Greetings, and welcome to the First American Corporation's Third Quarter 2021 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. As a reminder, this conference is being recorded. It is now my pleasure to hand the call to Craig Barberio, Vice President, Investor Relations for a brief introductory comment.
Thank you, Craig. You may begin.
Good morning, everyone, and welcome to First American's Earnings Conference Call for the Q3 of 2021. Joining us today on the call will be our Chief Executive Officer, Dennis Gilmore our President, Ken DiGiorgio 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 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 this morning's earnings release, which is available on our website at I will now turn the call over to Dennis Gilmore. Thank you, and good
morning, and thanks for joining our Q3 earnings call. First American has again delivered outstanding financial results. All of our core businesses continue to perform well and we've made progress on a number of strategic initiatives. Today, I'll discuss a few of those initiatives and then Ken will provide an update on Current order trends and business outlook. And Mark will conclude by providing details on our Q3 results.
As I've said before and it's worth repeating, First American is laser focused on innovation. As real estate transactions become increasingly digital, We are leveraging our unique data assets and technology to enhance the customer experience and to make the settlement process more efficient for all parties. One of our largest initiatives was the launch of Endpoint in 2018. While Endpoint is wholly owned by First American, it is ByDesign also a native digital startup committed to reimagining the closing experience for buyers, sellers and real estate professionals. Endpoint has captured a 3% market share in its initial market of Seattle and currently operates in 11 additional markets across California, Texas and Arizona, and we plan to add more markets in the near future.
A major factor in Endpoint's success has been its ability to attract world class tech talent. Endpoint has approximately 100 product managers, Engineers and designers and plans on doubling the team over the next 12 months. Fully embracing the tech ethic of continuous improvement, Endpoint often releases enhancements to its technology designed to further improve efficiency. As a result, Endpoint is increasingly becoming The first choice of digital forward companies, including those in the Proptech ecosystem. Given this track record, earlier this week, we announced an additional $150,000,000 commitment to Endpoint.
Endpoint will use these funds to continue to hire the best tech professionals, further improve the digital closing experience and expand its capabilities for PropTech Companies and digitally forward real estate professionals. We are about to close our previously announced acquisition of ServiceMac, an innovative mortgage subservicer with unique solutions. Founded in 2017, ServiceMac will complement our title and closing operations and over time will add assets to our trust bank and will enhance our ability to provide additional offerings to lenders and servicers. Turning to our venture portfolio, we continue to believe our investment Strategy is creating both value strategically and financially. We've made direct investments in 16 companies in the PropTech ecosystem.
Through these investments, we have gained valuable insights of these companies, many of which have become strategic partners. Financially, our investments generated $278,000,000 of gains this quarter led by Offerpad, which went public via SPAC in September. Based on the strength of the real estate markets and our strategic position as an innovator in the title and settlement space, In August, we announced 11% increase in our dividend. And our Board also approved an additional $300,000,000 share repurchase authorization. I will now turn the call over to Ken to discuss our recent order trends and our outlook.
Thank you, Dennis. As you mentioned, Our business continues to perform well. And with the strong real estate market, we expect these trends to continue. So far in October, commercial orders are up 14% over prior year. And while our residential purchase orders At 2,000 per day are down 7% compared to an unusually strong October 2020.
They are up 11% compared to October of 2019. As expected, given the recent uptick in mortgage rates, Refinance orders have fallen from $1700 per day in September to $1500 per day in October. That said, our outlook for the remainder of this year and into the next is positive. The housing market remains healthy. And although home price appreciation is expected to moderate, which will impact the growth in average revenue per order we've experienced recently, We expect purchase volumes to continue to grow as demand remains strong and more supply comes on to the market.
Our commercial business continues to experience an elevated amount of activity as deals that were delayed in 2020 due to the pandemic are now closing, and we believe uncertainty around tax law changes could be pulling certain deals forward into this year. Despite these tax uncertainties, we expect that a favorable economic backdrop and relatively low interest rates We'll deliver another strong year in commercial in 2022. While we expect residential refinance volumes to continue to decline as Mortgage rates increase. We believe we will be able to offset this decline with increased investment income generated by our bank and from escrow deposits. During the last cycle, growth in investment income more than offset the decline in refinance revenue.
I'll now turn the call over to Mark for a more detailed review of our financial results.
Thank you, Ken. We're pleased to report excellent results this quarter. We are in $4 per diluted share. Included in this quarter's results were $1.85 of net realized investment gains. Excluding these gains, we are in $2.15 per diluted share.
I'll start with our title business. Revenue in our title segment was 2,100,000,000 Up 21% compared with the same quarter of 2020 due to the strength of the purchase in commercial markets. Purchase revenue was up 9%, driven by a 12% increase in the average revenue per order. Commercial revenue was a record 262,000,000 An 84% increase over last year. Large deals are up as we closed 89 transactions in the U.
S. With premium greater than $250,000 up from 31 last year. We continue to expect a record year in our commercial business. Refinance revenue declined 36% relative to last year as mortgage rates have risen since the beginning of the year. In the agency business, revenue was a record $999,000,000 up 38% from last year.
Given the reporting lag in agent revenues of approximately 1 quarter, we are experiencing a surge in remittances related to Q2 economic activity. Our information and other revenues were $308,000,000 up 9% relative to last year. Revenue growth was primarily due to higher demand The company's title information and loss mitigation products. Investment income within the Title Insurance and Services segment was $50,000,000 up 11%, primarily due to higher average balances in the company's investment portfolio. In our title segment, pretax margin was 16.4%.
Turning to the Specialty Insurance segment, revenue in our Home Warranty business totaled $108,000,000 up 7% compared with last year. Pre tax income in Home Warranty was $9,000,000 up from $4,000,000 in the prior year. The loss rate in Home Warranty has fallen from 64% to 57%, and we believe many of the factors that triggered elevated claims at the onset of the pandemic are reversing. Our Property and Casualty Business had a pre tax loss of $11,000,000 this quarter. At the end of the Q3, our policies in force have declined by 49% since 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 25.3%, Higher than our normalized tax rate of 24% due to higher state taxes related to investment gains realized in the quarter. As Dennis mentioned in his remarks, we've made direct investments in 16 venture backed companies in the PropTech Industry. The $292,000,000 of capital we've invested into this effort had a market value of 669,000,000 As of September 30, this quarter, we recorded $278,000,000 of gains related to our venture investments. The largest gain was from our investment in Offerpad, an iBuyer that recently merged with a spec.
During the quarter, we recognized A $195,000,000 gain related to Offerpad. This investment is subject to a high degree of market volatility and we expect that we expect to impact our quarterly results. In addition to Offerpad, we also realized a combined 79,000,000 of gains related to our investments in Orchard, a company simplifying home buying and selling Sunday, A real estate marketplace for sellers of dated or damaged property and Picasso, a platform enabling people to buy and co own a second home. Beginning this quarter, we had moved all our venture related activity to our corporate segment. Prior to the 3rd quarter, Realized investment gains from our venture portfolio were recorded in the title insurance segment.
In the Q3, we increased our share repurchase authorization by $300,000,000 and had $463,000,000 remaining on our authorization as of September 30. During the quarter, we repurchased 208,700 shares for a total of $14,000,000 at an average price of $67.37 Cash flow from operations was $399,000,000 in the 3rd quarter, up 27% from the prior year. In addition, we raised $650,000,000 of a 10 year senior notes at a 2.4% interest rate. We expect to use our cash on hand to fund acquisitions in our core title and settlement business in adjacent markets, invest in innovative solutions such as Endpoint and return capital to shareholders. Our debt to capital ratio as of September 30 was 28.5% Or 22.7 percent excluding secured financings payable, slightly higher than our target ratio of 18% to 20%.
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. One moment please while we poll for questions. Thank you. Our first question comes from Mark DeVries with Barclays.
Please proceed with your question.
Yes, thanks. I was hoping, Dennis, if you could elaborate more on some of the more recent investments you've made. I think you provided some good color, but I just want to hear more about what some of these businesses do, How they fit within your strategy? And then more broadly, how you think about exiting these eventually? At what point after equity events like you experienced this quarter, do you look to exit?
Mark, you're specifically talking about our venture investments? Yes. Yes. Okay. Just kind of a recap, we've got 16 right now.
And we look at them really from 2 angles, Both strategically and then secondarily financially, and they performed very well financially for us. In the quarter, we had 278,000,000 Okay. So that's great. But more importantly for us, it's a strategic fit. We want to continue to invest in the Proptech ecosystem in our world.
We want to get closer and closer to those customers. They become strategic partners in many cases and customers for us and we'll continue with that activity. Now the second part of your question is, our strategy is longer term will likely be not holding concentrated positions in public companies, But we're in a lockout period right now on Offerpad, so we'll evaluate that in the future.
Okay. Are there with that specific example, are there ongoing business synergies that would cause you to keep it and ongoing learnings? How do you think about those kind of partnerships versus just kind of more financial investments?
The overlay would be None
of them are just financial. So they all have a strategic component. Specifically referencing Offer Cab, we're very close to A large customer for us, a very good strategic partner. So we'll weigh all of that together when we look about lowering Our ownership position in public companies, but they are close partners.
Okay, great. And then just one question on commercial. I think You alluded to the fact that it feels like some of the volume you're seeing is a pull forward of volume just because of potential Tax changes, could you just talk about what it is that kind of caused you to come to that conclusion what you're seeing? And then given that potential tough compare, what's kind of behind the optimism for next year?
Yes, Mark, this is Ken. Thanks for the question. I mean, I think a lot of what we're seeing with respect to the pull forward is probably By and large, anecdotal what we're hearing on The Street. You'll begin around the expectations with respect to tax changes. And with respect to the outlook, I don't think we'll probably achieve the exalted heights that we've Our commercial business in the Q3.
But as I mentioned, we do expect to have a strong remainder of the year and going into 2022 and there really are a handful of factors. The economy is strong. We expect that to continue. And while interest rates are picking up a bit, From a historical perspective, they're still pretty low. And then thirdly, there's a lot of capital still chasing deals.
So again, all those factors together, notwithstanding some of this pull forward, we're pretty optimistic on commercial for again the rest of the year and into
Got it. Thank you. Thank you. Our next question comes from Bose George with KBW. Please proceed with your question.
Hi, everyone. Good morning. Actually one follow-up on the venture investments. Are you guys still seeing opportunities out there to do incremental stuff on that side? And then just on Endpoint, The revenues for that going forward, is that going to be through the corporate segment or where does that flow through or will it flow through?
Hey, Bose. This is Mark. We are still seeing opportunities in Venture. I mean, so far year to date, we $100,000,000 of cash to work in Venture. The deals get more expensive.
There's more money chasing fewer deals. And so there's I would say there's fewer, but we're still finding opportunities and we'll see more of that in the Q4 here too. In terms of endpoint, all of the endpoint revenue And financials go through the title segment. So it's just it's really immaterial from a revenue perspective today, but it's growing quickly. But to answer your question, it's all in the title segment.
Okay,
great. Thanks. And then actually I know you guys don't really like to guide on margins, but just a little color would help. I mean you've Noted commercial and from purchase will remain strong. Investment income helps offset declining refis.
But just in terms of your guided sort of margin range, it's still kind of 11% to 13% and you're obviously running well ahead of that. So Just curious any color on where we could think margins could go?
Well, yes, I'll start
with that, Beau. So the margin Guidance that we've given in the past is really dated. I mean, we talked about 13% margins in the past, but that was given a certain Origination environment that we've really blown past. So when we look at margins going out to 2022, I mean, There's positives and negatives, right? I mean, we feel like the purchase market is still going to be very strong.
We think the commercial market is going to have a good year. We're always eking out efficiencies in our business. You've seen us generate for the most part increased margins for the most part every year because we continue to drive efficiencies. All that is positive. The negative obviously is refi.
I mean, we're not we don't expect at least to have a strong as of a refi next year. So that's going to be a headwind. And then we always spend more on technology. So when you mix that together, I mean revenue should be very similar to where it was in 2021 and the margins are also a function of the mix of business. Commercial is a very high margin business.
Agency is a great business for us with its low margin. But one thing I'd point out too longer term is that we've got A catalyst when it comes to investment income. So we're not really sure when the Fed is going to increase, but when the Fed does increase, we've talked about how we're going to generate $12,000,000 to $15,000,000 of annualized investment income every time the Fed raises. And given where our deposit levels are, It'll be on the high side of that because their deposit levels have just risen. So that's a little bit how we think about margins in the future.
Okay, great. That's helpful. Thanks.
Thanks, Buzz.
Thank you. Our next question comes from Geoffrey Dunn with Dowling and Partners. Please proceed with your question.
Thanks. Good morning. Good morning.
I was wondering if you could give maybe some specific revenue color on the influent other line and title. That continues to show good growth and it certainly looks like it's less sensitive to volumes, We're making it, again, obviously, a bit more difficult to project. So can you give us some rough breakdowns or specific breakdowns in In terms of the different offerings in there to give us a better line of sight on how it could perform out in 2022, 2023?
Yes, Jeff, this is Mark. So, as you know, I mean, there's a lot of Different businesses and information other line item, it's not like it's one business, it's a lot of different businesses. We're very happy with the growth there. I mean, we had a 9% growth rate This quarter, it's less than what we saw in the direct and agency, for example. And there's a few reasons for that.
Most of the revenue there, well, not most of it, but when I call it a few buckets here, this quarter we had about $92,000,000 of revenue related to Our data business, that's the kind of the biggest chunk of revenue. We've got DocuTek in there, about $25,000,000 of revenue. We also have a lot of title information reports that we sell, right, where It's not risk based. There's no claims associated with it, but we sell property reports. We sell search packages and other things.
We had about $70,000,000 or so of that type of business where we're just selling non risk based Title reports and so on and so forth. And then our international business had about $45,000,000 of revenue for the quarter. So there's other things, but those are the biggest buckets.
So when we look at the sensitivities, is can you talk about each one?
I mean, is The data business,
is that really track your order flow and real estate demand? Kind of go maybe through those 4 buckets and And give an idea of the sensitivity to volumes versus being less sensitive?
Well, I would say, the property reports are very tied Just order counts. And for the most part, these businesses really are tied to order counts, right? So when you look at DocuTek, we're going to get paid for every transaction. It's not like we get paid 2.5 times for a purchase transaction and a refi like we do with Tata Premium. Same thing goes for our data business, right.
Data business, There's minimums involved, right? But if they go over our minimum monthly contracts and they're going to then our customers pay kind of Per hit, right, per order, right. So none of the businesses in info and other really get that 2.5 times leverage that we see. So I would say as a general statement, the way to think about it is based off of orders as opposed to premiums like we see on the title business.
Jeff, this is Dennis. I'd just add, there'll probably be a little headwinds here in these businesses. They're still going to perform very well, but there'll be a little headwinds in the next couple of quarters probably with the refinance And that's going to impact the transaction side only.
Okay, helpful. Thanks. And then I wanted to just talk about Cash a bit. First, the cash balance of the HoldCo given that you did that big debt base this quarter. But also, I'm guessing that The gains this quarter were really balance sheet gains, not cash gains per se.
But how are you thinking about monetizing these investments? And then in turn, what you do with that cash? Is that going to be something that can be is it going to largely be reinvested in the business? Can people expect that a lot of these gains could be passed through to shareholders, particularly when you're talking about such big gains on these ventures? And then just generally, I know you typically are reluctant to give any specifics on your capital redeployment, but you re upped your buyback.
And it just seems like you're flush with cash right now. So can you just elaborate on those few things?
Yes. There's a few things there, Jeff. I'll start on that. So today we've got $714,000,000 of cash at the whole of the company. You saw we did this $650,000,000 senior notes deal.
We have 2 bond deals coming due in the next 2 years. We've got our February 23s. We've got our November 24s. That's $550,000,000 of debt Coming due in 2 years. We did this bond deal really as kind of an opportunistic trade.
We just were monitoring market conditions. We felt like it was just too good to pass up. So cash is fungible, right? But when you look at where we've spent the cash and where we intend to spend the cash,
One of the things we
did in the 3rd quarter is we put $140,000,000 into our bank to capitalize our bank. The bank deposits have been growing quite rapidly. I mean, at the beginning of the year, Our average balances were $4,000,000,000 Today, there's $7,000,000,000 And with our bank, every time our deposits go up by $1, we have to put $0.07 of capital in and we're very happy to do that. In this rate environment, the bank is making a 10% after tax ROE and we really take very little risk on the asset side And that's just going to improve when rates rise. So we put $140,000,000 in the bank.
We'll probably do another $25,000,000 to $50,000,000 in the Q4. We also have a pretty robust acquisition pipeline, and we're not ready to announce anything here today. But the next quarter or 2, I think most of that cash That we have at the holding company will go toward acquisitions in the next quarter or 2. So that's something that we kind of have in the pipeline. In terms of monetizing the venture investments, first of all, they're all at the holding company.
They're not trapped anywhere. And they're also long term. As you know, they're very illiquid, most of them, right? So it's all excess capital and really how we're going to Think about deploying that when it does convert to cash at some point, is we're just going to be opportunistic like we always are. I would suspect that we're going to Return more capital to shareholders in the future than we have in the past, but we'll also look to grow our business.
So we just kind of we're opportunistic about it.
Okay. I got a couple more, but I'll jump
back in queue. Thanks. Thanks,
Our next question comes from John Campbell with Stephens Inc. Please proceed with your question.
Hey, guys. Good morning.
Good morning, John.
Hey, I just want to touch first on the title plan expansion efforts. If you guys can maybe just kind of give us a sense Where you are relative to that original plan of, I think, 1,500 for the year, I think that's 80% or so coverage of the U. S. To give you an idea of where we are as far as that goal and then I don't know if there's plans to eventually go to 100%, if that makes sense or not. John, thanks
for the question. We're right on track actually. The Q3, we had 1300 new go forward plants. We'll hit our objective of 1500 by year end. Again, John, their go forward class, we're using our extraction technology that's just completely changed our ability to do this at a Completely different economic model than we have historically.
So we'll hit our 1500 objective. The second part of that question, will we go to 100% coverage? No, that's really going to be subsets questionable in the sense that we'll have to be opportunistic. We're starting to really get into the very small counties at that point. So the 80% allows us to have the level of automation long term that we want for our title automation objectives.
So bottom line, on track, continuing to grow, doing well.
Okay. That's helpful. And then if I'm thinking about this correctly, I think you guys are Generating kind of immediate savings as you open up those plants, but you're kind of recycling that back into further plant expansion. So just give us a sense for, I guess, average cost per plant expansion and then, if you can maybe frame up the associated cost savings with each?
Yes. I'll start. Mark may come in on it, but it's pretty de minimis, John. It's from the size of our company, our technology such now that it doesn't cost us much at all We put a new plan online like this on a go forward basis on a 1 or 2. We're kind of hitting on 2 things here.
We're not doing this for a cost savings play, If you will, per se, what we're really doing here is to expand our data content and our coverage. So not only are we building plants, we're capturing significantly more content We think we can use to automate our titling processes in the years to come. So don't think that so much as a cost arbitrage, but more from the strategy of automation going forward.
And John, in terms of the cost to build the incremental 1,000 plants, I mean, we already have 500 and we're building another 1,000 here. It's really it's $2,000,000 on a go forward basis. A lot of that is because we already have the images, right? So we already have the history, we already have the images and We're just paying to key in electronically. So it's really de minimis in terms of cost.
One last thing, not to get too detailed on this, John, but what's changed so radically Historically, these would all be keyed, manually keyed. And that is we were we are and we're very efficient at that, but Very different costs arbitrage now that they're electronically being abstracted.
Okay. That makes sense. And then one last one for me is, I've asked this in the past. I think you guys have said no change. Just want to check on this again.
But the closing ratio, that's obviously influenced by the order flow. If you look at it from a high level, just last couple of years, it looks like that to me at least, the closing you're closing out orders at a faster rate. So Am I reading too much into that or anything to call out there?
No, no, there's nothing to call out there. I mean, It is subject to kind of monthly swings depending on the we have a good order month on the open side or good closing month. But When we look at the orders that we open and how many ultimately close, it's usually about 72% is the long term average and that's kind of what we're running today, both on the refi and the purchase side. So we haven't seen any Structural shift in our closing ratio.
Yes. John, if you see any kind of noise in the numbers, if you will, the closing ratio, it would just probably be related to any kind of burst we see in refinances Up and down there. But like Mark said, the purchase is running at our historical averages.
Okay. Makes sense. Great work on the quarter, guys. Thanks.
Thank you.
Thank you. Our next question is from Geoffrey Dunn with Dowling and Partners. Please proceed with your question.
Thanks. I wanted to follow-up on really, I think, Dennis, your very first comment about being laser focused on innovation. Can you maybe give us a couple of buckets of specific areas of focus for your tech spend? Obviously, you just talked about Endpoint. I think there was some recent announcement about a partnership with Motorize.
But what are just an update on a couple of the specific areas where you continue to deploy your tech And trying to develop innovation and efficiency.
Over the last few calls, Jeff, I've mentioned a few, and Clarity First, Ignite RE, others and the title plans, etcetera. So that's kind of big buckets, if you will, big buckets. The big buckets for us Our to continue to build out our data assets, both content and coverage, and that's something we've talked about for a number of years. That process is And think of that, Jeff, as our foundation layers. The more content, the more coverage, the more accurate and timely that content and coverage is, the More accurately, we can automate the titling efforts.
So that's kind of a foundational level. 2nd level, big buckets, Jeff, are automating the titling itself And digitizing the closing. So on the titling, we've talked about it on prior calls and that is, We and others are running very high percentages of refinanced transactions and fully automated. And when you hear different numbers from different companies, By and large, that's a risk decision, how much risk you want to take versus how much full automation. And so that's ongoing.
The big effort we're focused on on title automation, the big effort we're focused on and it will be probably a multiyear effort and that is title automation on the purchase transaction. We think that we have the content now, we have the coverage, we have the skills, we have the technology, etcetera, etcetera that we think we can make significant headwinds on title automation on purchase. The 3rd on that transaction would be commercial, probably less likely to be automated. So it's mostly a residential play at this stage. Okay.
The second major component of our automation is the digitization of the close. And we have 2 efforts I call them, we have revolutionary efforts, if you will, and then more Structural, I mean, that's what I'm looking for and more consistent changes. More of a complete different way of looking at that would be endpoint. We've made the commitment this week to increase our funding by $150,000,000 And Endpoint right now, and it's related to other questions So, endpoint right now is really, really matching up very well with the PropTech market right there. They're looking for a different experience than traditional closing.
We're looking for what we call a native digital close and so a lot of growth there. And then we're continuing to automate, I'll call it the more traditional approach to escrow. But the bottom line over the long term, we think the closing will become highly digital in the future. So I kind of gave you really high buckets, data foundation, title automation and then digitizing the closing. And you'll see us continue to put capital Excuse me, you'll see us continue to put capital to it internally through CapEx and other investments and you'll see us continue to look for acquisition opportunities And that space also those spaces, excuse me.
And just a quick follow-up, are you seeing any instances where Endpoint is
winning business from traditional FAF?
In traditional FNF? Yes. Okay.
Within your own company, is Endpoint taking winning business
Very, very small, if any. We're just not we're really going after the Fintech more directly. And so we're not trying to chase our own businesses. So we're looking at a different marketplace by and large. And that's again ties to our venture strategy and the partnerships there.
Okay, great. Thank you.
Thank you.
Thank you. That is all the questions that we have for today. I would this concludes today's conference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.