First American Corporation (New)

Greetings and welcome to the First American Financial Corporation first quarter 2020 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. A copy of today's press release is available on First American's website at www.firstamerican.com. firstam.com forward slash investor. Please note that the call is being recorded and will be available for replay from the company's investor website and for a short time by dialing 877-660-6853 or 201-612-7415 and you'll enter a conference ID 13701584. We will now turn the call over to Craig Barbario, Vice President of Investor Relations, to make an induction, oh my gosh, an introductory statement.

Good morning, everyone, and welcome to First American's earnings conference call for the first quarter of 2020. Joining us today will be our Chief Executive Officer, 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 the 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 also contains certain non-GAAP financial measures that we believe provide additional insight into the operational efficiency and performance of the company relative to earlier periods and relative to the company's competitors. For more details on these non-GAAP financial measures, including presentation width 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'll now turn the call over to Dennis Gilmore.

Good morning, and thank you for joining our call. Today, I will comment on First American's response to the pandemic and its impact on our business. Mark will comment on our first quarter earnings, financial expectations for 2020, and capital management. Throughout the pandemic, our first priority has been to keep our employees and their families safe. Early in the process, we activated our business continuity plan, which includes giving our employees the ability to work from home. Today, the vast majority of our workforce is working remotely. For those that do come to the office, we are taking extra precautions and following CDC guidelines. Consistent with our people-first philosophy, we have committed to our employees that we will not make any layoffs through the end of the second quarter. We strongly believe that this is the right approach given these unique circumstances. We've taken a long-term perspective, and although this action will negatively impact our short-term results, we believe the benefits to our people, our customer, and ultimately our shareholders will be worth the investment. However, if the economy continues to deteriorate for an extended period, we will review all measures to control expenses as we have done consistently in the past. Our second priority has been to maintain service levels to our customers. The settlement services we provide are critical, and we have been deemed an essential service across nearly all states. Individuals, businesses, and lenders need title and closing services for the transfer of real estate or to secure a mortgage. and we've worked tirelessly to maintain business continuity despite the disruption caused by the pandemic. We've experienced minor disruption to our operation when the stay-at-home orders were first announced, but those issues were quickly resolved. These stay-at-home orders have come at a time when refinance volumes are surging, amplifying the strain on the industry. Throughout 2019, we have launched a number of automation efforts leveraging our deep data assets including Clear2Go, an engine designed for our central refinance channel that has been expanded to our branch and agency operations, covering a significant portion of our refinance transactions. This has helped us increase productivity and manage service levels at a time when volumes have soared. We will continue to focus on the advancement of numerous automation efforts across the business. I'd like to shift gears now and discuss the current market environment. Our purchase business was off to a strong start in 2020 and until mid-March when orders fell sharply. For the first three weeks of April, open purchase orders are down 43% relative to the same three weeks of 2019. We've seen West Coast markets decline approximately 50%, while other places, such as the Midwest, have fallen only 35%. The good news is, although orders have fallen severely, they appear to have stabilized. The 43% drop we are currently experiencing has been consistent since the beginning of April, and it appears we've reached a floor. For the first three weeks in April, refinance open orders have averaged 3,000 per day, up 120% over last year. This strong volume is serving as a natural hedge to our declining resale business. So far in April, revenues in our commercial business have dropped sharply, down 44% from the same period of 2019. Commercial transactions in industries such as retail, hotels, multifamily have slowed considerably due to the uncertainty of underlying cash flows. In other areas of our business, low mortgage rates have triggered strong growth in volumes. Our data business has benefited from strong demand as refinance volume has more than offset the decline in purchase. Our DocuTech acquisition, which we closed March 2nd, has seen transaction volumes up over 150% compared to 2019. DocuTech advances our ability to provide lender customers with end-to-end digital mortgage and settlement services. The events of the last few weeks have accelerated the adoption curve for e-close and First American is well positioned for this industry change. Our home warranty business continues to perform well. With purchase transactions declining, we continue to focus on the direct-to-consumer channel, as well as policy retention efforts. Our revenue growth is in line with our expectation, and we have seen a slight reduction in loss rate. Regarding title claims, we have not seen any increase in incurred claims. However, since the current economic conditions could result in an increase in claims, we've elected to raise our title loss provision rate to 5% this quarter. We continue to have a strong reserve position on our balance sheet, and Mark will comment on the title loss provision rate in detail in his comments. Our team is rising to meet the challenge of providing great service to our customers, and we believe customers increasingly want to do business with a company that's built to last. We enter this crisis with a strong balance sheet, and we can put our capital to work in this market by continuing to fund our innovation efforts and by making opportunistic investments when others can't. For the last several years, we have been on a journey to digitally transform our business, and the recent events have validated that our strategic path is the right one. We will continue to expand our data assets, further automate our title production, and continue to digitize our closing process. While we don't know when business will return to normal, we are confident that we will emerge in an even stronger leadership position when it does. I'd now like to turn the call over to Mark.

Thank you, Dennis. I'll comment on our first quarter earnings, financial expectations for 2020, and capital management. In the first quarter, we earned 55 cents per diluted share, excluding net realized investment losses of $65 million. primarily related to a decline in the value of equity securities, we earned $1.06 per diluted share. In the title segment, pre-tax margin was 5.6% or 10.3% excluding net realized investment losses. To date, we have not seen an uptick in claims as a result of the current market environment. In fact, claims are significantly below our expectation in the first quarter of 2020. Our incurred title claims in the first quarter were 26% below our actuarial expectation and 6% lower than prior year. However, title claims generally increase when economic conditions deteriorate. We don't expect our loss rate to approach the levels experienced from 2005 to 2008, but we do expect some increase in claims. It's quite possible that since we entered 2020 in such a strong reserve position, that existing reserves will be adequate to cover this expected increase in claims. But given market uncertainties, we believe it's prudent to raise the loss rate to 5%. Our current expectation is to maintain a 5% loss rate until we have more visibility into how the current environment will affect our claims experience. Turning to the specialty insurance segment, pre-tax margin was 10.5%. or 13.0%, excluding net realized investment losses. Both the home warranty and property and casualty business lines achieved lower claim loss rates, leading to a decline in the overall loss rate for the segment to 52% this quarter, compared with 55% in the prior year. First American has not traditionally provided guidance to investors. However, in this uncertain environment, we wanted to provide our internal expectations for 2020. Our forecast can be volatile and key assumptions are likely to change as the year progresses. The forecast is not a goal or financial objective, but rather our most recent projection for 2020. We are projecting a 45% year-over-year decline in open purchase orders in the second quarter, with a gradual improvement in the second half of the year. We also expect refinance orders to remain elevated throughout 2020. This implies a mortgage origination market of $2.8 trillion in 2020, comprised of $2 trillion refinance and $800 billion purchase. Our investment income will decline sharply in the second quarter given the 150 basis point decline in the federal funds rate in March. We expect investment income in our title segment to be in the range of $40 to $45 million per quarter. For our commercial business, we expect a 50% decline in revenue in the second quarter with a gradual improvement for the remainder of the year. Using these assumptions, we expect title pre-tax margin to be between 9% to 11% in 2020, excluding net realized investment gains and losses. Next, I'll comment on our liquidity and capital position. We have $420 million available on our $700 million line of credit. Borrowing on our line of credit increased $120 million in the first quarter to partially fund the DocuTech acquisition. Today, we have $153 million of cash at the holding company with an additional $506 million of dividend capacity available from our regulated subsidiaries for the remainder of 2020. Our debt to capital ratio was 23% as of March 31st. This provides us with nearly $1.5 billion of potential debt capacity, with $420 million readily available on our line. None of our long-term debt is due until 2023, so we have ample financial flexibility at our holding company. If debt market conditions are favorable, we will consider terming out the outstanding amount on our line of credit to take advantage of the low-rate environment. The investment portfolio at our insurance companies totaled $3 billion as of March 31st. Of this amount, 87% are debt securities and 13% are equities. Of the debt securities, 46% are government-backed treasuries, agency mortgages, and agency bonds. The average credit rating of the portfolio is AA-. We have just 4% of the debt securities portfolio rated below investment grade, and we have no CLOs or non-agency mortgage-backed securities. The investment portfolio at our bank totaled $3.4 billion as of March 31st. Of this amount, 100% are debt securities, with 78% of the securities being government-backed. The average credit rating of the portfolio is AA+. On a consolidated basis, the value of our investment securities has rallied since the beginning of the year. and we were in an unrealized gain position of $95 million as of March 31st. Given the forecast I described earlier, we expect to add to this already strong financial position. But if we're wrong and the market takes a turn for the worse, we have ample liquidity and a strong capital position to lean on. Given the price of our stock, our long-term optimism of the business, and our strong capital position, we elected to repurchase shares in the first quarter. We repurchased 1.7 million shares at an average price of $38.64, representing 1.5% of our shares outstanding. Our strong balance sheet gives us the ability to play offense in this market. We'll continue to be opportunistic with acquisitions and make organic investments that accelerate our digital transformation. I would now 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 1 on your telephone keypad. The confirmation tone will indicate your line is in the question queue. You may press star 2 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 your questions.

Our first question comes from the line of Jack Misesico of FAN.

Please proceed with your questions.

Hey, Jack Misesico, SAG. Hi, guys. Good morning. First question on the loss ratio increase. You know, it makes sense historically. I'm curious how much that was given to the forbearance plans that have been rolled out and, you know, at least six months of you know, relief before we start seeing defaults. And maybe a little bit of context around where title-only claim rates were in the 08-09 window and the combined loss ratio, but I was curious that I couldn't seem to find the title-only loss ratio out of a financial crisis. Thanks.

Okay. This is Dennis, and I'll start, and Mark will come back on the second part of that question. You're right. With the current forbearance plans, we don't expect to see any material change in default rates for a minimum of six months, potentially even a year. So, we think the market will be pretty stable right now from a default rate perspective. If we see any deterioration, it will probably be in the second or third quarter of 2021 actually. And so, we're just taking a cautious approach on this right now. And I should also point out too, entering this process as strong as we've ever been, Our quality of our books is very high, high equity. So I think it's the right move going forward, but it's a cautious move right now.

And in terms of the title loss ratios back in 2005 to 2008, in terms of our title settlement, they were generally between 10% and 13%, but the worst year we had with 2007 was about 13%, and 2005 through 2008 were somewhere around 10% to 11%. And there's obviously a lot of reasons why we don't think it's going to approach those levels.

Yeah, sure. I mean, it's a totally different underwriting environment today. On the digital flows, you're talking to press release about this environment driving that higher. Can you kind of bring to us what percent of the business is fully digital today, where you think that can get to? And then a side question, how much of the $208 million of revenue was provided by DocuTech for the sub-month of the quarter? Thanks.

Yeah, I'll start with DocuTech.

So we closed DocuTech like the first couple of days in March. And so in the quarter, we had $6.4 million of revenue related to DocuTech, really just one full month. And all that revenue was in our information and other line items. So you really got one month of DocuTech revenue in the corner. And, you know, just in terms of the acceleration of, you know, digital title and closing, you know, that's something that we've been really investing in heavily, both on title automation as well as, you know, making our closing process or escrow process more digital. And the interesting thing is we've invested heavily in those two things, and we think these events that have happened in the last – several weeks are really going to accelerate that adoption. So, we just see it increasing over time, and we're well-positioned to capitalize on that trend.

All right. Thanks, guys. Stay safe. Thank you.

Our next questions come from the line of Chris Gamitoni of CompassPoint. Please proceed with your questions.

Good morning, everyone. Good morning. I want to start with the agent channel. you know, the investments you've made and being able to handle the current operational environment. I was wondering if any, you know, smaller agents or how they're dealing with the current stay-at-home orders, disruptions, who might not have nearly the investment capacity as you.

I think what we're going to see on that is going to be really a mix all over the world, depending on how people go into the crisis. So it'll just depend, and we'll partner very closely with our agency. I mean, overall, from our perspective, we're going into this situation stronger than we've ever been. So we're very confident with how we're going to come through this process.

Yeah, I was wondering if maybe you would see more shift to direct if there are disruptions in the agent channel.

Probably not, but I think it will probably create some interesting opportunities for acquisitions going forward. I mean, from a capital deployment standpoint, I think there's a lot of really interesting opportunities probably that will present themselves over the next 12 or 15 months.

And on that acquisition, is it – I mean, besides the normal tuck-in, is it still mostly on the data side?

Both data and tuck-in on the title side, yeah. So, again, I mean, assets have been pretty pricey coming into this situation. So it's a really good situation we have coming into this with such strong liquidity. I just think, again, I think there are going to be great opportunities coming forward over the next 12 to 15 months.

Okay. And, you know, I fully acknowledge the commentary you gave about – maintaining personnel for the second quarter. I was wondering how this situation impacts planned investments, other spend that'll be in the other operating line and how you're managing more fixed costs or investment spend rather than personnel.

Generally speaking, I would say the other operating expenses are just coming down. Obviously, we're traveling a lot less these days. In the second quarter, we did have some I would say, you know, unusual items. Just in terms of right when the pandemic broke, I mean, we rushed to buy as many laptops as we could for our employees to enable them to work from home. So we had about $6 million of, you know, IT-related expenses, mostly laptops. And we also had about $4 million of professional services related to the DocuTech acquisition that hit this quarter. But generally speaking, you know, we do have some flex in OpEx.

Okay, perfect. Thank you so much.

Thank you.

Our next questions come from the line of Bose George of KBW. Please proceed with your questions.

Hey, Bose. Hello? Bose? Yes, we can hear you now.

Okay, great. Sorry, missed my headphones. So thanks a lot for the margin guidance. It was very helpful given all the volatility out there. So a couple of questions related to that. First, you know, the $2.8 trillion, you know, that's like the NBA, I think, is around 2.4. So is that, you know, based on your internal forecast for the market? And then secondly, the 9% to 11% margin, you know, guided to is the variance there on, you know, what happens on the revenue side or, you know, on the expense side or just what's driving that range?

Well, this is Dennis. Let me start on the forecast. I think we're going to continue to see a lot of volatility on that number from a lot of people. So right now that's our best estimate. But let me kind of tell you what's happening on the market. I think it's important. Right when the original stay-at-home orders were put in place, we saw a remarkable decline in volume from the purchase side, for example. In some markets, 60-plus percent. and in some markets, you know, more in the 30% range. What we've seen probably more importantly right now is over the last three weeks, it's our call right now. We've not only hit a bottom or a floor, if you will, we're actually starting to see them trend back upwards. So, you know, no question purchase will be difficult in the second and third quarter. We're forecasting right now the purchase to be down 45%, but I think, again, I'm optimistic we potentially could even do better than that. And then the other part of that forecast is our refinance volumes. And we ended the quarter really hot on refinance volumes. We had a few days over 4,000 orders per day. Right now, we're averaging 3,000 orders per day. To put that in perspective, we're up well over 120% from a year ago. And so, again, I think on the refinance, probably the most volatile part of the forecast. What we're seeing right now is the mortgage market settling down. They're getting more clarity. We'll probably see additional capacity coming into the market. So what I expect to see Is refinance staying around that $3,000 or accelerate going forward? And I'll tell you, we're well-suited to handle that right now. So long answer, I think the forecasts are going to be volatile, but we're pretty optimistic with what's happened looking forward right now.

And, Bo, just to follow up on the mortgage origination. So, you know, the NDA is at $2.4 trillion, and we're at $2.8, but the mix is very different. I mean, we're seeing our refinance volumes more than double, which is way higher than, you know, what the NDA is. And we also, on the purchase side, the NDA had purchased down 2% this year, and we're obviously seeing a much bigger drop than that. So we basically, we kind of look at our order forecast, and we project out what we think is going to happen for the year, and then we kind of translate that into a mortgage origination environment. So that's how we come up with the 2.2 million.

Okay, that makes sense. Thanks. And then just on the marking, you know, obviously there's a lot of volatility, so I'm not asking you to be more precise, but just curious what's kind of driving that range.

Well, the range, you know, again, as Dennis said, the forecast is so volatile, especially in this market. But given everything we know today, given all the assumptions that we outlined, you know, we're coming in at somewhere between a 9% to 11% margin. Now, last year we were at 15, but obviously the environment's changed. Investment income is falling with the Fed funds at zero. And between the decline in, you know, commercial and purchase that we expect and the strength in refinance, and that also includes a loss ratio of 5% for the rest of the year now. You know, we don't know if that's going to happen or not, but given all those assumptions, we're coming in somewhere in the range of 9 to 11 for the title segment.

And And just on the cost side, in terms of the residential versus commercial, do you have more flexibility on the residential side? Here's where you have, you know, sort of more ability to cut your costs.

Yeah, I mean, I think there's costs that are obviously that we can reduce. As Dennis talked about, you know, we're really holding the line on the personnel costs right now because we think we can do it, and, you know, we don't think we're going to be in this long, drawn-out, you know, period. So there's definitely, you know, flex on the personnel side, although, you know, Dennis said we're going to hold the line for at least the end of the second quarter and wait to see what happens with the market.

Okay, good. Thanks. Thank you. Our next questions come from the line of John Campbell of Stevens.

Please proceed with your questions.

Hey, guys. Good morning. Good morning. Mark, I really appreciate the kind of informal guidance. I think that was super helpful in kind of framing stuff up. I wanted to check on one thing, though. On the 2.8 trillion origination market, Can you talk about the home price appreciation, kind of what you guys are assuming maybe over the near term and for the balance of the year? Yeah.

You know, when we look at our average fee profile, and it really, really mostly applies on the purchase side, we've seen a 4% increase, you know, in the average fee profile in the first quarter. And, you know, we think that's going to be somewhere in the 2% to 3% range for the rest of the year. It's not like an exact science. And so, obviously, you know, if we have some sharp decline in home prices, that's going to affect our model. But we're basically assuming, you know, FLAC is slightly up HPA for the year.

And I'll only add on that is why we're taking that assumption right now is we've got such inventory shortages across almost all of the markets right now. We really don't see a lot of pressure on prices. Now, that could obviously change in 21 if we see a spike in default rates. But right now, we're thinking that because of the inventory situation that purchase price appreciation will be in those kind of ranges.

That makes sense. I think we're in lockstep with you guys for the market outlook for sure. On the DocuTech bill, I want to touch on the accretion. I know you guys had said maybe 10% or maybe 10 cents of EPS accretion. Could you talk to maybe, you know, I can't remember if you said a percent to the EPS accretion or if you said an actual dollar amount. So could you touch back on the accretion and then mark on the 6.4 million of revenue contribution, how seasonal is that in transactional? Is that a good kind of run rate for the rest of the year?

I'll start with this. So, you know, when we initially closed the DocuTech acquisition, our internal expectation was that it would be 10 cents accretive to 2020 earnings, about 2.1%. However, you know, since we closed the deal, the volumes have really just exploded. So it's going to be higher than that now. And, you know, we haven't gone back and reforecasted that. But The volumes of DocuTech, the revenue has doubled where it was last year, and we're getting margin expansion now just because of the, you know, a lot of it's automated. So we're feeling really good about that deal right now.

Yeah, I'll just add that margins, I think, will continue to expand there. It's a high-leverage business. Our timing is very good here. And so as we quickly move down, you know, really accelerate by the pandemic, drive to an e-solution across our enterprise, in the closing of the mortgages, DocuTech will play a key role there.

Yeah, and very timely acquisition.

John, I'm sorry. So in March, we had about $6.4 million of revenue, and it's hard to say what's going to happen for the year, but we think refi volumes are going to be elevated for the rest of the year, so I think that's a pretty good roommate.

John, let me also add, it's not directly part of your question, but just to put it out there right now, Just post-pandemic, moving everybody working from home, we're now working over 80% at home. We instituted the plan very early, probably two weeks earlier than anybody else. As Mark mentioned, we front-loaded laptops into the corridor and other things. It's been incredible how well our people have adapted. Our productivity lines are very good. Our title production is highly efficient right now, highly automated, actually. And our closing, well, we have some issues early on. All of those issues have dissipated. So when people have the issue, you know, the concerns, are we running smoothly? We're running very smoothly. We really don't have any material issues going on in the production lines right now in closing the deals.

Makes sense. Good work. Thanks, guys. Thank you.

Our next questions come from the line of Mark Hughes of SunTrust. Please proceed with your questions.

Thank you very much. On the commercial, I think you gave guidance on the revenue down 50%. What are you seeing in terms of open order trends here recently?

Let me start. I'll give it a little bit of high level, and Mark will come back on the order trends. We're guiding at 50%. We're actually running low 40s right now, so we're running a little bit better. and our guidance, commercial dropped off very, very quickly in some of the key markets led by New York, Chicago, when the stay-at-home orders were put in place. I will tell you right now we're starting to see some optimism that some transactions are starting to move again. So no question it's going to be a difficult second quarter, but I think it will probably bottom in second and start to clearly improve as we get through the second going into the third, specifically on the trends and orders.

Yeah, so far in April, for the first three weeks in April, our commercial open orders are down 37% from the same period of the prior year.

And then is there any nuance on purchase versus refi on commercial?

There's subtle differences in price, but I would say it's negligible. It's not nearly to the degree it is on the residential side, so I would say it's not material.

In terms of mix, are you getting more refi?

No, I would say that, you know, the mix is the same as it's been. We're not seeing any real differences between purchase and refi. You know, I mentioned that, you know, open orders were down 37%. You know, the thing that we really track is revenue because, you know, orders can be lumpy and you get some big deals or some smaller deals. And at least so far, you know, in the month, our revenue in commercial is down about 44% from prior year. And that's the metric that we track more than the order counting commercial.

On the residential refi, I'm curious, in your budget, kind of how you see those orders tapering. If we're running 3,000 per day, I think you, Dennis suggested you might see that actually accelerate a bit. But as we progress through the year, how should that look as we go into Q3, Q4, you know, early thinking?

Again, being a little optimistic on this right now, we're running and we're forecasting 3,000 a day through the rest of the year. But our call on the market may be a little different in that sense, as the market itself, the mortgage market, a lot of disruption over the last three or four weeks. Spreads really widened out. Capacity came in, those kind of issues. But what we're seeing right now is some stability starting to enter back into the market, some better clarity for the lenders. And so I think it's not out of the realm of possibility that we see the 3,000 accelerate as we move in probably into the third quarter and beyond. We'll see. We'll see where the interest rates are. Regardless of how it turns out, we're really well positioned to handle the volumes we've got or any increasing volumes we have in the future with the staffs we've got.

Then a final question. The no layoffs agreed. That sounds like a great policy. Did you measure how much of an impact that could be in terms of margin in Q2 specifically?

Well, I won't answer you on the margin question, but what I'll tell you is what it really means financially short-term. It's probably an impact to our short-term performance of $15 to $20 million. But, you know, I've got to say, it's clearly the right thing to do right now. We are facing such a different situation than we've ever faced before. We've never dealt with a global pandemic. Our people across the organization and others are highly stressed right now. So we thought It's absolutely the right thing to do. It's actually the smart thing to do. Our people are highly focused, highly committed right now, delivering an incredible level of service. So I actually think we'll look back on this in five years and it'll be one of the pivotal decisions we've made.

Agreed. Thank you very much. Thanks, Mark.

Thank you. As a reminder, if you would like to ask a question, please press star 1 on your telephone keypad. The confirmation tone will indicate your line is in the question queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our next questions come from the line of Jeffrey Dunn of Dowling and Partners. Please proceed with your question. Thanks.

Good morning.

Good morning. First question, and can you just maybe explain a little bit how closings are largely being done Are you primarily seeing more drive-through closings in the hardest areas? Are you primarily seeing remote closings? It looks like a lot of states have at least temporarily adopted e-notarization and e-signatures. What is the predominant means of closing all this activity in the harder markets? I do acknowledge that obviously there's parts of the country that are not as hit as heavily as maybe the coasts.

Yeah, Jeff, let me start on that one. It's a little of all of the above. We've done the drive-throughs. We did that early on. We've done by appointment only. When we bring anybody into the office, it's always with the appropriate social distancing and all the appropriate precautions. And so what we saw early, Jeff, on the closing issue was some issues with the notaries, but they really quickly worked themselves out. So specifically to the future aspect of the ROMs and remotes, I think that's probably going to play itself out and accelerate quicker over the next few quarters than what it has typically been adopted. So not a big issue right now, but I think it will be quicker for an adoption curve going into the second, third, and fourth quarters. So we're really optimistic about that, and we've made some investments there. So again, just one more time on that. The way we're doing it right now has been traditionally the way it's been done with all the appropriate caution involved. I think what we're going to see going forward is a quicker adoption of RON. Okay.

And then from a capital management standpoint, you know, I think you indicated before that you remain watchful of opportunities in the market. I'm just curious, with the stock down here and you buy back stock in Q1 below 40, on average, do you think your acquisition opportunities and the potential returns there remain more attractive than buying your stock in the low 40s?

Hey, Jeff, you know, I'd say it's going to be a balance and it's going to be a mixed approach. I mean, on the one hand, we think the value of our stock is really attractive at the current price. And we've got a, you know, we've got a strong balance sheet and we're in this really good position where we want to put the work in this market. So I think it's going to be a kind of a mix of acquisitions. And depending on where, you know, our shares trade, you know, it could be buybacks as well. But it'll be a blended approach.

Okay. But, I mean, you guys have tended to be very, very opportunistic on the stock. So, these are levels where we could see activity from you.

Yeah. I mean, we bought it at 38 and change in the first quarter. And so, you know what levels we're, you know, we're definitely interested in. We're not too far from that right now. So, we do think it's attractive here.

Okay. Great. Thank you. Thank you.

Our next questions come from the line of Mark DeVries of Barclays. Please proceed with your questions.

Yes, thanks. Just to follow up on capital deployment here, can you just give a sense of how much more capacity you think you have to do either buybacks or acquisitions at your current debt-to-cap?

Yeah, Mark. So, one of the things that we look at is, you know, we track our, our excess capital, and we look at how much cash we have at the holding company, and we always want to have one year of cash at the holding company. We track how much excess capital we have at Fatico, which is our primary insurance company, and we track obviously our debt, and we've got excess debt capacity today. So when we look at all those three things, As of the end of March, we had about $400 million of what we would consider excess capital. But I would say that's a conservative number, just because in that, we assume a stressed environment, and we're already in a stressed environment. And so, I would say at a minimum, at a very minimum, it's $400 million. We've obviously got a lot more flexibility than that.

Got it. Another follow-up question on the margin guidance. Does the 9% range kind of assume, is that based more on, like, what you're assuming today for the development of the market, and 11% might be if it, you know, the economy opens up faster and maybe the market evolves in a way that, you know, I think Dennis is optimistic that, you know, maybe we could see? Is that a fair way to think about it, or is it not quite that simple?

I would just say, you know, we have this point estimate, which is, You know, resales open down 45% and Q2 with a gradual improvement. We've got commercial revenue down 50% with a gradual improvement. And we've got refinance orders, which currently we're at 3,000 a day, and we assume that's going on for the whole year. So that's our point estimate. And if you use that, you get to 10% margins. And then we do some sensitivities about slightly higher and slightly lower, and that's how we get to 9 to 11.

Okay, got it. That's helpful. And then just one last one on expenses. You know, understanding that, you know, near term there won't be any layoffs. If revenue remains challenged over the course of the year, how do you, how can we think about the success ratio and, you know, and how you'll look to manage expenses relative to revenues?

Well, I would just say on the success ratio that, you know, we have been for years now, we've been targeting 50% success ratio with, And we've had success with that. And that's one of the reasons why last year, you know, we had the highest margins we've ever had because we've really been focused on hitting that. And I think especially in the last six weeks or so, we have not really been focused on success ratio. That's not a metric that we're really, you know, focused on at least, you know, in the current market environment. So there's no question that our success ratio is going to be sacrificed because of that.

Okay, got it. Thank you. Next one.

There are no additional questions at this time. That does conclude this morning's call. I would like to remind listeners that today's call will be available for replay on the company's website or by dialing 877-660-6853 and enter the conference ID 137 The company would like to thank you for your participation. This concludes today's conference call. You may disconnect.