Welcome to
the First American Financial Corporation Second 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. Please press star 0 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 6,855201-six 127415, by entering the conference ID 13,721,369. We will now turn the call over to Craig Barberio, Vice President of Investor Relations, to make an introductory statement.
Good morning, everyone, and welcome to First American's earnings conference call for the Q2 of 2021. Joining us today will be our Chief Executive are Dennis Gilmore 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 this morning's earnings release and the risk factors discussed in our Form 10 ks and subsequent SEC filings. Our presentation today contains certain non GAAP financial measures that we believe provide have additional insight into the operational efficiency and performance of the company relative to earlier periods and relative to the company's competitors.
For more information 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 www.firstam.com. I will now turn the
call over to Dennis Gilmore. Thanks, Greg. Good morning and thank you for joining our 2nd quarter earnings call. All of our core businesses are producing strong financial results and we are optimistic that 2021 will be an outstanding year for First American. Today, I will focus my comments on the progress we are making on a number of key strategic initiatives and Mark will then provide details on our 2nd quarter results.
The process of buying a home is complex and involves multiple parties. First American sits at the center of the transaction, are coordinating among realtors, lenders and consumers to protect the integrity of the process. As the transactions become increasingly digital, First America is focused on leveraging our unique property data and technology to enhance the customer experience expect the process more efficient and secure for all parties. First American's data assets and process expertise provide a unique are in a competitive advantage. Last quarter, we announced our initiative to expand our title plans from 500 to 1500.
By building an additional 1,000 plants, our databases will cover approximately 80% of all real estate transactions. We've made significant progress since our launch. We are currently at 850 plants are on track to achieve our goal of 1500 by the year end. These additional plants are currently being built on a go forward basis and will accrue Due to our patented extraction process, First American is in a unique position to build these plants by a fraction of our historical cost. Plus, we are now capturing virtually every data point on 7,500,000 documents per month, up from 5,000,000 last quarter.
Data that can be leveraged to automate title underwriting decisions in geographic areas that were previously done manually. In addition to our data leadership, we are focused on developing digital solutions to improve the customer experience. Across the enterprise, we are developing next generation cloud based technology to make it even easier for our customers to do business with us. For example, our direct division recently launched IgniteRE, a platform that provides real estate professionals with enhanced productivity tools and enables them to manage transactions from open to close with buyers, sellers and settlement agents in a secure environment. Ignite RE and Clarity First, which we discussed last quarter, are two examples of technology investments we've made to strengthen our competitive edge and more will follow.
Both platforms make it easier to work with us and expand our customer relationships. To support our technology initiatives, we have hired 130 product managers, designers and engineers so far this year. These critical hires reflect our commitment to expand our position as the industry leading innovator. Turning to our venture strategy. Since 2019, we've invested $260,000,000 in venture backed companies in the PropTech ecosystem.
These investments give us insight into high growth technology companies, most of which have become strategic partners. In addition to providing strategic benefit, they are contributing to profits as well. Venture investments will continue to be a component of our capital allocation strategy. In closing, I'm confident that 2021 will be another strong year for First American. All of our core divisions are performing well and we have a healthy pipeline of business heading into the second half of the year.
Our balance sheet is strong and our strategy of focusing on data and technology to enhance the customer experience will continue to succeed. I'd now like to turn the call over to Mark, who will comment on our Q2 earnings. Thank you, Dennis.
We're pleased to report excellent results this quarter. We earned $2.72 per diluted share. Included in this quarter's results were $0.59 of net realized investment gains. Excluding these gains, we earned $2.13 per diluted share. I'll start with our title business.
Revenue in our title segment was $2,100,000,000 up 44% compared with the same quarter of 2020 Due to the strength of the purchase and commercial markets, purchase revenue was up 66%, driven by a 43% increase in a number of closed orders coupled with a 16% increase in the average revenue per order. Commercial revenue was $223,000,000 a 104% increase over last year. Large transactions have resumed as we closed 54 transactions in the U. S. With premium greater than $250,000 are up from just 12 last year.
This year, we expect a record year in our commercial business. Refinance revenue climbed 23% relative to last year as the rise in mortgage rates that occurred during the Q1 put pressure on 2nd quarter closings. On the agency side, revenue was a record $905,000,000 up 51% from last year. Given the reporting lag in age of revenues of approximately 1 quarter, we are experiencing a surge in remittances related to Q1 economic activity. Our information and other revenues were $298,000,000 up 31% relative to last year.
Revenue growth was primarily due to higher demand for the company's title information products in our data and analytics, commercial and loss mitigation business lines. Investment income within the Title Insurance and Services segment was $47,000,000 up 10%, primarily due to higher interest income from the company's warehouse lending business and higher average balances in the company's investment portfolio, are partially offset by the impact of the decline in short term interest rates on the company's tax deferred property exchange and escrow balances. In our title segment, pre tax margin was a record 19.1%. Excluding the impact of net realized investment gains, pre tax margin was 16.3%. Turning to the Specialty Insurance segment, pre tax earnings totaled $20,000,000 up are from $7,000,000 in 2020.
Revenue in our home warranty business totaled $108,000,000 up 10% compared with last year. Pretax income in the home warranty business was $14,000,000 a decline of 13% in part due to elevated claims expense. Our property and casualty business generated pretax income of $6,000,000 this quarter. Included in this quarter's results With a $12,000,000 gain on the sale of our agency operations. At the end of the second quarter, our policies have declined by 22% at the beginning of the year and we expect a 70% decline by year end.
The full wind down of the property and casualty business is on track to be completed in the Q3 of 2022. The effective tax rate for the quarter was 24.0 percent, in line with our normalized tax rate. Cash flow from operations was $253,000,000 in the 2nd quarter, down from $344,000,000 in the prior year due primarily to the deferral of estimated tax payments allowed by taxing authorities during the height of the pandemic in 2020. With respect to this information security incident, as we previously disclosed, we reached a settlement with the SEC for $487,616 The New York Department of Financial Services matter remains ongoing. We continue to believe that it, along with all other matters relating to the incident, will be immaterial.
As Dennis mentioned in his remarks, we've invested a total of $250,000,000 in venture backed companies. This quarter, we recorded a $44,000,000 gain related to our investment inside, a real estate SaaS company that serves real estate agents, teams and brokers. Our largest investment has been in OfferPen, an iBuyer that is now party to a merger with SPAC, which recently announced that the value of the aggregate equity consideration to be paid to Offerpad's stockholders and option holders will be equal to $2,250,000,000 At that valuation, we would expect to book a gain of approximately 237,000,000 are on our $85,000,000 equity investment. We expect this merger to close later this year. Due to the growth of our venture portfolio, we have expanded disclosures in our Form 10 Q, which we expect to file later today.
These disclosures will include the cost, unrealized gains and carrying amount of our non marketable equity securities as well as information on concentration of these securities. We remain optimistic about our 2021 outlook. Although refinance orders have declined corresponding to an increase in mortgage rates, the purchase and commercial markets remain strong, Our claims experience is favorable and the general improvement in the economy is a tailwind to our business. 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. The confirmation tone will indicate your line is in the question for participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please while we poll for your questions. Our first questions come from the line of Bose George with KBW.
Hey, everyone. Good morning. Actually, first, just on the commercial. Mark, can you repeat what you said just on the large transactions? You said 50 for transactions with premium greater than I missed a dollar amount, and you compared it to last year.
Just curious how that compared to 2020. And then just in commercial, I guess, can you just talk about where you're seeing the strength? Because presumably this is happening without sectors like office coming back.
Yes. Well, why don't I start? This is Dennis. The numbers Mark referenced are commercial transactions, large transactions over 250, were 54 in the quarter, up over 4x from
a year ago. But you
have to compare it. Last year in 2020, that 1st year the Q1 of the pandemic, so probably a tough comparison there. So the second part of your question then was we're up across All geographic areas, almost all product types. Commercial is really strong right now, as we mentioned in the scripts. It's likely we'll will be very strong with the rest of the year, probably trending towards a record performance in commercial.
Okay, great. Thanks. And then Can you just remind us what goes through that default and other line for order counts? This was up the last couple of quarters, and I assume that's not being driven by default. Just curious what's the breakout in there?
Yes, it's just
it's a lot of
our default All orders go through that line item, including loss mitigation. We're doing a lot of loss mitigation work for lenders right now. So it's really default in loss mitigation.
Okay. So that is picking up the foreclosure moratorium.
I'm sorry, specifically the earnings, it's not foreclosure work right now, it's a lot of making it are open.
Okay. Great. Thanks a lot.
Thank you. Our next questions come from the line of John Campbell with Stephens. Please proceed with your questions.
Hey, guys. Good morning. Congrats on a solid quarter.
Thank you.
So on the expansion of the title plans, that's exciting for you guys. I guess the question here is, How should we be thinking about just the net effect of those? I think
you said
1.5 or 1500 plants over the next several years. Is there a good way to thinking about that over the next couple of years, is there a good way to kind of frame up the incremental revenue opportunity versus maybe just the potential production cost savings, anything you can provide there?
Yes. John, let me take a cut at that. It's really we're highlighting the strategic benefits we have with our data and our process component across the company. So you start with we've got the The largest public record databases now, we've really accelerated the growth there. We've mentioned it before that we've got some very unique patented extraction technology, which allows us to basically capture every field off of the document, image and image script.
So last quarter, we were extracting $5,000,000 components from the document this quarter is $7,500,000 So basically anything on the dock we can take now and we're building the plants. That's when we get to the plants. So we mentioned earlier last early last quarter that we're going to run it up to 1500 plants. We're now at 850. We'll be on track to hit 1500 by the end of the year.
Now we're building these, John, on a go forward basis. So they're going to accrue benefit for us on the years to come as they become richer and deeper. But we have the technology to point it backwards if we need it. So bottom line, it's a little hard to quantify for our analysts right now, but what it will allow us to do is to accelerate our total automation, leverage our data are fully aware of our assets.
Okay. That's helpful. And then Dennis, I've got a bigger picture industry question for you, but it just seems like every day we're seeing non bank originator, just somebody in the value chain, just looking to launch a title offering. And then, of course, you got the iBuyers. It's almost like they have to make that attachment work over time.
But to me, it just seems like the end result, if that's all effective, is maybe just a mix shift from direct agency, and not really disintermediation, but I'm just curious about how I guess, first, how difficult do you think the attach rates are for those newer players? And then Secondly, whether you think that trend is a positive, negative or maybe just a neutral over the long haul?
Yes. I'll start, John, with ebbs and Over the years, right? So this is not a new phenomenon for us and it has that deployed over the years. Right now, you do have a lot of people entering, so we'll have will move from direct to agency. We don't try to fight that at all.
We actually try to support it and embrace it. You see that in our venture strategy that many of these companies are partners for us, so we can deploy title assets or title information to or data. So either way it goes there. And I think it will continue to ebb and flow probably as the market gets a little more normalized or difficult, maybe it's not as attractive as we go forward. But it's something again, at the end of the day, we don't fight.
We actually encourage and support no matter how somebody wants to distribute the product.
Okay. That's helpful. If I could squeeze in maybe just one more for Mark here. On the Specialty Insurance segment, once you kind of clear out the P and C contributions, You're left with obviously just the warranty business. How should we be thinking about that kind of underlying margin going forward?
So once you clear out the P
and C business and it's going to take a little bit of time The lineup will be complete in the Q3 of next year. But when it's left, effectively, we're going to just have a Home Warranty 7. And as we've talked about over the years, We're really high on the home warranty business. But when you look at In the Q2, we had an operating margin of 9%. That excludes investment income.
Once you layer on investment income, It's more like 11% to 12%. And Q2 is typically a tough quarter for us, right, because we're getting a lot of claims, a lot
of air conditioners throughout
the 2nd quarter. But through through the cycle and through the seasonality of the year, the margin typically are somewhere between the range of 13% to 15% on a normalized basis. And you'll see that, Again, once the settlement begins coming. And John, this
is Dennis. I'd only add, you'll see in our disclosures that we broke out the performance of both home warranty and PNC, So our investors can get a better sense of what home warranty will look like when we're done wrapping up the P and C business.
Okay. That's perfect. Thank you, guys.
Thank you. Our next questions come from the line of Mark DeVries with Barclays. Please proceed with your questions.
Yes, thanks. I had a follow-up question on the commercial volumes. Those larger transactions tend to be pretty lumpy and episodic. As you look at your pipeline, though, does it look like this is kind of consistent with that Kind of lumpiness or do you actually see sustained strength as you look out through the end of the year on those larger transactions?
Yes, we do see sustained strength. The deals you're really referencing to, I'd reference them to kind of mega deals. But when we talk about the large deals, those are just, if you will, normal large deals and that strength we think will continue through the rest of the year.
Okay, great. And then on the purchase side, I think Mark highlighted that the fee per file was up about 16% year over year, which is actually kind of consistent with home price appreciation, Yeah. But you normally get about half of that. So are you seeing a positive mix benefit here where more of the purchase is also coming from just Higher priced markets that's driving your fee up kind of in line with home price appreciation?
Yes, we are. And just I mean overall, the market are very strong right now. Even on this topic, by the way, we're very optimistic. Rachel, demographics are positive for us. We had a very strong spring selling season.
I'll say in July right now, we're starting to trend a little more towards, I call it, a seasonal market. We're probably down about 6% on the load counts right now in July. And also we think that the purchase market also is starting to stabilize a little more, normalize if you will. The inventories are kicking up a little bit. We're seeing less crazy bidding wars will probably see less property appreciation in the year for the next year or so.
And all of those trend to us is Positive sign, not a negative. It makes the market more sustainable than normal. So we think it's going to be a really good second half of the year and we think
In revenues in info and other might be more cyclical as opposed to you taking share.
Well, it's hard to say because in for other as we know is a collection of businesses. When we look at the biggest drivers of the growth This quarter, the biggest driver was commercial business. So we actually grew in for another $15,000,000 just because of commercial business that we did that is Property reports and exchange fees and commercial due diligence and things like that. And so obviously, we've got tailwinds in commercial. The 2nd biggest driver was loss mitigation in our servicing business.
So as we talked about foreclosure moratoriums are here at least until the end of this month, but lenders are doing a lot of loss mitigation work and we're the beneficiary of that. So I would say that's somewhat And the 3rd biggest driver was our data and analytics business. And we've just got a lot of momentum in the data analytics business, both because of volumes but also because we're doing a really good job of licensing our data to different parties and growing that. So it's kind of a mix of things.
Okay, great. Thank you.
Thank you.
Thank you. Our next questions come from the line of Geoffrey Dunn with Dowling and Partners. Please proceed with your question.
Thanks. Good morning. Dennis, I wanted to follow-up on your comments initially about working on developing next gen cloud platforms and are hiring a bunch of people to develop cloud and digital efforts. Can you maybe give some more specific examples of areas you're focused on? There's been talk, obviously, last couple of quarters, front end, back end experiences, all that kind
of stuff. And the other question
I have is, as you develop these modules, do they sit naturally on the FAST system? Or
is the
FAST system something you're also investing in? It's been your kind of core system for years. I'm just curious if that's transitioning along with these other cloud initiatives.
Yes. Thanks, Jeff. We're going to talk a little bit about more about these issues just so people know what we're up to. And that's why we mentioned all the developers and engineers we're hiring. Think of the FAST system as a system of record and Clarity First, IgniteRE, others.
We've got these type of systems that are going to be the customer interface that are being built out in every division. We've highlighted just 2 of them for the investors right now. We're building out new front ends across the enterprise right now to have a more enhanced digital experience coming to the next gen from how we think the digital experience will occur and we're going to continue to do that, Jeff. So that's what we're talking about right now. We build out Clarity and Azul to Ignite RE, we've done again going across all of our divisions.
So that's going to be an ongoing effort. We see the business are moving into a digital future and we believe we're leading that and we're going to continue to lead that effort. So that's how we're thinking about that acknowledge and I think we've talked a lot about the data and how that effort is driving greater innovation for us and greater title automation also.
Thank you. Our next question comes from the line of John Campbell with Stephens. Please proceed with your questions.
Hey, guys. Thanks for the follow-up here. I think I might have missed this, but could you run through the July to date purchase and refi trends on the resi side? Yes, John, sure. So, so far in July, on the purchase side, we're opening about 2,300 purchase orders a day that's open.
And on the refinance side, we're almost, it says, a little bit below $1700 a day. We interesting, the 1st week or so with refinance, we were about 1400, 1500. We have seen a pickup just in the last 2 days with rates moving. But to answer your question, for the month to date in July, we're on the 1700. Okay.
And I don't know if you have the clarity in the system or if you guys have insights onto the price side, but It looks like that all systems are still a go on price growth. Any kind of sense for what that's looking like in July so far? That's not something we track, kind of intra month, so we don't have like a month to date. But there's no question we've got We've got a tailwind in terms of fee profile on the Freeport side. Okay, great.
That's very helpful. Thank you, guys.
Thanks, John. Thank you. There are no additional questions at this time. And with that, this does conclude 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 201-612-7415
and by entering the conference ID 13,7201,369. The company would like to thank you for your participation. This concludes today's conference call. You may now disconnect.