Stewart Information Services Corp (STC) 2024 Q4 法說會逐字稿

Hello and thank you for joining the Stewart Information Services fourth-quarter and full year 2024 earnings call. (Operator Instructions)

It is now my pleasure to turn the conference over to Kathryn Bass, Director of Investor Relations. Please go ahead.

Thank you for joining us today for Stewart's fourth-quarter 2024 earnings conference call. We will be discussing results that were released yesterday after the close. Joining me today are CEO, Fred Eppinger; and CFO, David Hisey.

To listen online please go to the stewart.com website to access the link for this conference call. This conference call may contain forward-looking statements that involve a number of risks and uncertainties. Please refer to the company's press release and other filings with the SEC for a discussion of the risks and uncertainties that could cause some of our actual results to differ materially.

During our call, we will discuss some non-GAAP measures for reconciliation of these non-GAAP measures. Please refer to the appendix in today's earnings release, which is available on our website at stewart.com. Let me now turn the call over to Fred.

Thank you for joining us today for Stewart's fourth quarter 2024 earnings conference call. Yesterday we released the financial results for the quarter which David will review with you shortly.

I'd like to address three topics in my remarks today. First, I will share my reflections on the progress we made on our journey in 2024. Second, I will share our view on the continued challenge, housing market. And finally, I'll offer some commentary on our strategic direction by business.

Before jumping into these discussions. I wanted to take a moment to acknowledge all of those who have been affected by the wildfires across California.

Our thoughts are with the many communities impacted by the devastation these fires have caused while we are fortunate to say that we did not have offices or employees impacted. We have and we will continue to find ways to support these communities in our efforts -- in their efforts to rebuild.

I am very pleased with the earnings and revenue growth we saw in the fourth quarter. I'd like to take a few minutes and reflect on the progress we made in 2024 to further fortify the company and to build resilience in our position.

In '24 we grew revenues by 10% and adjusted net earnings by 42% while confronting a multiple decade low housing market. These annual results show we are making real progress on our growth plans and have created leverage in the system that we can capitalize on when the market returns to normal levels.

In 2024 we took a significant step forward to fortify our position as a destination for top 10. This dedication is why US News World Report recognizes as one of the best companies to work for in '24, '25. We welcome countless new families to the companies who are hiring a best-in-class talent across the organization.

We have a really strong set of leaders at the helm, several of which have assumed position this year, which is a direct result of our thoughtful succession planning. Our leadership team in my view is now one of the best in the industry and is in a strong position to take the company forward. I am excited about having the opportunity to work with this team over the next few years to take the company to the next level.

Moving forward, some of the highlights of our businesses, our commercial services team stood up dedicated to hospitality and affordable housing teams rebranded our energy team to energy and infrastructure to more accurately reflect the extensive offerings we now provide to our clients in energy renewable infrastructure projects, including data centres.

All of this structure was put in place while growing domestic commercial revenues by 38% for the year. Our real estate solutions team also saw excellent growth in '24 up 36% on revenue in the prior year. Thanks to continually innovating and improving our client offerings. We have made significant progress in our expansion of this business line since the beginning of our journey in late 2019.

We are proud of the growth we have made in that business in Q4. We more than doubled the revenue we made in the entire year of 2019 in this segment. Across the organization, we have dedicated some of our energy to improving company's infrastructure including technology upgrades both internally and to our customers.

We have made great headway of building our operational leverage through global centralization centres and have strong leverage in the system to capitalize on when the market returns.

In the third quarter 2024, we announced our fourth annual cash dividend increase to $2 per share to reiterate our strength and commitment to shareholders. Finally, I believe with this I did not mention that in 2024, we donated over a million dollars to the Stewart Title Foundation to 100 scholarship recipients and over 900 organizations serving the communities we live and work in.

Since it's in section when we have given $2.9 million to our foundation, to the communities we live and work in. And I'm so proud of all the progress we have made on our journey and the real effort we have made in progressing the goals of the company in 2024.

Turning to the fourth quarter results, I want to note that I'm very pleased with the results of the quarter given market conditions from a macro perspective that the fourth quarter was the first year over year improvement we have seen in existing home sales that was preceded by 37 months of negative year over year trends.

We also now know that even with more positive print in Q4 a year, '24 existing home sales were down relative to '23 they get -- making the last two years the lowest housing markets we've experienced in several decades.

Even with the positive Q4, the market -- housing market still needs significant improvement in order to get back to the historically normal $5 million housing existing homes sold annually. And while we are pleased to see the movement in existing home sales, we believe this to be a point in time trend. Given the brief rate drop in September.

The latest pending home sales data also substantiates this outlook as it is down year over year and less than expectations. However, the uptick in existing home sales in the fourth quarter shows us that demand is very strong even in light of smaller than normal inventories, significant home price appreciation and higher mortgage rates. Over the last year, we have gradually shifted our expectations for the return to normal.

Given the prolonged market conditions in 2025 we expect the housing market to remain very choppy. Given the prolonged expectations around rates. We currently expect the first quarter to be very -- first half of the year to be very challenging and a more -- a transition to more normal existing home sales will start at the beginning of the second half of the year.

There are a number of factors we cite here such as steadily and increasing inventory and the effects that could have on temperate or steady price appreciation. The continued pressure cooker on demand and the moving past election uncertainty that said the continuation of elevated mortgage rates will likely keep demand at bay for the first few months.

In commercial we see the market growth we saw -- that we saw in the first -- in the last half of this year to probably continue. But while we have growth, it will be much lower than we saw in '21 and '22. Turning to each business, our direct operation segment has most immediately felt the impact of stifled residential housing market. We have remained diligent in managing our direct operation segment to protect our core of the market margin.

We remain focused on expansion efforts and targeted MSAs through both organic and inorganic means and keep a pulse on all the markets we are in as well as those we are not to ensure we are operating to our fullest potential across the country.

Choppy market conditions have slowed acquisition related activity recently. However, we remain very positive about the future outlook for opportunities and maintain a warm acquisition pipeline in preparation for an improved market.

We've also pursued small commercial penetration in our direct operations, and I've seen 15% growth in that segment of direct offices in '24. Our top priority in this business is to grow our share in attractive markets both organically and through acquisitions in target markets to structurally improve margins and enhance the resilience of our earnings.

Our commercial services business has been a strong performer in the last several quarters. As we feel the positive effects of our efforts to grow our share in critical geography and industry sectors. We have made a lot of investments in talent across our commercial operations so that we have the right people in place to maximize our growth potential.

Our fourth quarter results reflect that progress we have made to bring in top talent, serve our customers well and pick up our fair share of the market. We expect our commercial transaction momentum to continue but manage ourselves with the near-term commercial headwinds in mind, just as we try to stay ahead.

Our agency team remains focused on driving share gains in attractive agency markets by adding new agent partners as well as growing our share with existing agents. We are focused on improving our position in 15 target states and have seen solid progress in the majority of these states.

Our improved technology integration, support services and enhanced abilities around servicing commercial agents allow us to stand out with our agents. We continue to innovate for our agent customers every day and are proud of our recent launch of Connect Close, which is a Title production system built specifically to cater to our attorney agents.

This is a solution technology tool focused on improving agents, both efficiency and economics. We will continue to build on all of the momentum we have made in recent years for our agents in order to differentiate our services and better our offerings for agent partners.

Our Real Estate Solutions business continues its growth story as shown by fourth quarter results, our margins in the fourth quarter were dampened a bit by some onetime impacts such as startup costs for new customers and some timing of data contracts.

However, we expect to sustain or improve the low margins we have seen in the last couple of years. This team is focused on gaining share with top lenders and cross selling our products as we leverage our approved portfolio of services, cross selling and current market conditions poses some challenges.

However, we continue to see gains for both existing clients and new client introductions. We expect continued momentum in this space as the market improves. Our international businesses, we remain focused on growing our Canadian business by improving our geographic reach as well as increasing our commercial presence where we saw 17% growth this year.

Our significant growth in Real Estate Solutions and commercial services has resulted in an increase in our other operating expense ratios in Real Estate Solutions. Other operating expenses are higher percentage of mix due to the use of outside services and data and in commercial, we encounter higher outside data and search fees to service our customers.

We expect those two trends to continue, and we will continue to grow those lines of business. Overall, we remain diligent in managing our operations to ensure we can achieve both near- and long-term goals. We are dedicated to growing share in all of our businesses, and we remain steadfast in our pursuits to position each business for growth.

We believe in our direction and maintain our belief that we will achieve low double digit pretext margins with the macro market returns to historically normal levels, which would characterize as a $5 million purchase market. I want to thank all of our customers for their continued trust and partnership. We are committed to doing the best and to serve with excellence.

And finally, I want to thank our Stewart team for their loyalty and continued dedication to excellence. It's been an honour to lead the company over the last five years and I could not be proud of the progress we have made on our journey. I look forward to seeing where we can grow together.

David. I'll now turn it over to you and provide an update of the results.

Good morning, everyone. And thank you, Fred. I appreciate the excellent service of our employees and I'm grateful for the continued support of our customers. Let me also express my sympathies for those impacted by the California wildfires.

As Fred noted the market continues to be challenging with existing single family home sales at multidecade lows and mortgage rates in the 7% area. Yesterday, Stewart reported fourth quarter net income of $23 million or $0.80 per diluted shares on total revenue of $666 million.

The appendix A of our press release presents adjusted primarily related to net realized and unrealized gains acquired intangible amortization and other expenses that we use to measure operating performance. On an adjusted basis fourth quarter, net income was $32 million or $1.12 per diluted share compared to $17 million or $0.60 per diluted share in the fourth quarter 2023.

In the Title segment, operating revenues increased $60 million or 12% from improved performance in our commercial residential and agency Title operations. Title segment, pretax income increased $18 million or 65% primarily due to higher revenues.

After adjustments for purchase amortization, severance and office closure expenses to segments fourth quarter adjusted pretax income increased to $51 million versus $31 million last year. While adjusted pretax margin improved to approximately 9% compared to 6% last year.

On our direct Title business total, open orders increased slightly compared to the prior year quarter. While closed orders improved 15% primarily driven by higher domestic commercial and refinancing transactions. Our domestic commercial operations generated another solid result. Improving revenues by $28 million or 50% primarily driven by higher transaction size and volume from broad asset classes led by the energy multifamily and office sectors.

Domestic commercial average fee per file increased 33% to $19,600 compared to $14,800 in the prior year quarter. Domestic residential average fee per file decreased 8% to $2,900 compared to $3,200 in the prior year quarter due to lower purchase transaction mix.

With our agency operations fourth quarter, gross and net agency revenues both improved 6% or $17million and $3 million respectively consistent with the direct Title trend. On Title losses total Title loss expense in the fourth quarter was comparable to the prior year quarter as favourable claim experience offset higher Title revenues.

The fourth quarter Title loss ratio improved to 3.7% compared to 4.1% last year for the full year 2024, the Title loss ratio was 3.9% compared to 4.1% last year. We expect Title losses to be in the 4% range for 2025.

Regarding the Real Estate Solution segment operating revenues improved by $26 million driven by higher revenues in our credit related data and valuation services businesses. However, pretax income declined as vendor price increases occurred prior to customer contract renewals and elevated employee costs as we continue to grow customer relationships.

As Fred noted, we expect to be in the low-teens cash margin area as these relationships mature. Excluding acquisition and tangible amortization adjusted pretax income was $6 million, 7.4% margin the fourth quarter compared to $7 million or 12% margin last year. On consolidated operating expenses our employee cost ratio improved to 31% compared to 32% last year primarily due to higher revenues.

Our other operating expense ratio increased to 25% as our mix of Real Estate Solutions and commercial revenue increased as those businesses have higher third-party costs. On other matters our financial position continues to be solved to support our customers employees and the real estate market during this continually challenging environment.

At year end, our total cash and investments were approximately $380 million in excess of our statutory premium reserve requirements. In addition, we have a fully available $ 200 million line of credit facility. Total Steward stockholders equity at December 31, 2024, was approximately $1.4 billion or book value of approximately $51 per share.

Our net cash from operations was $68 million, which was $29 million higher compared to the prior year quarter as a proved as a result of improved net income. Again, thank you to all our customers and employees and we remain confident in our service to the real estate markets.

I'll now turn back to the operator for questions.

(Operator Instructions)

Bose George, KBW.

Morning George.

Everyone, Good morning, Fred, good morning. So I want to start with commercial and I just wanted to confirm, Fred, you said I think on commercial that you expect modest growth in 2025. And just trying to think about is that against the full year '24 or against the back half of '25 where the commercial market looks like it's, entered kind of a stronger phases of activity.

So it's funny, the market is really choppy right now. There's a lot of uncertainty frankly that entered in the last month or so, but our view is that it'll be single digit, low end of single digit growth, in commercial right now. That's what we think for the market I'm talking.

But there's a -- it's very uncertain but we see to your point that the second half of the year was better than the first half of the year last year. And we see the continuation of those trends a little bit, although it's very, it's a little bit more uncertain right now.

But we're positive -- it'll be in a positive territory we believe. And, again, it's going to be very sector oriented, because I think there's going to be continued real robustness around like data centres and things like that.

Okay. And so for now, just to think about it as modest growth on a year over year basis, just given just the uncertainty that's in the market.

That's what I believe, and our pipeline's been fine and as you know, those transactions take a lot longer, so we have more transparency in the shorter window because we have a lot of stuff in the pipeline. So we feel good about what's transpired this year.

Okay, great. And then actually in the Real Estate Solutions segment, I guess the David noted the repricing's that are likely to happen. I mean, in terms of the margins on that normalizing, does that happen fairly soon in 2025 or is there a little bit of a transition there?

Great question. So there really is two pieces and it was a little choppy this year because of the such large growth. There's two pieces of that bump in the night here in the fourth quarter. One is we have, startup costs for these big transactions.

We have a number of new clients coming on and if the timing doesn't fit exactly right, you have all these expenses without any revenue. So that'll take care of itself very quickly at the end of the quarter. The other is this pricing.

So the end of the third quarter of this industry, you tend to have a lot of the input costs around data come in. So those increases, for the credit bureaus and like and stuff. They were relatively material, and we've been working with our clients right to get those embedded into the contracts.

And so, we -- I feel very good. The teams have done a really good job. And so those pricing changes have been started in for it this week actually. So to go -- get in to start building into our relationships. So I think that's a relatively rapid improvement.

And as I said, I think this year is going to be a little bit better for the full year. My guess is that business, it will get about a point better. I think it's, that's 12% it'll be 13% or something, cash margin because it's settling, we're growing and it's settling.

And I should answer that question, long term to both because you've asked that before. In my view on the GAAP, when I get that 11.5% in a normal $5 million market, that market also -- that business has a lot of cyclicality to it, right?

So our appraisal business, our notation business and our data business is all, very cyclical when we're at a 35-year low. So I fully expect that thing from a GAAP point of view to get from where it is now to a full 10% margin. And I think the cash margin those business when we get to a more known market will be mid teen, like we thought, mid maybe even a little higher than mid-teen cash.

So I feel good about where we are. I like the margins that we're generating the cash margins. But I think as the market recovers, they have a shot that business should get better. Well, I don't see that big improvement in the market occurring in the next six months. I think that we're going to start moving in that direction at the back half of the year.

Okay. That's very helpful Thanks.

(Operator Instructions)

John Campbell, Stephens.

Good morning, John.

Guys, good morning. Congrats on a great close of the year. Okay, let's stay on commercial here. I'm, just looking at maybe some of your competition here. It looks like you're going to maybe outgrow both your skilled guys by about 3x on the year.

So I know there's some nuances there, Fred, you've talked, often about asset class exposure mix shift. I want to get your best sense. I know this is probably tough to unpack but your best sense for share games versus maybe unique -- your unique exposure.

That's a great -- it's a great question John, because as you know, I've talked a little bit about energy and well, I don't know the books of everybody else. Our energy book this year grew its percentage, say it's 35% or so percent of our book a little bit higher probably, that used to be about 18%, okay.

And what's happened obviously is a surge of some of that in that category of some of the alternative energy particularly solar and frankly, some of the infrastructure stuff that we -- that's in that category for us. So I believe that part of our outsized growth is our mix.

I don't know how much I know our competitors do that stuff too, but I've said that because we -- I think that's part of it, but I will tell you and then when I look at the 10 next categories, our growth is 50%. So we've invested a lot of people and -- people and sectors and segments to match up with our great underwriting capability. And as I said, when the company had issues and was sold, our capital was about half as much as it is now, and we were for sale.

So with the uncertainty, we didn't get our fair share of the market because of that and now we're starting to get. So to your point, my view is we've gone somewhere between a 9% of the market to 14% of the market or something and it's been pretty material.

And I think most of it is sustainable. But again, the reason I say that about the energy is that to your point, if we're -- if our mix in that category is bigger than others, we're probably getting the benefit of the growth of that, right. So say that could back down a little bit in a more normalized market.

But there's no question when I look at every single category. We've grown much bigger than the market, -- much better than the market, which tells me that underlying we're doing that. And again, we should, right?

We have as much underwriting capacity as anybody, but we're so much -- we started this journey at like as I said, 9% share, which was not -- there should be a better spread our risk in the commercial space, if we can invest properly and have the right capabilities matched up to the market. So I'm encouraged by what we've done. But again, I'm happy to say that some of it is the benefit of the mix that's occurred in the industry.

Okay. That's very helpful. I appreciate that. And then David historically, I think maybe the last two or three years you've talked to or expected like low to maybe mid 4% loss revision rate.

Obviously, you've been pretty consistently below that. It sounds like now you just mentioned low 4%. So maybe tightening that range a bit, but maybe if you could talk to maybe your past expectations, what you built in that maybe didn't occur that maybe you expected or maybe it was overly conservative, just more commentary on that and also what you're seeing on the back book and lost trends.

Yeah, John, I mean, I think it's just really a combination of the mix and so we had a little bit more elevated going back a few years because of some of the international exposure. I think that's moderated a little bit.

And then, the thing that you always have to be concerned about and that's why we try to be a little, you know, a little more balanced and things is that you can have the, what we call jumbo or large claims come in and the timing of those is hard to predict.

And so, I'd say it's a combination of just overall favourable macros and then some of the higher loss items haven't been hitting as much and that's why you've seen the better performance recently, but those are always out there, right. So you have to be prepared for.

Yeah. So I think our guidance is still going to be in that low for us. Right that's the average number.

Okay. And the last one for me on the investment income, just any sense for a broad range of expectations over the next quarter two.

Yeah, I think, we've been in that $13 million range, we were a little bit better in Q4. We just had some, a little bit better volume on some of our escrows and things like that. I think what we've been able to hold, keep in mind if you're looking at us versus first American, we're not here triggered at rates because we don't trade off the money market because we're not a bank.

And so, our rates are negotiated, assuming that the banks always give themselves a little cushion in that negotiation. And so because of that, we don't necessarily go down as quickly as rates do. And so we've been able to basically hold.

And so I think unless you were to have a really big extra drop in rates and right now it's one to two, maybe three for the year, the range of vetting, we should be able to hold pretty well at the levels we're at.

Okay Excellent. Thanks guys.

Thank you. And it appears that there are no further questions at this time. I will now turn the program back to our presenters for any additional or closing remarks.

I want to thank everybody for your interest in Stewart. Thank you so much.

Thank you. This does conclude today's presentation. Thank you for your participation. You may disconnect.