Nat Otis - Director, IR Matt Morris - CEO David Hisey - CFO.

John Campbell - Stephens Inc. Bose George - KBW Kevin Kaczmarek - Zelman & Associates Geoffrey Dunn - Dowling & Partners.

Good day, and welcome to the Stewart Information Services Third Quarter 2017 Earnings Conference Call and Webcast. Today's call is being recorded. At this time, all participants have been placed on listen-only mode and the floor will be open for your questions following the presentation.

I would like now to turn the call over to Nat Otis, Director of Investor Relations. Please go ahead..

Thank you, Keiff. Good morning. Thank you for joining us for our third quarter 2017 earnings conference call. We will be discussing results that were released earlier this morning. Joining me today are CEO, Matt Morris; 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 will contain forward-looking statements and 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 this morning 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 Matt..

Thank you, Nat, and good morning, everyone. We appreciate you taking the time to join us today.

First of all, I would like to extend this special welcome to David Hisey, our new CFO who joined us in August and also on behalf of everyone at Stewart's, I'd like to take the time to thank Allen Berryman for his many years of exemplary service to the company and congratulate him on his retirement.

Finally, before we go into the quarter, I'd like to recognize our employees in the southeastern United States and specifically the Houston area for the perseverance they have shown on ongoing recovery from the impact of hurricanes Harvey and Irma.

Everyone here at Stewart's has seen the hardships that people have faced and continue to face as well as the kindness, generosity and humanity that followed. It's truly been amazing to witness.

With respect to our company while the impact has not been extensive in purely financial terms that could have been far greater, had it not been for the tireless efforts of our team, particularly here in Houston and I want to thank them personally for their leadership during the storms and this isn't just about the impact of delayed closing and higher expenses Stewart employees' worked throughout the time in Houston, our headquarters here that were closed for several days during the storm and many employees were displaced from their homes for weeks and in some cases still haven't moved back into their homes and I sincerely thank them for their incredible effort during this time.

Now to matters of the quarter. This morning, we reported pretax income of $19 million and a net income of $11 million or $0.46 per share for the third quarter of 2017. We also reported operating revenues of $498 million. Our results were impacted by declining market trends, particularly refinancing orders.

The impacts of hurricanes Harvey and Irma that I mentioned earlier as well as the departures of certain retail staff that we previously discussed. On the second quarter earnings call, we noted retail staff departures in several specific regions. The departed revenues represented approximately $70 million in annual revenues.

Stewart has taken swift aggressive actions to address these disruptions. Our employees worked tirelessly after the hurricanes to quickly restore full operations. We've successfully recruited new revenue-generating associates and stabilized staff attrition.

At quarter end, we have hired new revenue-generating associates with expected annualized revenue generation of $20 million to $25 million. Additionally, our second quarter acquisition of Title365 generated new business which we expect to result in a $40 million to $50 million in annual revenue.

These combined actions are expected to fully replace all of the departed revenue by 2018 selling season and ongoing recruiting efforts and targeted acquisitions should further bolster our top line. I also want to provide an update on the Title and Escrow production deployment and the timing of any expense-savings benefit from it.

On last quarter earnings call, we noted that the staff departures have put those benefits at risk, given the priority of rebuilding revenue in the impacted areas and refining our technology deployment to ensure the continued delivery of great service to our customers.

As a result, we now expect to achieve a full $10 million run rate benefit by the end of 2018 and another $10 million by the end of 2019. It's also important to highlight the recently-announced change to our leadership structure.

Our Chief Legal Officer and Chief Compliance Officer, John Killea has been appointed to the additional role of President of Stewart Information Services. John's expertise and experience has been invaluable to the Stewart organization since he joined the company in 2000.

In this capacity, President John will help drive execution of Stewart's strategic priorities. Additionally, we announced that John Magness has recently joined the company as Chief Corporate Development Officer. John is a seasoned of well-respected industry veteran with over 35 years in the title and real estate business.

Most recently, he served as president of Old Republic Title companies. In his role as Chief Corporate Development Officer, John will play a key role in ensuring Stewart continues to provide the high quality services our customers have come to expect that will increase our revenue going forward.

Finally, as you saw on today's release our Board is exploring the full range of strategic alternatives available to Stewart.

We have retained financial and legal advisers to assist us with the strategic review process and all options are on the table including business combinations, the sale of the company and continued execution of our stand-alone business plan.

At the same time, I assure you that we will remain focused on executing our current operating plan and continue to provide comprehensive service and solutions to our customers.

We do not intend to provide updates on the strategic review until further disclosure as deemed appropriate or required and therefore will not be in a position to address any questions regarding the review during today's call. At this point, I'll turn over to David for more detail on our financial results..

Thank you, Matt, and good morning, everyone. As Matt discussed, our revenue and margins were impacted by the departures of certain retail staff, the impacts of hurricanes Harvey and Irma as well as market trends particularly refinancing orders.

The title segment generated pretax income of $25 million on a 5% margin compared to a pretax income of $50 million or a 9.5% margin in the third quarter of 2016.

The margin impact of revenue departures as everyone knows in hurricanes is very high because what ends up happening is you lose the small cost of the producers themselves, they're keeping their support in those areas as you're rebuilding those markets, you got the hiring cost of new people and as all that normalizes the margins return as revenue production occurs.

Let me provide a bit more context on the revenues. On the positive side, the residential fee per file increased 8% to $2,000 as the business mix shifted to a higher portion of purchased orders. International operations revenue improved 7% as Canada and the United Kingdom continue to perform well.

The commercial business continues to perform well and entered Q4 with a strong pipeline. However, we saw our revenues decline in Q3 due to several transactions being pushed into the fourth quarter.

In addition, while there was a good breadth in transaction type and geography this quarter, we didn't have any large deals close like we did in the third quarter 2016.

On the agency side, we continue to sign new agents and are excited about the prospects going for the new technology we are implementing that will provide our agents with enhanced connectivity and user experience. Gross agency revenues were down 5% and net revenues were down 7%.

The independent agency remittance rate was 17.5% compared to 18% last year due to a shifting geographic mix. In short, the average remittance rate was almost 20% in those states where we experienced gross revenue declines whereas the average remittance rate was 15% in those states where we experienced gross revenue increases.

Given our current agent footprint, we expect the remittance rates remain in the mid to high 17% range over the near term. Title losses as a percent of revenues were approximately 5% this quarter. Our total balance policy loss reserves were $476 million at quarter-end and remained above the actuarial midpoint of total estimated policy loss reserves.

Moving on to ancillary services in corporate segment. Revenues decreased 45% primarily due to our divestiture of the default loan servicing business in 2016. Expenses declined 46% more than offsetting the revenue decline during the quarter.

As a result, excluding $6 million of parent company and corporate expenses, the search and valuation services business was slightly positive from a pretax standpoint. With respect to overall expenses, employee cost in the third quarter of 2017 decreased 9% even with the effect of elevated hiring cost as we look to replace the revenue producers.

The decrease is due to a combination of volume-related rightsizing primarily in ancillary services, the previously described staff departures and ongoing operational efficiency gains in corporate operations. As a percent of total operating expenses and employee cost for the third quarter 2017, were 28.1% versus 28.3% last year.

Other operating expenses for third quarter 2017 decreased 6% due to reduced outside search fees driven primarily by lower search revenues from the ancillary services and centralized title operations. Of note, other operating cost in the quarter included $1.4 million of Title365 integration cost.

As a percentage of total operating revenues, other operating expenses were 17.8% versus 17.2% in the third quarter of 2016. On an ongoing basis, we expect that our other operating cost will average approximately 18% to 20% of total operating revenues in any given quarter, recognizing the seasonality of revenues.

Finally, our debt to capital ratio at quarter's end was $17.1%. I will now turn it back to Matt for a few concluding comments..

Thank you, David. Just before we move into the Q&A, I wanted to take a moment and reiterate the positive steps we have taken to position us well for the remainder of this year as well as we move into 2018. Again, to summarize, we have successfully recruited new revenue-generating associates and stabilized staff attrition.

We've also strengthened our executive team with the promotion of Jon Killea and the addition of John Magness. The acquisition of Title365 has been successful and we expect it to have strong positive contribution to our results.

We have largely mitigated the impact of the hurricanes at this point and we've refined the deployment of our title and escrow production technology and are experiencing positive feedback on the improvements.

In the addition to the system that David referenced to deploying an enhanced system to integrate with our title agencies, making it easier to do business with us and we expect to see that enable our shared expense next year. As a result, we remain optimistic about the future of Stewart. So we will now take your questions.

Again, as a reminder, we're not going to take questions regarding the strategic reviews. Operator, please open the lines..

[Operator Instructions] We'll take our first question from John Campbell with Stephens Inc. Please go ahead..

Good morning. Nice work stabilizing the attrition.

I know that was something you guys were focused on, but on the new recruitment or I guess just the run rate of rev, could you guys talk about what regions that is mostly geared towards? And then if there's any one or two maybe particular competitors where you're seeing those agents come from?.

So the reasons we talked about, large part of that is in the west, as well as some in Arizona, as well as Texas. So I think those revenue producers are in those areas. I'd say that the west and northwest have a large percentage of those. In terms of where they're coming from, I'm not sure we can disclose that information going forward.

But again, we're encouraged not only by the revenue, but also how people are coming onboard to Stewart and the opportunity that they see. In my mind, these are all experienced producers, some leading our new offices as well.

They're coming from great, great established companies and we have high expectations on their ability to drive our revenue and efficiencies going forward..

Okay. And then on the reserve ration, if I look at that year-to-date that's running I think about 30 bps or so higher relative to last year.

Any thoughts on where that goes? Maybe a good range as we're thinking after 4Q and maybe for next year?.

Yes. I think as we mentioned -- John, it's David Hisey -- we should really be thinking about it in the 5% range. I think there's always some little things here and there. I think we may have had a little bit in our Canadian operations this period. But I think 5% is probably the number to keep in mind going forward..

Okay.

And then last one for me, what's the comfortable debt range or leverage ratio for you guys?.

Well, I think we probably want to stay -- I think we have said about 17% currently. I think maybe we could go up a little bit from there. Maybe in the 20% to 25% range without a lot of adjective from the rating agencies. But I think that's a number to think about, but we can always go back and speak to them as needed..

Okay, great. Thanks, guys..

Thank you..

We'll take our next question from Bose George with KBW. Please go ahead..

Hey, good morning. Just a follow up on the staff hiring.

Are they generally in the same geography as for your loss staff or are they in different areas?.

No. They're generally in the geographies where we have lost staff. Yes, we have the normal hiring, but I think where our more aggressive recruiting has been is been in areas where we have lost - the markets where we did lose staff are strong markets and strong title markets for us that we made the commitment to go back and invest in.

So that's where bulk of our hiring is coming back in through..

Okay, great. Thanks.

And then just the ongoing hiring and the acquisition pipeline, I assume that's independent of the strategic review, they both continue?.

Correct..

Okay, great.

And then just on the mortgage services segment, is that $6 million loss or I guess for the corporate segment, is that $6 million loss a good run rate or after the breakeven now on the mortgage services do you think you could start seeing the earnings there as trending up?.

Yes, Bose. This is David Hisey. For now it's a good run rate. I think as we continue to look at that business, we may see some things moving forward. But I think that's a good run rate for now..

Okay, thanks. And then actually just sneak in one more.

In the commercial segment, what are the margins in that business? Are those margins at the levels where you want them?.

Yes. We think they are. We don't see those changing significantly from what they have been, but I'd say our commercial margins are pretty much in-line with what our expectations are. It has been and it should be going forward..

Okay, great. Thanks..

Yes. Thank you..

We'll take our next question from Kevin Kaczmarek with Zelman & Associates. Please go ahead..

Thanks for taking the questions.

Can you give us a rough breakout of the impact of the storms between commercial, residential purchase and refi?.

Really, all of that would be residential purchase and refi. Yes, I think you any commercial transactions would be a shorter delay. Where we're seeing that the bigger impact would be in the residential and residential resale, to be honest with you, would be a majority of that impact..

Okay.

And on the Title365 revenue and the annualized revenue from the new employees that you brought on, I guess how much of those annualized numbers was in the third quarter and how much should we be expecting in the fourth quarter?.

Hey, Kevin. It's David Hisey here. I think keeping in mind the seasonality of the business right and the time it takes for people to ramp up their books, we're really expecting the producers to start to hit their stride really as we start to come into next year.

And similarly with respect to 365, the third quarter is pretty much an integration quarter so we got high expenses and still trying to get the revenue transitioned.

We'll see some benefit of that, but again, you're really not going to be hitting that $40 million to $45 million run rate until we start to get into early to mid-next year just because of the cyclicality of this. And 365 has done higher revenues historically. I think it's just a function of how we hit the ground running and get that business going..

Okay. I guess I got two more.

On the title production technology, where are you guys in the roll out? Can you give us a sense of what percent of market you rolled out in? Or what percent of your business has the new production platform?.

Yes. I don't think we've given it percentage of where we are on the roll out per se, but I would say we're well under way. We've done some major states in terms of our deployments and are receiving good feedback.

I think on Q2, we talked about pausing that or advising our deployment methodology and I will confirm that the more recent reports is we continue to deploy, gotten good feedback. So I would say we're well under way with a processed product that we have much more confidence in..

Great. And then last one, looking at the fourth quarter, you mentioned the $4 million of pretax profit for short fall this quarter. I assume some amount of revenue is going to be pushed to the fourth quarter.

Should that come in at a pretty high incremental margin? How should we think about the revenue and pretax profit being shifted from 3Q to 4Q?.

I'm not sure, we continue to look at that in valid question. What you also saw relates to the hurricanes. While the closing is while the closings didn't occur and you had all the cost, obviously in these affected markets you really did not have any orders and you'd seen it pull back just overall activity in those markets.

So there's no probably high expectation that basically these are just delayed closings and your run rate of orders, you maintain through that process.

I think it's going to be a little bit of a lot going in Q4 because you do have some that are closing that were scheduled for Q3, but offsetting that, you have orders that really didn't occur in Q3 because of the dance in those markets..

All right. Great. Thanks a lot..

Yes..

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

Thanks, good morning. Matt, can you talk a little bit more about the integration title 365? You bought the company midway through July did the revenues come on as expected in third quarter.

How does this transition from an agency revenues over to direct revenues move along and then integration? I guess what I'm really trying to get out is did you get the type of revenue and margin you were expecting off the acquisition or was it more delayed than you expected in 3Q?.

I would say the revenue is as expected.

I think on bottom line performance, it was within expectations, but I think as David referenced, he did have some integration costs and driving some of those efficiencies just on their systems and again just some contractor provisions et cetera, you're definitely not seeing the bottom line impacting Q3 that we would expect going into next year.

Still some integration cost and some opportunities as we consolidate systems in some of that and procurement, some of it is the technology platforms. So, much of that should be done toward the end of this year and then we should see the margin improvement that we should expect into next year..

So when we think about the commentary from last quarter, [indiscernible] place that revenue hold it developed, it sounds like we wouldn't have expected new hires to really kick in until towards the end of the year and going into '18. Sounds like the bottom-line impact on 365 went a bit slower.

Is that a fair categorization for third quarter at least and then in fourth quarter, do you think we're on the same trajectory that you expected last quarter or were you a bit behind that?.

No. I think we're on the same trajectory. Obviously fourth quarter from a residential re [ph], you've got that seasonality that comes into play, so you don't see a significant impact on Q4.

We're really looking at the commercial transaction which usually drive our Q4 performance, but I don't think any of those estimations have changed in terms of the efficiency of Title365 or these revenue producers coming on board..

Okay, thank you..

Yes..

It appears we have no further questions at this time. I will return the floor to our presenters for closing remarks..

I just want to say thank you, everyone, for joining us for this quarter's conference call and we appreciate your interest in Stewart and look forward to hearing from you next time. Thank you..

And this will conclude today's program Thanks for your participation. You may now disconnect. Have a great day..