Q3 2020 First American Financial Corp Earnings Call
[music].
Greetings and welcome to the first American Financial Corporation third quarter earnings Conference call. At this time all participants are in a 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 todays press release is available on first Americans website at Www Dot first and forward slash investor.
First a dot com forward slash investor. Please note the call is being recorded and will be available for replay at the Companys investor website as for short time by dialing 87766, New Euro 6853 for Q Darrel 161 to 7415 and enter the conference I'd.
13711, canine seven we will now turn the call over to Craig Barbaria, Vice President Investor Relations to make an introductory statement.
Good morning, everyone and welcome to pursue Americans earnings conference call for the third quarter of 2020.
Joining us today will be our chief Executive Officer, Dennis Gilmore, and Mark people Executive Vice President and Chief Financial Officer.
Some of the statements made today may contain forward looking statements that do not relate strictly to historical or current back before.
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 occur. After the date. The forward looking statements are made written.
Risks and uncertainties exist that may cause results to differ materially from those set forth in these 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 subsequent SEC filings.
Our presentation today contain certain non-GAAP financial measures that we believe provide additional insight into the operational efficiency and performance of the company relative to earlier periods and relative to the Companys competitors for more information on these non-GAAP financial measures, including presentation with and reconciliation to the most directly comparable.
GAAP financials.
Please refer to this mornings earnings release, which is available on our website at www Dot first am dot com.
I will now turn the call over to Dennis Gilmore.
Good morning, Thank you for joining our call.
I'll start with a review of our third quarter results.
Provide perspective on the actions we are taking it a property and casualty business.
And discuss our outlook for the remainder of 2020 more.
Mark will discuss shortly in greater detail and provide an update on the company's capital position.
We delivered strong financial results for the third quarter.
Revenue for 1.9 billion up 15% and earnings per share of the dollar 62.
Pre tax margin on our title segment had a record 19%.
As volumes increased we also kept our focus on cost efficiency.
Even at 40% success rate, you're well ahead of our 60% target.
Purchase revenues were up 20% of the third quarter.
Moving by close your order growth and higher fee profile.
Low mortgage rates are driving substantial demand given the limited inventory of houses for sale price appreciation has been with us.
Our pipeline is strong heading into the fourth quarter. That's purchase open orders were up 14% on that third quarter and this trend continued in October.
We finance revenues were up 92% in the third quarter driven by strong growth in closed orders.
While rates continue to support elevated open orders, which were averaging 32 had it for a day of the third quarter. So far in October we are okay 2800 orders per day.
Our commercial business revenue for the third quarter declined 29% and please.
<unk> they'll be 9% decline in the second quarter.
The overall commercial market continues its recovery, we think ligands carried by asset class.
This quarter, we started to see a return of large transactions. We are encouraged that our open orders increased throughout the third quarter.
When the order is down only 7% year to year over year.
Commercial over the last six weeks a flock of last year.
Turning to our specialty insurance segment, we've initiated a process to trail sell the property casualty business.
Well this business has performed well over the years based on recent financial results Weve decided to focus on our core business and redeploy our capital to areas with higher expected returns.
Our home warranty business delivered strong growth improved retention rates and effective expense management throughout the quarter.
The business continues to experience an increase in claims frequency, particularly in the appliance and plumbing trades, which we believe are attributable to the pandemic.
Due in part to this trend we are in the process of making policy changes and adjusting our pricing to offset cost pressure in the business.
We expect the home warranty business to continue to generate strong margin performance this year.
Going into the fourth quarter, we are optimistic that low rates and demographic Tailwinds will continue to drive strong purchase and refinance activity.
And as we have indicated throughout the year, we expect refinance volumes to remain elevated well into next year.
Well they are truly commercial pipeline increases are often doesn't going forward, we do not anticipate the business to meet last year's record performance.
Throughout the third quarter experienced elevated order volumes and the vast majority of our workforce continues work remotely.
Okay, Foamix has demonstrated the strength and flexibility of our business and well.
Well the pandemic has greatly slowed major sectors of the economy.
Accelerating the digital innovation in all markets validating our strategy and the investments we've made over the past few years to secure our leadership position data title automation and digital closing I'd now.
I'd now like to turn the call over to Mark.
Thank you Dennis in the third quarter, we earned $1.62 cents per diluted share.
This includes net realized investment gains totaling 45 million or 30 cents per diluted share and.
An impairment on assets held for sale of 73 million or 49 cents per diluted share.
Excluding these two items, we earned $1.80 cents per share.
In the title insurance and services segment direct premium and escrow fees were up 12% compared with last year this growth.
This growth reflects a 30% increase in the number of closed orders Fortunately, partially offset by a 13% decline in the average revenue per order.
The average revenue per order decreased to $2193 due to a shift in the mix of direct title orders to lower premium refunds transaction.
<unk> product level, we continue to see higher average revenue per order for purchase transactions, which increased 8% this quarter as well as for refinance transactions, which increased 4% yeah.
The average revenue per order for commercial transactions declined 17% at the number of large transactions lagged the prior year.
Agent premiums, which are recorded on approximately a one quarter lag relative to direct premiums.
Were up 10% the agent split was 79.3% of agent premiums.
Information and other revenues totaled 283 million up 38% compared with last year.
Number of factors contributed to this growth, including the growth in mortgage origination that led to higher demand for the company's title information products and our acquisition of docking Tech, which isn't included in the prior year results.
Additionally, we benefited from services provided to support a temporary pandemic related government program in Canada.
Investment income within the title insurance and services segment was 45 million down 38%, primarily due to the impact of the decline in short term interest rates on the investment portfolio in cash balances.
Personnel costs were 481 million up 8% from the prior year. This increase was primarily due to higher incentive compensation expenses and salary expense and higher costs. As a result of recent acquisitions, partially offset by lower employee benefit expenses.
Other operating expenses were 251 million up.
Up 15% from last year, the increase was primarily due to higher production related costs as a result of the growth in order volume.
The provision for title policy losses, and other claims was 70 million or 5.0% the title premiums that escrow fees.
An increase from the 4.0% loss provision rate in the prior year.
Claims experience continues to be favorable relative to our expectations.
Incurred title claims totaled 33 million in the third quarter, a 21% decline relative to 2019.
To date, we have not seen an uptick in claims our intent is to maintain a 5% loss rate until we have more visibility into how the current environment will affect our claims experience.
Depreciation and amortization expense was 36 million in the third quarter up 6 million or 21% compared with the same period last year, primarily due to higher amortization of intangibles related to recent acquisitions.
Pretax income for the title insurance and services segment was $337 million in the third quarter compared with $254 million in the prior year.
Pre tax margin was a record 19.0% compared with 16.5% last year.
Excluding the impact of net realized investment gains pre tax margin was 17.1% this quarter compared with 16.4% last year.
As Dennis mentioned, we have initiated a plan to sell our property and casualty insurance business for.
For the first nine months of 2020, our property and casualty business recorded a pre tax loss of 91.5 million. This.
This amount includes two items first an impairment on assets held for sale of 73.3 million, which was recorded this quarter and second a 5.6 million reserve strengthening recorded in the first half of 2020.
The results of the property and casualty business will continue to be recorded in the specialty insurance segment until its sale is completed.
Net expenses in the corporate segment were $22 million up 3 million compared with last year, largely due to higher interest expense associated with our $450 million senior notes transaction, which closed in may.
The effective tax rate for the quarter was 24.6% in line with our normalized tax rate.
No 10 contracts payable on our balance sheet totaled just over 1 billion as of September Thirtyth.
Which consists of 992 million senior notes.
18 million of trustee notes and $6 million of other notes and obligations.
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.
He would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate that.
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One moment, please while we poll for questions.
Thank you. Our first question is from John Campbell with Stephens incorporated.
Hey, guys. Good morning with your question.
Hey, guys good morning.
Hey, <unk>.
I just want to clarify couple of things on the PMC business. So you guys are just selling the <unk> I guess, just PNC, you're not home warranties that that's right.
That is correct, yes, Okay, and then mark Thanks for the earnings break down, but if you could maybe provide what does the PNC revenue was over the last.
Nine months.
Yeah not so.
Year to date, it's 100 and 101 million in revenue.
Okay.
And and I think you also said you're going to hold that in the specialty segment, you're not moving that to discontinued ops is that right.
Yeah, we looked at that and it's just it's not material enough to move the discontinued ops. So it's just going to be recorded in specialty insurance just like it always has been until we consummate a transaction, yes, John I'll just give you some additional detail I mean, the results of Stanley, especially in segment and we're looking to get the transaction completed.
The first half of next year.
So we will give a further update at that point.
Okay, and then on the higher home warranty claims you guys highlighted the dependent because maybe kind of influencing trends. How did you guys get to that conclusion and I guess what is it about the pandemic is it just people at home or is this just kind of more wear and tear on the home.
Exactly it's kind of what we mentioned it in the second quarter, if I'm not mistaken and the business is doing really well. It's interesting our sales are real strong both consumer direct and our real estate channels and I think John as you know are seasonally strong worst quarter are toughest quarter is always a third quarter. So no surprise, there, but inside the quarter, we saw an uptick of our appliance trade.
Our clients claims that are flowing claims and Oh, we can't draw a straight line back to the pandemic, but it's just logical way to think about people at home more they're putting the stresses on our housing system. So we're going to take a look at some of our policies right there and do some price adjustments to make sure that our returns are appropriate for that business, but all in all that business is doing well, we'll think we'll have a very strong.
Fourth quarter and 21.
Okay. That's helpful. If I could squeeze in maybe one more on the PMC business any kind of a rough estimate of about the capital being release any kind of idea about proceeds and maybe what you do with that.
Well, yeah, the carrying value on the books as of 930 was 50 million. So we're going through a process and ultimately we don't know what the the proceeds will be but the the carrier.
The carrying value of 50 million right now.
John and with regards to the proceeds I mean bottom line here is we have this business has been a good business for us over the years, but it's been very volatile sort of drag on earnings over the last couple of years and we're just going to redeploy back into more of our core business, where we have a more consistent high return for pension.
Return profile.
Yeah makes sense to me. Thank you guys. Thanks.
Our next question is from Bose George with KBW. Please proceed with your question.
Hey, guys good morning.
Yes, you made a comment about the performance expectations for the next year or could you just repeat that I wasn't sure if you're comparing it versus 2020 or 2019.
On in general or any specific segment.
The I think your comment was in was in general They just did it I think it was just overall performance.
I just think we're optimistic actually going forward right now it's it's been 18 she will.
She will really volatile year, but we step back and look at things right now purchase very strong and then I'll just give a little detail on purchase right now will still come back into some more seasonal patterns, but for example orders right now through October up 17% from a year ago. So yeah, we'll still see seasonality in the fourth and first quarter, but I said.
Elevated water volumes, so that's on purchase and refinance we still think the 3000.
A day order volumes are good.
Yeah, I've got lenders building capacity spreads are still high. So we think that's still a good number before and then probably the.
They were probably getting more optimistic faster than we may have thought even two quarters ago commercial market, it's improving and a couple things happened in the quarter that are interesting to us.
Over the last six weeks or so are our order volumes were flat from a year ago, So thats very encouraging.
Well, our revenue was down 29% the business is a very profitable business to us. It's a very strong business and then inside the market. We saw a return of some large deals. So that's good we're seeing some real strength and segments right now as you probably have a guess and commercial RESCULA in resin and.
And warehouse or office buildings are starting to move the weakness is still in hotels and some retail segments, but all in all we're encouraged by commercial started heal faster than maybe we thought even two months ago.
Okay, great. Thanks, a lot for that and then.
And then actually.
Actually just curious what your thoughts are on buyback just given the strong earnings are great the stocks.
It's down quite a bit it's been lackluster for a little while since you have just curious if you think that's a good use of capital here.
Yeah Bose. This is a this is mark I mean, that's something we're we're always looking at you know we did feel like our our earnings were strong and one thing is to our earnings are higher than they were a year ago and yet our stock quite hasn't recovered not anywhere near what the pre pandemic. So it's something that we're.
We're continually thinking about yeah.
I think we're we're taking a look at it right now and it's just really don't earnings are very strong and we're optimistic looking forward right now.
Okay, great. Thanks, guys.
Our next question is from Jackson the Suncoke.
No Thats all great. Please proceed with your question.
Hi, good morning.
I wanted to talk through revenue per order.
Normally see a nice step up for Q from Threeq you a lot of that is commercially driven.
Thinking out loud here you've got a.
Purchase market that has.
Kind of held in stronger than seasonally certainly you've got the re Fi, which is dilutive, but you've also got the commercial beginning to come back and maybe there's sort of a catch up.
Dynamic at play here too.
Transactions maybe.
You know maybe been postponed through the surprise prior quarters is it possible that your thinking for what you see today that the revenue per order.
That step up could be abnormally higher.
Sequentially that maybe had been in prior prior years.
[noise] I would say, it's yeah. When you look back historically, yeah, we always have had a higher fee per file in Q4 because of the.
The reasons you mentioned last.
Last year was up about a $100 a an order from Q3 to Q4.
It's hard to say, but based on where we did a lot of it ultimately comes down to how strong commercial is going to be and that's something that a little bit unknown, but where we see now is we do think you're going to use that but like there always is.
So we think fee profile would be higher in Q4, how much higher it's just going to depend on the strength of the commercial market.
Okay.
And then on the specialty.
Loss ratio I know the.
Obviously, the severity and the volatility from the PMC business is much much greater.
But if we were to sort of back out.
You know the PNC volatility.
Conceptually how should we think about that loss ratio.
With just home warranty on a go forward basis.
Yes, the loss ratio for home warranty is very seasonal right. So we get we get a lot of claims in the in the summertime winter conditions go out we don't get many claims.
In the wintertime.
You know through the through the cycle and you know you know on an annualized basis typically were somewhere in that 52% to 54% range somewhere in there.
Oh, good obviously definitely be higher or lower depending on the quarter, but annually with about 52% to 54%.
Sure and then you said you're putting in some changes policy changes besides price.
It would have looked like maybe like a I don't know like [noise].
Freeze the freeze period up front or something before you can make a claim I just curious still kind of some of the changes you're making to address the higher costs higher claims.
Claims sure.
Sure Yeah. It's it's it's a multiple things you look at price you look at coverage even service fees. So you'll get a lot of different issues to make sure you're priced appropriate returns.
Okay alright, thank you.
Thank you.
Our next question is from Chad Keyworth and sounds like please proceed with your question.
Okay.
Moving on to.
Mark Hughes with Suntrust. Please proceed with your question.
Yes. Thank you good morning, the 8% appreciation in residential ARPU the purchase ARPO.
Well the mix shift or how much of that might have been the.
He's home price appreciation.
Yes. It was really you know the vast majority of it was was home price appreciation so yeah.
As you know Mark <unk>, our fee per file that we report is really on our directors and it's really our direct operations, which are on the west mainly the western states.
When you look at it for state, California was our biggest day related fee per file increase in California of 8%.
You know I can go long lists, Oregon, Washington, and Arizona. They were all know plus or minus that range. So it's really just a home price appreciation and not not really a big shift in the mix.
And your Asian premium was up 10% pretty strong number but is reported on a one quarter lag your direct was down 4% last quarter.
Or is that a mix shift it seems pretty strong if I'm thinking about it properly.
Yeah, you know I I would just say that like most of the time, the one quarter lag.
It is a good proxy for the fall.
Four to five quarters or so this quarter. It really wasn't so you're right you would have expected to have a lower agency growth based on what happened in Q2, but.
<unk> expenses came in every Pfizer really strong commercial is really strong for for agencies. So there is no. It's not really a mix shift I think it is timing of remittances more than anything else.
It seemed like you closed Laura <unk> orders than you have historically hard to judge precisely.
In any case.
It any comment other than the obvious which is that people are pretty committed to the re fi and purchase a it this time, but anything or anything on top of that.
Sure are you talking about the direct business or the agency business.
I'm talking about the direct business is that you seem to close so.
A higher proportion of the open orders.
I would say, we're we're very busy and we're very efficient right now so.
I wouldn't go any deeper than that we're just we're doing a very good job in operation is running very efficiently.
Thank you.
<unk>.
As a reminder, if you would like to ask a question. Please press star one on your telephone keypad.
Our next question is from Mark Devries with Barclays. Please proceed with your question.
Yeah. Thanks, I had a clarifying question around commercial yeah, I think as you alluded to obviously you know you're already seeing or turn a big deals and I think that's reflected in the ARPU being up pretty materially in commercial or you can.
Are you continuing to see an increase in larger deal sizes in your pipeline and should we expect that commercial ARPO to continue to drift higher as in the fourth quarter, yes.
Yes.
Thanks for the question, Yes, we are so kind of like I mentioned, we're starting to see the return of the large deals you will see the impact in the fourth quarter I do want to caution, though we're not going to we're not going to match fourth quarter 2019 that was a record quarter, but but the market started to improve faster than we thought it would even two quarters ago. So we're encouraged right now what we're seeing in commercial.
Okay remind me what the normal lag is between the opening and closing a commercial order is there anything in this in this environment, that's like pushing that out at all.
No I mean, I would say that the normal lag is you know is similar to a purchase transaction roughly 55 to 60 days. The one thing of commercial though is it's a lot more.
There's a lot more dispersion around me right. We can hope for an order we might not hold it for a year. We can open or would you quoted two weeks later so.
It really is it doesn't fall the same opened to close.
Uh huh.
As in purchase or refi, we've got a lot of certainty <unk> commercial.
A lot more dispersion around to me.
Okay got it and just finally it is as you alluded to in your prepared comments. The success ratio came in you know much better than you.
Much better than your target should we expect to catch up on that or is that you know it does that.
Does that reflect some expense discipline, which should keep your success ratio below target for for the near term.
There's not going to be a catch up we're running just running very efficiently. The decisions. We've made by the way earlier this year to not less important second quarter excuse me, which was 19 Rice's smart decision, we didn't have to hire anybody back.
And then all the efforts we've been doing on title automation, both <unk> and our data strategy and our digital closing strategies are all paying off right now so we're seeing the benefit enroll patients right now.
Okay have you are you are running close to capacity is such that if you see more volume you may need to always be closer to that 60% target to the scale up.
I can't predict the future, but were staffed accordingly, right now so we don't have any issues with that we've augmented our staff.
Slightly with some towns to deal some of the volume surgeons, but we're feeling good about the business, we're feeling good about our position right now.
Got it. Thank you. Thank you.
[noise] [noise]. Our next question is from Mark Hughes from Suntrust. Please proceed with your question.
Yeah, The Canada revenue you referenced in the release, how much was that a new bed continuing into the fourth quarter here.
In the in the third quarter was $18 million.
We're talking about the temporary revenue that we're getting from the <unk> government relief program that were a subcontractor to it was $18 million in the third quarter and it really ends in October so there'll be a little bit in the fourth quarter, but most of it will go away in Q4.
Thank you.
<unk>.
Our next question is from John Campbell with Stephens incorporated. Please proceed your question.
Hey, guys. Thanks, just a quick follow up we haven't obviously since the crisis, we haven't talked much about the default business.
Obviously for next year everybody's got a lot of concerns you guys are raising reserves I think stewart's obviously, raising reserves as well kind of anticipation of that but there's there's also the positive impact I guess of default, but if you can maybe just kind of walk through the asset you have there now what the revenue impact spend with the moratorium and maybe what that could look like next year.
Default activity kind of picks up.
[noise], yes, I saw so we have a group of really good default business and it serves as a as a great hedge for US right as you mentioned before back in the last.
Financial crisis, the default business was like our our highest profit center and the company body by a huge margin.
As things have recovered here these last 10 years or so.
The volumes have really fallen off but it's great to be there.
In case things in foreclosure you spike out so far this year of our default business is running at about $35 million of revenue or so year to date.
And it's basically flat versus last year. So we haven't seen a pickup in our really default activity, but again, we haven't seen a pickup in foreclosures through so we do see that and then our default business will start to come up yet and Jones, Dennis just longer term. We were the first to know our reserve rate up thinking that we would see an up ticking.
Default and I still think that's a possibility going into 21 has been more twins kind of roll off and the forbearances roll off the countering that right. Now is you know the real strong appreciation going on in the housing market and I think as you know if people have equity in the house, they're typically not going to let go for closure. So I think the equity situation.
He is going to I'll say.
I'll say blunt any significant re.
Relinquishing default at this stage right now.
Okay. That's helpful. I think Dennis I think we might have talked about this last quarter, but where are you guys right now as far as the we're running reserves versus actually estimate and I think you said maybe over 10% you have to release is that is that right.
Satisfaction I'll, let mark is the first part of that answer.
So as of 930 were were about a 5% over the actuary.
And again, we still have we're not we're not close to that 10% range, but we're in a very healthy reserve position right now.
Absolutely Okay. Thank you guys. Thank you.
Our next question is listen Mark too with Suntrust.
With your question.
Yeah. Thanks for Indulging me, if we think about the impact in the Oh home warranty business from the appliances. The plumbing would it be fair to say that's kind of the eight points you went from Oh.
Loss ratio was 61 to 69 is that.
Fair to say.
No that that represent to the within.
We increased the frequency of the two so.
Yeah, No that's definitely serve mark.
You know when you look at home warranty business was really talking about is really great people stay at home as Dennis mentioned, we're getting higher claims and that's that's that's really attributable to you know people stay at home more so.
Appliance bombing trade builder overcoming higher losses for us.
<unk>.
Okay. Thank you very much.
Hey, Mark.
There are no additional questions at this time that concludes this morning's call we'd like to remind listeners that today's call will be available for replay on the company's website or by dialing 8776.
65.
For 20161 to seven for one side and enter the conference I'd 13711 to nine seven.
Company would like to thank you for your participation. This concludes todays conference call you may now disconnect.