Q1 2021 First American Financial Corp Earnings Call
Greetings and welcome to the first American Financial Corporation first quarter earnings Conference call.
At this time all participants are in a listen only mode.
Brief question and answer session will follow the formal presentation.
And what should require operator <expletive>istance during the conference. Please press star zero on your telephone keypad.
A copy of today's press release is available on first American's website at.
Www Dot first a M dot com forward Slash Investor. Please note that the call is being recorded and will be available for replay from the Companys investor website for a short time by dialing eight seven and 7660.
853.
Or 201612.
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We will now turn the call over to Craig Barberio, Vice President of Investor Relations to make an introductory statement.
Good morning, everyone and welcome to first American's earnings conference call for the first quarter of 2021.
Joining us today will be our chief Executive Officer, Dennis Gilmore, and Mark Seaton 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 fact.
These forward looking statements speak only as of the day. 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.
Risks and uncertainties exist that may cause results to differ materially from those set forth and 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 contains 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 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 release, which is available on our website and www dot first and dot com with that I will now turn the call over to Dennis Gilmore.
Good morning, and thank you for joining our first quarter earnings call.
The year is off to a great start with our core business is achieving strong financial results.
Our outlook remains optimistic based on market trends and we are confident that 2021 will be another good year.
Today I'll focus my remarks on the progress, we're making and a number of key strategic initiatives as well as our venture investment program and Mark will then provide details on our first quarter results.
The transformation is well underway and the real estate sector.
And as paper intensive processes convert to digital.
First American is investing the time expertise and capital to continue to lead the change within the title and settlement industry.
We continue to make significant investments and technology across all of our major businesses.
To enhance the customer experience through digital solutions.
These efforts are now finding success and the marketplace.
And our commercial business, we've launched clarity first a platform that enables a streamline closing process and provides greater transparency and efficiency relative to conventional methods.
We believe it is the first NDA and digital solution for commercial real estate transactions.
And so nationwide rollout in June we have facilitated over 60000.
Commercial transactions.
And point is another example, first America's commitment to innovation and <unk>.
Digital startup that we've launched and Seattle in 2019 to re imagine the close and experience.
As captured a 2% market share and that area.
Encouraged by our success, we've recently entered six new markets, and we plan and going into 'twenty and markets by the end of the year.
In addition to providing a digital consumer experience and point is redesigning the closing process and we anticipate significant productivity gains versus today's traditional settlement transactions.
Now I'll only and we're deploying new digital tools to re imagine.
The customer experience, we are accelerating our investment and data we need to enhance our long term competitive position.
Our data business has grown steadily over the last 10 years.
Years ago, we set out to create a world cl<expletive> property data company.
Today, we have the industry's most comprehensive accurate property data, including title plan information.
And 2020, our database and <unk> exceeded $100 million and pre tax range.
And milestone.
And number of years ago, we set out to automate the manual data entry process.
We currently have 11 patents covering OCR and data extraction, which has facilitated us capturing over 60% of our data and a fully automated manner.
We expect this percentage to continue to grow and the future.
This technology has allowed us to vastly increase the amount of data we capture.
We are currently capturing virtually every data point on 5 million documents per month.
Today, we have 500 title funds, which is the largest state and repository and the industry to support title underwriting decisions.
Because of our patent extraction process. We have started the journey to add an additional 1000 and title plans on a go forward basis and <unk>.
Sure we are leading the effort and it comes to property data.
One benefit of having a strong data foundation is there.
And it feeds automation of our title production.
Good day, 96% of our company's refinance transactions running through our automated underwriting engine.
Based on our own risk profile.
And we've achieved a fully automated underwriting decision on 50% of those orders and we have a semi automated on an additional 40%.
Given the success, we've had with refinance automation, we have turned our attention to the purchase transactions.
All of these initiatives whether related to closing data our title production will improve the experience of our customers and our own productivity.
Which is why we have dedicated the necessary talent capital and focus to lead the title and settlement industry and the digital here.
Turning to our venture strategy since 2019, we've invested $225 million and venture backed companies and the prop tech ecosystem.
These investments give us insight into the high growth technology companies and.
And most of which have become strategic partners now.
Not only are these investments added value from a strategic perspective, and are providing financial upside as well and mark will elaborate further in his comments.
Venture investments will continue to be a component of our capital allocation strategy.
We believe the strategic and financial value of these investments to our shareholders will be attractive over the long term.
Additionally, and I'm pleased to announce that we were recently named a fortune 100 best companies to work for for the sixth consecutive year.
Amid the challenges of 2020, we never lost sight of the fact that our employees are the key to our company's success.
In closing I'm very confident that 2021 will be another great year for first and Mark.
I'll now turn the call over to Mark who will comment on our first quarter earnings.
Thank you Dennis.
We're pleased to report excellent results this quarter.
And $2 10 per diluted share.
And this quarter's results were 46 of net realized investment gains.
Excluding these gains we earned $1.64 per diluted share.
I'll start with our title business.
Revenue and our title segment was $1 9 billion up 45% compared with the same quarter of 2020.
All three of our major markets purchase refinance and commercial were favorable this quarter.
Purchase revenue was up 27% share.
And by a 15% increase and a number of closed orders coupled with an 11% increase and the average revenue per order.
Refinance revenue climbed 79% relative to last year and was flat relative to the fourth quarter as refinance closings continue to be elevated as a result from low mortgage rates.
Notably commercial showed its first year over year revenue increase since the pandemic.
Commercial revenue was 163 million and 2% increase over last year.
And number of large transactions closed at the end of the quarter signaling the overall strength and the commercial environment.
On the agency side revenue was a record $845 million up 41% from last year.
Given the reporting lag and agent revenues of approximately one quarter and we are experiencing a surge and remittances relating to Q4 and economic uncertainty.
Our information and other revenues were $275 million up 32% relative to last year.
This line item represents revenue from a collection of business lines that are not premium or escrow related and therefore, not risk based the largest component of information and other and as revenue from our data and analytics business, which totaled 89 million and 17% increase from last year.
Investment income was and the title insurance and services segment was $43 million down 29%, primarily due to the impact from the decline and short term interest rates on the investment portfolio and cash balances.
Partially offset by higher interest income from the company's warehouse lending business.
And our title segment pre tax margin was 17, 1%.
Excluding the impact of net realized investment gains pretax margin was 14, 1% a record from the first quarter.
I'll note that we lowered the loss rate 100 basis points to 4.0% this quarter.
It brings our loss rate in line with where we booked prior from the pandemic.
And by booking at 5% and 2020.
We added $52 million to our IV and oral.
Given relatively low claims activity significant levels of home equity rising home prices and a strengthening economy, we elected to lower loss rates this quarter.
Turning to the specialty insurance segment pre tax earnings totaled $6 million down from 13.002 million 20.
Our home warranty business, which accounts for 75% and the revenue from this segment continued to see growth and the top line.
Revenue was up 11% over last year.
Accordingly revenue and our direct to consumer channel increased 18%. We continue to see elevated claims largely as a result and people spending more time at home.
Our property and casualty business posted a loss of $7 million this quarter.
And the wind down of our property and casualty business and progressing on schedule and policies beginning to non renew and day.
Based on our current plan, we expect at least 60% reduction and our policies in force by the end of the year.
The effective tax rate from the quarter was 23, 4% in line with our normalized tax rate of 23% to 24 per cent.
With respect to the information security incident, the SEC, and New York Department and financial services matters remain ongoing.
We continue to believe that day along.
Along with all other matters relating to the Internet will be immaterial from a financial perspective.
Turning to capital management, we repurchased $65 million of stock at an average price of $52 86 during the quarter.
Since March 2020, we've repurchased $203 million and stock, which is close to the amount of our annual dividend to stockholders.
We have non repurchase shares thus far and second quarter. However, as we referenced on our last earnings call, we intend to be more active with share repurchases and the future.
And Dennis mentioned in his remarks, we have invested a total of $225 million and venture backed companies.
Our largest investment was and offer pad and I admire that is now part into our merger with supernova partners acquisition company.
Last month announced that the value of the aggregate equity consideration to be paid to offer and pan stockholder and and off from option holders will be equal to $2 25 billion.
And if the transaction is consummated and at that valuation, we would expect and book again later this year.
Of approximately $237 million on our $85 million investment.
Additionally, this quarter, we recorded $42 million and gains related to other venture investments and.
Including in side, our real estate SaaS company that serves high performing agents teams and brokers.
We remain optimistic about our 2021 outlook, although refinance orders have declined and corresponding to an increase in mortgage rates the purchase and commercial markets continued to grow our claims experience is favorable and the general improvement and the economies of tailwind to our business.
Now I would 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.
Like to ask a question. Please press star one on your telephone keypad.
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For participants using speaker equipment and may be necessary to pick up your handset before pressing the star keys, one moment. Please while we poll for your questions.
Our first questions come from the line of Mark Devries with Barclays. Please proceed with your question.
Yes, Thanks wanted to ask some clarifying questions about Dennis your comments around the title plants.
And here you correctly you said you are looking to add 1000 to 500 you already have.
You did and let me give you some background on that.
And in the script I talked about a few things number one that we wanted to set out to build a world cl<expletive> property and data company, which we have we've got the largest depositary property information and title plan information.
And the industry right now and then a couple of years ago, we set out to really aggressively transform how we do data extraction from the documents into the plants used to be all manual data entry and we've got a lot.
11 patents by the way and that which is probably not well understood 11 patents for LCR and data extraction and allows us now to extract over 60% of all the records fully auto fully automated and that percentage is growing fairly rapidly as we go forward.
And because of that now.
Taking we're touching basically 5 million documents, a month or extracting from those documents virtually all documents fields from the document and we're going to start building and another thousand go forward plans. This year now it used to try and go forward and hope that we'll build out the back and we see I think it's necessary and so we're building a 1000 new plants.
And it's all along with our strategy. This year that we think the data combined with the automation and the technology youre going to get us very unique strategic advantages over the long haul.
Okay.
That's helpful. And then I think historically, you've only focused and larger msas and where there was more scale does this automated extraction and make it more scalable to build these and much smaller markets and and factor there.
And just no markets that are too small and now that you can't build one and just given the efficiencies of creating the plants well there may be markets have become too small just because of the more non transaction, but youre right. It allows us to approach basically and Andy MSA, where we can get the data extracting information and build a plan and again, we're extracting now everything off the docking at the feed either or.
Property record database or our title plant database now I want to make sure. We're clear why these are go forward plan. So we still have to build the back plan, but when you start to think about this the competitive advantage and will give us over the next three five or 10 years and significant.
Yes, and that was my my last question on this topic is how.
How do we think about that I mean, do you see noticeable and sustainable share gains and markets, where you have a plant and and maybe they are the only one who has a plan and that market.
Not really.
Historically, but there are some nuances here and what I'm, saying historically, we build plants because of the cost of building them with limited record layoffs, we don't have the historical limitation and any longer and we're pulling everything off the documents. So we can put ultimately whenever we want and the P&L any documents feed that.
We think ultimately long term will help us automate the process.
But that the well will that give you and those markets and margin advantage over all your competitors.
And I'm, probably not going to answer it that way, but what I will tell you again. These are long term visions, we want and will extract from all of those data <expletive>ets. We have been building a long term competitive advantage, let's put it that way. Okay. That's helpful. Alright. Thank you.
Thank you our next questions come from the line of Mark Hughes with <unk>. Please proceed with your question.
Yeah. Thanks, good morning.
And thank you mentioned the $100 million and pre tax earnings from your data operations is that all third party business does that include any allocation from her.
Your title operations.
Yes, Mark.
It does include.
Allocations from our from our own first American operations, I mean, and when you look at our data business.
They sell to auto companies lenders lots of different customers, but one of those customers is for spirit and so it doesn't include kind of intercompany.
Transactions, but it's not the majority.
And maybe a third.
I would say lesser third it's about roughly about $30 million.
Okay Alright.
And then anything you can say about the order trends here and.
April 1st few weeks.
Yes, so so far and April a refinance orders are from <unk> thousand 800, a day in March they were 2000, a day, so we've dipped a little bit, but still we would consider pretty healthy levels from refinance and the purchase side. We're opening about 2400 per day for the first 15 business days.
And April.
And 80% increase over last year, but of course last year, it was a little bit of and at home.
And on the market from 2400 purchase transaction so far it from.
Yes.
How about commercial.
Okay.
Commercial.
And commercial world and about six 600, and which is.
And 81% increase over last year's 8% increase over the last month and were 600, and this is openings and commercial orders and I won't.
And I'll step back a little bit.
Clearly refinance are coming down, but when we step back and still at an elevated level and we're running about 1800 orders per day right now.
Purchase very optimistic and the market go forward volume.
Optimistic.
Strong tail winds right now.
Very good demographics, and very strong and then you have all the just the issues.
That came from the pandemic, so very optimistic and purchase and then I'll.
I'll say the same thing about commercial and just understanding and last quarter.
And starting to really see the change and the recovery from the pandemic last few quarters of very strong and we're optimistic and went into 'twenty, one right now and commercial and it's and by the way it's running at a very healthy healthy margin.
I Wonder if you could the last question would be just a kind of a little more and margin.
Success ratios, obviously quite a good one.
Much of this margin is from scale and just the.
Topline tailwind versus the efficiency that you talk about and I guess.
The question might be on a go forward basis any updated thoughts about the margin targets.
Well obviously.
Obviously, we're real pleased with 14% and title margin and in the first quarter, it's a combination of both.
Obviously, we've got tailwind with all three of our markets purchase commercial and refinance are all strong so that definitely helps the margin but.
We're also seeing and efficiencies to you mentioned the 44% success ratio I mean, we're doing a good job of managing our expenses given the market that we have.
And one of the things that we're seeing the benefit of his title automation and we don't have to.
Processor was manually as much as we used to and so we've really seen and benefitted from title automation and our margins too. So it's really a combination of.
Top line and better efficiency, both and of course, we lowered the loss ratio to it and that's 100 basis points.
Thank you.
Thank you as a reminder, if you would like to ask a question. Please press star one on your telephone keypad.
Our next questions come from the line of Bose George with <unk> W. Please proceed with your question.
Hello, Good morning.
So first with.
And investments.
And that'll continue to be a part of the capital allocation strategy and.
Should we think of that as kind of the same run rate you've had now and just the last couple of years.
And.
As the tech spend grows is it always just something that complements title or is it something that you know.
Could it standalone as a segment or a business at some point.
Yeah.
I think we heard the first part of your question George.
I'm, sorry, Bose just about the venture investments and we missed the second one thing I'll just comment on the venture investments as you know we've invested $225 million since 2019.
It seems like it was frontloaded, we're not seeing quite as many opportunities as we did in 2019 2020, but theres no question that we're going to continue to invest and we've got additional transactions, we expect and the second quarter.
And so that's going to be ongoing part of our capital allocation strategy, although probably not quite to the degree that we started and last column, yes and.
And this is Dennis bowls to your question.
Ill follow that yes, it's going to be part of our capital allocation strategy going forward and and as both financial and strategic and I think it's probably a little probably underappreciated with us. This gives us an opportunity to get very close to something emerging high tech growth companies and the prop tech ecosystem for us and they ultimately ended up being strategic.
<unk>.
Slash potentially customers for our title order data or we can see some of their products and services to help us deliver our products and services. So we think it's a win win.
Good right now that it's and every high high returns from those from a financial perspective.
But do you think it's the right thing to do for the long term career shareholders.
Okay.
And we struggled with there was a second part of the question sorry.
Oh.
You wanted to just repeat the second part, yes, we couldnt quite hear okay. The second part was just longer term how you thought about this whether it's always this would be something that complements title or could it be a business that essentially kind of could stand on its own.
And we're sitting here today, we don't we don't see.
And our venture investments and the dental segment or anything like that and it's very complementary to our core title business and so it is kind of integrated in terms of that and we don't we don't anticipate breaking it out anytime soon.
Okay, great. Thanks, and then.
I guess related question, but without first.
And even specific companies any thoughts on you know companies or technologies that are out there now that.
And part of their value propositions that they can sort of disrupt the titled market as it exists now.
Any thoughts on that or comments.
Well, there's a few areas that we've been interested in.
And no particular order I mean, theres certain technologies out there that will allow us to.
Be more efficient and we're really focused on the digital closing process were focused on title automation, we're focused on building and redo the business. So there's technologies out there that we can invest and we will help supercharge those efforts and those have been areas we've invested.
There's also new types of.
I'll call. It players who are trying to improve the home buying experience trying to improve and digitize that.
The mortgage process and those are also and that's also an area that we didn't really focus on two so those would be the two areas that come from.
Okay, great. Thanks.
Thanks Brooks.
Thank you. Our next question is coming from the line of John Campbell with Stephens. Please proceed with your question.
Hey, guys congrats on a great quarter and good morning.
Thank you.
And I wanted to touch back on the venture investments I think that's super interesting and and Dennis and I agree I think that's underappreciated side of your story, but some of it kind of bodes his question, but I mean, you guys have chalked up some pretty good gains and offer pads, obviously out there and it sounds like side and maybe on the path.
And towards monetizing at some point.
But just curious do you take those returns and just kind of let it ride you. Let this grow or do you keep that invested capital kind of a certain level and then you'd redeploy some of that back into the core title and just kind of how you think about that if there's a kind of structured.
Process around that.
Yes so.
It's a relatively new for us I mean again, we hit our first investment in 2019, and we've found a tremendous value a lot of it again and Dennis mentioned zone strategic side, but now we're finally, starting to see big financial upside as well.
<unk> be a while before we're actually able to monetize some of these investments and.
What kind of cross that bridge, when we come to it but they've been very strategic partners.
And as a broad statement.
And John I would probably just add that well will want and continue to have the strategic partners, but it depends on how they ultimately go into it depends ultimately how they hit the markets, we're not going to ultimately want to have highly concentrated single positions and public companies.
Makes sense.
And the commercial orders and it looks like the open orders up 5% year over year I mean, once you comp was actually pretty difficult. So that's encouraging to see if you guys can maybe just kind of talk to the pipeline I don't know if its kind of a size or characteristics of the deals and then any additional color on kind of regional <expletive>et cl<expletive> performance, Yeah, Let me start on that and more from how they come in.
And it's just strongly John as we mentioned last quarter and could definitely see the strength picky and won't be was it a slow recovery and the residential market, but the strength has accelerated and the fourth quarter into the fourth quarter, It's broad based brand and across <expletive>et cl<expletive>es. We're starting to see the reemergence of big deals, which is encouraging to us so again and now.
I'm going to say that it's going to be a record like 19, but definitely as time goes on and we become more optimistic on this channel.
And then John and I also mentioned that you didn't wasn't drug for the question, but I don't think we had mentioned and kind of a matter of what the market's rolls out of source and was a very tough market force and commercial and the middle of the year. It doesn't stop us from and invest in the business and my script I mentioned, we rolled out what we think is a market leading a question new platform for commercial.
As we go and 60000 transactions for some kind of no matter what the market is we're going to keep investing in these businesses to continue to grow efficiencies.
So and one thing I'd answer that just in terms of the commercial pipelines and we do look at our open orders, obviously, but the other thing we look at it and their escrow deposits because it gives you a little bit of a sense for the size of the orders and.
Our escrow deposits that we pushed towards bank has risen quite.
Quite impressively from this year.
In January our bank and 4 billion and deposits February four two margin was four nine usually there is a fallout at the end of the month because youre closing on transactions. So far in April were $5 1 billion deposits that are bank and a lot of our commercial and deposits gets out there. So.
When we see our escrow balance rise like this it's just it's again, it's a leading.
Indicator of economic activity from commercial.
Yes, that's great.
That's good insight for sure last one from me on the April open purchase orders and it sounds like 'twenty 400.
Obviously, that's up pretty substantially versus last year on the COVID-19 comp, but how does that compare to March just kind of sequentially.
Sequentially.
And.
It's basically flat and for months.
2400, and what we have the same thing.
Okay, great. Thank you guys.
Thank you.
Yeah.
Thank you. Our next question is coming from the line and Geoffrey Dunn with Dowling and partners. Please proceed with your question.
Thanks, Good morning.
And.
I wanted to follow up on the venture investments and it's a little more detail in terms of US just from some of the logistics of it where are these investments taking place and they within the regulated entities or outside of it and are you taking.
All direct equity investments are you going through any of the VC funds out there.
Stick and equities are there different different funding vehicles can you just give a little bit more color.
Yes, Jeff So we're making these investments out of the holding company.
Right.
This isn't like part of our.
First American title Underwriter investment portfolio. These are all out of excess cash at the holding company.
We've made most of everything we've talked about today, our direct investments, we're investing directly into a company. We've done about 10 or so direct investments. We also have done.
Investments and three of I'll call and Trop Tech venture firms.
And those are really earlier stage series series AA type companies, where it gives us more reach into earlier stage companies, mostly direct investments we've done it and series B series C, where you know you've got Red and we've got a product.
And so we really do both.
Direct and indirect but most of our most of our investments have been correct.
Okay, and as we think about and that's what I wanted to really get a feel for as we look at holding company resources, we think about common dividend and buyback et cetera, do you have a certain amount earmarked of your cash sources to be redistributed and into this into the VC initiatives or is it more.
Truly opportunistic could be zero, one year could be 100 million and Max.
I would say its truly opportunistic I mean, that's something that we've always talked about in terms of.
Acquisitions or buybacks or downwards, and ensure we really are opportunistic depending on.
And what the opportunities are.
And we saw a lot of opportunity and venture the last couple of years, and we decided to do big there. So theres nothing earmarked it could be zero one year. It can be 200 million and youre, just dependent and the opportunities.
Okay and has the board or management put a limit on how much funding you're willing to put into the Bcf first.
No.
Okay. Thanks.
Thank you our next questions come from the line of Mark Hughes. The Truest. Please proceed with your question.
Yes. Thank you Mark the Doc Tech contribute in the first quarter of last year, and if you could say how much.
<unk> first quarter as well.
Hum.
One second here.
And I'll throw that revenue and you talked about revenue or EBITDA.
If you'd like to share both of them are willing consumer I was thinking revenue.
Okay.
Hold on just a second and western here.
And then and then I'll ask just one other one.
Theres been something of a high profile competitor, a new competitor that's emerged and title I Wonder if you have seen any impact.
And from that competitor or any general thoughts.
I'm not going to comment directly on non.
Not really and the market impact but.
First thing I did mentioned in my script.
You know, which is probably again poorly understood or not well understood and that our company is for example, just in our data business is we have 11 patents on OCR and extracts from that alone. So we've got a very very active IP campaign going on.
So, we'll probably give more insight on that and the future too and the number of patents and we have across the whole enterprise not only and data extraction, but title automation and so more to come on that okay.
Understood. Thank you.
So yes, so mark.
So in terms of Darkey tax so the first quarter of this year, we had revenue of 23 billion and that's all good and info and other and we had EBITDA of $8 million.
And then the first quarter of last year, we owned it.
And not the entire quarter, but we had 6 million and revenue and.
And about 3 million of EBITDA.
Thank you appreciate it and.
And welcome.
Thank you there are no additional questions at this time.
That does conclude 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 eight seven and seven.
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6853.
For 201612.
7415.
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The company would like to thank you for your participation.
This does conclude today's teleconference. You may now disconnect.
Have a great day.
Yeah.