Stewart Information Services (STC) CEO Matt Morris on Q2 2016 Results - Earnings Call Transcript

| About: Stewart Information (STC)

Stewart Information Services Corporation (NYSE:STC)

Q2 2016 Earnings Conference Call

July 21, 2016 08:30 am ET

Executives

Nat Otis - Director of Investor Relations

Matt Morris - Chief Executive Officer

Allen Berryman - Chief Financial Officer

Analysts

Patrick Kealey - FBR Capital Markets

John Campbell - Stephens Inc

Geoffrey Dunn - Dowling & Partners

Chas Tyson - Keefe Bruyette & Woods

Ryan Byrnes - Janney Montgomery Scott

Kevin Kaczmarek - Zelman & Associates

Operator

Good day and welcome to the Stewart Information Services Second Quarter 2016 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 like to now turn the call over to Nat Otis, Director of Investor Relations. Please go ahead, sir.

Nat Otis

Thank you Erica. Good morning. Thank you for joining us for our second quarter 2016 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 that this conference call may contain Forward-Looking Statements that involve a number of risks and uncertainties. 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

Thanks Nat. And we appreciate everyone joining us today. This morning, we reported a clean second quarter 2016 where our improved cost structure resulted a higher profit margins, even as we saw decline in revenues. Our title segment delivered improved profitability and our ancillary services and corporate segment continued to show better results. Given the significant changes we have made in restructuring our business to reduce risk and enhance the scalability of our operations, we are approaching historically low titles losses while seeing quicker reduction of cost in response to changing in top line revenue.

As a consolidated level, we reported pretax income of $41.9 million, an increase of more than $10 million from the $31 million recorded in the second quarter of last year, while our second quarter 2016 total revenues fell 8%. We continue to benefit from the cost management program completed in the third quarter of 2015 as long as enhanced financial discipline with our core operations, this resulted in total expenses for the quarter falling 11% more than offsetting the decline in operating revenues.

As we maintain our focus on our core business, our title segment continues to show year-over-year improvement in pretax margin improving to 120 basis points over second quarter 2015. Total title revenues decreased 6% primarily due to lower refinance volume and low independent agency revenue and ancillary services revenues declined 38% as a result of our strategic exit of the delinquent loan servicing activities in the first quarter of 2016.

Looking forward we are continuing investments to lower our unit production cost and enhanced margins. We are also investing in revenues growth through targeted marketing program and hiring new sales associates while establishing more rigorous goals and accountability within our sales culture. Over the next few years, we expect to continue to realize improving margins through further outsourcing technology rationalization and title and escrow centralization and automation moving us toward our 10% pretax margin goal.

I'd also like to take a moment to address recent public statements about our company may by one of our shareholders. As many of you are aware that Stewart Board of Directors has taken significant actions and instituted a number of important changes over the last several years. We have long stocks maintained and open and productive relationship with our shareholders and if they committed to improve in the company's corporate governance profile and driving value for all of our shareholders.

To that end, we have added three new directors over the last three years including shareholder representatives which we believe help ensure a strong alignment between the interest of our directors and all of our investors.

We eliminated the company's dual class structure and now have a single class stock. We've improved core title margins from reduced expenses by $30 million from centralization optimization offshoring and technology rationalization. But we've increasingly engaged in shareholder friendly initiatives and including completing $70 million capital return program and increasing the dividend from $0.10 per share to $1.20 per share in 2015.

We believe strongly in our strategic plan and think Stewart is well positioned to deliver meaningful shareholder value over the coming years. We've completed significant restructuring initiatives here at Stewart and we believe the go forward business performance will reflect the positive impact of the actions we've taken resulting in continued growth and enhanced profitability. Our board values the opinions of our shareholders and we welcome open dialog with a shared goal of driving value.

I can assure you that our board and management will continue to take actions that we believe are in the best interest of all shareholders. We believe that over the next year and beyond the business will generate stronger margins and earnings growth that will translate into tangible shareholder value. At the same time I wanted to stress that it is the matter of course the board considers the wide range of strategic option to maximize shareholder value.

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

Allen Berryman

Thank you Matt and good morning, everyone. The title segment generated pretax income of $52 million or 11% margin compared to second quarter 2015 pretax income of $49 million or an approximate 10% margin. Our title segment revenues were $468 million for the second quarter 2016 a decrease of 6% from second quarter 2015.

With respect to our direct title operations, overall revenues decreased 3% from second quarter 2015. Revenues from purchase transactions increased 1%, while centralized revenues fell 34%. Residential fee profile in the quarter was 1,986 up 6% from second quarter 2015 and up 4% from first quarter 2016 due principally to the shift in mix to more purchased transactions.

Total commercial revenues for the quarter decreased 3% to $45 million. Title orders opened in the second quarter declined 7% from the prior year quarter with opened refinance orders decreasing 17% and opened commercial orders decreasing 3%. Title orders closed declined to 9% from the second quarter 2015 primarily due to a decline of 23% in refinancing orders closed.

Second quarter 2016 total international revenues increased 8% due to increased volumes on a local currency basis partially offset by the impact of a stronger US Dollar. Revenues from independent agency operations decreased 10% in the second quarter 2016 or 7% net of agent retention, as a result of several factors including changing our geographic focus as well as some longer closing cycles impacting agents with relatively high concentration with commercial business.

We've also been adversely influenced to a lesser degree by the loss of certain agents through the acquisition over the last 12 months. We've increased our overall independent agency count since the beginning of the year and continue to seek new high quality independent agent relationships. We anticipate our ongoing remittance ratio to be in the mid 18% range.

With respect to title losses. Title losses were $17 million in the second quarter of 2016 or 3.7% of title revenues compared to $20 million or 4.5% [ph] of title revenues in the prior year quarter. The decrease in title loss expense is the result of the reduction in our current year reserving rates for general and large claims due to operational improvements including continued favourable policy loss experience as well as a positive mid-year actuarial review of balance sheet reserves.

As mentioned earlier, second quarter 2016 and 2015 included $5 million and $7 respectively of net policy loss reserve reductions pertaining the prior policy years. Excluding the reserve releases, this quarter's loss ratio was 4.9% and we expect to maintain in accrual rate at the lower end of the 5% to 5.5% range on a full year basis going forward.

Our total balance sheet policy loss reserves were $463 million at quarter end and remained above the actuarial midpoint of total estimated total estimated policy loss reserves. Looking at our ancillary services and corporate segment. Revenues for the segment decreased 39% to $21 million compared to the year ago quarter primarily due to our strategic decision exits to delinquent loan servicing operations. The segment reported a pretax loss of $10 million in the second quarter 2016 which included approximately $7 million of expense attributable to parent company and corporate operations.

We recognized that it is taking longer to restore the business lines in this segment to acceptable margins. On a year-over-year basis, we were able to reduce cost commensurate with decline in revenues. The ancillary services operations reduced to employee count significantly again during the second quarter and the full effect of those reductions we'll be seeing in the third quarter.

Excluding the cost of corporate operations, our run rate goal for the combined businesses within this segment remains in the mid-to-high single-digit range with EBITDA margins in the low double digits. However, if that goal does not appear achievable within a reasonable timeframe, we will consider other options for certain products within those segments.

With respect to operating expenses and employee cost for the second quarter 2016 decreased 11% from second quarter 2015, while our average employee counts decreased approximately 10% from second quarter 2015 due to our cost management program as well as reductions in employee counts tied to volume declines. While we had expected the addition of work stemming from TRID to taper down, we're still seeing higher than anticipated overtime in temporary staff in our direct operations to handle the workload and we're currently enhancing systems to reduce accepted manual processes.

During the second quarter 2015, we incurred $3 million of severance expense which we did not incur in second quarter 2016. Other operating expenses for the second quarter 2016 increased 12% during the second quarter 2015 we incurred an aggregate $5 million of other operating expenses related to the cost management program and preparations for the new integrated disclosure rules as well as $4 million of litigation settlement expense.

We did not incur any significant non-operating charges during the second quarter 2016. Lastly a couple of comments on other matters, cash provided by operations was $50 million in second quarter 2016 compared to $32 million for the same period in 2015. The increase in cash provided by operations was primarily due to higher net income and lower payments of claims partially offset by lower collections on accounts receivables for the second half of 2016.

As of quarter end, $1 million of cash was held at the parent holding company. With regard to continued cost management, we're focused on actions that will lower unit cost to production thus further improve the margins. Our plans to improve margin also include further outsourcing, additional automation and manual processes and continued consolidation of our various systems and production operations.

We are currently investing in the technology necessary to accomplish this goals. As these multi-year effort is deployed that we expect to begin achieving a lower cost profile beginning in 2017 with further improvement through 2019. We expect to provide additional information as a percent of savings achieved on a cost profile basis in the second quarter of 2017.

And with that, I'll turn the call back over to the operator to take questions.

Question-and-Answer Session

Operator

[Operator Instructions] and we'll go first to the Patrick Kealey from FBR.

Patrick Kealey

So first, would love to get your thoughts here on the commercial market obviously a lot of headlines there. So maybe talk about what you saw intra-quarter maybe a little color around the numbers and then maybe give us your expectations as we look towards the second half of this year.

Matt Morris

Yes, absolutely. It's something that we watch closely obviously and we'll looking into analytics for the quarter that will - capital [ph] analytics noted commercial deal activity in the second quarter was down 20% and our open orders were down only 3%. So we have good transaction activity in a variety of geographies and deal types, have a pretty solid pipeline. And no real major transactions for us other than normal and actually saw some transactions slip into Q3.

So we remain positive on the macro market at least through 2017 and we're positive on our continued growth and presence in this space. Certainly our refinancing play a role in the view and we do expect them to slow at some point, but we also are favourable towards the more normalized mix of business.

Patrick Kealey

Okay, great no that's helpful. And then, I guess second you talked about in the ancillary services achieving your target margins there but, if you can hit it obviously value it options in certain lines. Can you maybe give us a little bit of color on any specific lines you may be looking at what your optionality would be there and then maybe if there is any optionality and then maybe add on specific businesses that may help out on the margin, I think that would be helpful as well.

Allen Berryman

I would just say that business today is really a relatively small handful of products and that little early to speculate to what the optionality might be on it. We just acknowledged that it's not achieving the margins that we would like it to achieve and we think that there's work that we can and are doing in that area and there's probably you know a point in time, which you start evaluating your other options as you go through that process of improving your back office services and some of your operations there. So I hesitate to speculate at this stage and what the optionality might be.

Matt Morris

And let me, not reading into your question but on the notion of other products. We do feel like the products that are in here are very strategic to our core title operations, same customers that we're not looking to expand the services right now, so we're not looking at other acquisitions to increase profitability in the space. We do see path forward and to making progress just not the pace we would have liked to improving the margins of our current offerings, but we're not looking to expand or add to those offerings at this point.

Patrick Kealey

Okay, great thank you.

Operator

And we'll go next to John Campbell from Stephens Inc. Please go ahead.

John Campbell

Just back to the mortgage services segment, can you guys kind of walk back through what exactly happened in the quarter? What were you thinking once you rolled obviously the default related services you kind of gravitate back towards that the margin of the remaining businesses or just the acquired businesses?

Allen Berryman

You're correct in that, well the principle reason that the revenues fell off in the quarter is because of the exit of that delinquent loan servicing operations, that was a fairly significant contributor in second quarter of 2015 and then beginning in third quarter 2015 going all the way through first quarter 2016 will kind of slowly rolling that business off and as I said, we were able to lower the cost in that operations commensurate with the overall decline in revenues, but obviously not at the pace that we were shooting for and as a result, it would the overall revenue decline and the overall cost decline kind of matched each other off.

So again work to do there and we've got a good team looking at it and they're working hard at it but just not quite where we wanted to be now.

John Campbell

And on the agency channel, so FNF and FAF I think they grew their agency business pretty nicely but you guys were down a fair amount and Allen, I think you touched on this just a second ago, but can you guys give a little bit more color there. I mean would you characterize that as more kind of voluntary conceding of market share or are you guys losing out share or is it a geographic mix?

Allen Berryman

Well I would say that, when I look at the piece parts of the decline and kind of state-by-state, we did see a decline in California that was what I would characterize as different geographic focus and less emphasis on agent business there. The other weakness that we had in the quarter was specific to our north eastern area and specifically New York. The agents there are have a high concentration of commercial business and we believe that some of that business just elongated in the closing cycles, as we've seen in the second quarter the overall commercial businesses as real capital analytics point of that was down about 20%.

So it's really sort of two pockets of weakness one, in a sort of self-design weakness if you will and other bore [ph], we think more temporary in nature.

John Campbell

And it's helpful and then on the loss reserves. Could you guys kind of give us an update or where you are with reserve levels? Do you feel like you're still fairly conservative or you're kind of in line with your actuary estimates?

Allen Berryman

Yes, I think we lowered the core accrual rate in the second quarter and we'll maintain that lower accrual rate going forward because we did come in obviously with the reserve release. We came in a little better than we thought we would on the actuarial estimate. I don't see it going down a lot further from where we are today in terms of just core accrual rate of call it 5%, we were at pretty much historically low cash claims payment right now. The new [indiscernible] claim is coming in as well as the severity of the claims that probably good at certainly as they've good they've been here in my tenure at Stewart. So I just don't see that the accrual rate will declining meaningful from here.

John Campbell

Okay and just for modeling purposes that 5%, 5.5% range is still good?

Allen Berryman

Yes, sir.

John Campbell

All right. Thank you, sir.

Operator

And we'll go next to the line of Geoffrey Dunn from Dowling & Partners. Please go ahead.

Geoffrey Dunn

I wanted to revisit this the margin results in the other corporate segment again, are you on a revenue basis out of the default product at this point?

Allen Berryman

Yes.

Geoffrey Dunn

Okay. So it sounded to me like there may be some lingering expense related to that product, so is that correct and it's just a timing an issue. I didn't quite understand the commentary of the revenues down, which I think was down as we expected but the expenses didn't come down commensurately. So can you just hash that out a little bit more for me?

Allen Berryman

Yes and there probably was some lingering expense relative to that in second quarter but I wouldn't to be fair, I wouldn't call that as a huge contributor to the quarter. I think it was really some weakness in other areas of other lines within that business that was probably more meaningful to the quarter results than just pure default - over delinquent loan servicing operations.

Geoffrey Dunn

All right, so then maybe to clear it up can you call out what kind of the corporate expense item is in that line versus the operating bottom line of your mortgage verse [ph] business.

Allen Berryman

Yes, the corporate expense is about $7 million. We said that on an annualized basis, I'm assuming I'm going to make sure I understand your question. You're talking about, sort of what you would call the public company and corporate operations FIFO [ph] rate, right?

Geoffrey Dunn

Yes, by breaking that segment in two segments. Meaning your MS segment and your corporate. So corporate is a $7 million drag bottom line, leaving us about, $3 million drag bottom line.

Allen Berryman

$3 million, exactly. Yes that's [indiscernible].

Geoffrey Dunn

So what is about those other businesses, when you bought them I believe they were all profitable. Is it that there is been revenue declines in those business as well, that has pressured that margin or what has changed since you bought those businesses that those are now, a net negative on the bottom line?

Allen Berryman

Yes, I would say that there has been some revenue decline in those businesses that's probably the predominant factor.

Geoffrey Dunn

Okay and then on the title side. You beat us on the margin and I think there is still obviously there is market, questions about what you can do on margin basis given your size and some of the expense history. FAF has a success ratio, they do. Have you guys ever considered something like that, so we have a more specific metric with what should judge you as you make progress towards your margin goals?

Matt Morris

We have and I think I don't know that we've come out with that number but I think it's similar to what we see, the competitors talked about. To-date, I think we've been cutting cost in a faster rate obviously this quarter we saw more than 100% in cost reductions for the reduction in revenue, so I think you could say it, it's consistent with what we've seen from what our competitors have stated, but to-date we're kind of over performing from that standpoint just due to the number of kind of structural changes we've been making.

Allen Berryman

And also just kind of if you look sequentially in terms of the overall change in net revenues, year to first quarter to second quarter and of course you see a expect and you do see an increase in revenue sequentially from first quarter, what I would point out is that. The vast majority of that revenue increase ended up as pretax earnings in second quarter. So I think that speaks a little bit or a little something of an indication of the power of the additional revenue.

Geoffrey Dunn

Okay, last question. It sounds like you pulled back purposely on some California agency business. How do you think about, I mean that is a structural difference for both you and FAF versus FNF in its margins? How do you think about the California agent business and how much you want to participate in that as you do aim for these bottom line results in the 10% plus margin?

Matt Morris

I mean obviously we're looking more you know much more profit margins, you know that West Coast business has been you know challenge from a risk profile as well as just the retention rates that are predominant in that market. So we're just much more careful. I will say, we're done with our vetting right now. So we're looking at agency relationships, we actually had some growth in the number of agencies, this quarter which we hadn't seen for a while you know in the last several years, which still then kind of reducing more agencies that we've been adding that has flipped that switch.

So I think we're probably where we want to be in California right now and don't have necessarily plans to add a lot of volume at the current market pricing of [indiscernible] rates in that area.

Geoffrey Dunn

Okay, thank you.

Operator

And we'll go next to the line of Bose George with KBW.

Chas Tyson

Hey guys, this is actually Chas Tyson for Bose. You said that you're targeting 10% pretax margin in a normalized market. It seems like and this market is probably is close to normalized, we're going to get for a while. So and what do you think you need to do to get there into I mean to the recent activist comments on the stock make you think about moving up the timeline for announcing potential cost savings from Q2 2017 considering to about a year away.

Matt Morris

Thanks for bringing it up and I do think it's important that we get some clarity on that question. First and foremost, I want to clarify that we've always said 10% is our target but to provide further color that target was set when the default loan services business was still providing significant accretive margins to our title operations with significantly develop [ph] that corporate expenses. Is after deciding to leave the default loan servicing business, we did maintain the 10% goal but we will require additional reductions on our cost profile and some higher revenue to offset the lost default services margin.

As we've discussed in our press release, we're on the right track to improving profitability. We were maintaining to reaching that goal in the future. Lastly, the other thing I would point out is that returning to a normal market mix and we've kind of defined that as 75% purchase and 25% refi, it's probably more critical to our margin target than the actual mortgage origination 1.5 number, since our business model is more heavily weighted to purchase transactions than it is to refi. So hope that provides a little clarity.

Chas Tyson

Yes, no that definitely does. So do you, is an issue of just changing the mix, if the current volume was 75-25 of purchase refi, do you think it'd be at 10% or do you need to add revenue inorganically as well as to scale up or?

Matt Morris

No, again we've got several initiatives that we've talked about that we continue to reduce our cost profile and there are some revenue gains that are needed in that. So I don't think we're comfortable at this point saying you had the perfect market whatever that would be, that we be at the 10% margin as I say, given the reduction in volume and the changes in the mortgage services side. It requires additional efforts on our part, which we have in place and we're working on right now and I don't think there is certain methods to expedite that going forward but we do have meaningful strategies in place and work streams to reduce our cost profile moving forward to get to that target.

Chas Tyson

Okay and on mortgage services, I mean you said you're evaluating whether not to margin targets that are achievable. I mean do you expect them to be achievable with your current knowledge and when do you think that you'll come to a point where you know whether not they're achievable that kind of on a same timeframe as announcing some of these other potential cost saves in the fee profile.

Allen Berryman

I'd say there's multiple work streams going on within the mortgage ancillary services now they're in terms of lowering their operating cost and adapting that operating cost structure to be more flexible and more variable, relative to the revenues that we're experiencing there today. As the timing as to some sort of announcement. As I said earlier, probably a little early to sort of speculate on what the optionality might be, but I don't expect it to be a protracted decision making process. I think this is something that we're very, very focused on and realize that we want to make a smart decision as soon as possible.

Chas Tyson

Okay, got it. Do you expect that position this year?

Allen Berryman

Too early to say.

Chas Tyson

Okay. And do you have any with your current knowledge you think said that, high single-digit low double-digit margins are achievable or can you not say that either right now?

Allen Berryman

I don't think I'm ready to pronounce that just yet.

Chas Tyson

Okay and I think you said that employee or headcount was down in that segment. I mean, how much were headcount cost down quarter-over-quarter and was that not necessarily reflected in 2Q.

Allen Berryman

Yes, the numbers are in our press release in terms of the employee cost at the segment level, but as I noted we did cut some considerable headcount in within the quarter May and June timeframe, so you don't have that full effect of those headcount reductions baked into the numbers yet you'll see those in Q3.

Chas Tyson

Is there a way to quantify that or just say how much headcounts reduced in quarter-over-quarter?

Allen Berryman

I honestly don't have that at my fingertips.

Chas Tyson

Okay and then just last one on centralized refi, I think you said in the press release that it was down 34% year-over-year. It seems like down more than maybe competitors were down from a refinance standpoint and down more than most of forecasts are calling forward on refi volumes year-over-year as well. I mean can you just shed some color on what's going on with the centralized products?

Matt Morris

Yes, I mean I think as Allen noted in the comments open orders in our centralized operations are increasing first weeks - two weeks of July compared to last [indiscernible]. We're seeing some growth, but obviously it relates to refinancing orders for last quarter, the primary drivers are centralized business and I believe we mentioned this last quarter but, our largest customers in the centralized business assuming to have the clients greater than the overall market, which negatively impacted us even though we continue to maintain it consistent percentage of their business.

But it does mean if rates drop, we expect to participate and an increasing order activity just potentially not a rates comparable to our larger peers given our client mix.

Chas Tyson

Okay, but you're maintaining the same wallet share with those clients, just there - for some reason declining more than the overall market.

Matt Morris

Correct.

Chas Tyson

Okay, I mean is there a reason for why they're declining more than the overall market or?

Matt Morris

Yes, I think just focus. You're seeing kind of that shift in mortgage originations and whose capturing share in that space and some larger regional players seem to be making greater strides than some of the larger players.

Chas Tyson

Okay, well thanks a lot guys, appreciated.

Operator

And we'll move to the next line of Ryan Byrnes from Janney. Please go ahead.

Ryan Byrnes

Just had a question on maybe guess the California agency I guess repositioning. My question is, how long is there, when do that start? And I guess some [indiscernible] I figured how long that could be a pressure on agent revenue?

Allen Berryman

I don't think it will be a pressure on agent revenue for more than another couple quarters to be honest. I think we've been pretty focusing on getting the footprint relative to our agency base in California for a while now. So I don't think that's going to be a big drag on too much longer.

Ryan Byrnes

Okay, great. And then, shifting over to the ancillary services can you maybe just help us or I guess remind us, maybe how much of your goodwill or how much goodwill in those businesses again if something were to happen there. I know they were the charge last year on the delinquency business, but just wanted to see how much goodwill remains in the ancillary businesses.

Allen Berryman

Again I'm sorry, I don't have that on my fingertips it will be on our 10-Q.

Ryan Byrnes

Okay.

Allen Berryman

I think we'll file next week. It's not lot, it's pretty nominal.

Ryan Byrnes

Okay. And then, sorry to just moving to my last one, I'm really stamping around here. Maybe to dish your thoughts on capital management here again it seems like the title market seems fairly stable right now. We've got over $500 million in statutory capital for commercial businesses, very solid dividend but just wanted to get your thoughts going forward buyback thoughts or how we should think about you guys using again the cash flow is improving just wanted to get your right philosophy or thoughts there.

Matt Morris

Yes, I mean I think we have to look at our options on, assuming we do have the commercial activities it's something we will [indiscernible] committed to supporting and maintaining that. We do have our buyback in place should we see that there's a time that which should make sense to do a stock buyback and we've also stated that, there's acquisitions going on in the market right now and potentially not at a pace which we had thought at this point, but I think we're looking at potentially very accretive title acquisitions that could support to our revenue increase as well and given our revised cost structure and again to reiterate we're looking at things in the title space, we think with our revised centralization and platform that thus can be highly accretive, so also looking at as options.

Ryan Byrnes

Great, thanks. That's all I guess.

Operator

And we'll go next to the line of John Campbell from Stephens Inc. Please go ahead.

John Campbell

One quick follow-up. How much is at the hold till now?

Allen Berryman

It was $1 million at quarter end.

John Campbell

And obviously with the share conversion, I guess the dividend payout will increase a little bit, is there any risk to the dividend as you guys see it at this point.

Allen Berryman

No, no I mean. We're as you saw there in the earnings release generating good cash flow. So we don't keep as a matter of course, we don't keep a lot of cash at the holding company because frankly it's not an operating entity. So except for dividend payment just not a lot of cash demand on it.

John Campbell

That makes sense and then is there a particular dividend payout ratio you're looking at.

Allen Berryman

Obviously, we talk about that sorts of things with our board, but we've not stated publicly at this point.

John Campbell

Okay, that's helpful. Thanks guys.

Operator

[Operator Instructions] and we'll go ahead from the line of Kevin Kaczmarek from Zelman & Associates. Please go ahead.

Kevin Kaczmarek

I guess question on margin improvement. How important do you think scale is versus improved efficiency at your current size? I mean do you think you might need to increase your market share by a couple hundred basis points to get a little bit operating leverage or can you get there with the current market share you have?

Matt Morris

We're definitely look at increasing market share I think we've alluded to this in the press release and in our opening comments as well, but definitely made the shifts I think, whether it's agency, whether it's direct or even on commercial side that we spent several years restructuring the platform and really think that it's time for growth right now, we see some good opportunities out there. So, it's definitely area of focus right now. I think previous years it's been highly cost focus, we still have those cost programs going on and we're leveraging, we have the expertise that we've developed and some outsourcing and centralization and have those programs in place, but those can be running at the same time, we can start capturing some share, in the market that we want to that's another point of clarification.

I think our mix of business wasn't necessarily optimal and I think if we have rationalized our footprint both on the direct side and agency side, we really have now, are able to focus and target certain markets for growth going forward and well seeing that has been very fruitful thus far.

Kevin Kaczmarek

Okay and if you think about any acquisitions that you guys have seemed or been at least taking a look at, can you give us a sense of what you're looking at and who you're competing against. I mean I know they're have been like a couple or at least one maybe $50 million agent sale, are you looking at deals at that size or are you looking more in the single-digit millions, can you give us a sense there?

Matt Morris

We've been looking at, a lot right now. So I will note that, I'd say we're in one sphere or the other. I will say, what we've seen some of the pricings have been a little bit higher than we would have expected and we've been interested in some of the additional players that are looking to make acquisition. So again in our strategy it's not something that is required for us. We do see there is opportunities that I think we’re obviously [indiscernible] that people come to us, so we're able to have a lot of visibility and everything, but we're obviously going to very careful than making sure that any acquisition we make is highly accretive to our shareholders.

Kevin Kaczmarek

And who you're competing against for these transactions, is the publicly traded peers or there are other players that are looking at these?

Matt Morris

There are other players as well. I think it's publicly traded there it's a lot, I mean there is competition among that independent agents. Yes, they need to see growth. They have higher regulatory burden and so some larger independent agents are also on the stake. And we're also seeing some private equity in this space as well, which is driving up some of those prices.

Kevin Kaczmarek

Okay and I guess lastly on a potential buyback, is there an evaluation or stock price that you'd start to consider a buyback, I mean increased use of buyback as opposed.

Allen Berryman

Again, that's something we talk about with our board and we do have a method now which we evaluate the appropriate purchase price for a buyback and you know the board has agreed to that and we challenge that from time to time. So there are metrics and some discipline around that.

Kevin Kaczmarek

Okay, all right thanks. That's all I had.

Operator

At this time we have no further questions and I would like to turn the call back over to Nat Otis.

Nat Otis

Thanks, Erica. That concludes this quarter's conference call. Thank you for joining us today and your interest in Stewart. Our third quarter earnings call will be on October 20. Good bye.

Operator

Would like to thank everybody for their participation on today's conference call. Please feel free to disconnect your line at any time and have a great day.

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