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Edited Transcript of STC earnings conference call or presentation 23-Oct-19 12:30pm GMT

Q3 2019 Stewart Information Services Corp Earnings Call

Houston Oct 25, 2019 (Thomson StreetEvents) -- Edited Transcript of Stewart Information Services Corp earnings conference call or presentation Wednesday, October 23, 2019 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* David C. Hisey

Stewart Information Services Corporation - CFO, Secretary & Treasurer

* Frederick Henry Eppinger

Stewart Information Services Corporation - CEO & Director

* Nat Otis

Stewart Information Services Corporation - Director of IR / SVP - Finance

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Conference Call Participants

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* Bose Thomas George

Keefe, Bruyette, & Woods, Inc., Research Division - MD

* DeForest R. Hinman

Walthausen & Co., LLC - Research Analyst

* Geoffrey Murray Dunn

Dowling & Partners Securities, LLC - Partner

* John Robert Campbell

Stephens Inc., Research Division - MD

* Mackenzie Jean Aron

Zelman & Associates LLC - VP

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Presentation

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Operator [1]

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Good day, and welcome to the Stewart Information Services Third Quarter 2019 Earnings Conference Call and Webcast. Today's call is being recorded. (Operator Instructions) I would now like to turn the call over to Nat Otis. Please go ahead.

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Nat Otis, Stewart Information Services Corporation - Director of IR / SVP - Finance [2]

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Good morning. Thank you for joining us today for Stewart's Third Quarter 2019 Earnings Conference Call. We will be discussing the 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 forms 10-K and other filings with the SEC.

Now let me turn the call over to Fred.

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Frederick Henry Eppinger, Stewart Information Services Corporation - CEO & Director [3]

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Good morning, everyone, and thank you for joining us today. David will go through the financials in a minute. But before that, I wanted to take a few minutes to briefly touch on my thoughts after 6 weeks as CEO of Stewart. First though, I would like to thank our associates for helping deliver strong third quarter results during a period of significant distraction from the speculation around the pending merger and our leadership change. Our people have remained focused and committed to deliver the great service our customers expect from Stewart. I believe that resilience in our results this quarter and over the last year, a period of significant uncertainty, confirms that the market wants and in many cases needs a strong independent Stewart. This brings me to Stewart today and what our focus will be.

I want to remind -- briefly remind everyone that this is a 125-year-old company with a strong brand and a proud history of customer-oriented service that has been distracted over the past several years. Amidst the backdrop of multiple activist campaigns, call for sale, a 1.5 year merger process that ultimately not -- did not ultimately consummated, most of Stewart's customers remained loyal and our employees delivered quality service. But this period of distraction was also a period of uneven financial performance, limited investment in our business and lack of sustained growth.

With these distractions behind us, I believe there is a tremendous opportunity to change this and build a company positioned to consistently compete and win in our industry. As the company moves beyond this period of uncertainty and uneven performance, I would like to point out a few important strengths we start with.

While I have just spoken about the strength of our people, which is a critical asset in a service and relationship-oriented business, the company's financial strength has never been on a firmer foundation. With a solid balance sheet and strong ratings, substantial statutory capital to grow premium growth and the ability to generate new significant future cash flows, we are well positioned to deliver on our new focus, building a world-class company that is positioned for the next 125 years.

While we are not satisfied with our performance over the last several years, the good news is that Stewart is not a traditional turnaround. As noted, we have many positive things in place to start us on the path of profitable growth again. And in fact, we have many of the foundational elements in place to support our effort.

That said, this is a journey, and we'll take some time to get where we ultimately want to be. The transformation will not be completed overnight but we will also not wait to get started. We will compete more effectively now and we will get better every day. We have done what we are calling 100-day plan, focused on examining all of our company's businesses, functions and capabilities to understand all the opportunities to strengthen our competitive position and improve our ability to deliver sustained winning performance.

Over the last 6 weeks, I've been able to meet with over 2,000 of our associates and visit a number of our markets and a number of our customers. In these first few weeks as CEO, my confidence has grown in what could be done to improve our competitive position and performance. Over the remainder of these first 100 days, we will lay out in greater detail how a reinvigorated Stewart will compete and win.

I am confident in the potential we can unlock at Stewart given the quality of our people, our brand and our financial strength. Going forward, the key will be to utilize these assets in a way that spreads improved growth and it drives improved performance -- financial performance with the overall goals of providing value to our customers, our partners, people and shareholders. David will now update you on the quarter.

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David C. Hisey, Stewart Information Services Corporation - CFO, Secretary & Treasurer [4]

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Thank you, Fred. And good morning, everyone. Stewart reported title revenues of $499 million, overall revenues of $560 million, and net income of $66 million or $2.78 per adjusted share. On an adjusted basis or per diluted share, on an adjusted basis, net income improved to $30 million from $20 million from last year's quarter while adjusted EPS increased to $1.28 per share from $0.85 per share from the third quarter of 2018. As presented in appendix A to our earnings release, the calculation for adjusted diluted EPS, which is a non-GAAP measure, includes adjustments related to the $50 million FNF merger termination as well as equity method investment impairment, merger expenses and other nonoperating gains and losses.

Our title revenues in the third quarter of 2019 were up 3% from last year's quarter due to a strong housing market, primarily influenced by increased lending due to lower interest rates and solid direct commercial, residential and international business results. The title segment generated pretax income of $49 million or a 10% pretax margin, excluding mark-to-market gains and losses related to equity securities investments, the impairment charge on an equity method investment -- the segment's third quarter 2019 pretax income would have increased 55% to $52 million from last year's pretax income of $34 million.

With respect to our direct title business, commercial revenues were up 7% as the fee per file increased 22% to $12,600 as a result of increased transaction size. Direct residential revenues improved 18% as a result of increased lending. Our residential fee per file decreased 4% to $2200, primarily as a result of change in business mix in which we had a higher ratio of refinancing to purchase orders. Total international revenues increased $3 million or 10% on increased volumes from our Canada and U.K. operations.

Compared to the third quarter 2018, opened and closed orders in the third quarter 2019 grew 29% and 21%, respectively. Regarding title losses, as a percent of title revenues, losses improved 20 basis points to 4.2% compared to 4.4% from last year's quarter. We expect our title losses to remain at approximately 4.2% of title revenues for the year 2019 and note that they can vary quarter-to-quarter.

At quarter end, our total balance sheet policy loss reserves were $452 million. Looking at [ancillary] and corporate segment, we reported a segment pretax income of $42 million for the third quarter 2019 compared with a pretax loss of $11 million in the prior year quarter. Excluding the FNF merger termination fee and merger related expenses, the segment's pretax loss in the quarter would've been $7 million versus $6 million in the prior year quarter.

The segment's operating revenues declined by $5 million as our search and valuation business was impacted by reductions in orders from several significant customers. The segment's results for the third quarter 2019 and 2018 included approximately $7 million and $13 million, respectively, of net expenses attributable to parent company and corporate operations with a higher expenses in the prior year quarter primarily caused by increased third-party mergers advisory expenses.

With respect to operating expenses on a consolidated basis, employee costs were up 4% compared to the third quarter 2018, primarily because of increased incentive compensation consistent with higher title revenues, partially offset by lower salaries expenses as a result of lower average employee costs. They remained approximately 28% of operating revenues.

Other operating expenses for the third quarter 2019 declined 3% to $88 million from $91 million in the third quarter of 2018. This decrease was primarily driven by lower professional fee expenses in the third quarter 2019, partially offset by higher outside search fees, principally related to increased commercial revenues.

As a percentage of total operating revenues and excluding FNF merger expenses, other operating expenses remained approximately 17%. Lastly, on other matters, stockholders equity attributed to Stewart was $754 million at September 30, 2019, the highest since 2007. At quarter end, we had approximately $943 million in total cash and liquid investments or $426 million after deducting required statutory reserves. We also have approximately $100 million available under our credit facility.

Our financial condition remains very strong with a debt to capital ratio of approximately 12% at quarter end and a book value per share of approximately $32. Net cash provided by operations during the quarter was $116 million, an increase of $79 million from the prior year quarter, primarily due to higher net income, which included the merger termination fee and lower payments on accounts payable during the quarter.

The effective tax rate for the third quarter 2019 was 24.5% compared to 20% for the third quarter 2018. The increased rate was due to benefits we had in the prior year quarter due to research and development tax credits. I'll now turn the call back over to the operator to take questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We'll take our first question from George, Bose with KBW.

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Bose Thomas George, Keefe, Bruyette, & Woods, Inc., Research Division - MD [2]

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This is Bose. Actually, the first question -- the operating margin was definitely -- was strong, stronger than we'd expected, strongest you've seen in a while. Is it -- I mean currently the strength of the market is a big driver but just even quarter over quarter, the revenues are up and expenses up very modestly. So anything you can sort of -- color you can provide on just the strength of the margin this quarter?

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David C. Hisey, Stewart Information Services Corporation - CFO, Secretary & Treasurer [3]

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Yes. It's David. Yes. I mean I think you sort of covered it right. It was pretty much the revenue leverage from the strong activities across the businesses and expenses didn't follow. I mean you certainly get some benefit of the fixed cost structure and so as revenues go up, we see that on the margin, and I think that's pretty much what we saw this quarter.

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Bose Thomas George, Keefe, Bruyette, & Woods, Inc., Research Division - MD [4]

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And I mean is it too early to talk about sort of the targets for normalized margin? Just when can we sort of discuss that?

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David C. Hisey, Stewart Information Services Corporation - CFO, Secretary & Treasurer [5]

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Yes. I think that just sort of going back to Fred's comments on the 100-day initiatives and the like, I think it's probably a little premature on sort of the longer-term margins, I think we need to get through that work and be back to you on that.

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Frederick Henry Eppinger, Stewart Information Services Corporation - CEO & Director [6]

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Obviously, for the company, right, we have lagged the industry and for a lot of reasons. And so what you will see us is focused on positioning ourselves to be better kind of situated to be a winner in the industry, which means got to improve both margins and frankly, our growth profile. But I think that's very possible to do, it's just a couple of areas where we need to focus and kind of think about our operating platform a little differently and how we approach the market. So...

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Bose Thomas George, Keefe, Bruyette, & Woods, Inc., Research Division - MD [7]

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Okay. Great. Actually just one more for me. On the agent side, the share -- obviously, year-over-year that's been declining, can you add just any color there in terms of how you're going to address that?

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Frederick Henry Eppinger, Stewart Information Services Corporation - CEO & Director [8]

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So obviously, the segment that's going to be most affected by the merger is going to be the agency because what agents don't want is too much concentration with the leading company in the industry. So we, obviously, had the implications of this announced merger where people shifted part of their shelf space away from us because of -- they didn't want to be in the Fidelity family. And so that's what we have to win back. And so what we've done immediately is, be very directive and very clear with those folks and try to win back that business. And I think -- again, I think that's something we can do we just have to get on it and focus on it but it is something that is easy to anticipate given the transaction. I mean to me it's the obvious thing that agents want to do is balance their business. So we're after that, and I think beyond that, I think there are some investments that we hadn't made for a while that will enhance the value proposition to agents on the technology side that we're going to start focusing on immediately. And So I think that's going to help us well. So we look to that segment to grow in the future for us.

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Operator [9]

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Our next question comes from John Campbell with Stephens Inc.

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John Robert Campbell, Stephens Inc., Research Division - MD [10]

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Congrats on a great quarter, and Fred, welcome, looking forward to working with you.

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Frederick Henry Eppinger, Stewart Information Services Corporation - CEO & Director [11]

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Yes. Thanks.

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John Robert Campbell, Stephens Inc., Research Division - MD [12]

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Yes. And so in your prepared remarks, and I think you just mentioned this in the last -- answered that last question, but you mentioned kind of the lack of reinvestment in the business over the last few years, I'm hoping you can maybe flesh that out a bit. I know it's probably a little early to size up maybe that total shortfall, and then it's probably way too early to lay out how much reinvestment is needed going forward. So if you could just maybe provide any additional insight there to what extent you can? And then maybe if you could also touch on what you're looking to do with the $50 million breakup fee that you guys have?

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Frederick Henry Eppinger, Stewart Information Services Corporation - CEO & Director [13]

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Yes. So as you could imagine, right, this company probably for multiple years now has kind of hunkered down in a lot of ways and managed itself relatively well. I mean if you look at our service growth, et cetera, I'm very impressed with what folks have done over the last few years as we've kind of really been internally focused as we look at things like restructuring and et cetera. And so if you look at our business -- as you can imagine, in most of our businesses there were some things that if you thought about long-term value creation, you would've invested in and we didn't.

And so in almost every business in every area there are some places that I want to redirect our investment. Now what we won't do is just lay on top of a bunch of additional investment. There is other things that we were doing that we're going to stop doing and reallocate that. So I would say that it's not overwhelming but it's important for us to kind of get focused on the future here and invest in some things. I would also say that the other thing that's going to be important for us is to fill some holes. As you can imagine, over the last couple of three years, we've lost some critical skills and capabilities in pockets, again, not overwhelming but areas where we need to make sure that we fill those holes and hire the right skill sets and make sure we are competitive in some areas.

So I'm pretty positive about where we are, and I'm kind of -- the resilience of the company is obvious when you look at kind of what we've done over the last 2 or 3 years. But the upside here is tremendous if I could just make sure we accelerate some focused investment in the businesses so we compete a little bit better. And again, is it overwhelming? No. But is it something that's going to take some time and some money? Sure. And in the next quarter in particular -- after next quarter, we'll be a lot clearer on where it is and what we're doing. And it's coming together pretty quickly, but it's still a little early on exactly what we're going to do in some of the areas. But it's -- again, it's pretty straight forward, right? You can see from our results over the last few quarters that essentially we were kind of not holding share. We were shrinking relative to the market and that's going to stop. So...

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John Robert Campbell, Stephens Inc., Research Division - MD [14]

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Got it. That's makes sense. And then on the commercial growth, that was a good result for you guys. I think you called out an over 20% growth in fee per file, I'm guessing that you guys probably caught a few larger deals in the quarter. So if you can just maybe provide a little more color on kind of the lumpiness of the orders? And then any additional call outs as far as the purchase versus refi mix and just any kind of geographical impacts?

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David C. Hisey, Stewart Information Services Corporation - CFO, Secretary & Treasurer [15]

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Yes. (inaudible). On the commercial, I think it's just the continued focus that the businesses has had on sort of the larger commercial customers across the country. That's a trend we've been seeing for, yes, sort of the last year or so. So I don't think it was -- there were any significant one-off deals, I think it was just sort of bigger transactions across the franchise.

In terms of the purchase refi mix, I mean, I think we're sort of seeing what the market is seeing there. (inaudible) against our competition when we had that order information. And so I would expect the trends you're seeing in the market to sort of impact us as well. (inaudible) look at all the housing economists that sort of look at this stuff, I mean they have in a continued strong housing market, maybe refi is tapering off a bit as we go into next year. And that would sort of be our expectation as well.

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John Robert Campbell, Stephens Inc., Research Division - MD [16]

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Okay. That's helpful. And then just to tack on to that. On the commercial side, any color as far as open orders and kind of what the pipeline looks like getting into 4Q?

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David C. Hisey, Stewart Information Services Corporation - CFO, Secretary & Treasurer [17]

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I mean I think the guys think it's -- business is still strong. But as you know, on those kinds of deals, I mean, timing matters but decent pipeline going in the quarter, just need to close them.

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Operator [18]

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The next question will come from Geoffrey Dunn with Dowling & Partners.

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Geoffrey Murray Dunn, Dowling & Partners Securities, LLC - Partner [19]

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Fred, acknowledging 6 weeks on the job, but as you think about your vision of the opportunities for Stewart, is this equally an expense and top line opportunity? Is it more top line than expense or vice versa? How do you view the opportunity for the operations based on what you've seen over the first 6 weeks and obviously your experience before that?

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Frederick Henry Eppinger, Stewart Information Services Corporation - CEO & Director [20]

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Yes. I mean obviously if you look at our performance over the last, say, 10 years, decade, right, our margins lagged the industry but our growth did, too. We've lost share over the last decade. And so obviously, there is -- we need to change that profile. And so what you will see is an expansion of margins as well as growth above the industry. And I think both are very possible. The question is how do you get at those margins expansions. I would tell you that most of it is going to be leveraged -- we're going to be leveraging it for some additional growth.

Again, are there some things that we're going to stop doing? Yes. I would say there's going to be a reallocation of dollars from some parts of the company to other parts of the dollar -- parts of the company.

And so I think this is kind of leveraging our portfolio. The other thing you've seen is some of our ancillary businesses, I think, are areas where we can manage better. And there is some real leverage there in the overall business as we do that. So again, it is -- it probably answers a little bit of both, but more on the top line than [the bot, we have to then just fewer] expenses because I want to leverage our ability to win at the local market level.

And again, as you can imagine, when you're reacting to things versus proactively thinking about it, all your expense dollars are not going to the right place, right? So for us, we've got to get on the front foot and make sure that we're investing in the right places that actually lead to profitable growth. And we're going to do that. And again, it was interesting again, even in 6 weeks, a couple of things that striked me. The energy of the place and there -- the kind of the people are focused on wanting to get back on the front foot and when -- I think what you saw in commercial is a little bit of that. I mean I think the energy level around some of our product -- outstanding commercial team is going to be there going to the future. So you have a bunch of folks that kind of know how to win and want to focus on the right things.

But the other thing that I've seen is just a bunch of things that we were going to do that did it, like there was a number of areas where we know what we need to do but we held off and I got to make sure we do that. And I got to make sure that we find funding for that. So this might be a little bit of a step back before a step forward in some cases. But we know the objective function, right. We can't -- in 3 years, we're not going to be at the bottom quartile of the industry returns and losing share, I can tell you that. So I'm pretty confident that we can turn this around, we just got to make sure we invest in some areas and focus on winning in the local market. So...

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Geoffrey Murray Dunn, Dowling & Partners Securities, LLC - Partner [21]

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Okay. And then in your comments you did have a bit of a cautionary couple of sentences about this is not an overnight process. Just to frame that, I mean is it reasonable to think about next 3, 5, quarters, really 2020 being a transition period, it could be a bit lumpy depending on what your initiatives are, plus and minus, and really the payout is more of a '21, '22 type of thing?

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Frederick Henry Eppinger, Stewart Information Services Corporation - CEO & Director [22]

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I think that's fair. Again do I think about it that way? Not necessarily because we're going to move forward and compete better every day. And this is a -- so much of an execution-based business that this is kind of -- if you can outhustle, you can do things. But there is going to be some investments, some refocusing of the company and some decisions that essentially are going to be about the long term not the short term. So I think it's a fair character relation.

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Geoffrey Murray Dunn, Dowling & Partners Securities, LLC - Partner [23]

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Right. And then last question for David. What occurred sequentially with headcount in Q3? And what are the preliminary actions into Q4?

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David C. Hisey, Stewart Information Services Corporation - CFO, Secretary & Treasurer [24]

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Headcounts have being coming down a little bit. I think that with the merger, we've been pretty firm on hiring. I think we'll see that trend continuing into the fourth quarter. I think where we go from there is really a function of what you just talked about with Fred, in terms of the initiatives and investments and that kind of thing.

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Operator [25]

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(Operator Instructions) Our next question comes from Mackenzie Aron with Zelman & Associates.

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Mackenzie Jean Aron, Zelman & Associates LLC - VP [26]

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Just wanted to follow up on that question around needing to rebuild the team in certain areas. Fred, can you give us any color around what you've seen so far? There are certain areas of the business that seem to have had more attrition or is it pretty broad based? Anything by geography? If there's anything you can call out from kind of a head count or personnel perspective?

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Frederick Henry Eppinger, Stewart Information Services Corporation - CEO & Director [27]

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Yes. I don't think it's specific to any area. But I do think that what you see when you go through something like this is that you lose some bench. And again, we have some holes in some areas that we're going to want to and need to beef out. But it's -- we've been remarkably resilient so it's not -- again, it's not overwhelming but it's fair. I mean again, you can imagine some functions, particularly overhead functions that when you go through something like this there is -- some people are just not going to hang around. So there is some areas that we will be beefing up, and we will -- making sure that we hire.

And again, I would tell you that I've already -- we've already had a lot of calls and conversations with people that we want back that are already coming back. And interesting enough, we've also had people from competitors that are talking to us about wanting to come, too. So again, my view is that this isn't overwhelming but it's important, it's an important part of what we have to do. We have to make sure that we have a resilient organization and we have the skills we need in all of the different areas. But again, it's just part of what we need to do.

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Mackenzie Jean Aron, Zelman & Associates LLC - VP [28]

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Great. And then just going back to the agency conversation as well. How -- what's the sense around how sticky some of the shifts have been from agents that have cut ties with Stewart? Are those relationships that could be turned on relatively quickly? Or what's been the initial kind of reaction and impression that you've heard?

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Frederick Henry Eppinger, Stewart Information Services Corporation - CEO & Director [29]

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It's a great question. I think for the most part, those are things that we can win back. I'm meeting actually tomorrow with over 100 agents to discuss -- kind of ask them what we're doing. I'm pretty -- that's a business that we're going to grow a lot. I feel pretty confident in that, we can be a good partner for particularly winning agents, agents that are investing in their business and growing their business. But they did shift, right? And again, I think it's completely logical. I think if I was an agent, I would've probably done the same thing.

So for us, we've got to focus on that and make sure that we provide the value proposition we need to, to win them back. So I'm confident we can get it back. The question is how long does it take? Hopefully, it's not too long, but we got to work it. We got to focus on it and make sure we are talking to them and making sure we understand what their reasoning was and why we should get it back. But again, it's not illogical. This is not one of those things, in my view, that it's not unknowable. We know exactly what they were thinking as business people. So we need to go through and get them back.

And if you look at some of the growth over the last few years structurally in the industry, the regional companies, the regional companies have done a good job taking some share from the larger companies in the agency channel. And that's something we can get back easily. We're a little bit more nimble than the bigger guys. That's something that we should focus on, particularly since a lot of those retail companies were built to sell and you've seen some transactions from their perspective. And so they have some disruption as well. So I think both short term and structurally, the agency channel is a channel that we can -- and really do some good damage there and grow some share.

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Operator [30]

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Our next question comes from DeForest Hinman with Walthausen & Company.

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DeForest R. Hinman, Walthausen & Co., LLC - Research Analyst [31]

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Great discussion. Thanks for your review and your few weeks on the job. You spent some time in terms of areas that we need to improve, but maybe so people can better understand the opportunity. Fred, can you talk about things that we do well? And you talk about the culture of winning, where are areas we can -- we're already performing well, we can do even better?

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Frederick Henry Eppinger, Stewart Information Services Corporation - CEO & Director [32]

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Yes. I think again, one of the things, I've watched this company for a lot of years, actually, and one of those fascinating things about it is, we have an underutilized brand. And what struck me and it continues to strike me, if you look at our local market service metrics and how their relationships are in some of these local markets with our people, it's extraordinary. And given all the distraction, all of the things that's gone through in this company, the fact that we've lost some people, if you look at the quality of the relationships locally and some of this service stuff, in a business like this, which -- if you have that, that's quite sticky. And the question is, how do you leverage that? But it is a tremendous strength.

The other thing I would tell you is almost every customer I talk to, they like our relative position versus the big guys, right? They think we're a little bit more responsive, a little bit more -- we hustle a tad better. Our insight about some of the segments like in commercial is a little bit better, the way we work with them. So again, there's some real interesting strengths in this company that I think as people partner with us better in a more global sense versus just at a micro person-to-person sense, it creates a real opportunity. But there's real strength here.

I mean again, if you look at across all industries, if you look took a company in a generic industry and you said you're up for sale for 18 months, and instead it falls apart. You wouldn't see the strength of our results over this period. I mean the stability of this company says something. The resilience that we are experiencing, the bounce back that we had in the last 6 weeks as people refocused on what we needed to do, that tells us that we have an underlying strength here that's real. There's something to leverage. Now again, that said, we have work to do. Together we have a lot of work to do to make us one of the better companies in the industry. So to your point, this company has tremendous strength to build off of.

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DeForest R. Hinman, Walthausen & Co., LLC - Research Analyst [33]

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Okay. And then as shareholders, as we're looking for that plan, I know you talked about opportunities and you talked about revenue and the margin profile. How are you going to be setting up those benchmarks, both internally and how to -- and help us think about how to make people hit those expectations? And how we're going to communicate? How we're moving towards those expectations or benchmarks as shareholders? Is it going to be -- we're going to have some 1-year targets? Then we're talking about 2- and 3-year targets, just any color that you could provide would be very helpful for shareholders.

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Frederick Henry Eppinger, Stewart Information Services Corporation - CEO & Director [34]

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Yes. So my view of this industry as in many insurance-type financial services companies is that this is an execution-based business. This is not -- so much of this is about winning day to day. It's kind of a game of inches, if you will. And so when you're in a game -- when you're in a business like that, execution delivery is everything. And so what we're going to be doing is, obviously, be very clear about where we're going and it's going to cascade through this organization. So people have a clarity of what we need to achieve together. And from the outside world, again, what I'll try to do is be clear over kind of the next 2, 3 years, where we think we're going and what it's going to look like.

Again my view is, some of those people overestimate what you can contract quarter-to-quarter and what a quarter really means. But if you look at the right metrics over a period of time, right, it's obvious what we have to improve, and -- to be in this business. So you will see us lay out a kind of what I would call a long-term plan for the company. You will see more importantly, internally, a clarity to all our colleagues to say, what do we need to achieve together.

And again, none of this stuff is easy. But my view is that we have a strong enough foundation, and we have a clarity of what we think the opportunities are so we can execute a plan that's relatively transparent. So I hope that's helpful. Again it's going to unfold. As I said over the next 100 days, as we kind of look at things because what I wanted to do is take a time to take a step back right here and look at all our businesses and look at all our positions so that I know how we need to reallocate our investment and our resources to the greatest opportunities because that's -- we got to make sure we jump on some of this and kind of make some progress quickly. So...

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DeForest R. Hinman, Walthausen & Co., LLC - Research Analyst [35]

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No, that's very helpful color. Shifting gears to capital allocation. I believe this was touched on but you have an interesting situation. I know there is some appropriate level of capitalization in terms of cash and investment portfolio, but at a very high level, it seems like you have a lot of excess capital currently and you've also received a break fee from the deal not being completed. You just spent half an hour talking about the opportunity in front of us. Is it appropriate to be buying stock and kind of rewarding shareholders for waiting for this transaction to close, it didn't, and potentially lowering the share count and what will soon, we hope, be a much better earnings profile in the future.

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Frederick Henry Eppinger, Stewart Information Services Corporation - CEO & Director [36]

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Yes. My primary use -- right now I'm going to hold the capital, I'm going to focus that capital on building the business. That doesn't say -- over time, I'm going to get some clarity on where we are with our capital base and if anybody's followed what I've done in the past, I tend to give back excess capital if I don't feel like I can use it to grow the business, that's just what I do. But right now what I'm going to do is focus on trying to build this business and right now my primary concern about our capital is using it to build the business. And I want to get more clarity over the next 12 months, and after that I can have a little bit better answer, but right now that's what the answer is.

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DeForest R. Hinman, Walthausen & Co., LLC - Research Analyst [37]

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Okay. So just a little bit more color on that. Would that include M&A-type transactions?

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Frederick Henry Eppinger, Stewart Information Services Corporation - CEO & Director [38]

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It could, it could. Again I think for us, one of the things that is clear in this business is that winning at the local market and having a strong position at local market is very, very helpful. Could I feel -- could there be some appropriate transactions that assist and that help us? Sure.

We don't need them necessarily, but that could be. But I want to look at all of the alternatives and to really understand how we build this business and that's really my priority right now.

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Operator [39]

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(Operator Instructions) The next question comes from Geoffrey Dunn with Dowling & Partners.

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Geoffrey Murray Dunn, Dowling & Partners Securities, LLC - Partner [40]

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I just had a few number of follow-ups. David, first, could you share your open order per day experience of the first few weeks of October?

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David C. Hisey, Stewart Information Services Corporation - CFO, Secretary & Treasurer [41]

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On a seasonal basis, we've continued to be strong. But I mean obviously, we're going into the slower time of the year. But relative to history, we're seeing good activity.

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Geoffrey Murray Dunn, Dowling & Partners Securities, LLC - Partner [42]

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Can you put any specific number around the first 2 weeks or no?

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David C. Hisey, Stewart Information Services Corporation - CFO, Secretary & Treasurer [43]

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I prefer not to. But it's strong relative to prior years.

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Geoffrey Murray Dunn, Dowling & Partners Securities, LLC - Partner [44]

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Okay. And then investment income dipped this quarter as did the yield, and obviously had a bit more cash in there, but what are your thoughts around yield and then in the investment income level relative to this quarter going forward? Particularly if we're looking at 2 more rate cuts of share.

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David C. Hisey, Stewart Information Services Corporation - CFO, Secretary & Treasurer [45]

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Yes. I mean we -- it's a good question. And there's a lot of people that would debate that. We had been building cash going into the transaction. I think the ultimate use of that is the positive -- the comment that Fred just had, I think there's -- depending on what happens with rates, as it stands right now you may not really be getting paid for a duration. But I think that's something our investment committee looks at and we'll be taking up with the Board and whether we want to -- how we want to reinvest some of that money in it. It might not only be in the investment portfolio, it might be, as Fred said, in the business.

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Geoffrey Murray Dunn, Dowling & Partners Securities, LLC - Partner [46]

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Okay. And then is $6 million still the right underlying run rate for corporate expenses?

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David C. Hisey, Stewart Information Services Corporation - CFO, Secretary & Treasurer [47]

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(inaudible) take all of the noise out from -- we've had the M&A stuff and all that and that's probably fair.

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Geoffrey Murray Dunn, Dowling & Partners Securities, LLC - Partner [48]

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Okay. And then last question. How do we think about the agency premiums going into the fourth quarter? do you -- and you're seeing a reminder, do you have lag reporting there so we should see a sequential uptick given Q3 direct activity or what is the trend there?

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David C. Hisey, Stewart Information Services Corporation - CFO, Secretary & Treasurer [49]

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There is a lag. So some of the activity that's seen on the increased order side will carry over into that business going into the fourth quarter. Yes.

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Operator [50]

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It does appear that we have no further questions at this time. I would like to turn the call back to our speakers for any additional remarks.

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Nat Otis, Stewart Information Services Corporation - Director of IR / SVP - Finance [51]

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That concludes this quarter's conference call. Thank you for joining us today, and your interest in Stewart. Goodbye.

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Operator [52]

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