Hello and thank you for joining the Stewart Information Services Q1 2020 Earnings Call. At this time, all participants are in a listen-only mode. Later, you'll have an opportunity to ask a question during the question-and-answer session. Please note this call may be recorded. I will be standing by, should you need any assistance.It is now my pleasure to turn today's conference over to Nat Otis, Head of Investor Relations. Please go ahead.

Thank you, Brie. Good morning. Thank you for joining us for today's Stewart's -- for Stewart's first 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 the call today. We are very pleased with the progress we made in the first quarter. But given the unique situation we find ourselves, I'll let David go through the quarter details in a little bit. And I would like to take a step back and reflect on our company as we address these challenging times.First, I would like to acknowledge all those frontline people, who are working tirelessly to keep us safe and healthy in communities across the country. Thank you. Our thoughts are also with those who may have lost a family member, a friend or a coworker or who are grappling with the challenges of COVID-19. Here at Stewart, I want to thank our employees for the tremendous effort they have undertaken over the last month in extremely uncertain times.Our team has worked tirelessly to keep our customers and coworkers safe while creating -- creatively finding ways to close transactions using a range of tools at their disposal in very uncertain and challenging conditions. In the second week of March, we transitioned to an operating approach that had roughly 70% of our employees working from home and with new social distancing and operating model approaches in place to make our customers and our employees be safer 5,500 people working differently, while leading record demand.In my view at the highest point of uncertainty, we came together and got the job done. Obviously, all of this requires a new operating approach where the team communicates daily to address the changes as things unfold. I am extremely proud of our team's teamwork and nimbleness, as we address changing business conditions.In the end, we do not know how the situation will ultimately unfold, but our priority remains the health and safety of our…

Thank you, Fred and good morning. Let me also thank healthcare, other frontline professionals and our associates for their tireless and inspirational service during these challenging times. The quarter started strong due to low rates and high real estate demand.As the quarter progressed rates dropped due to unprecedented government stimulus actions causing an increase in refinance activity, while purchase activity began to decline as national stay-at-home orders were implemented. These conditions continue at this stage of the second quarter with normally strong spring real estate activity reduced as we await the reopening of our country.Moving to the Q1 results. Yesterday, Stewart reported total operating revenues of $446 million and net income of $5 million for the first quarter 2020, which was the strongest first quarter in Stewart history. As laid out in Appendix A of the press release, adjusted net income was $13 million with adjusted diluted earnings per share of $0.56 compared to an adjusted net loss of $7 million and adjusted diluted loss per share of $0.28 in last year's quarter.The $11 million and mark-to-market losses on equity securities is the -- in the first quarter of 2020 accounted for the difference in diluted and adjusted diluted earnings per share. Our total title revenues for the quarter improved to $440 million or 17% from last year on solid performance in all areas of our title business. The title segment generated pretax income of $15 million or 3% -- 3.4% pre-tax margin. Excluding the mark-to-market adjustments the segment's first quarter pre-tax income would have been $26 million or a 5.8% pre-tax margin.With respect to our direct title business direct residential revenues improved $25 million or 24% on increased orders. Residential fee per file was approximately $2,000 or approximately 11% lower than last year primarily due to a higher refinance-to-purchase…

[Operator Instructions] And we will go first to Bose George with KBW. Please go ahead.

Yes. Good morning.

Good morning.

Yes, good morning.

Thanks. So I just wanted to first ask about your ability to control costs as we enter what is likely to be a pretty challenging environment just in all the channels. Can you just talk about, how much of your expenses are sort of more variable both on the residential side and then on the commercial as well?

Yes. Thanks. The objective we've had -- I've been here seven months and obviously, we've been very focused on improving our margins and we'll continue to be focused on that to position this company for profitable growth for a long time. So we've done a lot of targeted actions in the fourth quarter. In the first quarter, we took additional targeted actions. And I fully expect as we look forward, given the situation that we'll continue to take targeted actions to improve our position. This is extraordinary times, right?And so my job isn't to manage expenses, my job is to create shareholder value. So our goal will be to do what we need to do to manage our place through this, while keeping our team together focused and excited about improving and growing. And that's what we'll do. So I don't -- we will do things. We will manage ourselves appropriately through this and position ourselves to be quite strong as we come out of it. So I think we're a more nimble company and a company ready to adjust and that will be our focus so...

Okay. That's helpful. Thanks. And then actually just switching over to the commercial market. The -- it was strongest quarter, but can you just talk about the pipeline? How -- what you're seeing there? And also just the -- given your concentration in Texas, can you just talk about -- is commercial for you guys a little more concentrated there? Or is that pretty dispersed nationally?

It is relatively dispersed. We have a strong presence in both coasts as well. So the -- as you can imagine, commercial is going to be a little bit challenged given the economy and kind of the freezing up of a lot of those industries, whether it's a town of hospitality or energy. So I -- we believe that commercial will be a challenged segment for a while for everybody. I mean, I think it's just the way the market is. David, is there something you want to add on that? I want to make sure.

No, Fred. I think you covered it pretty well. I mean obviously the commercial markets vary by asset class with retail and energy and hospitality consistent with the declines in those primary businesses I think being a little more challenged. But I think in general, you covered it expect it to be maybe a little bit longer turnaround in that business just due to the nature of it.

Okay. Thanks. Actually, maybe just one little one also on the gap insurance product you mentioned. Can you just explain how that works? And is that going to be a material number? Or is that just a pretty modest piece?

It's modest. But David, is there anything else you want to add on that one?

No. And I think just to expand on what you said in your comments, Fred, in the gap insurance, I think it's the way the market has moved generally just because of what's happening with county recorders offices and the like. And so I think our practices are pretty consistent with the way other underwriters are doing it and also working in conjunction with lenders and the GSEs on what they require from a title policy.

Okay. Great. Thanks.

Thank you, appreciate it.

And we will go next to Mackenzie Aron with Zelman & Associates. Please go ahead.

Good morning.

Thanks. Good morning. First question on the investment income can you help us think about the sensitivity to the lower rate environment that we're now in?

Sure. So David, why don't you take that?

Yeah. Mackenzie, thanks for the question there. I think we're a little bit different maybe than some of our other competitors. We have been a little more liquid. And so that piece of the portfolio will move pretty significantly with the – in what we've seen with short-term rates coming down pretty significantly in the last month plus. But the vast majority – but other than that liquid piece of the portfolio the rest of our portfolio is in – I think our average durations four plus on the bond portfolio side. And we don't have a lot of near-term maturity. So I wouldn't expect the base coupon rate to change that much. The variability will be on the shorter-term portion.

Okay. That's helpful. Thank you. And then is there any color that you can give us on just what you've seen so far in April on the order flows?

Yeah. David, why don't you take that?

Yeah. I think, if you – Mackenzie if you were to look at what we saw in March there where – started to have a little pickup in the refinance percentage, I think that sort of carried forward on a percentage basis. But in general, open orders have been trending down with less market activity. You will have to see approximately where that ends up. But if you think about new home listings and some of the information that's been coming out on that, you could see a 20-plus percent depending on how the month ends up decline and opens.Close could still end up pretty consistent with March because it was a good carryover pipeline. But a lot of it's really going to depend on what happens with the mix of refinances, because rates are still pretty low, all the credits tightening as Fred mentioned and then sort of where we end up with real – primary real estate activity picking back up.

Okay. Great. And then on the loss provision rate, is it realistic to think that that can trend higher? And maybe what should we be thinking about in terms of the potential for higher losses in this type of an environment as well?

Yeah. It's a great question. And David, why don't you run it – go take it and I can follow-up?

Yeah. I would just start maybe with some general context on that Mackenzie. I think – and Fred alluded to this a little bit in his script. If you think about where the real estate market is today maybe versus 2007, 2008, it's in a much better place. You have sort of – lending standards have been much better going into this environment first of all. And second of all, you have a much better supply-demand balance where there's actually still excess demand for real estate. And so that will have the effect of price support.The big thing that caused losses back during the Great Recession was the fact that you had significant peak-to-trough declines in home prices. So I think we go in, in a much better place. What the losses will ultimately be anybody can guess on that. I would just also note another thing is that, we also have much better government programs to deal with this situation. And so even though, we're on sort of a national forbearance right now there's just some lease an FHFA announcement of the GSEs buying loans out early from the pools right? That will all have the effect of sort of stabilizing that part of the market.And then how the losses ultimately come-in will depend on, is there an increase in fraud first of all. Second of all, at what pace do foreclosures occur? And then the foreclosure element is going to be highly dependent on what happens with the employment picture and how quickly most people get back to work. And so it's hard to predict exactly what the numbers are going to be, but I think that maybe some context to think about the dimension of losses, potential losses this time back versus during the crisis.

Yes. I would agree with David. And we're in a much better place going in. And I think our risk profile is a lot better going in. So I agree with what all of David said.

Okay. That's helpful. Thank you and best wishes and hope you all stay healthy.

Yes. Thank you so much.

And we will go next to John Campbell with Stephens Inc. Please go ahead.

Good morning.

Good morning, John.

Hey, guys. Good morning. Congrats on a fantastic quarter. Very, very good results.

Thank you.

On the -- I'll just touch back on the color -- the order color a little bit for April. I'm mainly curious about commercial. I was thinking that maybe that would be somewhat of a standstill kind of late March. So you guys -- I think there -- your open orders for commercial were down 8% in March. So just curious about how that kind of phased throughout the month? And then any kind of color around just commercial orders thus far into April?

Yeah. David why don't you take that?

Yeah. John, thanks for the question. Yes, the commentary I was giving was sort of more general with a direction more to the residential stuff. I think with respect to commercial I think it is fair to assume that that activity has dropped off a bit more. We still are seeing orders, but for some of the reasons I mentioned in terms of certain other -- certain other segments of commercial being more stressed than others.And then also thinking about the parts of the country that have been hit the hardest right with New York being in the lead there, where there is a lot of commercial activity, yes, the orders have definitely been off a little bit more in commercial than they have in residential.

Okay. That's helpful. And then back on the foreclosures. Obviously, the forbearance issues who knows where we go from here, but it does seem like -- that wherever we're sitting now it's going to be maybe a little bit higher coming out of this. But you kind of talked to the title reserves and why that might not be so adversely impacted relative to the last go around.But could you talk about maybe the ancillary services segment? I know at one point you guys had I think one large contract with a large lender in that business. At one point during the default period was materially higher than where it is today. So I'm just curious in assuming a step-up in foreclosures how the ancillary services business is impacted? And then maybe also on the title side, if you could talk to the default orders? And how that could pick up as well?

David, go ahead. I'll follow on.

Yes. Sure. No, it's a great question. And I think just -- so our ancillary services business has two principal elements. Well, actually it has three. It also does some of the default stuff that you mentioned, but that's been sort of negligible of late. But it's mainly capital markets kind of transactions default and then valuation services, and all of those actually benefit from that type of a market.If you think about the capital markets piece that tends to be sort of bulk transaction. So whether those are delinquent loans that are being packaged and resold other kinds of loan packages with the non-QM market effectively being shut down, right, you could see a scenario where you're going to have sort of delinquent loan pools and the like being sold there.So that business would definitely benefit. We do still have as you noted the foreclosure search capability. And that -- should that return we've kept the capability and can also shift resources from some of our centralized search over to that area.And then valuations are also needed when loans go into foreclosure. So that business does tend to be somewhat countercyclical to origination, and could definitely be a help if we were to go into that environment.

Okay. That's helpful. And then one other thing kind of related to that broader segment. On the corporate side, what is the run rate now? Is it $5 million maybe $6 million a quarter? Is that right?

That's correct.

Okay. Excellent. Thank you guys.

Thank you.

[Operator Instructions] We'll go next to Geoffrey Dunn with Dowling & Partners. Please go ahead.

Thanks.

Good morning, Geoff.

Good morning.

Fred, I wanted to start off by following up on your comment that your focus isn't necessarily on expense management but creating shareholder value. Periods of disruption can also be periods of opportunity. So with the company in solid financial position, how are you thinking about this disruption as an opportunity to maybe look for additional talent? Additional product offerings or platforms? Or weakened agency acquisitions? Are those considerations over the next couple of months? Or is it too uncertain to try to pursue that type of thing?

Yeah. So I think it's a great question. As you just said, I mean what's interesting when you go through things like this is that if you stay focused and you are strong and well a good brand you can take advantage of some situations to build your capabilities. And we obviously have been focused on that in the last few months and we will be focused on it in the future as well.I do think right now is a little early in this current kind of four-week window here of really getting a picture of what exactly is happening. But my goal every day is to make us better. And whether that's managing our resources more appropriately and aligning them better or it's finding ways for us to improve our position. And we're going to continue to do that.And one of the reasons you try to be careful and manage your resources appropriately to your point is to give yourself the flexibility to act when there is an opportunity. And again our focus, as I said earlier, right now is not really the safety of our employees and closing the business.But as we look forward and this becomes clear and there's a little bit more stability, I fully expect that we'll continue to focus on doing what we're all about which is creating the premier company in the industry.And again I do think what we showed in the first quarter -- which again, it's just one quarter and -- is that we've come together pretty well and we're working well together and we're pretty nimble and we're very focused and we will create some additional opportunities.I would also say there's more for us to do right? We all know where we are comparatively. And this couple of quarters is going to be a little bit challenging to understand that completely. But we have more work to do as well. And so we're continuing to be focused on being better.But ultimately the goal is to properly grow the company, and I think we can do that and that's what we're going to be focused on. So it's a good observation, because it's -- again we're still in business. We're still focused on trying to build the best Stewart and we got our eyes wide open on doing that.

Okay. And then before the disruption started impacting the business in, I guess, second week of March for you, can you talk about some of the more material actions you took during the first quarter? I mean it's by far the best margin Stewart's put up in a long time for Q1. Obviously you did benefit from an inflated resi refi market. But what are some of the more material actions you can point to that have maybe kind of improved your Q1 prospects going forward? And margins in general?

Yeah. So, if you remember it's a combination kind of some of the fourth quarter and first quarter actions. I mean one of the biggest issues I mentioned right at the get-go is that one of our challenges that -- as a company is we weren't very strategic on where we invested our resources. So we were an inch deep and a mile wide. And so when you had fluctuations in volume or whatever, we were susceptible more than others because it's harder to adjust when you don't have scale in places.And so what you saw us begin to do is consolidate locations shift capital from one business to another and double down in some markets as far as investment, and again -- and be a little bit more disciplined if you will about some investments that we made and make sure we're investing those kind of not just in the short-term but in the future. We've got some -- a lot of technology initiatives that I think are starting to play out.So, this is about a lot of reallocation of resources. And again, we mentioned I think at the last quarter, we ended up there with about 25 places or locations we closed and wrote off the leases to get ourselves focused. So this is about investing in strength and building scale in a number of businesses. And we've made some progress and it shows up, right? I mean it kind of -- when we get a little bit of momentum with growth, the better utilization of those resources to show up.So we're not all the way there. We're going to continue to get better as a company. And as we grow, it's going to show. But we're on a good path. And again, this last -- these next two quarters will be a little challenging to -- as I said I think when I first started these journeys to kind of be where we want to be isn't always a straight line. And I think the next two quarters may show that it isn't a straight line in some ways. But I think a lot of the things to your observation that we did positions us to have the flexibility to continue to improve. And we'll continue to take the right actions to get us -- to make us better. So I feel like we're in a good position to be strong coming out of this. So we're going to keep focused.

And then last question is on commercial, highest margin product typically. No slide on the resi side, but I'm assuming the talent there tends to be more specialized and valuable. So, can you talk about the ability to manage expenses on the commercial business? I assume there's more of a variable component on commissions, but maybe not as much flexibility on headcount. How do you think about managing the expense base of that business specifically?

Yes. And again, you -- I -- we have a wonderful set of talented people in our commercial business. And the most important thing for us is making sure we keep that core of talented people focused and together. That organization too obviously given what we're going through we need to make sure that we're targeting our investment in those resources that matter. And so, it's more of a -- if it's targeted everywhere, it's kind of you want to be laser-like in commercial and make sure you're supporting your talent in a certain way.But for us that's a business we want to double over time. But we need to make sure we're managing it carefully because it is going to be under duress for a while I think as far as the amount of leases. But again, I think it's a good observation. That is a place that we have to be very thoughtful. I put a lot of faith and my leadership there and we will make sure we're focused on the future as we kind of take actions that are appropriate to make sure that our resources are at the right level.

Okay. Thank you.

And there appear to be no further questions at this time. I'll turn it back to speakers for any closing remarks.

Thank you, Brie. And that concludes this quarter's conference call. I want to appreciate everyone for joining us today and your interest in Stewart. Goodbye.

This does conclude today's program. We appreciate your participation and you may now disconnect.