Q2 2023 First American Financial Corporation Earnings Call
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Greetings and welcome to the second quarter 2023 first American Financial Corporation earnings Conference call.
At this time, all participants right now listen only mode. A brief question and answer session will follow the formal presentation.
Anyone should require operator assistance during the conference. Please press star zero on your telephone keypad. As a reminder, this conference is being recorded it is now my pleasure to introduce your host Craig Barberio, Vice President of Investor Relations. Please go ahead.
Good morning, and welcome to first American's earnings conference call for the second quarter of 2023.
Yesterday 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 these 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 performance.
Performance of the company.
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.
W. W. Dot first a M dot com I would now like to turn the call over to Ken to Georgia.
Thank you Craig we posted good results in the second quarter, given the continuing market headwinds.
Seasonal uplift in our business strong growth in net investment income and a continued focus on expense management enabled us to deliver our pretax title margin of 12, 1%.
Or 12, 6% on an adjusted basis.
On a consolidated basis, we earned $1 33 per diluted share or $1 35 on an adjusted basis.
Demand in our residential purchase business continues to be pressured by affordability issues due to high mortgage rates along with low inventory that has kept home prices elevated.
The purchase market, however appears to have stabilized, albeit at trough levels.
For the first three weeks of July we are seeing the typical seasonal decline in purchase orders with open orders down 1% compared with June .
Refinance open orders remained at trough levels in the second quarter, averaging 350 per day.
As I indicated on last quarter's call. The current pool of mortgage loans outstanding would need to see rates drop well below 5% to incentivize a significant uplift in refinance activity.
Which is highly unlikely in the near future.
The commercial market, which began to deteriorate in the back half of 2022 appears to have stabilized.
While commercial revenue was down 39% year over year, it was up 20% on a sequential basis.
In line with the typical seasonal trend.
Commercial open orders for the first three weeks of July were down 26%.
System with what we experienced in the second quarter.
There is still a high degree of uncertainty concerning the commercial market outlook.
However, based on the feedback we are still getting from customers. We expect the transaction activity in the second half of the year will be better than the first which is consistent with normal seasonal patterns.
While our key purchase commercial and refinance markets appear to have trough the timing of a recovery in these markets remains unclear.
Despite these challenging conditions, our financial discipline and strong balance sheet.
Allow us to continue to invest in strategic initiatives for the long term benefit of the company as well as return capital to our shareholders.
We continue to make progress at endpoint or digital title and settlement of company.
Our initiative to develop instant titled Decisioning for purchase transactions remains on track for deployment in two markets early next year we.
We've also made substantial progress at servicemaster, our sub servicing business, which delivered strong revenue growth and its first quarterly profit.
And since the market began to deteriorate at the beginning of last year.
We have returned $811 million to our shareholders through share repurchases and dividends.
In closing I am proud that first American has been selected as one of just 100 companies to fast company's best workplaces for innovators for 2023.
We are the only company in our industry to have ever received this recognition.
This accomplishment is a testament to our ongoing commitment to innovation.
And as a tribute to our people who in addition to delivering best in class customer service enabled us to lead the digital transformation of our industry.
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 $1.33 per diluted share or $1 35 on an adjusted basis.
Beginning this quarter, we are defining adjusted earnings for the first time to make our results more comparable to our peers.
Our adjusted earnings exclude net investment gains and losses as well as purchase related intangible amortization. These.
These adjustments will also apply to pre tax margin a reconciliation can be found in our press release.
Revenue in our title segment was $1 5 billion down 25% compared with the same quarter of 2022.
Commercial revenue was $178 million or 39% decline over last year, our average revenue per order for commercial transactions declined 12% this quarter to $11600 due to a combination of lower valuations as prices in the commercial market reset and fewer large transactions.
<unk> revenue was down 29% during the quarter driven by a 30% decrease in the number of orders closed partially offset by a 1% increase in the average revenue per order.
Refinance revenue declined 59% relative to last year due to the increase in mortgage rates.
And the agency business revenue was 625 million down 33% from last year, given the reporting lag in agent revenues of approximately one quarter. These results reflect remittance as related to Q1 economic activity.
Our information and other revenues were 244 billion down 20% relative to last year. This decline was the result of lower transaction levels across several business units driven by the company's data and property information products and post close and document generation services.
Investment income within the title insurance and services segment was $142 million or 105% increase relative to the prior year in the second quarter, we saw escrow balances increase due to normal seasonality of the business. We also continued to generate higher rates on our balances at the federal reserve, it's like four.
Times of share.
We continue to manage expenses given the decline in transaction activity. Our success ratio was 50%, meaning that our personnel and other operating expenses declined to 200 million and our net operating revenue declined $399 million.
The provision for policy losses, and other claims was $40 million in the second quarter or three 5% of title premiums and escrow fees down from the 4.0% loss provision rate in the prior year to three 5% loss rate reflects an ultimate loss rate of three 8% for the current year with a $3 million release for prior bonus.
Yes.
As Ken highlighted we continued to invest in businesses and innovation initiatives that we believe will positively contribute to our profitability in the long term, but at this point in their lifecycle adversely impact our financial results. We have discussed three initiatives servicemaster endpoint and instant decisioning for purchase transactions, which together generated a pre tax loss of <unk>.
$15 million this quarter impacting our pre tax title margin by 130 basis points, an improvement from the 150 basis point margin drag in Q1, primarily driven by profitability gains at servicemaster, which generated a 10% pretax margin this quarter.
Pre tax margin in the title segment was 12, 1% or 12, 6% on an adjusted basis.
Total revenue in our home warranty business totaled $106 million, a 4% increase compared with last year.
Pre tax income and home warranty was $14 million up 61% from the prior year.
The loss ratio and home warranty was 49% down from 52% in 2022, driven by a lower frequency of claims partially offset by higher claims severity.
The effective tax rate for the quarter was 23, 4% lower than our normalized rate of 24% due primarily to the mix of income between our insurance and non insurance businesses since our insurance business generally pay state premium taxes in lieu of income taxes in the second quarter, we repurchased 273000 shares for total.
With $15 million at an average price of $56 four.
Our debt to capital ratio as of June 30, It was 29, 2% excluding secured financings payable our debt to capital ratio was 22, 5%.
In May we entered into a new $900 million senior credit facility upsize from our prior $700 million facility. We currently have the entire amount available for liquidity 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.
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All participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key one moment. Please while we poll for questions.
Yes.
Our first question comes from George Luis J D. W. Franks.
Please go ahead.
Hey, guys good morning.
Firstly I just wanted to ask about investment income can you give us an update on your expectations for investment income and then can you remind me if there's something unusual in investment income in the second quarter.
Hey, good morning Bose Thanks for the question.
There's nothing really unusual in the second quarter.
Given different.
Assumptions in the past for investment income, but at this point of the year.
We're you know we're halfway done through the year, we've got a lot more visibility in terms of where balances are and so when the title segment, we should be somewhere between five 550 $550 million of investment income for the full year.
Well, we'll have an increase in Q in Q3, and then we're expecting a little bit of a decrease in Q4, just because of some balances that will run off related servicemaster, we're looking at somewhere between $5 569, right now full year okay.
Great. Thanks, that's helpful and then with the sale of home point to Cooper.
When that servicing is if that does move over to Cooper, how much escrow could could that could you lose as that happens and is there any sort of negative operating leverage while you sort of rebuild that surface Mike.
I believe yeah. Thanks. Thanks for the question I mean, we're anticipating that about 40% of the loans are gonna off board in September and to give you. The second part of your question on that we're already.
Making expense reduction associated.
With that now there's a there's a healthy pipeline that we think will replace that.
And but obviously the part of the obviously the timelines on those.
Our quick but there is a healthy pipeline the remaining 60%.
They could they could they will probably be there through the end of the year and could extend into into next year, it's not exactly clear when the remaining 60% are going to come off but were.
Hopefully they'll at least be you know into the into next year.
Okay, Great and actually can you remind me the interest income from the escrow at service Mac does that come through corporate or is that.
Entitled.
It's entitled Yeah, It's entitled but most of it goes through our bank and our bank rose up through our title segment.
Okay.
The guidance of the number you gave sort of incorporates all of the changes that service.
It does yes.
Okay, great. Thank you.
As a reminder, if you would like to ask a question. Please press star.
One on your telephone keypad.
Our next question comes from John .
Jon Kemp only teaching.
Please go ahead hey.
Guys good morning.
Alright, congrats on a great quarter, but I wanted to touch on the July order data again I might have missed this but I think you said that the first few weeks commercial orders down 26%, so a little bit better obviously than <unk>, but could you maybe rehash on purchase refi and other.
Yeah.
So for the first three weeks, we're looking at purchased were looking down 14% versus prior year refi. We're looking at about 340 orders a day, that's down 39% from last year.
Okay very helpful.
Go ahead, Ken no that's it.
Okay, and then on the on the interim title Decisioning for purchase I felt like that's a side of the story that holds a lot of promise for you guys. I know it's very early stage you guys are also.
No it shouldn't be very conservative and kind of how you roll that out, but maybe if you could give us some kind of a really called out from early round of pilots and then what you might need to see to be comfortable and start to move that into a national expansion efforts and then also what the initiatives can do for your business over time is that is it more of a share gain kind of revenue driver or is it a efficiency gain in <unk>.
Margin driver.
Yeah, I'll I'll start on that John I mean, I think I think what we've seen from sort of our MVP effort that it is you know we're confident that it is ready for rollout as I meant as I've mentioned in my earlier comments.
In two.
In two counties at the beginning of next year.
But you're right. It is it is going to take some time, but I would anticipate that we will have a national a national rollout probably within the next couple of years and we will continue to roll out markets.
You know as you know as our development efforts progress and I think there's a couple of aspects of the of the product that will drive results fourth it will there will be efficiency gains and again the precise amount of that remains to be seen but we'll certainly see some efficiency gains in.
In the business, but I think a big part of it is just the improvement in the customer experience, which we think ultimately will drive market share gains customers want to know.
Early if there are title issues that are going to need to be resolved and we're going to be able to indicate to them.
Initially even before an order is placed whether or not there's going to be a title issue or whether or not we can issue a commitment.
Okay, great. Thanks for taking my questions guys.
Thanks, John .
Yeah.
Okay.
Again, if you would like to ask a question. Please press star one on your telephone keypad.
Next question comes from so.
All right.
Please go ahead.
Hey, good morning, guys. Thanks for taking the questions.
Mark maybe you want to just take a step back and think through you know title margin sensitivity here more long term. So obviously you have the investment that should moderate from here and that should help margins, but as we think about volume sort of stabilizing and maybe even improving next year. How are you sort of thinking about the lift that you could.
See right from that improvement because clearly you're able to write orders more efficiently today than in years past.
So that makes it sort of hard to look at the past as a precedent here.
So if you could just offer any sort of framework on how youre thinking my margins as volume sort of do end up sort of improving here.
Yeah. Thanks, Thanks for the question so.
Well first of all I'd say that for this year.
Last quarter, we talked about double digit margins entitled This year, and we stand by that I mean, we feel good about hitting that in a pretty tough economic environment. There's no question about that when we look at 2024, we expect margins to improve on 24, even if volumes are flat, even if volumes are flat because we've got a few tailwind.
You pointed out the strategic investments, they're going to be less of a drag next year. We also have efficiencies that were.
Wringing out of the business now that will help US next year and then we'll also have depending on what the fed does at least some tailwind with investment income next year and so even in a flat let's call it origination market.
We think we can improve margins.
The MBA has some pretty aggressive growth for mortgage originations if that happens we will look really good but even if we get half of that or a quarter of that growth, we should be even better. So we feel we feel like we'll definitely have margin expansion next year and then the question is well it depends on how good the market is.
Got it Okay and then in the in the second half here just on the success ratio.
So obviously seasonality wise volume should subside here, but is there any reason.
Outside that that your success ratio cannot sort of stay flattish or any other items that we should be thinking about in the back half here.
No I mean, there's no extraordinary items to think about for the first half of the year, we've been at 50%.
Again in our title segment and for the back half of the year, we think will be at around 50% I mean, it could be plus or minus a little bit, but 50% is what I would think for the second half and therefore, the full year as well.
Got it and if I could just squeeze one and Ken I just wanted to touch on commercial here for a second so it looks like at.
At least based on the <unk> there were some mix shift a little bit to the higher.
Larger deals as you look at your pipeline for the back half I mean, what sort of the mix looking like between small and large deals.
Well I think you I think we're anticipating particularly as you go into the into the fourth quarter, we're probably anticipating to have some more large deals, but I think on the ARPA going down I think it's I think it's less about mix and more about price discovery, which we which we take as a good sign obviously, we don't like to see our Arco go down, but we like to see that the price disk.
<unk> is going on because theres going to that that implies to us that once that's done.
Completely done there'll be a lot more transaction activity.
Got it thank you guys.
Thanks Bill.
Since there are no further questions. This concludes today's teleconference. You may disconnect. Your line at this time. Thank you for your participation and have a great day.
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