Stewart Information Services Corp Q4 FY2025 Earnings Call

Hello, and thank you for joining the Stewart Information Services Corporation's Fourth Quarter and Full Year 2025 Earnings Call. Please note today's call is being recorded. It is now my pleasure to turn today's conference over to Kat Bass, Director of Investor Relations. Please go ahead.

Good morning, and thank you for joining us today for Stewart's Fourth Quarter and Full Year 2025 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 our actual results to differ materially. During our call, we will discuss some non-GAAP measures. For a 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 and Full Year Earnings Conference Call. Yesterday, we released the financial results for the fourth quarter and full year, which David will review with you shortly. I'd like to open today's call with some remarks on the overall progress we made in 2025 and then shift to market conditions a little bit, our fourth quarter results and strategic outlook for each of the businesses. We are very pleased with the progress we made in 2025, strengthening and growing the earnings power of all our businesses. While commercial markets saw some awakening in 2025, we remained in a multi-year slump for existing home sales with 2 years in a row of the lowest existing home sales in 30 years. Despite this market headwind, we grew revenues by 18%, net income by 48%, and adjusted EPS by 46% for full year 2025. That growth has allowed us to gain share and improve margins. We grew the company's adjusted pretax margin to 6.8%, up from 5.8% a year prior. We have created momentum for the company through continued execution of our targeted growth plans and have strengthened our position in each business. We delivered more distinctive products and services for our customers and made good progress on becoming a destination for the best talent in the industry. At the end of 2025, we also rounded out our lender services portfolio with the acquisition of Mortgage Contracting Services, also known as MCS. Virtually all of our growth in 2025 was organic, but we will continue to set our sights on additional profitable growth through targeted acquisitions. We enhanced our financial flexibility to capitalize on potential opportunities by successfully upsizing our credit facility by $100 million to $300 million and executing an equity offering of 2.2 million shares of stock, raising $140 million to provide additional dry powder. In 2025, we also increased our dividend for the fifth year in a row, moving from $2 to $2.10 a share annually. Moving towards some highlights for our businesses. In 2025, we grew all domestic commercial revenues by 34% year-over-year. This growth can be attributed to continued success in the expansion of our national commercial services business and growth in our small commercial growth initiative within our direct operations business unit. Our national commercial services business grew 43% year-over-year with significant growth across all of our asset classes. In our real estate solutions business, we grew revenues by 22% year-over-year and continue to have a very robust pipeline of opportunities. We have made significant progress on our expansion of this business line since beginning the journey in late 2019 and look forward to seeing how recently acquired MCS will expand our breadth and client coverage for top lenders and services. Our agency services business also made strong progress in 2025, growing revenue by 21% overall, and our strategy to drive more commercial to our agents was also very successful, delivering 34% growth for the year. Now I'd like to turn to the broader housing environment and our fourth quarter results. In the fourth quarter, we were able to maintain and in most of our businesses improve on our momentum. For the fourth quarter, we grew revenue 20% and adjusted net income by 52% compared to the fourth quarter of 2024. This growth is meaningful for us given the existing home sales grew in the quarter just under 1% in the same time frame. While existing home sales purchases improved very slightly in the quarter, we see signs of cautious optimism for housing in 2026. In the fourth quarter, 30-year mortgage rates hovered between 6.1% and 6.35%, showing a bit more stability than recent short-term trends. We have also seen a shift in the composition of mortgage holders with the population of mortgage holders with rates of 6% or higher exceeding those below 3%. This implies that we are seeing people continue to buy and sell for life events and that the market is beginning to accept that we are unlikely to return to 3% rates in the future. In the beginning of 2026, we have seen rates remain in the low 6% range, and housing inventory has continued to be a bit better than last year, up 8% for the quarter compared to the fourth quarter of 2024. Looking forward, we believe we have rounded the corner and are heading in the right direction to get back to a more normalized existing home sales environment in the coming years. We do not anticipate existing home sales getting all the way back to their long-term historic average of 5 million units in 2026, but we believe we will begin to see modest market improvements in 2026. Our direct operations business unit grew 8% in the fourth quarter compared to the same period last year, which we feel is strong given that this business is the most impacted by the effects of the challenged residential housing market. We remain focused on prioritizing share gains in target MSAs, both organically and inorganically, and we continue to make strides in our strategic initiative to grow our main street commercial business that runs through our direct office. Our main street commercial business grew 17% for the full year and 16% in the fourth quarter in direct operations. We continue to expect a portion of our future growth in this business to come from targeted acquisitions, and we maintain a growing pipeline of targets that should begin to develop as the market signals a return to normal levels. Our national commercial services business delivered another solid quarter of growth. Success for this group is largely due to increased coverage in a number of geographic markets and asset classes, expansion of our team, and our ability to underwrite larger transactions over the past several years given our improved surplus. We are focused on continuing to invest in best-in-class talent to grow share as relationships are especially important in this space and will allow us to expand our network and deepen our expertise. Because of the work we have done to continually improve this unit, in the fourth quarter, we benefited from underwriting some sizable transactions. We grew our national commercial services business unit by 49% in the quarter. We are pleased with the progress here, which represents the improved competitive position we have built for ourselves in the commercial market. Energy continues to be a point of strength, but for the year, energy growth was less than overall growth in this sector. In 2025, energy grew 34% for the year and all other classes grew 46%. We remain focused on growing all asset classes and target geographies to expand our overall footprint. Our agency services business had another strong quarter with revenues up 20% year-over-year. This growth is strong when considering that the overall housing market is near flat to last year, which affects our agency partners. We remain focused on growing this business through the expansion of wallet share with existing agents and onboarding new agents in all states with an emphasis on 15 states that are most attractive from an agency perspective. We are seeing sustained growth year-to-date agency across all our target markets, most notably Florida, Texas, and New York. Our commercial initiative with agents has also been a big part of our success as we continue to build on the momentum we have had in recent years. We saw 34% growth in this important initiative in 2025. Our real estate solutions business grew by 29% in the fourth quarter compared to last year. We also improved our margin in the fourth quarter over last year, but our full year margin of 10.1% was a bit short of our target for the full year 2025 due to some isolated pricing issues and expansion costs. For the full year 2026, we fully expect to improve margins and deliver in the low teen range for this segment and expect that our recent acquisition of MCS will help us improve our historical margin outlook. As mentioned in late December, we closed our acquisition of MCS, a property preservation service provider, allowing us to expand our default services offering and cross-sell customers across our expanded product lines. We expect continued progress in this business line as the market improves. Moving to our international operations, we are focused on broadening our geographic presence and depth in Canada, increasing our commercial penetration and expanding our presence in the refi market. In the fourth quarter, we grew our non-commercial revenue by 20% for the year, and we grew total international revenue by 11%. We believe we can build on our strong position in these markets and continue to grow share. Overall, we remain dedicated to strengthening our company throughout geography, customer and channel expansion in each business to set the company up for continued long-term success. I'm proud of the work we did in 2025 to further the company and look forward to seeing how we can capitalize on the potentially improving market conditions and opportunities in 2026. I want to thank our customers and our agent partners for their continued trust. We are committed to doing our best to serve you with excellence. Finally, to the Stewart team, I want to thank you for your loyalty and continued dedication to excellence. We are committed to being a destination for best-in-class talent. This year, I had the opportunity to meet with thousands of employees across multiple cities in the U.S. and Canada as part of my year-long roadshow. My time with you all during this series was powerful as it showed me that we have a very dedicated team that is aligned and focused on the strategic objective of becoming the premier title services company. We point to this dedication and alignment as a key component of why we received several employment awards this year, including USA Today's Top 25 Workplaces Award, Forbes' America's Best Employers for Company Culture, and ranking #1 per Forbes America's Best Employers for Women in Business Services. We are also proud that we were able to support our employees by donating $1.2 million to the Stewart Foundation for their local communities. We stood up the foundation together in 2021, and we've made a significant impact on our community since its inception. I cannot be prouder of the progress we have made on our journey. Much remains to be done to accomplish our goals, but I look forward to seeing where we grow together. David, I will now turn it over to you to provide an update on our results.

Good morning, everyone, and thank you, Fred. I appreciate our employees and customers for their steadfast support in the slow residential real estate market. Yesterday, Stewart reported strong fourth quarter results with both revenue and profitability improvements. Fourth quarter net income was $36 million or diluted earnings per share of $1.25 on revenues of $791 million. Appendix A of our press release shows adjustments to our consolidated and segment results, primarily related to net realized and unrealized gains and losses, acquired intangible asset amortization, and office closure and severance expenses that we use to measure operating performance. On an adjusted basis, fourth quarter net income was 50% higher at $48 million or $1.65 diluted earnings per share compared to $32 million or $1.17 diluted earnings per share. In our Title segment, operating revenues improved $106 million or 19%, driven by strong results from both our direct and agency title operations. As a result, title pretax income increased $13 million or 28%. On an adjusted basis, title pretax income improved 35% to $68 million from $51 million. Adjusted pretax margin improved to 10% compared to approximately 9% last year. In our direct title business, total fourth quarter open and closed orders for commercial and residential transactions improved compared to last year. Domestic commercial revenues increased $32 million or 38% with growth in all asset classes led by data centers and energy. Transaction size increased as our average domestic commercial fee per file improved 39% to approximately $27,000 compared to approximately $20,000 last year. Average domestic fee per file improved 13% to $3,300 compared to $2,900 last year, primarily as a result of transaction mix. Total international revenues increased modestly. Our agency operations were robust with gross agency revenues of $334 million, 20% higher than last year. This increase was primarily driven by improved volumes in our key agency states such as Florida, New York, and commercial transactions. After agent retention, net agency revenues increased $11 million or 22%. On title losses, total title losses in the fourth quarter increased slightly due to increased title revenues. The fourth quarter title loss ratio improved to 3.4% from 3.7% last year due to our continued overall favorable claims experience. We expect our title losses in 2026 to average in the 3.5% to 4% range. On our Real Estate Solutions segment, total revenues improved by 29% by $25 million, primarily driven by our credit information services business. As Fred mentioned, we recently added MCS and expect it to be a major contributor to the segment's revenues and profits going forward. The segment's adjusted pretax income improved 47% to $10 million compared to $6 million last year. We are focused on the overall cost of services and strengthening customer relationships. Adjusted pretax margin was 8.5%, 1% better than last year's fourth quarter, and we expect our margins to normalize in the low teens as these relationships mature. On consolidated expenses, our employee cost ratio improved to 29% compared to 31% last year, primarily due to increased revenues, while our other operating expense ratio was 25%, comparable to last year. Our financial position remains solid to support our customers, employees, and the real estate market. Our total cash and investments were approximately $480 million in excess of statutory premium reserve requirements. As Fred noted, our line of credit and December common share equity offering provide us with financial flexibility. Total Stewart stockholders' equity at December 31, 2025, was approximately $1.6 billion with a book value of $54 per share, which is $4 better than last year. Net cash provided by operations improved by $22 million or 32%, primarily due to higher net income. Again, thank you to our customers and employees, and we remain confident in our service to the real estate markets. I'll now turn the call over to the operator for questions.

Our first question comes from Bose George with KBW.

I just wanted to start with the commercial. Just given the strong commercial activity in 2025, can you talk about your expectations for commercial revenue growth in 2026? And then just related question, usually, there's been meaningful seasonality in Q1. But given what you see in the commercial pipeline, on the commercial side, do you think Q1 could be sort of a little better than usual?

Yes. Great question, Bose. So I feel very confident in our pipeline activity. It's pretty broad and good. I do think there is seasonality that will continue to be in commercial. The fourth quarter in particular this year, I think, was very robust. I think you're going to see that for a lot of people in the industry for several reasons. So I think our first quarter in general should be a little better than last year, but we'll still have the difficulties of the first quarter in my view. In general, I think commercial is going to be a good year for us next year, looking at the activity and the breadth of the activity. Some comparisons will be interesting to see on growth. So do I think we can grow commercial next year? Yes. I just think 49% is not indicative of future growth; there will be some moderating of growth, but we are going in the right direction in every class, and we're hiring and trying to get after it. I feel good about the depth. The other thing that's really interesting qualitatively is we're leading more deals now. In the past, we would participate, but now we are controlling more, which gives me comfort that we're moving in the right direction. Even if we digest growth in the next 2 years, I'm as confident as I've always been about our forward momentum. We're probably around 14% market share right now, and I think we can get closer to 20% over the next 2 to 3 years. I can't time that, but the momentum and our ability to progress is there. I also believe the market in general will be relatively strong this year as well. So hopefully, that's helpful.

Yes, that's great. That's very helpful. And then actually, can you remind us what percentage of your agent premiums are commercial?

That's a great question. So we've been trying to grow that business. The commercial was about 34% for the year. Of the 20% growth, we grew purchase about 16% for the quarter and 15% for the year. We grew refi with the agents about 40%, but that's only about $3 million of growth because it's a small percentage of our business. A significant part of our growth in purchase represented about $125 million, out of which 15% to 20% could be commercial now. This is important to us as we are still catching up to our competitors, whose numbers may be closer to the 20% to 22% range.

Okay, great. I have one last question about commercial. Have you discussed the direct margins for commercial compared to the direct margins for residential? I can't recall if that was covered.

They're a little better. The costs are more variable in commercial because of the commission structures and arrangements involved, so it's a tad better—probably around 1/3 better. Additionally, the float is better, and the margins get better as we grow bigger. In the fourth quarter, about 18% of our revenue was commercial, but on average, for the year, it was around 14% to 15%. In contrast, the big guys likely averaged in the low to mid-20s. So we are still short in that area, but this has been an important initiative for us, and the progress is very helpful as a company.

We'll now move on to Geoffrey Dunn with Dowling & Partners.

A couple of questions. First, what are the plans for the line of credit? Do you have an aggressive paydown schedule, or is the plan to let that leverage come down gradually with equity growth?

Jeff, it's David. I would say the latter. We could pay it off at any point, but we are just trying to keep flexibility, as Fred talked about. We're about $200 million drawn. We may bring it down a little, but you may see that for the year.

Okay. And then bigger picture, I wanted to ask you about AI and the effect you feel it's had on your business and if that's still accelerating. But also the effect it's had on the broader business. It looks like there's been some capital investment coming into the space for data collection, data mining, data organization. Curious if you view those as M&A opportunities, or is that something we should think about in terms of a longer-term competitive consideration?

Yes. It's a great question. There's a significant benefit to using AI in our business due to the volume of unstructured documents. It enhances efficiency, customer satisfaction, and quality. Our losses are often due to mistakes; thus, the quicker we can examine documents, the better. We have about 75 AI initiatives currently in progress around customer service, efficiency, and data management. From a competitive standpoint, it offers an incredible advantage to larger companies. While it's not going to eliminate our business, it'll certainly help improve our quality, consistency, and throughput. It's more about making incremental improvements. We're pursuing innovation and tools that enhance our service; for instance, there’s a tool in one of our businesses that I'm looking to acquire. This is an evolutionary process in our sector, making various parts of our operations more efficient. However, I emphasize that those last increments of improvement require human intervention, and an understanding of the market's intricacies remains critically important.

Okay. And then, David, just an accounting question related to this. Given the digitization at the municipal level and the increased ease of collecting data, is there any implication for the title plant assets, particularly the more legacy plants because it's cheaper to create those?

No. Title plants vary in access, and the title data varies across the country. The plants are needed in the markets we operate in to access data, so there shouldn't be any issues regarding recoverability.

What's happening is we're able to enhance the value of those plants more efficiently due to our centralized processing and management. This process proves beneficial, especially as we grow.

We'll now move on to Oscar Nieves with Stephens.

Earlier, you mentioned seeing signs of cautious optimism for housing as we look into 2026. Can you talk a bit more about the specific industry direction and whether those are broad-based or concentrated in certain regions?

Yes, it's a good question. Last year, people speculated that we'd see 8% to 10% improvement by the end of the year, but I didn't see any of that due to high under-3% mortgage rates and low inventory quality. Currently, we see the under-3% inventory getting a bit better, and it has increased; people say inventory goes up and down, which holds some seasonality. Now we're seeing 8% growth in the fourth quarter year-over-year and more activity. While I don't anticipate it will exceed 6% to 8% growth, I believe we will start seeing some movement this year. The first quarter is always challenging for us due to geography. And as for breadth, I think there is a meaningful spread, though markets like the Midwest have less variability, while the South tends to see more changes. I feel optimistic but expect modest improvement.

And touching on rates, looking at data from the ICE Mortgage Monitor, once rates go below 6%, the number of people with in-the-money mortgages increases significantly. Can you quantify the impact that would have on your revenues and ultimately on earnings?

I believe the discussions around that are somewhat speculative. I observe that in October, we had rates just under 6%, and things jumped significantly. Our economic performance heavily relies on existing home sales, which have stagnated at $4 million for 3 years. If we return to 5 million sales, our margins would move to 12%. The first quarter's volume impacts returns due to fixed cost levels. I've noted how our margins even improved while others declined, but we remain highly dependent on existing home sales. I am optimistic for gradual improvement, but I caution about the timeline to reach those levels. There’s much work to be done, but we should remain focused on driving earnings growth while we work toward these sales targets.

Yes. And maybe a last one, and I'll get back in the queue. You've highlighted efforts to expand agency in targeted MSAs, including Texas. Considering the Texas Department of Insurance will reduce title premium rates effective March 1, can you walk us through how that change will impact your financials both near-term and longer-term?

The agreed 6% reduction is less concerning than when it was previously 10%. We are addressing this by reviewing our fees and services in Texas, and I anticipate this will have a low single-digit impact on earnings. It may cause some disruption for smaller agents in rural areas, as they don't have significant margins. However, we are well-positioned to manage the changes, and I don’t expect it to alter growth expectations in our businesses.

And we do have a follow-up from Oscar.

Alright, I guess this will be my last one. You highlighted efforts to grow agency in targeted MSAs, both organically and through M&A. Can you provide more insight into how you're thinking about that strategy today, including any target levels of capital planned to deploy this year split between the title business and the Real Estate Solutions business?

Great question. For direct, we transitioned from being an inch deep and a mile wide by reallocating capital and shutting down some underperforming offices. We've targeted about 30 MSAs that we believe will drive growth as we aim for 10% market share locally to improve profitability. We've reviewed our 140 MSAs to identify our strengths and opportunities for growth. In the past 3 years, we faced challenges in the agency space as agents weren't making much profit. However, as the market improves, we anticipate more constructive conversations around acquisitions. I see approximately $300 million in acquisitions over the next 3 years, primarily focused on the direct channel to enhance margins regardless of the cyclical nature of the business. While we also seek smaller tools to facilitate our development, I believe the majority of our capital initiatives will be self-funded based on cash generation, so we intend to plan for flexibility moving forward.

I'm going to stick to my word. You answered the follow-up that I would have but...

Thanks a lot. Appreciate it.

We'll go next to Geoffrey Dunn with Dowling & Partners.

Just a couple of number questions. David, could you update us on what you saw January trend-wise for orders and share your thoughts on investment income for the coming year relative to 2025?

Yes, Jeff. I think Fred just covered it, but things have been opening up a little compared to last year's quarter. It’s hard to predict with current volatility, but it seems better than last year. Regarding interest income, we may see a slight decrease if rates cut, but that will depend on how quickly we see volume pick up.

We'll now move to Bose George with KBW.

One more for me as well. Can you give us an idea about the revenue contribution from MCS? Is there much seasonality there as that comes in?

Yes, both are good questions. There's a bit of seasonality, particularly in Q1 for that business. When we acquired the company, we discussed...

Bose, it's about $165 million a year in revenue, with around $40 million EBITDA. We’ll just have to see where it goes from there. Foreclosures have been increasing, and FHA delinquencies have also gone up, but that's how they're running now.

A little lower in the first quarter...

At this time, there are no further questions in the queue. I will now turn the meeting back to management for closing remarks.

I just want to thank everybody for their interest in Stewart. As I said earlier, I'm very pleased with 2025. We've made good progress, and we have good momentum. I believe that momentum will continue into 2026 if we stay focused. Thank you for your attention and interest in the company.

Thank you. This brings us to the end of today's meeting. We appreciate your time and participation. You may now disconnect.