Q2 2020 First American Financial Corp Earnings Call

Had a copy of today's press releases available first Americans website at Www Dot first a M. Dotcom forward Slash Investor. Please note that this call is being recorded and will be available for replay from the company's invest your website and for sure.

Short time by dialing 87766 06853.

Well I locally too well 16127415 and enter the conference I D number one three 706 905.

I will now I'll turn the conference over its grade Barbaria, Vice President Investor Relations to make an internet introductory statement.

Good morning, everyone and welcome to first Americans earnings Conference calls for the second order of 2020.

Do you already yesterday will be our chief Executive Officer, Gilmore, and Mark Sweetened Executive Vice President and Chief Financial Officer.

Some of the statements made today may contain forward looking statements that do not related strictly to historical her current fact.

These board it'd be stupid speak only ends up the daycare made and the company does not undertake to update Florida two shakes.

To reflect circumstances or event that occur after the date, the Florida two statements surveyed.

We're just gonna uncertainties exist that may cause results two different materially from those set forth in these fortunately statements.

For more information on these risks and uncertainties. Please refer to this morning hurting somebody in the risk factors discussed.

10-K, and subsequently FCC filings.

Our presentation today contains certain ungass financial measures that we believe provide additional insight into the operational efficiency and before hours of the company relative to earlier periods and relative to the company's competitors for more details on these non get financial measures, including presentation with and reconciliation to the most directly comparable.

[noise] financials. Please refer to this morning's earnings release cause he's available on our website at www Dot first a M dotcom.

Well now for them to call over to dentist Gilmore.

Good morning, and thank you for joining a cold.

Cause they all provide an update on first Americans response to the coronavirus pandemic.

So your the current market environment.

And highlight our progress in our data and digital initiatives.

Mark will give a rundown on our second quarter earnings.

Would you the company's capital N liquidity position and provide an update on last year's information security incident.

In response to the pandemic.

Priority, it's been two fold.

To keep our employees safe well meeting all the service needs of our customers.

Early on reactivated our business continuity clan, which enabled most of our where people to work from home.

Currently approximately 80 per cent of all Workforces working remotely.

It is likely will remain in this posture until the end of the year.

During our last earnings call, we discuss the no way of commitment we made to our employees to the end of June.

At a time of great on Thursday, we viewed it as an investment I don't boys and one consistent with our philosophy. It emphasizes it along to you.

It turned out to be a good decision.

Our most recent surveys root beer record levels unemployed engagement.

Yeah. That's importantly, one order volumes rebounded more quickly than unexpected we had are trained workforce in place to fulfill the needs of our customers.

Alright April forecast projected a 45 per cent year over year decline and open purchase orders and the second quarter.

Our actual experienced that's been materially better with just a 15 per cent year over year decline.

Ah residential purchase business has experience experienced a broad consistent recovery since the trough in April one order sell 38 per cent.

The recovery started and married when orders for down just 10% then we saw five per cent growth in June and so far in July or does your up six per cent.

Buyers, who postponed purchases in the spring have returned during the summer that's a traditional seasonality curve has shifted.

The refinance size open orders continue to be elevated.

And the second quarter, we average 2900 orders per day in line with her April forecast.

So Orange July we are open 830, 100 orders per day.

Continue to believe that <unk>, the refinance Margaret will remain elevated for the remainder of the year.

And a commercial business revenues and the second quarter declined 39% from the prior year.

Better than our April forecast of a 50% decline.

Maybe response to the economic uncertainty.

We've seen a slow down and activity across all commercial asset classes and the second quarter.

And that's our expectation that segment will remain under pressure for the rest of the year.

However, we haven't seen an improvement in open orders in recent weeks.

[noise] Hi, commercial order stay on just 10% versus last year.

Other areas, where I titles cycling have benefited from an increase in overall transaction activity.

Revenues and our database solutions business, we're up 12% this quarter and Doctor, Utah confused you exceed our expectations.

Turning to our specialty insurance segment two factors are driven elevated claims in her property casually business.

First we strengthen reserves for prior period claims by five.

Secondly incurred a higher number of large claim losses. This task holder, which we believe maybe in due in part to the pandemic.

Our home warranty business continues to perform one.

Although we have seen an increase in clean frequency this quarter, particularly in the appliance trade the tweeds tribute to the pandemic or direct to consumer sales had been stone, leaving our initial I'll look for 2020 unchanged.

Oh, we continue to make progress and are planted digitally transform our business and we believe the pandemic has accelerated the demand for digital clothing services.

We have three main areas of focus.

Data leadership title auto nation and digital closes.

This quarter, we close 2090 per cent more orders than in 2019, while our USA can't remain flat.

This is partially attributed to the work we've already done to automated optimize the work, Florida tied up production process.

Because tied automation is David dependent we continue to invest heavily inner data assets.

Yeah, a patented automated data extraction process.

[noise] can accurately captured title and property information more efficiently than ever enabling us to collect a more comprehensive Saturday to for the same costs.

We believe we have brought our coverage and deeper more comprehensive title and property databases than any other company.

Lastly, we continue to work on a number of initiatives <unk>, our core closing capabilities.

[noise] one notable effort underway is and point.

Digital title Unethical company, we can watch it in 2018.

Just 18 months and point has a two per cent Marcus Sharon Seattle.

We've launched in southern California, this quarter and currently entering the fees Phoenix market.

Although although it's still early days and putting a C. Rapid initial success and offering buyers and sellers in real estate professionals, a digital mobile first user experience.

The investments first American that's been making over the past few years to secure data leadership accelerate title automation and enabled digital clothing has put us in a superior position to add value for our customers S. Digital innovation transforms the mortgage and home by an experience.

Now like to turn the call over to Mark.

Thank you dad.

And the second quarter, we earned $1.52 cents per diluted sure <unk>.

Excluding that realized investment games at 69 million primarily related to any increase in the value of equity Securities. We were in one dollar five cents per diluted sure.

And then Thailand shirts, and services segment direct premium and extra fees were down for per cent of compare with last year.

This decrease reflects the 26% decline in the average driven per order <unk>.

Largely offset by at 29% increase and a number of clothes daughters.

The average revenue per ordered decrease two $1950 due to a shift in the next to direct title of orders to lower premium refinance transactions.

The average revenue per order for commercial transactions declined 21 per cent.

Refinance increased six per cent and purchase increased one per cent.

Agent premiums, which I recorded on approximately a one quarter lag relative to direct premiums.

Yep 10 per cent.

He didn't split with 79.0% Nobody's your premiums.

[noise] information another revenues totaled $228 million, 15% compared with last year.

The increase was primarily due to the recent acquisition of Dark you Tech.

And the growth and mortgage origination the led to higher demand for the company's title information products.

Investment income within a Thailand shirts and services signal, it's 43 million now I'm, 39%, primarily due to the impact of the decline in short term interest rates I'm investment portfolio in cash balances.

Personnel cost for $417 million down one per cent barrier.

This decline it was primarily attributable to lower incentive compensation expense. So it was largely all set by higher costs are the results in recent acquisitions.

Other operating expenses were $222 million, 14% from last year.

The increase was primarily due to hire production related costs as a result of the growth and order volume the impact of recent acquisitions and higher cost and a number of expense categories.

Partly offset by lower travel expenses.

The provision for tidal policy losses, another claims with 56 million or 5.0% of titled premiums escrow fees.

An increase from a 4.0% last revision right in the prior year.

[noise] claims experienced continues to be favorable relative to expectations.

<unk> title claims totaled $29 million in the second corner of 26% decline relative to 2019.

Two days, we have not seen an uptick in claims are intensive to maintain a five per cent lost right until we have more visibility into how the current environment will affect their claimed experience.

Depreciation amortization expensive 39 million and the second quarter up 8 million or 26 per cent compare with the same period last year, primarily due to recent acquisitions.

[noise] pretax income for the title insurance and services segment was 238 million and the second quarter compared with $233 million a prior year.

Pretax Martin was 16, 3% compared with 17.0% last year.

Excluding the impact of net realized investment games pretax Martin was 12.5 per cent this quarter compared with 16.5 per cent last year.

And that expenses in the corporate segment were 20 million of $1 million compared with last year.

The effective tax rate for the core was 23.8 per cent in line with our normalized tax rate.

No can contracts payable on a balance she told just over 1 billion as of June 30th which consists of $992 million. A senior notes 14 million of trust email can 5 million of other notes and obligations.

And May we issued 450 million of 4.0% 10 years senior notes do 2030.

We use $280 million of the proceeds to pay down or credit facility and the remainder is currently held that are holding company.

[noise] today, we have the entire amount available under a 700 million dollar revolving credit facility.

It has now been a little over a year since the information security incident, and we wanted to take the opportunity to provide you with an update.

In March the Nebraska Department of insurance, the primary regularly or a auto insurance company, let an examination of our information security program as of June 30th 2019, and our response to their information security incident.

The resulting report concluded that our I T General control environment suitably designed and it's operating effectively and that we adequately inappropriate Lee detected analyzed contained eradicated and recovered from the security Internet.

And we are in compliance with new York's side of the security requirements for financial services companies.

A number of other regulators have closed investigations without any findings.

The only two investigations has been active recently.

One being conducted by the enforcement Division of the New York Department of financial services and the other by the F C enforcement stuff.

The New York Department of financial services, Notwithstanding the complaint finding an examination report I mentioned earlier is alleged violations of New York Cypress security requirements.

Our efforts to resolve the matter have not been successful and as a result yesterday they filed a statement of charges.

We intend to conduct a vigorous defense, which will focus on among other matters. The examination report and its conclusion regarding our compliance with New York Cyber security requirements.

D. S. U C. Unfortunate staff is questioning the adequacy of disclosures we made at the time of the incident any adequacy a R disclosure controls.

There are also for class actions pending which consistent with our typical approach to litigation we were aggressively defending against.

We do not believe that these investigations and class actions will be material from finish the perspective.

I would now I'd like to turn the call back over to the operator to take your questions.

Thank you.

If he would like to ask a question. Please press star one on your telephone keypad, a confirmation teller indicate your line isn't the question kill you May Press Star too. If he was a dream of your question friendly him for a participant choosing speaker equipment and may be necessary to pick up your handset before pressing the star T is.

Our first question as from Mark to freeze that Barclays. Please proceed with your question.

Yeah. Thanks wanted to drill down on expectations for the the residential purchase some commercial market no Dennis how much of the balance on the purchase side do you think is due to pet up the man versus just maybe higher demand as a result of improved affordability and other reasons.

And also I know, it's a hard question, but you know on the commercials side <unk> what are your expectations for the trajectory of that as we go into the back out for you. It sounds like it's made a pretty significant improvement so far in July.

Sure, let's let's start with a purchase business.

It's interesting specifically the question pent-up demand or shift and the curves it's hard to tell right now, but the market's very strong you know we forecast.

A 45% decline in the second quarter, and clearly it turned out better than that and when we sit here now you know increased may increased in June increased in July really what it looks like to us as the just the <unk> cyclical I mean.

Curb shifted out spring biased shifted into the summer. So you know very strong very fast recovery on the commercial side.

[noise] the one market, we still see headwinds, you'll probably see them for the rest of the year. So it's kind of break it down and we thought we'd be down 50% on commercials second quarter.

She'll be downloaded 39%.

Now we're also seeing an uptick in deals right now, which is interesting really enjoy they're only down 10% from a year ago, but I <unk> I cause she costume, our Harper will be down we're not seem to return yet other magazines. So kind of how I see commercial right now it'll definitely be down for the rest of the year, it'll <unk> will face penguins or even with all that the businesses continue.

We're very well and material contributor profitability, that's kind of help secret mission right now.

Okay. So it sounds like maybe a little bit more of a revenue how do women of transaction had one with the megadeals are still kind of Florida come back.

Yeah. It at this stage and I think it'll just take a little longer for the commercial might be kind of to rebalance I have no reasonably the megadeals won't come back, but I'm guessing they're gonna come back later in the year.

Okay got it and I think I know the answer to this question, but I feel like I have to ask you you know if corelogic where to institute some kind of of a sales process as a result over the unsolicited beds.

[noise] saved would you guys have any interest in participating in that.

Yeah interesting question, we we are not focusing on corelogic right now, but I kind of go never say never it depends on what they ultimately do and what athletes they potentially maybe try to sell.

Okay. That's helpful. Thanks.

Our next question is from Jackman sat down with S. A G. Please proceed.

Alright, good morning, another impossible question to answer, but when you look at the <unk> five volumes your comment that Refis dinner opinions for all through the balance of the year.

You know we had capacity earlier in the southern quarter. So some of that I'm wondering is getting pushed out.

But now that we're sub three per cent I mean have you have your locked or do you have a sense of some sort of what the addressable loan market [noise].

Is today.

That would bun upset you know from a refi so I'm guessing.

[noise] loans, even in the high threes now are are are attractive for refi, but if you have you ever been able to size.

No sizes, almost besides that opportunity from here on there you've got the lab an agent as well, but just curious how are you thinking about that yeah, I'm gonna come out that question a little differently kinda visit impossible question to just kind of what are we seem right now we forecasted 3000 orders of day in the second quarter. We came in at 2900, so very cool store forecast.

So far in July or 130, 100, so a little better than than forecasts. So when we look out for the rest of the year I think refinance will stay strong all through the year going into 21 kind of to your question.

Now the second part of your question is you know it makes sense to us and so the originator of bill capacity and as we go into the seasonally slower period of the purchase I think the spreads will improve on the refunding out and I think we'll actually see again strong demand for refinance and the fourth quarter and first quarter.

Can't really size of the market, but we think it's gonna be a strong market for us.

You know for the foreseeable future.

Okay got it and then Doctor check can you can you talk about the contribution.

This quarter I think I think.

You know check was up to 15 60 per cent and you over here I'd kind of what the expectation forgot business for the year.

Yeah. So so donkey check in the second quarter I mean, we've talked about how how well it's been performing it it was $20 million of revenue and that's all included in the information another line item.

And the EBITA was all over $9 million and you know, obviously, they're performing well I'll give them a stranger the refi market. So I think that's a good run right at least while we see elevated refis I think going forward as we as we integrated you know more into first American Ah you know, we're not gonna continue to provide a numbers just because it'll be integrated into our operations, but in the second quarter. It was.

Bill fairly fairly stand alone and 20 million of revenue nine months EBITA.

It was that partially Y V or the other opex.

Just had a little bit of deleveraging over the over the years is that's where I'm separately I know that pop that off the <unk> law and it was about variable, but it's kinda rabbit it was Ohio that wasn't vanilla milkshake.

That's part of it but yeah. There's just a lot of things that are just going on in any other operating expenses I mean, we're paying.

More notary fees now than we were prior to the to Kobe happening you know, we're studying more on laptops and certain types of equipment that.

Hit that long island recently, so I think there's a there's a few different things happening there not just talking to.

Thank you.

Thank you.

[noise] Oh are.

And that's from our huge with Suntrust's. Please basically.

Yeah. Thank you very much.

Anything you might look to do on the expense front. This time bonus I think you were very.

Clear about maintaining your workforce at the beginning of this.

Episode, I'm curious whether there's.

Any views you got on the expense actions at this point.

Yeah. Thanks for the question, Yeah, I think we absolutely Bermuda right decision by the way pneumonia policy for the second quarter. You know it was a smart thing to do the right thing to do that really proved beneficial to us as the markets recovered much faster than maybe we anticipated that'd be with the first quarter.

Why it's the right thing to do as we've seen a big uptick in unemployed engagement scores as you would expect and they've been very focused in serving their customers that kind of going forward, we're going to revert back to our normal management to our success ratio is that we're looking at the business right now.

And the commercial business any any comments on the mixer refi versus purchase it sounds like there's an uptick in deal how much is the refi helping to stabilize that number.

Yeah, it's helping somewhat.

A R.

Ah revenue about 31% of our revenue.

And the second quarter was a commercial commercial running 31% ones refi and that's that's been gradually increasing over the last couple of years a year ago was 28%. So we are seeing somewhat of a mitigating factor with refi commercial business.

And how about <unk> on the residential purchase it was up a little bit less than one person was that.

Is that a good run red going forward, you think or is that a little bit of the anomaly.

What happened what happened in the second quarter was we really saw Californian when we get you know a lot of our director. This really felt really sharply from a volumes perspective, and so it really was a mix issue alright, so because california with just depressed from a volume perspective.

The total for <unk> for a purchase.

Revenue kind of be up one for sound like you've talked about going forward and when we seen California really come back. So I don't think that over the next.

You know over Q3 Q for that we should see that improve because we've seen California snapback. So so aggressively.

And then finally any.

Provision you might take this quarter for the regulatory.

Oh scrutiny either.

Probable loss or.

<unk>.

No we didn't take any any reserve this quarter and based on what we know right now we don't plan on taking a reserve so that's not something that we expect.

Thank you.

Q.

As a reminder to star one on your telephone keypad, if he would like to ask a question. Our next question is from John Campbell with Stevens. Please proceed with your question.

Hey, guys. Good morning, congrats on like a corner. Thank you.

I just want to touch on the info and services line a bit Dennis you guys have made pretty concerted effort over the years, you've done a really good job of cutting some of the cords or I guess the dependency corelogic for data.

I guess improving the expense related to that data is one thing you know driving revenues another thing, but just curious about your longer term views around building out you know more of a robust kind of data offering and then on that tenure agreement with Corelogic that expired in June does that does that for you guys up in any way as far as where or maybe to what extent you guys can compete with corelogic.

Oh, we have we have no limitation at all how we can compete with logic to start there. We've been building out our database is now for a number of years, we've talked about it over the over the last few years right now.

Think without.

Any doubt we have the newest complete most comprehensive datasets out there in the industry bigger than anybody else right now more depth and anybody else and why is that some war zone, because we're using it from her shirts purposes running our automation on our time and then you coupled with that with.

Maybe we haven't talked a lot about this as we develop a very sophisticated patent pending an extra patty patented data extraction method, where we can take vast amounts of information and I'm very automated manner to get it into our databases. So.

Well I'll tell ya as our databases continue to grill in depth and content, we'll use that to drive greater and greater title information in the future and then maybe where you're heading secondarily were seem nice growth in our other just call other data businesses.

Our licensee business or online business others.

Okay. That's helpful. And then maybe this is for mark, but just assuming that kind of fully baked endarch. Your tech what's the what's the margin profile for the for all that info and services business.

It's it's it's hard to say because.

There's so many different businesses in there I mean.

Some people think of it as one business I know you don't job but.

We really have our international business and then we've got a default visit <unk>, we have our data businesses Dennis talked about I think it's safe to say that the margin profile is is higher than our overall titled segment, but we don't we don't you know since it's really kind of a sliver of many different businesses. We don't have a kind of a roll of of what the margin profile.

But since they're they're they're generally speaking more data and more software driven the margin profiles higher than overall panel okay.

John had only out as we continue to get a larger contribution from our data businesses. They have margin characteristics as you would expect of any data business.

Okay that sounds looking forward, that's very helpful. And then last one for me on the loss provision right. It seems like you guys are being really really conservative there I mean claims are down year over year, you are not seeing really any adverse developments, but.

Just curious how long do you carry that five per cent right is there a target level just absolute dollars, you're looking to achieve or is that your hold that five until you get him a more clarity on the market trends and I guess, how forbearance plays out from here.

Yeah, I'll start a balance so again, we felt really good about our reserves, we felt great about I'm heading into this crisis and.

The last couple of years, we've been booking at a 4% Los right and one of the factors that goes into claimed his economic environment. That's one of the factors and we're in a tougher economic environment. This year than last year. So we thought.

We would do the prudent thing and raise the loss right to 5% now we haven't seen any uptick in claims like we've talked about and in fact every single month of the year. So far our claims have been below are actually we're on forecast, we just sign that you're.

Least appropriately reserved so right now the plan is that there's still uncertainty the market. We plan on continuing to Buffy 5% for a couple of quarters here and we see we think it's a little bit too early to know what the ultimate impact of Cove. It is on our claims once we get a little more visibility, we'll we'll look at it and John I live alone.

Yeah. It is.

The real telling time to become probably early 21, when we see the forbearance, if she's kind of on windy and we'll see what the default rates are and we do know when we see an increase in default. It has a possibility for increased claims for us. So this will probably become a lot clearer in early 21 is my guess.

Okay, and I hope it helps give me a bet on.

Process with the point estimate and reserved is there a point, where you get over reserved to some extent where you have to release.

Yeah. The general rule of thumb is that we can't be more than 10% above are.

<unk> and we can't be more than 5% below I mean, I think that's the general rule of thumb.

As of June 30th we were for 1% above our our third party actually married so we do have room, there you're right I mean.

Can't increase our reserves endlessly there is a cat, but we still have some cushion first before we get to that point.

[noise] helpful. Thank you guys.

Our next question is from punish George with can't be that'd be please proceed.

Hey, good morning.

The investment income is that a good one right now for the current interest rate environment and I'm. Just curious how about 10 31 volumes are playing into that like is there any upside if commercial picks up in 10 31 volumes increase.

Hey, both so.

You don't last quarter, we talked about this $40 million to $45 million of investment income Intertitles seven minutes.

For each quarter for the rest of the year and and the second quarter. We came in right in the middle of that $43 million right in line with our estimate.

And heading.

Q3, Q for it's going to fall a little bit just because of reinvestment.

Lower rates, but we still feel like it'll be between 40, and 43 million probably in the lower in that range.

So that's our our expectation for investment income certainly.

Commercial volume picks up we'll do better in 10 31, there's no. There's no question about that but I still think it'll it'll still be between 40 to 43 million range I don't think it's going to be that much of a swing.

Okay, great. Thanks, and then switching to the home warranty business is there anything that can be done on the pricing site. There just yeah curious how are you thinking about that with.

The last frequency, increasing and they should have people working from home might continue for awhile. So just curious if I were thinking about that.

Yeah, that's something that we've been doing the last few years.

Kind of been really raising rates selectively at home warranty on a regular basis.

I I think what's happening right now with on warranties, Yes, we're having more claims, especially appliances because more people at home and be using their equipment more but we're also doing a lot better than we were expecting on direct to consumer and really when we look at our forecast for the year.

Right in line with what we thought at the beginning of the year. So.

There is room to raise rates, although that's not like a key part of our strategy now just because it's something we regularly do we've been doing that for several years now.

Oh, Okay, and then just one on the the decline in the revenue in the default order segment.

Actually what drove that is that the more poor closer moratorium and just curious what's like puts the main driver of what goes through there.

Yeah, that's really what it is funny because of the moratoriums, we're just getting once default owners and so they're really really as low as they've been in a long long time right now because of that that sounds drive anymore.

Okay, great. Thanks.

Thank you.

Our next question is a follow up from our he's with Suntrust's. Please proceed.

Thank you Dennis to update your four year of guidance for the pre tax margins I think you said on the last call 911.

How're you feeling about that now.

Mark start on that question I'll come back.

Mark we we never have really given a forecast really ever we did it last quarter just because there was so much uncertainty and we just wanted to be will transparent and.

Until until the market, where we were thinking now when you look at what <unk>.

What are what are forecast was back in April.

<unk> said that the resale orders, we're going to be down 45% of the second quarter, while they were about 15% that's materially bedroom, what we thought the refi market is right in line with our with our expectations back to any commercial is doing a little bit better Dennis mentioned, we thought it was down 50%. It was actually down 39% and we're seeing improvements so everything is either.

Line or better than our forecast so when we looked at our 911% margin based on what we sit today, we're gonna be higher than the high end does that range, but we don't we don't generally plan on providing Reagan forecast nikolas.

Mark and just kind of.

Reiterate remarks that we're just feeling a lot better about the business at the end of this clothing.

At the end of the first quarter the markets are better all in all we're performing very well and so we're optimistic looking at the back half of the year now.

Thank you very much thank you.

There are no additional questions at this time. This does conclude this morning's call wherever they tell me my listeners that today's call will be available for replay on the company's website or by dialing 87766 06853.

[noise], well 16127415 and enter the conference I D. One three 706 905.

Company and Wednesday to thank you for your participation. This concludes today's conference call you may know disconnect.

[noise].