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. 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 stewart.com website to access this conference call fully. 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 fourth quarter earnings conference call. Dave will review the quarterly financial results shortly, but first, I want to discuss our overall perspective on Stewart in the current market. As mentioned previously, our efforts over the past few years have focused on fundamentally enhancing the company's operations to better position ourselves on our journey to become the premier title service company. Our long-term goal remains to build a stronger and more resilient business that can thrive in various real estate cycles and economic conditions. We are working on improving our margin growth resilience by expanding our presence in attractive markets and enhancing our operational capabilities and financial discipline. Although we have made significant strides in managing a challenging market, we were affected by a notable decline in the purchase market during the fourth quarter. The challenges posed by a higher interest rate environment increased significantly in the fourth quarter, with rates exceeding 7%. We anticipate this tough market will persist into 2023 and are balancing cost discipline with investments in skills and capabilities that will best prepare us for the long term. While interest rates have dropped by 100 basis points early in 2023, leading to favorable trends in January, factors like interest rates, home inventory, and housing affordability could quickly shift back to a normal real estate market. Throughout 2022, we managed a declining market, transitioning from a significant increase during a bull market to a rapidly contracting purchase market. Consequently, we have implemented thoughtful and targeted expense measures throughout the year to ensure we maintain financial strength and solid service for our business while positioning ourselves for a stable market. In the fourth quarter, we experienced a further substantial decline in the purchase market, concluding the year with a 46% decrease in closed orders and a 44% drop in open orders year-over-year for December, marking our lowest point of the year. This trend prompted us to take additional significant but targeted expense actions in the quarter to safeguard our financial flexibility. We remain focused on our long-term objectives; the investments and improvements made over the past few years have enhanced our structure and long-term financial performance. We are committed to our strategic plan of strengthening our competitive position by becoming more efficient and maintaining a disciplined operational model that performs well throughout various cycles. We have prioritized growing scale in appealing markets across all business lines, and we have made substantial progress in enhancing the customer experience across all our channels. While we are pleased with advancements in our talent, technology, customer experience, and financial model, we acknowledge that there is still work to be done, and our journey is ongoing. We will continue to invest strategically during this market while maintaining our strong financial position. Our long-term financial goal remains to achieve high single to low double-digit margins over the cycle. However, during challenging quarters like the fourth quarter and the first quarter of 2023, margins may be under pressure. Our adjusted margins for the quarter reflect investments in talent and systems required for long-term achievement. Disciplined management and capitalizing on growth opportunities are essential in enhancing Stewart's financial standing. Before the adjustment, margins were below single digits in typical markets, and we consistently faced losses in lower volume markets. Our initiatives to enhance scale in direct operations, improve our portfolio through acquisitions and real estate services, and strengthen our operating model have enabled us to better navigate margin pressures, particularly in difficult environments. As we progressed, we identified areas in need of improvement to reach our goals. Since then, we have made significant investments in technology to refine our production processes and centralize operations, ultimately enhancing efficiencies and capabilities. There have been substantial advancements in enhancing the customer experience across all channels and rolling out our agency technology platform, which facilitates better connectivity with agents. We are making excellent strides in these investments, yet we recognize that there is still work ahead. We believe the current market will create opportunities to enhance scale in targeted direct markets and introduce services that complement our current offerings. Growing market share in direct target MSA markets remains a key strategic objective. In the fourth quarter, we acquired FNC Title Services, specializing in Title Services for reverse mortgage transactions, and BCHH, a national provider of Title Services to institutional investors and lenders. Both companies are leaders in their fields and are crucial to our strategy for expanding our service offerings and scale. We continue to integrate completed acquisitions into our production and other systems, improving both customer experience and overall operational efficiencies developed over the past few years. In our agency business, 2022 witnessed advancements in key areas positioning us to increase scale in our growth markets and enhance our share with high-quality independent agents. We have seen remarkable progress in deploying technology and services that enhance connectivity, usability, and risk management for our agency partners. As we move through 2023, our services platform for agents has never been stronger. Positioning our commercial operations for growth across all business lines has been a primary focus this year, as these operations play vital roles in our overall strategy. We made significant talent investments in 2022 to support these objectives. Although we remain optimistic about the long-term commercial market, we recognize there may be short-term challenges due to fluctuating financial markets. In closing, I want to emphasize that we will meticulously manage expenses and investments, balancing the immediate operating costs associated with current market challenges while reinforcing Stewart for long-term growth and performance. A strong financial foundation should position us well to leverage the opportunities this cycle presents. I conclude with an optimistic long-term perspective on the real estate market and Stewart's potential to become a premier title services company. I also wish to extend my gratitude to our associates for their dedication and to our customers for their ongoing loyalty and support. David will now provide an update 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, the residential market was negatively impacted by 30-year mortgage rates that peaked over 7%. Consumer sentiment has been forward due to the rate environment, inflation, affordability, and recession concerns. Commercial real estate is seeing the impact of higher rates and volatile markets as well. Yesterday, Stewart reported fourth quarter 2022 net income of $30 million and diluted earnings per share of $0.49 on total revenues of $656 million. After adjustments primarily from net unrealized gains and losses on equity securities and office closure, severance, regulatory, and litigation expenses, adjusted fourth quarter net income was $60 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 by $255 million or 30%, primarily due to the volume declines driven by higher interest rates. As a result, the title service pretax income was $27 million compared to $119 million in the prior year quarter. While on an adjusted basis, the segment's pretax income was $35 million compared to $120 million in the prior year quarter. After adjustments for purchase intangible, amortization, and other items listed in the appendix of our press release, adjusted pretax 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. However, 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 34% 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 due to the economic environment. Similar to our direct title revenues, 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 geographical 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 of 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 pretax income decreased to $400,000 from $5 million last year, primarily due to lower transaction volumes resulting from the economic environment. Pretax margin for the fourth quarter was 0.7% compared to 6.1% in the fourth quarter of 2021. After adjusting for purchasing tangible, amortization and other items listed in Appendix A, adjusted pretax 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 cost, as a percent of operating revenues, was 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 2022 and 2021 respectively. Excluding office closures, regulatory and litigation expenses, the other operating expense ratio was 21% in the fourth quarter 2022 compared to 23% 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 31, 2022, are approximately $430 million in regulatory requirements and we also have a fully available $200 million line of credit facility. Total stockholders' equity attributable to Stewart is $1.36 billion, and 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're always grateful for and inspired by our customers and associates. We advocate for everybody's safety and prosperity and are confident in our supported real estate markets. I'll now turn the call back over to the operator for questions.

Our first question is coming from John Campbell from Stephens.

Good morning, John.

Hi, guys. Good morning. If I strip out the one-timers here, I'm showing that the personnel cost 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 to avoid that share loss. And I know you've invested to garner share, so you don't want to lose that on the other side of the market. So my question here is the 4Q 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?

We're experiencing a slight lag. Over the past three quarters, we've made significant progress on both fronts. I mentioned in the last earnings call that we took a targeted approach with $25 million in actions in the fourth quarter. This resulted in approximately 20 personnel changes and five open orders. The balance of our actions has shifted throughout the year, leading to our current situation. As you can see from the restructuring, which included office closures, this impacted our operations. The first quarter tends to be our most challenging, and we have a good sense of how that will play out based on the current order count. We are being careful in our approach because I believe we will navigate through a couple of tough quarters, but we have built strong capabilities across the organization. It's crucial that we are ready to seize market opportunities when they arise, and I want to ensure we maintain momentum. I'm pleased with how the team has managed this situation.

John, this is Dave. Just one other thing on the other expense line, whether it may be a difference in the percentages there. A lot of the real estate services have third-party data and other costs, and so that varies a lot more closely to revenue than maybe the employee one.

That's a great point. And then on the implied direct title kind of fee-per-file, I'm going a little bit of trouble back into that. If I take just the direct revenue divided by the closed orders, I think it's about a 40% lift year-over-year. I know there's a mix shift there. But if I look at that sequentially, it's kind of a similar mix shift and that was a 10% move sequentially. I'm thinking maybe the kind of recent acquisitions might be skewing that a bit. So maybe if you could talk to that, help explain that.

Yes. I think for that kind of a difference, John, I mean, you're probably talking about geographical mix and stuff like that. Those acquisitions, the reverse fee per file isn't quite that high. And the other one closed later in the year, so we wouldn't see any impact of that. So in that sense, that's just more geographic mix shift.

Okay. That’s helpful. Thank you, guys.

Thanks, John.

It looks like we have another question from John Campbell.

Yes, this is my show today, everyone. Could you please discuss the BCHH business, which you acquired in late December? It would be great to hear how that affects the P&L. I believe it likely fits within the Real Estate Solutions segment. Additionally, I would appreciate some insights on the potential synergies and how this aligns with your overall strategy.

Yes, John, that is indeed a title operation, so it will be included in the title segment. To understand it, their main customer base primarily consists of institutional investors who focus on aspects like single-family rentals and related activities. Similar to our previous initiatives with the reverse business involving FNC, we are exploring market segments where we can distinguish ourselves and leverage the growth potential related to economic and demographic trends. Some analysts have estimated that the family institutional market could represent around 10% to 15% of the entire real estate market at some stage. This positions us as one of the leading providers in that area, presenting an opportunity to target that market segment.

Okay. And then this is somewhat related to BCHH, but if you could go back to FNC, I think you had talked about in the past that it was maybe going to hit in 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 and then also on BCHH if that's going to hit on purchase or other?

Yes. FNC is another. With BCHH, I think we're going to need to take a hard look at that because some of that could be other and so it's purchased. And so there's probably going to 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 the question-and-answer session. I will now turn the program back over to Fred.

I think there are some more questions in the queue. Questions are there in the queue.

It actually looks like a couple just queued up, and we have Bose George from KBW.

Hi, Bose. Good morning.

Good morning. I wanted to follow up on John's question regarding expenses. As we see the benefits of the cuts made this quarter take effect, how can we estimate the margin range for 2023, assuming the market stays generally in line with consensus expectations?

I think the first quarter will be largely influenced by the weak order intake in the fourth quarter. However, we anticipate a significant improvement after that. The staffing adjustments we've made suggest we have excess capacity in our system right now. As the market improves and volumes increase, our ratios should improve significantly throughout the year. We are optimistic about our current position and future outcomes. Looking at this year as a whole, even though we experienced a decline in the business, our annual ratio management provides a clear insight into our operational capabilities. I feel confident about our actions and our current status. One challenge we face is that our portfolio differs somewhat from others, and we don’t have additional investment income affecting our revenue ratios. When compared on an equal basis, we've managed well. It is important to note that larger competitors of ours may have more overhead as they are significantly larger. Overall, I believe our actions and the scale of those actions are quite comparable.

Okay, great. That's helpful.

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 of relationships that you saw in the fourth quarter where you guys were a little bit lower than actual on the employee side. Some of that may continue, because we don't get quite the dollar-for-dollar, but maybe things that.

I believe the first quarter will be quite difficult, similar to the fourth quarter, as we are currently at a low point. However, what's noteworthy is that our orders have increased significantly. As of January, we saw a rise of 28% in overall orders and about a 20% increase in commercial orders. The first quarter impacts the fourth quarter investments, leading to higher quality results, but we are experiencing some delays. I feel like we are starting to recover from this low point, which is positive. It's also important to note that we are more seasonal compared to our competitors because we have less presence in California and Florida, unlike others with larger stakes there. This gives us a nuanced advantage with the dynamics of the fourth quarter and a somewhat weaker first quarter. Therefore, we experience a bit more of a seasonal delay. Nonetheless, I feel confident we are on the right track as we observe emerging trends and a return to balance.

Okay, great. That's very helpful. Thanks. And then, actually, can you remind us what drives that non-controlling interest line? Now, it's come down very modestly, despite the big move down in income.

Yes. Yes, that's where we don't have 100% ownership in some of our businesses. And it varies from period to period. So we had done a slight majority purchase like a couple of years ago, and then we've been staging into that. And so that was helping that line. And then, we had a couple of new entities in the fourth quarter, so that might have kicked the ratio off a little bit. But in general, we're trying to minimize the partial ownerships, but there's going to be periods of fluctuation. A lot of that was historic; we did at the beginning I would try to buy and get rid of that and have had some ownership but one of the recent acquisitions for real strategic reasons we get a little bit of ownership to line incentives. So that's why it bounced a little bit, but I don't see that getting huge or any base that's not going to jump.

Okay, great. And actually just going to add one more, just the legal and regulatory settlement was that kind of just a one-off? Any color on that?

Yes, we addressed the issue in New York regarding anti-poaching. Everyone in the industry is somewhat fatigued by it; we've really looked into it. This situation arose from our transaction with Fidelity and some services they provided related to anti-poaching. I believe we were the third party to reach a settlement on this matter. We just want to move past it, but I think it’s a unique situation.

Yeah. Okay. Got it. Great and thanks a lot.

Our next question comes from Geoffrey Dunn from Dowling & Partners.

Hi guys. Good morning.

Hi. Good morning.

Good morning.

So 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 of processing those orders. So as it shapes up, it sounds like directionally we're looking underneath more compressed margins sequentially. And I guess my main question is do you think you can make money in the first quarter?

Great question. I think this is a very challenging quarter, definitely our most challenging one. We've been quite aggressive in managing our expenses, but I still believe the first quarter is the toughest.

Okay. And then investment income, it looks like you had a pretty good uptick this quarter after I've seen much movement beforehand. David, did you reposition the portfolio differently, or is this just a lagged impact from the – you know money yields going up?

Yes, Geoff. 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 the 4%-plus in money markets where you weren't getting that. And so, 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 our ways to grow the business, but that's mainly the effect of money market rates.

Yes. 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 and that we don't have a depository for our escrow. So our investments are going to come really from our investment portfolio and a little bit from the 10/31 business. But we don't get the benefit of our $2 billion of escrow, but 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 last question is about the commercial sector. Many people view this as a year of normalization for commercial, but that can be quite challenging considering the recent results. Can you discuss what you see as normalization, identify the areas that are actually being affected economically, and outline the advantages and disadvantages compared to the normalized level?

Yes. The first quarter is noteworthy because it may be slow in certain areas, yet orders are increasing, which suggests that the year will likely turn out well. There are some geographical factors at play, with the US experiencing a bit of a slowdown. However, considering our mix, the energy sector is performing strongly, and we are seeing significant growth there. Certain sectors, like office spaces, are expected to face more challenges. Overall, we believe the commercial market will be quite positive. The comparison with last year's first quarter was quite favorable, and we anticipate that this will continue in the first quarter. Overall, we expect a solid commercial year, although there will certainly be ups and downs.

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 want to thank everybody for joining us on this quarter's earnings call. Thank you.

And this does conclude today's conference. You may now disconnect. Have a great day.