Q3 2019 Earnings Call

Greetings and welcome to the first American Corporation third quarter 2019 conference call.

At this pretty listed.

Oh no question answer session.

Poll for questions.

Our first question today is coming from Jack in the Cinco from SNG. Your line is not alive.

Hi, good morning, I'm looking at the personal cost leverage in the quarter.

It looked like there was more maybe more of a pronounced step down improvement and I mean, just first question would be is is that all volume or is there something maybe more permanent going on that's driving that better leverage.

I would you say that you know we've been really focused on managing our cost and we had an explosion in refinance orders on them and we didnt pay a lot more in overtime. This quarter, we paid more intense but I think we we feel good about our ability to sort of maintain our kind of employee level. So I don't think there's any kind of this.

Structural stepped down but I think it's a function of the orders writing fast enough to kind of being diligent on the cost side, Yeah, and I would only add like we mentioned on the second quarter call, they're going to hold our Ics are headcounts, even going into the third quarter, which we effectively have done.

As Mark said, we use overtime intense and other things and also and I mentioned in my script here, we're getting some early benefits from.

All of automation efforts, we're rolling out in the company.

Okay. Thanks, and then.

On the dividend.

You know the past looks like for the third quarters been when you've maybe taking a look at that a little closer.

In the ratios drifted down a bit.

Just curious on any updated thoughts around dividend dividend payout ratio that sort of thing.

Well.

You know the dividends are a key part of our capital management strategy, we've been raising dividend every year for for quite a number of years now.

And so it's something we discussed regularly with the board, we expect to pay a higher dividends in the future.

And so that's something we're looking at.

And having regular dialogue about especially the fact that our earnings are so strong this year and the outlook looks good for next year. So I wouldn't really look any anything in particular in the fact that we didn't raised in August because that's something we're going to evaluate in future.

Alright, thank you.

Thank you.

Thank you. Our next question today is coming from Bose George from KBW. Your line is allies.

Hey, good morning, and can you just talk about the increase in the commercial fee per file there was obviously up nicely year over year, and then just kind of waste to think about what happens with that line item.

Let me start on and then I'll hand, it over to Mark on the specific on the art, though again, we had a very strong commercial quarter again I mentioned in the second quarter. We have some big deals were all from the second is a third so little lumpy there, but all in all the very strong quarter force in commercial pipeline is very strong going into the fourth quarter and even looking now into 20 were optimistic income.

So.

Yeah, I would just say yeah. There we did close a very large transaction this quarter that skewed to the our pull a little bit we got a deal that was over 10 million a premium but even if you would have backed that out we still would have had an increase in arco. So we're just seeing a lot of really no large transactions come through right now.

Okay. Thanks, that's helpful and then actually going back to the information other segment.

Thank you in your prepared remarks, you noted that some of it was an increase in orders, but last quarter. There was an increase in that segment was down a little bit year over year. So you know there yes. Other drivers we should think about and just you know just when should think about the outlook for the growth in that line item as well.

Well when you look at the growth in for one other in the last you know on an annualized basis.

Most of the growth is coming from our data business and so you know as you know we sell our title plan information, we're still on property record information and that drove most of the growth. We also did.

Sell more in I'll just call it title information products like searches that we provide them in connection with a transaction and so I would expect it would.

The biggest driver is going to be what happens with mortgage originations.

Well we are seeing.

Higher higher data sales in that line item too.

And I'd only add on that is.

Well, probably getting near a bottom on the reduction of default type products out of that groups of the default business has been falling for us as defaulters all across the.

That's right now and as Mark said, our data businesses are accelerating.

Okay. Thanks, and then actually is one more in your prepared remarks, the 7 million impairment in the office consolidation did you say that went through the expense this quarter.

Yes, yes, I went through a other other operating expenses and final settlement seven though.

Okay, great. Thanks.

Thanks, those Banco next question today is coming from Mackenzie Aron from Zelman and Associates. Your line is now lives.

Thanks, Good morning.

I guess I was hoping you could just elaborate a little more on the automation efforts that are helping the margin maybe if there's anything specific that you can give us a little color on and then also just where in that process is it still early innings, it's something that will continue to be a a tailwind.

Yeah, I'll give you a little bit of a any insight on that we really have two main points of focus for the company those digitizing the closing for the title site and automating the title efforts across the board specifically on the title inside.

Looking at reduce processing time increase our efficiency lower risk and improve the consumer experience kind of altogether and in that we've been aggressively working deploying AI and machine learning crossed our databases for a number of years actually we're seeing the benefits right now early innings and we're seeing the primarily in our refinance business right now.

Okay, Great and then also passed switching gears, a little bit, but on the acquisition pipeline and whether its.

Agent or anything on the technology and data side, maybe just talk about what you're saying.

That could be a tuck in benefit.

Sure. He has actually been a pretty quiet year first from an acquisition perspective fit our strategy really hasnt changed it was kind of full pipeline that we've been pretty selective this year on the acquisition front itself.

Like we said before we're looking for target acquisitions and agents, where we want.

Good place.

Looking for information companies on the data side to drive greater tight automation and what we have done this year. The as we've been doing some strategic investments in businesses that are not directly in the title called the complementary to core title and I anticipate will do continue we'll continue to be more of those and Tony.

Great well thanks, so much thank you.

Thank you as a reminder, ladies and gentlemen that star one to be placed into question Q. Our next question is coming from quarter trend from Stephens. Your line is now live.

Yes, good morning.

So I know you all are pretty heavily exposed to California can you talk about the purchase trends you're seeing there and do you think prices will keep growing that market like they are and if so what kind of effect do you think that will have on purchase.

Sure. Let me let me just answer the question broadly across the country and then I'll, let mark talk about specifically about California.

But we're getting progressively more optimistic on purchase our purchase orders countrywide were up 2% and the quarter line up 2% right now in October you know really going into more of our seasonal slow time. So clearly, we're becoming more optimistic on purchase as we go into 20. So I think continue to see purchased start probably terms.

From a headwind or tailwind going into 20, now specifically on California.

Yeah, just just to give you some numbers so, California is our largest state and on the purchase side and this is the direct business.

Our revenue was up 2% year over year.

And on the refinance side it was up 119%, obviously, we're going to want to refinance volume in California.

And then on the agency side, we've actually strategically.

Have been reducing our footprint in California, our premiums are down about 26% just because we made some pretty dramatic reductions with the with the splits.

And so we've done that kind of intentionally just just to kind of could we just do Michael the prices. It was out so thats kind of a snapshot on California.

Okay perfect. Thanks, guys is helpful.

And one more on the specialty insurance segment.

So loss ratio that really proved this more but because of weather benefits in the PC business or better underwriting in home warranty.

And more home warranty, what's what's driving the revenue growth. There is it grew on the customer base better pricing. If you guys keep brought some more detail there would be helpful.

Sure. It just wasn't overall very good quarter first, especially in specifically on home warranty.

The third quarter is typically our weakest quarter because of the season will claim events going on in the quarter.

We had increased clients, but lower frequency excuse me lower severity. So we had strong expense management across the board in that business.

Also in home warranty I mentioned in the script, we're really I'll call accelerating our efforts to develop greater consumer direct a greater consumer direct business. We've got a significant one now we want to grow it in 20 and beyond when we look at the consumer direct business by and large we think it has a lot a greater lifetime value to the customer than our traditional real estate channel. So.

Kind of wrap up in home warranty, we just had a very good quarter, we controlled our expenses well look a little girl consumer direct business going forward.

Got it thanks, guys. Thank you.

Thank you. My next question is coming from Mark Hughes from Suntrust. Your line is that alive.

Yes. Thank you. Thank you stuff that last question have you given an update on the mix of consumer direct versus a real estate channel within the home warranty business.

We haven't but our dominant channel there as far as our real estate channel. So the opportunity for us is to grow the consumer direct side.

Dennis anymore, you can say you sounded very optimistic on commercial kind of big picture what gives you confidence there.

Specifically on commercial.

Yeah, I'm thinking about kind of 2020.

Yeah, we just look at what we've got going on right now our pipelines are full this is really got strength across the markets across the asset classes like I mentioned on the on the second quarter called the third quarter call. Both both calls well always seek lumpiness in big deals. So with that said the pipeline is a good going into the fourth quarter the economy strong.

So.

I'm not sure 20 will be a record year for us I, just think it's going to be another good here for us and commercial.

And then on investment income Mark when you take into account.

Alex is in the fed moves and timing and all that up how should we think about the Q4 investment income relative to Q3.

Well.

Last time, we have this earnings call, we talked about the fact that every time the fed cuts, we expect to $12 million to $15 million decline in investments come on an annualized basis and we're we're actually getting a lower in the range. So you know our experience has shown at the numbers closer to 12 million the thing that happened in the third quarter is that balances now.

His rose and investment income was up a million sequentially and we are most of our balance was driven by commercial and so commercial has the seasonally strong quarter in the fourth quarter. So we think that as we sit here today balances are going to continue to increase in fourth quarter. So investment income is likely to be down a couple of million dollars next quarter, but.

Wont really you won't really see this $12 million annualized number until until we get into next year.

Thank you.

Thanks Mark.

Thank you. Our next question today is coming from Jason you from Piper Jaffray. Your line is allies.

Yes, thanks, and congrats on a very good quarter <unk>.

Good question question on the visibility you have on commercial can you just remind us how much visibility how many months visibility you have on that pipeline.

You know, it's hard to say, that's I would say of all of our businesses. It's the most difficult to forecast over like a call. It a 90 day period.

Simply because like with purchase and refinance once we get an order in you know we pretty much no. One is going to close with commercial we can get an order in and we just don't know when it's going to close it wasn't 30 days you can look in six months in closing year. So so we feel strong about the commercial business because of the orders that we have in the pipeline, but it's really the most difficult business to fourq.

Yes in the short term.

Okay. So I mean, but you pretty much have good visibility into the ended the year as that is that fair to say.

Yeah, you think about the fourth quarter yeah all.

Really the same that Mark said pipeline fall.

Very strong going into fourth quarter, you just can't predict the closing on some of the big deals that could go into the first quarter, even second quarter, So pipeline fall, but it's difficult to predict the exact closing on a transaction.

Got it thanks, and then you know with the FNF Stewart deal being blocked has there been any change in the competitive environment that you've noticed.

No. It's been has been will continue to be business as usual for us.

Like like we've said on previous calls we weren't distracted by the deal we've been very very focused on our strategy given what we think it's right for our company and for our customers and that'll go forward, we'll continue that strategy going forward, So no change to us.

Sounds good thank you.

Yeah.

Thank you ladies and gentlemen, we reached end of our question answer session that also does conclude today's teleconference. You may disconnect. Your lines at this time and have a wonderful day, we thank you for your participation today.