First American Corporation (New)

Greetings and welcome to the First American Financial Corporation's third quarter earnings conference call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. 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.firstam.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 enter the conference ID, 137-11297. We will now turn the call over to Craig Barberio, Vice President, Investor Relations, to make an introductory statement.

Good morning, everyone, and welcome to First American's earnings conference call for the third 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 facts. These forward-looking statements speak only as to 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 filing. 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 information 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 will now turn the call over to Dennis Gilmore. Good morning, and thank you for joining our call. I'll start with a review of our third quarter results, provide perspective on the actions we are taking with our property and casualty business, and discuss our outlook for the remainder of 2020. Mark will discuss our earnings in greater detail and provide an update on our company's capital position. We delivered strong financial results in the third quarter. Revenues were $1.9 billion, up 15%, and earnings per share of $1.62. Our pre-tax margin in our title segment hit a record 19%. As volumes increased, we also kept our focus on cost efficiency, achieving a 40% success ratio, well ahead of our 60% target. Purchase revenues were up 20% in the third quarter, driven by closed order growth and higher fee profile. Low mortgage rates are driving substantial demand And given the limited inventory of houses for sale, price depreciation has been robust. Our pipeline is strong heading into the fourth quarter. As purchase open orders were up 14% in the third quarter, and this trend continues in October. Refinance revenues were up 92% in the third quarter, driven by strong growth in closed orders. Low rates continue to support elevated open orders, which were averaging 3,200 per day in the third quarter. So far in October, we are opening 2,800 orders per day. Our commercial business revenues in the third quarter declined 29%, improving from the 39% decline of the second quarter. The overall commercial market continues its recovery with improvements varying by asset class. This quarter, we started to see a return of large transactions. We are encouraged that our open orders improve throughout the third quarter. with orders down only 7% year over year. Commercial orders over the last six weeks are flat to last year. Turning to our special insurance segment, we've initiated a process to sell the property casualty business. While this business has performed well over the years, based on recent financial results, we've decided to focus on our core business and redeploy our capital to areas with higher expected returns. Our home warranty business delivered strong growth, improved retention rates, and effective expense management throughout the quarter. The business continues to experience an increase in claim frequency, particularly in the appliance and plumbing trades, which we believe are attributable to the pandemic. Due in part to this trend, we are in the process of making policy changes and adjusting our pricing to offset cost pressure in the business. We expect the home warranty business to continue to generate strong margin performance this year. Going into the fourth quarter, we are optimistic that low rates and demographic tailwinds will continue to drive strong purchase and refinance activity. And as we have indicated throughout the year, we expect refinance volumes to remain elevated well into next year. While our improving commercial pipeline increases our optimism going forward, We do not anticipate the business will meet last year's record performance. Throughout the third quarter, we experienced elevated order volumes and the vast majority of our workforce continues to work remotely. Our performance has demonstrated the strength and flexibility of our business. And while the pandemic has greatly slowed major sectors of the economy, it has accelerated the digital innovation in our markets, validating our strategy, and the investments we've made over the past few years to secure our leadership position in data, title automation, and digital closings. I'd now like to turn the call over to Mark.

Thank you, Dennis. In the third quarter, we earned $1.62 per diluted share. This includes net realized investment gains totaling $45 million or $0.30 per diluted share and impairment on assets held for sale of $73 million or $0.49 per diluted share. Excluding these two items, we are at $1.80 per share. In the title insurance and services segment, direct premium and escrow fees were up 12% compared with last year. This growth reflects a 30% increase in the number of closed orders, partially offset by a 13% decline in the average revenue per order. The average revenue per order decreased to $2,193 due to a shift in the mix of direct title orders to lower premium refinance transactions. At a product level, we continue to see higher average revenue per order for purchase transactions, which increased 8% this quarter, as well as for refinance transactions, which increased 4%. The average revenue per order for commercial transactions declined 17% as the number of large transactions lagged the prior year. Agent premiums, which are recorded on approximately a one-quarter lag relative to direct premiums, were up 10%. The agent split was 79.3% of agent premiums. Information and other revenues totaled $283 million, up 38% compared with last year. A number of factors contributed to this growth, including the growth in mortgage origination that led to higher demand for the company's title information products, and our acquisition of DocuTech, which isn't included in the prior year results. Additionally, we benefited from services provided to support a temporary pandemic-related government program in Canada. Investment income within the title insurance and services segment was $45 million, down 38%, primarily due to the impact of the decline in short-term interest rates on the investment portfolio and cash balances. Personnel costs were $481 million, up 8% from the prior year. This increase was primarily due to higher incentive compensation expense and salary expense and higher costs as a result of recent acquisitions, partially offset by lower employee benefit expense. Other operating expenses were $251 million, up 15% from last year. The increase was primarily due to higher production-related costs as a result of the growth in order volumes. The provision for title policy losses and other claims was $70 million, or 5.0% of title premiums and escrow fees, an increase from the 4.0% loss provision rate in the prior year. Claims experience continues to be favorable relative to our expectations. Incurred title claims totaled $33 million in the third quarter, a 21% decline relative to 2019. To date, we have not seen enough safety claims. Our intent is to maintain a 5% loss rate until we have more visibility into how the current environment will affect our claims experience. Depreciation and amortization expense was $36 million in the third quarter, up $6 million or 21% compared with the same period last year, primarily due to higher amortization of intangibles related to recent acquisitions. Pre-tax income for the title insurance and services segment was $337 million in the third compared with $254 million in the prior year. Pre-tax margin was a record 19.0% compared with 16.5% last year. Excluding the impact of net realized investment gains, pre-tax margin was 17.1% this quarter compared with 16.4% last year. As Dennis mentioned, we have initiated a plan to sell our property and casualty insurance business. For the first nine months of 2020, our property and casualty business recorded a pre-tax loss of 91.5 million. This amount includes two items. First, an impairment on assets held for sale of 73.3 million, which was recorded this quarter. And second, a 5.6 million reserve strengthening recorded in the first half of 2020. The results of the property and casualty business will continue to be recorded in the specialty insurance segment until a sale is completed. Net expenses in the corporate segment were $22 million, up $3 million compared with last year, largely due to higher interest expense associated with our $450 million senior notes transaction, which closed in May. The effective tax rate for the quarter was 24.6%, in line with our normalized tax rate. Notes and contracts payable on our balance sheet total just over $1 billion as of September 30th, which consists of $992 million of senior notes, $13 million of trustee notes, and $6 million of other notes and obligations. I would now like to turn the call back over to the operator to take your questions.