Q2 2021 First American Financial Corp Earnings Call
[music].
Greetings and welcome to the first American Financial Corporation second quarter earnings Conference call at.
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Brief question and answer session will follow the formal presentation.
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A copy of today's press release is available on first American website at.
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First AAM.
Dot com forward slash and investor.
Please note that the call is being recorded and will be available for replay from the company's investor website and for a short time by dialing 8.7 and 760.
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For 20161 to 7 and for 1.5 and by entering the conference I'd 1.
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Q1.369.
So ill 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 second 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 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.
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 information 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 at www Dot and first pay M Dot com.
I will now turn the call over to Dennis Gilmore. Thanks, Greg Good morning, and thank you for joining our second quarter earnings call.
All of our core businesses are producing strong financial results and we are optimistic that 2021 will be an outstanding year for first American.
Today I will focus my comments on the progress we are making on a number of key strategic initiatives and.
And Mark will then provide details on our second quarter results.
The process of buying a home is complex and involves multiple parties.
First American 50, the center and the transaction coordinating among reinsurers lenders and consumers to protect the integrity of the process.
And as the transactions become increasingly digital first American is focused on leveraging our unique property data and technology to enhance the customer experience expected process more efficient and secure for all parties.
First American data assets and process expertise provide a unique competitive advantage.
Last quarter, we announced our initiative to expand our title plans from 500 to 500.
And by building and additional.
Plants are databases will cover approximately 80% of all real estate transactions.
And we've made significant progress since our launch.
We are currently at 850 plants and are on track to achieve our goal of 500 by year end.
These additional plants are currently being built on a go forward basis, and will accrue significant benefits to us and for years to come as our historical content becomes deeper and richer.
Due to our patent as extra cash extraction process first American is in a unique position to build these plants for a fraction of our historical cost.
Plus we are now capturing virtually every data point on 7.5 million documents per month up from 5 million last quarter.
Data that can be leveraged to automate title underwriting decisions and geographic areas that were previously done manually.
In addition to our data and leadership.
We are focused on developing digital solutions to improve the customer experience.
Across the enterprise, we are developing next generation cloud based technology to make it even easier for our customers to do business with us.
For example, our direct division recently launched ignite already a platform that provides for real estate professionals with enhanced productivity tools and enables them to manage transactions from open to close with buyers sellers and settlement agents and the secure environment.
Ari and clarity for.
And which we discussed last quarter are 2 examples of technology investments, we've made to strengthen our competitive edge and more will follow.
Both platforms make it easier to work with us and expand our customer relationships.
To support our technology initiatives, and we acquired 130 product managers designers and engineers so far this year.
And these critical hires reflect our commitment to expand our position as the industry leading innovative.
Turning to our venture strategy since 2019, we've invested $260 million and venture backed companies and the prop tech ecosystem.
These investments give us insight into high growth technology companies, most of which have become strategic partners and.
In addition to providing strategic benefit and are contributing to profits as well.
Venture investments will continue to be a component of our capital allocation strategy.
In closing I'm confident that 2021 will be another strong year for first American.
All of our core divisions are performing well and we have a healthy pipeline of business heading into the second half of the year.
Our balance sheet is strong and our strategy of focusing on data and technology to enhance the customer experience will continue to succeed.
I would now like to turn the call over to Mark who will comment on our second quarter earnings.
Thank you Dennis.
Pleased to reported excellent results for this quarter.
We earned $2.72 per diluted share.
Included in this quarter's results were 59 soon from net realized investment gains.
<unk> gained we earned $2.13 per diluted share.
I'll start with our title business.
Revenue and our title segment was $2.1 billion up 44% and compared with the same quarter of 2020 due to the strength of the purchase and commercial markets.
Purchase revenue was up 66% driven by a 43% increase and the number of closed orders coupled with a 16% increase from the average revenue per order.
Commercial revenue was $223 million or 104% increase from last year.
Large transactions have resumed and recruit 50 for transactions in the U S with premium greater than $250000 up from just 12 last year.
This year, we expect a record year and our commercial business.
And refinance revenue declined 23% relative to last year and of the rise in mortgage rates that occurred during the first quarter for pressure on second quarter closings.
On the agency side revenue was a record 905 million up 51% from last year.
Given the reporting lag and Asia revenues of approximately 1 quarter, we are experiencing surge and remit includes related to Q1 and economic activity.
Our information and other revenues were $298 million up 31% relative to last year.
Revenue growth was primarily due to higher demand for the company's title information products, and our data and analytics commercial and loss mitigation business months.
Investment income within the title insurance and services segment was $40.7 million up 10%, primarily due to higher interest income from the company's warehouse lending business and higher average balances and the company's investment portfolio.
Our fully offset by the impact of the decline and short term interest rates on the Companys tax deferred property exchange and escrow balances.
And our title segment pre tax margin was a record 19, 1% excluding the impact of net realized investment gains pre tax margin was 16, 3%.
Turning to the specialty insurance segment pre tax earnings totaled $20 million up from $7 million and 2020.
For revenue and our home warranty business totaled $108 million up 10% compared with last year.
Pre tax income and home warranty business was $14 million.
A decline of 13% and part due to elevated claims experience.
Our property and casualty business generated pretax income of $6 million this quarter.
Included in this quarter's results for the $12 million gain on the sale of our agency operations.
And at the end of the second quarter, our policies and force for declined by 22% at the beginning of the year and we expected 70% decline and by year end.
The full wind down of the property and casualty business is on track to be completed and the third quarter of 2022.
The effective tax rate for the quarter was 24.0 percentage in line with a normalized country.
Cash flow from operations was 253 million second quarter down from 344 million and the prior year due primarily to the deferral of the estimated tax payments allowed by taxi taxing authorities during a hydro dependent and we can 2020.
With respect and information security and as we previously disclosed we reached a settlement with the SEC for $487616.
The New York Department of financial services matter remains ongoing we continue to believe that along.
Along with all other matters relating to the income will be immaterial.
As Dennis mentioned in his remarks, we've invested a total of $260 million and venture path conference.
This quarter, we recorded a $44 million gain related to our investment and signed a real estate SaaS company that serves real estate agents teams and brokers.
Our largest investment has been and offer Perm and high buyer that is not party to a merger of this pack, which recently announced that the value of the aggregate equity consideration to be paid to offer pads stockholders and option holders will be equal to $2.2 5 billion.
At that valuation, we would expect to book a gain of approximately 237 million on our $85 million equity investing.
We expect this merger to close later this year.
Due to the growth for venture portfolio, we have expanded disclosures in our form 10-Q, which we expect to file later today.
These disclosures will include the costs unrealized gains and carrying amount of our non marketable equity securities as well as information on concentration and deeper for the securities.
We remain optimistic about our 2021 outlook, although refinance orders have declined corresponding to an increase in mortgages and the purchase and commercial markets remained strong and our claims experience was favorable and a general improvement and economy is a tailwind for 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 and would like to ask a question. Please press star 1 on your telephone keypad.
A confirmation tone will indicate your line is and the question queue.
You May press Star 2 if you would like to remove your question from the queue for participants using speaker equipment and may be necessary to pick up your handset before pressing the star keys, 1 moment. Please while we poll for your questions.
Yes.
Our first question is coming from the line of Bose George with <unk>. Please proceed with your questions.
Hey, everyone and good morning.
First just on the commercial.
Mark can you repeat what you said just under large transactions and we said 50 for transactions with premium greater than I missed the dollar amount and you compared it.
Last year, just curious how that compared to 2020 and then just commercial I guess can you just talk about where you're seeing the strength because presumably this is happening without sectors like office space coming back.
Yes, why don't I start this is Dennis.
And the numbers and Mark referenced our commercial transactions large transactions over $2.55.
For in the quarter up over for index from a year ago, but you have to compare last year and 2020 that was the first share the first quarter dependent NHL and probably a tough comparison to the second part of your question that was were up across all geographic areas almost all product tonnage commercials were really strong and then as we mentioned and which for.
Rich.
It's likely to be very strong and rest of the year, probably trending towards a record performance and commercial.
Okay, great. Thanks, and then.
Can you just remind us what goes through that default and other lines per order accounts.
And this was up for last couple of quarters and I assume that's not being driven by default. So just curious what's the breakout from there.
Yes.
It's a lot of our default orders growth for that line item, including loss mitigation and we're doing a lot and loss mitigation works for lenders right now and so it's really defaulting off net.
Okay. So that is debt is picking up perfectly fit for closing and Mark Tony.
And for a specific liabilities is not if not foreclosure work right now philosophy Corp.
Okay.
Okay, great. Thanks, a lot.
Okay.
Thank you. Our next question comes from the line of John Campbell with Stephens. Please proceed with your questions.
Hey, guys. Good morning, congrats on a solid quarter. Thank.
Thank you.
Thanks for the title plant.
<unk> for you guys.
I guess the question is how should we be thinking about just the net effect of those I think you said out there.
And $1.5 or 1500 plants over the next several years.
Is there a good way to think.
And thinking about that over the next couple of years. So is there any way to kind of frame up the incremental revenue opportunity versus maybe just the potential production cost savings anything you can provide there.
Yes, John let me take a cut at that it's really we're highlighting the strategic benefits, we have with our data and are for us components across the country. So you start with.
Got it.
Largest public record database and now we've really accelerated the growth there.
And we've mentioned it before but we've got some very unique patented extraction technology, which allows us to basically capture every field office document imaging and that my script for.
And last quarter, and we were distracted and $5 million from ellipse from the documents disclosed 7 for us So basically I mean and anything on a dollar for can take them and mobility and the plan first when we get to the plants. So we mentioned earlier last early last quarter that we're going to run it up to 500 plants. We're now 850 will be on track to hit.
<unk> thousand 500 by the end of the year and we are building. These generally on a go forward basis, so theyre going to accrue benefit for us on the years to come as they become richer and deeper but we have the technology to point and factors if we need it so bottom line, it's a little hard to quantify for an analyst right now about what it will allow us to do is to accelerate our title automation and leverage our data.
And I kind of assets.
Okay. That's helpful and then Dennis I've got a bigger picture and if your question for you, but it seems like every day, we are seeing a non.
Non bank originator and just somebody and the value chain just looking at launch.
Offering and then of course, you've got the eye buyers.
Almost like they have to make that attachment work over time.
But to me it seems like the and resolve if thats all effective as maybe just the mix shift from direct to agency.
And not really disintermediation, but I'm just curious about.
I guess first how you how difficult do you think the attach rates are for those newer players and then secondly, whether you think that trend is a positive negative or maybe just a neutral over the long haul.
Yeah, I'll start John with the ebbs and flows over the years right. So this is not a new phenomenon for us and it has ebbed and flowed over the years right now and we do a lot of people entering so we'll have and so.
We'll move from direct to agency, we don't try to fight that and always actually show to support it and embrace it.
See that and our venture strategy by the way many of these companies or partners for us. So that we can deploy channel assets or title and condition to or data for either way. It goes there.
And I think it will continue to ebb and flow credit as the market gets a little more normalized difficult and it's not as attractive as we go for but it's something again and things of the day, we don't fight, we actually encourage and support and other how somebody wants to distribute a pathetic.
Okay. That's helpful. If I could squeeze and then maybe just 1 more for Mark here on the specialty insurance segment. Once once you kind of clear out the P&C contributions Youre left with obviously just the warranty business, how should we be thinking about that kind of underlying margin going forward.
And so.
And once you clearly for P&C business, and it's going to take a little bit of time.
Yes.
Why have you completed and the third quarter of next year, but what is left executive when income Homeworking and as we've talked about over the years.
Really.
Hi on the home warranty business.
When you look at the and the.
Second quarter.
And we had an operating margin of 9% debt execute and investment income once you layer on investment income and it's more like 11, 11 and 12%.
And Q2 is typically a tough quarter for us already to get and getting a lot of claims by year futures being out and the second quarter.
And through the cycle of June.
The seasonality of the year.
Margins typically are somewhere between the range of 13 to 15 percentage points and you can see that again Wednesday and went to 70 begins.
And John This is Dennis I'd, only add with C&I and disclosures that we broke out the performance for both home warranty and P&C. So our investors can get a better sense of what for warranty will look like when we're done and wrapping up the P&C business.
Okay. That's perfect. Thank you guys sure.
Thank you as a reminder, if you would like to ask a question. Please press star 1 on your telephone keypad.
Yes, Thanks, I had a follow up question on the commercial volumes.
For the larger transactions tend to be pretty lumpy and episodic as you look at your pipeline. How does it look like this is is kind of consistent with that.
Welcome this or do you actually see sustained strength as you look out through the end of the euro and those larger transactions.
And we do see sustained strength the deals you're really referencing too and I kind of references and this kind of mega deals.
When we talk about the large deals those are just if you will normal large deals and that strength and we think will continue for the rest of the year.
Okay, Great and then on the purchase side I think mark highlighted that the fee per file was up.
About 60% year over year, which is actually kind of consistent with home price appreciation.
But you normally get about half of that so are you seeing a positive mix benefit here, where more of the purchases also coming from just higher price markets Thats driving your fee up kind of in line with home price appreciation.
Yes, we are and just overall the market is very strong and.
And on this topic and we're very optimistic rates and lower demographics are positive for us we had a very strong spring selling season, and I will say in July right now and we're starting to churn and a little more towards and I call that with seasonal market, we're probably down about 6% on all accounts revenue in July and.
Also we think that the purchase market and also is starting to stabilize a little more normalized if you will and inventories are ticking up a little bit we're seeing less crazy bidding wars would probably see less property appreciation and the year for.
For the next year or so and all of those trend to US is a positive Sony and not a negative it makes it makes the market market and more sustainable and and normal. So we think it's going to be a really good second half of the year with a 22 is going to be good for the year for purchase.
Okay, Great and then can you just talk about how much of the strength and revenues and info and other is.
Might be more cyclical as opposed to you are taking share.
Well, it's hard to say because info and other as we know is a collection of businesses.
And we look at the biggest drivers and the growth this quarter. The biggest driver was commercially. So we actually grew in for another $50 million just because of the commercial business and we did that.
Is it risk catastrophe and property reports and exchange fees and commercial due diligence and things like that.
And so obviously, we've got we've got tailwind and commercial and the second biggest driver was.
Loss mitigation and our servicing business. So you talked about and foreclosure moratoriums are here and leased until the end of this month, but lenders are doing a lot of loss mitigation working where the beneficiary of that so I would say, that's somewhat cyclical and and the third biggest driver with their data and analytics business.
And we've just got a lot of momentum on the day.
Both because of volumes, but also because we are doing.
Really good job of licensing our data different parties agreement and so it's kind of a mixture of things.
Okay, great. Thank you.
And.
Thank you our next questions come from the line of Geoffrey Dunn with Dowling and partners. Please proceed with your question.
Thanks, Good morning.
Dennis I wanted to follow up on your comments initially about.
Working on developing next Gen cloud platforms and high.
And a bunch of people to develop cloud and digital efforts.
Can you maybe give some more specific examples of areas you're focused on and Theres been talk obviously, the last couple of quarters front and backend experience is all that kind of staff and.
And the other question I have is as you develop these modules do they sit naturally on the SaaS system.
Or.
And in the past system, something you're also investing and Thats been your kind of core system for years, and just curious if thats transitioning along with these other cloud initiatives.
Thanks, Jeff.
And we're going to talk a little bit about more about these issues just for people know what we're up to and that's why we mentioned and other developers and engineers we are hiring.
And the Fas and the fastest into their system and a record and.
Clarity first.
And I'd already others. We've got these type of systems that are going to be the customer interface <unk> and build out and every division. We highlighted just too early for the contract for the <unk>.
Right now, but we are building out new front and across the enterprise right now to have more enhanced digital experience to the nextgen from how we think the digital experience links occur and.
We're going to continue to do that Jeff. So that's why we're a bit less what we're talking about and right now with all that clarity and disorder ignite and we've done and again going across all of their divisions, so thats going to be and ongoing effort.
We see the business moving into a digital future.
We believe for leading that and we're going to continue to lead that effort. So that's how we're thinking about that technology and then I think we've talked a lot about the data and.
And how that that effort is driving greater innovation for us and Vega total automation and listen.
Okay.
And <unk>.
Okay, I guess I'll leave it at that.
Thank you our next questions come from the line of John Campbell with Stephens. Please proceed with your questions.
Hey, guys. Thanks for the follow up here I think I might've missed this but could you run through the.
July to date.
Purchase and refi trends on the resi side.
Yes, John sure. So so far in July.
And the purchase side, we're opening about 'twenty 300 purchase orders a day and with open and on the refinance side, we're almost it's a little bit below $70 per day.
Interesting the first week or so with Refis we were.
And about $14.500, we have seen a pickup just from the last 2 days with rates moving but to answer your questions for the for the month to date in July and almost 17 years.
And I don't know if you have the clarity and the system or if you guys have insights into the entry onto the price side, but it.
It looks like debt pulse systems, or so ago on home price growth and any kind of sense for what that's looking like in July so far.
That's not something we track kind of insured intra month. So we don't we don't have like a month to date and Theres No question you've got it.
Non tailwind and returns of 3% and.
And for sure.
Okay, Great. That's very helpful. Thank you guys.
Thanks, Jim.
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There are no additional questions at this time and with that 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 8.7 and 76606 to 8.5.
3 for 2016127 for 1.5 and by entering the conference I'd day, 1 and 3.7% Q1 and 369 and.
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