Stewart Information Services had been laying low about its next steps after the changes to its executive team, but the company’s newest chief executive officer took the stage at the FBR Capital Markets’ Fall Investor Conference at the Grand Hyatt New York to discuss the current position and growth prospects for the company.
Matt Morris, chief executive officer of Stewart, started by noting Stewart’s “strong premium to surplus ratio,” and that the balance sheet isn’t as strong as it once was, but that it has withstood the test. He emphasized the company’s focus on scalable and marketable markets including commercial and international operations. He said cashflows are improving and the company benefited a great deal from the cost-cutting measures it undertook since the housing bubble burst.
“We have moved to a more variable-cost structure,” Morris said to the room full of investors from the financial, insurance and real estate sectors. Stewart had built more of a fixed-cost structure that it had to work to reverse when the economy changed. “We were ramping up expenses to take care of business at a rate faster than profit margins were increasing. We added too many fixed costs and had to take them off. Now it’s comparable to the rest of the industry.”
Morris said the company made big changes in its structure, specifically its layers of management. He said it removed some of those layers and centralized its back office functions, shutting down 300-plus locations during the last few years.
“Now our ability to capitalize if there’s a recovery — our ability to open a new branch without the legal structure and back office costs — we can capitalize quicker,” he said.
Another key number for Stewart during the last few years has been its claims expense. Morris said he believes the company has seen the roughest patch in terms of claims from the high-volume years and that the number is “controllable in the long term.”
“We have taken efforts to reduce our risk profile,” he said.
He said the company had significant declines in remittance rates from its independent agents and that it has taken deliberate steps to alter contracts with those independent agents, with the target of a 20 percent average remittance rate on the horizon.
He also made mention of “levers” the company has to pull during a flat housing market to continue to drive profits.
“For example, commercial revenue is a lever for us. We’re gaining market share and gaining in it in a rebounding market … and we’ll see this regardless of a flat housing market” he said. The commercial market in 2011 is estimated to come in at $220 billion and next year’s forecast is for $240 billion across the country.
Real Estate Information
The biggest area of opportunity Morris highlighted for Stewart was its Real Estate Information segment. This segment has evolved into more of a mortgage servicing unit and has the position to capitalize on the influx of distressed asset business that will be a fixture in the market for the foreseeable future. The company’s acquisition of PMH Financial this year is a part of this strategy.
“We made a deliberate effort in 2008 to have a seat with the largest lenders, and depending on what Fannie and Freddie do … or any changes with government programs, we have the ability to offer a new service,” Morris said. This segment can assist in asset management, foreclosure review, loan modifications, etc. “We will grow this and see increasing revenues there.”
On the traditional title insurance side, Morris explained how the company restructured in 2009 and canceled about 4,000 agents, leaving 3,500 in the mix. This actually increased revenues.
“We had a huge cost structure supporting a nonprofitable agency base, and we took efforts to alter that, which helped our risk, adjusted claims and [helped us] better manage our direct and independent channels,” Morris said.
Right now, Stewart is trading at less than 45 percent of book value, and the industry is at 70 percent.
“We have a solid position [in the title insurance business], and that provides stable cash flow,” Morris said during the question and answer portion of the presentation. “In the mortgage servicing space, we see higher profit margins and that’s where our key focuses are right now for opportunities.”