First American Financial Corporation (NYSE:FAF) Q4 2023 Earnings Call Transcript
First American Financial Corporation (NYSE:FAF) Q4 2023 Earnings Call Transcript February 8, 2024
First American Financial Corporation isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Greetings, and welcome to the First American Financial Corporation Fourth Quarter and Full Year 2023 Earnings Conference Call. [Operator Instructions]. A copy of today's press release is available on First American's website at www.firstam.com/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 13743995. We will now turn the call over to Craig Barberio, Vice President Investor Relations, to make an introductory statement.
Craig Barberio: Good morning, everyone, and welcome to First American's Fourth Quarter and Year-End Earnings Conference Call for the year 2023. Joining us today on the call will be our Chief Executive Officer, 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 and 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 yesterday's earnings release and the risk factors discussed 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 with and reconciliation to the most directly comparable GAAP financials, please refer to yesterday's earnings release which is available on our website at www.firstam.com. I would now like to turn the call over to Ken DeGiorgio.
Kenneth DeGiorgio: Thank you, Craig. We were performing well in a challenging market ahead of the cybersecurity incident that occurred in late December. As previously disclosed, we elected to take systems off-line while we assessed and remediated the situation. The incidents materially impacted the company's operations and consequently, our fourth quarter financial results. Our title orders and related product demand appear to have returned to normal levels, however, and we do not expect any significant ongoing impact from the incident. Looking to 2024, we expect challenging market conditions to persist. Housing affordability and lack of inventory will remain headwinds for our purchase business. Refinance activity will also remain subdued given that most existing mortgages carry interest rates under 5%.
Transactions in the commercial market should increase albeit at lower prices as price discovery continues. While we expect to see modest revenue growth in both our residential and commercial businesses this year, this could change depending on the path of mortgage rates. Turning to order trends in our key markets. Purchase open orders in January are up 6% compared with last year. Refinance open orders in January averaged over 300 per day, consistent with trough levels experienced throughout 2023. Commercial open orders for January are up 7% compared with last year. While some of these orders spilled over from December, these trends support our assessment that the cybersecurity incident will not have a significant ongoing impact on our business.
Despite the uncertainty of the timing of a sustained recovery in our key markets, the strength of our business, along with our financial discipline and strong balance sheet allow us to continue to invest for long-term growth while returning capital to our shareholders. We remain active in our share repurchase program, repurchasing $18 million of our shares in the fourth quarter for a total of $73 million for the full year at an average price of $55.18 per share. In closing, I want to acknowledge the significant support provided by our agents and customers, and other industry participants during our cybersecurity incident. I also appreciate the patience our customers demonstrated as we work through the process of returning to normal operations.
In addition, we have consistently highlighted the importance of our people to the success of our business. The incredible dedication and resilience they demonstrated in response to the cybersecurity incident underscores this principle. I gradually appreciate their tireless efforts to serve our customers and restore our systems. Now I'd like to turn the call over to Mark for a more detailed discussion of our financial results.
Mark Seaton: Thank you, Ken. This quarter, we generated earnings of $0.33 per diluted share. Our adjusted earnings per share, which excludes the impact of net investment losses and purchase-related amortization was $0.69. These results include tax benefits of $5 million or $0.05 per share, primarily due to research and development tax credits we claimed. As previously disclosed, our earnings this quarter were materially impacted by the cybersecurity incident. However, the exact impact the incident had on our results is unknowable. In our title segment, revenue from certain transactions were transitioned to other providers, while others were delayed into 2024. On December 18, prior to our systems being taken offline, we produced an internal forecast estimating our adjusted EPS to be $1 per share.
This forecast includes our actual results for October and November are forecast for December and a tax rate of 24%. Our actual adjusted EPS was $0.69, including the $0.05 tax benefit implying a $0.36 shortfall relative to our internal estimate. Although we believe most of this difference is related to the cyber incident. As I mentioned, the exact impact the incident had on our fourth quarter results is unknowable. Included in this $0.36 shortfall was $11 million of direct expenses related to the incident in our corporate segment. It is too early to tell how much of this shortfall will be recouped in the first quarter or how much will ultimately be covered by our insurance program. We do not believe the incident will have a significant impact on the company's outlook for 2024 Turning to our title segment.
Revenue was $1.3 billion, down 18% compared with the same quarter of 2022. Commercial revenue was $172 million, a 32% decline over last year. Our average revenue per order for commercial transactions declined 20% this quarter to $11,000 due to a combination of fewer large transactions and lower valuations as prices in the commercial markets soften. Purchase revenue was down 11% during the quarter, driven by a 14% decrease in the number of orders closed, partially offset by a 4% increase in the average revenue per order. Refinance revenue declined 32% relative to last year. Although mortgage rates have fallen 100 basis points from the recent highs, there are still levels materially above what is needed to generate a significant rise in refinancing activity.
In the Agency business, revenue was $570 million, down 24% from last year. Given the reporting lag in agent revenues of approximately 1 quarter, these results reflect remittances related to Q3 economic activity. Our information and other revenues were $211 million, down 12% relative to last year. This decline was primarily due to reduced demand for the company data and property information products in our direct title business. Investment income within the Title Insurance and Services segment was $132 million, unchanged relative to the prior year as higher interest rates were offset by lower escrow balances. For the full year of 2023, we saw our investment income surged 50% as the Fed raised rates 4 times. Now as the Fed prepares to lower rates, we estimate that for each 25 basis point decline in the Fed funds rate, our annualized investment income will decline $15 million but the ultimate amount will fluctuate depending on the level of cash and escrow balances.
The provision for policy losses and other claims was $30 million in the fourth quarter or 3.0% of title premiums and escrow fees, down from the 4.0% loss provision rate in the prior year. The 3.0% loss rate reflects an ultimate loss rate of 3.75% for the current year with an $8 million release for prior policy years. Over the last several quarters, we have highlighted the margin drag in the title segment related to three strategic initiatives: ServiceMac, Endpoint and instant decisioning for purchase transactions. We have seen significant earnings improvement in ServiceMac since we acquired the company in October of 2021. And this quarter, the pretax margin of ServiceMac was in line with our overall Title segment results and no longer margin drag.
Therefore, we are removing ServiceMac from our commentary and only including Endpoint and instant decision for purchase transactions. Together, these two strategic initiatives reduced our pretax margin in the title segment by 130 basis points. Pretax margin in the title segment was 4.5% or 7.5% on an adjusted basis. Total revenue in our home warranty business totaled $99 million, a 9% decline compared with last year. In 2022, we recognized a favorable deferred revenue adjustment of $8 million. Excluding this adjustment, revenue in our home warranty business will be flat relative to last year. Pretax income in home warranty was $15 million, down 6% from the prior year. The loss ratio in home warranty was 44%, down from 47% in 2022, driven by lower frequency and severity of claims.
Adjusted pretax margins in the home warranty segment was 19.9%, up from 18.8% in 2022. The effective tax rate for the quarter was 10.7%. Lower than our normalized tax rate of 24% due primarily to research and development tax credits we recognized during the quarter. In the fourth quarter, we repurchased 329,000 shares for a total of $18 million at an average price of $53.85. Our debt-to-capital ratio as of December 31 was 28.6%, excluding secured financings payable, our debt-to-capital ratio was 22.3%. Now I would like to turn the call back over to the operator to take your questions.
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