Greetings, 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. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. 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 third quarter of 2021. Joining us today on the call will be our Chief Executive Officer, Dennis Gilmore, our President, 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 this morning's earnings release and the risk factors discussed in 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 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.
Thank you. Good morning, and thanks for joining our third quarter 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, Ken will provide an update on the current order trends and business outlook. Mark will conclude by providing details on our third quarter 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 by design 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 million 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 on our previously announced acquisition of ServiceMac, an innovative mortgage sub-servicer with unique solutions. Founded in 2017, ServiceMac will complement our title and closing operations, in 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 we have become strategic partners.
Financially, our investments generated $278 million of gains this quarter, led by Offerpad, which went public via a 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 an 11% increase in our dividend. Our board also approved an additional $300 million 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. With a strong real estate market, we expect these trends to continue. Far in October, commercial orders are up 14% over prior year. 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 1,700 per day in September to 1,500 per day in October. 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 onto 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 will 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 earned $4 per diluted share. Included in this quarter's results were $1.85 of net realized investment gains. Excluding these gains, we earned $2.15 per diluted share. I'll start with our title business. Revenue in our title segment was $2.1 billion, 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 million, 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 million, up 38% from last year. Given the reporting lag in agent revenues of approximately one quarter, we are experiencing a surge in remittances related to Q2 economic activity. Our information and other revenues were $308 million, up 9% relative to last year. Revenue growth was primarily due to higher demand for the company's title information and loss mitigation products. Investment income within the title insurance and services segment was $50 million, up 11%, primarily due to higher average balances in the company's investment portfolio. In our title segment, pre-tax margin was 16.4%. Turning to the specialty insurance segment, revenue in our home warranty business totaled $108 million, up 7% compared with last year.
Pre-tax income in home warranty was $9 million, up from $4 million in the prior year. The loss rate in home warranty has fallen from 64%- 57%, as 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 million this quarter. At the end of the third quarter, our policies in force had 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 third quarter 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 million of capital we've invested into this effort had a market value of $669 million as of September 30th. This quarter, we recorded $278 million of gains related to our venture investments. The largest gain was from our investment in Offerpad, an iBuyer that recently merged with a SPAC. During the quarter, we recognized a $195 million gain related to Offerpad. This investment is subject to a high degree of market volatility, and that we expect to impact our quarterly results.
In addition to Offerpad, we also realized a combined $79 million of gains related to our investment in Orchard, a company simplifying home buying and selling, Sundae, a real estate marketplace for sellers of dated or damaged property, and Pacaso, a platform enabling people to buy and co-own a second home. Beginning this quarter, we have moved all our venture-related activity to our corporate segment. Prior to the third quarter, realized investment gains from our venture portfolio were recorded in the title insurance segment. In the third quarter, we increased our share repurchase authorization by $300 million and had $463 million remaining on our authorization as of September 30th. During the quarter, we repurchased 208,700 shares for a total of $14 million at an average price of $67.37.
Cash flow from operations was $399 million in the third quarter, up 27% from the prior year. We raised $650 million 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 30th was 28.5%, or 22.7% excluding secured financings payable, slightly higher than our target ratio of 18%-20%. 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 that 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 handset before pressing the star keys. One moment please while we poll for questions. Thank you. Our first question comes from Mark DeVries with Barclays. Please proceed with your question.
Yeah, thanks. Was hoping, Dennis, maybe you could elaborate more on some of the more recent investments you've made. I think you provided some good color, but be interesting 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.
Yeah. Okay. Just a recap, we've got 16 right now, and we look at them really from two angles, both strategically and then secondarily financially. And they've performed very well financially for us. In the quarter, we had $278 million of gain. That's great. More importantly for us is the 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. The second part of your question is, our strategy 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. 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 more financial investments?
The overlay would be none of them are just financial. They all have a strategic component, specifically referencing Offerpad. We're very close to them. A large customer for us, a very good strategic partner. We'll weigh all of that together when we look about lowering our ownership position in public companies. They are close partners.
Okay, great. 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 caused you to come to that conclusion, what you're seeing, and then given that potential tough compare, what's behind the optimism for next year?
Yeah, Mark, this is Ken. Thanks for the question. 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. Around the expectations with respect to tax changes. With respect to the outlook, I don't think we'll probably achieve the exalted heights that we've achieved in our commercial business in the third quarter. 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. While interest rates are ticking up a bit, from a historical perspective, they're still pretty low. Thirdly, there's a lot of capital still chasing deals.
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 2022.
Got it. Thank you.
Thank you. Our next question comes from Bose George with KBW. Please proceed with your question.
Hey, 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? 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. So far, year to date, we've put $100 million of cash to work in venture. The deals are getting more expensive. There's more money chasing fewer deals. I would say there's fewer, but we're still finding opportunities. We'll see more of that in the fourth quarter here, too. In terms of Endpoint, all of the Endpoint revenue and financials go through the title segment. It's really immaterial from a revenue perspective today, but it's growing quickly. To answer your question, it's all in title segment.
Okay, great. Thanks. Actually, I know you guys don't really like to guide on margins, but just a little color would help. You've noted commercial and from purchase will remain strong. Investment income helps offset declining refis. Just in terms of your guided to the margin range, it's still kind of 11%-13%, and you're obviously running well ahead of that. Just curious, any color on where we could think margins could go?
Well, yeah. I'll start with that, Bose. The margin guidance that we've given in the past is really dated. We talked about 13% margins in the past, but that was given a certain origination environment that we've really blown past. When we look at margins going out to 2022, there's positives and negatives, right? We feel like the purchase market's still going to be very strong. We think the commercial market's going to have a good year. We're always eking out efficiencies in our business. You've seen us, for the most part, increase margins for the most part every year because we continue to drive efficiencies. All that is positive. The negative, obviously, is refi. We don't expect at least to have as strong as of a refi next year. That's going to be a headwind. We always spend more on technology.
When you mix that together, revenue should be very similar to where it was in 2021, and the margins are also a function of the mix of business. Obviously, commercial is a very high-margin business. Agency's a great business for us, which is low margin. One thing I'd point out, too, longer term, is that we've got a catalyst when it comes to investment income. We're not really sure when the Fed's going to increase, but when the Fed does increase, we've talked about how we're going to generate $12 million-$15 million of annualized investment income every time the Fed raises. Given where our deposit levels are, it's going to be on the high side of that because our deposit levels have just risen. That's a little bit how we think about margins in the future.
Okay, great. That's helpful. Thanks.
Thanks, Bose.
Thank you. Our next question comes from Geoffrey Dunn with Dowling & Partners. Please proceed with your question.
Thanks. Good morning.
Morning.
I was wondering if you could give maybe some specific revenue color on the info and other line in title. That continues to show good growth, and it certainly looks like it's less sensitive to volumes, making it obviously a bit more difficult to project. Can you give us some rough breakdowns or specific breakdowns 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?
Geoff, this is Mark. As you know, there's a lot of different businesses in the information and 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. We had a 9% growth rate this quarter, it's less than what we saw in direct and agency, for example. There's a few reasons for that. Most of the revenue there, well, not most of it, but when I call out a few buckets here, this quarter, we had about $92 million of revenue related to our data business. That's kind of the biggest chunk of revenue. We've got Docutech in there, about $25 million of revenue. We also have a lot of title information reports that we sell, where it's not risk-based. There's no claims associated with it, we sell property reports.
We sell search packages and other things. We had about $70 million or so of that type of business, where we're just selling non-risk-based title reports and so on and so forth. Our international business had about $45 million of revenue for the quarter. There's other things, but those are the biggest buckets.
When we look at the sensitivities, can you talk about each one? The data business, does that really track your order flow and real estate demand? Kind of go maybe through those four buckets and give an idea of the sensitivity to volumes versus being less sensitive.
Well, I would say the property reports are very tied to just order counts. For the most part, these businesses really are tied to order counts. When you look at Docutech, we're going to get paid for every transaction. It's not like we get paid two and a half times for a purchase transaction and a refi like we do with title premium. Same thing goes for our data business. Data business, there's minimums involved. If they go over our minimum monthly contracts, our customers pay kind of per hit, per order. None of the businesses in info and other really get that two and a half times leverage that we see. 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.
Geoff, this is Dennis. I just add, there'll probably be a little headwinds here in these businesses. They're still going to perform very well. There'll be a little headwinds in the next two quarters probably because of the refinance dropping. That's going to impact the transaction side of them.
Okay. Helpful. Thanks. Then I wanted to just talk about cash a bit. First, the cash balance of the holdco, given that you did that big debt raise this quarter. Also, I'm guessing that the gains this quarter were really balance sheet gains, not cash gains per se. How are you thinking about monetizing these investments, then in turn, what you do with that cash? Is that going to be something that is 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? 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.
Can you just elaborate on those few things?
Yeah. There's a few things there, Geoff. I'll start on that. Today we've got $714 million of cash at the holding company. You saw we did this $650 million senior notes deal. We have two bond deals coming due in the next two years. We've got our February 2023s, we've got our November 2024s. That's $550 million of debt that's coming due in two years. We did this bond deal really as kind of an opportunity trade. We just were monitoring market conditions. We felt like it was just too good to pass up. Cash is fungible, right? 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 third quarter is we put $140 million into our bank to capitalize our bank. The bank deposits have been growing quite rapidly.
At the beginning of the year, our average balances were $4 billion. Today, they're $7 billion. With our bank, every time our deposits go up by a dollar, we have to put $0.07 of capital in. We're very happy to do that. In this rate environment, the bank's 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. We put $140 million in the bank. We'll probably do another $25-$50 in the fourth quarter. We also have a pretty robust acquisition pipeline. We're not ready to announce anything here today, but in the next quarter or two, I think most of that cash that we have at the holding company will go toward acquisitions in the next quarter or two.
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. They're also long-term. As you know, they're very illiquid. Most of them, right? 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. We're opportunistic about it.
Okay. I got a couple more, but I'll jump back in queue. Thanks.
Thanks, Geoff.
As a reminder, if you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. Our next question comes from John Campbell with Stephens Inc. Please proceed with your question.
Hey, guys. Good morning.
Morning, John.
Hey. I just want to touch first on the title plant expansion efforts. You guys can maybe just kind of give us a sense of 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. Just give me an idea of where we are as far as that goal. I don't know if there's plans to eventually go to 100%, if that makes sense or not.
Yeah, John, thanks for the question. We're right on track, actually. The third quarter, we hit 1,300 new go-forward plants. We'll hit our objective, 1,500, by year-end. Again, John, they're go-forward plants. 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. We'll hit our 1,500 objective. The second part of that question, will we go to 100% coverage? That's really going to be questionable in the sense it will have to be opportunistic. We're starting to really get into the very small counties at that point. The 80% allows us to have the level of automation long-term that we want for our title automation objectives. Bottom line, on track, continuing to grow, doing well.
Okay, that's helpful. If I'm thinking about this correctly, I think you guys are generating immediate savings as you open up those plants, but you're kind of recycling that back into further plant expansion. Just give us a sense for, I guess, average cost per plant expansion, and then if you could maybe frame up the associated cost savings with each.
Yeah. I'll start. Mark may come in on it. It's pretty de minimis, John. From the size of our company, our technology is such now that it doesn't cost us much at all to put a new plant online like this on a go-forward basis, number one. Number two, you're kind of hitting on two 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. Not only are we building plants, we're capturing significantly more content that we think we can use to automate our titling processes in the years to come. Don't think of it so much as a cost arbitrage, but more from the strategy of automation going forward.
John, in terms of the cost to build the incremental 1,000 plants, we already have 500, and we're building another 1,000 here. It's $2 million on a go-forward basis. A lot of that is because we already have the images, right? We already have the history, we already have the images, and we're just paying to key in electronically. It's really de minimis in terms of the cost.
One last thing. Not to get too detailed on this, John, but what's changed so radically for us is historically, these would all be keyed, manually keyed. We are, and were, very efficient at that, but very different cost arbitrage now that they're electronically being abstracted.
Okay. That makes sense. One last one from me is, I've asked this in the past, I think you guys have said no change. Just want to check on this again. The closing ratio, that's obviously influenced by the order flow. If you look at it from a high level, just the last couple of years, it looks like that, to me at least, that you're closing out orders at a faster rate. Am I reading too much into that or anything to call out there?
No, there's nothing to call out there. It is subject to kind of monthly swings, depending on if we have a good order month on the open side or a good closing month. 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. We haven't seen any structural shift in our closing ratio.
Yeah, John, if you see any kind of noise in the numbers, if you will, the closing ratios, it would just probably be related to any kind of bursts we see in refinances up and down there. Like Mark said, the purchase is running in our historical averages.
Okay. Makes sense. Great work in the quarter, guys. Thanks.
Thank you.
Thank you. Our next question is from Geoffrey Dunn with Dowling & 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 Notarize. Just an update on a couple of the specific areas where you continue to deploy your tech spend and try to develop innovation and efficiency.
Well, over the last few calls, Geoff, I've mentioned a few, ClarityFirst, IgniteRE, others, and the title plants, et cetera. Let's kind of big buckets, if you will. Big buckets. The big buckets for us are to continue to build out our data assets, both content and coverage. That's something we've talked about for a number of years. That process is accelerating right now. Think of that, Geoff, as our foundation layers. The more content, the more coverage, the more accurate and timely that content and coverage is, the more accurate we can automate the titling effort. That's kind of a foundational level. Second level big buckets, Geoff, are automating the titling itself and digitizing the closing.
On the titling, we've talked about it on prior calls, and that is we and others are running very high percentages of refinance transactions now fully automated. 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. That's ongoing. The big effort we're focused on right now in title automation, and it will be probably a multi-year 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, et cetera, that we think we can make significant headways on title automation on purchase. The third on that transaction would be commercial, probably less likely to be automated.
It's mostly a residential play at this stage. The second major component of our automation is the digitization of the close. We have two efforts going. We have revolutionary efforts, if you will, then more structural. I mean, that's what I'm looking for. 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 their funding by $150 million. It's related to other questions, too. Endpoint right now is really matching up very well with the PropTech market right there. They're looking for a different experience than traditional closing. They're looking for what we call a native digital close, a lot of growth there. We're continuing to automate, I'll call it, the more traditional approach to escrow.
The bottom line over the long term, we think that closing will become highly digital in the future. I kind of gave you really high buckets. Data as foundation, title automation, and then digitizing the closing. 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 in those space. Excuse me.
Just a quick follow-up. Are you seeing any instances where Endpoint's winning business from traditional FAF?
From traditional FNF?
FAF.
FAF. Okay.
Yeah. Within your own company. Is Endpoint winning business from your own traditional channels?
Well, very small, if any. We're really going after the FinTech more directly, and so we're not trying to chase our own businesses. 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. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.