It is no secret that 2021 posed a variety of challenges for the title insurance industry. High demand for housing coupled with low mortgage rates led to an increase in both purchase and refinance transactions, pushing many firms to expand their capacity. Stewart Information Services Corporation was no exception.
“2020 and 2021 were two of the best, as well as most challenging years in the title industry as a whole given tremendous changes in the market historically low rates and an ongoing impact and uncertainty caused by COVID,” Stewart chief executive officer Fred Eppinger said during the company’s fourth quarter earnings call on Thursday.
During Q4, Stewart recorded net income of $85.5 million, compared to $59.7 million during the fourth quarter of 2020. For all of 2021, the company saw net income of $323.2 million compared to $154.9 million a year prior.
In the title sector, pretax income increased 25% year over year. Total direct title revenue grew 24% from a year prior to $423.1 million. Non-commercial domestic title revenue was responsible for $282.3 million of the direct title revenue, which Stewart primarily attributed to increased residential purchase transactions and scale. Commercial domestic revenue came in at $93.1 million due to improved commercial transaction size and volume compared to the prior year quarter.
Contributing to this increase in revenue was a 28% year-over-year decrease in title loss expense to $13.1 million, which the company attributed to favorable claims experience which was partially offset by higher title revenues. As a percentage of title revenues, the title loss expense in the fourth quarter 2021 was 3.9 percent compared to 6.8 percent in the prior year quarter.
A hot topic of conversation during the call was the decrease of refinance volume due to rising mortgage rates, which are nearing 4%. While company executives acknowledged this concern, they stated that they feel that Stewart is in a good position to pivot into a more purchase transaction heavy market.
“I think it is back to normal, so it’ll be a little choppy probably in the first quarter, but returning to what the normal cycle is,” Stewart CFO David Hisey said during the call. “I think it’s going to be fine, but we’re going back to more seasonal outlook and that’s why I look at the whole year and I feel really good.”
Eppinger added: “The long term outlook for the residential real estate market remains encouraging as purchasing and trends are projected to continue to be strong and demographic realities such as first-time Millennial home buying add to the opportunity of an increasing favorable mixture. As Stewart is preparing for this market transition, a title company that is better able to stay in the ups and downs of our real estate cycle, the key part of building the resilient foundation is the work we continue to do to gain adequate local scale and priority markets.”
To help expand its coverage of purchase (and refinance) transactions, Stewart spent much of the fourth quarter on an acquisition spree. In November and December of 2021, Stewart acquired Michigan-based Devon Title Agency, New Mexico-based Las Cruces Abstract and Title, Washington-based Rainier Title and Chicago-based Greater Illinois Title Co.
“Consistent with our strategy here, we are focused on the areas that we’ll have the most meaningful and durable impact on our long-term operating performance gaining scale in attractive direct markets and scaling geographic focus at our agency and commercial operations,” Hisey said during the call.
However, due to these acquisitions, the firm’s operating expenses increased. Consolidated employee costs in the fourth quarter 2021 increased 20% from the fourth quarter of 2020, primarily due to increased salaries and employee benefits, thanks to a 22% higher average employee count drive by acquisitions, and higher incentive compensation on improved overall operating results, but employee costs, as a percentage of total operating revenues decreased from 25.3% in Q4 of 2020 to 23.3% in Q4 2021.
Non-employee cost related operating expenses increased 62% year over year during the fourth quarter to $80.7 million, due to increased service expenses tied to higher ancillary services revenues, higher outside title search and premium tax expenses on improved title revenues, state sales tax assessments and office consolidation costs.
As a percentage of total operating revenues, non-employee cost-based operating expenses for the fourth quarter of 2021 to 22.2% compared to 17.9% a year prior, primarily due to the increased size of our ancillary and other real estate services operations, driven by the many acquisitions the company made during Q4 2021.
Looking ahead to 2022, Eppinger said on the call that he hopes they are able to take advantage of what looks to be a “positive commercial market” and he stated that as part of Stewart’s look ahead to the future, the company is working to expand its technological offerings.
“We understand that the real estate transaction will continue to evolve becoming less paper intensive more remote and more digital,” Eppinger said. “As we have done with many of our recent transactions, we will continue to invest when appropriate and technology and services that help facilitate this change and therefore improving the customer ease of use and experience.”
In December 2021, Stewart announced its acquisition of PropStream, a real estate data and analytics aggregator, for $175 million. This comes just a little over two months after the company announced its acquisition of Informative Research, a mortgage-focused data and analytics tech company based in Houston, for $192 million.