Steve Stelmach - FBR Ryan Byrnes - Janney Capital

Welcome to Stewart Information Services Third Quarter 2014 Earnings Conference Call and Webcast. (Operator Instructions). I would now like to turn the call over to Nat Otis, Director of Investor Relations.

Good morning. Thank you for joining us for our third quarter 2014 earnings conference call. We will be discussing third quarter 2014 results that were released earlier this morning. Joining me today are CEO, Matt Morris and CFO, Allen Berryman. Matt will begin with some brief remarks followed by a review of the quarter by Allen. We will then open up the call for questions. 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 expectation of future financial operating results and are not statements of fact actual results may differ materially from those projected. The risks and uncertainties in the forward-looking statements are subject to include but are not limited to risk and other factors detailed on pages 5 and 6 of our press release published this morning and in the statement regarding forward-looking statements 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 Matt.

Thanks Nat. I want to thank everyone for joining us today. We obviously appreciate your interest and welcome the opportunity to provide a bit more color on the quarter. Those of you that have been following our story know that we have been aggressively transforming our environment over the last three years. We believe the remaining initiatives around our cost management program, share repurchase and acquisitions integration are the main key drivers towards enhancing shareholder value. In terms of title revenue for the quarter the housing market continued the over trend seen in second quarter 2014 during the third quarter with a reasonably consistent flow of refinancing transactions and resale transactions showed a steady modest improvement. Our direct operations will positively influence by having a full quarter's result of operations from the acquisitions completed in the second quarter as well as progress in several of the new branch offices. As a result direct title revenues increased 13.3% compared to the third quarter of 2013 and increased 11.3% sequentially from the second quarter of 2014 without any acquisition related revenue that increased would have remained positive but in the range shy of 5%. Independent agency revenue experienced another quarter of decline falling 24% compared to the third quarter of 2013 but increasing sequentially 10% in the second quarter, while slightly higher than the general market decline. The decline stems from a combination of factors including geography, agency revenues that is now recorded direct revenue to reach an acquisition. The impact of overall [ph] refinancing transactions and the continued agency rationalization. As previously discussed we have been focused on the rationalizing our agencies and increasing our remittance rate to assure the highest quality net-worth which we believe we will continue to yield benefits in an increasingly regulated and scrutinized market as well…

Thank you Matt. Good morning to everyone. As a reminder since the management team who oversees the mortgage services operations also overseas our centralized title operations catering to large mortgage lenders, the acquired revenues pertaining to centralized title or reported in the mortgage services segment while the acquired revenues pertaining to local office operations are reported in the title segment. This reporting is in accordance with generally accepted accounting principles and segment reporting rules. As you would expect the acquired revenues pertaining solely to non-title operations i.e. the (indiscernible) and DataQuick collaterals valuation services were reported in the mortgage services segment. The remainder of my comments so as otherwise indicated will discuss results reported on the consolidated statements of operations that is the level of which the component of revenues are disclosed. Looking first, there are title operations, total title revenues declined 9.5% from the third quarter 2013 and increased sequentially 10.7% from the second quarter of 2014. For the title segment revenues increased sequentially 8.5%. With respect to our direct operations, our direct revenues increased 13.3% from the third quarter of 2013, and increased 11.3% sequentially from the second quarter of 2014. Our direct revenues include the required title operation revenues of DataQuick and LandSafe for the entire quarter. Excluding these revenues the increase in direct revenues from the prior year quarter would have been approximately 3.8%. Also as a reminder our direct revenues include domestic and international residential and commercial business. The majority of our commercial revenues are generated in United States and Canada. Commercial revenues from those sources increased a very strong 31.2% from the third quarter of 2013 and increased 20.5% sequentially from second quarter 2014. While quarter-over-quarter results for commercial business can fluctuate considerably due to the timing of win large transactions closed. Our commercial…

(Operator Instructions). Thank you. Our first question is coming from Steve Stelmach of FBR.

Matt, first just maybe a near term type question, you talked about a little bit of upside potential going into the fourth quarter going where you’re seeing the business will ramp clearly with the rates where they are -- we might get a little bit of refi bounce here. You think you’re sort of adequately right sized that opportunity or do you need to ramp up expense a little bit just sort of capture that or how do you feel?

No I don’t think we need to ramp up expenses at this point. Like I said we usually see seems to be a declining year normal residential and refi business going into the fourth quarter. So I think again we’re constantly looking at employee expenses relative to revenue coming in and normally at this time maybe looking to reduce those expenses, so you know order accounts you know keep up -- we should have some good opportunities there as well.

Okay. And then maybe on the long term on the commercial side. It's been a little over while since you guys have gotten that rating back to where you wanted it, when I think about that opportunity, is it now matter of just the commercial market growing for you guys or is it still an issue where you guys have the opportunity to sort of increase your penetration inside that market? In other words are you kind of getting your allocation as we speak or do you think there is a more opportunity to get a bigger piece of the pie.

I think what I would say we have been encouraged by -- seen some progress in that segment, this year and so we’re seeing traction from the ratings upgrades, seeing traction from our strengthening surplus, seeing traction from our change in management that we have done. Hopefully that continues to progress. We’re not -- I would say all the way there so we plan to continue to attract share in that segment but timing, it's hard to assess commercial on a quarter-by-quarter basis but we were encouraged by our quarter this year and encouraged by the plans we have made and how we see them progressing in the future.

Okay and then just last one, on title losses obviously recovery aside, how should we expect that trend in 4Q and in the '15 on a more normalized basis?

I think setting aside the recovery that you’re seeing a normalized title loss ratio in third quarter. We continue to trend very well against our actuarial projections and so had no plans at the moment to either raise or lower the accrual rate in the fourth quarter, I just don’t see the reason to. We complete our year-end actuarial review as part of our year-end close and so as we get those data back then we will have a chance to reassess what we do in 2015. So sort of stay tuned I guess is the answer there.

Our next question comes from Ryan Byrnes of Janney Capital.

Just wanted to get your thoughts now with the convertibles converted to common stock, your thoughts on any changes to potential dividend philosophy. Just wanted to get your thoughts there and obviously again with the stock trading above book, wanted to get your thoughts, repurchase versus dividend going forward.

Sure. I think we have said that our initial use of our capital is going to be to complete the stock repurchase program. We recognize that our dividend is probably is not equivalent to what our industry peer group is and we certainly want to address that but we think in the near term the focus is going to be on completing that stock repurchase program.

And then also just quickly wanted to talk a little bit further I guess -- the declines in the agency channel. I guess part of that you noted was because there may have been more refi in that channel that you had previously thought. But heading into the fourth quarter this year and into next year refi shouldn’t as much of a headwind. So should we expect agency revenue to kind of plateau from here on a year-over-year basis?

Yes I would think so. Again we have talked, several things we have kind of alluded to -- for agency we did have some of the acquisition was previously, agency that we purchased which is now direct. We did have some geographic differences in addition we have talked about you know continue to kind of rationalize our agency network for this best in class systems. We have talked about having kind of a 50:50 mix of direct versus agency and I think you saw a lot of progress toward that and really our focus is now kind of leveraging that stable platform with growth and growing our agency businesses in higher remittent states. But we have seen again from a claims perspective, we’re very happy with where our agency segment is right now and we are seeing potential growth from here.

And then just quick one, my last one is with the fee per file growth again it grew very nice, year-over-year and sequentially. I realized the commercial is growing but and refi is shrinking. But is there something else happening there because again the growth seems to be pretty dramatic there.

Yes it's obviously the growth in the commercial business, it had a bit of an outside effect in the quarter fee per file [ph] but I don’t see anything abnormal about that. It's kind of what we have seen historically when you get a big shift in mix and particularly when you look at this sort of first nine months versus last nine months you had a really major shift in residential resale versus refi and then you weigh around top of that, a pretty dramatic increase in commercial in Q3. Home price appreciation obviously played some role, it's obviously not -- home prices aren't accelerating at same rate that we saw a year ago. They are sort of moderating now which is I think as expected. So that was some influence in the quarter but I would say the main influence is just the shift in mix to more commercial transactions.

And again within commercial transactions, are you guys doing I know you don’t give this data but maybe just directionally, are you guys doing larger commercial fee per file transactions now than in the past?

From a pricing perspective I'm not aware of any dramatic increase in terms of -- core sense per thousand [ph] pricing. We’re seeing larger deals because of increasing surplus particularly in states where you’re limited to some fraction of your surplus whether it's 50% in Texas or 100% somewhere else. You know when you grow your surplus that has a direct correlation to the size of the deal that you can take on.

(Operator Instructions). Our next question comes from Brett Huff of Stephens.

This is James filling in for Brett, congrats for the quarter. So first question is kind of mortgage services, can you kind of give some idea what the organic growth rate was in that segment and then also just any color on the profitability in that segment and how it might trend into 2015 as it kind of gets upto that more 10% to 15% range?

If by organic growth you mean sort of how the legacy business performed. I think the legacy business continued to which is the default and distressed revenue stream, that continued to see a decline in the quarter which was not unexpected and so the real emphasis has been over the last nine months of transforming that segment away from dependency on that line of revenue and more towards the diversified line of revenue which we think with the acquisition as we have largely achieved that. Going forward into 2015 obviously not providing guidance but I think some of the statements we have said earlier in terms of revenue expectation for the acquisitions are still valid. Now that we have completed the acquisitions, the revenues are going to ebb and flow a little more closely aligned with mortgage originations ebbing and flowing. So I think there is some expectation in '15 that mortgage originations will be flattish to '14 or at least the current thinking as I understand. To iterate we did -- we talked about the immediate synergy savings of 5 million which we feel is -- we would have taken that out on a run-rate basis but we still need to integrate the acquisitions and there is rationalizing and other mortgage services opportunities. So we have talked about getting into increasing margins moving next year and see great hopes in that, maybe not from the immediate synergies but there is a lot of actions underway to reduce our cost structure and to optimize some of those platforms within the Stewart network.

And then on the commercial business, good results there, was there any lumpiness in terms of big deals that came in or was it more kind of the broad based strength and then do you kind of expect this 30% type of growth to continue even though it's kind of lumpy from quarter-to-quarter.

Well to answer your first question, there was no single sort of large transaction in the quarter that provided a spike. You know to your second question it's 30% of the big number, right? So I don’t know that I would expect that kind of increase on a year-over-year basis in any particular quarter although it could certainly happen in a particular quarter recognizing that closing of these commercial transactions maybe anticipated in one quarter but not unusual to see them slip into a subsequent quarter. We didn’t really have that much impact in this quarter but it's still something we have seen in the past and I don’t think that is out of the question going forward.

All right and then the last question I’ve is on the agency business and as you guys worked to increase your agency presence in those high remittent states, first of all what's the strategy for doing that? Is it kind of buying out agents or is it signing up new ones? And then how do you see those remittance rates trending into 2015? Are they going to get to a more of a peer type level or is that sort of more of a longer term objective?

I think we’re definitely -- so recruiting independent agencies so we’re signing up new agencies in those remittance states and we do see that trend moving more to I think where our competitors are. We do want to be cost us where we’re directionally moving in that direction but we want to make sure that the operations are profitable but we will see improving remittance rates going forward.

And it appears that we have no further questions at this time. I would like to turn the program back over to Matt Morris for any closing remarks.

Great. Thank you Leo. Again, just wanted to thank everyone for joining us. It has been a very active year, we realized as we have transitioned mortgage services we have enhanced our commercial business. We have moved toward the 50:50 mix of agency versus direct premiums in-line with our strategies. Just on a final note, we remain mindful of industry conditions and some observers obviously predicting a sub-trillion dollar mortgage origination market in 2014 with little improvement in 2015. 2015 is also a year in which we and the industry will observe changes stemming from the CFPB Enforcement of Dodd-Frank Mortgage Regulation. So given these market conditions, we believe continuing to execute on the remaining elements of our five year plan including the cost management initiative, integration of mortgage services acquisitions and the stock buyback, are they optimal strategies to drive shareholder value. These plans are focused on continued margin improvement throughout 2015 and look to 2016 where we expect to see a full run-rate benefit. Successful execution of our plan will ensure the offering of financial stability our customers expect and the financial reward our shareholders expect. Thank you very much for your time.

Thank you. This does conclude today's teleconference. Please disconnect your lines at this time. And have a wonderful day.