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First American Financial Corp (FAF)·Q1 2024 Earnings Summary

Executive Summary

  • Q1 2024 delivered stable results in a seasonally weak backdrop: revenue $1.425B (-1% y/y), GAAP and adjusted EPS $0.45; consolidated adjusted pretax margin 4.1% as net investment gains ($0.07) were offset by purchase-related amortization ($0.07) .
  • Management reaffirmed 2024 outlook for modest revenue growth and Title margins similar to 2023, citing green shoots in resale orders and stabilizing commercial ARPO; Home Warranty remained a bright spot with 19.3% pretax margin .
  • Investment income headwinds emerged from deposit mix shifting to third-party banks; CFO guided title-segment investment income of ~$120–$125M per quarter in 2024 with risks if mix shift continues; normalized tax rate ~24% (Q1 effective 19.9% on R&D credits) .
  • Operational nuances: $6M bad-debt write-off (≈50 bps Title margin impact), 150 bps Title margin drag from Endpoint and instant decisioning initiatives, and CapEx expected down 15–20% in 2024 vs. $260M in 2023 .
  • Potential stock reaction catalysts: reaffirmed FY outlook despite macro uncertainty; early order inflection in resale/commercial; however, deposit mix pressure on investment income and regulatory overhang (CFPB discussion) remain watch items .

What Went Well and What Went Wrong

  • What Went Well

    • Home Warranty execution: revenue $105M (+1% y/y) with pretax margin 19.3% (adj. 18.8%); loss ratio improved to 41.7% from 47.3% y/y on fewer and lower-severity claims .
    • Early demand stabilization: open resale orders per day rose 5% in March and +2% in April-to-date; commercial open orders +1% in Q1 and +5% in April-to-date; management sees signs of bottoming in commercial ARPO .
    • Cost discipline and loss provision tailwind: Title loss provision at 3.0% of premiums (vs. 3.5% y/y), reflecting 3.75% ultimate loss rate and $7M reserve release from prior years .

  • What Went Wrong

    • Title profitability softer y/y: Title pretax margin 5.5% (adj. 4.8%) vs. 6.5% (adj. 6.8%) last year; margin impacted by $6.2M write-off (~50 bps) and 150 bps drag from Endpoint/instant decisioning initiatives .
    • Investment income pressure: Title investment income fell to $117M (-$8M y/y) due to lower average escrow/1031 balances and a higher share of interest-bearing deposits at third-party banks; CFO flagged continuing mix risk .
    • Refinance activity still weak: refinance revenue -13% y/y with mortgage rates near ~7% suppressing refi volumes; April refi orders ~371/day, flat y/y, +6% m/m .

Financial Results

MetricQ1 2023Q4 2023Q1 2024
Revenue ($USD Millions)1,446.1 1,429.3 1,424.6
GAAP Diluted EPS ($)0.44 0.33 0.45
Adjusted Diluted EPS ($)0.57 0.69 0.45
Pretax Margin (%)4.1% 2.7% 4.1%
Net Investment (Gains)/Losses ($M)(7.4) (41.7) 9.0
Purchase-related Intangible Amortization ($M)9.9 9.6 9.2

Notes: In Q1 2024, $0.07 of net investment gains were offset by $0.07 of purchase-related amortization, making GAAP EPS equal to adjusted EPS .

Segment performance

SegmentMetricQ1 2023Q4 2023Q1 2024
Title Insurance & ServicesRevenues ($M)1,348.6 1,321.1 1,319.8
Pretax Income ($M)88.2 59.8 72.7
Pretax Margin (%)6.5% 4.5% 5.5%
Adjusted Pretax Margin (%)6.8% 7.5% 4.8%
Investment Income ($M)124.6 132.0 116.7
Home WarrantyRevenues ($M)103.7 98.8 105.2
Pretax Income ($M)15.9 14.7 20.3
Pretax Margin (%)15.3% 14.9% 19.3%
Adjusted Pretax Margin (%)15.2% 19.9% 18.8%
CorporatePretax (Loss) ($M)(44.5) (36.1) (34.7)

KPIs and operating drivers

KPIQ1 2023Q4 2023Q1 2024
Title Orders Opened (U.S. direct)172,600 124,600 155,500
Title Orders Closed (U.S. direct)106,600 100,600 102,700
U.S. Commercial Revenues ($M)148.4 171.6 142.8
U.S. Commercial Closed Orders14,900 15,600 14,300
Total ARPO ($)3,428 3,899 3,516
Loss Provision (% of Title Premiums & Escrow)3.5% 3.0% 3.0%
Home Warranty Claim Loss Ratio (%)47.3% 43.6% 41.7%
Debt-to-Capital (%)—28.6% 30.3% (22.5% ex. secured financings)
Cash Dividend Declared per Share ($)0.52 0.53 0.53

Estimates comparison

  • S&P Global consensus estimates for Q1 2024 (EPS, revenue, EBITDA) were not retrievable at this time due to a vendor limit; therefore, a vs.-consensus comparison is unavailable for this report. We will update once accessible.

Guidance Changes

MetricPeriodPrevious GuidanceCurrent GuidanceChange
Revenue trajectory (consolidated)FY 2024Modest growth expected in residential and commercial (Q4 commentary) Modest revenue growth expected maintained Maintained
Title segment pretax marginsFY 2024Not explicitly quantified in Q4 PR; implied stable Similar to 2023 margins Maintained (qualitative)
Title segment investment income ($M/quarter)Q2–Q4 2024n/a~$120–$125M/quarter; higher in Q2, taper later; assumes 2 Fed cuts; -$5M/qtr impact once Home Point deposits leave New quantitative range
Effective tax rateFY 2024n/aNormalized ~24% (Q1 effective 19.9% on R&D credits) New disclosure
CapExFY 2024n/aDown 15–20% vs. $260M in 2023; efficiency shift to in-house engineering New quantitative guide
Endpoint/Instant Decisioning dragFY 2024~130 bps in Q4 2023 (prior commentary referenced) ~150 bps drag in Q1; expected to lessen as revenue rises seasonally Updated (drag to ease)
DividendOngoingAnnual rate $2.12 set in Q3 2023 $0.53 declared in Q1 (unchanged q/q) Maintained

Earnings Call Themes & Trends

TopicPrevious Mentions (Q3’23, Q4’23)Current Period (Q1’24)Trend
Macro/VolumesQ3: “Historically difficult conditions,” affordability low; commercial volumes down ~50% from 2021 peak . Q4: Cyber incident impacted operations; outlook for modest growth in 2024 .Open resale orders +5% Mar, +2% Apr-to-date; commercial open orders +1% Q1, +5% Apr; still challenging overall .Gradual stabilization from trough
Commercial ARPO/Price discoveryARPO decline cited; commercial revenues down materially y/y .ARPO up 1% y/y; 4 “mega deals” >$1M; signs of price discovery bottoming .Bottoming signs
Investment Income & DepositsQ3: Higher rates benefited investment income; offset by lower balances . Q4: Investment income stable; higher cost of funds at bank .Title inv. income $117M; headwind from shift to interest-bearing deposits at third-party banks; 30% mix; 120–125M/quarter guide with risks .Headwind from mix shift
Technology/EndpointInvestment in digital settlement and automation noted across quarters .Endpoint + instant decisioning reduced Title margin by 150 bps in Q1; drag should lessen as revenue rises .Near-term drag, improving over 2024
Loss Provision/LitigationLoss rate reduced to 3.0% from 3.5% in Q3’23; maintained 3.0% in Q4 .3.0% in Q1; includes 3.75% ultimate loss rate and $7M reserve release .Favorable, sustained
Regulatory/Policy—Management addressed DC scrutiny/CFPB RFI; expects little ultimate impact and emphasized title value .Ongoing overhang, low expected impact per mgmt
CapEx/Engineering—CapEx peaked in 2023; -15–20% y/y in 2024; shift to in-house talent .Improving efficiency

Management Commentary

  • “Market conditions in the real estate and mortgage industries continued to be a challenge... we have maintained our focus on managing operating expenses while continuing to invest in long-term strategic initiatives such as expanding our title plant assets and building technology solutions...” .
  • “We have recently started to see signs of a measured recovery... open resale orders per day were up 5% in March... commercial business... open orders up 1% in the first quarter... further growth in April” .
  • “We continue to expect modest revenue growth and title margins similar to what we achieved in 2023” .
  • On regulatory attention: “We... support efforts to make the purchase of a home more affordable... we need to do a better job educating policymakers about the critical role title insurance plays... not a barrier to homeownership” .

Q&A Highlights

  • Investment income drivers and guide: Mix shift toward third-party savings deposits (30% vs. 18% a year ago) pressures investment income; Title segment investment income guided to ~$120–$125M/quarter in 2024, with higher Q2 and modest drift lower thereafter; assumes two Fed cuts; risk if third-party mix rises further .
  • Margin cadence: Expect 2024 Title margins comparable to 2023; Q2 tough comp; stronger second half as volumes improve; tailwinds from lower loss rate and cost saves vs. headwinds from higher D&A and investment income .
  • Endpoint/Instant decisioning drag: ~150 bps Title margin drag in Q1 (vs. ~130 bps prior quarter); expected to lessen as revenue seasonally improves .
  • Commercial trends: ARPO up 1% y/y; four “mega deals” in Q1; sign of price discovery progress; Blackstone commentary noted as corroborating bottoming .
  • Deposits/Home Point offboarding: ~$380M of deposits leaving ($50M ~May 1; $330M ~July 1); ~-$20M annualized investment income and ~-$20M annualized interest expense both fall off; deboarding fees immaterial (<$1M) .
  • CapEx: 2023 CapEx $260M; 2024 CapEx down 15–20% with shift to in-house engineering .
  • Refi: April refi orders running ~371/day, roughly flat y/y and +6% m/m .

Estimates Context

  • S&P Global consensus for Q1 2024 EPS, revenue, and EBITDA was unavailable at the time of analysis due to a vendor rate limit. Accordingly, we cannot present vs.-consensus beats/misses for this quarter. We will update this section when S&P data become accessible.

Key Takeaways for Investors

  • Foundation stable in a tough quarter: Revenue/EPS essentially flat y/y with consolidated adjusted pretax margin holding at 4.1% despite lower Title investment income and discrete cost items .
  • Early order inflection: Measured improvement in resale/commercial orders into April is a constructive signal for 2H recovery potential, consistent with maintained FY outlook .
  • Watch investment income mix: Deposit migration to third-party banks and Home Point runoff temper 2024 Title investment income; the $120–$125M/quarter guide carries downside risk if mix worsens .
  • Margin path: Expect 2H skew with improving volumes and easing drag from Endpoint/automation initiatives; Q2 comp remains tough .
  • Home Warranty as ballast: Sustained improvement in loss ratio and near-20% pretax margins provide steady earnings contribution .
  • CapEx rollover: Reduced 2024 CapEx (-15–20%) and in-sourcing signal improving free cash flow efficiency over time .
  • Policy overhang: Management expects limited fundamental impact from CFPB discussion; nonetheless, headline risk remains a factor to monitor .

Additional notes

  • Other relevant Q1 2024 press releases beyond the earnings release were not identified in the document set queried; the 8-K furnished the full press release and exhibits .