Hello and thank you for joining the Stewart Information Services Second Quarter 2020 Earnings Call. All participants are currently in a listen-only mode. Later, there will be an opportunity to ask questions during the question-and-answer session, and instructions will be provided at that time. Please note that this call may be recorded. It is now my pleasure to turn today's conference over to Nat Otis, Head of Investor Relations. Please go ahead.

Good morning. Thank you for joining us for today for Stewart's second quarter 2020 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. I will remind participants that this conference call may contain forward-looking statements that involve a number of risks and uncertainties because such statements are based on an expectation of future financial operating results and are not statements of fact, actual results may differ materially from those projected. The risk and uncertainties with forward-looking statements are subject to include, but are not limited to the risks and other factors detailed in our press release published yesterday evening and in the statement regarding forward-looking information, risk factors and other sections of the company's Form 10-K and other filings with the SEC. Let me now turn the call over to Fred.

Thanks, Nat, and thank you everybody for joining us today and your interest in Stewart. Before discussing this quarter's results in greater detail, I'd like to once again take the opportunity to thank our employees. They have continued to prioritize the health and safety of our customers and peers while tirelessly conducting business under challenging conditions. I would also like to thank our customers who have remained loyal to Stewart. We are gratified to see more agents returning their underwriting business to Stewart as they value the unparalleled service that defines our brand and our company. David will go through this quarter's financials in more detail in a minute, but first I'd like to make a couple of observations on our performance. First, I am pleased with the results and more importantly, with the progress on our journey. We are continuing to see the emergence of the team's effort to create the new story, one that is focused on becoming the premier title services company. While it is clear that the residential market has been strong and has helped us, much of our improvement comes from a more focused approach to investment in our businesses and improving operating discipline. Although future conditions are very much an unknown, I believe Stewart is more prepared than ever to handle any uncertainty and, when possible, take advantage of opportunities that arise given our financial strength and appeal and improving operational performance. Second, the cornerstone of Stewart’s evolution is the belief that the company needs to invest and grow to maximize its operational potential. For too long, Stewart has been a mile wide and an inch deep. We need to invest in a few significant categories. First, attractive businesses in geographies where we can have sustained success and where additional scale can more efficiently and effectively improve profitability. Second, we will further leverage our strengths by increasing investment in areas that are already in a strong competitive position. And lastly, we will continue to look for adjacent businesses and technologies that can help us further leverage our place in the ever-evolving real estate closing experience. For example, we closed on our purchase of US Appraisals at the end of May. And with just one month of input in our quarter, this acquisition helped to markedly improve our ancillary services results. In the end, US Appraisals brought us closer to our customers, added technology that will be critical in driving future business, and added scale and improved profitability. All of this at what we would view as a reasonable price. Exactly the type of transaction we are looking for and will continue to look for. We have a strong acquisition pipeline in each of these categories and expect to be opportunistic in our capital deployment while understanding the near term and set uncertainty of the market conditions. Let me finish by noting that we are in extraordinary times with uncertainty dominating our daily lives for the foreseeable future. While the possibility exists that a full recovery may not take place until after the vaccine is found, a major part of it will, as always, I believe, be grounded in the health and stability of our real estate market. As I said last quarter, Stewart will continue to put the safety of our employees, our customers, and our communities first. And whether during or after this pandemic, Stewart will be there, ready to help lead this industry and support our real estate market. Thank you for your time and David will now go through the quarterly financials.

Thank you, Fred, and good morning. Let me also thank our associates for their amazing and inspirational service and our customers for their support during these challenging times. The quarter started with a slower sprint in real estate activities; national stay-at-home orders were in effect. However, unprecedented Federal Reserve changes to lower rates caused a significant increase in refinance activity. Real estate sales activity increased throughout the quarter. And today, we are seeing a strong purchase and refinancing activity with 30-year mortgage interest rates in the 3% area. Commercial has been negatively impacted by economic conditions, and we are mindful of the potential negative economic impact across our business due to recent increases in virus cases. Moving to Q2 results yesterday, Stewart reported total operating revenues of $507 million and net income of $34 million for the second quarter, which is another strong performance for Stewart. As detailed in Appendix A of the question press release, adjusted net income was $32 million with adjusted diluted earnings per share of $1.37, compared to adjusted net income of $22 million and adjusted diluted earnings per share of $0.91 for the second quarter 2019. Mark to market gains, partially offset by severance costs in the quarter, accounted for the difference in diluted and adjusted earnings per share. Our total revenues for the quarter improved by $196 million or 8% from last year, driven by strong performance in domestic residential and agency operations, which were partially offset by lower revenues from commercial and international title operations. Pretax income for the title segment was $55 million, a 40% improvement from last year's quarter. The pretax title margin of 11% was helped by revenue growth and cost management focus. With respect to our direct title business, direct residential revenues increased by $14 million or 9%, primarily due to a significant improvement in refinancing transactions. Residential fee per file for the second quarter was approximately $1,800, lower than last year, also due to a higher refinance mix. Domestic commercial revenues declined by $20 million as a result of fewer commercial transactions and a lower fee per file of $9,800. Total opened and closed orders improved 28% and 32% respectively compared to the prior year quarter, primarily attributed to strong refinancing and improving purchase demand. We're currently seeing order trends above the June levels as we said at this point in July. Our agency business increased revenue by $47 million, and agency remittance improved modestly to 17.5%. Regarding title losses, total title loss expense increased 15%, primarily on increased title revenues and, as a percentage of title revenues, our title loss expense was 4.3% versus 4.1% in the prior year quarter. As Fred noted, we acquired U.S. Appraisals at the end of May and the business generated $7 million of revenues in June. U.S. Appraisals added key valuation capabilities which allowed our ancillary business to perform throughout the residential cycle as valuation work was strong during origination and delinquency periods and capital markets search picked up later in the cycle as various types of loan pools are sold. Turning to operating expenses, which consist of employee and other operating costs, operating expenses declined as well. Employee costs, net of severance and other operating costs declined due to continued management focus. Employee costs as a percentage of revenue declined from 30% to 27%, and other operating expenses declined from 18% to 15%. On other matters, our financial position remains strong. Our total cash and investments on the balance sheet are over $400 million above regulatory requirements, which along with $100 million available on our newly expanded credit line remain solid foundations to support our customers, employees, and real estate markets. Stockholders’ equity attributable to Stewart was $781 million at the end of the second quarter with book value per share of approximately $33. Lastly, net cash provided by operations during the quarter improved to $61 million from $31 million in the prior year. I'll now turn the call back over to the operator to take questions.

And we can take our first question from Bose George with KBW. Please go ahead.

Good morning, Bose.

Yeah, good morning. Good quarter. Actually, I mean, first question is just on the strength in the agent channel. Can you talk about what's happening there? Have you recovered a lot of the share that you saw some move during the FNF merger period?

Yeah, good observation, Bose, that's exactly right. So obviously, the ABC channel has some of the same good trends on refi as the peers, the directors; but for us, we also have the benefit of a number of agents that left us after the announcement of the transaction and are now coming back. I feel pretty good about that. Our team has done a great job, laser focusing on people that we've had relations with in the past. And I think the agents are thrilled that we're back and we're getting that business back. So that's why we see a little bit of greater growth perhaps than some other folks.

Okay, good, thanks. And then just given your comments about order trends being better in July versus June, do you think your 3Q margins and earnings could look fairly similar to 2Q if nothing else changes in the market?

Dave, if you want to take that?

Yeah, Fred, of course. Yeah, I mean, I think it's just as we sit today, we’re seeing good demand. I think, as I mentioned in my script, we're very mindful of what's happening with the coronavirus and the spread. And so I think things are looking good on the order front now. We’ll just have to see how the rest of the quarter and the year plays out.

Okay, thanks. And let me just ask one on longer-term expectations. Do you guys intend to put out any sort of longer-term margin expectation? And are there other ways for us to think about assessing your progress towards where you’re heading in terms of more efficiencies, etcetera?

Yeah, a great question. I think you've heard me say some of this before. When I look at Stewart, for a decade, we underperformed the industry pretty materially, probably maybe between a 4% and 5% margin. My view is over these next three years, we're structurally changing things. So we're going to materially change that margin, and it's not one or two points, it’s materially going to be better than that. It's going to be approaching our competitors. Although I've said our competitors have a different business mix, so it's not going to reach all the way there, but it's going to be a material change. And it's going to be structural, it's going to be consistent. So, I feel like we're making good progress on that. We're not all the way there. And obviously, this quarter was particularly good given a bunch of things coming together. But we're doing the right things to kind of set ourselves up so that we can have a better consistent, improved margin. And that's what you're going to be able to expect from us. I think we'll have value creation. Over the next three years, we will grow a little bit more than everybody else, and we will also increase our margin. And so I think that's where the value creation will come from the company.

Okay, okay. Great. Thanks a lot, guys.

Yes.

We will take our next question from Geoffrey Dunn with Dowling & Partners. Please go ahead.

Thanks. Good morning. My first question is with the savings initiative you announced in May. How much of that was straight annualized savings for the bottom line versus funds to be reinvested in the ongoing initiatives to turn the company around?

Yes. If you look at what we did, there were three categories. One was a small portion related to temporary factors, like travel and other expenses, due to the new environment. Another involved structural changes that were independent and focused actions we took to improve the positioning of our offices for better success. Finally, some was due to changes in volume at various locations and exiting non-strategic offices. I would say a portion of that is being invested back into the business. For example, since we began this journey, we have closed or exited around 30 to 40 locations. The proceeds and resources from those actions are being redirected to areas where we can grow and invest in our people. Much of what we are doing now involves reinvestment. However, I want to emphasize that we are not going to wait three years to see improvements. We aim to make gradual progress every day. All these actions will help us become stronger and demonstrate that strength, and a significant portion of our efforts is being reinvested back into the business. I believe the returns on this reinvestment will be substantial, and we will show improvement, but reinvestment will continue. I can't provide an exact percentage.

Okay. And then, I think both commercial and residential seem to bottom in turn sooner than I was guessing two, three months ago. But obviously, there's a lot of macro challenges still out there and particularly consideration for the commercial market. So can you give some color on what's been going on in commercial? What's the pipeline and commercial look like? And what's the feel just looking out over the next whatever timeframe you have visibility into, but even just the activity in the back half of the year?

Yes. David, why don't you start and I can finish.

Yes, sure. Geoff. So, I think the commercial market would be slower for longer, I think is from over time. And commercial ties to track economic activity much more closely than necessarily rates just because of the structure of the financing there. And so, a lot of what's going to drive that is, how do places reopen? How do we go back to work? As companies rethink space needs and the like, what does that ultimately play out at? And a lot of those questions are still unanswered. And then you've also got the various differences by property class, right? So, some of the bigger cities, like New York, the activities are significantly curtailed; some of the smaller markets, maybe not as much. And then you’ve got different things happening in different sectors, like leisure and hospitality is quite slow. And so when you put all that together, it just calls for a much longer recovery. And that's what we're thinking about right now. So, Fred, I don't know if you have anything else to add there?

We're still optimistic about the long-term commercial prospects of the company. You might notice that the recovery at the lower end may progress at a different rate compared to the higher end commercial market. We believe we're well positioned in our direct offices, our approach to secondary cities, and within our commercial services group. We've aligned our resources effectively. The same applies to Canada, where we've been enhancing our capabilities. While we're being cautious, I agree with Dave that it will take some time for the situation to correct. Overall, I believe we're in a good position as this situation evolves. We've also taken careful steps to ensure our resources are well aligned for now. However, it will indeed be a prolonged recovery.

Okay, and just last question in terms of the trends. Was April the commercial bottom, and you saw strengthening like you did in July versus June as well?

Dave, you got that?

Yes, I don't know. If we're going to be down for a while, I don't think we've reached the bottom yet. I would expect a slow recovery, as we've mentioned.

We'll go next to John Campbell with Stephens Inc. Please go ahead.

Yes. So I mean really, really good results you had. It looks like margin expansion over 200 bps versus last year. Obviously, commercial’s a pretty high margin business for you guys; it's down 40%. You also had a little bit higher reserve. So, just kind of unpack the outperformance just as best you guys can. I mean, there was obviously a little bit of strength from purchase and refi. But anything kind of unique or one-time in there? And then if you guys can maybe talk to how much some of the office closures and maybe reinvesting in some of the better marketing potential offices helped?

Go ahead, David, why don't you?

Maybe I'll just speak first to the quarter, Fred. And then if you want to maybe talk a little bit about how you see the office closures. I would say the first one that if that wasn't significance of the quarter, a lot of what Fred talked about, where we were in a number of smaller areas and just trying to get refocused, and that sort of drove that. I think with respect to the quarter, the two things that really drove the performance were the strength of the domestic residential business and then the strength of agency on the revenue side. And then when you couple this with the cost management and focus initiatives, you just had a much higher amount dropping to the pretax margin line, as you talked about. And so that really drove the quarter. And that by far offset the weakness that we find in commercial and to a lesser degree in international. So, I don't know, Fred, if you had anything else to say, but I got sort of...

Yes, I think that's right, David. I mean, again, since we started this journey, we've been trying to make sure that everywhere we are, we're committed to winning there. And that we're going to have the right resources to be at the scale to manage it appropriately through the cycle. And what we saw is that we were an inch deep and a mile wide in a lot of places. And so we're not all the way there everywhere. But we picked our spots and we said, here's the places we're really going to be able to win and commit to our people and deliver. And we exited other places that were chronically underperforming, and we were never going to win, and have reallocated those resources to the better places. And yes, the market has helped us with volume and our people have delivered extraordinarily well. We have a lot of offices that are at probably their peak. And so people did that in a very effective way. So things are coming together. Again, it's a strange time with everything that's going on and the uncertainty. But again, I think our company's getting better and more focused. And it is allocating resources a little bit more precisely about where the opportunities are, and we're doing a heck of a job of reaching back out to our customers that were distracted from over the last few months and quarters. And we're now reconnecting and starting to win back that business. So, I think we're in a good place. And we have more to go, and we need to continue to get better. But I think we're making really good strides in improving the performance. And frankly, the growth prospects for the company.

And then, obviously, you guys don't provide guidance. There's way too many moving parts here. But I mean, for assuming that commercial maybe picks up a little bit in the next quarter. I think purchase is going to be stronger, refi probably, or maybe down a little bit. I know that's kind of a lower margin business. But this quarter was a record EPS by quarter for you guys. Is there any reason, assuming those assumptions are correct, why you wouldn't put up a higher EPS number next quarter?

David, I want to let you take that.

I think we've covered our responses. I think we stand fine as we are today but mindful of spikes and other things happening, election coming up in the fall. I mean, there's a lot of moving pieces, as you said. So things look fine now and we're just managing through it every day.

Okay. How do you pick a shot there? The last one for me, the US Appraisals business. That seems like a really good acquisition for you guys. Just a little bit more details there. I'm assuming that almost all of that’s transactional revenue. But any sense for next 12 months type revenue potential? And then if you could maybe talk to the margin profile; is that accretive to the underlying title margin?

Yes, we are excited about it, and Aaron Foster and his team are a fantastic addition for many reasons, not just for the business. I believe they will contribute significantly to this institution. David, would you like to discuss the impact?

Yeah, I mean, I think we're one month in. So, let's see how it plays out. I guess the way we looked at it, and I mentioned some stuff in my remarks. We did about $7 million in revenue in June. It is a transactional business; it is appraisal orders. And so their business is going to benefit by the trends that we've been seeing overall in terms of overall order count increase and what's happened in the origination market generally. And I think, again, the way we think about that is we didn't really have a first mortgage product in our services business. Now we have one. I think it'll allow us to drive revenue in that sector while the market’s going well as it is today on originations. I think if delinquencies were to pick up either later this year or next year with all the forbearance activity rolling, there's a lot of valuation work there. And so if you have any numbers, it's probably a little high because of what's going on in terms of an annual run rate. And I think the margin, as we'll see over time, it should be consistent with our overall margins.

Okay, that's very helpful. I don't know if you guys disclosed this, but how much did you pay for it?

We didn't disclose it. But if you look at the changes in the balance sheet, you might be able to figure it out.

Got it? Thanks, guys.

And it does appear we have no further questions. I'll return the floor to our presenters for closing remarks.

I just want to say thank you for everybody to joining the call.

And this will conclude today's program. Thanks for your participation. You may now disconnect. Have a great day.