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Stewart Information Services Corporation (NYSE:STC)

Q2 2014 Earnings Conference Call

July 31, 2014 08:30 a.m. ET

Executives

Matt Morris – Chief Executive Officer

Allen Berryman – Chief Financial Officer

Nat Otis – Director of Investor Relations

Analysts

Geoffrey Dunn – Dowling & Partners

Steve Stelmach – FBR

Operator

Welcome to Stewart Information Services Second Quarter 2014 Earnings Conference Call and Webcast. Today’s call is being recorded. At this time all participants have been placed in a listen-only mode and the floor will be open for your questions following the presentation.

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

Nat Otis

Thank you, Leo. Good morning. Thank you for joining us for our second quarter 2014 earnings conference call. We will be discussing second-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.

Before I pass the phone to Matt, I would like to point out that there are two per share numbers on the front page of the press release that you should have been [tax affected]. The $10.5 million litigation settlement is $0.13 per share and the $3.2 million acquisition is $0.09 per share. A new press release will be issued shortly if it hasn’t already.

I will now pass the call to Matt.

Matt Morris

Thanks Nat. Well, welcome, we want to thank you for joining us. We know that given recent acquisitions compounded with various closing dates, we recognize certain challengers have been analyzing this quarter’s performance, and thus we welcome the opportunity to provide a bit more color on the quarter, as well as expectations around the acquisition’s cost management initiatives and capital considerations as well.

In terms of title revenue, the overall market continued the themes over the last three quarters in the housing industry. Total title orders, while rebounding from the depressed level of the first quarter, remained well below last year. The spring and early summer season did not have the upward momentum most of us expected, resulting in title segment revenues falling 15.3% compared to the second quarter of 2013.

In terms of volume related expense reductions, excluding the effect of acquisitions, we did see some progress in the reduction in operating employee expenses were in line with the reduction in our direct title revenues. Also we are encouraged by the improvement in our title policy loss experience. We completed the acquisitions of all but the collateral valuation costs of the transactions announced in the first quarter, and as we further evaluate these new offerings, we remain confident that once integrated with our existing Stewart Lender Services business that we can expand margins throughout 2015, while the depth and breadth of services offerings position us to excel in an increasingly regulated mortgage services market. In addition, we are underway with our previously announced plan to reduce $25 million in structural expenses through certain projects that will run through the end of 2015.

So to summarize our financial results, total revenues for the second quarter 2014 were $446.1 million, a decrease of $71.1 million or 13.7% from $517.2 million for the second quarter of 2013. Operating revenues decreased 13.8% year-over-year to $441.9 million from $512.8 million.

Pre-tax earnings for the second quarter 2014 were $10.8 million, representing a decrease of $38.1 million when compared to pretax earnings of $48.8 million for the second quarter of 2013. The second quarter of 2014 includes a $13.7 million of aggregate costs relating to the previously announced litigation settlement, as well as incremental costs incurred on integration projects arising from the acquisitions closed during the quarter. The earnings per share impact of these charges is $0.39 per share.

Net earnings attributable to Stewart for the second quarter 2014 were $5.9 million or $0.27 per diluted share, as compared to earnings of $26.9 million or $1.09 per diluted share, for the second quarter 2013. So in terms of the overall market, prior year second quarter included a material number of refinancing transactions, which you are aware of, which wasn’t the case in the current quarter. Refinancing transactions are estimated to have fallen by 65%. Given the rapid fall off in refinancing transactions at about the same time last year, we do expect year-over-year order counts to reflect a more comparable mix in the second half of 2014.

Through May, existing home sales in the second quarter of 2014 are estimated to have fallen 4.5% from the second quarter of 2013, although just released June existing home sales showed an increase of 2.6% from May of 2014, and were at the highest level since October of 2013.

Home prices continued to rise with the most recent estimate indicating that they are up 4.6% from a year ago. A few other points before I turn it over to Allen, except for the valuation services businesses of DataQuick, we closed the acquisitions announced in the first-quarter, and we will close the valuation services businesses tomorrow on August 1, and so it would be included in our results for the first two months – for two months of the third quarter.

We do have a team of internal staff and external resources executing our integration plans. We remain confident in our synergy estimate of $5 million that we announced last quarter to be achieved by the end of this year, and also we are pleased to receive a ratings upgrade on a principal underwriter in late May. A.M. Best increased our financial strength rating to A- from B++.

So I will now turn it over to Allen for more detail on our financial results.

Allen Berryman

Thank you Matt, and good morning everyone. Looking first at our title operations, total title revenues declined 14.3% from the second quarter of 2013, but increased sequentially 15.6%. For the title segment revenues increased sequentially 11.6%. Since the management team oversees the mortgage services operations, also oversees our centralized title operations the acquired revenues pertaining to centralized title are reported in the mortgage services segment, while the acquired revenues pertaining to local office title operations are reported in the title segment. This reporting is in accordance with segment reporting rules.

As would be expected, the acquired revenues pertaining solely to non-title operations, such as [Indiscernible] are reported in the mortgage services segment. The remainder of my comments will otherwise indicated would discuss results as reported on the consolidated statements of operations as that is the level at which the components of revenue are disclosed.

With respect to our direct operations, our direct revenues declined 4.3% from the second quarter of 2013, but increased 35.5% sequentially from the first quarter of 2014. Our direct revenues include the acquired title operation revenues of DataQuick for two months and LandSafe for one month. Excluding these revenues, the decline in direct revenues would have been approximately 7%.

As a reminder, our direct revenues include domestic and international residential and commercial business. Our international operations, including commercial business, continue to perform well, increasing 7.3% over the prior year second quarter, but increasing nearly 50% on a sequential basis. The strong growth from first quarter 2014 is due primarily to overseas commercial transactions.

Notwithstanding the strong performance of our overseas commercial business, the majority of our commercial revenues were generated in the United States and Canada. Commercial revenues from both sources declined 8.3% from second quarter of 2013, but increased 4.6% sequentially from the first quarter of 2014.

Turning to our domestic business, our closed orders declined 20% from the second quarter of 2013, but increased 30.3% sequentially from first quarter. Note that orders from the acquired title operations are not yet included in our order count. We expect to begin including them effective the third quarter reporting. The closing ratio of 70.3% was one of the lowest second quarter closing ratio since the second quarter of 2007. Our closing ratio for the second quarter of 2013 was 73.2%, which was closer to the historical average closing ratio of 75%.

Had the closing ratio for this second quarter, the second quarter of 2014, been equivalent to 2013 second quarter, closed orders would have been almost 11,000 higher. However, revenue per order increased to 19.8% over the second quarter of 2013 due principally to home price appreciation, a shift in mix to more retail and commercial orders, combined with the decline in refinancing orders, as well as the impact of a rate increase in Texas, while was effected May 1, 2013.

For the remainder of 2014, we don’t expect to see the same increase in revenue per quarter percentagewise as refinancing orders fell dramatically starting in June of 2013, and then plateaued somewhat by September of 2013. Also the Texas rate increase will be fully anniversaried in the third quarter of 2014.

Total opened orders for the quarter fell 16.7% over the prior year quarter driven mainly by the fall off in refinancings, but increased sequentially to 15.6% from first quarter 2014. Refinancings fell from about 25% of opened orders in the second quarter of 2013, to slightly more than 15% of the total in the second quarter of 2014. So far in July opened orders per workday have remained generally consistent with what we experienced in June, which itself was only down slightly from June of 2013.

So looking at our agency operations, our independent agency revenues fell 22.2% from the second quarter of 2013, which was a much sharper decline than seen in our direct operations. We believe this decline is largely due to the geographic distribution of our agents versus our direct offices. Many of the states with the highest agency revenues saw year-over-year declines in existing home sales, in addition to the sharp decline in refinancing transactions.

While we also saw such declines in several states with direct operations presence, our significant direct presence in Texas with a very robust housing market helped to offset some of these declines. Further, our commercial direct operations benefits disproportionately from our commercial business. Our remittance rate decreased 10 basis points from the second quarter of 2013 so the net agency revenues declined at essentially the same rate as gross agencies revenues.

We continue to be pleased with performance of our independent agent network and we will continue to emphasize quality of the network, while partnering with them to get ready for the changes in the industry [Indiscernible] CFPB regulations as well as implementing ALTA best practices.

Looking now at title losses, our title policy loss experience continued its improvement in the second quarter 2014 running well below actuarial expectations. In accordance with our usual practice, we completed an outside actuarial review of our policy loss reserves and determined that our preliminary balance sheet reserve exceeded our upper limit policy range of 4% above the actuarial midpoint. We therefore booked a reserve reversal relating to prior policy years of $6.5 million in the second quarter.

A similar scenario existed in the second quarter of 2013 and we booked a $6.6 million reserve reversal relating to prior policy years in that quarter as well. Thus there was no year-over-year impact from the current quarter’s reserve release. Title loss expense declined 24.8% to $18.2 million in the second quarter 2014 compared to $24.2 million in the second quarter of 2013.

As a percentage of title revenue, title losses were 4.4% in the second quarter of 2014, a decrease of 60 basis points from the second quarter of 2013 and 190 basis points from the first quarter of 2014. But remember that that quarter included approximately $2.4 million of policy loss reserves relating to legacy escrow losses arising from mortgage fraud.

While we are still evaluating the effect of the actuarial update for the remainder of 2014, we expect to modestly lower our core provisioning rate effective in the third quarter. Remember that notwithstanding any adjustments to the core provisioning rate quarter-to-quarter fluctuations in the overall title loss ratios were not unusual due to any new large claims incurred as well as adjustments to reserves for existing large claims or escrow losses.

Our total balance sheet policy loss reserves were $494.1 million at June 30, 2014, and were approximately 4% above the actuarial midpoint of total estimated policy loss reserves.

Now turning to mortgage services, given the significance of the acquisitions to the mortgage services segment, my comments here will focus on total segment results rather than mortgage services revenues as reported in the consolidated statement of operation. Revenues from our mortgage services segment were $38.6 million for the second quarter 2014, increasing 3.6% compared to $37.7 million in the second quarter 2013, and increasing 34.5% sequentially from first quarter 2014.

Revenues were favorably influenced in the quarter by the acquisitions as well as our new contracts began contributing meaningful revenue during the quarter. Excluding the effect of the acquisitions, revenues would have declined approximately 19% due to the ongoing run off of contracts related to default and distressed properties. The segment reported a pre-tax loss of $1.6 million in the second quarter 2014, compared to pretax earnings of $5.2 million and a pre-tax loss of $1.6 million for the second quarter 2013 and first quarter 2014 respectively.

The acquired operations themselves were not accretive to pretax earnings during their short period of ownership in the second quarter due to transition activities, but we remain confident that they will be accretive by year-end 2014. As Matt mentioned, our acquisition integration team finalized the numerous project plans under development before closing, and thus began the integration efforts in earnest during the quarter.

We remain confident of our synergy savings target of $5 million and of achieving it by year-end 2014. Also as a reminder, we will close the valuation services businesses with DataQuick tomorrow, and so we will report two months of revenues from that business in this next quarter. With that we will be well on our way towards achievement of our objective for this segment to transition from its historical service offering to the management of defaulted and distressed loans to a more sustainable suite of service offerings that support the ongoing loan origination and servicing needs of lenders. We will however maintain our default services expertise and for this segment will have products that move in concert with traditional mortgage origination cycles and products that will provide revenue in down markets.

Given that mortgage origination forecasts have fallen since our original evaluation of the acquired companies at the beginning of 2014, our current expectation of annualized revenues both title and non-title have been revised downward 10% to 15% from our original expectation. Also, although recorded in the corporate segment note that we incurred approximately $3.2 million of incremental cost relating to acquisition activity.

So looking at operating expenses next, employee cost in the second quarter of 2014 increased 3.3% from the second quarter of 2013 and sequentially 6.6% from the first quarter 2014. In addition to the acquisition completed during this quarter, mortgage services entered into a new contract providing component servicing to mortgages held by military families, in which we assumed responsibility for the facilities and employees where those services are performed. As a result we added approximately 360 employees to our overall employee base.

Since year-end 2013 total headcount has increased by approximately 700 employees on a net basis, with an increase of approximately 1,050 due to the acquisitions in the new mortgage services contract, partially offset by a reduction of approximately 350 in existing operations with the majority of those reductions in the legacy mortgage services operations.

Other operating expenses increased by 21.4% in the second quarter 2014 compared with second quarter of 2013 and 31.6% sequentially from the first quarter of 2014. The increase from the prior year’s second-quarter, as well as the first quarter of this year is due principally to the litigation settlement charge, the cost associated with integration efforts and the impact of the acquisition.

Excluding the litigation settlement and the effect of the acquisitions and employee and other operating expenses would have declined on a year-over-year basis. During the second quarter of 2014 our cost management program was fully initiated. We identified specific opportunities for structural cost reductions, estimated the savings to be achieved in each, assigned project owners to each of these opportunities and began developing implementation plans, including resources necessary and estimated timelines.

Given that we are looking to change our operating structure to achieve savings irrespective of volumes, each of the projects will involve considerable internal and external resources and will take time to execute properly. We expect the majority of the individual projects to be completed by year-end 2015, and totally remain committed to our stated goal of achieving $25 million of annualized cost savings, exclusive of market conditions by the end of 2015.

And lastly, a few comments on other matters. Our effective tax rate was 30.8% and 41.3% for the second quarters of 2014 and 2013, and 47% and 41.5% for the first six months of 2014 and 2013 respectively. The second quarter tax expense is the amount computed for the first six months less the amount previously reported for the first quarter. The tax benefit shown for the first six months is based on forecasted full year effective tax rate. The effective tax rate for the first six months of 2014 increased compared to the same period in the prior year primarily because of the impact of non-deductible expenses being spread over the [lower] expected full year 2014 income than full year 2013 income.

Cash provided by operations was $15.4 million in the second quarter of 2014 compared to $46.5 million for the same period in 2013. Substantially all of the costs incurred in the acquisition integration efforts were paid in cash during the quarter, and the reminder of the decline was due to lower operating results. Cash title loss claim payments were $21.4 million in the second quarter of 2014 compared to $29.7 million for the same period in 2013, continuing the trend of declining cash claims payments.

Notes payable at quarter end totaled $65.5 million, with the increase since year-end 2013 due to withdrawals on our $75 million line of credit. Withdrawals were used principally to fund the purchase price of the acquisitions, as well as their initial working capital needs and litigation settlement payment.

Our debt-to-equity ratio at quarter end was 14%, below the 20% we had set as our unofficial internal limit on deleverage. We don’t yet have the second quarter statutory balance sheet for our principal underwriter completed, but as the end of first quarter our statutory liquidity ratio was 0.92 to 1. Our internal objective is to achieve and maintain a ratio of at least 1 to 1 as we believe that ratio is crucial for most of the ratings agency and competitive perspectives.

On an ongoing basis, this ratio will largely guide our decisions as to how much cash we will dividend up from the underwriter to the parent company. During the second quarter we acquired 96,042 shares of our common stock for an aggregate purchase price of $2.9 million pursuant to the previously announced stock buyback program. We will be alert to opportunities to buyback shares if prices are not materially good value for the shareholders. Also we currently do not intend to use leverage to accomplish share buybacks.

So with that I will turn the call back over to the operator for questions.

Question-and-Answer Session

Operator

(Operator instructions) Our first question is coming from Steve Stelmach of FBR.

Steve Stelmach – FBR

Hi, good morning. Allen, you gave some good color around the title losses, can you sort of give a little bit more color there, I know in the past you guys have sort of soft targeted 75% as title loss number, what is going to be required to get there, is it more on the loss side, or at this point is it more of a function of just a better revenue environment to drive that sort of percentage lower?

Allen Berryman

Well, I would say that we are very encouraged by the trends that we have seen on the loss side, and those trends have allowed us to not only take the reserve of leases that we took in second quarter 2013 and 2014, but it is also allowing us to revisit our core provisioning rate going forward. So, while certainly the revenue number plays an impact in that math of the title loss ratio, we still feel pretty comfortable with where we are heading on a loss of the absolute dollar perspective, as well as where the projected policy losses are heading from an actuarial perspective. So I would expect it as we have said before and continue to believe that we should ultimately be in that 5% to 5.5% range on a normalized basis.

Steve Stelmach – FBR

Got it. Okay, and more of a macro question, maybe for Matt, I think a lot of pundits out there believe the next leg of the housing recovery is dependent on sort of the return of the first time homebuyer typically lower loan balance, lower, house price, is there any evidence in your business that you are seeing that that maybe in fact occurring. I know home prices are up for everybody, and you mentioned that in your release, but, any evidence in terms of mix shift as for lower home price going forward or at least currently?

Matt Morris

I don’t think we have – no, I agree with your statement. I don’t think we have evidence that it is occurring. I will say that demand is there, and I think there are lot of conversations going on, in the lending world. We hear from homebuilders, but unfortunately I don’t see it in the data yet that those buyers are coming back into the market. Essentially I think the market will correct and they will come back. We don’t see signs of it immediately.

Steve Stelmach – FBR

Okay, and then just last one, you talked about the Texas premium increase last year and how that is working through, any prospects for sort any other sort of rate increases in any other states, or is that trend largely, played out at this point?

Matt Morris

I think that trend is largely played out. Again a lot of the – the discussions are ongoing but we have made a lot of corrections in the last couple of years taking into account, the most recent market cycle and so there will be changes. I don’t think, anything that is significantly, meaningful coming up in the near future.

Steve Stelmach – FBR

Got it. All right. Thank you very much.

Matt Morris

Thank you.

Operator

Our next question comes from Geoffrey Dunn of Dowling & Partners.

Geoffrey Dunn - Dowling & Partners

Thank you. Good morning. I guess first the tax rate is bouncing around a lot here, with a lot of moving parts in the numbers, can you give us any idea where we should be thinking about that number in the back half of the year?

Matt Morris

I think our full year sort of normalized tax rate should be in the 38% to 41% range. It has bounced around a little bit, obviously it is going to be influenced based on your overall expectation of earnings for the year and how those earnings are covered or not by any non-deductible permanent differences between the book tax basis. So it is a little hard to say exactly where it will settle out in the back half of the year, but I would say that on a fully normalized, annualized basis it ought to be in that sort of 38% to 41% range.

Geoffrey Dunn - Dowling & Partners

And then I apologize, I just missed your commentary about the ratio governing your stat dividend capability, could you review that one more time?

Matt Morris

Sure, on our statutory balance sheet, the liquidity ratio is defined as cash and investments divided by total statuary liabilities. So that is one of the ratios that the rating agencies monitor. We have historically run at a ratio of greater than 1 to 1, obviously meaning more cash in investments than statutory liabilities. We have been running it less than 1 to 1 for several years now – have been making steady incremental improvement to that. As of the end of the first quarter we were at 0.92 to 1. So we are still a little bit shy of our 1 to 1 target, and obviously we will have an update on the second quarter when we finalize the Form 9, but right now we are still just a little shy of that target.

Geoffrey Dunn - Dowling & Partners

Okay, and so you – you will stay away from stat divs from the underwriting companies if below that 1 to 1 target?

Matt Morris

That is kind of the expectation at the moment, yes.

Geoffrey Dunn - Dowling & Partners

Okay, and what currently is the – barring that ratio, what is the available regular statutory dividend in 2014?

Matt Morris

Yes, there is the theoretical amount and then is the practical amount, I would say that the practical amount is something that we really had discussed internally and haven’t really talked about external at the moment. And I think now we’ll just continue to discuss that internally and make the decision on what we might ask as a statutory dividend from our regulator or with top drive regulator about by the end of 2014.

Geoffrey Dunn - Dowling & Partners

And what’s the theoretical that the 10% or surplus type number?

Matt Morris

Well, I think it’s actually 20% of surplus is a theoretical maximum which is about $95 million based on last year’s surplus.

Geoffrey Dunn - Dowling & Partners

Great, alright, thank you very much.

Matt Morris

Sure.

Operator

Our next question comes from (inaudible).

Unidentified Analyst

Great, thanks guys. First question on buyback, just to make sure I understood that correctly. Again, it looks like you guys bought right around book value in the quarter and I think you guys know that you didn’t want to lose shareholders. So, should we think around book value as kind of the high end governor of where you guys would buyback?

Matt Morris

I would say that’s probably a fair assessment of it. We do discuss internally with our board what an appropriate limit on, purchase might be, we said before in first quarter that based on the business model consternation that we’re undergoing, we do expect to see much improved results going forward and therefore buying shares today at book value maybe quietly above. It seems to be reasonable way of returning capital to the shareholders.

Unidentified Analyst

And then, I just wanted to clarify the integration cost of $3.2 million, did those went through the mortgage service segment or the corporate segment, just wanted to ensure about that?

Matt Morris

Yes, they went through more of the corporate segment. To clarify the litigation settlement charge of $10.5 million is in the tidal segment whereas the acquisition integration charges are in the corporate segment.

Unidentified Analyst

Got you. And then, I mean, again, just looking at the more with service segment, even with the revenue growth and excluding those transaction cost, I guess a little surprising to see it run at a modest loss again this quarter. I’m not trying to get too much dig into too much guidance, but when we can expect that not to be – when do we think that can be profitable again?

Allen Berryman

I think the synergies will play out through the end of this year, I mean, really if you look at our expectations if we get back to really looking at 2015 and in 2015 we think we’ll start the year off with nominal margins but increasing those margins could have been at 15% range by the end of the year, by the end of 2015. So, it’s part of how I think it should be judged. Remainder of this year I think will largely be integrating those transactions and obviously there is a lot of noise and associated with the transaction done only in the one-time cost that in integrating those acquisition. So, we will be spending a lot of time on that this year really with margins coming back in line starting beginning, end of this year, beginning next year and hopefully becoming fully accretive by the end of 2015.

Unidentified Analyst

Got you, thanks for that color. And my last, just a number, quick loan numbers item. The investment income it can’t have been in the run rate of high 3s, it almost reached $5 million this quarter, were there any one-timers in the investment income this quarter?

Matt Morris

No, they were not.

Unidentified Analyst

Okay, great, thanks, that’s all I had.

Operator

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

Unidentified Analyst

Good morning, this is Jims filling for Brad, thanks for taking the questions. Just a thought on the agency business, could you give us a little IPO, what’s driving the 22% decline there in agency and they called out the variances in GOs for existing home sales, but I mean, things like existing home sales and even kind of worse regions at Midwest and West decline in the 5% to 10% range. Is there something else going on there that we should think about and how is that going to kind of trend moving forward?

Matt Morris

At this time our analysis is, the year-over-year decline is sort of a geographic issue, I would think going forward you would see less disparity between the fee changes in direct revenue and the changes in agency revenue, of course, depending on how strongly the commercial business behave that could also influence revenue. But, one of the things that I mentioned earlier is that in the back half of the year the Texas rate increase will be anniversary and so you won’t have the benefit of that rate increased on a year-over-year basis in the direct operations. And, we’ve had some very, very nice results in our (inaudible) market here in Texas and that’s been gratifying to us. I would say that on the agency front we’ve not changed our philosophy of managing our agents for quality and profitability rather than growth and so, I think that’s probably populating because that line is the business that we will continue for the foreseeable future.

Unidentified Analyst

And that weakness in agency help profitability at all this quarter?

Matt Morris

Not materially because overall agency retention rate didn’t change tremendously during the quarter. The underlying off ratio of the existing agent is very, very good and has been for so for quarters in a row, so I would say that the agent business in the absolute is profitable for us.

Unidentified Analyst

Okay, great. And then, on the cost cut $25 million, even talking about those structure reductions, how much was completed in 2Q, I know there is some offsetting cost associated with that and we don’t get the full ramp more until 2015, but we can get, is there any clarity you can give on sort how the net benefits might come in early 2015 and even 2014 and how we can think about that?

Matt Morris

Yes, I expected that we will start to see some of the benefits of this program coming in early 2015. Cost management is something that we undertake on a daily basis and as we go through any given quarter we’re always reducing cost where we find the opportunity to do so. I would tell you what the little different about this exercise is the much more rigorous process review and more rigorous review of our technology and a more rigorous review of our operating structure options. And so, when we’re doing that type of activity, you’re undergoing a fairly comprehensive self examination and those types of things you want to be careful about because the cost of not doing them correctly could be extreme. And so, we’re being very measured in the approach and very delivered in the approach and the project plans we’ve in place are solid.

We’ve got good people executing, we’re moving on a very deliberative fashion and therefore I don’t know that we’ll see a tremendous amount of that in 2014, but should start picking up in early 2015 and then ramping up through the rest of the year.

Unidentified Analyst

Okay, thanks. Last question from me is on the buybacks, thanks for the commentary there first of all and just to dig in a little more, could you give any clarity on whether there are any factors besides share price as it relates to book value that might affect win and how many shares you buyback, and then how can we expect those buybacks to ramp moving forward?

Matt Morris

I would think the only other principle consideration would be the fact that I mentioned little earlier in terms of getting a dividend out of our underwriter into the parent company for cash to fund the buyback. Our underwriter had some nice performance in the first quarter on a statutory basis, again haven’t seen second quarter, but we expect it will be incrementally positive to the liquidity ratio and the surplus in the second quarter. We gather a invest upgrade in the second quarter, so all the signs are pointing to making us feel more comfortable with these ideas of taking cash out of the underwriter and dividending up to the parent company for purposes of share buyback.

Typically, I would say we haven’t asked our regulator for a dividend now for many years, and so, we’ve always had a really good relationship with our regulator and so to the extent that we go to them and say, it’s time for us to dividends and cash out of our underwriter up to our parent, I think they will be fine with it. I think it’s less of a regulatory issue and I think it’s more or less feeling comfortable with some metrics around our statutory balance sheet relative to both rating agencies as well as what our competitors might publish.

Unidentified Analyst

Thanks it’s very helpful, thanks John and thanks Matt.

Allen Berryman

Thank you.

Matt Morris

Certainly.

Operator

Our next question comes from Geoffrey Dunn of Dowling & Partners.

Geoffrey Dunn – Dowling & Partners

Thanks. Just a quick question on EM&A expenses, is pretty unchanged at this quarter. How should we expect that to drop off at the back half of the year since we directionally we’re trying incorporate that, I want to get re-hit on how your corporate expense going to improve with those follow up?

Matt Morris

I think you will probably see a similar level in the third quarter and we’re being the real heavy lifting if you will of the integration effort in this quarter, so wouldn’t surprise me at all with the similar level in third quarter with it falling off pretty substantially by fourth quarter or into fourth quarter.

Geoffrey Dunn – Dowling & Partners

Okay, great, thank you very much.

Matt Morris

Certainly.

Operator

And there are no further questions at this time and I would like to return the conference back to Mr. Nat Otis for any concluding remarks.

Nat Otis

Thanks Veil. Once again I would point out that on the front page of the press release the $10.5 million litigation settlement is actually $0.30 per share and the $3.2 million acquisition related expense is $0.09 per share and I want to thank everyone for joining us today that concludes this quarter’s conference call and we’d join us for our third quarter call on October 23. You can disconnect your lines, thanks.

Operator

Thank you, this does conclude today’s teleconference, please disconnect your lines at this time and have a wonderful day.

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Source: Stewart Information Services' (STC) CEO Matt Morris on Q2 2014 Results - Earnings Call Transcript

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