Prepared remarks
Hello, and thank you for joining the Stewart Information Services Fourth Quarter and Full Year 2024 Earnings Call. Please note, today's call is being recorded. It is now my pleasure to turn the conference over to Kath 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 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 challenged 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 that the fires have caused. While we are fortunate to say that we did not have offices or employees impacted, we have and will continue to find ways to support these communities in their efforts to rebuild.
While 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 2024, 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 talent. This dedication is why U.S. News & World Report recognized us as one of the best companies to work for in 2024 and 2025. We will attract new members to the company through hiring of best-in-class talent across the organization. We have a really strong set of leaders at the helm, several of whom have assumed positions this year, which is a direct result of our thoughtful succession plan.
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 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. We branded 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 centers. 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 2024, 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 2019 in this segment. Across the organization, we have dedicated some of our energy to improving the company's infrastructure, including technology upgrades, both internally and to our customers. We have made great headway in building our operational leverage through global centralization centers and have strong leverage and assistant to capitalize on when the market returns. In the third quarter of 2024, we announced our fourth annual cash dividend which increased to $2 per share to reiterate our strength and commitment to shareholders. Finally, I'd be remiss if I did not mention that in 2024, we donated over $1 million to the Stewart Title Foundation to 100 scholarship recipients and over 900 organizations serving the communities we live and work in. Since its inception, we have given $2.9 million through our foundation to the communities we live and work in.
I am 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 for the quarter given market conditions. From a macro perspective, 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 a more positive print in Q4, the year 2024 existing home sales were down relative to 2023, making the last two years the lowest housing markets we've experienced in several decades. Even with the positive Q4, the housing market still needs significant improvement in order to get back to the historically normal 5 million homes sold annually. While we are pleased to see the movement and increase in comp sales, we believe this uptick 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 long market conditions. In 2025, we expect the housing benefit to remain very choppy, given the prolonged expectations around rates. We currently expect the first half of the year to be very challenging and 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 increasing inventory and the effects that could have on tempered or steady price appreciation, the continued pressure cooker on demand, and 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 in the last half of this year to probably continue. But while we have growth, it will be much lower than we saw in 2021 and 2022. Turning to each business, our direct operations segment has most immediately felt the impact of the stifled Residential housing market. We have remained diligent in managing our direct operations segment to protect our core of the market and our margin. We remain focused on expansion efforts in 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 robust acquisition pipeline in preparation for an improved market.
We've also pursued small Commercial penetration in our direct operations and have seen 15% growth in that segment of direct offices in 2024. 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've 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 the progress we have made to bring in top talent, serve our customers well, and pivot our fair share in the market. We expect our Commercial transaction momentum to continue and we will keep in mind the near-term Commercial headwinds 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 supports 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 that focuses on improving agent efficiency and economics. We will continue to build on all 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 one-time impacts such as start-up costs for new customers and some timing of data contracts. However, we expect to sustain or improve the low teen 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 improved portfolio of services. Cross-selling in current market conditions poses challenges; however, we continue to see gains from both existing clients and new client introductions. We expect continued momentum in this space as the market improves. In 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 a higher percentage of mix due to the use of outside services and data. 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 that our direction and maintaining our belief that we will achieve low double-digit pretax margins once the macro market returns to historically normal levels, which we 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 our best to serve with excellence.
Finally, I want to thank our Stewart team for their loyalty and continued dedication to excellence. It's been an honor to lead the company over the last five years, and I could not be prouder 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 to provide an update on 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 multi-decade lows and mortgage rates in the 7% area. Yesterday, Stewart reported fourth quarter net income of $23 million or $0.80 per diluted share on total revenue of $666 million. The Appendix A of our press release presents adjustments primarily related to net realized and unrealized gains, acquired intangible amortization, and other expenses that we used 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 of 2023.
In the Title segment, operating revenues increased by $60 million or 12% from improved performance in our Commercial, Residential, and agency operations. Title segment pretax income increased by $18 million or 65% primarily due to higher revenues. After adjustments for purchase amortization, severance, and office closure expenses, the segment's 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 by 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 by 33% to $19,600 compared to $14,800 in the prior year quarter. Domestic Residential average fee per file decreased by 8% to $2,900 compared to $3,200 in the prior year quarter due to a lower purchase transaction mix. With our agency operations, fourth quarter gross and net agency revenues both improved by 6% or $17 million 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 favorable 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 low 4% range for 2025. Regarding the Real Estate Solutions 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 intangible amortization, adjusted pretax income was $6 million at a 7.4% margin in the fourth quarter compared to $7 million at a 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 solid 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 Stewart stockholders' equity at December 31, 2024, was approximately $1.4 billion or a 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 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.
Questions and answers
And we will take our first question from Bose George with KBW. Please proceed.
Good morning, Fred. I want to start with Commercial. I just wanted to confirm that you mentioned expecting modest growth in 2025 for Commercial. Are we looking at that growth in relation to the full year of 2024 or the latter half of 2025, especially since the Commercial market seems to have gained momentum?
The market is currently quite volatile, and there's been a lot of uncertainty over the past month. We expect growth in the Commercial sector to be in the low single digits. While there is uncertainty, we noticed that the second half of last year performed better than the first half, and we anticipate that those trends may continue, even though the situation is less predictable right now. However, we remain optimistic that growth will be positive. It's important to note that this will vary by sector, particularly with ongoing strength in data centers and similar areas.
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. Our pipeline has 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 kind of what's transpired this year.
Okay. Great. And then actually, in the Real Estate Solutions segment, I guess David noted the repricings that are likely to happen. I mean in terms of the margins on that sort of normalizing, does that happen fairly soon in 2025? Or is there a little bit of a transition?
Yes, that's a great question. There are two main factors contributing to this year's fluctuations due to significant growth. In the fourth quarter, one reason is the start-up costs associated with our new clients. If the timing of these transactions isn’t perfectly aligned, we incur expenses before seeing any revenue, but this should rectify itself quickly by the end of the quarter. The second factor is related to pricing. Typically, at the end of the third quarter in our industry, we see a rise in input costs, especially regarding data from credit bureaus and related services. These increases have been substantial, and we are actively working with our clients to incorporate them into contracts. I'm confident that our team has managed this well. The implementation of these pricing changes began this week, and they are starting to integrate into client relationships, which is a promising development.
I believe that by the end of the year, our business will likely improve by about a percentage point, resulting in cash margins moving from 12% to around 13%. Long-term, from a GAAP perspective, I anticipate that our margins, currently at 11.5% in a typical $5 million market, will rise to a full 10% margin. Given the cyclical nature of our data business, which is operating at a 35-year low, I expect a recovery to a more normal mid-teens cash margin, and I'm optimistic about our current performance and margins. Although I don't foresee a dramatic market improvement in the next six months, I believe we will begin to see progress in the latter part of the year.
Okay. That's very helpful. Thanks.
Thank you.
And we will take our next question from John Campbell with Stephens. Please go ahead.
Good morning, John.
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 scaled guys by about 3x in the year. So I know there's some nuances there. Fred, you've talked often about asset class exposure kind of mix shift. I want to get your best sense, I know this is probably tough to unpack, but your best sense for share gains versus maybe your unique exposure?
That's an excellent question, John. Regarding energy, I can share that our energy portfolio has grown this year by around 35%, which is significantly higher than the previous 18%. This growth can be attributed to a surge in categories like alternative energy, particularly solar, as well as some infrastructure projects we have. I believe part of our significant growth comes from our strong mix. While I'm not entirely sure how our competitors are performing in this area, I think it plays a role in our success. Looking at the overall categories, we've experienced a 50% growth, and we've made substantial investments in personnel and sectors to align with our strong underwriting capabilities. Previously, our capital was only about half of what it is now due to uncertainties when the company was for sale, which limited our market share. Currently, however, we've increased our market presence from around 9% to approximately 14%, which is a notable improvement.
I believe much of this growth is sustainable. If our mix in the energy category is larger than that of others, it's likely we are benefiting from the overall growth in that sector. In a more stable market, we can expect to see normalized growth. Overall, it's clear that we are outperforming the market across various categories, indicating that we are effectively utilizing our substantial underwriting capacity. Despite starting our journey with a relatively small market share, I am optimistic about our progress and believe that the current mix in the industry is benefiting us.
Okay. That's very helpful. I appreciate that. And then, David, historically, I think maybe the last two or three years, you've kind of talked or expected like low to maybe mid-4% loss provision rate. Obviously, you've been pretty consistently below that. It sounds like now you just mentioned a 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 perhaps you expected or maybe it was overly conservative? Just more commentary on that and kind of also what you're seeing on the back book and loss trends?
Yes, John. I mean, I think it's just really a combination of the mix. 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. The thing that you always have to be concerned about, and that's why we try to be a little more balanced, is that you can have what we call jumbo or large claims come in, and the timing of those is hard to predict. I'd say it's a combination of overall favorable macros and 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.
Yes. So I think our guidance is still going to be in that low 4s; right, that's the average number.
Okay. And then last one for me on the investment income. Just any kind of sense for a broad range of expectations over the next quarter or two.
Yes. I think we've been in that $13 million range. We were a little bit better in Q4. We just had a little bit of better volume on some of our escrows and things like that. I think we've been able to hold. Keep in mind, if you're looking at us versus First American, we're not hair-trigger on rates because we don't trade off a money market because we're not a bank. Our rates are negotiated, assuming that the banks always give themselves a little cushion in that negotiation. Because of that, we don't necessarily go down as quickly as rates do. We've been able to hold. I think unless you were to have a really big extra drop in rates. Right now, it's one to two, maybe three for the year, sort of the range of betting. We should be able to hold pretty well at the levels we're at.
Okay. Excellent. Thanks, guys.
Thank you.
Thank you. 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 at any time.