Earnings Call Transcript - STC Q3 2025

Operator, Operator

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

Kathryn Bass, Director of Investor Relations

Good morning. Thank you for joining us today for Stewart's Third Quarter 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.

Fred Eppinger, CEO

Thank you for joining us today for the third quarter earnings conference call. Yesterday, we released the financial results for the quarter, which David will review with you shortly. I'd like to start today's call with a discussion of our perspective on current housing market conditions, followed by a review of our third quarter results and strategic progress by business. I am proud of our third quarter results. Our 19% revenue growth and 40% earnings growth reflect the efforts we have made to continue to grow the company even while facing prolonged headwinds from the historically low housing market we continue to be in. There continues to be both a blend of positive and negative economic headlines related to housing. In the third quarter, we experienced some rate relief, exiting September with mortgage rates around 6.35%. While there is some softening of rates in the third quarter, we did not see rates quite as low as the quick dip we experienced in September of last year, where rates hovered momentarily right around 6% and caused a flurry in purchase and refinance activity to close out 2024. I am more confident in the market's ability to improve over the next 12 months this year than I was last year at this time. The housing market continues to become a bit friendlier for buyers as inventory has been growing. Builders continue to offer incentives and an increasing portion of homes are being sold below list price, indicating the cooling of house price appreciation. We have also seen price improvement in more of the MSAs. That said, home prices still remain a hardship for many buyers as the median sales price of existing homes sold is still increasing year-over-year, though at a lesser rate than we have experienced for most of '24. So far this year, existing home sales are hovering right around 4 million annual units as many buyers continue to sit on the sidelines awaiting less volatility in the macro market conditions and in anticipation of future rate cuts into next year. September existing home sales data will be published later this morning. However, we expect around a 1% to 2% increase in existing home sales relative to the third quarter of '24 this quarter. Looking ahead, we believe the housing market will continue to gradually improve over the coming year, and '26 will be the beginning of a transition back towards a more normal existing home sales environment, which we characterize as 5 million existing homes sold. From a commercial market perspective, we have benefited from and capitalized on recovery seen in the commercial real estate markets across various asset classes. We expect this recovery to continue into '26 and beyond. Given these market headwinds and volatility, we are proud of the results that we have delivered in the third quarter as they reflect our momentum. In the third quarter, as I said, we grew total revenues by 19% and adjusted earnings per share by 40% when compared to the same period last year. Our direct operations unit grew 8% in the third quarter relative to the same period last year. We see this as solid progress given that this business unit most immediately feels the effects of challenged residential housing market. Our direct operations leadership remains focused on the charge and growth share in target MSAs and micro markets, both organically and inorganically. They are also focused on picking up share in small commercial transactions that run through this business unit, and we are seeing real progress on that initiative with commercial growing 18% in direct this quarter. We continue to expect a significant portion of our future growth in this business to come from targeted acquisitions, and we maintain a warm pipeline of targets that will develop as the market signals a return to more normal market levels. Our National Commercial Services business delivered another solid quarter of growth. Success for this group is largely due to our increased penetration in the number of geographic markets and asset classes. We have brought on best-in-class talent, and we'll continue to invest in talent in this space to grow our share. Thoughtful investment in our talent will allow us to expand our network and deepen our capabilities in more geographies and asset classes in order to leverage the distinctive underwriting capability we currently have. We grew domestic commercial revenues by 17% in the quarter. And through the third quarter, we have grown domestic commercial revenues by 33%. I'm proud of our performance here as it really represents the momentum we have built for ourselves on the commercial front. The energy asset class continues to be a point of strength. Data centers, hospitality and self-storage were also areas of growth for us in the quarter. We are 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 28% year-over-year in the third quarter. This amount of growth is exciting for us when considering the overall housing market is near flat for the year. We are on a mission to grow this business through share gains in attractive states, onboarding new agents and wallet share expansion with existing agents. While we see growth across all states, there are 15 states that we are targeting for share shift and growth. We are seeing sustained growth year-to-date in agency in several of our target states, most notably Florida, Texas and New York. Our commercial initiatives with agents have also been a big part of our success, and we continue to build out momentum that we have made in recent years to our target agents to differentiate our services and enhance our offerings for agent partners. Our Real Estate Solutions business delivered another strong quarter of results as well, generating revenue of 21% higher than the third quarter of '24. The increase was led by our credit information business. Our margins again improved sequentially and are now in the low teens range, which we would consider our normal range. We are focused on growing this business line by gaining share with top lenders and cross-selling our products as we leverage our improved portfolio of services. We expect continued progress in this business line as the market improves. Moving to our international operations, we are focused here on broadening our geographic presence within Canada and increasing our commercial penetration. In the third quarter of '25, we grew revenue by 21% versus '24 due to non-commercial growth of 12% and outsized commercial growth due to a handful of larger transactions. 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 through thoughtful geographic, customer and channel expansion in each business to set the company up for continued long-term success. I am pleased to share that in September, we announced an increase in our annual dividend from $2 per share to $2.10 per share. This is the fifth year in a row we have increased our dividend to shareholders. We continue to invest in ourselves and our shareholders as we pursue smart growth for each of our business lines. Thank you to our customers and agent partners for your continued trust. We are committed to doing our best to serve you with excellence. And I'd like to close by saying thank you to our employees for their dedication, loyalty and drive. It has been a privilege this year to visit so many of our offices this year and see and experience the energy that you have all shared with me. It is contagious. We have never had better talent as we do today. I'm so proud of how far we have come on our journey to become a destination for industry-leading talent. Earlier this year, we were recognized as a top workplace by USA Today. And in the third quarter, we were named by Forbes as one of America's Best Employers for company culture. We also ranked in the business services category by Forbes as the Best Employer for Women in 2025. I want to thank you all for what you're doing to build upon the company's legacy and set up the company for enduring success. David, I will now turn it over to you to provide an update on our results.

David Hisey, CFO

Good morning, everyone, and thank you, Fred. I would also like to thank our employees and customers for their continued support as we navigate the residential real estate market, which remains around 15-year lows. Yesterday, Stewart reported strong third quarter results with growth in both revenue and profitability. Third quarter net income was $44 million or $1.55 per diluted share based on revenues of $797 million. Appendix A of our press release shows adjustments primarily related to net realized and unrealized gains and acquired intangible amortization that we use to measure operating performance. On an adjusted basis, third quarter net income improved 41% to $47 million or $1.64 per diluted share compared to $33 million or $1.17 per diluted share in the third quarter of 2024. In the Title segment, operating revenues grew $107 million or 19%, driven by our improved direct and agency title operations. As a result, title pretax income increased $17 million or 38%. After adjustments for net realized and unrealized gains and losses on purchased intangible amortization, adjusted title pretax income was $61 million, which was $17 million or 40% higher than the prior year quarter. Adjusted pretax margin improved to 9% compared to 7.7% last year. On our direct title business, total third quarter open and closed orders related to commercial and residential transactions improved. Domestic commercial revenues improved $12 million or 17% across various asset classes, including data centers. Domestic commercial average fee per file was $17,700, which was similar to last year. Domestic residential average fee per file increased 6% to $3,200 compared to $3,000 last year as a result of higher purchase orders. Total international revenues increased $9 million due to increased volumes and large commercial deals. On agency operations delivered strong performance with gross revenues of $360 million, increasing 28%, primarily driven by improved volumes in key states, as Fred noted, and commercial. Similarly, net agency revenues increased $12 million or 25% compared to the prior year quarter. On title losses, total title loss expense decreased slightly due to our continued overall favorable claims experience. The title loss ratio for the third quarter was 3% compared to 3.8% last year. We expect our title losses to average 3.5% to 4% over the coming period. On the Real Estate Solutions segment, total revenues improved $20 million or 21%, primarily driven by our credit information and valuation services operations. The segment's adjusted pretax income was slightly higher than the prior year quarter. We continue to manage the higher credit information costs and are expanding and strengthening customer relationships. Adjusted pretax margin for the third quarter was 11.3%, which is better than the prior three sequential quarters. We expect our margins to be in the low teens as these relationships mature. On our consolidated operating expenses, our employee cost ratio improved to 27% compared to 30% last year, primarily due to higher revenues, while our other operating expense ratio was comparable to last year. Our financial position remains solid to support our customers and employees in the real estate market. Our total cash and investments were approximately $390 million in excess of our statutory premium reserve requirements. We recently renewed and upsized by $100 million to $300 million our line of credit facility, which is fully available. Total Stewart stockholders' equity at September 30, 2025, was approximately $1.5 billion with a book value of $52.58 per share. Net cash provided by operations improved by $17 million or 22% compared to last year. Again, thank you to our customers and employees, and we remain confident in our service of the real estate markets. I'll now turn the call over to the operator for questions.

Operator, Operator

Our first question will come from Bose George with KBW.

Bose George, Analyst

I want to start by asking about the growth in agent premiums. It seems like you're continuing to expand in this area. Are you gaining market share? If so, is this coming from the larger competitors, or can you provide more insight on the current situation?

Fred Eppinger, CEO

Sure, there are two main components to this. On the residential side, particularly in the 15 states we are focusing on, we are seeing a good shift in market share, reaching about 16.5% this quarter. This is mainly evident in those targeted states, and we are also deepening our penetration with existing customers. This improvement is partly because we can now service all states and our technology has improved. On the commercial side, we have seen significant growth, around 40% in the agency channel this quarter. Historically, we excelled in commercial agents in the New York area, but our performance outside of New York was not as strong. We have focused on enhancing that service over the last couple of years, and it is really gaining momentum. Overall, both the strength in commercial and our efforts with larger agents, as well as smaller agents, are contributing to this positive trend. I'm pleased with the progress in both areas.

Bose George, Analyst

Okay. Great. And then just sticking to the commercial, can you talk about the pipeline into year-end? How is that looking? And how much is office starting to contribute as well?

Fred Eppinger, CEO

I feel good about our orders and the commercial aspect. The pipeline looks strong. We've had a great year, with an increase of about 35%, and large accounts are up approximately 39%. The growth has been broad across different categories, although the office sector hasn't shown significant growth and I don't expect that to change. Most other categories are performing well. I'm optimistic about the overall breadth of our growth, even as the percentage has declined, which is a positive sign. A few quarters back, I noted that energy was becoming a larger portion of our business, but now it has leveled out as we expand in other areas. Looking ahead to the second half of the year, I believe our comparisons will be interesting as we had a strong fourth quarter last year. I will keep an eye on how this develops, but based on our orders and what’s in the pipeline, I feel confident about the upcoming fourth quarter.

Bose George, Analyst

Okay. Great. That's helpful. And then just one more quick one. The investment income line was a little bit lower than last quarter. Anything to call out there? Because I assume the rate cut was late in the quarter.

David Hisey, CFO

Nothing significant. I mean, we will have some variability with short-term rate cuts because that's where all the escrows and everything are invested. So I think you may be seeing a little bit of that, but we haven't seen a whole lot of impact so far. And so far, the balances have been able to offset the rate cuts, but we'll just have to monitor that going forward.

Operator, Operator

Our next question will come from Jeffrey Dunn with Dowling & Partners.

Jeffrey Dunn, Analyst

I wanted to follow up on the expectation for a low teens margin in RES once relationships mature. Is there a critical revenue level that goes with that expectation?

Fred Eppinger, CEO

No. I mean, in the RES services, that's low teens, and I've mentioned in previous calls that we experienced a hiccup at the beginning of the year due to the significant rate increases from the data players, which came late. We were in the process of incorporating those rate increases into our contracts, and we also adjusted our pricing strategy to adopt more value-added approaches. This required us to catch up a bit. Once this adjustment fully integrates into the system, I expect us to return to the low teens margin that we've maintained over the past couple of years. The margin improves significantly when the market recovers, as many of our service businesses rely on volume. There's leverage from the typical business flow, and I believe in a $5 million purchase market, we could see margins reaching the mid-teens, perhaps around 14% to 15%, instead of the 12% range. Thus, I would describe the improvement path as a direct line from our current position above 12%. But again, like many businesses, there is a fixed variable aspect, and growth in that area greatly enhances the margins.

David Hisey, CFO

And Jeff, the other thing is that if you just look at the sequential, so we sort of bottomed at like 7% something in fourth quarter of last year, and then we've been slowly getting back up to the low teens. And so that's what we're talking about, right? It's having worked through all that and now being at the level that we would expect.

Fred Eppinger, CEO

And it was really about the data contract opportunity. It wasn't really the volume or anything. It was really just a one-time event, which we will recapture. We just had to get it built into our contracts.

Jeffrey Dunn, Analyst

Okay. And then just following up on the NII question. Can you just remind us how you think about the sensitivity to that NII line to Fed rate cuts?

David Hisey, CFO

Yes, Jeff, our rates are negotiated, so we don't experience the same direct drop as those with a 25 basis point cut. We haven't seen a significant decrease in our rates because we were never at similar levels as money market rates. Moving forward, the key will be whether rates are cut as they decline and how that interacts with our balances. As volume increases, balances will grow. I believe interest income will remain relatively stable over the next year, possibly slightly decreasing, but it will largely depend on these two factors. Once we observe the impact of rate cuts throughout the year, we will gain clearer insights into this.

Operator, Operator

It appears we have no further questions at this time. I'd now like to turn the conference back over to our presenters for any additional or closing remarks.

Fred Eppinger, CEO

Yes. Thanks for joining today. I want just to summarize where I think we are right now. So I believe that while the market is kind of still bouncing on the bottom, we're more confident looking forward over the next 12 months that we're going to start to see improvement. I think we're at the beginning of the improvement. There's enough indication that that's true. And the other thing I would say is, as a company, I feel very confident in our capabilities, and we're well poised to take advantage of that improvement. And one of the things that I think is kind of showing up nicely for us is we talked about at the beginning of the year, if the market didn't grow, what did we expect? We said, well, if the market doesn't grow, we believe we can generate about 10% revenue growth and about 20% earnings growth because of the improvements we've made in our operating model. And I think what we've done year-to-date is we've grown roughly 17% and about 45% earnings growth. And so it shows that we have some momentum in being able to grow in this market, and we're operating in a way that we get leverage from the growth. And I feel pretty good about that. And as the market improves, I think we are positioned to continue on that. Will it be as good as it's been in the first quarter? I don't know, right? The last three quarters are very good. It might even out a little bit, but I can tell you that we continue to have momentum in our ability to grow share and our ability to improve earnings. So I feel like even though the market I feel is relatively difficult, I think we're well positioned. So I appreciate people's interest and attention to the company. And again, I thank our employees for their commitment to what we're doing because I know how hard it is. So thank you, everybody, for your time and attention.

Operator, Operator

Thank you, ladies and gentlemen. This concludes today's event. You may now disconnect.