Stewart Information Services' (STC) CEO Matt Morris on Q4 2015 Results - Earnings Call Transcript

| About: Stewart Information (STC)

Stewart Information Services Corp (NYSE:STC)

Q4 2015 Results Earnings Conference Call

February 11, 2016, 8:30 am ET

Executives

Nat Otis - Director of Investor Relations

Matt Morris - Chief Executive Officer

Allen Berryman - Chief Financial Officer, Treasurer, Secretary

Analysts

Chas Tyson - KBW

John Campbell - Stephens Inc.

Patrick Kealey - FBR

Kevin Kaczmarek - Zelman & Associates

Geoffrey Dunn - Dowling & Partners

Ryan Byrnes - Janney

Operator

Welcome to the Stewart Information Services' fourth quarter and full year 2015 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 opened for your questions following the presentation.

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

Nat Otis

Thank you, Tanisha. Good morning. Thank you for joining us for our fourth quarter 2015 earnings conference call. We will be discussing results that were released earlier this morning. Joining me today are CEO, Matt Morris and CFO, Allen Berryman. To listen online, please go to the stewart.com website to access the link for this conference call.

I will remind participants this conference call may contain forward-looking statements that involve a number of risks and uncertainties. Because of such statements are based on an expectation of future financial operating results and are not statements of fact, actual results may differ materially from those projected. The risk and uncertainties with forward-looking statements are subject to include, but are not limited to the risks and other factors detailed in our press release published this morning and in the statement regarding forward-looking information, risks 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.

Matt Morris

Thank you, Nat. Again, we appreciate everyone joining us this morning today. This morning, we reported fourth quarter 2015 earnings with our title segment delivering another quarter of solid results, while our mortgage services segment remained challenged by the delinquent loan servicing operations, which we are exiting.

Allen is going to provide the specifics our financial results in a moment, but let me first offer my thoughts on 2015 and the outlook for 2016 at the more macro level. 2015 will be remembered as the year of TRID for the title industry, bringing more processing technology changes than we have seen in decades. We are seeing a return to business as usual as any lingering questions are resolved and processes and technology refined.

In addition to the industry change, 2015 was eventful year for Stewart. We accomplished that lays the foundation for a continued prosperous future. We launched a major brand refresh and committed resources to discipline target sales growth. We rigorously evaluated the performance of our network of direct offices and consequently exited several underperforming states.

We instituted new processes and technology that improve operational efficiencies and initiated an enterprisewide effort that will revamp our title and escrow production over the next 24 months, enabling further efficiencies and expense reduction. We accomplished significant outsourcing pursuant to our cost management program resulting in our enhanced year-over-year pretax margin and we expect to leverage the lessons learned to further reduce costs, improving margins in 2016 and beyond.

Restoring our mortgage services operations to profitability has been more difficult than anticipated. We responded to rapidly shifting market conditions and announced the exit from our delinquent loan servicing operations in second quarter of 2015. Unfortunately, those operations have and continue to negatively impact results through the first quarter this year. Market conditions change continuously and we are acting aggressively to create a more cost-effective operating platform, including systems rationalization, offshoring and reevaluating our geographic footprint.

In November 2015, we announced a 20% increase in the company's cash dividend payable to common shareholders to $1.20 per share, responding to our ability to deliver improved operating performance and cash flow. The first quarterly payment of the increased dividend began in December 2015. We remain committed to allocating capital to maximize shareholder value, including how and when we invest in growth and operational capabilities.

Of course, capital allocation and operational decisions always take into consideration our expectations of market conditions. Our current view is for total title industry revenues in 2016 to be in line with 2015. We expect home sales and home prices will experience low single-digit increases which would be offset by a decline in refinance volumes. We do believe that strong commercial real estate market combined with a greater than normal commercial refinance volume should results in a low double-digit percent increase in industrywide commercial revenues.

With respect to Texas and specifically Houston, each continued to gain jobs although the Houston's housing market has seen a recent decline in home sales, particularly in homes priced over $750,000. While home sales in Houston declined 2.5% last year, I want to remind you that 2015 was the second-highest sales volume ever recorded in the city. We anticipate a 10% decline in total Houston existing home sales in 2016, partially offset by a small increase in median price. The Houston economy is far more diversified now than in past slowdowns and in fact we are seeing offsetting job growth and increased housing demand related to the downstream energy construction boom along the Gulf Coast.

Texas overall existing home sales are expected to grow in 2016, albeit at a lower rate than the 3.4% in 2015. But whatever the global market conditions present, we continue to pursue smart revenue growth. In late 2014, we established a chief revenue office and during 2015 expanded our revenue growth and sales management capabilities. Today we have specific revenue targets for 2016, which should yield above market growth in the areas we target with a specific plan with accountable executives to achieve them.

We also recognize that the changing regulatory environment and its impact on customer requirements may enable highly accretive acquisitions in our core title business. Coupled with our successful cost management program, including further centralization, offshoring and technology rationalization over the next two years, we are committed to a 10% pretax margin in a normalized origination market.

Lastly, in continuing our transformation, we announced on January 26 of this year, a plan to reclassify company stock to eliminate its dual class structure. We believe that the proposal will strengthen Stewart's corporate governance by aligning voting rights with economic interest of our stockholders. Our simplified capital structure provides a solid foundation for us to drive value creation and future growth. The company will be seeking stockholder approval of the reclassification at its annual meeting of shareholders on April 27, 2016.

So now I am going to turn it over to Allen to discuss the financial results.

Allen Berryman

Thank you, Matt. Good morning everyone. Total operating revenues decreased 3.3% in the fourth quarter of 2015 compared to the year ago quarter with title revenues essentially the same as last year and mortgage services revenues declining by 40.2% as we exit the default servicing business.

Although overall close title orders declined by 1.5% from fourth quarter 2014, a shift in mix the offset revenue decline what would otherwise have been experienced. We closed 2.6% fewer residential orders in fourth quarter of 2015 which was offset by growth in refinancing and commercial orders closed at 5% and 1.5% respectively. We believe that our residential closings in the quarter were somewhat negatively impacted by the new integrated disclosure requirements known as Know Before You Owe, which became effective October 3, 2015.

Commercial revenues continued to show strength with worldwide growth of 9.1% over the prior year. Notwithstanding the modest growth in overall title segment revenues, the segment generated solid pretax results with pretax margin growing approximately 200 basis points to 12.1%. In addition to the growth in higher margin commercial revenues, our cost management program positively influenced pretax margin.

With an expected sharp decline in refinancing originations in 2016 as well as an ongoing reduction in the number of delinquent and defaulted loans, we anticipate title revenues associated with these transactions to decline primarily affecting our centralized title operations within the mortgage services segment. While we have seen new customer growth in mortgage services, our operational focus will be on continuing to rationalize our cost structure to return the segment to profitability in the second quarter with margin growth on track for further improvement in back half of the year.

As in previous quarters, we have included a table in the press release setting forth adjusted income before taxes and adjusted EBITDA. We provide this information as we feel these are important measures of operational profitability. We recorded several nonrecurring and nonoperating charges during the quarter and I want to summarize them here to provide some context to the quarter's overall results.

We incurred approximately $3.7 million of cost in mortgage services segment relating to the exit of the delinquent loan servicing operations, consistent principally of severance for early lease termination charges, asset impairment and accelerated amortization. Our estimate of the total charge to be incurred related to exiting these operations remains in the previously stated $5 million to $7 million range to be incurred through the first quarter of 2016.

The title segment incurred approximately $1.8 million of nonoperating charges associated with severance and asset impairment. The corporate segment reported approximately $4.4 million of charges related severance with legal consulting cost due to cost management program and asset impairment.

So with that background, I will look at our business unit results. With respect to direct title operations, revenues increased by about 1% from the fourth quarter of 2014. Total title orders opened in the fourth quarter declined 8.6% from the prior year quarter, while total title orders closed decreased 1.5%. Residential fee profile in the quarter was $1,943, up slightly from $1,901 in the third quarter of 2015.

U.S.-only commercial revenues increased 8.7% to $48.7 million compared to fourth quarter of 2014. Total worldwide commercial revenues for the quarter were $55.2 million, an increase of 9.1% from the fourth quarter of 2014. International commercial revenues, though unfavorably impacted by a strengthening U.S. dollar, still grew 12.1% to $6.5 million compared to fourth quarter of 2014.

Looking at commercial revenues on a full year basis, which helped smooth out some of the quarterly volatility, U.S.-only commercial revenues grew a strong 14.7% and total worldwide commercial revenues grew 9.3%. For the fourth quarter 2015, total international revenues were $27.8 million, down 2.1% from $28.4 million in the fourth quarter of 2014. The revenue decline was due solely to the changing foreign currency exchange rates as a result of continued strengthening of U.S. dollar.

Our independent agency operations also generated positive results with fourth quarter 2015 revenues comparable to fourth quarter 2014. Net of agency retention, independent agency revenues increased 1.5%. The full year 2015 and 2014 remittance ratios were 18.3% and 18.5% respectively and our anticipated ongoing remittance ratio will be in the mid-18% range, since we consider full year remittance ratios to be more predictive than any single quarter.

With respect to title losses, title losses were $27.7 million in the fourth quarter of 2015 or 5.9% of title revenues, compared to $31.3 million or 6.6% of title revenue in the prior year quarter. On a year-to-date basis, which helps smooth out some quarterly volatility in loss ratios and excluding the $14.8 million recovery recorded in third quarter of 2014, our core accrual rate for title losses was 5.6% for both 2015 and 2014. We anticipate maintaining our core accrual rate around 5.5% going forward.

Our total balance sheet policy loss reserves were $462.6 million at quarter end and remained above the actuarial at midpoint of total estimated policy loss reserves. We closed out 2015 on a stronger positive note in our title operations notwithstanding the effect of the new integrated disclosure requirements. Although total title segment revenues grew approximately 1% from last year's fourth quarter, the segment generated pretax income of $54.9 million representing a 12.1% margin, increasing 20.4% from fourth quarter of 2014 to $45.6 million which was a pretax margin of 10.2%.

Looking at mortgage services segment, revenues increased 39.8% to $42.2 million compared to the year ago quarter. Fourth quarter 2014 revenues include net realized gains of $7.4 million. Relative to the fourth quarter of 2014, the revenue decline was primarily attributable to expected declines within our delinquent loan servicing operations following demand for certain centralized title products, including refinancing transactions and default related title and the sale of a small subsidiary in fourth quarter of 2014.

Excluding the impairment of nonoperating charges, the segment generated an adjusted pretax loss of $8.8 million in the fourth quarter 2015 versus pretax income of $1.7 million for fourth quarter 2014. This represents a pretax decline of $10.5 million on an operating revenue decline of $19.9 million. The delinquent loan servicing operations will continue to operate unprofitably during the first quarter of 2016 as we wind this business down in accordance with the schedule agreed to with our customers.

After finalization of the wind down of the delinquent loan servicing operations, the revenues of the mortgage services segment will be predominantly aligned with the mortgage origination cycles especially as it relates to centralized title and valuation services. While we will retain our capability to providing services to assist in the management of trouble loans, we expect the residual revenues associated with these service offerings to continue to shrink. Therefore as we mentioned earlier, our operational focus in 2016 would on implementing cost reductions and other efficiencies to return the segment to profitability in the second quarter of 2016.

With respect to operating expenses, employee costs for the fourth quarter 2015 decreased 4.2% from fourth quarter of 2014 and decreased sequentially 3.2% from third quarter 2015. Average headcount decreased approximately 6% and 3.2% from fourth quarter of 2014 and third quarter 2015, respectively. Excluding severance charges, employee costs as a percentage of operating revenues, were 31.8% and 32.4% for the fourth quarter of 2015 and 2014, respectively.

Other operating expenses for fourth quarter of 2015 and 2014 were comparable. Fourth quarters 2015 and 2014 include $1.3 million and $7.7 million, respectively of the charges described earlier. Excluding the impact of these costs, other operating expenses as a percentage of total operating revenues were 19% and 17% in the fourth quarters 2015 2014, respectively, with the fourth quarter of 2015 ratio being unfavorably influenced by lower operating efficiencies.

Depreciation and amortization expense was $8.3 million in the fourth quarter of 2015, as compared to $8.2 million in the fourth quarter of 2014. Included in fourth quarter of 2015 is $1.1 million of accelerated depreciation charges related to exiting the delinquent loan servicing operations.

Lastly, a few comments on other matters. Fourth quarter 2015 results include net realized losses of $4.6 million, driven primarily by $3.6 million of impairment charges whereas fourth quarter 2014, include net realized gains of $5.1 million driven by noninvestment portfolio realized gains totaling $9.1 million partially offset by impairment charges of $2.7 million.

Cash provided by operations was $14.9 million in the fourth quarter of 2015 compared to $49.6 million for the same period in 2014, a decrease of $34.7 million. The decrease is due to the decline in net income as well as claims payments in excess of our loss provision as we paid a large claim that had previously been accrued. Fourth quarter of 2014 also included cash receipt related to the partial recovery of a large loss which had been reflected in title loss expense in the third quarter of 2014.

With regard to further cost management, our focus is on those actions that will improve pretax margins and as we have said our goal is to achieve a 10% pretax margin in the normalized origination market. Our plan to improve margins, including further outsourcing, additional automation and manual processes and further consolidation of our various systems and production operations. Improving margins also means seeking better pricing from our vendors, aggressively managing our portfolio of office leases and being disciplined when it comes to keeping an existing office opened or deciding to leave to open a new one. All of these drive margin improvement. Given the multitude of variables involved, we don't comfortable providing an absolute number for cost reduction.

With that, I will turn the call back over the operator to take questions.

Question-and-Answer Session

Operator

The floor is now open for questions. [Operator Instructions]. Our first question is coming from Bose George with KBW. Please go ahead. Your line is open.

Chas Tyson

Hi. This is actually Chas Tyson, on for Bose. I had a question on mortgage services segment. A couple of quarters ago you guys had given guidance on that segment, targets of $120 million to $140 million of revenue with low teens EBITDA margins. Given that commentary you made about lower centralized refi and default production in 2016, are there any updated thoughts on those revenue or margin numbers?

Matt Morris

I would say right now that the revenue numbers in 2016 are probably modestly lower than that. But I would also say that as mentioned a minute ago, our goal is to get that segment back in to profitability beginning in Q2 and then ramping it up from there. I still expect to see as a pretax margin of about, let's call it, high single digits with an EBITDA tight margin in low double-digit as we get towards to the back half of 2016.

Chas Tyson

Okay. And should we think, if we look at the segment and try to ex that delinquent services part of the business, I know you mentioned that you are trying to look at the cost structure to get to profitability in 2Q, but I guess if we think about the segment going in 2Q, ex that delinquent services do you need to rationalize the cost structure or take out some cost to get profitability? Or would it already be profitable even absent finding efficiencies?

Matt Morris

Well, we would clearly need to rationalize some of the cost structure to get to the margin targets that I just outlined. But I think we can get there on just business as usual with those remaining operations.

Chas Tyson

Okay. Got it. And then I want to ask, if you had a viewpoint this kind of limit on the industry in general, whether there is a possibility for consolidation among larger players from an antitrust perspective? Do you think that would be a possibility?

Matt Morris

It's hard to speculate on that. It's really so many variables involved in potential industry consolidation. You don't want to try to predict what regulatory actions might be taken or not. So I think at this point, we would rather not speculate on that.

Chas Tyson

Fair enough. Thanks very much.

Operator

Thank you. Our next question comes from John Campbell with Stephens Inc. Please go ahead. Your line is open.

John Campbell

Hi guys. Good morning.

Matt Morris

Good morning John.

John Campbell

With respect to the mortgage services segment, can you isolate or maybe just tell us a little bit more about just maybe the originations side of the business, what's that doing to both of the services? Is that growing outside of the default related services?

Matt Morris

Refinance volume is falling. I think as we have seen as an industry trend and so most of our refinance business is in that mortgage services segment and so while it is origination, that business line is primarily made up of particularly defaults. These are services which are obviously declining as the economy improves as well as falling refinance volumes.

John Campbell

Okay. Got it. And then obviously, with some of the severance costs coming out of mortgage services, you guys have already taken a lot of those actions. So it's not necessarily as you get in the next few quarters, you guys have to cut additional staff. It sounds like you already maybe have made some cuts and we should see those as naturally some of those most saves you left into the next two or three quarters?

Matt Morris

I think that's fair. I mean, obviously we are going to react to volume fluctuations and continue to make cost rationalization as volumes fluctuate. So to say that we are completely done with the cost cutting on the side of the business that's unrelated to what we are exiting, it's probably not completely accurate.

John Campbell

Got it. And then just industry trend, obviously the 30 year has declined every single week to start this year. Are you guys seeing any kind of lift like modest lift at refis to start the year?

Matt Morris

We are. I think that's in line with what we are seeing in the overall market, but we would echo what we are seeing in the press on refinance increases as mortgage rates are declining starting this year.

John Campbell

Got it. And then last one from me. On the reserve, that was a little bit higher than what we were expecting this quarter. I know there is some volatility there. Was that anything that you guys can isolate in the past? Any particular maybe commercial claim or anything like that?

Matt Morris

No. Nothing really stuck out in the quarter. In any given quarter, we are going to obviously have a little bit of volatility, whether just depending on whether we have got some adjustments, positive or negative, to our overall reserve position. But no one large thing stuck out in the quarter. I still feel really comfortable about us reserving about 5.5% range going forward recognizing that there is always going to be a little up or down in any given quarter.

John Campbell

Sure. Thanks for taking the questions, guys.

Operator

Thank you. Our next question comes from Patrick Kealey with FBR. Please go ahead. Your line is open.

Patrick Kealey

Good morning. Thanks for taking the questions. First off on the title business, you saw nice year-over-year growth in the pretax margin and outlined some cost-saving initiatives for 2016. So being at 12% now, what would you say is your long-term goal, given the initiative you have now? And not asking for a timeline, but say a couple years out where would you expect that to be in a normal origination environment?

Matt Morris

Well, in a normal origination environment, you are probably pushing it closer to 15%, just assuming all of the things being equal. But as we said, we are continuing to work on some production efficiencies that we think will help us get there, so that we are set up for that sort of margin achievement in that environment.

Patrick Kealey

Okay. Great. And then on the capital management side of things, given market volatility and your new share repurchase authorization you guys put out toward the end of last year, how are you thinking about that. maybe near term and a little bit longer term between further dividend increases versus looking at your own stock at today's levels?

Matt Morris

Well, I would first point out that part of the capital management equation is also managing our underwriter's balance sheet. And we don't really know yet what our statutory balance sheet looks like. So probably not looking to do stock repurchase until we have a better sense of what our overall statutory balance sheet looks like as well as just some other variables that we take into account in any scenario. So it's something that's obviously we evaluate on an ongoing basis and try to make the smartest decision possible, given the circumstances at the time.

Allen Berryman

And just to highlight that again. So I think we have talked about the prioritization of just the stability of the underwriter, first and foremost. Secondarily would be dividends in the range which we are looking at right now. And then subsequent to that, just looking at growth opportunities then stock repurchase would be in there. Either board would continue to look at ongoing capital opportunities to see how to return long-term value to shareholders.

Patrick Kealey

Great. And then if I can squeeze one more. You talked number of cost rationalizations you guys are looking at. So if I think about that on a timeline, is there any you can highlight as maybe a little bit more near-term or low hanging fruit versus the others you mentioned? Or is it really just everything is kind of on an ongoing basis and it will blend in here over the next couple quarters as we move through 2016 and maybe into 2017?

Matt Morris

Yes. I think it should blend in. I believe we are picking really the low hanging fruit and that's why, as Allen commented, we haven't pushed a number out there. We feel like the cost management program itself took the big buckets and now we have some longer-term initiatives over the next couple years will continue to improve margins going forward.

Allen Berryman

If you think about sort of production efficiencies that implies lower unit cost of production and obviously you get the savings of lower unit cost of production, it's just a little hard to trace it straight line, because of volume fluctuations. But that's why we try to focus more on just lowering unit costs because that's a savings that you get in up or down transaction environments.

Patrick Kealey

Okay. Very helpful. Thank you guys.

Matt Morris

Thank you.

Operator

Thank you. Our next question comes from Kevin Kaczmarek with Zelman & Associates. Please go ahead. Your line is open.

Kevin Kaczmarek

Thanks. Given TRID related issues in the fourth quarter on the title side, I know you gave some margin guidance on the mortgage services segment, but on title can you give us a sense of whether your expenses were abnormally elevated at the end of 4Q? And how they should maybe trend into the first part of 2016?

Matt Morris

Yes. We did see some increased over time in our title segment in the fourth quarter. It was about $2.5 million more in overtime in this fourth quarter versus the year ago fourth quarter. Obviously, it's hard to say that every dollar of that would be for TRID but the working assumption which I think is a valid one is that the lion's share of that increased overtime was due to TRID. So as you move into the seasonal slower time of the year, you are naturally not going to incur a lot of overtime to begin with and then you also do other things like it adjusting hours or what have you to respond to changes in volume in the first part of the year.

Kevin Kaczmarek

Okay. And then on the order side, would you guys, I guess is there an extra backlog of orders that didn't get processed that you expect a catch-up in 1Q? Or how is that trending in terms of the order closing times?

Matt Morris

It's interesting. We saw a lot of that take place in Q4 and I think there is some holdover. But honestly, a lot of that picked up towards the end of the year and I would say closed a little bit sooner than we may have anticipated.

Kevin Kaczmarek

Okay. And I guess on the commercial side, have you seen any upticks in claims related to energy? Or do you have any sense of your exposure here?

Matt Morris

No. We really haven't seen any real uptick in our commercial claims. We have had a relatively, what I would call anyway, a relatively benign year from that perspective, just relatively few. We had some in the first quarter. You probably remember the discussion back to and around some of the claims were approved in the first quarter, but since then it's been really pretty modest.

Kevin Kaczmarek

Okay. And then I guess lastly on the Asian revenue, what were some of the drivers there? Was there anything that stood out in the quarter in terms of the regular order flow or whether their revenues were abnormally affected by TRID?

Matt Morris

Only anecdotal information there. I had said in a couple of meetings with some of our agents back in middle part of the fourth quarter and it was clearly impacting them then. But my expectation is that as they got into December they started to see some of that closing activity normalized. You can see from our table in the press release, our orders closed November through December and jumped up nicely and I would anticipate that the agents had a similar experience.

Kevin Kaczmarek

Okay. So I guess in a way, you guys accrue for it. We shouldn't be modeling any sort of --?

Matt Morris

No. Since we don't really know agent order flows, we just know cash receive flow. And that kind of gives us an idea of trends.

Kevin Kaczmarek

Okay. Great. Thanks.

Operator

Thank you. [Operator Instructions]. And we will go ahead and take our next question from Geoffrey Dunn with Dowling & Partners. Please go ahead. Your line is open.

Geoffrey Dunn

Thank you. Good morning.

Matt Morris

Good morning.

Geoffrey Dunn

A couple of accounting questions. First. I am trying to get a better idea of how your services profitability compares to other real estate services products out there? When we look at that margin, is there any purchase price adjustments that are in there, but you typically see other companies extract out?

Matt Morris

Yes. That includes amortization of acquired intangibles.

Geoffrey Dunn

So when you are talking kind of low double-digit margin, if you adjust for the purchase price amortization, where does that margin shake out?

Matt Morris

That would adjust for the purchase price amortization.

Geoffrey Dunn

Okay. So the guidance is excluding purchase price amortization which was included in the results of this quarter?

Matt Morris

Yes. It is included in the result. So on a GAAP basis, obviously it includes it.

Geoffrey Dunn

All right. So are you guys going to start breaking that out for us? Because I think the implication then is, we are looking at probably more of a high single-digit margin.

Matt Morris

For GAAP? High single digit GAAP and low double digit adjusted for purchase price amortization. We can certainly put that in our 10-K.

Geoffrey Dunn

Okay. And then with respect to your corporate, has management give any additional thought in terms of allocating that to the segments?

Matt Morris

Well, obviously we recognize they are a little different in our treatment of corporate expenses and a lot of what centralized services operations that end up in that segment. So that's something we are evaluating. It's a little premature to speculate on how we might change it. But we are thinking about that again.

Geoffrey Dunn

Okay. Great. Thank you.

Operator

Thank you. Our next question comes from Ryan Byrnes with Janney. Please go ahead. Your line is open.

Ryan Byrnes

Great. Thanks. Good morning, everybody. Just had a question on the open orders within commercial. The second quarter in a row they were down double-digits. Just wanted to see if something was going on within the commercial segment there?

Matt Morris

Nothing that we have seen that we can point out. Given the nature of commercial transactions, we usually are careful on the quarterly comparisons but we continue to see commercial growth and are encouraged by commercial productivity.

Ryan Byrnes

Okay. And then shifting back to the corporate segment, again I realize there are a bunch of kind of one-timers running through that this year. But again, it was worse year-over-year, the pre-tax losses were around in $160 million versus $140 million last year. Just trying to figure out, what a decent run rate, again how should we think about that going forward?

Matt Morris

Probably a little premature for me to give guidance on that. Obviously as I said a minute ago, we are rethinking how we look at that cost pool there, but I would expect certainly in first quarter we will normalize the actual operating expenses of that operation of that segment. So I think I will just leave it that for now.

Ryan Byrnes

Okay. And then just my last one would be, the agents split. They continue again obviously year-over-year with some solid improvements same as this the third quarter. Is that just kind of reflective of the geographic mix shift? And is that something you guys should expect to continue?

Matt Morris

The improvement in the quarter was largely due to improved mix in terms of getting more revenue from the higher remitting states. Clearly we have targeted from a revenue growth perspective, we are targeting growth in the states that are higher remitting. Having said that, we do think that sort of 18.5% remittance rate would be a good outcome for us in 2016.

Ryan Byrnes

Great. Thanks.

Operator

Thank you. [Operator Instructions]. And it does appear, we have no further questions. I will now hand the floor back over to Matt Morris for any additional or closing remarks.

Matt Morris

Thank you very much. And again, I appreciate everyone joining us this morning. Just to close, reiterate that we are encouraged by the company's transformation over the last several years and we do remain committed to further margin expansion growth with some fine projects to drive shareholder value. So we appreciate your time this morning and have a great day.

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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