Hello, and thank you for joining the Stewart Information Services third 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, again, please press star zero. It is now my pleasure to turn today's conference over to Brian Glaze, Chief Accounting Officer. Please go ahead, sir.
Thank you for joining us today for Stewart's third 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 third quarter 2023 earnings conference call. Yesterday, we released financial results for the quarter, and David will review these in a minute. Before doing so, I'd like to update you on our view of the market and our continued progress on important initiatives that we believe will set Stewart up for long-term success. This quarter, we are proud to celebrate 130 years in business as a pioneer in the title industry, and also coming up on our 30 years as a listed company on the New York Stock Exchange. These milestones caused me to reflect on the last four years, and looking back, I see that we have made great strides in fundamentally improving Stewart's operating and financial performance to better position ourselves for even more prosperous future.
Although the current economic environment continues to pose significant short-term challenges, we have materially improved our business, creating a strong and more resilient enterprise that will thrive over a full real estate cycle. Even in light of the current economic environment, we continue to intensely focus on our journey to become the premier title service company. We are managing through a challenging environment where we believe mortgage rates will remain elevated into 2024. Rates increased throughout the third quarter to around 7.5%, where they were previously in the high 6% range at the close of the second quarter. Higher mortgage rates continue to impact transaction volumes, and we find ourselves at historic lows for sale of existing homes. At an industry level, we are experiencing historically low purchase volumes, combined with low existing home listing inventory, which has kept pricing strong.
As we look forward, we see 2024 as a transition year to a more normal market in 2025, and believe the next six months will continue to be very challenging, given the macroeconomics laid on top of the typical seasonal impacts. While we have significantly improved the underlying financial and operational performance of the company, there's more we can and will do, and it is critical we remain focused on improving margins, growth, and resiliency through improved scale and attractive markets, and enhancing our operational capabilities. In this challenging environment, it is easy to lose focus on achieving long-term goals. However, I am extremely pleased with the dedication we have shown in making progress on our enterprise initiatives during the third quarter, and in our progress toward improving our long-term performance.
Maintaining our strong financial position, even in this current environment, gives us flexibility to continue to pursue these investments and take advantage of opportunities as they arise. We have taken targeted cost actions where appropriate. We have been careful not to take actions we felt would threaten our competitive position and long-term value-creating opportunities. We believe that the real estate cycle will begin to normalize later in 2024, and the best path forward for Stewart to get through this period is to continue investing in our people and remaining focused on our long-term improvement plan. I believe we have done a good job of balancing strong financial discipline with targeted investments, and we will continue to be very diligent with our expense management during this difficult moment in the cycle.
We remain focused on enhancing our operating model, investments in technology to enhance the customer experience, and improve efficiency of our operations and building scale in targeted areas. These strategic investments will cause our cost ratios to remain elevated in a market with low transaction volumes, but will set us up for better overall performance in the future. We believe that these long-term investments, coupled with thoughtful near-term expense management, will improve our structure and financial performance for the long term. We routinely reevaluate markets in our direct operations, where we have the opportunity to increase share and enhance our leadership strength. Given the market uncertainty, we've been more selective in our investment decisions to make sure our deployment of capital provides long-term returns, and I believe we will maintain this conservative approach through the first half of 2024.
We remain positive on the commercial market, even though we believe certain sectors remain challenged in the near term due to changing financial markets. Sectors such as energy remain strong for us, while we see ongoing challenges in sectors like office and multifamily properties. Growth in all sectors of our commercial operations is an important component of our overall strategy and positions our commercial operations for growth across all business lines, has been a key focus of our journey. We are making investments in talent so that we have the leadership in place to achieve these objectives. We are investing in technology to support our commercial operations, to allow us to better serve our customers, and we believe our strategies will create long-term growth in the commercial markets for us. In our agency business, we are leveraging our technology to drive market share gains.
Both in this quarter and throughout the year, we have excellent progress on the deployment of technology and services that provide a significantly improved customer experience for our agents. This enhanced experience includes greater connectivity, ease of use, and risk reduction for our agent partners. We are pleased that our platform of services for agents is as strong as it's ever been, and we've begun to see meaningful progress in our target markets such as Florida, Pennsylvania, and the overall commercial market. In real estate solutions, we are seeing share gains as we leveraged our improved portfolio of services to better and more deeply serve our lender clients. So while we are not immune to the market downturn in these businesses, we've been able to offset some of this with our share gains.
A significant part of our investments is focused on improving our technology for the title production process, automation, and centralization to improve operational efficiencies and capabilities. Our investments have already resulted in significant progress to improving our customer experience across all channels. An example of this is the one I just mentioned in our agency technology platform, which significantly enhances ease of use and connectivity with agents. Another area of priority as we work to improve our operating efficiency is the centralization and digitization of our title data. We are pleased with the significant progress we have made on this this year, and in the more normal production levels, we will see considerable improvement in our delivery costs. We continue to integrate our acquired entities into production and other systems.
This helps us to improve our overall customer experience and offers operating efficiencies that we've been building on for the past several years. Integrating the remaining acquired companies is an important priority, and we expect to complete the majority of our integration efforts by mid-next year. Improving our financial strength by growing margin has been a significant focus of our journey. We've made good progress on this effort, and we are aware that returns remain depressed during this phase of the cycle. The investments I've mentioned, many of which have been materially implemented, should allow us to achieve low double-digit margins as we turn to a normal five million unit purchase market. And specifically, the initiatives that we prioritize this year should improve margin by about 200 basis points in a normal market.
While we are encouraged by improvements in talent and in technology and customer experience and our financial model, we know that work persists and the journey is not complete. 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 all real estate cycles. We have emphasized growing scale and attractive markets across all our lines of business, and we have made great strides in improving the customer experience in all our channels. Retaining key talent is always important, but we've been even more focused on retaining talent through this market so that we have the right team in place as the cycle improves. Our efforts are yielding results through increased year-over-year market share gains in each of our direct, agency, commercial, and real estate service businesses.
Let me conclude by reiterating that we have been managing the balance of our expenses and investments thoughtfully, to be mindful of necessary operating discipline for the current market challenges, while also remaining dedicated to strengthening Stewart's long-term growth and performance. Our solid financial footing should best position us to take advantage of the opportunities that this difficult cycle will provide. Finally, I remain positive on the long-term view of the real estate market and the ability of Stewart to become the premier title services company. Our associates have worked diligently throughout these challenging times, and I appreciate all they have accomplished. I also want to thank our customers for their continued loyalty and support. Dave will now update everyone for the results.
Good morning, everyone, and thank you, Fred. I would also like to thank our associates for their outstanding service and our customers for their continued support. During the third quarter and through today, the real estate market continues to experience low housing inventory, high mortgage rates, and lower commercial and residential real estate activity, contributing to lower third quarter operating results as compared to the third quarter last year. Yesterday, Stewart reported third quarter net income of $14 million or $0.51 per diluted share on revenues of $602 million. Starting this quarter, we revised our presentation of consolidated non-GAAP measures relating to adjusted net income and adjusted EPS by excluding acquired intangible asset amortization from the calculation. This revised presentation allows us to be consistent with how we present non-GAAP measures related to our title and real estate solutions segments.
We don't believe this amortization is indicative of our operating performance. After adjusting for net realized and unrealized gains and losses, acquired intangible asset amortization, and other items detailed in Appendix A of our press release, adjusted net income for the third quarter was $24 million or $0.86 per diluted share, compared to net income of $43 million or $1.58 per diluted share in the third quarter of 2022. Regarding the title segment, total revenues in the third quarter decreased to $126 million or 19%, while pre-tax income decreased by $16 million or 32% compared to the prior year quarter. After adjustments for purchase and intangible amortization and other items, the segment's pretax income was $42 million or 8% margin, compared to $65 million or 10% margin for the same quarter last year.
On our direct title business, total opened and closed orders in the third quarter declined by 7% and 10% respectively compared to last year, primarily due to the current real estate environment. Domestic commercial revenues decreased $9 million or 15%, primarily due to lower transaction volume, while average commercial fee per file was approximately $14,200, compared to $13,700 from the prior year quarter. Domestic residential revenues declined $37 million or 18%, primarily due to lower purchase and refinancing volumes. Average residential fee per file in the third quarter was $3,000 or 10% lower than last year's quarter due to lower purchase mix. Total international operating revenues decreased $5 million or 12%, primarily as a result of lower transaction volumes in our Canadian operations.
Given the lower commercial and residential activity in the market, third quarter revenues from our agency operations decreased $75 million or 22% compared to third quarter last year, while the average remittance rate was roughly comparable. Regarding title losses, total title loss expense in the quarter declined by $3 million or 13%, primarily due to lower title revenues. As a percent of title revenues, third quarter title loss expense was 4.3%, compared to 3.9% in last year's quarter, which benefited from favorable claims experience. For the full year 2023, we still expect title losses to average in the low 4% of title revenues.
Related to the real estate solution segment, third quarter pretax income was $2.6 million, compared to $3.4 million last year, primarily driven by a slight dip in revenues as strength in our credit-related data businesses help offset other transactional businesses. Pretax margin was 3.8%, compared to 4.8% in the third quarter of 2022. After adjusting for purchase and intangible amortization, adjusted pretax margin was 13%, similar to the prior year quarter. On our consolidated operating expenses, our employee cost ratio was 31% in the third quarter, compared to 27% last year, primarily as a result of lower operating revenues. Lower operating revenues also resulted in slightly higher other operating expense ratio of 22%, compared to 21% last year.
On taxes, our third quarter income tax expense was higher than our normal tax rate of 24%, primarily due to additional tax expense resulting from lower utilization of foreign tax credits as we completed and filed our federal tax return. The impact of this true-up on EPS was roughly $0.13 per share. We do expect our tax rate to return to historical levels. On other matters, we continue to have a solid financial position to support our customers, associates in the real estate market. At the end of the third quarter, our total cash and investments were approximately $380 million over statutory premium reserve requirements, and we also have a fully available $200 million line of credit facility.
Total stockholders' equity attributable to Stewart at September 30th, 2023, was approximately $1.35 billion, with a book value of approximately $49 per share. Lastly, net cash provided by operations in the third quarter was $60 million, compared to $49 million during the prior year quarter, primarily due to lower claims and accounts payable payments, partially offset by lower net income. We appreciate our customers and associates and remain confident in our support of the real estate markets. I'll now turn it back to the operator for questions.
Thank you. At this time, if you would like to ask a question, please press star one on your telephone keypad. You may remove yourself from the queue at any time by pressing star two. Once again, that is star one to ask a question. We will pause for a moment to allow questions to queue. Thank you. Our first question will come from Bose George with KBW. Your line is now open.
Morning, Bose.
Hey, good morning. Can you give us an updated thoughts on your margin expectations, you know, like for the next 12-18 months? And just given your comments on 2024 being a transition year, you know, is 2025 when, you know, we should think about a more normalized, whatever, double-digit margin?
Yeah, Bose, thanks for the question. So that's exactly right. So if you remember at the beginning, when I first got here, we talked about targeting high single digits, double. I think in about 2020-2021, we achieved that. Obviously, 2021 outperformed because it was excess volume. But at a five million kind of unit purchase market, I think we were in that, you know, 9.5%-10% range. What's happened is we've done good work, and I think we're now in the 11.5%-12% margin range when you're in that five million units range, because we've done a lot of work. The problem is, obviously, is the volume is so depressed now. Think about it as we have excess capacity, and we can't really extract all that margin.
My view is that 2025 is like our point of view when you look at forecasts. 2025 is when we get back to that five million kind of range. And so that's where I think you'll see margins get better. I think about the next two quarters is quite difficult, given where we are and where volumes are, obviously, with the spike that we saw in rates. We're kind of still worse than the previous year, although that comes together, as you know, because last year at this time, things started really cratering. And so that'll come together a little bit into the first quarter. But so it's like a journey from here, kind of that first quarter through the transition and next year, particularly second half of next year, towards a more normal market in 2025.
And again, the other thing I would say, Bose, we're not, there's other things we're working on, too. There's other things to improve ourselves, and we're not sitting on our hands, but right now I have pretty good transparency to that.
Yeah, that's helpful. Thanks a lot. And then just on investment income, that was up again pretty nicely this quarter. Can you just talk about, you know, sort of the trajectory for that? Is this quarter a reasonable run rate, or could that continue to trend up, you know, with rates?
Yeah, Bose, I think as we talked about in the last quarter, that's when we were really putting the escrows to work, and I think we had said that's about $2 million a month, which is what it remains. And so you saw the full effect of that hit in the third quarter, and then you saw a little bit of an uptick on the general investment income, I think, just mainly due to the more favorable rate environment. So yeah, I would say that this is a pretty good run rate where we stand now.
Although, obviously, it's also affected by the float, right?
Yeah, I mean.
If the.
If balances, you know, volumes were to continue to go down meaningfully, you could have a negative impact on balances, and that could change it a little bit. The offset is we might be able to get a little bit higher rate, but balances could cause it to dip a little. I'd say as it stands, it's a decent run rate.
Okay, great. Thank you.
Thank you.
Thank you. Our next question comes from Soham Bhonsle with BTIG. Your line is now open.
Hey, guys. Good morning.
Good morning.
Good morning.
Hope you're doing well. I guess just to start, with the move in rates recently, I was just wondering where orders are sort of trending through October. I think September was down sort of 8% year-over-year, so just sort of wondering on the run rate there now.
Yeah, the rates have affected order counts. And so it was a little. I would describe it as a little bit of a shock to the system. And so what you saw at the tail end of this quarter, they started dipping, and that has continued into this quarter. And so as I mentioned a couple of seconds ago, I think the four—you know, if you remember last year, the shock started about now, and it really started dropping toward the end of the year. So we're still below last year in the fourth quarter, and so we're decreasing, we're still below, but I think that'll come together a little bit toward the end of the year because last year went down so much.
But it's, you know, there's an impact to what happened in the last three weeks, for sure.
So does that mean that we're sort of above or below that sort of 8%? I get that the comps are going to get easier, right? But sort of flattish is the way to think about it then?
Flattish against what? So I'm saying it's continued down. Saying again, you got both the seasonal impact and you got the impact of rates. So the fourth quarter of orders are going to move down again.
Okay. All right. Okay, I think I understand. Okay. And then I guess on, on market share, you know, I'm just curious on some of the drivers there. It looks like refi share picked up quite a bit, and there was also a bit on purchase. So Fred, can you maybe just walk through what you're seeing on the ground and maybe who you think you're taking the share from?
Sure. So each of our businesses are, have been positioned for growth, right? So in agency, we were just up until about 15 months ago, right, we were meaningfully behind on ease of use and integrations. That's caught up. So there's 14 states in particular that we have targeted, and we're starting to get good traction in a lot of them. As we introduce, we kind of reintroduce ourselves to agents or gain shelf space. You know, maybe we have 5% share with them, and now we go to 10%. So what's happening is, as we reintroduce ourselves to agents with a little bit better value proposition and we appoint some new agents, we're getting nice share shift.
And again, it's hard work, and it's one at a time, and I think we're in early innings of that, but it's been, I think, six quarters or so where we've seen increases of share. The other thing that's a little unique about us is that we have, as a percent, less refi than some of the competitors. And so as that market became more of a purchase market, that helped us as well. But that's the story in agency. In direct, but in essence, it's essentially we're a lot better talent-wise than we were two years ago. We did a bunch of acquisitions in core MSAs, and while the markets are bad, we're better in many markets, 30-40 markets. And so we're holding our own, and we're actually winning a little bit there, too.
I think that will get better as we—as the market gets more normal and we get to go back to buying more agencies. But right now, we're holding our own and getting a little bit because I think of the capabilities and skills in the markets we have—we were in. On the lender business, we just—again, it's been really less than a year that we had a full portfolio of these products and services assembled. And so what's happening there is we're able to cross-sell and deepen our relationship with a lot of these lenders because we have a broader portfolio. And what's interesting in the lender business is we weren't in the top four before. We were only about $30 million of revenue when we started this journey. So that has grown to a, you know, $300 million business.
So our positioning there is so much better. So I see that kind of organically continuing as we become a legitimate alternative to the two big guys. And then finally, commercial, that is also very organic. So what we've done there is we've done a lot of hires in the key markets in direct, and that's smaller commercial. We've also done the same thing. We picked the markets that we were interested in. We've made some investments as well there. The other thing that's interesting in commercial, the market's obviously way down, but one of our real strengths is energy, and energy is up, right? So if you look at energy was probably 13% of our business last year, it's probably 25% of our business now.
So we have a benefit of having a resilient mix because of our areas of expertise, but we've also invested quite a bit in commercial. So again, in all of these businesses, my view is, over the long haul, we're set up to gain share. And as the market comes back, I think that's actually going to be more robust, because again, when in down markets, people are a little bit reluctant to change allegiances. And so I think it's going to only get better if we can stay focused and make sure we keep enhancing kind of our value proposition. But I'm happy with the effort of the team. We're, it's a tough thing.
You know, we're balancing really thoughtful expense management, but also trying to be targeted on our investments to make sure we keep improving. And it's showing some progress, which is good.
Yeah, no, that's great to hear. And just one more, I guess, on commercial. I'm wondering on the fee per file side, it was stronger than what so—you know, your peer reported this morning. So just can you just talk about the drivers? Is it the energy piece that you're talking about? And then, how do you sort of see the fourth quarter developing here?
Yeah. So just as a caution, for us, we're not huge, right? So it's very lumpy, based on what mix closes, but your insight is right. So if you look at some of the energy deals, they were quite large. That drove some of that. So again, but we tend to be a little lumpy on that, on the size because of this, you know, just we just don't, we're not that big, so three deals can really matter. But again, it, as I look forward, it's a tough market, right? Commercial's down pretty significantly. It's probably down, if you look at industry data, probably 40%-50%. We're down less than that because we're being a little successful, but it's a down market, and it will continue to be.
What's weird about commercial, that's a little bit, in my view, something that we have to, you know, understand and understand the risk. So it tends to have a lot of closings in December, and we have a lot of business, and we have a lot of stuff in the pipe, and we have a lot of files. But with this market uncertainty, you know, could a different percent close at the end of the year? And so that's the one thing I'm watching, because, again, we've got lots of pipe, we got lots of activity. But it's a weird business where you, December, by far, is always our biggest month. And so, you know, we're obviously going to focus on that. We'll see how it turns out. But in general, I'm very comfortable with how we're attacking the market.
Great. Thanks a lot for the color, guys.
Sure.
Once again, if you'd like to ask a question, please press star one to join the queue. Our next question will come from John Campbell with Stephens Inc. Your line is now open.
Hey, guys. Good morning.
Good morning, John.
Hey, I just wanted to check maybe on the other orders. I mean, I think you had a—it was over 100% sequential increase, so pretty big step up there. Hoping you can maybe help with the modeling there. I think, David, in the past, you've said that that's not going to be too seasonal, that won't really mirror the, you know, the purchase seasonality. But I'm curious about how to model that going forward, and then also if you could maybe help with the average fee per file of the other orders.
Yeah, no, John, I mean, that's where the home equity stuff and the institutional real estate business that we acquired at the end of last year, that's where those orders go. I, you know, they're particularly the institutional real estate is a bit lumpy because it's all a function of, you know, bulk purchases and then securitizations. In terms of the average fee per file, the reverse stuff tends to be more like a purchase transaction, and then some of the institutional stuff, when you buy it, the deal, it's like a purchase transaction, but then the securitization tends to look more like a refi transaction. And so it's pretty lumpy.
I would say, you know, fee per file is probably gonna be a little closer to purchase just because it's probably more heavily weighted bulk acquisition and then reverse. But timing of securitizations can sway that quite a bit.
Okay. How would you suggest maybe? I mean, I get the lump, the lumpiness, but it seemed like, you know, pretty steadily each month in the quarter reported, you know, a fair amount higher than what you've seen, you know, on average last couple quarters. But how should we think about modeling that? I mean, do you see just kind of continued momentum and then maybe taking that down next year?
Yeah, I mean, you have to think about those individual markets. And so if you think about reverse, you know, last fall it was a little choppy because you had the capital markets issues, and so securitizations weren't getting done as much, but that's recovered. And then there's also been, you know, if you, my litmus test is if you watch for the Tom Selleck commercials, when you see him on a lot, that usually means reverse is doing pretty well.
But when you don't see him, it's not doing very good. But we have seen Tom lately, maybe I think that market's continued to come back. The institutional side is still pretty choppy. I mean, it's, you know, there, if you just think about the rent, price to rent ratio and stuff like that, it's pretty choppy. I mean, my sense is that would continue to get better over time, but it's probably a slower recovery.
Okay, makes sense. Then, just a two-part question on the tax rate. I mean, the 33%, it sounds like that was the lower foreign tax credits. But first, from a GAAP standpoint, I think that was like a $0.09 or maybe $0.10 EPS drag for you guys. It doesn't look like you added that back to your, the reported adjusted EPS metric. So I guess first, is that right?
Yeah, we did not. We tend not to focus as much on the tax stuff, but if you were to normalize it, you're right, it would be a big impact, like you said.
Okay, that's helpful. Then secondly, it sounds like you're viewing that, you know, the lower foreign tax credit as a one-time. But then, David, just want to make sure you reiterate that, that's the expectation that that's gonna normalize moving forward.
No, that's right. I, I did say in my script that we expect the tax rate to come back to the, to what it's been historically. We have had some lumpy periods. It just hasn't been as, as evident, where we probably had $2 million-$3 million, similar type adjustments. It just since we had a lower income base, it's more pronounced this quarter.
Okay, that makes sense. Thanks for the time, guys.
Thank you. Appreciate it, John.
Thank you. This does conclude today's Q&A. I'll now turn the call back over to our presenters for any additional or closing remarks.
Well, I want to thank everybody for the interest in joining our call. Thank you very much. Appreciate it.
Thank you, ladies and gentlemen, this concludes today's event. You may now disconnect.