Greetings, and welcome to the First American Financial Corporation Second Quarter Earnings Conference Call. At this time, all participants are on 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.firstam.com/investor. Please note that the call is being recorded and will be available for replay from the company's investor website, and for a short time by dialing 877-660-6853 or 201-612-7415, and enter the conference ID 13747727. We will now turn the call over to Craig Barberio, Vice President in Investor Relations, to make an introductory statement.
Good morning, everyone, and welcome to First American's Earnings Conference Call for the second quarter of 2024. Joining us on 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 also 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 yesterday's earnings release, which is available on our website at www.firstam.com. I will now turn the call over to Ken DeGiorgio.
Conditions remained challenging in the second quarter. We benefited from the seasonal pickup in demand. Total revenue was $1.6 billion, and our adjusted earnings per diluted share were $1.27. Our Title segment delivered an adjusted pre-tax margin of 11.9% this quarter, compared with 12.6% last year. The spring selling season proved to be disappointing.
Our closed orders were up less than 1% compared with last year, as affordability issues, high mortgage rates, and elevated home prices suppressed demand. Despite the muted transaction activity, tight inventory conditions led to home price appreciation, resulting in a 4% increase in our direct purchase revenue. Challenging conditions continue into the third quarter, with open purchase orders down 3% through the first three weeks of July. Closed refinance orders were down 5% in the second quarter. Refinance activity picked up as the quarter progressed. The double-digit open order growth we posted in June has so far accelerated in the first three weeks of July, with percent of direct revenue in the second quarter. Our commercial business is stable in the face of continuing uncertainty in the market. Closed orders were down 2% in the second quarter.
For the first three weeks of July, while open orders are up 4%, we expect the ongoing uncertainty to weigh on our commercial business in the third quarter. We remain optimistic, however, that we will see a meaningful rebound in activity in the seasonally strong fourth quarter. Our home warranty segment again delivered strong results, with an adjusted pre-tax margin of 15.2%. Though our real estate channel is facing the same headwinds we are seeing in our title company's purchase business, we are increasing our emphasis on the direct-to-consumer channel, which we expect to drive increased profitability over the long term. Turning to the progress we have made on our long-term strategic initiatives, First American is the undisputed leader in title data, with the most comprehensive, accurate, and timely data assets in the industry.
While for years we've leveraged these data assets to automate underwriting of refinance transactions, we have had early success in our efforts to extend the competitive advantage of these assets to purchase transactions. In April, we successfully launched an ongoing pilot of automated underwriting for purchase transactions, which is much more complex and heavily dependent on title data. This initiative, which we call Sequoia, was launched in Maricopa and Riverside counties with a goal of rendering an insurable title decision for at least 50% of residential properties. At Endpoint, we have successfully built a next-generation settlement platform for transactions. Going forward, we will focus on further enhancing this technology and deploying it in the broader organization.
Over the long term, we expect that Sequoia, Endpoint, and other initiatives will enable us to service our customers faster and more efficiently than the competition... On our last earnings call, we indicated that we expect modest revenue growth this year, which will enable us to achieve title margins similar to what we posted in 2023. After closing the books on the first half, in the second half of the year, and in particular, the fourth quarter. 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 generated earnings of $1.11 per diluted share. Our adjusted earnings [audio distortion] amortization was $1.27 per diluted share. Turning to our title segment, revenue was $1.5 billion, down 1% compared with the same quarter of 2023. Purchase revenue was up 4% during the quarter, driven by 9% 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 $616 million, down 1% from last year. Given the reporting lag in agent revenues of approximately one quarter, these results primarily reflect remittances related to Q1 economic activity.
Information and other, and other revenues were $241 million during the quarter, down 1% compared with 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 in direct premium and escrow fees. Investment income was $126 million in the second quarter, down $16 million compared with the same quarter of last year. The decline was primarily driven by lower average interest-bearing escrow and tax-deferred property exchange balances, partly offset by higher interest income from the company's warehouse lending business.
The provision for policy losses and other claims was $35 million in the second quarter, or 3.0% of title premiums and escrow fees, down from the 3.5% loss provision rate in the prior year. The second quarter rate reflects an ultimate loss rate of 3.75% for the current policy year and a net decrease of $9 million in the loss reserve estimate for prior policy years. Pre-tax margin in the title segment was 11.7%, or 11.9% on an adjusted basis, excluding both net realized gains and purchase-related amortization. Total revenue in our home warranty business totaled $107 million, unchanged compared with last year. Pre-tax income in home warranty was $17 million, up 15% from the prior year.
The loss ratio in home warranty was 46%, down from 49% in 2023, due to lower claim severity that was partially offset by higher claim frequency. Adjusted pre-tax margin in the home warranty segment was 15.2%, up from 12.9% in 2023. The effective tax rate for the quarter was 23.2%, in line with our normalized tax rate of 24%. In the second quarter, we repurchased 752,000 shares for a total of $41 million at an average price of $54.14. Our debt-to-capital ratio as of June 30th was 29.7%. 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.
Thank you. We will now be conducting a question-and-answer session. If you would like to ask a question, please 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 queue. For participants using speaker equipment, it may be necessary to pick up your handsets before pressing the star key. One moment, please, while we poll for questions. Our first question comes from the line of Mark Hughes with Truist Securities. Please proceed with your question.
Yeah, thank you very much. The direct-to-consumer channel, what motivated that? What kind of impact could that have on profitability? Is that going to be a kind of upfront expense load? Curious about that.
Yeah. Yeah, thanks for the, thanks for the question, Mark. I, I mean, you know, a big part of what motivated is just looking to diversify the business, you know, given the pressures that I had mentioned in my opening comments on the real estate channel. You know, they're facing the real estate channel, which is, you know, selling home warranties in connection. There's, there's a -- there was, there was an opportunity, and this has been ongoing for years, but there was an opportunity to pursue the, you know, the direct-to-consumer channel, which, you know, is obviously also a product of the fact that there's a lot of green space in the, in the home warranty, in the home warranty business.
There's a lot of homes that aren't covered by home warranties, and one of the ways to capture that, one of the best ways to capture that is with the, in the direct-to-consumer channel. I think the implication of your question is right. There's an upfront investment associated with direct-to-consumer. It takes... You know, you need to get into the renewals to really start realizing the profitability of the DTC channel.
Then on the Sequoia initiative, what are the implications in terms of revenue per order? You know, if you're successful there with instant decisioning, what does that mean in terms of the, you know, kind of the revenue opportunity going forward?
Well, you know, Mark, I'll point out that, you know, as I mentioned in my comments, that we're, this is at the pilot stage, very, very early, and we just rolled out the pilot in April, so it's very early to tell. But we think there will ultimately be, you know, real revenue opportunities associated with Sequoia because, you know, the feedback we get from customers is they want things done. They want to know if there's a title issue faster, and we can tell them with Sequoia instantly in Riverside County. And then there will obviously also be, you know, efficiency gains if the pilot ultimately proves successful.
And then the commercial, you expressed optimism about the fourth quarter, but maybe hedged a little bit on 3Q. Did I hear that right? And what motivates that, maybe a little more tempered view on 3Q?
Well, I mean, we look at 3Q as coming off of Q2. You know, and as I mentioned, you know, closed orders were down 2% in Q2, revenue was down. You know, we did see open orders tick up in July in the first three weeks 4%. But, you know, just based on what we're hearing and a little bit of the trend we saw in Q2, I think that you guys may be more optimistic than we are on Q3. But we are very optimistic on Q4.
You know, we saw in Q2, for example, a shift to refinance, which tells me that they're starting to work out some of the issues, particularly in office, you know, on loans that have been coming due. So that's, you know, that's a sign that things are starting to move a little bit. And we also saw increases in Q2, both year-over-year and sequentially in [audio distortion] along.
Appreciate that. Thank you.
Thank you. Our next question comes from the line of Mark DeVries with Deutsche Bank. Please proceed with your question.
Yeah, thanks. My first question is a follow-up on your last comments, Ken. On the optimism for the fourth quarter, are those last two factors the main reason, or are there conversations you're having that kind of make you optimistic about how, you know, with clients on how the end of the year is shaping up in terms of transaction size and velocity?
Yeah, I mean, it's a little bit of both. It's conversations, it's the, you know, the factors I just described. I think it's an expectation that we might get some interest rate reductions, which I think are big, but, you know, I think the forward curve is anticipating, you know, three rate reductions before the end of the year. But of course, you know, as I've said in the past, the forward curve is never accurate. But, so it's a little bit of all of those things. And then obviously talking to our own people about what they're seeing in the pipeline and what their expectations are. But listen, I'm getting weary of trying to predict what the commercial market is going to do because there's a lot of volatility and a lot of uncertainty, but we are optimistic.
Okay. Fair enough. And then Mark, I was hoping to get an update from you on, you know, the efforts you kind of talked about on the last call to defend your deposits, some of the migration that you're going away, whether that was through offering a little more rate. Could you just give us an update on what happened over the last quarter?
Yeah, sure. So, first of all, you know, our investment income came in in line with our expectations. I mean, we talked on the last call about how we expected $120 million-$125 million of investment income in the title segment for the rest of the year, and we came in at the high end of that range, which is kind of right in line with where we thought. At last quarter, we talked about how 30% of our escrow deposits, we don't capture any economics from, for different reasons. And it stabilized this quarter, so in Q1, that number was 30%, in Q2, it was 29%. So I mean, it's stabilized, and our initiatives haven't even really kicked in yet. We just started kicking them in in July.
So, the benefit that we got was really just market driven this quarter, and the initiatives that we have to defend these deposits and to provide more incentive for customers to use our own banker are just now starting to kick in. So we feel good that things have stabilized on that front.
Okay, great. Thank you.
Thanks, Mark.
Thank you. Our next question comes from the line of Soham Bhonsle with BTIG. Please proceed with your question.
Hey, guys, Soham Bhonsle here. Hey, guys, hope you're doing well. Just following up on that, the last question, Mark, on NII, it sounds like, you know, in the back half, I mean, I guess it sounds like you've put in some things in place in July. Should we then expect, maybe interest income or any costs to go up there as you defend these deposits? And then what's the outlook for the back half year on NII?
So, there are a few things going on. For the second half of the year, we think right now it'll be at the lower end of that range, somewhere around $120 million a quarter for Q3 and Q4. And there's really two reasons for that. The first is, we lost the last of Home Point loans, our Home Point loans, on July 1st. And with Home Point loans came $300 million of deposits. So we no longer have any of the Home Point loans, and there's $300 million of deposits that we were basically earning Fed funds right at, that left our bank as of July 1st.
So there'll be a, you know, a few million dollar drag there on investment income for the third quarter, but there's gonna be a corresponding reduction in interest expense, too. So in terms of pre-tax, it's really not gonna have an effect. And then when we look to the fourth quarter, if we actually do get 3 rate cuts in September and November and December, December won't really matter much, but that will put a little bit of pressure on investment income too. So when we look at it now, you know, we still feel like we'll be, you know, $120 million a quarter for Q3 and Q4 because of those factors.
Okay. Then just back to title margins, I was hoping to maybe understand the cadence of margin progression from here in the back half, because obviously last year you had the cybersecurity issue, and so we can't really use that as sort of the base for the fourth quarter. But if I look back to sort of, you know, the fourth quarter of 2022, you did a 10.9% margin, and that was still in an environment where I think, you know, commercial volumes were pretty decent. So yeah, any thoughts on cadence for margins in the back half would be helpful as well.
A lot of it's gonna depend on, you know, what Ken talked about, was just how, you know, how strong is the commercial market. I would just say that, you know, in a typical year where we don't have significant refi activity, Q2 is the peak of our pretax margins, and we think that's gonna be the case this year, too. So we expect, you know, our normal seasonal decline in title margins as we progress through the year, as refi out there. And again, ultimately, it will depend on how strong the commercial market is. But we feel like margins will sort of peak in Q2 this year.
Okay. And then, Ken, just last one on Endpoint. I was hoping maybe you could share, you know, whether that's recent wins or any anecdotes from customers that have, you know, used the technology that sort of helps illustrate, you know, the appetite for what you're sort of building here. And then should we think of Endpoint more as, you know, like, one plus one equals two, or, you know, is there gonna be any sort of cannibalization and call it the regular way of doing title longer term?
Yeah, I mean, I'll say sort of generally, the customers that have experienced Endpoint, you know, have liked the platform and liked the approach that Endpoint is taking. But, you know, keep in mind that it's a pretty small, you know, sort of direct revenue base with, you know, with Endpoint. And the focus on Endpoint going forward, you know, you know, in addition to operating as a standalone business is, as I mentioned, further enhancing the capabilities of Endpoint, but then deploying it in the broader organization. And we think that's where the real opportunity lies, is in making our broader organization more efficient.
This is just, just not in the area we have talked about in the past, mainly what we call Jot, which is, you know, mobile notary management, but in the, you know, the production side, the operations side of the, of the broader title company. So I think it'll make us more, It promises to make us more efficient, so I-
All right. Thank you.
Thank you. Our next question comes from the line of Bose George with KBW. Please proceed with your question.
Hey, guys, good morning. Actually, I don't know if you gave this already, but what was the margin impact from instant titling and Endpoint? And then from Sequoia, should we think of any margin drag, you know, from that as that builds out?
Thanks for the question, Bose. Yeah, so the margin drag for—I mean, historically, we've, we've reported sort of Endpoint and Sequoia bundled together, and, and that number was 140 basis points drag this quarter. So it was slightly better. I think it was 150 basis points last quarter, and we think that over time, it will, it will, you know, continue to creep down.
Okay. And, actually, the 140, that was Endpoint and Instant Titling, or was that with Sequoia in there, or, or is that for Sequoia going forward?
So Sequoia is our instant decisioning-
Oh, thank you.
-for purchase transactions.
Oh, that, yeah.
Okay.
Automated transactions.
Yeah.
Okay, perfect. And then actually just switching over to investment income. You know, when I look at just the breakout, like, just through your call report, I mean, it looks like the bank's contribution to investment income, it looks like it may be about a quarter of it is coming from the bank versus the rest that, you know, on your own balance sheet. Is there a way to think about how much of the investment income is, you know, is from the bank versus, you know, not from the bank?
Yes. Give me one second here. There's a long pause here, Bose, but it'll be worth it. I got your answer. So this quarter, we had $126 million of investment income, and $44 million of that came from the bank. The rest is really, the majority of it is just our investment portfolio from, from our insurance companies, both onshore and offshore. I mean, that's, you know, just our fixed income portfolio. And we also have investment income from our escrow deposits that are third-party banks, too. That's most of it.
Okay, great. Thank you.
Thanks, Bose.
Thank you. Our next question comes from the line of Terry Ma with Barclays. Please proceed with your question.
Hi, thanks. Good morning. So I think you guided to similar margin for full year 2024 as full year 2023. As I look at kind of revenue performance in the first half, it was kind of down 1%-2%. So do you need to see a re-acceleration in revenue growth in the back half to hit that margin guide? It sounds like y ou're a little less optimistic on Q3, but a little bit more optimistic on Q4. So just wondering how to think about that?
For the margin guide that we've given in terms of margin similar to last year, we talked about having, you know, moderate and or low single digit revenue growth. So we'll need, you know, 2% revenue growth to have margins similar to last year. That's what - that's our current expectation.
Got it.
Which would imply some, you know, some acceleration in revenue in the second half relative to the first.
Okay, got it. And then on the investment income of $126 million, this quarter, it was a little bit above the high end. Was there anything episodic in there? I think you mentioned, some contribution from the warehouse lending business. Do you expect that to continue for the rest of the year?
Yeah, that's a good point. I mean, we were a little bit higher than our top end of the range because of the warehouse lending business that's growing and doing great, and we think that will continue. So yes, we're going to continue to have benefit from warehouse lending. And there wasn't anything that was really like one time in investment income that caused you know us to be above the range. It was just you know really strong performance.
So the $120 per quarter guide is mainly just an adjustment Home Point coming out?
Home Point is really the exclusive reason why investment income, we think, will be down in Q3. And then in Q4, a little bit because of, you know, what's expected to be declines in the Fed funds rate.
Okay, great. Thank you.
On the purchase orders, the open orders down 3%, thus far in July. I'm curious about how that's kind of looked week to week. Maybe if you start in mid-June. I'm just curious if it's been a kind of steady deceleration or if you had a, you know, a notable drop down in June and then it's kind of held that level.
So when you look week to week, the first week in July, our purchase orders were down 7.5%. The second week, we were down 0.5%, and the third week, we were down 1.5%.
Okay. That's helpful. And then back to the investment income, Mark, you know, last earnings call, I think, I think you called out the metric of, like, 30% or so of the deposits not earning interest. I don't, I don't know if you have this on hand, but any sense for what the investment income upside is if you're able to get that back kind of to the teens level that you had in the past?
I don't have that on me here, John, but what I'd say is that the investment income forecast that we've been talking about here, this $120 million, that assumes that 30% number, well, it's really 29% here in the second quarter. That assumes that stays flat. So, you know, we don't expect that to change significantly until we have, you know, lower Fed funds rates. We can move that on the margins with some of these initiatives we're doing to provide more incentive. But if that 30%-29%, 30% number falls, that's just upside to our guidance on investment income.
Okay. And then, I guess it's maybe at the risk of oversimplifying it, on lower rates, it diminishes that competitive edge that some of your competitors have, and the ability to offer higher rate. Is that fair to say?
That's right. For if you're talking about for the banking of the tracked deposits, that's correct.
Okay. And then last one for me on Home Point loans. Mark, I think you mentioned that basically everything rolled off July 1. You talked to the investment income impact, but is there another revenue impact? I'm thinking about the off-boarding fees, if there was anything sizable in the quarter.
There'll be some, I would just say, some de minimis impact to Information and other because of, you know, the fees that we charge for servicing loans. You won't really see it because ServiceMac continues to grow, we continue to sign new customers. You won't really see it because it's going to be immaterial. But there will be about a $3.5 million deboard one-time fee that we collected in July, which will hit Q3.
Okay. Very helpful. Thank you.
Okay. Thanks, John.
Thank you. Our next question comes from the line of Mark Hughes with Truist Securities. Please proceed with your question.
Yeah, thank you. I wonder if we could just get a kind of a regulatory update, the CFPB, the pilot project, that sort of thing. Any updated view you might have would be great.
Yeah, thanks for, thanks for the question, Mark. You know, there's probably not, you know, not a lot of update, I think, from the last quarter. I mean, on the title waiver program, you know, the Fannie request for proposal is out. You know, I think there's been a lot of pushback on the title waiver program from legislators, the state attorneys general, and the like. So I think there's a lot of political pressure coming down on Fannie's regulator in particular. But, you know, it—I think it remains to be seen there.
With the, you know, with the CFPB, their request for, you know, for information, on, you know, on whether or not they should, you know, prohibit lenders from passing on the cost of title insurance, I mean, that RFI is out. Our, you know, our trade group and other trade groups are responding. You know, on that, I'll say our opinion is that's, you know, probably bad for consumers. There have been a lot of push over the years to increase transparency, and now this will decrease transparency to consumers. And I think it'll probably increase costs to consumers, but it, it feels like the CFPB wants to push ahead. But at the end of the day, it's not going to necessarily be bad for us. In fact, it might actually be good for us.
I mean, we have a strong centralized lender program that should enable us to perform well in the event that the CFPB goes in the direction I think they want to go. So we're, you know, as always, we're watching these, you know, these things, you know, carefully, but it's evolving still.
Thank you.
Thank you. And our next question comes from the line of Soham Bhonsle with BTIG. Please proceed with your question.
Hey, Ken, just quickly on home warranty. It sounds like you're continuing to invest in that business, but I kind of want to understand the strategic rationale for holding it longer term. And I think earlier this quarter, there was a pretty sizable acquisition in this space that what looks like a pretty healthy multiple. And I know there's some differences between your business and theirs, but maybe just talk to us about what keeps you interested in the home warranty business, and then, you know, maybe potential to harvest some of that cash in the future, and maybe redeploy that into title or capital return if you guys sort of choose to do so.
Yeah, thanks, thanks for the question. I mean, you know, there's clearly home warranty is probably the furthest from our core title and settlement business, though I know it is a settlement business in connection with purchase transactions. But, you know, we like it, I think for a lot of the reasons that I mentioned in response to, you know, one of the earlier questions. I mean, the home warranty market is dramatically underpenetrated. So we think there's you know, a real opportunity to seize that market. You know, and the deal you mentioned, yeah, I mean, it was a sizable multiple, and that was, you know, for 2-10. But that company was primarily, you know, selling warranties into on new home construction.
It wasn't even really a risk-taking business. So it's hard to compare our home warranty company and what we would typically think of as home warranty companies with, with that business.
Great. Thank you.
Thank you. There are no additional questions at this time. This 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 877-660-6853 or 201-