Hello, and thank you for joining the Stewart Information Services Fourth Quarter 2023 Earnings Call. At this time, all participants are in a listen-only mode. Later, you will 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 the conference over to Brian Glaze, Chief Accounting Officer. Please go ahead.

Thank you for joining us today for Stewart's fourth 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 a 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.

Thanks, Brian, and thank you for joining us today for Stewart's fourth quarter 2023 earnings conference call. Yesterday we released financial results for the quarter and Dave will review these in a minute. Before doing so though, I'd like to update you on my view of the market and our continued progress on important initiatives that we believe will set Stewart up for long-term success. While we have thoughtfully managed through this very difficult economic environment and invested carefully, we have continued to invest in a number of critical areas to materially improve our business. Our focus has been on creating a stronger and more resilient enterprise that will thrive over a full real estate cycle. As we close 2023, we are operating in an environment that saw mortgage interest rates reach a high of 8% during the fourth quarter before falling to around mid-6% near the end of the year. Mortgage rates and rate volatility continue to impact transaction volumes and we find ourselves at historic lows for the sale of existing homes. At an industry level, the historically low purchase volumes combined with low existing home listing inventory has kept home prices elevated. As I have said before, we see 2024 as a transition year towards a more normal market for existing home sales during 2025 and believe the next six months will likely be very challenging given the macroeconomics laid on top of a typical seasonal impact. While the current environment has been difficult, I am very pleased with the progress our teams have made in improving the underlying financial and operating performance of the company during 2023. There is more work to be done and it is critical we remain focused on improving margins, growth, and resiliency through improved scale, attractive markets, and enhancing our operational capabilities, but I want to thank our teams for their dedication to making significant progress on these enterprise initiatives during the last twelve months. During the year and continuing this quarter, we successfully strengthened our financial position, giving us the flexibility to continue investing in the long-term success of Stewart and to take advantage of opportunities as they arise. During the fourth quarter, we continued to manage costs thoughtfully and have taken targeted actions where appropriate. We continually evaluate our cost structure to ensure that we are making sound long-term decisions on expenses. We have also been very careful not to take actions that we felt would threaten our competitive position and long-term value-creating opportunities. The most prudent path forward for Stewart, as the market begins to normalize in late 2024 and into 2025, is to continue investing in our people and remaining focused on our long-term improvement plan. I believe we've 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 our customer experience, improve efficiency of our operations, and build scale in targeted areas. Some of the investments in technology have focused on improving our title production processes as well as our data management and access. These strategic investments are resulting in cost ratios that are somewhat elevated given we are in a market with historically low transaction volumes. However, we are setting Stewart 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 in the long term. During the current environment, we have been prudent with our acquisition-related investments and have been routinely reevaluating markets in our direct operations where we have the opportunity to increase share and enhance our leadership capabilities. This has ensured that our deployment of capital provides acceptable long-term returns. We will maintain this cautious approach to investments through the first half of 2024. During the fourth quarter and throughout 2023, our commercial operations have performed well in a challenging market. While certain sectors were and will be challenged in the near term due to difficult financial markets, sectors such as energy remain extremely strong for us and we see ongoing challenges in sectors like office. Growth in all sectors of our commercial operations remains an important component of our overall strategy, and positioning our commercial operations for growth across all our 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 also investing in technology to support the commercial operations to allow us to better serve our customers and more efficiently manage our business. We believe our strategies will create long-term growth in the commercial markets for us. Our agency business finished the fourth quarter with another solid performance as we have been leveraging our agency technology to drive market share gains. During the fourth quarter and throughout the year, we have made excellent progress on our 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 has ever been and we will continue to focus on growing share in our target markets such as Florida, Pennsylvania, and the overall commercial market. Our real estate solutions maintained solid financial results in the fourth quarter and throughout '23, particularly given the market headwinds. We are focusing on driving share gains as we leverage our improved portfolio of services to better and more deeply serve our lender clients. While we are not immune to the market during downturns in these businesses, we've been able to offset some of the challenges with share gains. An important achievement during 2023 was our focus on improving our technology for title production process automation and centralization to improve operational efficiency and capabilities. Our investments have already resulted in significant progress toward improving the customer experience across all channels. Another area of priority work, as we work to improve our operating efficiency, is the centralization and digitization of our title data. We are pleased with the progress that we made on that this year. This advancement at more normal production levels will result in considerable improvement in our delivery costs. Improving our financial strength by growing margin has been a significant focus of our journey. We have made good progress in this effort and we are aware that the returns remain depressed during this phase of the cycle. Our investments should allow us to achieve low double-digit pre-tax margins as we turn to a more normal 5 million unit purchase market. While we are encouraged by our improvements in talent, technology, customer experience, and our financial model, we know that our 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 lines of business and we have made great strides in improving the customer experience in all our channels. Attracting and retaining key talent is always important and 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. I am pleased that 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 being dedicated to strengthening Stewart for long-term growth and performance. Our solid financial footing should position us to take advantage of the opportunities that this 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 and our agency partners for their continued loyalty and support. David will now update everyone on the results.

Good morning, everyone, and thank you, Fred. As always, I'm thankful to our associates for their outstanding service and our customers for their continued support, more so during the challenging current market. Although mortgage rates dropped after the Fed's December meeting, comments in the January meeting caused rates to rise through today, causing a continuation of a choppy market. 2023 had the lowest existing single-family home sales in over 15 years and commercial real estate activity was also challenged. As a result, operating results were lower than the prior year. Yesterday, Stewart reported fourth quarter 2023 net income of $9 million or $0.32 per diluted share on total revenues of $582 million. After adjustments for net realized and unrealized gains and losses, acquired intangible asset amortization, and other expenses detailed in our press release, the fourth quarter adjusted net income was $17 million or $0.60 per diluted share compared to adjusted net income of $23 million or $0.84 per diluted share in the fourth quarter of 2022. In the title segment, total operating revenues in the fourth quarter decreased $79 million or 14%, while fourth quarter pre-tax income slightly improved primarily due to higher investment income and expense management. After adjustments for purchase intangible amortization and other items, the title segment's pre-tax income was $31 million compared to $35 million for the fourth quarter 2022. Adjusted pre-tax margin was about 6% for both quarters. On our direct title business, total opened orders in the fourth quarter increased by 10% primarily due to acquisitions in 2023, while closed orders decreased by 3% compared to the prior year. Domestic commercial revenues decreased by $11 million or 16%, primarily due to lower commercial transactions. Average commercial fee per file was approximately $14,800 compared to $15,100 from the prior year quarter. Domestic residential revenues decreased $18 million or 10% as a result of 5% lower purchase and refinancing volumes and lower fee per file. Average residential fee per file in the fourth quarter was $3,200 compared to $3,500 last year, primarily due to transaction mix. Total international operating revenues declined $1 million or 4% primarily due to overall lower transaction volumes. Similar to the lower commercial and residential activity in the market, agency revenues in the fourth quarter decreased by $49 million or 16% compared to the prior year, while the remittance rate was roughly comparable. On title losses, total title loss expense in the fourth quarter was 5% lower compared to the prior year primarily from lower title revenue. As a percentage of title revenues, the fourth quarter title loss expense was 4.1% compared to 3.7% in the fourth quarter of 2022, which benefited from 2022's favorable claims experience. For the year, title loss expense averaged 4.1% compared to 3.8% last year. We expect title losses to be in the low to mid-4% range in 2024. Regarding the real estate solutions segment, fourth quarter pre-tax income improved $1 million compared to last year, primarily due to increased revenues from our credit-related data business, which more than offset declines from our transactional businesses. Pre-tax margin was 2.3% compared to 0.7% last year. On an adjusted basis, pre-tax income and margin were comparable to the prior-year quarter at roughly 12%. On our consolidated expenses, our employee cost ratio was 32% compared to 30% last year, primarily driven by lower operating revenues. Other operating expenses were 23%, which was comparable to last year. Regarding income taxes, the effective tax rate for the fourth quarter was 39%, which was higher than our historical tax rate, primarily due to the effect of non-deductible expenses on lower domestic pre-tax income. We expect our tax rate to return to historical levels as domestic operations normalize. On other matters, our financial position remains solid to support our customers, employees, and the real estate market. Our total cash and investments at December 31, 2023, was approximately $415 million in excess of statutory premium reserve requirements. We also have a fully available $200 million line of credit facility. Total stockholders’ equity at December 31, 2023, was approximately $1.38 billion with a book value of approximately $50 per share similar to last year. Net cash provided by operations in the fourth quarter improved to $41 million compared to $25 million last year, primarily as a result of lower payments on claims and accounts payable, partially offset by lower net income in this year's quarter. Lastly, we greatly appreciate our customers and associates and remain confident in our service to the real estate markets. I'll now turn the call back over to the operator for questions.

We'll take our first question from Soham Bhonsle with BTIG. Your line is open.

Hey, guys, good morning. Hope you're all well.

Good morning. Good morning.

Wanted to maybe just start with January and February orders, where there was a trending for the first few weeks here. Are you sort of seeing comps turn positive year-over-year or anything on a month-over-month basis on the resi and commercial side would be great.

Yes. We view the market as somewhat of a tale of two cities, and we consider this a transition year leading to a more normal market in 2025. The first half of the year is likely to be quite challenging. In terms of the first quarter, I see it as starting to recover from the low point, but we will still experience orders that are lower than last year, albeit closer in comparison. This trend is evident in the purchase order data we shared for October, November, and December. We expect some improvement in the first quarter, though it will still fall short of last year's performance. Seasonality should aid us as we move toward the second quarter. However, one of the main challenges we face is the volatility that has increased to 8%, which has negatively impacted the order results, leading to more cancellations. Rapid changes like this often result in a rise in cancellations, affecting our closed orders. This volatility has influenced current trends. Nonetheless, I still believe that the idea of a transition next year remains a good expectation, and hopefully, we will begin to see positive developments in the second half of the year.

Yeah. It's David. Real quick, I mean, you also have to look at it in the context of what rates have been doing. So if you think about the first quarter of 2023, they were in the 6.2%, 6.3% area, they came down to 6.6% at the end of this year, and then they've come back up as a result of those Fed comments in the last meeting. So you sort of start this year with a little bit of a choppier environment.

Yeah, okay, understood. And I guess the second one, I wanted to get a sense for where margins could potentially land this year. But maybe attack it a little differently. I think most forecasts are calling for originations up 15% to 20%. We'll see where rates go and everything, but 15% to 20% in that sort of scenario, can you maybe just give us a sense of how you're thinking about managing the core employee and other OpEx lines, right? Like, should we expect you to sort of stay at this current fourth quarter run rate for at least the first half and then maybe there's an increase in the back half, but how would you sort of expect that to ramp up with volumes?

Yeah. So I've mentioned this a couple of times. It's an interesting thing, right, because we've had a wild last two or three years. The way I think about our margins is that in about '21, if all things being equal, we took a company that was averaging about 2% over the decade before the journey. We got it up to about 9.5% and 10%. My view is in '21 we had better margins, obviously, but it was because it was so much excess volume. I had a lot of offices at over 100% capacity. So it wasn't a sustainable thing but it was top of the margin. The work we've done over the last year in particular, we broke the camel's back a little bit on a couple of things. I believe we picked up a couple of hundred basis points. So in a normal market that we think about at about 5 million purchase homes, I think we’re instead of 9.5%, 10%, we’re probably at 11% to 11.5%, something like that now. So that’s kind of the general way to think about our economics. The problem is we're in one of the worst markets in 15 years and at a very low level. I look at the numbers; that improvement I just talked about doesn't show up in the numbers, but what we've done is create what I call excess capacity. As volume comes back, we won't be adding a lot of resources because of the operating model that we've created. Part of the savings that you don't see is the fact that we have excess capacity in our search and clear areas and some of the data management areas. I feel like as things improve, our margins will as well. Again, the seasonality and the challenge in the first quarters is going to be worse than last year. However, I see as we come out of the year, we should have improving margins, but we’re not going to be anywhere close to a normal market probably next year. I think we’re in pretty good shape. Looking at this fourth quarter, this is one of the worst quarters in 17 years, and we were able to make money, which was not historically true. So I feel like we're in a really good position to improve margins as the market improves. If that's helpful.

So, if I could just follow up. So, David, I guess for you, should we just think about sort of the employee and OpEx line sort of run rate that where it is today and take that forward for the rest of the year? How should we think about that?

I believe what Fred meant is that we won't significantly increase our headcount. The first quarter tends to be our slowest season, which means revenue may not be very high. Therefore, on a percentage basis, you might see a small increase, and that will be the period for adjustments. As we start to see an increase in volume, we will benefit from not hiring additional staff. There will always be some variable costs due to sales expenses, but those costs won't rise at the same pace as they have in the past. As volume increases, you can expect to see improvements in margins throughout the period.

Okay. Yeah, that makes sense. And then just last one, your peers had cyberattacks, and I guess, have you seen any sort of discernible change in just customer behavior or anything out there?

No, I don't believe there will be any significant impact in the short term. However, in the long term, being one of the big four and having a strong balance sheet could be beneficial. Agents today are becoming more cautious and thinking about spreading their risk, which is also true in commercial sectors. The more astute agents have always considered this. This situation should particularly benefit us owing to our market position and the number of agents who are not exclusively aligned with us. People are likely to be more prudent about risk distribution, especially in a market that is dominated by four strong players.

Yeah. All right, thanks a lot, guys.

Thank you. We'll take our next question from Bose George with KBW. Your line is open.

Good morning, Bose.

Hey, good morning. Wanted to ask just in terms of your margin expectations for the back half of this year, is that sort of looking at the year-over-year sort of improvement, or is that thinking sort of incorporating some potential pickup in macro? Just how are you thinking about later this year?

It's the macros, but it's also leveraging some of the work we've done, right? This excess capacity I talked about is kind of sitting on the sidelines. So it's both leveraging the volume increase, but also the kind of new profile of the business. It's a little bit of both, but it's driven by law. The issue is we just have so little purchase volume in the system right now versus a normal year that we're kind of at the bottom as far as what we can do with expenses and managing our resources. I'm very proud of what we've done. You would want to cut much more out of the system. This is why when I talked about the first quarter being challenging, because we are going to be bouncing on the bottom in this first quarter.

Okay. Yeah, that makes sense. And then actually the other orders number again had a pretty good jump. Is there sort of bulk activity? Can you just remind us what's in there, is that mostly for the purchase?

Sure. This is the last quarter where the BCHH acquisition comparison helps us, right. We bought them at the beginning...

At the end of 2022. So they weren't in last year, much in last year.

Right. So it's driven by that business, which is doing very well.

Okay. So that order count for the quarter is kind of a reasonable run rate. And is there seasonality in there or is that more just sort of transaction-based?

Yeah, it's a transaction-based business, Bose. You think about that as sort of the buy-to-rent, built-to-rent business, and then there's securitizations and the like. There's property aggregation and then there's disposition and securitization. So it's a lumpy business and tends to move in chunks.

Okay, great. Thanks.

Thank you. We'll take our next question from John Campbell with Stephens Inc. Your line is open.

Good morning, John.

Good morning, everyone. In the past, you mentioned an ongoing investment of around $20 million or discretionary spending related to long-term strategic initiatives. However, Fred, in your prepared remarks, you noted a cautious approach for the first half from a macro perspective. In your earlier response, you mentioned that there’s not a need to add many new positions since you've already established excess capacity. My question is whether you expect that $20 million spend from last year to remain steady this year. Do you think the market will recover as much as analysts have predicted, or do you see potential for market strength?

No, it's a great question. It's roughly about the same, probably closer to $19 million than $20 million. There are some important data initiatives we have underway, particularly regarding access to data that will improve our efficiency. We are upgrading our operating technologies, as we have an outdated operating system similar to what we have in the commercial sector. The spending this year will be about the same. Additionally, there will be some extra investment in cybersecurity. To address your question, we evaluated each of those investments and considered the timing, especially given the challenges of the first six months of the year and what would yield a quicker return. It’s crucial that we invest in these areas since the company fell behind on capital investments in some sectors before this journey began. We are trying to prioritize and catch up on these essential investments. Many of these initiatives aim to enhance the experience for our employees and customers regarding data access and decision-making. I believe the teams have made significant progress this year on these initiatives, and the upcoming ones are also important. They may be less visible to our customers than previous projects, focusing more on back-office and operational improvements, but they all contribute to our progress effectively.

That's helpful. Regarding the growth initiatives, I recall you mentioned that the rollout of the agency tech platform is a driver of share growth. Could you provide more details about the platform itself? Specifically, what sets it apart? Additionally, from a broader perspective, what are the goals you aim to achieve in the agency, and how does that tech platform align with your overall strategy?

So, one of the areas we fell slightly behind in is working with agents because it's about combined economics and the efficiency of the entire process. It largely depends on how well we can integrate into their systems and provide the necessary information for their operations. We've made significant investments in both integrations and the information exchange. Initially, we could only provide services in three states, but now we cover the entire country, similar to our larger competitors. This is important to agents as they look to manage their costs in a down market and are increasingly using our services to support their work. When we approach an agent in Florida, our platform is as efficient, if not more so, than others in the market. Additionally, for select agents, we offer a concierge service to access commercial services, enhancing their efficiency and geographical reach. We continuously seek ways to improve our integrations and interactions with them. We believe that, as a result, many agents will see it as safer to diversify their business and share a portion with us, given that our offerings are as good, if not better, than those of our competitors. We've experienced six or seven quarters of share growth among agencies and steady growth in strong states. As these enhancements take root region by region, we expect that trend to continue, and I'm optimistic about it.

Okay, that's very helpful. Thanks for the color.

We will take our next question from Geoffrey Dunn with Dowling & Partners. Your line is open.

Hey, good morning.

Good morning. So, I wanted to go back to the expense side here. Fred, a year ago you had a chunk of expense for office closures, and you weren't going to cut too deep into expenses. You're investing for the future. Here we come this quarter, there's another chunk of office closures. How do you identify these opportunities? And that leads into my second question. I think there's an emerging debate here on what '24 actually ends up being. If we don't get rate cuts towards the end of the year and mortgage rates stay higher than what Fannie and certainly the NBA are forecasting. I'm starting to wonder what the risk is of only 5% type of market rather than a 20% growth market. I know you said you kind of bounced off the bottom; it doesn’t sound like the company is positioned for a flat or 5% type of growth market in 2024. Can you talk a little bit more about how you identify expense savings and what your actions would be if we are looking at a 5% market?

Yeah, so again, Geoff, really good question. We look at this kind of MSA by MSA, and within the MSA kind of geographic pockets, we've made a lot of improvement in 30 markets or something in the last couple of years to get share, so our margins are good. But we still have sub-geographies where we were trying to get to the scale we felt we needed to get to. And at some point, you feel like you can't, given the market and to your point, the slowness of the comeback. We have consolidation opportunities from the acquisitions we've done where you have duplicate locations that are close together to manage the business. Some operational initiatives have freed up our ability not to have to hire folks if people leave, etc., because of the efficiency that we've been gaining. We try to be really thoughtful. My point is that we've done a lot and there isn’t a lot left to do. I do believe seasonality is going to help us, even if the market isn't as robust as some of the scenarios are. The first quarter is going to be challenging, but I think seasonality is going to help us in the second quarter. This is why when I talked about the first six months, we have to be really prudent in sequencing investments. We have to manage ourselves like it could be what you just described, that’s the way we’re going to have to manage ourselves and be thoughtful and careful. But I don't see a lot, and I'm not planning a lot.

If I said the market was going to look exactly like it did in 2023, is your 2024 result better?

Yes. So not the first quarter, but it would be a tad better because we're going to bed up the spot. We’ve done a better job on investment income on escrow through the whole year. We've improved our operations a little bit more efficient. All things being equal, it would be a tad better; it's just going to be clouded by the first quarter.

Got it. Okay. Thank you.

We have no further questions on the line at this time. I will turn the program back over to our presenters for any additional or closing remarks.

Okay. I want to thank everybody for joining us for this quarter's call. I really appreciate the interest in Stewart. Thank you so much.

This does conclude today's program. Thank you for your participation. And you may disconnect.