Stewart Information Services Corp Q4 FY2020 Earnings Call

Hello and thank you for joining the Stewart Information Services Fourth Quarter and Fiscal Year-end 2020 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 this call may be recorded. It is now my pleasure to turn today’s conference over to Nat Otis, Head of Investor Relations. You may begin.

Thank you, Aaron. Good morning. Thank you for joining us today for Stewart’s fourth quarter 2020 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.

Thanks, Nat. And thank you for joining us today for Stewart's fourth quarter 2020 earnings call and for your interest in Stewart. I’ll go through the details of this quarter's results in a minute, but first, let me take a little time to reflect on 2020. This was a tremendously challenging year, which would be a vast understatement. Companies faced unchartered territory. People everywhere stepped up and carried on. I couldn’t be more proud of how everyone here at Stewart navigated personal and professional challenges brought by COVID-19. Our employees provided superior service to our coworkers while keeping family and customers safe. Our sincere focus is that 2021 starts everyone back on the road to personal, professional, and economic security. At Stewart, the year started off with me finishing my first 100 days as CEO. We've begun to lay the foundation of our journey to become the premier title services company, with an intense focus on meaningful improvement in 2020. We began with strong improvement in the first quarter, but very quickly the market was impacted by COVID-19 before recovering and then thriving. Changing demographics, strong underlying fundamentals, and low interest rates brought about a historic jump in transaction volumes. The pandemic has highlighted that the value of home and safety has never been more sought after. In conjunction with a significant increase in transaction activity was the acceleration and acceptance of remote and virtual closings due to pandemic-related follow-ups and safety concerns. Stewart met those challenges head-on. Instead of simply putting our long-term plans on hold, we were able to take advantage of elevated market activity while still putting in place critical building blocks for our future.

Thank you, Fred, and good morning. Let me also thank our associates for their amazing and inspirational service and our customers for their support during these unique times. The fourth quarter saw continued strong residential real estate market driven by robust purchase and refinance demand as the 30-year mortgage rate exited the quarter around 3%. The commercial segment saw strong customer activity around year-end, although the outlook remains challenged by economic conditions. Economic stress increased around year-end as virus cases and hospitalizations trended up and appear to be moderating. As we await the calming effects of mass vaccinations, we continue to be mindful of the impact of these challenged economic conditions, including high levels of mortgage which, when lifted, will result in increased pitfalls and may elevate title losses.

We will take our first question from Bose George with KBW. Your line is open.

I just wanted to start with a question which I asked last quarter as well, but given how things have gone this year, clearly you’ve been very successful. Are there any changes to your expectations for normalized margin going forward?

Again, when we started the overall company, we preferred this, but we were about half of these shipments. We were in the 5% margins. I believe we can double that. I talked about high single-digit net low double that 10% range, and I continue to believe that's what our goal is. The question I think is, are we a little bit ahead of schedule? I'd say we probably are on some of our journey getting there, and I am confident that we made significant improvement. Obviously, this year, boosted by extraordinarily attractive market makes us look maybe a little better than a normalized world, but we're still on track to what I think we can do. For us, right now, the opportunity is there to improve our margins, but I also believe we will outgrow the market as well, and that's really what our focus will be.

Okay, that makes sense, thanks. And can you just talk about the acquisition landscape? The one you did this year, the larger one seems to be very successful in terms of what it has done for the company, and it would seem like that's one way to get your margin longer-term above that 10%, say the target that you noted earlier. So can you just talk about how you're thinking about acquisitions?

Yeah, again, I think one of the things I talked about from the beginning is that we would manage our capital investment and our expense investment in an appropriate way. So we shed a lot of things, and we've also invested in some areas. One of the most important things in our business around execution is having critical mass at the local market level because we own the direct business. We need to make sure we position ourselves in every market to be a leader, which means we need to gain critical mass this year that we can execute effectively through a cyclical business. We have a solid pipeline as we're looking at local markets and where we think we need to focus. We've done that with a view of the 140 MSAs. We have a point of view on our strategic position in every market and where we want to focus our investment both organically and in acquisitions. I totally expect that you'll see continued targeted acquisitions to change our structural position in a lot of markets, and so far, it's been going well. As I said, we have excellent conversations with numerous people, so I am comfortable with how we can advance the agenda in that way.

And our next question comes from John Campbell with Stephens, Inc. Your line is open.

Hey guys. So over $6 in EPS this year, just incredible. I remember the management team and the board once dreaming of $5 in EPS and I know you’ve had some big targets in the current type. On building out the additional scale and the non-title business, I know that one of your key areas is integration costs right now. You’ve got a RevPAR housing market helping lift transactions, but I don’t know, maybe David, what do you think is kind of a normalized margin for that ancillary services business if you strip out commercial? Is it kind of low double digits? Is that a good way to think about it?

Yeah, I think, John, for durable real services business across the cycle, I think for the company overall, if you're trying to understand, think about the cycle of origination servicing. In this quarter, originations obviously were up. There wasn’t a lot of capital markets activity because that typically lags originations due to loan quality issues and distressed loan sales. With forbearance and delinquency impacting things, there really wasn't a lot of distressed loan sales or default title work.

It seems to me that you believe you're positioned just ahead of a significant market surge. I assume some have already taken action on that front, so great job. I have one quick question. Can you clarify how you categorize that? Is there a way to provide a breakdown?

Well, I think it's appropriate. I am going to ask David to answer this more specifically, but as someone who has lived their life running a big reserve balance sheet type of business, my view is always that when we go into a period like this, we need to look at the potential risks ahead and be conservative. It’s prudent and appropriate for us. I imagine about an insurance company needing to be cautious about our reserve position during this period. Obviously, it's not about what's happening today that you're thinking about; it's what could potentially happen in the future. I think our consumer stance is the right thing for the company right now. As I said, next year, we'll be at about the same reserve level as this year, but it made sense to make some assumptions that are both conservative and position us well for the future.

We'll go next to Geoffrey Dunn with Dowling & Partners.

So Fred and David, I wanted to revisit the M&A topic from a couple of different angles. First, given what happened in 2020, I would imagine that potential acquisition targets have a different opinion of their valuations. Are you seeing real opportunities now, or is this something that may just be delayed a little bit as value opinions become a bit more realistic? Then on the other side of the equation, how are you thinking about financing future M&A? Have your line of credit, obviously your debt to capital, but you also continue to have a pretty good equity multiple here, and you turned around and spent your last equity raise immediately. Is it worth exploring another equity raise to establish dry powder in anticipation of your pipeline?

It's a really great question about people's expectations. We walk away and say no a lot more than we say yes. Let me be clear. We have numerous conversations. We understand that leadership is a key part of the equation for us as we grow our business, and there is always sensitivity because this is a strong market. You must come to an agreement on what the multiple run rate for the business is and how it works. We have not encountered problems to date and have engaged in transactions that make sense for both parties. To your point, being patient means we're not in a huge rush to act. We will be selective and thoughtful about the valuations. I’m encouraged, though, because of the strategic fit we have with a number of these parties. The conversations continue to be positive, and we’ll find the right opportunities over time in the right areas to build our business. Because of who we are, the entities we require are better off joining us, considering who we are and how they will integrate into our firm, which is helpful in these conversations, especially as we explore local market opportunities.

Yeah, Geoff, thanks for the question. As everybody knows, markets are open right now, and we obviously think about all the options. I think on the equity side, it needs to match the right opportunity. As I mentioned, we have about $600 million of statutory and regulatory capital right now. Obviously, not all of that is available because you need some operational buffers and the like, but primarily just a couple of hundred million there. We also have our line of credit available, and so I think we feel good about available capital, and other markets are open. We're just trying to match those against the right opportunity.

And there are no additional questions at this time. I'd like to turn the program back over to CEO, Fred Eppinger.

Well, thank you everyone for joining us this quarter. We appreciate your interest in Stewart. Thank you.

Thank you for your participation. This does conclude today's program. You may disconnect at any time.