Q4 2024 First American Financial Corp Earnings Call
Greetings. Welcome to First American Financial Corporation's fourth quarter and full year 2024 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. Should anyone 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.firstam.com.
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1-375-1214
Speaker Change: We will now turn the call over to Craig Barbiello, Vice President Investor Relations, to make an introductory statement. Please go ahead.
Speaker Change: Good morning, everyone, and welcome to First American's fourth quarter and year-end 2024 earnings call.
Speaker Change: Joining us today on the call will be our Chief Executive Officer, Ken DeGiorgio, and Mark Seaton, Executive Vice President and Chief Financial Officer.
Speaker Change: 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.
Speaker Change: Risk and uncertainties exist that may cause results to differ materially from those set forth in these forward-looking statements.
Speaker Change: For more information on these risks and uncertainties, please refer to yesterday's earnings release and the risk factors discussed on our Form 10-K and subsequent SEC filings.
Speaker Change: Our presentation today also contains certain on-gap 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.
Speaker Change: For more details on these non-GAAP financial measures, including presentation width and reconciliation to the most directly comparable GAAP financials, please refer to yesterday's earnings release, which is available on our website at www.firstam.com.
I will now turn the call over to Kenneth DeGiorgio.
Kenneth DeGiorgio: Thank you, Craig. 2024 continued to be a challenging year for our industry, particularly in the residential purchase and refinance markets.
Kenneth DeGiorgio: Relatively low inventory, elevated home prices, and mortgage rates hovering around 7% have together produced a home sales market that is as low as we've seen since the mid-1990s.
Kenneth DeGiorgio: High mortgage rates have also kept refinance volumes at trough levels.
Kenneth DeGiorgio: Through this ongoing downturn in the market, we have maintained our commitment to invest in the business.
Kenneth DeGiorgio: making considerable progress with our strategic initiatives while remaining focused on expense management with an emphasis on optimizing our information technology environment.
Kenneth DeGiorgio: Despite these generally challenging conditions, at the end of the year, we did, however, benefit from a surge in our commercial business and began realizing the full benefit of our strategic investment portfolio rebalancing project.
Kenneth DeGiorgio: In all, we delivered an adjusted pre-tax title margin of 10.3% for the year.
Kenneth DeGiorgio: In the fourth quarter, we delivered excellent results. Title premiums and escrow revenues were up double digits across all key business lines, highlighted by 47% growth in our commercial revenue.
Kenneth DeGiorgio: In our commercial business, we saw broad-based strength across all asset classes, with industrial and multifamily leading the way.
Kenneth DeGiorgio: Our investment income of $155 million in the title segment exceeded our expectations.
Kenneth DeGiorgio: And our success ratio was 51% this quarter on net operating revenue growth of 25%, reflecting our continued focus on expense management and the benefit of scale in our business.
Kenneth DeGiorgio: Our adjusted pre-tax title margin for the quarter was 11.8 percent.
Kenneth DeGiorgio: Our home warranty segment had a good quarter, posting revenue growth of 4% and an adjusted pre-tax margin of 18.2%.
Kenneth DeGiorgio: During the quarter, we continued to invest in our direct-to-consumer channel, which accounted for 42% of our contracts written in 2024, and which we expect will improve profitability as the lifetime value of these new policies is realized over time.
Kenneth DeGiorgio: Turning to the outlook for 2025, while we are planning for mortgage rates to remain elevated, we expect modest improvement in both the residential purchase and refinance businesses.
Kenneth DeGiorgio: Though still early, we are already seeing this in our results.
Kenneth DeGiorgio: For the four weeks ending February 7th, our purchase orders were up 1% and our refinance orders were up 43% compared with the same period in the prior year.
Kenneth DeGiorgio: Our commercial business is off to a strong start with revenues up 24% in January.
Kenneth DeGiorgio: We expect our commercial business will have a good year, with revenue growth weighted to the first half of the year, given the 33% increase experienced in the second half of last year.
Kenneth DeGiorgio: On the whole, 2025 will be another year of earnings improvement in what looks to be the early stages of the next real estate cycle.
Kenneth DeGiorgio: In closing, I would like to comment on the widespread damage and devastation from the recent wildfires in the Los Angeles area, which unfortunately directly impacted several of our people and customers. Our thoughts are with them and the many others who have suffered through this terrible event.
Kenneth DeGiorgio: Our company's roots in Southern California and the greater Los Angeles area date back over 135 years. So all of us at First American feel a responsibility to help our colleagues, neighbors, friends, and families cope with this tragedy.
Kenneth DeGiorgio: Our company, along with many of our employees, have responded to that call. I want to thank our people for all they have done to provide support and relief to those affected.
Mark Seaton: Now I'd like to turn the call over to Mark for a more detailed discussion of our financial results.
Mark Seaton: Thank you, Ken. This quarter we generated gap earnings of 69 cents per diluted share. Our adjusted earnings, which exclude the impact of net investment losses and purchase related amortization, was $1.35 per diluted share.
Mark Seaton: Turning to our title segment, revenue was $1.6 billion, up 22% compared with the same quarter of 2023.
Mark Seaton: Purchase revenue was up 18% during the quarter driven by an 11% increase in closed orders as well as a 5% improvement in the average revenue per order.
Mark Seaton: Commercial revenue was $252 million, a 47% improvement over last year. Our closed orders increased 4% while our average revenue per order surged 39% due to broad-based strength across both asset class and transaction size.
Mark Seaton: Refinance revenue climbed 75% relative to last year due to a 68 improvement in closed orders. Refinance accounts for just 5% of our direct revenue and highlights how distressed that market continues to be with mortgage rates around 7%.
Mark Seaton: In the agency business, revenue was $698 million, up 23% from last year.
Mark Seaton: Given the reporting lag in agent revenues of approximately one quarter, these results reflect remittances related to Q3 economic activity.
Mark Seaton: Information and other revenues were $238 million during the quarter, up 13% compared with last year, due to growth in Canada, commercial, and the data and analytics business.
Mark Seaton: Investment income was $155 million in the fourth quarter, up $23 million compared with the same quarter of last year, primarily due to the strategic portfolio rebalancing project we executed in the third quarter, which has helped us grow our investment income despite three Fed rate cuts.
Mark Seaton: The provision for policy losses and other claims was $38 million in the fourth quarter or 3.0% of title premiums and escrow fees, unchanged from the prior year. The fourth quarter rate reflects an ultimate loss rate of 3.75% for the current policy year and a net decrease of $10 million in the loss reserve estimates for prior policy years.
Mark Seaton: Adjusted pre-tax margin in the title segment was 11.8% excluding both net realized losses and purchase related amortization.
Mark Seaton: Total revenue in our home warranty business totaled $103 million, up 4% compared with last year. The loss ratio in home warranty was 44%, unchanged relative to 2023.
Mark Seaton: Adjusted free tax margin in the home warranty segment was 18.2% compared with 19.9% last year. Included in this quarter's results were $6 million related to a change in estimates.
Mark Seaton: of Earned Premium Revenue, which negatively impacted both revenue and pre-tax income.
Mark Seaton: The effective tax rate in the quarter of 27% was driven by a valuation reserve against deferred tax assets partly offset by the recognition of research and development tax credits.
Mark Seaton: This resulted in a reduction of $0.03 per diluted share when compared to the company's normalized tax rate of 24%.
Mark Seaton: Our debt-to-capital ratio as of December 31st was 30.8%. Excluding secured financings payable, our debt-to-capital ratio was 23.9%. Now I would like to turn the call back over to the operator to take your questions.
Thank you.
Speaker Change: If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue.
Speaker Change: and for participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment while we poll for questions.
Speaker Change: Our first question is from Mark DeVries with Deutsche Bank. Please proceed.
Mark Devries: Yeah, thanks. Wanted to drill down on the results in the commercial business in the quarter.
Mark Devries: Just trying to get a sense of the true breadth of the recovery here and also kind of what it implies for the go-forward growth rate on the business.
Mark Devries: And, you know, we feel pretty good about the commercial business as a whole. I mean, the trends are great. I mean, in Q3, our revenue was up 19%, in Q4, as we mentioned earlier, it's up 47%, and in January, so far, it's up 24%.
Mark Devries: We've got some confidence that there's going to be strength, overall strength, in the commercial market and strength in our commercial business. Now keep in mind, as I mentioned in my comments, that when you go to the second half of the year, you're going to be comparing it to the second half of a really strong 2024.
Mark Devries: commercial revenue was up 33% but you know on the whole at least you know what we're hearing and the surveys we're seeing we feel we feel we feel pretty good about the about the commercial market.
Speaker Change: Or do you kind of view growth as decelerating quite materially? I'm just trying to get a sense of the cadence across the four quarters.
Speaker Change: I mean, listen, we feel like we can grow, but there's so much uncertainty in the market between interest rates and the broader economy that it's hard to predict. But we feel like we can grow, even off of...
Speaker Change: even when compared to, again, our really strong second half of 2024.
Speaker Change: Okay, great. And just one last on this topic for me. Just wanted to get a sense of what you think really caused this dramatic step up in the back half of the year. I know we've been talking about
Speaker Change: You know, the market's at some levels being kind of locked up as parties looked, you know, for real visibility on where transactions would clear. Have we kind of reached a tipping point now where buyers and sellers have found equilibrium and pent-up demand is really getting pulled through?
Speaker Change: Yeah, well, I mean, I think there was a couple of factors going. I think, you know,
Speaker Change: I think price discovery is probably further along than it's ever been, so the market is starting to settle a little bit, and that will continue on, I think, into next year.
Okay
Great, thanks for the comments.
Speaker Change: Our next question is from Terry Ma with Barclays. Please proceed.
Thank you. Bye. Bye.
Terry, please check and see if your line is muted.
Speaker Change: You know, in 2024, X, any net realized losses, you guys did about kind of six percent, but most of it, you know, came in the back half and particularly in the fourth quarter.
Speaker Change: And you did indicate where you believe we're in the early stages of a real estate cycle. I think Fannie and MBA are projecting anywhere from 8 to kind of 9 percent purchase volume growth for this year.
Speaker Change: So any way to help us kind of think about kind of what the revenue growth expectations for the title business are this year?
Speaker Change: We break it out in markets, Terry. We feel like we're going to have growth, you know, similar to where the NBA is standing. I mean, obviously, it's hard to say, but I think somewhere in that range makes sense. I think on the refi side...
Speaker Change: It's probably even harder to say. We're going to have more growth in refis than purchase this year, the way things are going. But it's off such a low base, it's probably not that material. And then Ken just kind of talked about the commercial business growth. So those are our three major markets.
And the good news for us is we've got tailwinds
Speaker Change: You know, it's still early, it's hard to say, but we feel confident that we'll grow in all those three markets, which are the most important ones to us.
Speaker Change: Got it. That's helpful. And then I guess, you know, if those expectations play out, how should we kind of think about margin expectations? Should we be kind of modeling or thinking about kind of like the success ratio?
Speaker Change: You know, I'd say, Terry, you know, that keep in mind, despite, you know, some very challenging markets over the last two years, you know, we've had a 10% margin.
Speaker Change: I think if we get these, you know, sort of modest tailwinds that we've been talking about and, you know, we get some improved investment income and we'll continue controlling costs that, you know, we should be able to improve margins at least commensurate with the market.
Okay, great. Thank you
Speaker Change: As a reminder, there's star 1 on your telephone keypad if you would like to ask a question.
Boss George: Our next question is from Boss George with KBW. Please proceed.
Thank you.
Boss George: Hey guys, good morning. I just wanted to follow up on the the margin question. So I mean, I guess with the restructuring
Mark Devries: Actually, can you quantify the benefit there on the margin, so all else equal, what would that have pushed up the margin, and then I assume the increases you talked about are kind of above that level, is that right?
Mark Devries: We talked about how we would get $67 million of benefit because of that. And so we've gotten some benefit in Q3. We got the full run rate here in Q4.
Mark Devries: And so when we look in 2024, everything else will be equal. We'll get about a $42 million investment income pickup and pre-tax income pickup.
Mark Devries: because of the portfolio rebalancing project. And that's compared to this year. So 2025, we'll have $42 million more investment income than we did in 2024 because of the rebalancing project.
Speaker Change: Okay and I mean if I back of the envelope that seems like that would be
50-ish basis points to the margin.
Does that seem right?
Speaker Change: Okay, and so then and then just going back to Ken's comment about the improvement in margin being commensurate with the market So like like so this year you guys did 10.3% margin
Speaker Change: you know so we could add the 50 and then is it some improvement over that is that kind of the the building blocks to the margin in in 2025?
Speaker Change: Yeah, I think it's probably, you know, at least that. I mean, we could get some lift, too, from additional cost control and potentially additional improvements in investment income if we are able.
Speaker Change: for example, to capture additional deposits from other channels we're looking at. So it's, yeah, it's at least commensurate with the market.
Speaker Change: Okay, great. Actually, and then just one on investment income. You know, that number was up obviously quite a bit this quarter. Just can you talk about the run rate for that number in 2025?
Speaker Change: Yeah, well, so when we were on this call, you know, in Q3, we really guided to like 140 to 145 million investment income in Q4.
Speaker Change: Because of the there was a lot of you know noise with a rebalancing project and we came in at 155 million So we're 10 million higher than the high end of our forecast. So we really outperformed
Speaker Change: our own expectations in Q4, mainly because commercial was so strong. So commercial deals were stronger than what we expected. We hold escrow deposits in connection with these commercial deals. We can earn investment income with connection to these commercial deals. So that was all positive. So we look next year.
Speaker Change: For the full year of next year, you know, we feel like we're going to grow investment income on the one hand. We've got the the The 42 million dollar benefit that we just talked about from the portfolio rebalancing project The negative though is we have had three rate cuts here
Speaker Change: in the fourth quarter, and who knows what the Fed's going to do next year. But we at least have a $45 million headwind going into next year because of the Fed rate cuts.
right.
Speaker Change: So those two kind of wash out, but we still feel like we're going to grow investment income because of...
Speaker Change: The market's going to grow, commercial's going to grow. We feel like we can grow our warehouse lending business and shift some more strategic deposits to the bank.
Speaker Change: So we expect growth and investment income on a year-over-year basis. When you look at the quarters though, we expect
Speaker Change: our investment income to drop Q4 to Q1 just because of seasonality. We're just holding less escrow deposits, investment income is going to fall in Q1, but there is a seasonal factor to it. But on a year-over-year basis, we expect growth.
Okay, great. Thank you.
Thanks both.
Speaker Change: Our next question is from John Campbell with Stevens Inc. Please proceed.
John: Hey guys, good morning. Congrats on a great quarter. Morning. Thanks, John. Good morning.
Speaker Change: Hey, so you guys obviously put up, you know, really good title pre-tax margin expansion. You're lapping a, you know, a pretty disrupted 4Q last year. But if I look at the prior year, so fourth quarter 2023, you guys, oddly enough, put up the exact same level of title revenue, you know, x gains and losses.
Speaker Change: that higher margin commercial rep too, but the main difference was obviously the investment income is about 23 million higher this year.
Speaker Change: I think some might look at that and say you guys should be put up with higher margins and I believe, you know, a lot of that, or a portion of that...
Mark Devries: Higher investment income does get offset by higher title interest expense. So Mark, I'm hoping maybe you could just clear that up, walk through the mechanics there, and then talk to the sensitivity of the bank-driven investment income to interest expense offset.
um
Yeah, thanks for that, John.
Thank you.
Mark Devries: So, first of all, in terms of the offset, most of our investment income is driven by
Mark Devries: our investment portfolio and our escrow deposits. I mean, those are the two big drivers. There's other drivers.
Mark Devries: including our warehouse lending business, which does have an offset to interest expense.
Mark Devries: you know, a cost of funds too. But most of its, the biggest piece is driven by, the portfolio there is no offset on interest expense there. So you're right there, you know, some of the growth we saw here in Q4 was because of our warehouse lending business and there's a corresponding, you know, offset on the interest expense side.
You know in terms of
our performance versus, you know, two years ago.
Mark Devries: 2023 was still a tough year. I mean, the market was still in decline.
Mark Devries: and we were still in the process of cutting expenses and so there just is a lag there. I think when we look today at our, you know, 51% success ratio, I mean, we're obviously coming out of the trough and we're proud of, you know, how we've been managing our expenses here and we still feel like we can, you know, hit those success ratios going into next year.
Speaker Change: Okay that's helpful and then on the escrow driven upside from commercial activity is there a rule of thumb I know it probably is not exact here but for every million or call it 10 million whatever it is for commercial revenue how much of an upside that typically provides for investment income?
Thank you.
There's no...
Speaker Change: There's no rule of thumb here. I mean, we're typically getting let's call it fed funds on our deposits
Speaker Change: Commercial deposits. I mean some of those deposits we get to keep for our benefits some of those deposits We don't get to keep because investors want to put it at third-party banks for different reasons. So there's
Speaker Change: There's really not a rule of thumb. I mean, the way we model it internally is all of our escrow deposits. I mean, I think that, you know, getting fed funds is that the rule of thumb. But in terms of how it translates from, you know, commercial revenue to investment income, it's tough. There's just a lot of different factors going on.
Speaker Change: Yeah, I can appreciate that for sure. And one more here on the info and other line within title, a good bit better than we expected. I'm just hoping to get just kind of a broad update there. I know Service Mac, you know, you had some revenue headwinds there. I saw deferred revenue was actually up.
Mark Barberio, Kenneth DeGiorgio, Mark Seaton
Yeah, so the three big drivers are...
Speaker Change: The biggest driver was our international business and rates have come down in Canada.
Speaker Change: And there's more refis There's been you know, there's a hundred seventy five basis point reduction in rates in Canada, which is really driven refis So that's that's the biggest driver there close to that though is There's a it will I'll just call it US title. So there's a lot of
Speaker Change: business do we get that's not premium related, right? It's just property reports and other, you know...
services and products that we provide that aren't risk-based.
Speaker Change: that go into that line item. And so as we've seen growth in commercial and resale and refi, we're naturally going to grow info and other just because of our non-risk-based products.
Speaker Change: And then the third component that really drove it was growth in our data and analytics business, which we've been growing for quite some time now. So those are the three big drivers in Info & Other.
Speaker Change: Okay, and I mean it's not a huge part of the business so it might not matter too much here, but any kind of clarity on the pre-tax margin kind of profile for that segment or for that sub-segment?
Thank you.
Speaker Change: Ten business units here and every business unit has you know a slice of info and others So it's really not a standalone business. It's just a it's really it really represents the non risk-based revenue that we have in all of our business units
So we don't have, there's not one margin for it.
Understood. Thanks guys. Thanks John.
Thank you.
Speaker Change: Our next question is from Mark Hughes with Truist Securities. Please proceed.
Yeah, thank you. Good morning.
Speaker Change: Morning. Mark, you'd mentioned a six million dollar change in estimates. Did that flow 100% to the pre-tax line?
Speaker Change: It did, yes. And it's really deferred, so it hit the fourth quarter, and we'll recapture it over 2025. But yes, it did hit revenue and pre-tax.
Speaker Change: Okay, any comment on the office market? Sounds like commercial is firing on all cylinders. Does that include office?
Mark Devries: Office, Mark, wasn't a big component of our commercial revenue last quarter, but it is coming off the sidelines, particularly suburban office. But there is an increase, I think, in office activity.
Thank you.
Question on the home warranty when I think about
Mark Devries: You've seen good growth in direct to consumer. It looks like the time on market is going up, the inventory is going up, and maybe that motivates some sellers to...
Mark Devries: Yeah, absolutely. I think as you get to a more buyer-driven purchase market, you'll see more activity in home warranty. In fact,
Speaker Change: The real estate channel, again, that's the sales in connection with the purchase and sale of property was a driver of our performance in the fourth quarter for home warranty. So I think your theory on that is right. As you go into a buyer-driven market, you'll see some sprinkles added in with home warranty.
Great. Thank you very much.
Thanks, Mark.
Speaker Change: There are no additional questions in the queue. That will conclude this morning's call. We would like to remind listeners that today's call will be available for replay on our company's website.
or by dialing 877-660-6853.
or 201-612-7415.
Speaker Change: and enter the conference ID 13751214. The company would like to thank you for your participation. This concludes today's conference call. You may now disconnect.