Q3 2021 First American Financial Corp Earnings Call

We've invested into this effort had a market value of $669 million as of September 30th.

This quarter, we recorded $278 million of gains related toward venture investments the largest gain was from our investment in offer pad and I admire that recently merged with the spec.

During the quarter, we recognized a $195 million gain related to offer pad. This investment is subject to a high degree of market volatility and we expect that we expect to impact our quarterly results.

In addition to offer pad, we also realized a combined $79 million.

Gains related to our investments in Orchard, accompanied simplifying home buying and selling Sunday, our real estate marketplace for sellers of David or damaged property and Picasso platform, enabling people to buy and KOL and a second home.

Beginning this quarter, we have moved all of our venture.

Of <unk> activity to our corporate segment prior to the third quarter realized investment gains from our venture portfolio were recorded in the title insurance segment in.

In the third quarter, we increased our share repurchase authorization by $300 million and had $463 million remaining on our authorization as of September 30.

During the quarter, we repurchased 208700 shares for a total of $14 million at an average price of $67 37.

Cash flow from operations was $399 million in the third quarter up 27% from the prior year.

In addition, we raised 600.

$50 million of a 10 year senior notes at a two 4% interest rate, we expect to use our cash on hand to fund acquisitions in our core title and settlement business in adjacent markets invest in innovative solutions, such as endpoint and return capital to shareholders our debt to capital ratio as of September 30th.

Third fifth 28, 5% or 22, 7%, excluding secured financings payable slightly higher than our target ratio of 18 months to 20% 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.

If you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate that Youre line is in the question queue. You May press star two if he would like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys.

One moment, please while we poll for questions.

Thank you. Our first question comes from Mark Devries with Barclays. Please proceed with your question.

Yes. Thanks.

Was hoping somebody could elaborate more on some of the more recent investments you've made I think you you praised some good color, but theres going to hear more about.

What.

You know some of these businesses.

Who.

How they fit within your strategy and then more broadly.

How do you think about exiting these eventually.

At what point.

After.

Events like the experience this quarter do you look to exit.

Specifically talking about our venture vessels.

Yes, yes, okay. So just kind of a recap we've got 16 right now when we look at it really from two angles, both strategically and then secondarily financially.

Performed very well financially for us and the $278 million of gains. So that's that's great, but more importantly for US is the strategic fit we want to continue.

The best in the prop tech ecosystem in our world when we get closer and closer to those customers. They become strategic partners in many cases and customers for us and we'll continue with that activity.

The second part of your question is.

Strategies longer term will likely be not holding concentrated positions in public companies.

But we're in a lockout period that offer pads. So we'll.

Evaluate that in the future.

Okay are there would that specific example, or their ongoing business synergies that would cause you to keep it on ongoing learnings.

How do you think about those kind of partnerships.

Ships versus just kind of more financial investments.

The overlay would be none of them are just financial so they all have a strategic component specifically referencing awful.

Close to a large customer for us.

<unk> partner, So we will weigh all of that together when we look about.

<unk>.

<unk> ownership position in public companies, but they are close partners.

Okay, Great and then just one question on commercial I think.

You alluded to the fact that it it feels like some of the volume you're seeing is a pull forward of volume just because of potential tax changes could you just talk about what it is.

Is that kind of you know.

Cause you to come to that conclusion, what youre seeing and then you know given that potential tough compare what's kind of behind the optimism for next year.

Yes, Mark this is.

Ken Thanks for thanks for the question.

I think a lot of what.

We are seeing with respect to the pull forward is probably by and large get anecdotal what we're what we're hearing on the street.

He began around the expectations with respect to tax changes.

And with respect to the outlook I don't think we will probably achieve the exalted heights.

That we've achieved in our commercial business in the third quarter.

But as I mentioned, we do expect to have a strong remainder of the year and going into 2022, and they really are a handful of factors. You know the economy is strong we expect that to continue and while interest rates are ticking up a bit from.

From historical perspective.

Spectrum, they're still pretty low and then thirdly, there is a lot of capital still chasing deals.

Again, all of the all of those factors together notwithstanding some of this pull forward we are pretty optimistic on that.

Commercial for again, the rest of the year and into 2022.

Got it thank.

Yeah.

Okay.

Thank you. Our next question comes from Bose George with <unk>. Please proceed with your question.

Hey, everyone. Good morning.

12 months on the venture investments you.

Are you guys still seeing opportunities out there to do incremental stuff on that side.

And then just on endpoint the revenues for that going forward is that going to be to the corporate segment or where does that flow through I really come through.

Hey, Bose this is mark.

We are still seeing.

Opportunities adventure I mean, so far year to date, we put 100.

$5 of cash to work adventure.

The deals are getting more expensive, there's more more money chasing fewer deals and so there is.

I'd say theres fewer but we're still finding.

Opportunities and.

We'll see more of that in the fourth quarter here too.

In terms of in terms of the endpoint all of the endpoint.

Hundred million revenue.

And financials go through the title segment. So it's really immaterial from a revenue perspective today, but it's growing quickly but to answer your question. It's all entitled segment. Okay. Great. Thanks, and then actually I know you guys don't really like to guide on margins, but yes.

Just a little color would help I mean, you've noted.

Commercial and purchase will remain strong.

Investment income income helps offset declining refis, but just in terms of the guided through the margin range. It's still kind of led to 13% in Europe to be running well ahead of that so just curious any color on where we could think margins could go.

Well, yes, I'll start with that though so the margin.

Guidance that we've given the past is really David I mean, we talked about 13% margins in the past, but that was given a certain.

Origination environment that we've really blown past.

So.

When we look at margins going out to 2022, I mean, there's positives and negatives right. I mean, we feel like the purchase market is still going to be very strong. We think the commercial market is going to have a good year, we're always eking out efficiencies in our business you've seen us for the most part increased margins for the most part every year because we continue to drive efficiencies all of that is positive.

The negative obviously as Refis we.

We don't expect at least to have a strong as of a refi next year. So that's going to be a headwind and then we always spend more on technology.

So when you mix that together I mean revenue should be very similar to where it was in 2021 and the and the margins. There are also a function of the mix of business. Obviously commercial is very high.

Margin business agencies, a great business for us, which is low margin, but one thing I would point out to longer term is that we've got a catalyst when it comes to investment income. So we're not really sure when the fed is going to increase but when the fed does increase.

We've talked about how we're going to generate 12% to $15 million of annualized investment income every time the fed.

Yes.

And given where our deposit levels or is it going to be on the high side of that because our deposit levels are just risks. So that's a little bit how we think about margins in the future.

Okay, Great that's helpful. Thanks.

Thanks Bruce.

Thank you. Our next question comes from Geoffrey Dunn with Dowling and partners.

Please proceed with your question.

Thanks, Good morning.

I was wondering if you could give.

Maybe some specific revenue color on the info and other line entitle.

That continues to show good growth.

Certainly it looks like it's less sensitive to volumes.

We're making.

Notable accomplishment, but more difficult to project. So can you give us some some rough breakdowns are specific breakdowns in terms of the different offerings in there to give us a better line of sight of how it could perform out in 'twenty two 'twenty three.

Yes, Jeff this is mark so.

Yeah.

As you know.

A lot of different businesses and the information and other line item, it's not like it's one business. There's a lot of different businesses, we're very happy with the growth. There I mean, we had a 9% growth rate this quarter, it's less than what we saw in <unk>.

Direct and agency for example.

And there's a few reasons for that most of the revenue.

I mean is there.

Well not most of it but when I call out a few buckets here. This quarter, we had about $92 million of revenue related to our data business.

Kind of the biggest chunk of revenue, we've got <unk> in there about $25 million of revenue.

We also have a lot of.

They're heidel information reports that we sell right, where it's not it's not risk based theres no claims associated with it but we sold property reports we saw.

Search packages and other things.

We had about $70 million or so of that type of business, where we're just selling.

Non risk based title.

Reports and so on and so forth.

And then our international business added about 45 million of revenue for the quarter. So theres other things, but those are the biggest buckets.

So when we look at the sensitivities.

Is can you talk about each one I mean, the data business that really track your order.

Hello, and real estate demand kind of go through those four buckets given idea of the sensitivity to volumes versus there being less.

Well I would say the property reports are very tied to.

Just order counts and for the most part these businesses really are tied to order counts right. So when you look at Darkey Tech.

We're going to get paid for every transaction, it's not like we get paid two five times for purchase transaction then refined like we do with patent premium same thing goes for our data business right data business, there's minimums involved right, but if they go over our minimum.

Monthly contracts and they're gonna than our customers pay kind of per per hit rate per order.

Right. So so none of the businesses.

In info and other really get that two five times leverage that we that we see so.

I would say as a general statement the way to think about it is based off of orders as opposed to.

Premiums like we see on the title business, Jeff This is Gary.

And they'll probably be a little headwind.

And each business segment performed very well, but they'll be a little headwind in the next couple of quarters, probably because of the refinance dropping and that's going to impact the transaction cycle.

Okay helpful. Thanks, and then I wanted to just talk about cash about first our cash balance at the Holdco given that you did a big deal.

As.

Okay.

But also and I'm guessing that the.

The gains this quarter were really balance sheet gains by cash gains per se, but.

How are you thinking about monetizing these investments and then in turn what you do with that cash is that gonna be something that can be scaled.

It's going to largely be reinvested in.

Of course.

And people expect that a lot of these gains can be passed through to shareholders.

Particularly when you're talking about such big gains on these ventures.

And then just generally I know you typically I'm reluctant to give any specifics on your capital redeployment, but you re upped your buyback and it just seems like you're flushed.

The business right now so can you just elaborate on those few things.

Yeah, there's a few things there Jeff.

Start on that so today, we've got $714 million of cash at the holding company you saw we did this.

$650 million senior notes deal.

We have.

Two bond deals come in due in the next two years.

With <unk> on February 23, as we get to November 'twenty four is at $550 million of debt that's coming due in two years.

We did this bond deal really is kind of an opportunistic trade.

Entering market conditions, we felt like it was just too good to pass up.

Cash is fungible right, but when you look at where we've spent the cash and where we intend.

<unk> cash.

One thing we did in the third quarter as we put $140 million into our bank to capitalize our bank. The bank deposits have been growing quite rapidly I mean at the beginning of the year. Our average balances were $4 billion today, there are $7 billion.

And with our bank every time our deposits go up by a dollar we have to put certain incentive capital when.

And we're very happy to do that in this rate environment, the banks, making a 10% after tax ROE and we really take very little risk on the asset side and that's just going to improve win win rates rise. So we put a $140 million of bank will probably do another 25 to 50 in the fourth quarter.

We also have a pretty robust acquisition pipeline.

And to spend and we're not ready to announce anything here today, but in the next quarter or two I think most of that cash that we have at the holding company will go toward acquisitions in the next quarter or two so that's something that we kind of have in the pipeline in terms of monetizing the the venture investments first of all they are all at the holding company Theyre not.

Anywhere.

And they're also long term as you know they're very illiquid.

Most of them right. So it's all excess capital and really how we're going to think about deploying that when it does convert to cash at some point.

Is we're just going to be opportunistic like we always are I would suspect that we're going to return more capital.

Travelers in the future than we have in the past, but we'll also look to grow our business. So we just kind of we're opportunistic about it.

Okay, I got a couple more but I'll jump back in Capex.

Thanks, Jeff.

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Yes.

Our next question comes from John Campbell with Stephens, Inc. Please proceed with your question.

Hey, guys. Good morning, good morning, John.

I just wanted to touch first on the on the title plant expansion efforts. If you guys can maybe.

Just kind of give us a sense of where you are.

Relative to the original plan of one 5000 for the year.

I think that's 80% or so coverage of the U S.

Could you give me an idea of where we are as far as that goal and then I don't know if theres plans to eventually go to a 100% if that makes sense or not.

Thanks for the question.

Right on track actually the third quarter, we had 1300 Eagle Ford plants will hit our objective of 1500 by year end.

Again, John their go forward plus we're using our extraction technology, that's just completely changed our ability to do this at a completely different economic model that we have historically, so we'll hit.

1500 objective the second part of that question when we go to a 100% coverage.

That's really going to be subsets questionable in the sense. It will have to be opportunistic we're starting to really get into the very small counters at that point. So the 80% allows us to have the level of automation long term that we want for our titles.

Foundation objectives, so bottom line on track continuing to grow doing at all.

Okay. That's helpful and then.

If I'm thinking about this correctly I think you guys are generating kind of immediate savings as you open up those plants, but youre kind of recycling that back into further plant expansion. So just give us a sense for I.

Title on average cost per plant.

Spansion and then if you could maybe frame up the associated cost savings with each yeah, I'll start Mark may come off, but it's pretty de Minimis Joan.

From the size of our company technology, such now that it doesn't cost us much at all.

Putting a new plant online like this on a go forward.

Basically what I wanted to see the kind of hitting on two things we're not doing this for a cost savings play if you will per se. What we're really doing here is to expand our data content and our coverage. So not only are we building plans for capturing significantly more content that we think we can use to automate our catalytic processes deploying so don't think of that so much of the cost.

Cost arbitrage.

More from the strategy automation going forward.

And John in terms of the cost to build the incremental plans I mean, we already have 501 billion another thousand here it.

It's really it's $2 million on a go forward basis, a lot of it because we already have the images right. So we already have the history, we have any of the images.

And we're just we're just paying to key in electronically. So it's really it's really de minimis in terms of the costs and one last thing not to get too detailed on this but what's changed so radically forces in here.

Historically this is dealing with all the key manually keyed and that is we were we are and were very.

With that but.

Very different cost arbitrage now that theyre electronically being extracted.

That makes sense and then one last one for me is you know Ive asked this in the past I think you guys have said no change just wanted to check on this again, but you know the closing ratio. That's obviously influenced by the order flow.

If you look at it from a high level just.

Efficient couple of years it looks like to me at least the closing you are closing out orders at a faster rate. So am I reading too much into that or anything to call out there.

No no there's nothing to call out there I mean, it is subject to kind of monthly swings depending on.

We have a good order month on the open side are good.

Last week the month, but when we look at the when.

When we look at.

The orders that we open and how many ultimately close.

It's usually about 72% as the long term average and Thats kind of what we're running today both on the refi into purchase side. So we haven't seen any structural shift in our clothing.

And if you see any kind of noise.

And the numbers if you've got the closing issues it would probably be related to any kind of dose we see in refinances.

And down there, but the personal like Mark said the purchases rather than our historical averages.

Okay. It makes sense great work on the quarter guys. Thanks.

Okay.

Yeah.

Thank you. Our next question is from Geoffrey Dunn.

One with Dowling and partners. Please proceed with your question.

Thanks, I wanted to follow up on really I think that is your very first comment about being laser focused on innovation.

Can you maybe give us a couple of buckets of specific areas of focus for your tech spend obviously, you just talked about endpoint.

I think there was some.

Recently announced.

Now it's been about a partnership of motorized, but what or just an update on a couple of the specific areas, where you continue to deploy your tech spending and trying to develop innovation and efficiency.

Over the last few calls I've mentioned, a few of them clarity first.

Ignite three others in the title plants et cetera, so that left.

It buckets, if you will it did buckets.

The big buckets for us are to continue to build out our data assets.

Content and coverage.

That's something that we've talked about for a number of years that process is accelerating right now and think of that Jeff is a foundational areas the more content and more coverage.

There is a more accurate and timely that content and coverage is the more accurate we can automate the titling efforts. So that's kind of a foundational level second level big buckets, Jeff are automating the titling itself and digitizing the closing so on the titling we've talked about it on prior calls and that as you know we and others.

Others are running very high percentages of refinance transactions are fully automated and when you hear different numbers, but different companies by and large that's a risk.

Decision, how much risk do you want to take versus how much full automation and so.

That's ongoing the big effort will focused on only one title automation.

We haven't really focused on it will be probably a multiyear effort and that his title automation on the purchase transaction.

I think we have the content now we got the coverage we have the skills, we have the technology et cetera et cetera that we think we can make significant headway on title automation on purchase.

The third on that transaction would be commercial probably less likely.

It could be automated so it's mostly a residential play at this stage is the second major component of our automation is the digitization of the clubs.

And we have two efforts going I call them Revolutionary efforts, if you will.

And then more structural I mean, that's what I'm looking for.

And more.

Consistent changes more of a complete different way of looking at that would be endpoint.

Made the commitment this this week.

Increased their funding by $150 million.

And then point right now and it's related to other questions to end point right. Now is really really matching up very well with the prop tech market right there.

They're looking for a different experience than traditional clothing, we're looking for more like what we call a native digital clothes, and so a lot of growth there.

And then we're continuing to automate I'll call the more traditional approach to escrow, but the bottom line the bottom line over the long term, we think the closing will become highly digital in the future.

What kind of gave you a really high buckets data foundation title automation, and then digitizing the closing and you'll see us continue to grow.

Excuse me hopeful that you'll see us continue to put capital to it internally through Capex and other investments and Youll see US continue to look for acquisition opportunities in that space also those space excuse me.

Sure.

And just a quick follow up are you seeing any instances, where endpoints winning business from traditional aircraft.

From traditional SNF.

Yeah, Okay, Yeah, and then within your own company at some point they can you know winning business.

Channels well.

Very very small.

With any we're just not we're really going after the fintech more directly.

So we're not trying to.

Chase our own businesses. So we're looking at a different market close by and large and that's again ties to our venture strategy and the partnerships there.

Okay, great. Thank you. Thank you.

Small thank you that's all the questions that we have.

For today.

I would.

This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation and have a wonderful day.

Okay.

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