Hello, thank you for joining the Stewart Information Services first quarter 2023 earnings call. At this time, all participants are in a listen-only mode. Later, you will have the 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 call over to Brian Glaze, Chief Accounting Officer. Please go ahead.
Thank you for joining us today for Stewart's first quarter 2023 earnings conference call. We will be discussing results that were released yesterday after the close. Joining me today are CEO, Fred Eppinger, and CFO, David Hisey. To listen online, please go to the stewart.com website to access the link for this conference call. This conference call may contain forward-looking statements that involve a number of risks and uncertainties. Please refer to the company's press release and other filings with the SEC for a discussion of the risks and uncertainties that could cause our actual results to differ materially. During our call, we will discuss some non-GAAP measures. For 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 for Stewart's first quarter 2023 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. Our efforts at Stewart over the last 3 years have focused on fundamentally improving the company's operating performance to better position ourselves on our journey to becoming the premier title services company. The long-term goal remains to create a stronger more resilient business that can thrive through all real estate cycles and economic conditions. We focus on improving margins, growth, and resiliency by improving our scale in attractive markets and enhancing our operational capabilities. In challenging markets like we are currently in, it is often difficult to advance long-term goals.
I am pleased with our progress towards improving our long-term performance as we balance investments with the need to manage expenses carefully. As we discussed before, we anticipated the first quarter to be our most challenging. To prepare for this, we took significant actions to manage costs during the second half of 2022 and again in the first quarter of 2023. We have been careful not to take actions that we felt would threaten our competitive position and long-term value-creating opportunities. We believe this is a historic cycle low, and the right answer to get us through this period is to continue to invest in our people and remain focused on our long-term improvement plan and manage through a couple of challenging quarters, which is what we are doing.
Early in the first quarter, interest rates ticked down fairly significantly, which resulted in an increase in open orders. However, order volumes slowed again when rates quickly reversed again in February, peaking in mid-March. These challenging market dynamics, along with the impact of seasonality, led us to our lowest quarter closed order volumes in over 20 years and resulted in an overall loss for the quarter. As we moved into the second quarter, interest rates moderated slightly but remained elevated. We expect this difficult environment will moderately improve in the second quarter, but the challenging environment will continue into the second half of 2023, and we will continue to manage our business with a careful balance of cost discipline and investments in skills and capabilities that we expect will be the best position us for the long term.
Although interest rates have declined in the early second quarter, interest rates, home inventory, and housing affordability would be hindrances to any quick return to a normal real estate market. We remain focused on our long-term strategies, enhancing our operating model, investments in technology, enhance customer experience, and improve efficiency of our operations in building scale in targeted areas. While we took additional expense actions this quarter, we recognize that these strategic investments will cause our cost ratios to remain elevated in this market. We believe that the long-term investments, coupled with a thoughtful near-term expense management, will improve our structure and financial performance in the long term. In our direct operations, we are making progress on our strategy to grow scale in attractive markets. Even during this challenging market, we've continued to evaluate a select number of opportunities to increase our scale and footprint.
Given the market uncertainty, we will make very thoughtful decisions around deployment of capital. Positioning our commercial operations for growth across all our business lines has been a key focus in our journey, as these operations are an important component of our overall strategy. We made investments in talent during the past year to aid in achieving these objectives. We believe our focus will create long-term growth in the commercial markets, although we recognize changing financial markets may create headwinds in the short term. In our agency business, we have made excellent progress on our deployment of technology and services that provide greater connectivity, ease of use, and risk reduction for agency partners. As we move through 2023, our platform of services for agencies is strong as it's ever been. We've begun to see meaningful share growth in our target markets.
On the topic of technology, we continue to invest significantly in improving our technology for the title production process, automation, and centralization to improve operational efficiencies and capabilities. We've already made significant progress improving customer experience across all channels and rolling out our agency technology platform, which significantly enhances ease of use and connectivity with agents. We have made significant progress integrating completed acquisitions into our production of other systems, which improves our customer experience as well as the overall operating efficiencies that we've been building on for the past several years. The remaining integrations will be an important focus for the remainder of 23. Maintaining our current strong financial position while investing opportunistically during this market remains a top priority. Financially, our long-term goals remain to generate high single, low double-digit margins over the cycle.
There will be quarters like the 1st quarter and the 4th quarter of 2022 where margins will be challenged. We remain focused on our strategic plan of building an improved competitive position and being more efficient and having a disciplined operating model that functions well through all real estate cycles. We have emphasized growing scale in attractive markets across our business, and we have made significant progress in improving the customer experience in all channels. While we are encouraged by our improvements in all our 4 critical fronts: talent, technology, customer experience, and our financial model, we recognize work remains and our journey is not complete. We have seen the results of our efforts to increase year-over-year market share gains in each of our direct agency and commercial businesses.
Let me finish by reiterating that we will both manage our 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 take advantage of the opportunities that this cycle will provide. I also would like to restate my positive long-term view on the real estate market and the ability of Stewart to become the premier title services company. A tremendous thank you to our associates and all their hard work and to our customers for their continued loyalty and support. Dave will now update everyone on our results.
Good morning, everyone, thank you, Fred. First, I would also like to thank our associates for their amazing service and our customers for their support.
As Fred noted, the first quarter saw a continuation of a difficult real estate market and poor consumer sentiment. Low residential inventory, high mortgage rates, lower commercial real estate activity, and tough economic conditions all contributed to this situation. Yesterday, Stewart reported a net loss of $8 million or $0.30 per diluted share on total revenues of $524 million. After adjusting for net realized and unrealized gains and losses, the adjusted first quarter net loss was $7 million or $0.25 per diluted share, compared to a net income of $56 million in the first quarter of 2022. The lower results for the first quarter were primarily driven by significantly lower revenues caused by volume declines on lower home sales and refinances.
Total title revenues in the first quarter decreased $265 million or 37%, resulting in the title segment's pre-tax loss of approximately $1 million compared to pre-tax income of $83 million during the prior year quarter. After adjustments for purchase intangible amortization and other items listed in Appendix A of our press release, the segment's pre-tax income was $4 million or 1% margin compared to $81 million or 11% margin in 2022. In our direct title business, domestic commercial revenues decreased $24 million or 42%, primarily due to lower transaction volume and size. Average commercial fee per file was approximately $8,300 for the first quarter compared to $12,700 for the prior year quarter. Domestic residential revenues were down $70 million or 32% as a result of significantly lower purchase and refinancing transactions.
However, residential fee per file was approximately $3,400, which was 30% higher from last year due to a higher purchase mix. Total international revenues decreased $16 million or 40%, primarily due to lower transaction volumes in our Canadian operations. Total open and closed orders declined by 37% and 45%, respectively, in the first quarter compared to last year. In line with our direct title revenues, first quarter revenues from our agency operations decreased $155 million or 38% compared to last year. The average agency remittance rate decreased to 17.4% compared to 18.1%, primarily as a result of geographic mix. In regard to title losses, total title loss expense in the first quarter decreased $12 million or 40%, primarily driven by lower title revenues.
As a percentage of title revenues, the title loss expense was 3.9% compared to 4% last year. For the full year 2023, we expect title losses to average from 4%-4.2% of title revenues. For the Real Estate Solutions segment, pre-tax income decreased to $1.4 million for the first quarter from $7 million last year, primarily as a result of 30% lower revenues driven by lower transaction volume. First quarter pre-tax margin was 2.2% compared to 7.6% last year. After adjusting for purchase intangible amortization, the adjusted pre-tax margin was 11.5% compared to 14.8% last year.
The segment's total operating expenses in the quarter decreased 26%, primarily due to lower costs related to revenues and lower incentive compensation. Consolidated employee costs as a percentage of operating revenues increased to 33% compared to 24% in last year's quarter, primarily due to lower operating revenues in 2023. Other operating expenses as a percent of operating revenues were 23%, which was comparable to last year. On other matters, our financial position remains strong to support our customers, employees, and the real estate market. At March 31, 2023, our total cash and investments were approximately $340 million over statutory premium requirements, and we also have a fully available $200 million line of credit facility.
Total stockholders' equity attributable to Stewart at the end of the quarter was approximately $1.35 billion, and our book value per share was approximately $50. Lastly, cash used in operations of $51 million compared to net cash provided by operations of $35 million last year, primarily driven by the first quarter's net loss. We are always grateful for our customers and associates. We advocate for their safety and prosperity. Remain confident in our support of real estate markets. I'll now turn the call back over to the operator for questions.
Thank you. At this time, if you would like to ask a question, please press star one on your touch-tone phone. We will take our first question from Bose George with KBW. Please go ahead.
Morning, Bose.
Hey, guys. Good morning. Actually, I wanted to ask about the margin. I mean, it might be a tough question, but just given the, you know, the challenging backdrop on both residential and commercial, and assuming that persists for much of this year, you know, what can we think about in terms of the margins the business can generate?
Bose, I'm still convinced that when we look out for the next six to eight quarters, we will end up averaging kind of that high single digit, double digit. I do think the question is kind of how it evolves this year. I think we all had a view that it was going to improve material into the second half of the year. I think if you think about it now, I would say over the last six weeks, I think it's going to be a more moderate improvement in the second quarter, but it will improve. What's interesting for us is that, close orders were down 50% in January, 48, I think, in February, and then 40 in March. I mean, they money in March. I think we are much better company.
I think we can manage ourselves, and I think the margins will improve dramatically through the year. I just think there'll be one moderate improvement in the second quarter than maybe we thought six weeks ago because of the volumes. you know, again, if you look at last year when we had a tough fourth quarter, we ended at 8%. I think we'll be a little less than that this year if the back half improves. I think it's got a you know, we have a lot of leverage here. One of the things is we have capacity in the system, and so as the volume comes in, we won't be adding a lot of resource, right? We have a lot of leverage from where we are, and the portfolio is a lot better.
'Cause I look at it historically at our order counts and kind of where we are, and I think we're bouncing off the bottom now, and we're poised to do a lot better through the rest of the year.
Okay. That's great. That's very helpful. Thanks. Then just on the Real Estate Solutions segment, what's a good way to think about the run rate there? Like, how much of that is transaction dependent versus versus not?
Yeah. Hey, Bose. It's David. It's pretty transaction dependent. If you think about the mix of businesses, we've got the PropStream business, which is a subscription business, so that's not as transaction dependent, although people come in and out of that business, you know, depending on what's happening in the market. That's less transaction dependent. The other businesses, appraisal, credit, you know, those are transaction dependent. That was what you really saw in this quarter in some of those businesses, transactions hit pretty hard. You know, we have had some pretty good success in the credit business with differentiating in the market. I think in general, that business is doing well relative to the market.
We, you know, we're a participant in the Fannie Mae appraisal modernization program, one of the 10 or so folks that were selected for that. Those are the kinds of things that will really help that business sort of be durable and better than some, you know, as the market improves. That's a way to maybe think about the puts and takes. I'd say a good amount, you know, over half is transaction dependent. You know, you've got some stuff that's less transaction dependent.
Okay, that's helpful. Just the increase in that segment over last quarter, was that just sort of, you know, some of the acquisitions kicking in?
Well, we did have the small AccountChek acquisition in the first quarter. We had a nominal benefit from that. We did also have some customer wins and so I think it was a combination of those. We have some good momentum in a couple of those businesses around products that actually help lenders save money in the mortgage process. We're actually, you know, a little bit of growth happening in a couple of those businesses right now.
Okay, great. Thanks a lot.
We will take our next question from John Campbell with Stephens Inc. Please go ahead.
Hey guys, good morning.
Morning. Morning, John.
Hey, going back to the question, and this is for Fred or maybe David here, but Fred, you talked to the levers for controlling the model, or you don't think you need to add, you know, much additional expense as the revenue rebuilds. Just trying to get a better grip on those incrementals. It'd be helpful if you guys maybe provide the all-in fixed cost level as it stands right now, or if you're not able to provide that, maybe just talk broadly to the mix of fixed versus variable costs now and maybe how you expect that to shift from here.
Again, obviously, you know, we have the strict fixed costs, right, that are the 20% or 30% range. Sort of 20 to 30 fixed. You've got, you know, sort of the infamous, you know, 40 to 50 semi-variable, and then, you know, the 30 to 40 of true variable. The challenge is always managing the semi-variable. Exactly. So what I would say, John, that personnel wise, right, if you're down 50% of order, you can't cut 50% of your resource personnel, right? You've got to be really careful about how you're managing your resource and protect the capabilities of the institution. What I would say is that we've been very thoughtful, and we've done a lot of actions.
The way I think about it is we have excess capacity in that semi-variable component that we've retained to take advantage of the market as it comes back. What you see is, it's notorious in this business, right, on the way up, your marginal margin is higher, right? You're managing kind of that semi-variable to Dave's point in a fixed way, and that'll increase. At some point, you hit an overtime like we hit in 21. If you don't have resources, it really gets exaggerated as far as your margin. The way I look at it is that, you know, we're bouncing off the bottom here. We've done a very good job.
I really applaud our team in being creative across the board and being thoughtful about expenses in every dimension. As I look forward, that incremental revenue helps us tremendously on margin. I just think it's gonna be a tad slower than we thought before. I think the second quarter, what you're seeing is, well, the ten-year is down that spread wide and the darn inventory has been a little bit hesitant to go up. Although I saw the read yesterday was a tad better. It was like October lows. It's gonna unfreeze over time. I'm still pretty encouraged by the end of the year. Right. It's actually the next quarter that is a transition period. Again, I'll reiterate what I said. We were down 40% in order count in March, and we made some money, right?
This company historically would have never been able to do that. This company, you know, for 100 years, we never made money in the first quarter. We've been fortunate enough to do that in the last three years. You look at our portfolio and how we manage ourselves, and I think we have a lot of leverage on the way up here. We just gotta keep managing ourselves carefully, right? It's a, it's a challenge market.
Makes sense. That's really good color. I appreciate that. Then on commercial, obviously a lot of uncertainty out there. I think investor attention is really shifting towards commercial, obviously. If you guys can maybe talk to the order pipeline, what you guys are seeing. I saw in March, you know, the open orders are down 40%. Kind of what you're seeing, if you've got any insights into April, and then if you could just talk broadly to the mix and or maybe what you're expecting around fee per file. There's gonna be continued pressures there as you close out in 2Q.
Go ahead, Dave.
Yeah, John. I mean, it's, I think what you're seeing is not inconsistent in our book is not inconsistent with what you're seeing in the market generally. You've got, you know, offices obviously challenged, although some markets not as challenged as others. I think the major metro offices the major metros tend to be a little more challenged primarily because they have still more work from home. We haven't seen, like in New York and places like that, you know, the bigger transactions come back and you're seeing that in the lower fee per file.
I think as you get into some of the smaller markets, it's not as bad of a story on office, although then you have to, you know, see what's gonna happen with all the regional banks because they've been a big credit provider to that sector. You know, we saw a lot of energy deals at the end of the year. I think there's still a lot of activity there, and we'll probably see, you know, some of those mature and close here over the coming year. Then, you know, it's sort of a mixed bag. I mean, you're seeing decent stuff in retail. Multifamily had been really strong. It's slipping a little bit, but generally stronger than the rest.
You know, industrial's backed off a little bit, right, because there just isn't as much activity as there was during the pandemic, but still generally strong. You know, I think it's the combination of those things and then what's happening in the capital markets and then people trying to adjust to calibrate changes in the WAC on valuation that's causing that slowing. The one if there is a slightly positive thing, you know, deals are mainly getting pushed, not canceled. We just have to see how that all develops. Hopefully, as there's more clarity on valuation and capital and financing, those will actually close, right? And that'll maybe you know, result in a better outcome. But should that situation not change, then it'll continue to be challenged.
Yeah.
I think we're I don't think it's like the res market. I think it's, again, we're planning on it being down a little bit. We were fortunate enough to gain share last year in commercial. We've had some good progress. Our energy practice is as busy as it's ever been. It's a little bit choppy and lumpy because of when the closings are. One of the interesting things we have is we have probably a higher portfolio in our centralized commercial of smaller deals. I think the uncertainty around regional banks is a little bit of pause in some of that markets. There is a little bit of, I think, kicking out of some of that.
We kind of think we're going to have, you know, this downturn is going to be real for a while, and we'll see, I think, the back half of the year, some better results. It's interesting to us. We are really busy in a couple of these segments, as busy as we've ever been. It's interesting to me. I feel pretty good about the business by the end of the year and toward the end of the year. It is kind of a very uncertain. All the stuff going on with the banks that we see this week, it makes all that stuff a little bit uncertain. You also, John, have to think about it in the dimensions. It's not only sector-specific, but it's type of activity.
you know, new developments, sales, and then, refinances, right? You, you do have that $1.5 trillion maturity ladder mainly this year and next year. That's going to provide some support to commercial.
Yeah.
Right? It's just a question of what happens with that, right? Do you have a lot of restructurings? Do you have some defaults? You know, as it looks like now with all the REITs and everybody reporting, even though people might be increasing reserves, a lot of those loans are still performance, right? Which could be positive because it might mean you can actually refinance those that have to restructure default.
Yeah, that's super helpful. That's great insights. I appreciate that, guys. Last one for me. Just kind of a housekeeping question. David, on the, on the other orders, I know M&A is certainly influencing that, but you've had a pretty big step up there. If you could maybe talk to the seasonality of those other orders as well as what that kind of average fee per file is?
Well, others primarily are reverse basis through FMC. Yeah, I mean, that's going to approximate more, not exactly because the transactions are a little bit smaller, but it's going to be closer to a purchase transaction than a refinance transaction.
Okay. That's from a fee per file standpoint and seasonality standpoint?
It's not as seasonal, right? Because it's you can do that if you have equity in your home. It's more a function of getting a hold of a customer and closing the loan. It's not as seasonal. It's in markets like this where you have a lot of built-in equity is actually a good market. It's just, you know, that market's been changing a lot with some of the originators being sold, repositioned, that kind of thing. You've also got new originators coming in. I think it's more a function on the volume side of what's happening with the originators than it is the opportunity from an equity and an age perspective.
Okay. Makes sense. Thanks, guys.
Thanks, John.
Just as a reminder to ask a question that is star and one on your touchtone phone. We will take our next question from Geoffrey Dunn with Dowling & Partners. Please go ahead.
Good morning, Geoff.
Thanks. Good morning. I'm not sure if I'm going to ask this right, but from a commercial market, obviously, we're going through a big downturn cycle here. With what's going on with office space, do you have concerns that there's any kind of secular shift happening? I ask that more because of your mention about investing in commercial talent. You know, is your commercial talent, for example, focused on certain sectors, and you could have made an investment in some of your specialized in office, and now that's not necessarily the right investment? Is that something we have to worry about if office doesn't come back? Is your talent, commercial talent more flexible across the various sectors that you cite?
It's a good question because it is actually more flexible. For us, it's very geographical. One of the things that this company was historically is we were very skewed to New York on a commercial side, and we didn't have the breadth geographically. It actually is diversifying away from office in some ways or office-like developments. I feel really good about it. In fact, we did some energy-focused acquisition because it's kind of one of our underwriting capabilities. It's obviously because of what's happening. There's some opportunity there. It's been very much a geographic. Obviously, there's some obvious places, whether it's industrial or the warehouse or the data center stuff. Like there's some natural places that we focused on given what the trends were.
I feel pretty good about what we've done. I would say the way I think about it, we primarily were very weak in certain geographies in our coverage, and in growth markets that were important to cover, and that's how we thought about it. I actually think we're pretty darn well positioned. I mean, the office thing since the pandemic, everybody expected it. I mean, again, this isn't something new. The other thing, the secondary city versus the primary city, in my view, was also something that kind of you kind of knew and you anticipated as you thought about staffing and approach. One of the interesting things about us is we've always had a great reputation from an underwriting point of view.
The issue is because of our uncertainty of being for sale, quote-unquote, three years ago, and the notion of our cap, we had a lot less capital back then. We weren't a relevant third player. We were relevant, but we were less relevant, is another way to say it. We're now very relevant. The question is, do we have the right capabilities in the right markets to attack the business? By the way, I would also say that's true in the direct offices at the low end of commercial, where we didn't have as many people dedicated to that segment as we need to have and will have going forward, because that's going to be a vibrant segment for most. I mean, look at all our secondary cities. It's still the most powerful segment.
Again, I think we've been thoughtful about this happening. I'm not worried about the necessarily office thing or even the retail has been held up a little bit more than we expected. Retail was the other one that I think everybody anticipated was, you know, you weren't going to go long into retail. We were pretty thoughtful about how we thought about adding resources.
Right. you've mentioned a few times balancing expense management with longer term investments. How long can you sustain that balance? you know, you can paint a scenario that, you know, mortgage rates start loosening up, but if the consumer starts running into economic pressure, you know, the estimates for originations this year, next year could still prove optimistic. It looks like the spring selling season is starting off soft. At what point do you have to start cutting muscle, or do you just kind of bear down and endure it?
Yeah. I feel like, again, I do feel like we're bouncing off the bottom. It's a great question. What a couple things I referred to. I have about $18 million-$20 million that I identify as discretionary investments in long-term stuff for the year. It's about $5 a quarter. I could have made a little bit of money this quarter or close, you know. Those investments are kind of the data management stuff we're doing. We're doing some kind of more on kind of centralization. We've got some stuff we're doing on balancing where we do our search work and the cost delivery of search work.
If I look at those initiatives, it would give you probably a couple, you know, I believe 200 basis points of improvement in margin over the next 18-24 months. They're discretionary. We're well into them. I think the right thing to do in some case, you could characterize them as we're catching up to our competition, competition. That's what I was referring to those as discretionary. There's another way to think about it, which is we've taken as much action as anybody that we compete against. The issue in my view is that I don't think there's a lot of great alternatives to go further. I think there's always been hygiene gaps.
As things shift and as commercial gets weaker, there's, you know, there's some things we could do on a targeted basis. We've done kind of what I feel is appropriate, and it would be nothing, you know, if we went a lot further down. Again, if the market's gonna be down 50% continuously, you got to rethink that. The whole industry is gonna have to think that. I don't. Again, we're a little weak because of the seasonality of us, more so than others. I think we manage our expenses well. I think we're in a good place to actually have increasing margin through the rest of the year. I feel okay with that.
The other point I would make is I mentioned at the last call, one place I feel like we just haven't done enough yet is our interest income on escrow. When we first started the journey, we looked at getting a bank and as we got short money, we were like a quarter of a point, so nobody was interested in deposits. We are working hard at creating partnerships with a couple of banks to make sure that we're extracting on our, you know, couple billion dollars in escrow, some interest return, which again, changes our margin at this level of volume. I think we can do get that done by the end of the year, and it kind of helps our profile, you know, relatively materially.
That's the one lever kind of I believe we need to aggressively act on, and we have it. As far as the portfolio stuff, one of the other questions today was our data business has been growing and that is more stable earnings at a low volume like this. I think we're doing some things on the offensive side that'll enhance our margins if the, if the market stayed at this level. I actually think there's in most all scenarios, we're gonna enhance margins through the year. I feel pretty good about where we are. It's something we work at pretty hard. I wanted to mention the 20 because it's an explicit decision we made. I think it's the right decision.
I think the IRR on that is gonna be tremendous because I think the improvement, you know, I think somebody asked that on the previous call. The problem with that improvement is if you don't have volume, you don't get the full benefit of those improvements in efficiency. We'll get to a level of volume soon here that those will be more transparent. I feel like they want to thank you.
All right, thanks. That's really good color.
Thank you.
It appears that there are no further questions at this time. I'll turn the call back over to the management for closing remarks.
I want to thank everybody for joining us, for this quarter's call. Thank you so much for your attention.
Thank you for your participation. You may disconnect at any time.