STC
#Thank you <UNK>.
We appreciate everyone joining us today.
I know some of you are, may be in the snow this morning, so we appreciate the time.
This morning, we reported solid fourth-quarter 2016 results with pre-tax income improving $20 million over the fourth quarter of 2015.
Total fourth-quarter 2016 revenues increased 6% to $526 million, while operating revenues improved by $31 million over fourth-quarter 2015, primarily due to increased revenues from our core title operations.
We reported net income of $17 million or $0.71 per diluted share for the fourth-quarter 2016 compared to net income of $3 million or $0.11 per diluted share for the prior-year quarter.
Total title revenues increased $37 million or 8% due to higher revenues in our independent agency, core retail and commercial channels which led to an improved title segment margin of 7.4% this quarter, up from 4.9% in the prior-year quarter.
Purchase transactions grew nicely year-over-year and domestic commercial revenues were actually the highest we've seen in the last 16 quarters.
We were able to hold segment employee cost flat while increasing operating revenues by 8%.
Although industry-wide refinancing transactions are forecasted to decline significantly in the coming year, we still expect expanding margins, given our transaction mix is more heavily weighted to purchase transactions.
We do anticipate a slowing but sustainable transaction volume with price increases in existing and new home sales, driven largely by demographics and the emerging millennial homebuyer, in addition to favorable macro trends we are even more encouraged by positive growth in key markets as a result of our new sales initiatives.
We do continue to benefit from the cost management initiatives as well as enhanced financial discipline within our core operations, resulting in total employee and other operating expense decreasing 3% for the quarter, while total operating revenue increased 6%.
In addition, we are encouraged by programs currently being deployed, which will further reduce our cost per file and improve margins.
<UNK> is going to be reviewing these savings projections further in his comments.
Our adjusted EBITDA improved 100% over the prior-year quarter on a 6% revenue increase, validating the changes we have made in our transformed operating model.
Overall, our fourth quarter marked a solid finish to a very important year for Stewart.
We completed our journey to a best-practices governance structure with the elimination of the dual class stock and the addition of new Board members, including two very experienced insurance CEOs in Fred Eppinger and <UNK> Bradley.
Both of these new Directors led their respective companies to produce strong growth and excellent shareholder returns.
I'm pleased to report that all of our new Board members are actively engaged and are already making significant contributions.
Also in the year, we enhanced the capability and capacity of our team with the addition of Tim Okrie, our Chief Operating Officer, to focus on delivering our growth and bottom-line performance objectives.
We did generate encouraging revenue growth in our core markets, while continuing our plans to improve the efficiency in our operating model, and we took actions to significantly improve the results of our ancillary services operations and focus on our core business.
We are confident that these actions, along with our commitment to improving our customers.
experience and our growth plans in targeted markets positions us for continued earnings growth and sustainable margin improvement.
We remain positive on our prospects going forward for both our Company and the overall macroeconomic environment.
So, I'll now turn it over to <UNK> for more detail on our financial results.
Thank you, <UNK>, and good morning everyone.
The title segment generated pretax income of $38 million or a 7.4% margin compared to fourth-quarter 2015 pretax income of $23 million or a 4.9% margin.
Our title segment revenues were $512 million for fourth-quarter 2016, an increase of 8% from fourth-quarter 2015.
With respect to our direct title operations, overall revenues increased 4% from fourth-quarter 2015 as a result of revenue increases in our core retail, domestic commercial and international operations.
Somewhat offsetting these revenue increases were declines in default-related centralized title transactions.
Total commercial revenues for the quarter were comparable to prior-year quarter, while domestic commercial revenues increased 2% to $53 million which, as we noted a moment ago, was the highest quarterly revenue generated in the past four years.
Domestic residential fee per file in the quarter was approximately $1,900, a 2% decline from fourth-quarter 2015.
Domestic commercial fee per file was $6,700 compared to $6,200 in the prior-year quarter or a 7% increase.
Fourth-quarter 2016 total international revenues increased 9% due to increased volumes on a local currency basis, principally in Canada, partially offset by the impact of a weaker British pound against the US dollar.
On a full-year basis, our Canadian operations achieved record premium revenues on a local currency basis.
Revenues from independent agency operations increased 11% or $28 million in the fourth-quarter 2016.
Net of retention, revenues increased $3 million or 6%, generally in line with the increase of our direct retail locations.
Quarterly fluctuations in the average remittance rate are not unusual, and on a full-year basis, which is more indicative of our ongoing expectation, the average remittance rate is 18.2% in 2016 versus 18.3% in 2015.
We anticipate our ongoing average annual remittance ratio to be in the low-to-mid 18% range.
Title losses as a percentage of title revenues were 4.8% in the fourth-quarter 2016 as compared to 5.9% in the prior-year fourth quarter.
On a year-to-date basis, the title loss ratio was 4.8% in 2016 versus 5.6% in 2015.
The fourth quarter's overall loss ratio was slightly influenced by favorable true-up adjustments to large loss estimates, while the full-year loss ratio was further influenced by the second-quarter policy loss reserve release.
We anticipate maintaining loss accrual rate of approximately 5% in 2017.
Our total balance sheet policy loss reserves were $463 million at year-end and remained above the actuarial midpoint of total estimated policy loss reserves.
Looking at our ancillary and services and corporate segment, revenues for the segment decreased 42% to $14 million compared to the year-ago quarter, primarily due to our strategic decision in 2015 to exit the delinquent loan servicing operations, which we completed in first quarter of 2016.
Excluding the 2016 and 2015 non-operating and non-recurring charges I'll describe in a moment, the segment's pretax loss including the cost of parent Company and corporate operations for fourth-quarter 2016 was $10 million versus $14 million in 2015.
During the fourth-quarter 2016, we sold the government services and loan file review and audit lines of businesses within the ancillary services operations and recorded realized losses on the sales totaling $3 million.
Operating losses attributable to the sold operations were approximately $4 million in the quarter.
Unrelated to the sales, we also recorded approximately $2 million of early lease termination charges related to ancillary services operations as we consolidated our footprint to lower occupancy cost going forward.
Going forward, our ancillary services operations will consist almost exclusively of search and valuation services, which we expect to generate positive cash flow, but be approximately breakeven in 2017 on a GAAP basis, which includes purchase price amortization.
We anticipate the run rate costs of our parent and corporate operations to approximately $7 million per quarter, resulting in an overall pre-tax loss for the segment.
With respect to operating expenses, as I'm reviewing, remember that the fourth-quarter 2015 included a number of non-operating and non-recurring charges that were detailed in the expenses section of the earnings release and which totaled approximately $5 million.
The discussion that follows excludes those charges.
Employee costs for fourth-quarter 2016 decreased approximately 7% from fourth-quarter 2015 while average employee counts decreased approximately 9% due to our cost management program, reductions in employee counts tied to volume declines, and the exit of the delinquent loan servicing operations, as mentioned earlier.
Fourth-quarter 2016 employee expenses include approximately $1.3 million of severance.
As we enter 2017, we anticipate further adjustments to overall employee expenses in the first quarter in response to the usual seasonal slowdown in transactional activity, as well as ongoing margin enhancement initiatives.
As a percentage of total operating revenues, employee costs for the fourth-quarter 2016 were 27.9%, an improvement of 430 basis points compared to 32.2% in the prior-year quarter.
Other operating expenses for fourth-quarter 2016 increased 2%.
As a percentage of total operating revenues, other operating expenses decreased by 80 basis points to 18% in the fourth-quarter 2016.
Given the proportion of other operating expenses represented by relatively fixed costs and our overall shift to more utilization of third-parties rather than internal employees for certain production needs, we anticipate annualized other operating expenses to generally average 18% to 20% of total operating revenues over the near term.
This ratio should gradually decline as our growth plans yield higher revenues relative to the fixed cost.
Lastly, a couple of comments on other matters; the effective tax rate for fourth-quarter 2016 was 15% and was lower than normal due to recording benefits from unrecognized research and development tax credits, while the fourth-quarter 2015 effective tax rate of a negative 400% was due to return to provision adjustments and low pretax income after non-controlling interests.
Cash provided by operations was $59 million in the fourth quarter of 2016 compared to $15 million for the same period in 2015.
The increase in cash provided by operations was primarily due to the higher net income and lower payment of claims and accounts payable during the fourth quarter of 2016.
As of year-end, $3 million of cash was held at the parent holding Company.
As we've discussed on these calls before, our plans to improve margins include; further outsourcing, additional automation of manual processes, and continued consolidation of our various systems and production operations.
We are also in the early stages of an initiative that will lower unit cost production in our retail branches, thus further improving margins.
Throughout 2016, we invested in the technology and people necessary for this initiative, piloted new title and escrow production technology in two smaller markets and have just recently begun a pilot in a larger market state.
While this is a multi-year effort, the early results of the pilots have been encouraging.
We expect to ramp-up orders processed through the new system on a market-by-market basis during 2017 and 2018.
Although the cost of maintaining duplicate staff through the transition periods will limit savings realized in 2017 on an absolute dollar basis, we expect to achieve run rate savings of over $10 million on an annualized basis by the end of this year and an additional $10 million the following year, based on current transaction volume and mix.
Thanks <UNK>.
Before we turn it over for questions, this is <UNK> <UNK> again.
I did just want to recognize and as was stated in the press release that <UNK> <UNK> has announced his plans to retire from the Company after being with us since 2008.
<UNK> is going to remain with the Company through the transition and I just wanted to publicly express our appreciation to <UNK> for all that he's done in the more than eight years as CFO for Stewart.
We've been through a significant transformation and <UNK> has done a yeoman's job in pulling our finance and accounting organizations together for our new operating model and we appreciate his years of service.
So, a formal search for a new CFO will start immediately, but just wanted to recognize <UNK> for his consistent contribution.
So thank you <UNK>.
Thank you.
Thank you very much.
And now, we can turn it over to the operator.
Well, thank you.
Thank you, <UNK>.
Yes <UNK>, it's <UNK>.
I think as we mentioned in prior quarters, the 10% pretax margin target was set when the default loan services business was still providing significantly accretive margins to our title operations, which more than offset all of our corporate expenses, and after exiting the default loan servicing business, we didn't back away from that 10% but we have discussed that it would require additional reductions on our cost per file and higher revenue to offset those lost profits.
So, as discussed in this quarter, and as <UNK> mentioned, over the next several years, continued plans in place and programs in place that we've already seen some benefit that says we're on the right track toward improving profitability long-term and target those specific growth opportunities.
Yes, and I think ---+ again, commercial does change quarter-to-quarter and year-over-year and we would expect relatively flat going forward.
From commercial, we look at Q4, we had several energy deals helping out.
The Houston office saw good volume on both costs.
That's not specifically relevant to New York.
So overall, we feel good about 2017.
We have a good pipeline to start the year.
We're seeing some opportunity just with some uncertainty in the commercial markets and, as you know, we are more driven by those transactions happening and there does seem to be different thoughts on where the commercial volume will go and some portfolio rebalancing which we think is beneficial for 2017 and can uphold that commercial strength.
I think it's probably just kind of a rush to get some of those deals closed by year-end.
I don't know that there was anything special about the types of orders.
They were just kind of the usual odds and ends and that just ---+ needed to get them closed by year-end.
I can't point to anything specific that probably drove that.
And <UNK>, obviously in a lower refinance ---+ when refinance lines are going down, refinance has normally a lower closing ratio.
So you'll probably see that across the industry as refinances decrease, that closing ratio should increase.
Yes, I think <UNK> ---+ I think the important thing for us is to make sure that we're staying focused on reducing that unit cost per file, which is the initiative I spoke of earlier as well as just making sure we're focused on the basic blocking and tackling in terms of trying to generate that top-line revenue growth and maintaining an increasing leverage on some of the fixed cost base.
So I think the important thing for us is going to be; number one, the production cost; number two, revenue growth; and number three, just that continuing focus on efficiency in the back office operations.
And <UNK>, this is <UNK>.
Just to reemphasize on the volume question.
Again, as we look at it refinance, down 45%-plus probably.
But the purchase being up 5%, we think is beneficial for us.
We're looking at strong job growth.
So, we do expect the industry premiums may be down 2% or 3% next year, but given where we are seeing our growth for the markets we've targeted and given our percentage of that purchase business, we still see the revenue line being able to improve those margins.
Yes.
I think when you're thinking about what's left in that segment, it's really just the valuation and search services, and roughly a third of the revenue in the segment for this fourth quarter was associated with the businesses we sold.
So, with what's left and the run rate of that revenue, we think that on .
it will generate nice positive cash flow for us, but after you factor in purchase price amortization, it's slightly breakeven on a GAAP basis.
So, when you factor in the cost of the corporate parent Company and corporate operations, that ends up with a loss in the quarter and the year.
Well, I mean, if we're at roughly operating breakeven on a GAAP basis in the search and valuation services and we're expecting kind of a $7 million-ish quarterly run rate on the parent company operations, I mean, so that would be roughly the loss.
Yes, of course, we're going to look to improve margins.
I would say, kind of the same thing we said mid-2015, is that we always keep our options open.
So, we're not going to just accept kind of a breakeven outcome for that operation on an ongoing basis and I'll just kind of leave it at that.
Well, the sold operations probably didn't perform as well as we would have liked in the back half of the year, which is part of the reason that we sold them.
But, as I said, we're going to keep our options open and make that determination sooner rather than later on what's left.
Right.
So the initiative is around lowering the cost of your core retail title order in our branch operations.
The $10 million is kind of the math that we do, when we look at some of the pilot results and say if we just assume kind of the same volume that we're seeing today and the same rough mix that we're seeing today through those retail operations, you get to a roughly $10 million run rate savings by the time that you roll these out.
So it's a phased rollout and that's why you don't see the $20 million all at once, it rolls through the states one by one.
I indicated, we'd done the pilots in the smaller markets and now we're doing a pilot in a larger market to kind of prove the results of the smaller market testing and we're very optimistic about it.
I mean, it's been very encouraging so far, and we feel good about putting out that $10 million in year one and $10 million in year two, so we feel pretty good about achieving that.
Now, there is some overlap in cost, right, because this is a transitional program.
You're going to have staff ramping up in the new system, while the staff is still doing their work in the old system.
So there is some overlap of costs there.
Yes.
So Geoff, just to reiterate, we probably won't then see any cost reductions until closer to the end of this year, in 2017, just because those duplicative cost are sitting in the market.
But again, on a run rate basis, pretty comfortable and confident in our ---+ hitting that target by the end of 2017 and an additional $10 million by the end of 2018.
I think that on the search and valuation work, it is triggered more or less simultaneously with the title order opening.
So if anything, it probably is in advance of recognition of revenue on a title order closing.
So, if you want to think about it that way, I think that's probably a reasonable way to think about how the seasonality flows through that business.
I don't know that it will be terribly chunky.
I don't recall the roll-off schedule right off the top of my head, but it's obviously tied to how we're rolling it out in market by market.
Obviously, we're going to target the bigger market states first to get the bigger bang for the buck.
I just ---+ right of the top of my head, I don't remember the exact schedule.
Yes.
We think that there probably was, just due to interest rates increasing, the election effects.
You obviously had people making some decisions that they feel like needed to be made.
So, I do think that's a true statement.
It's interesting, in commercial, we saw a little bit of both, to be honest with you.
We did see some increased activity from rate sensitive deals closing in the quarter of things that were locked.
On the other side, a lot of this is anecdotal on commercial transactions, but due to kind of expectations for tax rates in 2018, et cetera, you had several deals that all of the sudden weren't as anxious to close by the end of the year.
So again, I think, depending on what type of entity was buying and selling, you had some people that were rushing to close and some people that got more patient.
That concludes our quarter's conference call.
Thank you for joining us today and your interest in Stewart.
We look forward to seeing you next time.
Take care.
