was $1.36 billion. Our book value per share was approximately $50, which is 5% higher than December 31, 2021. Lastly, net cash provided by operations for the fourth quarter decreased to $25 million compared to $133 million in last year's quarter, primarily due to the lower net income in the fourth quarter of 2022. We are always grateful for and inspired by our customers and associates. We advocate for everybody's safety and prosperity and are confident in our support of real estate markets. I'll now turn the call back over to the operator for questions.
At this time, we will open the floor for questions. If you would like to ask a question, please press the star key followed by the one key on your touch-tone phone. If at any time you would like to remove yourself from the question queue, press star two. Our first question is coming from John Campbell from Stephens.
Morning, John.
Hey, guys. Good morning.
Morning.
Hey. If I strip out the one-timers here, I'm showing that personnel costs is down maybe a little bit less than half the rate of revenue. Other operating expense is down sharper than revenues. I know it's important that you guys retain staff, you know, to avoid that share loss. I know you've invested to garner share, you don't want to lose that on the other side of the market. My question here is the four Q movement in revenues and expenses by those line items, is that kind of a preview of what's to come? You're basically cutting the other operating expense faster than the salaries?
A little bit, John. The reality is that we're lagging a little bit. We've done a material amount of stuff in the last three quarters. When I saw this dip, kind of like I mentioned actually a little bit in last earnings call at the end of the third and into the fourth, that we took about $25 million worth of action, thoughtfully, targeted and surgical. Like, we took about $25 million action in the fourth quarter. I would say that was probably 20 of personnel, five on other. The balance, you know, changes and shifts kind of during the year, kind of what we did. That's what you saw.
Obviously you can see in the restructuring the result of some of that stuff with the office closes and some of this other stuff. The balance has been kind of that going in. What we see, obviously, the first quarter is our toughest quarter always, and the order count, obviously, when you see the open orders go down so much that we kind of know what the first quarter is going to be like in some ways. I thought that was appropriate to. To your point, otherwise, we are being thoughtful about this because in my view, there's, you know, two or three terrible quarters we've got to get through.
We built great capabilities across the organization, and I got to make sure we can take advantage of the market when it comes back, and we will. I want to make sure the momentum stays and the skills stay. We're trying to be really quite thoughtful about it, and I feel very good about how the team has managed through it. John, just to expand, one other thing on the other expense line and why there may be a difference in the percentages here is that, you know, a lot of the real estate services has third-party data and other costs in it. That varies a lot more closely to revenue than maybe the employee line.
Oh, that's true. Yeah. Other. Yeah.
. Okay, that's a great point. On the, on the implied direct title kind of fee per file, I'm having a little bit of trouble backing into that. If I take just the direct revenue divide by the closed orders, I think it's about a 40% lift year-over-year. I know there's mix shift there, but if I look at that sequentially, it's kind of a similar mix shift, and that's it with a 10% move sequentially. I'm thinking maybe the recent acquisitions might be skewing that a bit. Maybe if you could talk to that, help explain that.
Yeah. I think for that kind of a difference, John, I mean, you're probably talking the geographic mix and stuff like that. Those acquisitions, you know, the reverse fee per file isn't quite that high, and the other one closed way later in the year, so you wouldn't see any impact of that. My sense is that's just more geographic mix shift.
Okay. That's helpful. Thank you, guys.
Thanks, John.
Once again, that is star and one if you'd like to ask a question. It looks like we have another question from John Campbell.
Guess this is my show today, guys.
There you go, John.
If you could touch on the BCH business, that's something obviously you guys acquired in late December. If you can maybe talk to how that impacts the P&L. I'm thinking that probably falls in the Real Estate Solutions segment. Also, if you could give a little bit of color on the synergy potential and kinda how that complements the strategy.
Yeah, John. That actually is a title operation, so it's gonna be in the title segment. I think the way to think about that is their primary customer base is sort of the institutional investor side to think about single-family rental, think about build and rent, that kind of thing. You know, I think much like we did with the reverse business with FNC, we're sort of looking for market segments where you can differentiate and that have growth potential with what's happening, you know, sort of in the economy with demographics and the like. You know, some people, and I'm sure you've done some work on it, have sort of sized that single-family rental institutional maybe 10%-15% of the total real estate market at some point.
you know, this is one of the pre-premier providers there, and it's just our opportunity to go after that market segment.
Okay. This is somewhat related to BCHH, but, if you could go back to FNC. I think you had talked about in the past, that was maybe gonna hit other orders, and then maybe I think you said last quarter maybe that was purchased. Is it a mix now? If you could talk about the impact to other orders that picked up a good bit sequentially. Also on BCHH, if that's gonna hit on purchase or other.
Yeah. It's, FNC is in other. With BCHH, I think we're gonna need to take a hard look at that because some of it could be other and some of it's purchase, there's probably gonna be a bit of a split there.
Okay. That's helpful. Thank you, guys.
Thanks, John.
It looks like that is our allotted time for question and answer session. I will now turn the program back over to Fred.
I think there's some more on the, in the, queue. Is anybody on the queue?
Yes. It actually looks like a couple just queued up, and we have, Bose George from KBW.
Hey, Bose. Good morning.
Hey, good morning. Just wanted to follow up on the question from John on expenses. You know, as the benefit of the cuts that you did this quarter flow through, is there a way for us to kinda think about what the margin range is for 2023, you know, assuming sort of the market remains, roughly in line with consensus expectations?
Yeah. I mean, I think again, the it's gonna be very different by quarter because the first quarter is gonna be much more dictated by the poor order intake in the fourth quarter. I think after that, we believe it's gonna improve pretty materially.
Mm-hmm.
The personnel stuff we've done, in my view, gives us, you know, obviously, at some level, we have excess capacity in the system, still given for where we are and what we're doing. That as the market improves, obviously those ratios improve materially through the year if you have the capacity state, steady state as the volume increases. You know, we feel pretty good about where we are and where we're gonna end up. If you look at this year's year in total, it gives you. Like, if you look at kind of how we managed the full 12 months, even though it was a declining business, and you look at the way that ratio is on an annual basis, you get a pretty good sense of how we can manage the business, right?
I feel pretty good about what we've done and where we are. One disadvantage we have, as you know, is our portfolio is a little different. Like, we don't have a bank or investment income that goes to the revenue line that changes these ratios. If you look at us on a comparison basis, we've actually managed pretty well apples to apples. It's just that we have a little different portfolio than others have. Obviously, you know, the big guys are three times, four times our size, so there's a little bit of overhead at the top. But I would say on a relative basis, the actions we've taken and the level of actions we've taken is very comparable.
Okay, great. That's helpful. Thanks.
Well, just one other thing on that. I mean, I think the one thing to think about is even though we have taken all those actions, I think some of the ratio relationships that you saw in the fourth quarter where, you know, maybe you guys were a little bit lower than actual on the employee side, you know, some of that may continue because we don't get quite the dollar for dollar.
I think the first quarter will be very challenging, just like the fourth is. We're at the bottom right here. What's interesting, though, that I'm sure you've seen it, what's exciting, you know, orders are up for us in January, 28% open orders. Commercial orders are up 20% or something. Your first quarter is driven what the fourth quarter intake was really. While it's really good, that lags, right? I feel like we're bouncing off the bottom here, which is excellent. The first quarter, the other thing about us to remember is we're more seasonal than all the other competitors because we have the least in California and Florida. Everybody else has huge positions in California. We don't.
We got a little bit of a double whammy of a bad fourth quarter and, you know, a weak-ish first quarter because we're big in Northeast, we're big in New England, we're big in, like, Alaska and stuff. We have a little bit more of a seasonal lag. Again, I would say that I feel like we called it right because we can see the kind of the trends coming, and things bouncing a little bit back. It's good.
Okay, great. That's very helpful. Thanks. Then actually, can you remind us what drives that non-controlling interest line? It's come down very modestly despite the big move down in income.
Yeah. Yeah, that's where we don't have 100% ownership in some of our businesses, and it varies from period to period. We had done like a slight majority, you know, purchase like a couple of years ago, and then we've been staging into that. That was helping that line. We had a couple new entities in the fourth quarter, that might have, you know, kicked the ratio off a little bit.
Yeah.
in general, we're trying to minimize the partial ownerships, but there's gonna be period fluctuation.
Yeah. A lot of that was historical. In the beginning, I've been trying for buy in to get rid of that and have 100% ownership. One of the recent acquisitions for real good strategic reasons, we did a little bit of a minority ownership to align incentives. That's why it bounced a little bit. I don't see that getting huge or anything. That's not gonna jump.
Okay, great. Actually just gonna add one more. Just the legal and regulatory settlement, you know, was that kind of just a one-off? Any color on that?
Yeah. It was. It was with New York on anti-poaching, if you will. Everybody in the industry was tired, kind of being looked at it that. It came out of actually, I believe, our transaction with Fidelity and some service they did about anti-poaching. We settled. I think it was the third player to settle on that, and we just wanted to get it behind us. I think it's a one-off. It's not something that's, you know, gonna occur.
Okay, great. Thanks a lot.
Our next question comes from Geoffrey Dunn from Dowling & Partners.
Hey, Geoffrey. Good. Thank you.
Morning.
Just first with respect to the near term, it sounds like activity is picking up. You don't necessarily get those revenues completely in the first quarter, but you certainly have the expenses in processing those orders. As it shapes up, it sounds like directionally we're looking at maybe a more compressed margin sequentially. I guess my main question is, do you think you can make money in the first quarter?
Great question. I think it's gonna be a challenging quarter. I think this will be our most challenging quarter. Again, we've done a pretty aggressive job managing all our expenses. Again, I think first quarter is gonna be the most challenging.
Okay. Investment income, it looks like you had a pretty good uptick this quarter after not seeing much movement beforehand. David, did you reposition the portfolio differently, or is this just a lagged impact from rates, money yields going up?
Yeah, Jeff, it's David here. I mean, a lot of that's just the benefit we're getting in the money markets right now. I mean, you can get 4% plus in money markets where you weren't getting that. It's just the earnings on the excess cash. I think we're keeping the investment portfolio relatively short on the duration side and over-indexing on ways to grow the business. That's mainly the effect of money market rates.
Yeah. As you know, the short money is so good right now, right? It's a very unique situation, how quickly it moved and how good short money is. And again, it shows a little bit of our gap in that we don't have a depository for our escrow. Our investments are gonna come mostly from our investment portfolio and a little bit from the 1031 business. We don't get the benefit of our $2 billion of escrow. It is a very unique time, right? It's kind of the best time. It's a little countercyclical in a tough market right now with investments.
My, my last question is on commercial? You know, I think a lot of people are thinking of it as like a normalization year for commercial, but the problem is that can be very painful when you're coming off of record results. Can you talk to beyond maybe what you think as normalization, what remain the hotspots? What are the areas that seem like they're actually starting to get impacted on an economic basis? You know, what are, what are the pluses and minuses relative to the normalized level?
Yeah. Again, for us, what's interesting is that, you know, I think the first quarter is gonna be interesting because I think it's gonna be slow in some places, but the orders are up, so the tail, you know. I think the year is gonna shape up pretty good. I think there's some geography stuff going on right now. I think New York is a little bit slower. For us, what's interesting given our mix, energy is very strong. For us, we have some advantages in that what we're seeing is really nice kinda pickup and growth in the energy sector. Obviously, there's the obvious sectors that are gonna struggle a little bit more than others, like on office is gonna obviously struggle.
In general, we think it's gonna be a pretty good market in commercial. I do think the comparison, last year's first quarter was really good.
Mm-hmm.
I think there's gonna be a comparison in the first quarter, but I think overall for the year, it's gonna be solid. It's gonna be a solid commercial year. But there is a twist and case to your point. There's no question right now.
Okay. Thank you.
Thank you.
It appears we have no further questions. I'll now turn the program back over to Fred for any closing remarks.
Well, I wanted to thank everybody for joining us on this quarter's earnings call. Thank you.
This does conclude today's conference. You may now disconnect. Have a great day.