Q4 2022 First American Financial Corp Earnings Call
Greetings and welcome to the first American Financial Corporation fourth quarter, and full year 2022 earnings Conference call.
At this time all participants are in a listen only mode.
A brief question and answer session will follow the formal presentation.
If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.
A copy of 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 this call's being recorded and will be available for replay from the company's investor website and for a short time by dialing 870, 76606853 or 20161 to 7415 and enter the conference I'd 137353.
Six four.
We will now turn the call over to Craig Barberio, Vice President Investor Relations to make an interrupt introductory statement.
Good morning, everyone and welcome to first American's fourth quarter and full year 2022 earnings conference call.
Joining us today on the call will be our Chief Executive Officer, Ken to 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 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 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 at our website.
At Www Dot first a M dot com.
I will now turn the call over to our CEO Ken to Giorgio.
Thank you Craig.
At the very beginning of 2020 too many expected the strength of 2021 to continue into the year.
Early on however, we saw that the cycle was turning.
As a result, we began to sharpen our focus on expense management.
Due in part to these early expense management efforts the benefit of growth in net investment income and a record setting year in our commercial business first American achieved a full year title segment pre tax margin of 10%.
Or nearly 12% excluding net investment losses.
Total revenue declined 9% to seven $5 billion.
Continuing challenging market conditions weighed on our fourth quarter financial results in.
In the quarter, we generated revenue of $1 7 billion and earnings per diluted share of <unk> 52 cents or.
Or $1 35 per share excluding net investment losses.
In our title segment, we delivered a pre tax margin of 7% or 10%, excluding net investment losses the.
The key drivers of these results, where our ongoing focus on expense management and continued growth in investment income.
Our specialty insurance segment also contributed with a pretax margin of 14% or.
Or 18%, excluding net investment losses.
Okay.
Turning to our key title businesses refinance has been declining for the past two years. So it's now at trough levels.
In January we opened 324 refinance orders per day down from over 1100 per day a year ago.
Our open purchase orders were down 37% this quarter <unk>.
Based on our order trends, we are seeing early signs of stabilization with open purchase orders improving from down 40% in November to down 37% in December and down 31% in January .
The recent decline in mortgage rates combined with lower home prices has led to some improvement in affordability and therefore demand, which makes us cautiously optimistic that the purchase market is in the early stages of recovery.
Our commercial business had a record year in 2022 with revenues up 2%.
However, open orders have been meaningfully declining over recent months.
Open orders were down 27% in the fourth quarter and this downward trend has continued in January with open orders down 20% compared with last year.
While uncertainty remains high our expectation for our commercial business in 2023.
Is that it will be another good year, but below 2020 two's record level.
Despite the challenging environment ahead of US we believe the company is well positioned to emerge even stronger when the current down cycle ends.
Our healthy balance sheet allows us to continue to actively pursue capital deployment opportunities.
Including investing in key strategic initiatives and acquisitions as well as returning capital to shareholders.
We continue to make good progress at endpoint or digital title and settlement company.
And on our instant titled Decisioning initiative for purchase transactions.
These investments today will pay out over time by adding efficiency, improving the way customers interact with us and importantly, freeing up our people from process oriented tasks to further enhance their ability to focus on delivering superior customer service.
On the M&A front, we continue to have the financial flexibility to pursue attractive opportunities that may arise.
And during 2022, we returned $658 million to shareholders through share repurchases and dividends.
In closing I want to thank our employees for all their hard work and accomplishments in 2022 and for their dedication as we navigate it through the sharp downturn in the real estate market.
It is their professionalism talent and customer focus that drives our company's continued success.
Now I would 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> 52 per diluted share included in this quarter's results were <unk> 83.
Customer losses.
Excluding these losses, we earned $1 35 per diluted share.
Two items contributed to our net investment losses this quarter.
First we realized $79 million of losses on our fixed income portfolio in connection with our tax planning strategies.
Second we incurred $46 million of unrealized losses related to our venture portfolio.
Revenue in our title segment was $1 6 billion down 29% compared with the same quarter of 2021.
Commercial revenue was 251 million a 34% decline over last year, our escrow balances, which are largely driven by commercial activity totaled $10 billion at the end of the quarter down from $11 billion in the fourth quarter of last year.
Purchase revenue was down 30% during the quarter driven by a 36% decrease in the number of orders closed partially offset by a 9% increase in the average revenue per order.
Our revenue per order for purchase transactions continued to benefit from recent acquisitions of escrow companies in southern California.
We include escrow revenue from these transactions in the numerator without a corresponding title order in the denominator, excluding acquisitions average revenue per order would have been up 1%.
Refinance revenue declined 74% relative to last year due to the increase in mortgage rates.
And the agency business revenue was $753 million down 25% from last year, given the reporting lag in agent revenues of approximately one quarter. These results reflect <unk> is really a Q3 economic activity.
Our information and other revenues were $241 million down 25% relative to last year.
The decline was the result of lower transaction levels across several business units driven by the decline in residential mortgage originations, including the Companys data property information in post close services.
Investment income within the title insurance and services segment was $132 million or 169% increase relative to the prior year.
Rising short term rates are benefiting the interest income we receive on a cash and investment portfolio escrow balances and tax deferred property exchange per ounces.
As short term rates have risen we expect investment income to continue to be a tailwind for earnings in 2023.
On the expense side, we continue to manage expenses given the decline in transaction activity.
Excluding acquisitions, our success ratio was 46%, meaning that our personnel and other operating expenses declined $232 million and our net operating revenue declined $503 million.
Well below our long term target of 60%. We believe our success ratio was a good outcome given the sharp decline in transaction activity and our commitment to continue to fund strategic initiatives. In addition, we recorded $17 million of severance expense this quarter.
As Ken highlighted we continue to invest in businesses and innovation initiatives that we believe will positively contribute to our profitability and long term, but at this point in our lifecycle adversely impact our financial results last quarter.
We discussed three initiatives service Mac endpoint and instant Decisioning for purchase transactions, which together generated a pre tax loss of $21 million this quarter impacting our pretax title margin by 150 basis points.
Notably service Mack turned EBITDA positive this quarter.
Pre tax margin in the title segment was seven 1% or 10, 4%, excluding net investment losses.
Turning to the specialty insurance segment total revenue at our home warranty business totaled $108 million up 4% compared with last year.
Pre tax income and home warranty was $15 million down from $17 million in the prior year.
Excluding net investment gains and losses pretax income was $21 million up from $15 million last year.
The loss ratio and home warranty was 47% down from 52% in 2021, driven in part by a lower frequency of claims.
The financial results of our property and casualty business are no longer material.
The effective tax rate for the quarter was six 9% excluding the impact of our net investment losses, our tax rate would have been 18.0% less than our normalized tax rate of 24% due primarily to a shift in the mix of earnings to insurance businesses, which generally paid premium tax and Lewis.
Income tax.
In the fourth quarter, we repurchased 687850 shares for a total of $34 million at an average price of $49 47 for the full year of 2022, we have repurchased seven 5 million shares for a total of $441 million at an average price of $58 65.
Our debt to capital ratio as of December 31 was 30.0%.
This ratio was impacted by both of our accumulated other comprehensive loss and our secured financing is available.
Excluding these two items, which is more in line with how our banks through the ratio or debt to capital ratio was 22, 9%.
On February one, we repaid $250 million senior unsecured notes that matured using cash on hand at the holding company later in the year, we expect to either drawn our line or issued new senior unsecured notes to replace this depending on capital market conditions and other factors.
As of December 31, we recorded accumulated other comprehensive loss of $868 million.
This quarter, we elected to sell fixed income securities, which produced $79 million of capital loss in connection with our tax planning strategy to offset capital gains we recognized in 2019, 2020. One we expect this strategy to ultimately generate 24 million of cash benefit.
Finally in order to provide additional transparency to investors, we were making two enhancements to our disclosures first in addition to disclosing purchase and refinance orders, we will breakout commercial orders in our monthly disclosures beginning with our January report.
Second in.
In the first quarter, we will move our property and casualty results through our corporate segment and disclose home warranty as a standalone reporting segment.
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'd like to ask a question you May press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May Press Star two if you would like to remove your question from the Q4 participants using speaker equipment. It may be necessary to pick up your handset before pressing.
Starkey.
Our first question comes from the line of Bose George with <unk>. Please proceed with your question.
Hey, guys good morning.
Mark can you repeat what you said about the severance expense this quarter and then going forward do you think we could see more of that or do you feel like you've kind of right sized to the current environment.
Hey, good morning, both so we had $17 million of severance expense in the fourth quarter I think getting into the first quarter, we will have a little bit more service, but not quite to the extent that we got in the fourth quarter.
Okay, great. Thanks, and then on the tax rate going forward.
Should we just use kind of the normalized range or did anything kind of change.
No.
Look at that because if you look over the last couple of years normalized tax rate has actually been less than 24% because we've gotten discrete benefits here and there.
But I think for 2023, and moving forward somewhere between 23, and a half and 24% as our normalized tax rate.
Okay, great. Thanks.
Our next question comes from the line of Mark <unk>.
Devreese with Barclays. Please proceed with your question.
Yeah. Thanks, I was hoping to get some color on just the mix of the commercial business in the quarter.
You still seem to be benefiting from pretty large <unk>.
What's your expectation for that as we as we get into 2023.
I would say.
We're going to we.
We've had obviously a lot of momentum in commercial throughout most of 2000.
22 fourth quarter was a little bit more challenging for us revenue was down 34%. It was still good relative to historical standards. It just wasn't as good as the prior year, which was a record.
Looking at 'twenty, three I'd say orders are definitely softer now closings are softer hitting in the first and second quarter.
And we actually think that things will pick up in the second half of the year based off of conversations we're having with our customers.
But I think in terms of our Po certainly for the next six months, we would expect to see a decline in auto and commercial just because we are not seeing the same level of larger transactions that we have.
Historically, including last year.
Okay got it and then just.
Related question on the investment income.
They are probably still a little bit more tailwind from a few more fed hikes, but.
As you know the commercial orders trend down is there a headwind there to investment income from just having kind of lower 10 31 exchange balances.
There is.
There is a headwind I would say just on investment income.
The good news is that when we look at the fed forward curve its actually more favorable now than it was a year ago, sorry, it last quarter.
And so the fed raised 75 basis points in November and 50 basis points in December we still haven't gotten the full effect of that which we will get here in the first quarter. That's a good news bad news as balances are following and balances are falling.
Two reasons. One is there is this natural seasonality in January commercial we typically close a lot of deals at the end of the month and then our escrow balances fall heading into January so we're seeing a normal.
Seasonal impact of our balances, but we're also of course seeing more of a cyclical impacts of our balances to a commercial down in the purchase market down. So overall, we think investment income.
To be a tailwind.
For us, but certainly balances coming off as.
He has hurt us a little bit I think we've always given this guidance for the last couple of years of we would generate $15 million to $20 million of annualized investment income for every rate increase now we're probably at the low end of that range, given where balances are.
Okay, great. Thanks, Mark.
Thanks Mark.
Our next question comes from the line of Mark Hughes with <unk>. Please proceed with your question.
Yeah. Thanks.
Good morning.
Mark.
The ARPA.
You talked about the phenomenon, where you helped by the M&A.
On the residential side would have been 1% otherwise when when do you lap that and go back to the.
Just kind of 1%.
We'll lap it.
In the first quarter. So Q Q4 here is going to be the last quarter that we talked about that Q1 will have a pure kind of year over year for the southern California's growth issue.
Yeah Okay.
And then.
Yes ratio.
Still seems pretty good under the circumstances.
Would you anticipate the success ratio should improve.
Certainly all depends on the order trends.
Other things you can predict but.
Given what you see on the <unk>.
Personnel front.
How are you thinking about success ratio.
Yes, Mark this is Ken.
We think the success ratio will probably improve a little bit.
But I'll add to us.
We've always been real conscious about expense management and that that level of consciousness will continue if.
The market continues to deteriorate.
Sure.
Wherever conscious on expenses.
Sure.
Yeah, Okay. Thank.
Thank you very much.
Thanks.
As a reminder, it is star one to ask a question.
Our next question comes from the line of John Campbell with Stephens. Please proceed with your question.
Guys good morning, happy new year.
I mean are you John .
Just two part question here on the specialty insurance segment, obviously really good results. There we were thinking that would spruce up a bit with our home warranty business kind of rising the surface but.
You guys were well ahead of us. So the first question is could you maybe talk to what drove the sequential revenue growth in operating revenues and then why also the info and other was up so much and then from a bigger picture do you think your position in that segment to return to growth this year.
Well I'll give some high level comments and then mark can come in on the numbers, but I think yes. It was it was a good quarter considering the.
The pressure in the real estate market and the resulting impact on the real estate channel in our in our home warranty business.
Our claims are still the severity is still high on claims, but the frequency is down but we think frequency is probably a more normalized levels.
Note that we've been deploying more resources and our direct to consumer business and we're seeing good results there and we're also realizing some of the benefits of.
The price increases, we've been making as well as that.
Meaningful tick up in renewal rates.
Yes, the only thing I would add there John is at the end of the year.
In our home warranty business, we do.
An annual kind of revenue true up depending on how the claims patterns came in and we got to.
Our revenues grew up and home warranty was $8 million.
This quarter. So we did get a benefit of that and there was about $2 million of expenses associated with that too is we chewed up our deferred acquisition cost. So it's about a $6 million impact to pre tax for home warranty.
Okay. That's helpful. And then I wanted to drill down on the segment earnings I think that was probably the best segment margin you guys are probably ever had.
What's a good margin to think about for the full year, just assuming that we run with.
It sounds like Youre, not going to have much of an impact of the wind down of the P&C business moving forward, but maybe just think about what that segment margin looks like and then where you think you could take that maybe over time.
Yes, and one thing I will point out too is that we're also seeing a benefit of.
The P&C wind down a year ago, we lost $8 million in our P&C business on a pre tax basis in this quarter was effectively breakeven even in the third quarter, we lost $9 million. So we're getting that kind of.
Kind of cleared out of our specialty segment.
But in terms of like.
Going forward typically the home warranty margins have been.
Somewhat better than the title margins I mean, I would say low double digit margins as kind of a normalized market for home warranty and they've done a really good job of growing revenue, particularly in direct to consumer channel and so we think.
Warranty will grow through the cycle, a little bit faster than the overall title business.
Okay very helpful I'm going to jump back in queue. Thanks, guys.
Thanks, John .
There are no additional questions at this time that concludes this morning's call we'd like to remind listeners that today's call will be available for replay on the company's website or by dialing 870, 76606853 or 200, 161% to 7%.
<unk> 105, and enter the conference I'd 1373536 for the company would like to thank you for your participation. This concludes today's conference call you may now disconnect.
Yeah.