First American Financial Corp Q3 FY2024 earnings call

• Ken DeGiorgio noted adjusted revenue was up 4% Y/Y, the first year-over-year growth since Q2 2022, and adjusted earnings per diluted share were $1.34, up 10%. Title premiums and escrow revenues were up across business lines, with commercial division revenue up 19% (first increase since Q2 2022) driven by large transactions. Purchase demand picked up late in Q3 but softened, with closed purchase orders per day down 2%. Refinance orders were up 12% Y/Y, and refinance revenue up 20%. Title segment investment income declined Y/Y but grew sequentially due to portfolio rebalancing. Home Warranty segment had adjusted pre-tax margin of 7.7% (down from 9.3% Y/Y) due to increased marketing spend in direct-to-consumer channel. Company is committed to innovative technologies to boost productivity. Outlook includes challenging purchase market persisting, but refinance and commercial expected to perform well in Q4. Full-year 2024 revenue growth expected to enable title margins similar to 2023. Since 2022, repurchased 10 million shares and increased dividend by 6%.
• Mark Seaton discussed GAAP loss of $1 per diluted share, while adjusted earnings were $1.34 per diluted share. Net realized investment losses of $312 million in Q3 due to portfolio rebalancing, but expects $67 million annual increase in investment income from Q4. Title segment revenue details, Q4 investment income outlook ($140M-$145M), tax rate details, debt-to-capital ratio (34.8% as of Sept 30), and $450M note offering in September.

Title Segment

• Revenue was $1.3 billion, down 15% compared to Q3 2023. Excluding net investment losses, revenue increased 4% Y/Y. Purchase revenue was up 3% driven by improved fee per file. Commercial revenue was $190 million, a 19% improvement Y/Y (closed commercial orders fell 5% but average revenue per order surged 23%). Refinance revenue climbed 20% Y/Y. Agency revenue was $684 million, up 3% Y/Y. Information and other revenues were $242 million, up 1% Y/Y. Investment income was $136 million in Q3, down $5 million Y/Y but up $11 million sequentially. Provision for policy losses and other claims was $37 million (3.0% of title premiums and escrow fees). Adjusted pre-tax margin in the title segment was 11.6% excluding net realized losses and purchase-related amortization.

Home Warranty Segment

• Total revenue totaled $111 million, up 2% Y/Y. Pre-tax income was $9 million, down 4% Y/Y. The loss ratio was 54% (down from 55% in 2023). Adjusted pre-tax margin was 7.7% compared to 9.3% in 2023.

• Expect challenging conditions in the purchase market to persist in the remainder of 2024. The refinance market should continue to improve though off a low base. The commercial business is expected to perform well in Q4. Full-year 2024 revenue growth is expected to enable title margins similar to those in 2023. Cautiously optimistic about improvement in 2025. Q4 title segment investment income is expected to be between $140 million and $145 million, including the full run rate of portfolio rebalancing projects.

• Risks and uncertainties related to forward-looking statements, which may cause results to differ materially. Impact of interest rate changes on investment income. Potential impact of alternative online title (AOL) usage on the title business.

Q: Bose George asked about margins and tech spend.

A: Ken DeGiorgio responded that they have strong conviction on margin outlook for 2024 given commercial business performance and expect improvement in 2025. On tech spend, they see opportunity to reduce costs by centralizing, standardizing, and simplifying technology operations, having already seen cost reductions from shifting to in-house developers and doing a zero-based budgeting review.

Q: John Campbell asked about investment portfolio rebalancing impact, cycle turn, and DTC in Home Warranty.

A: Mark Seaton said the $67 million annualized benefit from portfolio rebalancing will fund at least 4-plus Fed cuts. Ken DeGiorgio was cautiously optimistic about a cycle turn, and on DTC in Home Warranty, they think there's opportunity given the underpenetrated market and investment in DTC is prudent though early days.

Q: Terry Ma asked about investment portfolio rebalancing impact on rate cuts and commercial volumes.

A: Mark Seaton said the $67 million benefit from rebalancing will offset Fed cuts, and commercial is a big driver of escrow deposits as it holds deposits longer. Ken DeGiorgio mentioned commercial volumes showing broad-based strength and optimism for Q4.

Q: Mark DeVries asked about investment portfolio optimization, commercial vs purchase impact on investment income, and AOLs traction.

A: Mark Seaton said most portfolio repositioning is done but some potential remains. Commercial is a bigger driver of investment income due to longer deposit holding. Ken DeGiorgio said slight tick-up in AOL usage but not meaningful as AOLs aren't faster, better, or cheaper.

Q: Mark Hughes asked about commercial transaction size and CFPB.

A: Ken DeGiorgio said commercial transactions are diversified across asset classes and CFPB activity was not heard much but expected to tick up post-election. Mark Seaton discussed commercial fee per file variability.

Q: Geoffrey Dunn asked about strategic value of Home Warranty platform.

A: Ken DeGiorgio said it's an evolution, not a change, with opportunity in the underpenetrated Home Warranty market and direct-to-consumer channel as purchase market is under pressure