First American Financial Corporation (NYSE:FAF) Q1 2024 Earnings Call Transcript

First American Financial Corporation (NYSE:FAF) Q1 2024 Earnings Call Transcript April 25, 2024

First American Financial Corporation isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: 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-and-answer session will follow the formal presentation. [Operator Instructions] A copy of today's press release is available on First American's website at www.firstam.com/investor. Please note that this call is being recorded and will be available for replay from the company's investor website and for a short time by dialing 877-660-853 or 201-612-7415 and enter the conference ID 13745815. And we will now turn the call over to Craig Barberio, Vice President, Investor Relations to make an introductory statement.

Craig Barberio: Thank you, operator. Good morning, everyone and welcome to First American's earnings conference call for the first quarter of 2024. Joining us today on the call will be our Chief Executive Officer, Ken DeGiorgio; 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 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 yesterday's earnings release and the risk factors discussed on 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 risk 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 Ken DeGiorgio.

Ken DeGiorgio: Thank you, Craig. Market conditions in the real estate and mortgage industries continued to be a challenge in the seasonally weak first quarter. Elevated mortgage rates and low albeit growing inventory levels have caused transaction volumes to remain near historically low levels. During this period, we've maintained our focus on managing operating expenses, while continuing to invest in long-term strategic initiatives such as expanding our title plant assets and building technology solutions to increase efficiency, reduce risk and enhance our customers' experience. Although our financial results this quarter were a function of the tough mortgage origination market, we have recently started to see signs of a measured recovery.

In March, our open resale orders per day were up 5% and that positive trend has continued so far in April with open resale orders up 2%. Growth in our resale orders so far this year is the first positive change we've seen in this key market since June of 2021. We are also seeing improvement in our commercial business with open orders up 1% in the first quarter and we have seen further growth in April with open orders up 5%. Our home warranty segment had another strong quarter delivering a pre-tax margin of 19% and is positioned well for future growth. On our last earnings call, we stated that we expect modest revenue growth this year and that we can achieve title margins similar to what we posted in 2023. After closing the books on the first quarter and looking at the order pipeline in April, our expectations remain unchanged.

I'd like to take a moment to address the recent attention our industry has received from Washington D.C. This attention is the product of a broader effort, an effort at which all of us at First American wholeheartedly support to make the purchase of a home more affordable. The focus on our industry as part of this effort reveals however that as an industry we need to do a better job educating policymakers and other stakeholders about the critical role title insurance plays in protecting people's investments in their homes which are the primary vehicle for wealth creation for a majority of Americans. This role includes not only paying claims when they arise, but also the extensive work we do to correct title defects before the transaction closes.

The cost of which is not reflected in our industry's claims rate. This important curative work protects consumers and lenders, among others from hundreds of billions of dollars of title risk exposure per year. Moreover, title and settlement fees are among the smallest cost components over the life of a mortgage and as a result, are not a barrier to homeownership. The discussions in Washington are still in early stages, and we believe that ultimately, our industry will be successful in reaffirming the value of title insurance to policymakers. But irrespective, we are uniquely positioned to meet the demands of an evolving market because of our growing leadership in title data, which is fueled by our proprietary data extraction technology, our national closing at platform and deep distribution relationships, our extensive underwriting expertise, our commitment to and continued investment in cutting-edge technology such as Endpoint, our digital settlement platform and automated underwriting for purchase transactions and most importantly, our world-class workforce and culture which recently resulted in our recognition as one of the 100 best companies to work for by Great Place to Work and Fortune Magazine for the ninth consecutive year.

Though, we are the leader in the digital transformation of our industry, fundamentally, we are a people business, and it is the quality, talent and dedication of our people that ensure our company's long-term success. 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 earnings of $0.45 per diluted share. Our adjusted earnings per share, which excludes the impact of net investment gains and purchase related amortization was the same as our GAAP earnings at $0.45 per share as $0.07 of realized gains were offset by $0.07 of purchase-related amortization. Turning to our Title segment. Revenue was $1.3 billion, down 2% compared with the same quarter of 2023. Purchase revenue was up 2% during the quarter, driven by a 2% increase in the average revenue per order. Commercial revenue was $143 million, a 4% decline over last year. Though, our closed commercial orders fell 4%, the average revenue per order for commercial transactions increased 1%.

Refinance revenue declined 13% relative to last year. With mortgage rates hovering around 7%, they are still at levels materially above what is needed to generate a significant rise in refinance activity. In the Agency business, revenue was $564 million, down 5% from last year. Given the reporting lag in agent revenues of approximately one quarter, these results primarily reflect remittances related to Q4 economic activity. Our information and other revenues were $217 million, down 2% relative to last year. This decline was primarily due to an increase in the capture rate of title premiums from an affiliated title agent which caused a decline in information and other revenue and a comparable increase to direct premium and escrow fees. Investment income within the Title Insurance and Services segment was $117 million, down $8 million relative to the prior year due to lower average interest-bearing balances in the company's escrow and tax-deferred property exchange business that were partly offset by higher interest income from the company's warehouse lending business.

The provision for policy losses and other claims was $29 million in the first quarter or 3.0% of title premiums in escrow fees, down from the 3.5% loss provision rate in the prior year. The 3.0% loss rate reflects an ultimate loss rate of 3.75% for the current year with a $7 million release from prior policy years. Over the last several quarters, we have highlighted the margin drag in the title segment related to both endpoint and instant decisioning for purchase transactions. Together, these two strategic initiatives reduced our pretax margin in the title segment by 150 basis points this quarter. Pre-tax margin in the Title segment was 5.5% or 4.8% on an adjusted basis. These margins reflect a $6.2 million write-off of uncollectible balances impacting the margins by 50 basis points.

Total revenue in our home warranty business totaled $105 million, a 1% increase compared with last year. Pre-tax income in home warranty was $20 million, up 28% from the prior year. The loss ratio in home warranty was 42% down from 47% in 2023 driven by lower frequency and severity of claims. Adjusted pre-tax margin in the home warranty segment was 18.8%, up from 15.2% in 2023. The effective tax rate for the quarter was 19.9%, lower than our normalized rate of 24% due primarily to research and development tax credits recognized during the quarter. In the first quarter, we repurchased 58,600 shares for a total of $3.5 million at an average price of $59.37. Our debt-to-capital ratio as of March 31st was 30.3%. Excluding secured financings payable, our debt-to-capital ratio was 22.5%.

Now I would like to turn the call back over to the operator, to take your questions.

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