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Stewart Information Services Corporation (NYSE:STC)
Q2 2021 Earnings Call
Jul 22, 2021, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

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

Nat Otis -- Director, Investor Relations & Senior Vice President-Finance

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 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.

Frederick H. Eppinger -- Chief Executive Officer

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

We realized 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 volatility [Phonetic]. [Technical Issues] 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 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, though not complete, have begun to take hold. While we clearly benefited from extraordinary residential activity in 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.

In conclusion, as always, I want to thank our associates for all their hard work and congratulate them on their results. Our journey continues and we are a quarter closer to our goals. Thank you, and David now will update everybody on our results this quarter.

David Hisey -- Chief Financial Officer

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% due to strong performances from our residential agency and commercial operations. The title segment generated $126 million of pre-tax income, an increase of $71 million from last year's quarter. As a result of revenue growth and continued management focus. Pre-tax 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. Total international revenues increased $29 million or 118%, primarily due to improved volumes in our Canadian operations. Total open orders increased 8%, while closed orders improved 27% compared to the last year, primarily due to the strong housing market. Similar to our direct title business, our agency operations generated a solid quarter with revenues of $390 million, which was $113 million or 41% higher than last year.

The average agency remittance rate was settled or at 17.5%. On title losses, total title loss expense increased $12 million or 56%, primarily as a result of increased title revenues as a percentage of title revenues, title loss expense was 4.5% compared to 4.3% last year. In regard to operating expenses, which consist of employee and other operating costs, total operating expenses increased primarily due to increased revenue and order activity. Employee cost as a percent of operating revenues improved to 24% from 27% last year while other operating expenses increased to 17% from 15% last year, primarily due to the pass-through appraisal and service costs in our increased appraisal services businesses, excluding these businesses overall other operating expense ratios would have been 12% for the second quarter 2021. On other matters, our financial position remains very solid to support our customers, employees, and the real estate market.

Our total cash and investments on the balance sheet are approximately $600 million over regulatory requirements and we have approximately $225 million available on our line of credit facility. Shareholders' equity attributable to Stewart increased to $1.13 billion with book value per share of approximately $42.

And lastly, net cash provided by operations for the second quarter increased to $103 million compared to $61 million from last year's quarter. We are grateful for and inspired by our customers and associates, advocates for everyone's improved safety and prosperity, and confident in our supportive real estate markets. I'll now turn back to the operator for questions.

Questions and Answers:

Operator

[Operator Instructions] We will take our first question coming from Bose George with KBW. Please go ahead.

Frederick H. Eppinger -- Chief Executive Officer

Good morning, Bose.

Bose George -- Keefe Bruyette & Woods -- Analyst

Hey guys, good morning, 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.

Frederick H. Eppinger -- Chief Executive Officer

All 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 three 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 this, the market and obviously the market, it's historic, but I think we've made really good progress on our underlying goal. And so, we are 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 – than 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 the growth, but we've grown, whatever it is $700 million to $800 million on a run-rate basis and, but we're positioned to continue to outgrow the market as well. So, I feel good on both sides, but I'm 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 couldn't sustain this for two or three more years because of the, over time and the stress in the system. But the marginal contribution during this year is terrific, right and we are, I think we are doing a good job, taking advantage of it, but it's not -- it's not -- that part of this is not as sustainable, no.

Bose George -- Keefe Bruyette & Woods -- Analyst

Okay. And 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?

Frederick H. Eppinger -- Chief Executive Officer

Yeah, 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.

David Hisey -- Chief Financial Officer

Yeah, I think firstly in terms of the, both the closed and open orders are running closed around where they were in June, open maybe 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 it drop a little as we get towards the end depending on volumes, that's sort of the watch item.

Frederick H. Eppinger -- Chief Executive Officer

Yeah. And again, I think on 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 good momentum, but this quarter was for a lot of reasons, kind of a perfect storm, as far as, results.

Bose George -- Keefe Bruyette & Woods -- Analyst

Okay, that's perfect. Thanks. Actually, just a quick one, 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?

Frederick H. Eppinger -- Chief Executive Officer

Yeah, so 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 on a lot of locations. That is not a sustainable number, right. So the reality, it's good. We are 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.

Bose George -- Keefe Bruyette & Woods -- Analyst

So okay. Great, thanks a lot.

Operator

All right. Our next question comes from John Campbell with Stephens, please go ahead, your line is open.

Frederick H. Eppinger -- Chief Executive Officer

Good morning, John.

John R. Campbell -- Stephens Inc. -- Analyst

Hey, guys, good morning. Hey, so, yeah, I remember back in the activist days, obviously, this predates you guys a good bit, but you guys I think had that goal or objective of about $5 of EPS. Looks like you put that up in the first half of this year. So that was fantastic, some 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 that 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?

Frederick H. Eppinger -- Chief Executive Officer

You want to go first, David and I can speak.

David Hisey -- Chief Financial Officer

Yeah, John, I mean, I think it's, 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, if we started to see some increased activity on the foreclosure front could spike up a little as the year goes.

Frederick H. Eppinger -- Chief Executive Officer

Yes. So again I think our philosophy, we described in the fourth quarter and again in the fourth quarter. I just think it's 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 are 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.

John R. Campbell -- Stephens Inc. -- Analyst

Okay, make 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 costs for that segment, I'm getting 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 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 can take those pre-tax margins?

David Hisey -- Chief Financial Officer

Yeah, I think, John, we're trying to get that consistent with the corporate margins that Fred described, overall corporate pre-tax margin. I think, we have seen some improvement with some of the scales, I think as we've talked about before, there are sort of puts and takes going on there. So, you don't have any foreclosure kind of activity, right. There is a lot of title work and other valuation work that goes with that, there's limited capital markets activity and most of it’s origination now. And then even on the origination front, because there's so much demand for appraisers, right, that the cost of that, it's creeping up a little, we can always recover it. So there is 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.

Frederick H. Eppinger -- Chief Executive Officer

Yeah. And I would say just a 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 that’s going to come through, but 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 got to be careful with that because you transition clients and stuff like that. We're right on track with what we’re doing. What we got, we like what we have, we like the portfolio and as we kind of disclaim [Phonetic] the operations, 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 consolidations of platforms, given the impact on clients, right. You got to do that with your clients to get to the single platform. So we're in a good shape.

John R. Campbell -- Stephens Inc. -- Analyst

Okay, sounds great. And then last one from 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 and...

Frederick H. Eppinger -- Chief Executive Officer

[Indecipherable], So it was late, there 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 might -- 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. It had some really interesting capabilities that we were interested in both geographically, but also in subsectors. And so it's a nice add, but we really didn't mean anything this quarter.

John R. Campbell -- Stephens Inc. -- Analyst

Okay, that's helpful. Thank you, guys.

Frederick H. Eppinger -- Chief Executive Officer

Sure.

Operator

[Operator Instructions] We will go next to Geoffrey Dunn with Dowling and Partners, please go ahead.

Geoffrey M. Dunn -- Dowling & Partners -- Analyst

Hi, good morning.

Frederick H. Eppinger -- Chief Executive Officer

Good morning.

Geoffrey M. Dunn -- Dowling & Partners -- Analyst

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, it exploded. It doesn't seem, just back to pre-COVID, but you're running stronger than pre-COVID. So can you talk more about the broader commercial market where you're seeing health, is it still the secondary markets, are the primary market coming back, what's going on with New York? And then what's going on specifically with Stewart in the commercial market where it seems maybe the gains this quarter were ahead of at least one of your peers and last quarter you were kind of lagging.

Frederick H. Eppinger -- Chief Executive Officer

Yeah.

Geoffrey M. Dunn -- Dowling & Partners -- Analyst

I guess just a general update there, please.

Frederick H. Eppinger -- Chief Executive Officer

Yeah, that's great. So, let me just talk about some trend things, and then I might 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 actively feels pretty good, pretty broadly and 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 back -- pushed up into the fourth quarter. And as I had mentioned when we looked, we did our analysis of share in commercial last year, looks like we grew a little bit of share.

During COVID, we did a really good job in my view, focusing our efforts on our seven key markets in a couple of sectors, particularly energy and it put a lot of resources against that and we feel pretty good about the momentum pretty broadly. The Sunbelt is a little better, you can imagine where some of the better areas are. But we feel pretty good about the broad-based of the come back and the momentum we have in the business. As I've said before [Indecipherable], 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 has three credible players in a lot of the dip 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, 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, where – a scale of this is such that a few deals little bit from one quarter to 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.

David Hisey -- Chief Financial Officer

Yeah, I mean, just maybe a couple of other quick things, Geoff. So I think just in general, there it 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 offices sort of by market, New York, and San Francisco at least what we see. So a little slower and as Fred had pointed out, some of the Sunbelt markets, Texas and 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.

Geoffrey M. Dunn -- Dowling & Partners -- Analyst

Okay, thanks. And then just a second question it's more of technical, which we've had a refi dominated resi market for several years. And this quarter you saw really 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-per-file benefit, but do you get a closing ratio benefit as well?

Frederick H. Eppinger -- Chief Executive Officer

Okay, go ahead, David.

David Hisey -- Chief Financial Officer

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

Frederick H. Eppinger -- Chief Executive Officer

Yeah, and it -- obviously, there is 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 a couple of -- 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 stuff and the purchase market, purchase in such a better thing for the title business than refi in a bunch of ways that we see, while it -- this is a record year and it can 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. And we could talk about the inventory issues short term [Indecipherable] 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 extremes right now. But we feel relatively good about the purchase market looking out.

Geoffrey M. Dunn -- Dowling & Partners -- Analyst

Okay, thank you.

Operator

And there appears to be no further questions, I will turn the call back to [Technical Issues] for any closing remarks.

Nat Otis -- Director, Investor Relations & Senior Vice President-Finance

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

Operator

[Operator Closing Remarks]

Duration: 27 minutes

Call participants:

Nat Otis -- Director, Investor Relations & Senior Vice President-Finance

Frederick H. Eppinger -- Chief Executive Officer

David Hisey -- Chief Financial Officer

Bose George -- Keefe Bruyette & Woods -- Analyst

John R. Campbell -- Stephens Inc. -- Analyst

Geoffrey M. Dunn -- Dowling & Partners -- Analyst

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