Q4 2019 Earnings Call
Greetings and welcome to the first American Financial Corporation fourth quarter, and full year 2019 earnings Conference call.
This time all participants are in listen only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad.
A copy of today's press release is available on the first American website.
W. W. W. First I. Unfortunately, I'm, sorry, www Dot first M Dot com forward Slash Investor. Please note that the call is being recorded and will be available for replay from the company's investor website and for a short time by dialing 87766 06853 or two.
This year or 161 to seven for one five and enter conference I'd have 1369 800 to.
I'll now turn the call over to Craig Barbarians, Vice President Investor Relations to make an introductory statement.
Good morning, everyone and welcome to first Americans fourth quarter and full year 2019 earnings conference call.
Joining us today will be our chief Executive Officer, Dennis Gilmore, and marketing Executive Vice President and Chief Financial Officer.
So the statements made today may contain forward looking statements that do not relate strictly to current or historical fact these forward looking statements speak only as of the date. They are made and the company does not undertake to update forward looking statements to reflect circumstances or events that occurred after the date. The forward looking statements are made.
Risk and uncertainties exist that may cause results to differ materially from those set forth any forward looking statements for more information on these risks and uncertainties. Please refer to this morning's earnings release and the risk factors discussed in our form 10-K, and subsequently I think the filings.
Our presentation today contain certain non-GAAP financial measures that we believe provide additional insight into the operational efficiency at the forms of the company relative to earlier periods and relative to the company's competitors.
For more details on these non-GAAP financial measures, including presentation with and reconciliation to the most directly comparable GAAP financials. Please refer to this morning's earnings released which is available on our website at www Dot first am dot com.
I'll now turn the call over to Dennis Gilmore. Good morning, Thank you for joining our call.
Today I'll begin with a review of a fourth quarter and full year results.
By a discussion of our outlook for 2020.
I'll close with some comments regarding our pending acquisition of Docie Tech announced this morning.
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Fourth quarter earnings per share with Golar 97, other door 80, excluding net realized investment gains.
Adjusted EPS for the quarter was up 41% compared to last year.
Lower mortgage rates drove improved performance in our refinance and purchase business.
Refinanced revenue was up 153% and the fourth quarter and a purchase revenue increased 8%.
In addition, our commercial the business delivered record revenues of 3% from the prior year.
These favorable market conditions combined with our operational efficiency enabled us to achieve record margins in our title insurance segment.
Overall, our title shirt segment posted a pre tax margin of 17.8% or 16.8%, excluding net realized investment gains.
And our specialty insurance segment, our home warranty business continues to deliver stronger trends driven by growth in our real estate and direct to consumer channels combined with lower loss rate.
Property casualty does not improve this corner.
Benefited from lower claims severity and lower wildfire related claims.
And especially insurance segments overall loss ratio declined to 51% driving a pre tax margin of 16.7%.
40.7%, excluding net realized investment gains.
Turning to the full year of 2019, the company delivered earnings per share.
$6.22 on revenue of 6.2 billion.
A pretax title margin was 16.1% the highest our company's history and our specialty insurance segment delivered a pre tax margin of 13.2% the highest margin achieved since 2014.
We remain optimistic with regards to our outlook January refinance orders per day were up 45% from December and up 96% compared to last year.
The positive refinance order trends continue into February.
Purchase orders per day were up 6% in January and this momentum continuing its continuing into February.
We believe the 2020 will be a good year for the purchase market.
We expect our commercial business will continue to deliver strong results this year.
As we've previously discussed we anticipate that our investment income will decline a 2020 driven by the federal reserves rate cuts in the second half of last year.
In summary, we were optimistic about market conditions in 2020, the company's ability to continue to deliver strong financial results.
Given our confidence in the prospects of our business and our commitment to maximize long term shareholder value, we raised the dividend by by 5% in January.
I'd now like to share a few thoughts on our pending acquisition of Docie Tech highly respected leader and the document technology solution industry.
This acquisition reflects our ongoing commitment to invest and grow our core business. It demonstrates our dedication to improve in the home buying experience for our consumers and driving their digital transformation other real estate settlement process.
Closing I'm proud of our company's performance in 2019.
Our vision remains consistent to be the Premier title insurance and settlement service company for our employees, our customers and our shareholders I'd now like to turn the call over to Mark for more detailed review our financial results.
Thank you Dennis.
In the title insurance and services segment direct premium in escrow fees were up 17% compared with last year.
This increase reflects a 27% increasing closed orders, partially offset by an 8% decrease in the average revenue per order.
The average revenue per order decreased to $2603 due to a shifting the mix of direct title orders to lower premium refinance transactions.
The average revenue per order for each major business line, however increased during the quarter with commercial up 2% purchase up 4% and refinanced up 9%.
Agent premiums, which are recorded on approximately a one quarter lag relative to the Brett direct premiums were up 15% <unk>.
The agent split was 78.9% division premiums.
Information and other revenues totaled 203 million up 11% compared with last year.
The increase was primarily due to growth in real estate transaction that led to higher demand for the company's title information products.
Investment income within the title insurance and services segment was 70 million up 1%.
Higher average balances, primarily due to strength and the tax deferred property exchange and warehouse lending businesses were largely offset by the impact of the decline in short term interest rates on the company's investment portfolio in cash balances.
Personnel costs were 450 million up 6% from the prior year. The increase was due to higher incentive compensation overtime, a temporary employee expense.
Other operating expenses were 224 million up 12% from last year. The increase was due to higher production related costs. As a result of the increase in order volume and higher software in professional services expense.
The provision for title policy loss is another claims was 52 million or 4.0% of title premium in escrow fees unchanged relative to the prior year.
The current quarter rate reflects an ultimate loss rate of 4.0 per cent for the current policy or with no change in the loss reserve estimates for prior policy years.
Pre tax income for the title insurance in services segment was 284 million in the fourth quarter compared with 136 million in the prior year.
Pre tax margin was 17.8% compared with 10.4% last year.
Excluding the impact of net realized investment gains pretax margin was 16.8% this quarter compared with 14.2% last year.
Net expenses in the corporate segment was 17 million down 1 million compared with last year.
The effective tax rate for the quarter was 22.2% lower than our normalized tax rate of 23.5% due to discrete tax benefits, including research and development growth.
No 10 contracts payable on our balance sheet totaled 728 million as of December 31st which consist of 540 million of senior notes 160 million on our credit facility 15 million of trust emails and 5 million of other Nelson obligation.
Our debt to capital ratio as of December 31st with 18.5%.
With respect to the Doc Tech acquisition, we expected from the entire 350 million purchase price with cash at the holding company, we do not expect to draw on our credit facility and we'll continue to have 540 million of availability on our line. After the close the transaction I would now like to turn the call back over to the operator to take your questions.
Thank you we will now be conducting a question and answer session. If he would like to ask a question. Please press star one on your telephone keypad.
Permeation total indicate your line isn't the question Q you May press Star too if you would like to move your question from the Q for participants using speaker, if I mean, it may be necessary to pick up your handset before pressing the star Keith.
Once again that is star one to register questions. At this time. My first question is coming from Merck to freeze of Barclays. Please go ahead.
Thanks, I have a two part question for you.
First is how should we think about the success ratio here. If you know order strength remains a strong for the balance of a year is what we've seen so far and then you know given any commentary there how should we think about yeah. Your expectations for a more sustainable long term pretax title margin.
I mean, you're clearly delivering results that are going to well above guidance that you provided in the past.
Yes, Thanks, Marc I'll start with.
First of all in terms of the success ratio 2019 was obviously a great year on the title segment. It was 27% was definitely exceeded our our target of 60%.
You know looking forward to 2020, M. and we're always focused on efficiencies with shown that over the years I think we're going to lose.
Some of that success ratio in 2020, it wouldn't surprise as it was higher than 60% for a couple of different factors.
The ones, we just continue to investing in technology and our systems and so we were sort of incredibly efficient in 2019, I think we don't expect nearly that same level success ratio go into 2020.
In terms of the margins.
We're really proud of the 15.2% adjusted margin we had a 19.
There's a few things going on so on the positive side and we feel great about the purchase market feel great about the commercial market.
But we've got headwinds of Dennis talked about our investment income headwind given the fact.
That said to cut rates three times, and that's going to be that's going to be headwind for us. So if you just look at what the fed did at the second half of last year, that's going to put about $30 million of investment income headwinds next year, which is.
It's tough to <unk> to recapture that so overall, we think margins will be really strong next year, just maybe not quite the level the word and you look like.
Got it thank you.
Thank you. Our next question is coming from Boston word of KBW. Please go ahead.
Hey, guys. This is Tom aiming join on for does I wanted to ask a how much cash remains at the at the holding company post Doc Tech acquisition and how much of that do you guys consider excess.
[noise].
Well, we're going to have.
[noise] at the ended the year, we had 342 million of cash at the holding company, but one of the process of taking dividends from a yard or primary insurance subsidiary mother subsidiaries to two to fund the Docie Tech acquisition. So typically we like to have about 100 million of cash at the holding company now that's roughly what will have.
You know post close and then in addition to that of course, we're gonna have the 540 million liquidity online <unk>, but we'll continue to huh.
Okay got it and then when you talk about a the headwinds to investment income next year, the the $30 million how much of that could potentially be offset by strength, then I guess warehouse or tenthirty, one balances, which you called out this quarter and as you know rates remain favorable I'm. The warehouse you know when markets.
Remain robust so just how much support can you get turned out to the investment income.
Well, that's a good point I'm. So the 30 million number that I I quoted that's assuming that balances just stay flat.
So obviously you know commercial continues to grow.
For 10, 31 exchange balances grow which they are so far the in January jeez balances were.
Higher than they were of all of last year. Then that's going to just you know me make that $30 million number lower so a lot of it depends on what happens with balances and so far this year, we're seeing really strong commercial balances.
Got it and then just last one if I could sneak it and what do you guys think about the accretion from from Docie taxes. There's some is it reasonable to assume something like a mid teens ROI on that acquisition.
[noise], Oh, I I think the way that I would think about it is we've we've got a confidentiality provisions in our purchase agreement. The positive. It's that's from disclosing financial information until the deal closes, but it's gonna be immediately accretive by the turn of about 10 cents. This year on a pro.
Form basis, and we would just think it would would grow after that.
Got it appreciate it.
Thank you. Our next question is coming from John Campbell of Stephens. Please go ahead.
Hey, guys. Good morning, Congrats on a good quarter.
Thank you I wanted to touch right back on Mark's Oh My comment you made about the 10 cents accretion you said that's on adjusted basis would just breaking is that backing out the purchase amortization.
No. It's not no. That's just on GAAP basis, Okay that that'd be only got basis got you and it sounds like you guys can't really provide much as far as detailed on Dr. Terry I guess could you, let us know it would that be falling on the info and other line within title or is that a new segment you might be creating.
Now it will be on it'll be under information.
Okay.
And then on information services the growth popped up a pretty good. This quarter is is that just kind of tracking natural.
That's just the resi trends or is there something else going on there, but it's definitely tracking our natural trend the order trends I'm also seeing some acceleration data business that's going on there right now okay. That's good to hear and then obviously I know you guys aren't economists, but I wanted to get your view on the refinance tremendous your I mean, the industry forecasters it looks like.
They're kinda group together, you know down 2020, 5% or show this year.
You know you guys put up really good January orders, that's like reflects already give it sequentially.
I don't know if that was expected or if it's kind of ahead of schedule that influence is you know your view for you fight trends for the year, but all that to say I guess, what do you guys thinking for re Fi this year or would you be or would you take the over or under on the industry projections.
I think I'm going to take either on that John because it's really a difficult one as you know when we put a budget together a couple of a couple of months ago, we budgeted unlike the industry forecasts that down 20% range.
Coming out of the gates very strong January very strong accelerate in February so I'm thinking right now we're going to have a very strongly finance at least the first half of the here and clearly the comps will get more difficult in the second half the year, but so far so good.
Okay, and you said it February actually accelerated from January Yeah, we're accelerating right now so very strong business well, okay. Great. Thanks, guys. Thank you.
Oh excuse me. Thank you. Our next question is coming from Chris <unk> of Compass point. Please go ahead.
Good morning.
On the 10 cents from dock Utac is that a full year number or is that the three quarters, assuming that closes sometime.
That's a full year number 10 cents yeah. So.
Yeah, we expected to closing.
But he ended the first core.
And then I wanted to dig.
More into the title margin I'm kind of color it.
Hearing that you were amazingly official <unk> I'm wondering Neil was most of that efficiency picked up and centralized channel. It just looks as though the margin improvement excluding.
The positive or negative I benefit really accelerated want to refinance picked up so I'm wondering you know we shifted more to a purchase centric market. If we shouldn't expect the same.
Healthy level all success rate.
Yeah, Let me take I'll take the first so cut it down and now can follow on happy if there's anything any just decide where we're doing very well I mean, we've had six years ago and margins 19 was a record margin for us. So overall performance is very strong as Mark mentioned, our success ratio very strong and 19.
Coming into 20 were very optimistic on year by the labor, becoming more optimistic as Weve entered the year purchased strong refinance strong.
Probably get a question on commercial strong. So all we think will be strong performers and 20 are PNC and a warranty business, especially business, having a lot of momentum so everything strong going into 20, the negatives as Mark mentioned, we'll be at the investment income. That's that's we're guiding lower obviously because of the fed rate increases last year.
Natural increases our expenses you kind of put all that together.
Going to have a good here and then specifically to your question, yes, definitely getting benefits from the automation across the enterprise, we <unk>, we got direct benefits and a refinance business.
And we're moving forward on other automation efforts across the purchase so if we have a very strong purchase market, we will definitely benefit from that.
Okay.
And following up on specialty commercial you noted increasing strength.
The home warranty business.
Yes, you know what's driving the accelerated.
Growth.
It's a marketing et cetera. It seems like claims were better just wondering what the underlying if that is that a pricing initiatives.
I was a weather so any color would be great. It's a little of everything our channels are strong both consumer direct and realistic we're growing in both right now growing their consumer direct probably disproportionately faster than our real estate channel right now our claim rate was lower severity is below so all in all the business is performing very well and we had favorable weather.
Finally, our liquidity here, so a beneficial across the board that business is entering 20 with a lot of momentum.
Alright. Thank you so much thank you.
Thank you. Our next question is coming from Mackenzie Aron of Zelman and Associates. Please proceed with your question.
Thanks, Good morning money.
One question for me following the Docie Tech acquisition acquisition can you just talk about appetite 2020 or further tuck in acquisition do you talked in the past about <unk>.
He is or other things on the technology front, given where the catalyst.
What's the outlook as pipeline.
Sure Yeah.
He's got a pretty good pipeline right now so we're excited about that strategy has been very consistent and we'll make it says we want to invest in the core type of business settlement businesses like we had been so no change there at all we will look for tuck in agency acquisitions, where they fit both geographically and yeah and culturally that's very important title agency business.
And then we're going to look for either technology data or information businesses, either have answered title automation or advance our desire to close enough. That's so really consistent to what we've been doing will continue to look for the same type opportunities.
Okay, great. Thank you. Thank you.
Thank you. Our next question is coming from Mark Hughes of Suntrust Robinson Humphrey. Please go ahead.
Oh. Thank you yeah, I'll ask about the commercial open order up 11% seems pretty strong could you give some context around that what the what's happening there.
[noise], we just continue to see strengthen the commercial business I mean in 2018. It was a record year fourth last year, you know revenue grew by 3%, which we're really proud of them. We've just seen the momentum continue.
Into January in into February sort order counts are strong coming from you know I'm across the country very different the various different asset classes and so were rural you know we're proud of our commercial business is performing right now.
And then.
The <unk>.
We didn't think about talking ticket I wonder whether you could just give a little more detail how they come to market what kind of distribution, what's their customer profile like where do you all add value with that transaction.
Sure there the core customers or lenders they provide a mortgage docs.
Okay market, leading a technology to provide mortgage docs to a large percentage lender. So right now it allows us to get earlier in the transaction the one.
Hi, due to I understand that allows us to advance. So you know he closing of the mortgage docs, which ultimately lead to eat settlement for us So pretty excited about the fit excellent company accident leadership are excited happened join us.
Is that is you look at it is this a.
How much do you get from revenue gains versus Oh cost synergies on a go forward basis.
[noise], it's more revenue play it's not it's not a cost synergy play and it's really just a strategic fit as Dennis mentioned, because it opens up the gateway for equals for us. So it's a it's not an acquisition that we're going to create value by taking a lot of costs out we're going to get value by coding solutions for our customers.
Thank you.
Thank you.
Once again, ladies and gentlemen that is star one if you'd like to register a question at this time.
Next question is coming from Jack <unk>. Please go ahead.
Hi, good morning.
Following on the last two questions I guess looking at the momentum in commercial open orders.
Do you feel like you can grow ARPO.
Either in the first quarter or a full year basis, I mean, obviously refined numbers of sort of been pretty resilient here, but how do we think directionally about that because it seems like you've got a little more commercial lender back pocket going into the year.
[noise], we do feel like we can grow it no no commercial isn't a business, where we're going I'm trying to raise rates I mean, I think we're really our arcos just a function of the types of deals that we close but commercial prices had been rising which helps our ARPO. There's been a lot of high quality deals that have happened, we're getting a lot of visits in California.
In commercial so we're a little over weight there and so yeah. We think we can grow our pro but it's more of a function of the deals that come to us as opposed to being proactive about your I'm trying to grow our phone.
Okay and then.
Talk you Tech.
You know looks like they do business with about 175 lenders.
I'm curious what you think their market share is.
There if you can share with US and then secondly on revenue is it a subscription model generally or is it or is it volume driven just thinking about you know cyclicality of the business.
Yeah, Let me take the second part first at the transaction business not a subscription business.
On market share a tough tough to answer the question directly because it's hard to know marketshare that segment. We think there are markedly better though.
Okay. Thank you and the business by the way is very sticky.
Thank you. Our next question is coming from Geoffrey Dunn of Dowling and partners. Please go ahead.
Thanks, Good morning.
Oh, Mark can you tell us what the total operating subsidiaries dividends were in 2019, and what that levels looking like potentially for 20.
[noise].
You mean need the dividends than we do we actually did in 2019.
Yeah, I think originally capacity was almost to 90 to start the year just curious what you actually did and what that expected numbers for 20.
Jeff I I, we can get we can get the exact number maybe offline I would I wouldn't say that we maximized the dividends in 2019, well, we just take everything we can out of our subsidiaries were not holding anything there and obviously with jockey check we expect to do the same thing, but I don't have the exact numbers off often tell my head for 2019.
Okay, and then with Docie Tech can you talk a little bit about what does that platform bring to you that says that our new capabilities versus deepening and broadening broadening existing capabilities.
Joe Let me, let me start around first of all we've been working on advancing yet the E closing the settlement efforts for the last number of years. We think it's very important as we look forward that closing and this last the settlement will move in that direction, specifically the dock Utac, what a brings to us as the document creation sort of moving up the value chain into that led to.
Creating the documents will have knowledge of the docking creations much earlier and I think what it does specifically.
That allows us to accelerate the E closing of the mortgage docs as part of the settlement.
So when you say create the document and you're talking about the digitize forms that could be sent to the borrower to sign into Vance doesn't include any kind of you know to relation.
The first part yes, you know those actions a separate after we have underway.
But it's actually the creation of the dogs that can ultimately be sign and an easy format.
Again, we think it simplifies the process it actually enhances the consumer experience.
And so remember the mortgage docs are just a component of the ultimate ultimate settlement, but it's a large component.
And this is something that you previously outsourced or just didnt have the capability at all.
Oh previously we did we get them from somebody like Us Ducky Tech.
Okay. Thanks.
Hey, Jeff I just wanted to follow up on your on your last question. So in 2019.
Our holding company had 385 million of dividends from its subsidiaries and that's both of regulated and unregulated and then in 2020, we'd expected to be a little bit higher just because of the weighted the calculations work, but that gives you stands for dividends.
Okay. Thank you.
Once again, ladies and gentlemen that is star one to register for questions. Our next question is coming from Mark Hughes of Suntrust Robinson Humphrey. Please go ahead.
No wonder just a quick update on the specialty insurance your direct to consumer initiatives. The mix of business. There are based on transactions versus.
Renewals or that the a direct channel.
Oh.
Let's have market the specifics on the on the on the volume transactions.
Well I I I would say that you know the direct to consumer we didnt have one direct to consumer order 10 years ago announced significant part of business comes from direct to consumer about half of our business in home warranty comes from renewals and half of it is sort of new business that we get every year and again once you have those renewals is it yeah, there's an 80% chance.
They renew after the first year, so about half the book comes renewal that happened.
And then I'll, just add summit and the strategy standpoint, we do very very well in the real estate channel and we've probably been a little underweight in the direct to consumer, which we put a large effort into nine team and that effort will continue into 20 and beyond.
Thank you.
Ladies and gentlemen, this concludes today's conference.
To remind listeners that today's call will be available for replay on the company's website or by dialing 87766 06853.
She is 0161 to seven for one five and enjoy the conference I'd have won three.
Nine 800 too.
The company would like to thank you for your participation.
This does conclude today's conference you may disconnect. Your lines at this time can have a wonderful day.
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