Stewart Reports Third Quarter 2023 Results

• Total revenues of $601.7 million ($603.7 million on an adjusted basis) compared to $716.4 million ($722.8 million on an adjusted basis) in the prior year quarter
• Net income of $14.0 million ($23.9 million on an adjusted basis) compared to $29.4 million ($43.3 million on an adjusted basis) in the prior year quarter
• Diluted EPS of $0.51 ($0.86 on an adjusted basis) compared to prior year quarter diluted EPS of $1.08 ($1.58 on an adjusted basis)

HOUSTON, Oct. 25, 2023 /PRNewswire/ -- Stewart Information Services Corporation (NYSE: STC) today reported net income attributable to Stewart of $14.0 million ($0.51 per diluted share) for the third quarter 2023, compared to $29.4 million ($1.08 per diluted share) for the third quarter 2022. On an adjusted basis, Stewart's third quarter 2023 net income was $23.9 million ($0.86 per diluted share) compared to $43.3 million ($1.58 per diluted share) in the third quarter 2022. Third quarter 2023 pretax income before noncontrolling interests was $27.1 million ($40.0 million on an adjusted basis) compared to pretax income before noncontrolling interests of $45.5 million ($63.9 million on an adjusted basis) for the third quarter 2022.

Third quarter 2023 and 2022 results included $1.9 and $6.4 million, respectively, of pretax net realized and unrealized losses primarily driven by net unrealized losses on fair value changes of equity securities investments in the title segment.

"Our third quarter results reflect the continuing slowdown in real estate market activity due to the higher interest rate environment coupled with the normal seasonality of late summer. As we expect that higher interest rates will continue for several quarters before beginning to moderate, we will continue to balance thoughtful cost discipline with investment in long-term enterprise initiatives," commented Fred Eppinger, chief executive officer. "Our focus remains on these long-term strategies that will create a stronger and more resilient company, and I am pleased with the significant progress on these important enterprise initiatives this quarter."

Selected Financial Information
Summary results of operations are as follows (dollars in millions, except per share amounts, and amounts may not add as presented due to rounding):

Effective this quarter, we revised our presentation of non-GAAP measures related to adjusted net income and adjusted net income per diluted share by excluding acquired intangible asset amortization from the calculation. Acquired intangible asset amortization for the third quarter and first nine months of 2023 was $9.6 million ($0.26 per diluted share) and $27.3 million ($0.75 per diluted share), respectively, compared to $7.8 million ($0.22 per diluted share) and $24.7 million ($0.68 per diluted share) for the third quarter and first nine months of 2022, respectively. Excluding this adjustment for acquired intangible asset amortization, adjusted net income per diluted share would have been $0.60 and $1.05 for the third quarter and first nine months of 2023, respectively, compared to $1.36 and $5.98 for the third quarter and first nine months of 2022, respectively. Acquired intangible asset amortization is a non-cash expense related to acquisitions that management believes is not indicative of the ongoing performance of the acquired operations. This revised presentation also allows us to present our non-GAAP consolidated results consistent with the presentation of our non-GAAP measures related to our title and real estate solutions segments. Refer to Appendix B for the restated non-GAAP consolidated results for all quarters of 2022 and the first two quarters of 2023.

Title Segment
Summary results of the title segment are as follows (dollars in millions, except pretax margin):

Title segment operating revenues in the third quarter 2023 decreased $125.8 million, or 19 percent, compared to the third quarter 2022, due to transaction volume declines in our direct and agency title businesses. Total segment operating expenses in the third quarter 2023 decreased $96.5 million, or 16 percent, primarily driven by lower operating revenues. Agency retention expenses in the third quarter 2023 decreased $61.5 million, or 22 percent, in line with lower gross agency revenues of $74.8 million, or 22 percent, while the average independent agency remittance rate in the third quarter 2023 was comparable to the prior year quarter.

Total employee costs and other operating expenses in the third quarter 2023 decreased $33.8 million, or 12 percent, compared to the prior year quarter, while as a percentage of operating revenues, these expenses were 47.4 percent in the third quarter 2023 compared to 43.4 percent in the third quarter 2022. Title loss expense in the third quarter 2023 decreased $3.2 million, or 13 percent, compared to the prior year quarter, primarily as a result of lower title revenues. As a percentage of title revenues, title loss expense was 4.3 percent in the third quarter 2023 compared to 3.9 percent in the third quarter 2022, which benefited from last year's favorable claims experience.

Investment income in the third quarter 2023 increased $8.2 million compared to the third quarter 2022, primarily due to higher interest income resulting from earned interest from eligible escrow balances and increased interest rates and higher short-term investment balances in the third quarter 2023. Non-GAAP adjustments to pretax income primarily included $1.8 million and $6.4 million of net realized and unrealized losses and $4.8 million and $6.3 million of acquisition intangible asset amortization and other expenses in the third quarters 2023 and 2022, respectively.

Direct title revenues information is presented below (dollars in millions):

Total non-commercial domestic revenues in the third quarter 2023 decreased $36.8 million, or 18 percent, primarily driven by a 17 percent decline in residential purchase and refinancing transactions compared to the prior year quarter. Domestic commercial revenues in the third quarter 2023 declined $9.1 million, or 15 percent, primarily resulting from 18 percent lower commercial closed orders compared to the third quarter 2022. Average domestic commercial fee per file in the third quarter 2023 was $14,200, or 3 percent better compared to $13,700 in the third quarter 2022, while average residential fee per file in the third quarter 2023 was $3,000, which was 10 percent lower compared to $3,300 in the prior year quarter due to a lower purchase mix in the third quarter 2023. Total international revenues in the third quarter 2023 decreased by $5.1 million, or 12 percent, primarily due to lower transaction volumes in our Canadian operations compared to the third quarter 2022.

Real Estate Solutions Segment
Summary results of the real estate solutions segment are as follows (dollars in millions):

The segment's operating revenues in the third quarter 2023 decreased $1.5 million, or 2 percent, compared to the third quarter 2022, primarily as a result of lower valuation services revenues resulting from lower transaction volumes tied to the continuing elevated interest rate environment, partially offset by higher credit information services revenues. In line with the revenue decline, combined employee costs and other operating expenses in the third quarter 2023 decreased $1.6 million, or 3 percent. Non-GAAP adjustments to pretax income in the third quarters 2023 and 2022 were related to acquisition intangible asset amortization expenses of $6.3 million and $5.8 million, respectively.

Corporate and Other Segment
The segment's results for the third quarter 2023 and 2022 were driven by net expenses attributable to corporate operations which were $10.8 million and $9.7 million, respectively.

Expenses
Consolidated employee costs in the third quarter 2023 were $13.6 million, or 7 percent, lower primarily due to lower salaries and benefits expenses and incentive compensation driven by reduced transaction volumes and lower average employee count compared to the prior year quarter. As a percentage of total operating revenues, consolidated employee costs were 30.7 percent in the third quarter 2023 compared to 27.2 percent in the prior year quarter, primarily due to lower third quarter 2023 revenues.

Total other operating expenses in the third quarter 2023 declined $20.8 million, or 14 percent, compared to the prior year quarter, primarily as a result of lower costs tied to lower title and real estate solutions revenues, and reduced third-party outsourcing, office closures and marketing expenses. As a percentage of total operating revenues, consolidated other operating expenses for the third quarter 2023 were 22.1 percent compared to 21.1 percent in the third quarter 2022.

Other
Net cash provided by operations in the third quarter 2023 improved to $59.5 million compared to net cash provided by operations of $48.9 million in the prior year quarter, primarily driven by lower payments on claims and accounts payable, partially offset by the lower net income during the third quarter 2023. Income tax expense for the third quarter 2023 was higher than our normal tax rate of 24 percent, due to annual federal return adjustments recorded during the quarter primarily related to lower foreign tax credits.

Third Quarter Earnings Call
Stewart will hold a conference call to discuss the third quarter 2023 earnings at 8:30 a.m. Eastern Time on Thursday, October 26, 2023. To participate, dial (800) 343-4849 (USA) or (203) 518-9843 (International) - access code STCQ323. Additionally, participants can listen to the conference call through Stewart's Investor Relations website at https://investors.stewart.com/news-and-events/events/default.aspx. The conference call replay will be available from 11:00 a.m. Eastern Time on October 26, 2023 until midnight on November 2, 2023 by dialing (877) 856-8966 or (402) 220-1610 (International).

About Stewart
Stewart (NYSE:STC) is a global real estate services company, offering products and services through our direct operations, network of Stewart Trusted Providers™ and family of companies. From residential and commercial title insurance and closing and settlement services to specialized offerings for the mortgage and real estate industries, we offer the comprehensive service, deep expertise and solutions our customers need for any real estate transaction. More information can be found at https://www.stewart.com.

Cautionary statement regarding forward-looking statements. Certain statements in this earnings release are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, as amended. Such forward-looking statements relate to future, not past, events and often address our expected future business and financial performance. These statements often contain words such as "may," "expect," "anticipate," "intend," "plan," "believe," "seek," "will," "foresee" or other similar words. Forward-looking statements by their nature are subject to various risks and uncertainties that could cause our actual results to be materially different than those expressed in the forward-looking statements. These risks and uncertainties include, among other things, the volatility of economic conditions; adverse changes in the level of real estate activity; changes in mortgage interest rates, existing and new home sales, and availability of mortgage financing; our ability to respond to and implement technology changes, including the completion of the implementation of our enterprise systems; the impact of unanticipated title losses or the need to strengthen our policy loss reserves; any effect of title losses on our cash flows and financial condition; the ability to attract and retain highly productive sales associates; the impact of vetting our agency operations for quality and profitability; independent agency remittance rates; changes to the participants in the secondary mortgage market and the rate of refinancing that affects the demand for title insurance products; regulatory non-compliance, fraud or defalcations by our title insurance agencies or employees; our ability to timely and cost-effectively respond to significant industry changes and introduce new products and services; the outcome of pending litigation; the impact of changes in governmental and insurance regulations, including any future reductions in the pricing of title insurance products and services; our dependence on our operating subsidiaries as a source of cash flow; our ability to access the equity and debt financing markets when and if needed; our ability to grow our international operations; seasonality and weather; and our ability to respond to the actions of our competitors. These risks and uncertainties, as well as others, are discussed in more detail in our documents filed with the Securities and Exchange Commission, including our Annual Report on Form 10-K for the year ended December 31, 2022, and if applicable, as supplemented by any risk factors contained in our Quarterly Reports on Form 10-Q, and our Current Reports on Form 8-K filed subsequently. All forward-looking statements included in this earnings release are expressly qualified in their entirety by such cautionary statements. We expressly disclaim any obligation to update, amend or clarify any forward-looking statements contained in this earnings release to reflect events or circumstances that may arise after the date hereof, except as may be required by applicable law.

ST-IR

Appendix A
Non-GAAP Adjustments

Management uses a variety of financial and operational measurements other than its financial statements prepared in accordance with United States Generally Accepted Accounting Principles (GAAP) to analyze its performance. These include: (1) adjusted revenues, which are reported revenues adjusted for net realized and unrealized gains and losses, and other adjustments (revenues of sold real estate brokerage company), and (2) adjusted pretax income and adjusted net income, which are reported pretax income and reported net income after earnings from noncontrolling interests, respectively, adjusted for net realized and unrealized gains and losses, acquired intangible asset amortization (see succeeding paragraph), office closure costs, executive severance expenses, state sales tax assessment expense (which was related to an acquisition), and other adjustments (pretax results of sold real estate brokerage company). Adjusted diluted earnings per share (adjusted diluted EPS) is calculated using adjusted net income divided by the diluted average weighted outstanding shares. Management views these measures as important performance measures of core profitability for its operations and as key components of its internal financial reporting. Management believes investors benefit from having access to the same financial measures that management uses.

Effective this quarter, we revised our presentation of non-GAAP measures related to adjusted net income and adjusted net income per diluted share by excluding acquired intangible asset amortization from the calculation. Acquired intangible asset amortization is a non-cash expense related to acquisitions that management believes is not indicative of the ongoing performance of the acquired operations. This revised presentation also allows us to present our non-GAAP consolidated results consistent with the presentation of our non-GAAP measures related to our title and real estate solutions segments. Refer to Appendix B for the restated non-GAAP consolidated results for all quarters of 2022 and the first two quarters of 2023.

Below are reconciliations of the non-GAAP financial measures used by management to the most directly comparable GAAP measures for the quarter and nine months ended September 30, 2023 and 2022 (dollars in millions, except share and per share amounts, and amounts may not add as presented due to rounding).

Appendix B
Restated Non-GAAP Consolidated Measures

Below are the restated non-GAAP consolidated measures for prior quarters in 2023 and 2022, which have been revised from the previously reported measures to adjust for acquired intangible asset amortization‎ expense (dollars in millions, except share and per share amounts, and amounts may not add as presented due to rounding).

Refer to Appendix A for management's discussion of these non-GAAP adjustments and for the calculations for the quarters ended September 30, 2023 and 2022. In addition to the adjustments described on Appendix A, the non-GAAP consolidated measures for the fourth quarter 2022 also include an adjustment for regulatory settlement and litigation ‎expenses.

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SOURCE Stewart Information Services Corporation