Hello, and thank you for joining the Stewart Information Services Second Quarter 2021 Earnings Call. . It is now my pleasure to turn today's conference over to Nat Otis, Head of Investor Relations. Please go ahead..

Thank you, Ashley. Good morning. Thank you for joining us today for Stewart's Second Quarter 2021 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 risks 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..

Thank you and thank you for joining us today for Stewart's Second Quarter 2021 Earnings Call. And I want to thank everybody for your interest in Stewart. Dave will take you through the details of this quarter's financial results in just a minute. But before then, I want to touch on a couple of broader points.

When I began at Stewart almost 2 years ago, I discussed both the value of our people and brand as well as the financial strength of our core business. Stewart clearly was not a typical turnaround story, yet significant changes where necessary.

To compete effectively, we needed to focus on the strategy founded on targeted scale, operational improvement, talent upgrades and acquisitions in core and ancillary business lines.

We realize that our journey to become the premier title services company would not happen overnight, but we began to put in place the pieces necessary to build a resilient long-term success. As you know, the rebuild has been happening in the face of the pandemic and historic origination.

I want to once again applaud our associates who have worked through these challenges. But our team understands our mission and is aligned to moving fast to achieve our long-term goals while taking care of our loyal customers.

I bring this up today as we deliver on record earnings because the improvements in process and investments in talent, scale, services and technologies we have made, were not complete, have begun to take hold.

While we clearly benefited from extraordinary residential order activity and a nice uptick in our commercial business this quarter, the contribution of our structural changes and operational discipline to our results is exciting to see.

While we are bullish on the real estate over the long term, we are realistic in our assessment that the current market will not last forever. That said, on a daily basis, we are making decisions and taking actions that will define us through the current market and the next full real estate cycle.

That is what drives us, and that is what you're beginning to see in our results. I'm often asked the question, how do you appropriately quantify the changes that Stewart has made so far in our journey.

With all that we have been working on, it can, at times, be challenging to measure all the ways we've improved our operations by being more efficient, adding talent, unlocking existing expertise, eliminating redundancies, rescaling operations and embracing new and improved technology.

But I feel comfortable that the picture that we -- that can lie ahead if we execute on our plan is embedded in our performance in the first half of '21. .

Thank you, Fred, and good morning. Let me also thank our associates for their inspirational service and our customers for their steadfast support. We continue to see a strong residential real estate market driven by demand, favorable interest rates and an economy getting back to normal.

The commercial real estate market is also benefiting from this improving economy. Although the economy is improving, there are several watch items, including Fed and government policy in action, virus variants and anti-vac sentiment and an improving yet historically high mortgage delinquency and forbearance which need to play out.

Since these watch items can create operating volatility, we continue to focus on the areas that will have the most meaningful and durable impact on our long-term operating performance.

Gaining scale in attractive direct markets, improving scale and geographic focus in our agency and commercial operations, scaling and broadening lender services and throughout our business, improving service and digital capabilities to provide a seamless end-to-end user experience.

For the second quarter 2021, Stewart reported net income of $95 million and diluted earnings per share of $3.50 on total operating revenues of $802 million. On an adjusted basis, second quarter net income was $86 million, an improvement of $54 million compared to $32 million from last year's quarter as disclosed in Appendix A of the press release.

The main difference between reported and adjusted net income being the gain on sale of certain buildings. Compared to last year, total title revenues for the quarter increased $248 million or 50% and due to strong performances from our residential agency and commercial operations.

The title segment generated $126 million of pretax income, an increase of $71 million from last year's quarter as a result of revenue growth and continued management focus. Pretax margin for the segment also improved to 17% compared to 11% from Q2 2020.

With respect to our direct title business, residential revenues increased $76 million or 47% from increased purchase and refinancing transactions. Residential fee per file for the second quarter was approximately $2,100, a 15% improvement over last year's fee per file due to a higher purchase mix this year.

Domestic commercial revenues improved $30 million or 97% due to increased transaction volume and higher average fee per file, which was $12,600 versus $9,800 for last year's quarter. .

. We'll take our first question coming from Bose George with KBW..

Great quarter. Actually, let me just start just asking about the margins. When you look out into 3Q, any reason to think that margins will change meaningfully from what you reported? And then just any updated thoughts on where you think normalized margins could be just again, given the strength of what we're seeing so far..

Right. So as you know, when we started our margins for the overall company, we're about 50% of the lead two guys in the business. And our goal, as I said from the beginning, was to double those and double the margins over the next 3 years, which would get us to the kind of 10% -- 9%, 10% level for the overall company.

What you've seen is overall, we're ahead of that because of the strength of the market. And obviously, the market is historic. But I think we've made really good progress on our underlying goal. And so we're right on track of where I said we would be and I think those are sustainable. The market obviously has helped beyond that, right.

And we all know that at some level. So I feel good about the margins. I feel like we're a much better company where we -- then where we started. And then the other part, we said we were going to position ourselves to be able to grow as well. And you've seen that as well. So again, as the market helped us with growth, yes.

But we've grown whatever it is $700 million, $800 million on a run rate basis and believe we're positioned to continue to outgrow the market as well.

So I feel good on both sides, but I am fully aware that this extraordinary housing market has helped us look even better, right, as it will to everybody else because what you have is between over time, we are basically using all our capacity, right? Everybody is within the offices.

And so you're leveraging, you're in force and you're fixed cost to the max, right? You could sustain this for 2 or 3 more years because of the overtime and the stress in the system.

But the marginal contribution during this year is terrific, right? And we're -- I think we're doing a good job taking advantage of it, but it's not -- that part of this is not as sustainable. So....

Okay. So that makes sense. And just specifically on the third quarter, I guess you've got decent visibility into where volumes are.

Do you think that the margin is there? Any reason to think that comes down meaningfully from what you just reported?.

Yes. What we've disclosed, and I'll have David talk a little bit about orders. If you saw what we showed in both received orders and closed orders, what we saw is a nice shift to purchase, right, which offset some of the decrease. So obviously, those open orders carry into the next quarter.

We feel like there's some nice momentum going into the third quarter. But everybody can see the refi market as it's changed. Although, obviously, recently, we saw interest rates go down again. So it's a little bit of a crystal ball. But we have some nice momentum in our business right now..

Yes. I think, both in terms of the both the closed and open orders, they're running closed around where they were in June, open may be dropping a little bit. We'll see if the decline in rates gets out to pick up a little.

And so I think the trend for the early part of the quarter, certainly there could have dropped a little as we get towards the end, depending on volumes, that's sort of the watch item..

Yes. And again, I think some of our other businesses, international was terrific, but you know from the data, price increases in Canada were 20-plus percent.

So there's some things about this quarter that are extraordinary that we should just keep that in mind, right? So I think we have a good momentum, but this quarter was for a lot of reasons, kind of a perfect storm as far as results..

Okay. That's perfect. Actually, just a quick 1 just on the international.

Is that -- is there something lumpy there? Or should we sort of see some of that growth there as kind of sustainable?.

Yes. As I said. So Canada, we've done a lot of interesting things. I feel good about it. We're investing. We're one of the leaders, obviously there, and we're balancing commercial -- a little bit of investment in commercial there, and I feel good about our future and how we're building it.

The market was very strong, right, even though the ports were closed, the market was incredibly strong this quarter. And as I said, the price, if you look at the stats, the price increases were incredible, like 20-plus percent in a lot of locations. That is not a sustainable number, right? So the reality is good. We're happy with our business.

We have some nice momentum. But again, the results, in my view, at some point, those -- that's got to normalize, right? So again, I don't -- I think this quarter's results in international were extraordinary, and I'm not sure that's sustainable..

Our next question comes from John Campbell with Stephens..

So yes, I remember back in the activist days, obviously, this predicts you guys a good bit, but you guys, I think, had a goal, objective of about $5 of EPS looks like you put that up in the first half of this year. So that was fantastic. It's nice work. So I wanted to ask two questions here. So first on the reserves.

You guys had mentioned earlier this year, expecting kind of the loss provision rate to somewhat, I guess, hang around the levels you guys saw last year, I think it was 5.3% or something like that, 5.2%. You guys have run ahead of that pretty far in the first part of this year. So just curious about what you're expecting for the back half..

So do you want to go first, David, and I can....

Yes, John. I mean, I think it has been running a little lower. I think the activity levels with the sort of the moratorium and the like on foreclosures have sort of definitely impacted the first part of the year. I think you've got the FHFA moratorium expiring in July and I think we just have to see how it goes.

I mean, obviously, if the current pace continues, it's going to look more like it has looked this year. But if we start to see some increased activity on the on the foreclosure front, could spike up a little so see how a year goes..

Yes. So again, I think our philosophy, we described it in the fourth quarter and again in the fourth quarter. I just think its appropriate right now for us to be maybe conservative to overly conservative. But as David says, with the moratorium, obviously, the run rate is a lot better than we're reserving for.

But It's fine to be conservative at this level. We feel very, very confident at this level, and we'll see how it unfolds..

Okay. Makes sense. And then on the ancillary services business, it seems like you guys have something really kind of positive spinning up there. If I back out the corporate cost for that segment, I'm getting to about a 4% margin. I think last year, you guys were negative. The years prior to that, it was a pretty steep loss type business.

So David, just curious about the moving parts there, where do you think that margin can go over the kind of near term? And then longer term, if you guys get that to a certain level of scale, where you think you could take those pretax margins?.

Yes. I think, John, we're trying to get that consistent with the corporate margins that Fred described, overall corporate pretax margin. I think we have seen some improvement with some of the scale, I think, as we've talked about before, there's sort of puts and takes going on there.

So you don't have any foreclosure kind of activity, right, there's a lot of title work and other valuation work that goes with that. There's limited capital markets activity and most of its origination now.

And then even on the origination front because there's so much demand for appraisers, right, the cost of that is creeping up, although you can't always recover it. So there's a lot of puts and takes going on. I think we're making progress.

And I think, over time, we'll get closer to corporate margins, particularly in a more normalized cycle where you have activity throughout each of the services. But that's sort of what's happening right now..

Yes. And I would say, just in general, that's all. I agree with all that, and I would add, if you remember, we've talked about this a couple of times. So we had a legacy -- we had some multiple platforms.

And we said, what you're going to see is a lot of those true margins beginning of next year kind of at the tail end of the first quarter because we still have consolidation work on the platform. And obviously, you've got to be careful with that because your transition clients and stuff like that. We're right on track of what we're doing.

What we got -- We like what we have. We like the portfolio. And as we kind of get to line the operation, get the platform set up, I'm not worried about us hitting those targets as we described. So I would say we're right on track.

I didn't expect it to go faster than that, given the sensitivity we have about some of the consolidation of platforms, given the impact of clients, right? You've got to do that with your clients to get to the single platform. So we're in good shape..

Okay. Sounds great. And then last 1 for me. The Thomas title acquisition, I mean, obviously, that's kind of geared to the commercial side of things. It looks like you guys closed that, I would imagine, in June, it looks like you had a pretty big pop sequentially from May to June and commercial orders. Just curious about how much of an impact that was..

So it was late, it really wasn't any real impact. We had a real bounce back in commercial. We're feeling pretty good about it. We look forward to the end of the year. We feel like things have come back a lot. Has it come all the way back? Probably not.

But it's a nice -- it's a big change what we've seen, and we have a lot of momentum in our commercial business, which is good. And again, that acquisition was smaller to more targeted. They had some really interesting capabilities that we were interested in, both geographically, but also in some sectors.

And so it's a nice add, but we really didn't mean anything this quarter..

. We'll go next to Geoffrey Dunn with Dowling & Partners..

I wanted to keep that commercial conversation going. First quarter, it seemed maybe like Stewart didn't bounce back as much as some of your peers on commercial. This quarter exploded and it doesn't seem just back to pre-COVID that you're running stronger than pre-COVID.

So can you talk more about the broader commercial market, where you're seeing health still the secondary markets or the primary markets coming back? What's going on in New York? And then what's going on specific to Stewart in the commercial market where it seems maybe the gains this quarter were ahead of at least 1 of your peers, in the last quarter, you're kind of lagging.

I guess just a general update there, please..

Yes, that's great. So let me just talk about some trend things, and then I'm going to have David talk generally about the market. But obviously, the market is coming back, which is a good thing. We're seeing it. And so the activity feels pretty good, pretty broadly.

I think the subsectors that we can talk about that are obviously less than others, but it's a pretty broad-based come back.

As far as our numbers, what's weird, it's a smallish business still for us and it's lumpy, right? So if you remember the fourth quarter last year, we blew it away, right? So for whatever reason, I think some of our volume in the first quarter got pushed up into the fourth quarter.

And as I had mentioned, when we looked -- we did our analysis of share in commercial last year, it looked like we grew a little bit of share. During COVID, we did a really good job in my view, focusing our efforts on our 7 key markets in a couple of sectors, particularly energy, and it put a lot of resource against that.

And we feel pretty good about the momentum pretty broadly. Some belts a little better. You can imagine where were some of the better areas are. But we feel pretty good about the broad base of the comeback and the momentum we have in the business.

As I've said before, it is a place, given our history and our distraction and we're always good financially, but our capital strength right now is unprecedented historically. This is a place we should invest in growth and share shift to us.

It really is three credible players in a lot of the big business and we should be getting more than our fair share right now. And so it is an area that we're focused on investing. And again, given our capital base and what we see, we think there's a long-term opportunity.

And Thomas is a first step that's a little bit more visible, but we plan on making other additional investments. So I feel good about it. I feel good about our momentum. But it's hard to get -- it's really lumpy for us.

I mean it's just not -- we're -- the scale of this is such that a few deals move it from 1 quarter or another kind of could create a trend that's not real, right? But again, as we look at orders, I feel pretty good about the rest of the year. So David is there....

Yes. I mean, just maybe a couple of other quick things, Geoff. So I think just in general, there seems to be capital returning to commercial real estate, not only on the equity side, but that continues to be cheap and plentiful I think on a sector basis, you have sort of multifamily and industrial, strong offices sort of by market.

New York and San Francisco, at least what we see, still a little slower. And as Fred pointed out, some of the Sunbelt markets, Texas and the like, stronger. And so I think that's what we're seeing in our results, and we just have to see how things go. But it does seem like there's higher interest and higher capital being committed to the sector..

Okay. And then just a second question. It's more technical, which we've had a refi-dominated resi market for several years. And this quarter, you saw really the start of a shift back to purchase.

Can you talk about closing ratios on a purchase versus refi? I mean we can look at the numbers, but with all the volatility, it's hard to really nail down any differential.

But not only as you go to purchase, do you maybe get a fee for file benefit, but do you get a closing ratio benefit as well?.

Go ahead, Dave..

I mean generally, it's a little better, right, because you don't have people falling out shopping as much as you do on refi. So yes..

Yes. And obviously, there's a little benefit to that. And the big part, obviously, is the revenue per file is a very different profile for us. And so it does help in a number of ways.

And one of the things I think we've mentioned in a couple -- our work on forecasting, we're pretty bullish on the next couple of years, right? I mean, from a title perspective and the demographics with millennials and stuff and the purchase market, purchase is such a better thing for the title business that refi in a bunch of ways that we see, while this is a record year and it could come down, the next couple of years look pretty darn good historically, over a long period of time because of the strength of the purchase market.

It could also about the inventory issues short term in this and that. But so many of the trends are relatively positive for the next couple of years and we're seeing some of that play out in a little bit of extremes right now. But we feel relatively good about the purchase market looking out..

There appears to be no further questions. We'll turn the call back to Mr. Eppinger for any closing remarks..

I want to thank everybody for joining us on our call this quarter and appreciate your interest in Stewart. Thanks so much..

Thank you. And that does conclude today's program. Thank you for your participation. You may disconnect at any time..