Release Date: July 25, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Total revenue for the second quarter was $1.6 billion, with adjusted earnings per diluted share at $1.27.
- The Home Warranty segment delivered strong results with an adjusted pretax margin of 15.2%, up from 12.9% in 2023.
- The company successfully launched a pilot for automated underwriting for purchase transactions, which could enhance operational efficiency.
- Investment income was $126 million in the second quarter, driven by higher interest income from the company's warehouse lending business.
- First American Financial Corp (FAF, Financial) repurchased 752,000 shares for a total of $41 million, indicating strong capital management.
Negative Points
- Title segment revenue was down 1% compared to the same quarter of 2023, indicating a challenging market environment.
- Closed refinance orders were down 5% in the second quarter, reflecting high mortgage rates and affordability issues.
- Commercial revenue saw a 1% decline over last year, with closed commercial orders falling 2%.
- Investment income declined by $16 million compared to the same quarter last year, primarily due to lower average interest-bearing escrow and tax-deferred property exchange balances.
- The provision for policy losses and other claims was $35 million in the second quarter, reflecting an ultimate loss rate of 3.75% for the current policy year.
Q & A Highlights
Q: You talked about focusing on the direct-to-consumer channel in the Warranty business. What motivated that, and what impact could it have on profitability?
A: Kenneth DeGiorgio, CEO: The motivation is to diversify the business due to pressures in the real estate channel. The direct-to-consumer channel offers a significant opportunity as many homes are not covered by home warranties. There is an upfront investment, but profitability increases with renewals.
Q: What are the implications of the Sequoia initiative on revenue per order?
A: Kenneth DeGiorgio, CEO: It's early to tell as Sequoia is still in the pilot stage. However, we expect revenue opportunities because customers want faster title issue resolutions. Efficiency gains are also anticipated if the pilot proves successful.
Q: You expressed optimism about the fourth quarter but were more tempered about the third quarter. Why is that?
A: Kenneth DeGiorgio, CEO: The third quarter is coming off a weaker second quarter with closed orders down 2%. While open orders ticked up 4% in July, we are cautious. However, we are optimistic about the fourth quarter due to signs of price discovery and potential interest rate reductions.
Q: Can you provide an update on efforts to defend your deposits and the outlook for investment income in the second half of the year?
A: Mark Seaton, CFO: Our investment income was in line with expectations. The percentage of escrow deposits not earning interest stabilized at 29%, and our initiatives to defend these deposits are just starting. We expect investment income to be around $120 million per quarter for Q3 and Q4.
Q: What is the strategic rationale for holding the Home Warranty business long-term?
A: Kenneth DeGiorgio, CEO: The Home Warranty market is underpenetrated, offering significant growth opportunities. Despite being furthest from our core Title and Settlement business, we see potential in capturing more market share.
Q: What was the margin impact from Instant Titling and Endpoint, and should we expect any margin drag from Sequoia?
A: Mark Seaton, CFO: The margin drag from Endpoint and Sequoia was 140 basis points this quarter, slightly better than last quarter. We expect this to continue decreasing over time.
Q: How should we think about the cadence of margin progression in the back half of the year?
A: Mark Seaton, CFO: Typically, Q2 is the peak for pretax margins in a year without significant refi activity. We expect a normal seasonal decline in margins as the year progresses, with Q2 likely being the high-water mark.
Q: Can you provide a regulatory update, particularly on the CFPB and the Title Waiver program?
A: Kenneth DeGiorgio, CEO: The Fannie Mae Title Waiver program is facing political pressure, and the CFPB's request for information on prohibiting lenders from passing on title insurance costs is ongoing. While these changes could increase costs for consumers, our centralized lender program positions us well.
Q: What was the impact of the home point loans rolling off on July 1?
A: Mark Seaton, CFO: The loss of home point loans resulted in a $3.5 million deboard fee collected in July, which will impact Q3. There will be a minimal impact on information and other revenue due to continued growth in ServiceMac.
Q: How has the trend in purchase orders looked week-to-week in July?
A: Mark Seaton, CFO: In the first week of July, purchase orders were down 7.5%, down 0.5% in the second week, and down 1.5% in the third week.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
