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First American Financial Corp (FAF 1.93%)
Q2 2019 Earnings Call
Jul 25, 2019, 11:00 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Greetings and welcome to the First American Financial Corporation's Second Quarter Earnings Conference Call. [Operator Instructions]. A brief question-and-answer session will follow the formal presentation. [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 short time by dialing 877-660-6853 or 201-612-7415 and enter the conference ID 13692064. We will now turn the call over to Craig Barberio, Vice President, Investor Relations to make an introductory statement.
Craig Barberio -- Vice President, Investor Relations
Good morning everyone and welcome to First American's earnings conference call for the second quarter of 2019. 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 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 filings.
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 details on these non-GAAP financial measures including presentation with 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.
Dennis J. Gilmore -- Chief Executive Officer
Thank you, Craig. Good morning and thank you for joining our call. I'll begin with a review of our second quarter results and then discuss our outlook for the remainder of 2019. The Company delivered outstanding financial results this quarter. Second quarter earnings were $1.64 per share or $1.58 per share, excluding net realized investment gains. Low interest rates continue to strengthen the purchase market, drive substantial growth and refinance activity and support a healthy commercial market.
The Title segment delivered a record pre-tax margin of 17% or 16.5% excluding net realized investment gains. Strong expense management and growth in our investment income drove improvements in our earnings and margin.
The Title segment's revenues were flat, our refinance revenues were up 34%, our purchase revenues declined 2%, an improvement from recent trends and our commercial revenues were down 2% compared with last year, in-line with our expectations. Our Specialty Insurance segment delivered strong results driven by performance of our home warranty business, which had a lower claim losses due to lower claim frequency and severity. The overall segment benefited from a decline in the loss ratio to 56.4% driving a pre-tax margin of 12.8% compared with 8.4% last year.
As we previously announced, we have completed our investigation into the consumer impact of our recent information security incident. Though the investigation identified only 32 impacted consumers, we take seriously our responsibility to keep our customers information secure and we regret the concerns this incident caused.
Turning to the outlook, the strong economy and lower mortgage rates continue to drive improvement in the market. We are encouraged by July's open order trend. Purchase orders were up 4% driven by strength in new home orders. Refinance orders were up 65%, which bodes well for the residential market in the second half of the year. In addition, we expect continued strong performance from our Commercial business. Although the anticipated reduction of the Fed funds rate will impact our investment income given current market business conditions and the efficiencies of our operation, we expect to deliver strong financial results in the second half of the year.
I'll now turn the call over to Mark for a more detailed review of our financial results.
Mark E. Seaton -- Executive Vice President, Chief Financial Officer
Thank you, Dennis. In the Title Insurance and Services segments direct premium and escrow fees were up 1% compared with last year. This increase reflects a 1% increase in the average revenue per order with the number of direct title orders closed flat relative to last year. The average revenue per order increased to $2,620 primarily due to higher residential real estate values, partially offset by a shift in the mix of direct revenues to lower premium refinance transactions. The average revenue per order for purchase transactions increased 3%, while the average revenue per order for commercial transactions increased 1%.
Agent premiums which are recorded on approximately a one quarter lag relative to direct premiums were down 3%, the agent split was 78.9 % of agent premiums. Information and other revenues totaled $198 million down 4% compared with last year. The decline was primarily due to lower revenues from the Company's centralized lender businesses and international operations.
Investment income within the Title Insurance and Services segment was $71 million, up 37%. The increase resulted from higher average balances and rising short-term interest rate that drove higher interest income in the Company's investment portfolio and cash balances. Short-term rates impact our escrow deposits, operating cash, 1031 Exchange business and our bank where we held $4.2 billion in cash and debt securities as of June 30. Personnel costs were $423 million, down 1% from the prior year. The decrease was due to lower salary expense driven by lower average headcount during the quarter.
Other operating expenses were $194 million down 4% from last year. The decline was due to lower production and office-related expenses. The provision for title policy losses and other claims was $44 million or 4% of title premiums and escrow fees unchanged relative to the prior year. The current quarter rate reflects an ultimate loss rate of 4% for the current policy year with no change in loss reserve estimates for prior policy years. Pretax income for the Title Insurance and Services segment was $233 million in the second quarter compared with $210 million in the prior year. Pretax margin was 17% compared with 15.3% last year, excluding the impact of net realized investment gains and losses, pre-tax margin was 16.5% this quarter compared with 15.1% last year.
Net expenses in the corporate segment were $19 million, up 7% compared with last year. This quarter, we incurred $1.7 million related to the information security incident. Expenses associated with the incident are recorded in the corporate segment. Although we will incur additional expenses related to this incident, we expect them to be immaterial.
The effective tax rate for the quarter was 18.4% lower than our normalized rate of 24%, primarily due to the resolution of state tax matters from prior years. Cash provided by operations was $267 million, up from $211 million in the second quarter of 2018.
In April 2019 we entered into a new five-year, $700 million senior unsecured credit agreement. As of June 30, outstanding borrowings under the facility totaled $160 million. Notes and contracts payable on our balance sheet totaled $730 million as of June 30, which consists of 547 million of senior notes, $160 million on our credit facility, $18 million of trustee notes and $5 million of other notes and obligations. Our debt-to-capital ratio as of June 30 was 18.4%.
I would now like to turn the call back over to the operator to take your questions.
Questions and Answers:
Operator
Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Mark DeVries from Barclays, please.
Mark DeVries -- Barclays -- Analyst
Yeah, thanks, Mark how should we think about expenses in the back half of the year. I know you guys had late last year, early this year been cutting costs and then had the surge in refinance activity that obviously helped the margin this quarter. Should we expect, all other things being equal, a little bit of pressure on the margin as you need to staff up or are you in a good position right now on expense side?
Dennis J. Gilmore -- Chief Executive Officer
Yeah, Mark this is actually Dennis. We did to manage our expenses aggressively in the second half and our headcount is down 8% from last year. Right now, our staffing levels are up fairly relative to our current quarter activities and we continue to utilize our seasonal workforce very aggressively by utilizing temps and over time. So right now with the current order volumes, we do not expect to increase our head count significantly in the third quarter.
Mark DeVries -- Barclays -- Analyst
Okay, great. And then are there any kind of residual issues that you need to deal with here from the information security issues that we need to think about?
Dennis J. Gilmore -- Chief Executive Officer
Really, I'll put it in two buckets. We'll have some small costs, we'll roll through in the third quarter, but our intent will not to be to highlight them. We'll actively -- because of the headline nature of what happened, we'll be very actively aggressively defending the lawsuit. And we work cooperatively with the regulators. So that will be the tail event .
Mark DeVries -- Barclays -- Analyst
Okay, got it. All right, thank you.
Operator
Our next question comes from line of Bose George from KBW. Please proceed with your question.
Bose George -- KBW. -- Analyst
Hey, guys. Good morning. I just wanted to follow up on the margin outlook really for the back half of the year and for the year. Your historic range, you've talked about 11% to 13%, with the expenses potentially pretty stable in the back half of the year, I mean could you hit the 14% level for the full-year?
Dennis J. Gilmore -- Chief Executive Officer
Yeah, I probably won't give you the exact number, but we, I think as you know, we've been very focused on growing our margin over the last five years and we've been successful really regardless of the market outlook, and I think when we enter the second half right now purchase is going to be less of a headwind, which is good for us and there is no question we're benefiting from, I would call a little bit of a surprise the refinance and we have a very strong commercial market going forward. So right now sitting here, we think we can exceed last year's margin in '19.
Bose George -- KBW. -- Analyst
Okay, great, thanks. And then actually just on the other segment, the corporate segment, what's a good run rate for the just the expenses of that segment?
Mark E. Seaton -- Executive Vice President, Chief Financial Officer
Bose, it's Mark. So when you look historically, we've been really consistent $18 million a quarter. I mean there's not a lot of volatility. This quarter we were $19 million, because again we pushed all the cost of the information security incident there. So I think somewhere between $18 million and $19 million over the next few quarters is a good assumption.
Bose George -- KBW. -- Analyst
Okay, thanks. And then actually, just on the Specialty Insurance segment, can you talk about the outlook there, just in terms of the margins?
Dennis J. Gilmore -- Chief Executive Officer
Yes. I think we'll continue to improve there also. We had a very strong second quarter for our Home Warranty business, but our claims frequency also were down there. We did get a little bit benefit from the weather in the second quarter. Third quarter typically will be another more difficult quarter for that business what I think will do well and our P&C continues with its turnaround effort. So I think we'll have another good second half to the year for the Speacialty Group.
Bose George -- KBW. -- Analyst
Okay, great, thanks.
Operator
Our next question comes from line of Jason Deleeuw from Piper Jaffray. Please proceed with your question.
Jason Deeleuw -- Piper Jaffray -- Analyst
Thanks for taking the question and a good work on the quarter. Question on 11% to 13% Title pre-tax margin goal. I know it's a couple of years old, but would you -- when would you update that or how are you thinking about that and kind of when you're thinking about the long-term margin potential of the company? If you could just kind of give us some of your high-level thoughts on that margin range and when would you consider adjusting that range?
Mark E. Seaton -- Executive Vice President, Chief Financial Officer
Thanks for the question, Jason. What I would say is, when we first develop that range at Investor Day last year we talked about this 11% to 13% margin in Title, but that assumes a mortgage market of 14 to 180 with about a 25% refi mix and that's kind of where 2019 is turning out to be. Now we're operating at the high-end or even exceeding that level for a couple of reasons. One is, investment income has been higher than we thought. And the second thing, I think Commercial has been better than what we thought versus when we were back in Investor Day. And so I think we'll wait till the year plays out then we'll consider updating the range, perhaps next year .
Jason Deeleuw -- Piper Jaffray -- Analyst
Okay, thanks for that. And then on the investment income, and it looks like we will get the Fed rate cut. What are you expecting in terms of Fed rate cuts and just interest rates and the investment income dollars, is there any help you can give us thinking about that going forward?
Mark E. Seaton -- Executive Vice President, Chief Financial Officer
So initially when the Fed started raising rates we guided to this $12 million increase in our annualized investment income for every rate increase and we've actually gotten more like $15 million and that's what we've guided last several quarters just because -- mainly because our balances have risen. Right? So we've really consistently got $15 million of annualized income every time the Fed has risen.
Now the question is, what happens when the Fed cuts, which is what is expected and it's hard to say exactly, but we feel like we can beat that $15 million. We don't think it's going to go down quite that much for a couple of reasons. One is, just the strategic nature in which we manage our deposits. And the second one is, really in the last six months we've gone to more of a fixed-rate strategy in some of our portfolios, specifically the bank and our insurance company.
And so we've shifted from floating-rate securities to fixed-rate, which I think is going to help us. So now as we sit here today, if the Fed cuts, we're expecting somewhere between, like a $12 million to $15 million decrease in our investment income and that assumes that deposit levels are steady, consistent, where they are today.
Jason Deeleuw -- Piper Jaffray -- Analyst
It's very helpful. Thanks. And just the last question on the commercial -- your national commercial revenue was down a little bit, your large competitors' was up a little bit, is there anything going on with market share or just kind of timing of deals or anything get shifted quarter-to-quarter? Any color on kind of the Commercial revenue trends.?
Dennis J. Gilmore -- Chief Executive Officer
Yeah, thanks for the question. Yeah, we had a very good commercial quarter and actually and then we started the year. We actually thought we'd be down a little in commercial as we've guided to and we're actually performing better than that, specifically to the quarter it was a timing issue. We had -- we could not close a few large deals, they will probably spillover into the third quarter And regarding market share actually, we think we're picking up market share right now. So, overall very strong fundamentals in commercial. We think we'll have another very good second half to the year.
Jason Deeleuw -- Piper Jaffray -- Analyst
Okay, thank you very much.
Operator
Our next question comes from line of Mark Hughes from SunTrust. Please proceed with your question.
Mark Hughes -- SunTrust -- Analyst
Thank you very much. On the other operating expenses, anything on the data capture or processing front that you're getting some incremental efficiencies that are helping to drive that down that maybe more durable, you may see more of it?
Mark E. Seaton -- Executive Vice President, Chief Financial Officer
Hi, Mark. You know we -- I would say that we are getting some benefit on some of the automation that we've put into some of our processes, specifically on the centralized refi business. I wouldn't say it's material at this point. So when you look at our overall Title segment the cost savings is not significant, but it's -- but we're still early in that and we hope it will grow over time.
Dennis J. Gilmore -- Chief Executive Officer
Yeah. And I would only add the early returns for the automation, efforts we've rolled out in our Central Group is good and it's absolutely helping us deal with the current volume surge and I think those benefits will grow over time.
Mark Hughes -- SunTrust -- Analyst
And then in the Specialty business, decline in frequency and severity, would you say that was weather perhaps or just normal variability . Do you think underwriting made a difference in the quarter?
Dennis J. Gilmore -- Chief Executive Officer
Great question. It's really all of the above. We continue to do with a very good job on underwriting. We continue to do a very good job on claims management and we had some benefit from the relatively mild weather pattern so far in some of our key markets. So it's all of the above.
Mark Hughes -- SunTrust -- Analyst
And then finally, the July purchase orders are up and looking at your early commentary last year, I think you were down 1% through this period. I assume the comparisons could just get easier from here, anyway to comment on the trajectory of that when you reflect on how last year played out on purchase orders?
Dennis J. Gilmore -- Chief Executive Officer
Yeah. Yeah, thanks for the question. No question It's getting better for us right now. I think the spring selling season. I would classify it is really in-line with our expectations, maybe slightly better,actually. When we started the year, we had actually controlled our costs very aggressively. I think we were going to go through the resetting of the market. I think that's still happening, but sitting here today, the economies are very strong for us. I think the housing is really moving to that more balanced position in our opinion. Early in July, we were up 4%, but a lot of that's being driven by the volatility of new homes. Our new homes are up a lot right now. What's really interesting to us is the lease sales up 1% right now so far in July, which is a really good sign and we're entering the back-half that our comps get a lot of easier. So all in all, we think actually the purchase will be definitely less of a headwind going into the second half.
Jason Deeleuw -- Piper Jaffray -- Analyst
Thank you.
Operator
[Operator Instructions] Our next question comes from the line of Chris Gamaitoni from Compass Point. Please proceed with your question.
Matt Gaudioso -- Compass Point -- Analyst
Hi, good morning. This is Matt Gaudioso on for Chris. Thanks for taking my question. Just one on centralized lender, you noted lower revenue year-over-year by the spike of refis, is there anything to call out here? Or could you expand on some commentary? Thanks.
Dennis J. Gilmore -- Chief Executive Officer
Yes. So, our refi business or our centralized lender business isn't just originations, which you kind of refi title orders. We also have other businesses in there including default. And default continues to decline and so it's really just a mix of default versus our origination business.
Matt Gaudioso -- Compass Point -- Analyst
Thanks.
Dennis J. Gilmore -- Chief Executive Officer
Thank you.
Operator
Our next question comes from line of MacKenzie Aron from Zelman & Associates. Please proceed with your question.
Mackenzie Aron -- Zelman & Associates -- Analyst
Thanks, good morning. Just one question on the capital situation. Given that the debt-to-cap is somewhere at the low end of the 18% to 20% target you all talked about. Can you just talk about how you think about the opportunity, right now, whether it's to increase the dividend or look at buybacks or if there are strategic acquisition opportunities on the table? How are you thinking about capital allocation over the next year or so?
Mark E. Seaton -- Executive Vice President, Chief Financial Officer
Sure. MacKenzie. I'll start with that. First of all, we talk about our target debt-to-cap of 18% to 20% and we are at the low-end of that range, which is a good comfortable place to be, I think at this point in the cycle. At the end of the day, we're trying to invest as much as we can in our core business, either through organic projects that will help build a moat around our business or through M&A. And if we can invest -- adequate returns for our shareholders, organically or through M&A, we'll do that all day long. And to the extent that we can't, we pay dividends and occasionally we buy back shares, but dividend is something that's really important to us, we've been raising it very aggressively really since -- from the last five years or even longer.
So we want to pay a healthy dividend, it's really important to us, we buy back stock occasionally not frequently, but occasionally, and so those are the -- that's kind of our thought process going forward. But we like the debt-to-cap where it is right now based on where we are in the cycle.
Dennis J. Gilmore -- Chief Executive Officer
Yes. And I would only add on the deal front, it's been relatively a quiet first half of the year for us. But we've actually got a pretty healthy pipeline of deals we're evaluating right now and our strategy is just so everybody is clear, is pretty consistent, we're looking to acquire title agencies in key markets, we're looking to buy data and information companies to help the title automation and we're looking at either acquisitions or minority investments, a little outside of our core but very complementary to title. So good pipeline and as always, we'll be disciplined on our deployment as long as we can get the returns.
Mackenzie Aron -- Zelman & Associates -- Analyst
Great. Thank you.
Dennis J. Gilmore -- Chief Executive Officer
Thank you.
Operator
Our next question comes the line of Jack Micenko from SIG. Please proceed with your question.
Sean Brophy -- SIG LLC -- Analyst
Hey, good morning guys. This is actually Sean Brophy on for Jack this morning. So, my first question was on average revenue per order, the growth there seem to slow a little bit this quarter, just given the refi mix. But in your comments you also showed some confidence around commercial volumes going forward. So are you calling for better commercial volume to maybe offset some of that refi mix impact? How should we sort of think about that dynamic going forward?
Dennis J. Gilmore -- Chief Executive Officer
Well, if you're looking at like our Title segment's average revenue per order, including all the business lines. We expect it to decline next quarter just simply because of the mix of refi versus purchase. Obviously refis are going well. We're going to close more refi orders next year and that's going to put some pressure on our refi per order. And then typically in the fourth quarter it rises because commercial is a strong quarter usually in the fourth quarter. And so we think it could rebound in the fourth quarter. We don't -- the way we look at it and manage the business, we don't really look at kind of the consolidated fee profile. We break it out purchase, refi and commercial, look at it by individual business lines. And this quarter our purchase average fee profile was of 3% versus last year, mainly just because housing prices have continue to risen.
And so, I think that was in-line with our expectations. Our refinance fee per file was up 15% versus last year, which is up more than a typically is for -- just because again housing prices are rising. We've raised rates a little bit, but I think the refi fee profile 15% have been a big benefit to us. And finally, commercial fee profile was flat just because of the size of the deals that we're doing in the second quarter were similar to what they were last year. So that's more of how we look at it on a financial basis.
Sean Brophy -- SIG LLC -- Analyst
I guess sort of just piggy-backing off of that longer-term commercial fee perf -- I mean average revenue per order, sort of where is that trend, do you see that sort of in the mid-single digit range or low single digits, where do you sort of see that going?
Dennis J. Gilmore -- Chief Executive Officer
You're talking about when you lump purchasing commercial and refi all together.
Sean Brophy -- SIG LLC -- Analyst
Just the commercial side, sorry.
Dennis J. Gilmore -- Chief Executive Officer
I'm sorry just commercial. It really all depends on the size of the deals. We're still in a really strong commercial environment. Our fee profile in commercials consistently been up for probably six, seven years now, and so it's been decreasing. So I would say low single-digits, is probably somewhat when we would expect.
Sean Brophy -- SIG LLC -- Analyst
Okay, thank you.
Operator
Our next question comes from line of John Campbell from Stephens. Please proceed with your question.
Carter Andrew -- Stephens -- Analyst
All right, thanks guys, this Carter on for John. One more quick question on the purchase market, is there anything to call out from a geographical standpoint? Or is the volume come pretty, pretty broad based?
Dennis J. Gilmore -- Chief Executive Officer
Thanks for the question. The west I would say is still probably trailing. Central is a little stronger, right now. But again, we're looking for a pretty -- definitely less headwinds going into the second half. I think our comps get a lot easier. So I think from a modeling perspective probably pretty broad base, but the west is -- probably still got the most pressure.
Carter Andrew -- Stephens -- Analyst
Got it. Thank you. And then real quick on the capital allocation. Is there a specific reason why you prefer paying the dividend over buyback stock. And if you can provide a little more color on the decision making process behind that?
Mark E. Seaton -- Executive Vice President, Chief Financial Officer
Well, I think the dividend -- I mean we're a strong cash flow generating company, and we have a lot of really attractive investment opportunities in our business. But the reality is we generate more cash flow than we have opportunities and that's why we pay a dividend and it's something we've done, it's something that we want to --, it's a good discipline to have. As a company we want to return capital back to our shareholders, consistently and so our primary method is dividends and that's something we're going to continue to do. I think we -- typically every so often when there's dislocations in the market, we repurchase shares, and we're always looking for those opportunities. But primarily we're focused on dividends because we want to return capital on regular consistent quarterly basis.
Carter Andrew -- Stephens -- Analyst
Got it. That's helpful, thanks guys.
Mark E. Seaton -- Executive Vice President, Chief Financial Officer
Thank you.
Operator
That's all the time we have for questions today. [Operator Closing Remarks]
Duration: 28 minutes
Call participants:
Craig Barberio -- Vice President, Investor Relations
Dennis J. Gilmore -- Chief Executive Officer
Mark E. Seaton -- Executive Vice President, Chief Financial Officer
Mark DeVries -- Barclays -- Analyst
Bose George -- KBW. -- Analyst
Jason Deeleuw -- Piper Jaffray -- Analyst
Mark Hughes -- SunTrust -- Analyst
Matt Gaudioso -- Compass Point -- Analyst
Mackenzie Aron -- Zelman & Associates -- Analyst
Sean Brophy -- SIG LLC -- Analyst
Carter Andrew -- Stephens -- Analyst
