Q1 2022 First American Financial Corp Earnings Call
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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.
A brief question answer session will follow the formal presentation.
If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.
Copy of today's press release is available on first American's website at Www Dot first.
Hey, dotcom.
Forward slash.
Investor. Please note that this call is being recorded and will be available for replay from the company's investor website for a short time by dialing 8776606853.
Whereas two well 161 to 7415 and enter a conference I D 137 to 9079, we will now turn the call over to Mr. Craig Barbell, yet placed.
Vice President of Investor Relations to make the introductory statement.
Yeah.
Good morning, everyone and welcome to first American's earnings conference call for the first quarter of 2022, joining us on today's call will be our Chief Executive Officer, Ken did Giorgio 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.
These forward looking statements speak only as of to 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. 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 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 company's 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 at www Dot first a M dot com.
I'll now turn the call over to our CEO Ken to Georgia.
Thank you Craig our company delivered good financial results in the first quarter, our seasonally slowest period.
Revenue was $2 billion with earnings of 88 cents per share or $1 17 per share excluding net investment losses.
The market is currently transitioning from record low interest rates to a more normalized environment and we believe first American will outperform for two primary reasons first the market is shifting away from refinance transactions towards purchase and commercial transactions, which is where we have a greater marker.
Sure second we are the only title company that has a bank, which will enable us to capitalize on higher interest rates to a greater extent than our competitors.
Based on the forward curve for fed funds, we expect growth in investment income to add about $150 million to our annualized pretax income by the end of this year.
In terms of our outlook for the remainder of 2022, we expect transaction levels in the purchase market to continue to be down from last year, given inventory constraints and declining affordability. However, we expect strong housing demand supported by the strong economy and labor markets to continue to drive.
Robust home price appreciation.
And together with acquisitions and modest growth in purchase revenue this year.
Also given strong fundamentals in the commercial market. We are confident in our commercial business will continue to operate at an elevated level into the second half of the year.
Given the current market transition to a more normalized rate environment. We're sharpening our focus on expense management. We will however continue to invest in strategic initiatives that drive our company's operational efficiency and future growth, including through ongoing funding of our title automation and digital closing initiatives and the <unk>.
Expansion and enhancement of the data assets that few of them.
We've been active with share repurchases in response to market conditions that have resulted in our stock being undervalued in recent months.
This year, we have repurchased 325 million shares for a total of $210 million at an average price of $64.64.
I'm also pleased to report that our previously announced acquisition of mother load holding company a title agency with 92 offices across 11 states, including the key markets of California, Texas, and Arizona is expected to close in May we.
We are excited to welcome mother load, which includes 10 highly successful regional brands and over 1000 talented employees to our company.
In closing I want to thank our employees for all their hard work and accomplishments it.
It is their continuous focus on supporting each other our customers and our communities that for the second seventh consecutive year resulted in first American being named to the 100 best companies to work for list by Great place to work and Fortune magazine.
Now I'd like to turn the call over to Mark for a more detailed discussion of our financial results.
Thank you Ken.
This quarter, we earned <unk> 88 per diluted share included in this quarter's results were 29 <unk> of net investment losses.
Excluding these losses, we earned $1 17 per diluted share.
Revenue in our title segment was $2 billion up 8% compared with the same quarter of 2021.
Commercial revenue was 242 million, a 48% increase over last year.
We experienced strength across the board in terms of geography asset class and deal size.
We closed 77 transactions in the U S with premium greater than $250000 up from 34 transactions last year.
Our escrow balances totaled $15 billion at the end of the quarter up from.
$10 billion at year end, which indicates a healthy pipeline for commercial activity.
Purchase revenue was up 10% during the quarter driven by a 16% increase in the average revenue per order, partially offset by a 5% decline in the number of orders closed.
Our purchase orders declined from an unusually strong quarter in Q1 of 2021, which experienced the release of pent up demand due to the pandemic.
Refinance revenue declined 59% relative to last year due to the increase in mortgage rates and.
In the agency business revenue was $948 million up 12% from last year.
Given the reporting lag in Asia revenues of approximately one quarter, we experienced growth in remittances related to Q4 economic activity.
Our information and other revenues were $302 million up 9% relative to last year revenue growth was primarily due to the recently completed acquisition of service Mac.
Investment income within the title insurance and services segment was $53 million or 23% increase relative to the prior year.
The increase was primarily due to higher average invested balances.
As the federal reserve raises rates, we expect to generate additional investment income from our escrow deposits cash balances 10, 31 exchange deposits in our bank investment portfolio, where we have over 1 billion of floating rate securities on the last earnings call. We estimated based on current deposit balances.
So the 25 basis point increase in the federal funds rate would equate to a 15% to $20 million increase to our annualized investment income in the title segment.
We believe this estimate is still appropriate and expect to see the benefit of the Feds March rate hike beginning in the second quarter.
Based on the forward curve for the fed funds rate, we expect our investment income to grow by about $150 million on an annualized basis by the end of this year.
Pre tax margin in the title segment was 11%.
Turning to the specialty insurance segment operating revenue in our home warranty business totaled $104 million up 5% compared with last year.
Pre tax income and home warranty was $16 million up from $13 million in the prior year, primarily due to lower claims activity at the loss rate fell from 54% to 46%.
Our property and casualty business had a pretax loss of $4 million this quarter to date our policies in force have declined by 88% since the beginning of 2021, and we expect a full wind down to property and casualty business to be completed in the third quarter of this year.
The effective tax rate for the quarter was 24, 6%.
As a result of recent acquisitions, we expect that our normalized effective tax rate will be 24, 5% slightly higher than the 24% rate we have been using as a benchmark for the last several years since a larger portion of our pretax income is now coming from our non insurance businesses and are subject to higher state income taxes.
In the first quarter, we repurchased one 6 million shares for a total of $108 million at an average price of $69 four.
So far in the second quarter, we repurchased an additional $1 7 million shares for a total of $102 million at an average price of $60 54.
As Ken mentioned in May we expect to close our acquisition of mother load holding company. The purchase price is 300 million, which represents five one times trailing 12 month adjusted EBITDA, our debt to capital ratio as of March 31 was 29, 1% or <unk> 23 for <unk>.
<unk>, excluding secured financings payable now I would like to turn the call back over to the operator to take your questions.
Thank you.
Question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question killed 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 the handset before pressing the psyches.
Our first question is from Mark Devries with Barclays. Please proceed.
Thank you could you discuss how you're thinking about managing expenses here, you know as the refi volume slows and.
And and how you're thinking about that particularly relative to kind of the the success ratio notion.
Yeah, a couple of things I'd say mark Thanks for the question.
The first of all in terms of the success ratio.
It's a metric we've been talking about for a long time and one of the things that we we'd note about the success ratio is it's really relevant when there is significant changes to revenue either up or down.
This quarter, our net operating revenue change 50 million on a base of $2 billion. So it's the success ratio is not as relevant when you have small changes to revenue and I think we're going to see that for the rest of this year as I talked about last quarter. We think our revenue is going to be roughly flat and so as a result, the success ratio isn't going to be as meaningful.
On the head count side, though.
I would say is that.
If we have businesses that are.
Our experienced decline declining order volumes, particularly because of the refi market and we're reducing head count in those areas. There's other areas, where we're adding for example, NCS our commercial revenue was up 40%, we're adding in commercial we're adding an endpoint and service Mac with some of these recent acquisitions and so.
There's kind of two things going on were reducing areas that are kind of order dependent we're adding in areas that are that are growing so we have to kind of balance that as we go forward.
Got it.
And then second question was.
I was happy to see the the share repurchase activity could you just talk more about kind of your appetite.
To do more of that should should the shares continue to kind of trade near these levels.
Yeah, Mark this is Ken thanks, Thanks for the question Yeah, I mean, that's.
As we noted we've repurchased three 5 million shares already.
And we've gotten more aggressive aggressive recently, but you know as we've said in the past, we're going to evaluate share repurchases going forward compared to other capital deployment opportunities you'd be it M&A investing back in the back in the business and the innovation in our technology dividends in our venture capital portfolio, but I.
We'll say if the if the current environment persists.
We expect to be active in the repurchase market.
Okay great.
And one related follow up on that in the you know I think.
Private market valuations have obviously come off a fair amount in the Fintech space are you seeing more opportunities to put capital to work in kind of the mortgage tech space or.
Our companies are reluctant to kind of sell these valuations right now.
I mean, interestingly I don't we're not seeing the private value of come office as as much as you might be seeing in the publicly traded market but.
We don't we don't see a ton of attractive.
Attractive opportunities you know I think we're getting and we've always been disciplined about investing in the in the venture space and it will end and I think are the hurdles are probably getting a little higher I think you know as we've mentioned in the past we've got two hurdles one strategic and one financial and both of those hurdles are probably getting a little higher in the current environment.
Okay, great. Thank you.
Okay.
Our next question is from Bose George with <unk>. Please proceed.
Okay.
First just the comment about.
Premiums of revenues being flat I assume that includes the accretion from mother Lode.
That's right that's right, where we're going to expect to close the mother Lode here in May and so when I say revenues flat.
That assumes acquisitions and the biggest one is.
So that doesn't have that.
Great. Thanks, and then just one more on the expenses.
Was there anything sort of one time I mean, you referred to the incentive comp.
In the release I can say is there anything that sort of elevated it or should we just think of this as fairly normalized.
Yes.
Wouldn't say there was anything that was unusual I mean, the one thing I would point out is that we had $12 million higher <unk> expense in the title segment than we did a year ago were not allowed to sort of a crew or restricted stock units last year was it was a good year for bonuses because it was a record year and so we booked a loss.
Lot of that in the first quarter. So our first quarter <unk> expense was $12 million higher than last year, but that's it.
That's an entry we do every every first quarter just higher this year there was nothing unusual.
Other than I can say that.
Okay, Great and then can you just give us an update on purchase order trends in April .
Yes, so so through the first 19 business days in April our purchase orders are.
Our 'twenty 100, a day, it's down about 10% from a year ago Refis are about 700, a day, that's down about 60% from a year ago and our commercial transactions are these are all opens im talking about commercials about 600 today and Thats kind of where we were the last last year.
Okay, great. Thanks.
Thanks, Bob.
Yes.
A reminder, star one on your telephone keypad.
Ask your question. Our next question is from Brian Gilbert with B P. I G. Please proceed.
Hi, Thanks, Good morning, guys.
Wanted to ask about pretax margin in the title business and I.
I know that typically we see a sequential improvement from <unk> to <unk>.
As volume picks up and I'm wondering if we should expect to see that again in 2022 or if there's headwinds on an orders are going to.
Affect that at all.
Oh, no I think Q.
Q1 based on what we see today is definitely going to be the seasonally slowest period.
So.
Margins are just going to increase from here on out and one thing that we mentioned on the remarks that I'll just point out again is that you know as the fed raises rates I mean, we're going to get $15 million to $20 million of annualized investment income and we saw that in March as soon as the fed raised in March.
All of our banks almost all of our banks increase their rates and so we're going to start to see a big benefit of investment income here, particularly as we get to the second half of the year, but even if you excluded that we would still have have have higher margins.
The latter quarters than we did in Q1, there is no question about that.
Okay got it and second question for me is on actually the agency margin it looks like it came down around 60 basis points.
<unk> 22 from from Monkey 'twenty, one so anything to call out there and then as we think about adding mother load to the business does that impact the <unk>.
Your your overall agency percentage of the business.
In terms of this.
Blair I think is what youre talking about the E&C margin, it's really just a function more of <unk>.
Geographies you know typically is.
As you know I mean, we have better splits on the east coast and the West Coast.
And so it's really just a function of geography more than anything else I think in terms of the mother Lode acquisition. It's an agent today once we acquire it it will be a direct operation. So it really won't have an effect on our agency revenues basically flipped to direct revenue once we once we close it.
Great. Thanks. Thank.
Thank you.
Our next question is from John Campbell with Stephens incorporated please proceed.
Hey, guys good morning.
Good morning, John back to your comments around the purchase Rev being up this year I mean, obviously mother load. The acquired orders are going to are going to help there. So I guess first is are you assuming organically purchase ramp down on the year.
Yes, so organically, excluding acquisitions and we look at our purchase revenue.
It'll be you know it'll be down slightly.
Two 3% something like that based on what we're seeing today, we obviously have the situation where orders are falling, but we're getting a big benefit in the average fee per file on an organic basis, I think we're a little bit less than flat I think once you layer in the acquisitions.
It will be high single digits and purchase driven.
Okay, and then I don't want to put too fine of a point on it I know, there's a lot of moving pieces here, but any what's.
What's your rough sense for how much units are down on the year relative to price.
On an organic standpoint.
Yeah.
Can you I didn't I don't think I understood. Your question John can you explain that again, well if you think about purchase revenue.
Just a matter of the number of orders times times.
Times price H P E and so just curious about how you how you're thinking about the decline in orders purchase orders versus.
Upside surprise.
So so far I would say on the year, we're going to be.
When you look at the first four months of the year, we're we're down high single digits in terms of.
In terms of orders.
And we think it might get a little bit better than that but.
But I think high single digit decline is probably a reasonable assumption in terms of orders again.
On an organic basis.
On an HPA I think we should be 7% to 8% up something like that.
One of the things Thats happened is in the first quarter our fee per file was up 16% half of that is really because of the fact that we bought some independent escrow companies in southern California, and there is revenue, but not any orders attached to them organically, we're seeing about an 8% increase in HPA and so they are roughly going to.
So that makes sense.
And HPA that makes sense and then.
I guess.
A decade ago. It was the rule of thumb was always like purchase was two times the revenue per order of a refi. It seems like that's gone away. The other way. So I don't know is it 335 times now.
It's a good way to think of that.
I'd say generally speaking it's about two five times.
You are right it used to be two times, but because housing prices are increasing.
Several years ago, we were taking right now that the rule of thumb is is two and half times. Okay last one from me.
The expected funding mix for the mother Lode acquisition, just how much dry powder you have cash why is the holding company and what you would expect it that way.
So.
As of March we had.
813 million cash at the holding company.
The mother Lode of acquisitions $300 million, we can obviously fund that without taking on additional debt and we repurchased about $100 million of stock in April so really kind of on a pro forma basis were about $400 million. It's a very comfortable place to be I mean, one thing that we feel good about is we did the debt deal last year, where we raised $650 million.
At a two 9% rate and.
That's turning out to be a pretty good deal in hindsight, so effectively what we did is we pre.
Free borrowed for the for the muddle of deal. So we're just going to funded with cash on hand.
Okay perfect. Thank you guys.
There are no additional questions at this time that will conclude this morning's call we would like to remind listeners that today's call will be available for replay on the company's website.
By Dialling 8776606853, or two O 161 to 7415 and enter the conference I'd number 137 to 9079 the company would like to thank you for your participation.
This concludes today's conference call you may now disconnect.
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