First American Financial Corporation (FAF) Earnings Call Transcript & Summary

Good afternoon. Thank you for joining us. I'm Mark DeVries, Barclays U.S. consumer finance analyst. I'm very pleased to be joined today by the CFO of First American, Mark Seaton. We are going to be doing a fireside chat, so I've got a number of prepared questions for Mark. This is live. So anyone is listening in and has questions for Mark, you can yield them -- email them to me. My e-mail should be on your screen. It's [email protected], or alternatively, you can message me over Bloomberg. So with that, Mark, why don't we dive into it. Can you just update us on how May volume trends are tracking compared to April's order count? Have you seen refi orders stabilize now that rates have kind of stabilized and the 30-year mortgage rate has even dipped back down kind of sub-3% here?

Yes. Mark, thanks a lot for having us at the conference again. And I want to point out that Craig Barberio on mine and for Craig, it says, Mark, so we kind of swapped in here. So anyways, you'll be able to figure that out. Yes. So just in terms of volumes, so the year is turning out to be another good year for us in terms of volumes. I mean, for May, we're running at about 1,800 refi orders a day so far in May. It's basically where we were in April. So what we've seen on the refi side is that the last 6 months of 2020, we were -- here at First American, we were opening about 3,000 refis a day. And that was pretty much peak. I mean we had an all-time high mortgage market last year. I mean as a company, as an industry, we can't process more than an equivalent of 3,000 a day for us. And we have seen it fall off as mortgage rates have risen. So now we're 1,800 a day. I think 1,800 a day is a really strong level. I think when you get to 1,000 a day or less, it's -- I'd say that's a low level of refinance activity. 1,800 a day for that, it's pretty strong. It's higher than what we thought we were going to be at this point when we put our plans in place for 2021. And it has seemed to kind of stabilize at this rate, right? So it went from 3,000 to 1,800 pretty quickly, and it's kind of stabilized there now. Now who knows what happens going forward. But the 30 years kind of ticked down a little bit here, and that's kind of helped stabilize our order flow. So the fact that we're 1,800 bodes well for closing for the second half of this year. On the purchase side of things, we're really pleased with the strength of the purchase market. We're opening about 2,400 purchase orders per day so far in May. So we're seeing, call it, mid-single-digit growth versus last year on the order side. And then in terms of ARPU, we're seeing low double-digit growth in terms of ARPU. So we're really -- internally, we're surprised that the fee per file has been so strong, especially since we haven't been raising rates, right? And that's just a function of strong HPA. We're also getting a higher mix of business from the coastal states like -- coastal areas like California. So the purchase market is strong now. And we think we've got tailwinds with purchase over the next, call it, 5 years with all the millennials buying homes. So we definitely have tailwinds in purchase. And you mix that all together, and we're going to have another good year in terms of revenue for 2021.

Okay. I think you just mentioned double-digit ARPU. Give us a sense for how much of that is home price appreciation? How much of that is the geographic mix? And I think, historically, correct me if I'm wrong, the guide post had been you get roughly half for every percentage of HPA, you may get 50 basis points of price. But obviously, we're seeing double-digit HPA here. Is a lot of that coming more from HPA than it is from mix?

The rule of thumb we always think about here, and it is 60%, right? So housing prices go up 10%, and we're going to have a 6% higher fee per file. Now obviously, we're getting a lot more than that. We're getting like 100%. And so I think the high level way to think about it is you can attribute the other 40% of the delta just mix of business. I mean that's probably the easiest way to think about it. That's not sustainable over a long period of time, but we are seeing that right now.

Okay. Got it. And I know this is a tough question. I think you talked about how your refi orders have kind of leveled off around 1,800 a day. If rates remain at these levels, would you see that holding for the course of the year? Or are you guys looking for some level of burnout as we get into the summer months?

It's always hard to say. I mean I know there's like monitors out there that say that there's 15 million eligible refi borrowers at a 3% mortgage rate, 15 million. Now 15 million, that's a lot of refis that could still be done at a 3% mortgage rate. So I think it all just depends. But I'll tell you, I think if mortgage rates did stay around 3%, we can be at 1,800 for quite some time, just like we were getting the same questions a year ago, how long can you have 3,000 a day, and we had it for half a year. Now rates went up, we're 1,800 a day. As long as rates don't go up anymore, I think we can be at this level. But it's hard to tell.

Okay. Turning to the commercial trends. To what extent do you believe we're seeing a catch -- just a catch-up in commercial activity from a real quiet second quarter and 3Q '20 versus just a more long-lasting kind of continued boom in commercial demand?

When we talk to our customers in commercial and we talk to our sales team and our leadership in commercial, they're more bullish than they've ever been about commercial. And what we don't hear is that it's all a catch-up. Maybe there's some of that, but that's not how we're thinking about it. So in the first quarter, we had 2% revenue growth in commercial versus first quarter of last year. And first quarter of last year was a pretty normal market. Obviously, we're going to -- the next quarter is Q2, everything changed in Q2 of last year, so we're going to have huge comps year-over-year. But we're kind of back in a normal market in terms of revenue, transaction volumes, we're getting more bigger deals. It feels more normal. And we're very optimistic that it's going to continue to accelerate. One thing we look at is our escrow deposits. It's one thing we look at, right? So typically, what happens is at the end of the quarter, like last week in March, there's a lot of commercial transactions that closed. When commercial transactions close, we have fewer deposits, right, so -- because people have their escrows and they close escrow and deposits get released. And we usually see like a big drop in deposits at the end of quarters. We didn't see that in the first quarter. We didn't -- we had a lot of closings, a lot of -- closed a lot of big deals. But we opened like just as many and our escrow deposits didn't -- there wasn't a blip. It just kept going, which means we have a good pipeline heading into the second half of this year. So we feel really optimistic about the commercial market. There's a lot of strength in it. We didn't -- it's a very different cycle than we saw the financial crisis 12 years ago. Back then, we were getting a lot of foreclosed properties and a lot of default-related work. Now it's -- we're not getting that. We're still getting a lot of healthy transactions. So we're seeing broad-based strength. Industrial is real hot. Cap rates are really low. Investors are still searching for yield and commercial real estate is a good place to put their capital.

Okay. Is there anything that you guys are concerned about in some of the tax policies that's getting kicked around that could really impact that level of activity and slowly dip you down?

It's interesting. During the last tax reform, we just had a frenzy of transaction activity at the 11th hour. I mean, literally, open orders on a Tuesday, close on a Wednesday, flurry of activity. Who knows what's going to happen this time around. The one thing that we are looking at with this latest round of tax reform is just 1031, 1031 exchange. So there's been talk about eliminating 1031 or somehow reducing the 1031 benefit, which would not be a good thing for us. I think it's more of an opportunity cost than anything else. Like right now, our earnings from 1031 are about $10 million a year pretax. So we make -- it's a good business for us, but it makes $10 million when rates are 0, right? So when rates -- short-term rates go up, we -- it increases the profitability. So if that were going to be taken away or the benefit reduced, it would hurt our 1031 business. But other than that, like in terms of just our commercial title business, there's nothing that we're really concerned about.

And I would just add there that keep in mind the 1031 is primarily driven by residential, so it's not an overwhelming component of commercial real estate.

Okay. And as you alluded to, Mark, you obviously make more in that business in a higher rate environment. You're obviously getting more carry on those deposits. Can you give us a sense of how in a more normalized environment, what that earnings contribution would be income? What do you see as being at risk based on some of the policies that have been thrown out there in terms of reducing the eligibility around that?

What -- do you want to start with that, Craig?

Yes. I mean, we looked at that recently. And we -- the earnings per quarter, I mean we're running a $1 million to $2 million of interest revenue at the present time. And if you step back about 6 or 7 quarters, it was upwards to $10 million. So there was a pretty big upside there that we're giving up.

You're talking about just the 1031 business, Mark?

Yes, exactly.

Okay. Yes, that's right.

Yes. Now having said that, I mean, that's how it's been in the past. The other fact of matter is -- and this is being worked kind of right now. There's a big piece of the business, that $500,000 capital gain cap that they're talking about, there's a substantial portion of the business that would be under that, and therefore, it would continue. So jury is still out, but it wouldn't be -- we wouldn't be getting up all that. There would be a substantial portion, it would still fall under the $500,000 cap.

Okay. Staying with the commercial business, are there any sectors where you're seeing that are outperforming or underperforming the overall performance in your commercial business? And how has that kind of changed since the initial pandemic-induced dip in commercial volumes that you saw?

Yes. We've got a national business. I think we're a really good proxy for the market, right? It's not like we're overweight East Coast or West Coast or overweight hotels or industrial. I mean we're kind of -- we are the market, right? So it's obvious like the sectors that are hottest is industrial. I mean a lot of industrial properties, obviously, that's the place to be in terms of commercial real estate, cap rates are like all-time lows. The softest areas are retail. There are certain office buildings, centralized office parks that are softer. But that's where, I think, that we play well in is that whenever there's disagreements about the future of a certain asset class, things trade, buyers buy things because they have a different view than a seller. And we sit in the middle and we can capitalize on that trade. So to answer your question, retail and office are a little bit underweight and industrial is overweight. But we -- again, we participate in all of those transactions. We're not underweight or overweight in anything specifically.

Okay. That's helpful. Turning to your title margins. They've been well in excess of your long-term historical average even before this COVID-related refinance. Have you been able to realize a kind of structural margin improvement within your title business as you recognize the effects of your ongoing automation efforts coupled with just kind of a stronger commercial order demand?

We have -- we do have -- I mean, it's like there's never-ending quest to improve your structural margins. It never ends, and we have. And it's just -- there's not some big bang. It's just, over time, we just keep work on -- keep working on it. I think a decade ago, it was back-office centralization, right? It was going from 30 accounting centers to 1. It was going from 100 claims centers to 1. We did all that a while ago, and we got structural advantage out of that. And the latest thing is just the automation efforts. Title automation is one of those. So one thing I'll -- stat I'll give is 5 years ago, we had a centralized production unit, right, called National Production Services. And so all the orders -- when we get an order, whether it's residential, purchase, refi, commercial, it all goes to 1 unit, and they process the order. They give the preliminary commitment back to the customer in the field, right? So all the title -- it used to be all done locally in like 800 offices like a way back and now it's just all done in 1 place. But we've done a much better job the last few years of digitizing that and using automation. So 5 years ago, we spent $150 million in National Production Services. $50 million is data, and that's not going away. You need data, right? If anything, we'll spend more on data over time. $50 million we would spend on offshore labor, $50 million we spent on onshore labor. Well, last year, we spent $140 million in our National Production Services unit. But we also had way more orders than we did 5 years ago, right? It's like all-time high mortgage market and yet we're spending less. And so when you look at it in a per order, it's a lot less. And so that's an area where we've got structural changes, 60% of the orders that we open now are completely automated on the refi side, on refis. But that being said, $150 million on our $6 billion of expense base is not -- we spend more on sales. We spend more on closings and offices in that. So we have seen structural change, but there's more to come. I mean we're still -- it's gradual improvement. But yes, there's no question. I mean to have 15% margins in a full year -- I mean even in Q1, we had 14% margins in Q1. I mean that's -- we've never seen that before. And a lot of that is market. There's no way we're going to get that without a good market. But a portion of it is definitely structural cost cases we make. There's no question about that.

Yes. Historically, I think the response has been there's no real difference in margin for purchase versus refi. Does that still hold? Or has the ability to maybe automate a higher percentage of your refinance transactions pushed that to being a higher-margin business?

Again, I would say it generally still holds. It's very hard for us to parse that out because in our 800 branches, we've got teams that do purchase and refi. I mean they do both. So it's hard to exactly put up. But we've done studies and we've done our best, and we realized that the contribution margins are the same. Now profit dollars are 2.5x as much for a purchase transaction, right? Because you get 2.5x the premium and the margins are the same, so you're trying to find some profit dollars and you can spread that over your fixed cost more. So we'd rather have a purchase market than a refi market. But in terms of the margins, they're roughly the same. I think that because we've been able to automate some of the title production efforts, that's definitely helped refis because we haven't done any automation on the purchase side. And that's kind of the next wave. That's what we're working on now is to automate the purchase transaction. And so we have improved the margins on refis more than purchase, but I wouldn't say it's dramatically different just because the title production cost is such a low -- it's a part of the overall expense base of a refi transaction.

Okay. So this past quarter, you talked a lot about some of the new plans to open additional title plants. How should we think about kind of the near-term financial impact of those investments along with the longer-term benefits from those plants?

This is something we're really excited about. We've had 500 title plants, meaning title plants in 500 counties for a long time now. But we buy images from -- when I mean images, images of deeds and mortgages, we got to buy these images from about 1,500 counties. And we've done that for many, many years. So we've got 1,500 counties of images, but we only keep 500 of those counties. And the reason why is because it's been very -- it's been cost prohibitive to do all 1,500, right? But we just made such dramatic improvements in how we populate our database. And I'll just give you an example, Mark, like for years and years and years now, how do we populate our title plant database? Well, we have someone key in, Mark Seaton bought 123 Main Street. Somebody else keys in, Mark Seaton bought 123 Main Street. If they match, it goes in the database. That's how we do it. And we have to make sure it matches because we ensure office data. We're going to have plants that doesn't match. So we've been very focused on quality for many, many years now. Well, about 4, 5 years ago, we said, let's see if we can try to automate this without compromising our quality. And because of machine learning and AI and some of these advances in technology, we can do that now. So today, 60% of the data of these images, it goes into the title plant. We don't need to touch it. 60% of the time, we're so sure that we're right that Mark Seaton actually bought this property and we can put that in a database. 20% of the time, we're not sure. So we have the computer to do the first pass. We have a person key the second pass. And if those match goes in, and then another 20% both are manual because the computers aren't quite there yet. That's huge. That is huge for us. And so what we've decided to do is it's not that we're going to just save $10 million or $15million, we're going to just explode the amount of data that we're capturing for basically the same cost. So going back, like what's it going to cost us, it's going to cost us $2 million a year more, $2 million per year to go from 500 title plants to 1,500 title plants. It's just a rounding error. Now we don't have 15-year histories of these incremental 1,000 plants. We can make a separate decision down the road, "Hey, do we want to go back key all these things. But right now, the plan is lift on a go-forward basis, key 1,000 plants. And there's big benefits to doing that. We can start getting a history going for the future. We can eliminate because what happens is if we don't have a title plant, we have to either scrape county websites. We have to send an abstracter out to go to a county to get the document. It's a lot more expensive in those ways, right? So if we have the data, we can eliminate all that expense, right? So it's a margin advantage. We think it's a market share advantage, too. And so it's something we're excited about.

Okay. That's helpful. And one of the things that some investors may not appreciate is you often -- you also -- I'm sorry, you rent out access to [indiscernible]. Can you just talk about that dynamic? How that works? Kind of what the revenue opportunities are around that?

Yes. So at 500 title plants today, we're the largest title plant provider by far and I think our second largest is maybe 200 plants, something like that. And it is the utility for the industry. I mean we sell our title plant data to Fidelity and Stewart, Old Republic. There's 15,000 title agents out there. We sell our title plant to them. And we're not in every market. So in some places, we're buying title information from others. So the industry typically -- the way it kind of grew up is the title plants are very regional, right? And then many years ago, First American, we want to be the largest. We have national coverage. And so we have more than 70% coverage today, and it's growing, as I talked about when we go to 1,500 plants. So -- and we sell this to third-parties. And I would say we've gotten market share gains on title plant data because we're just the easiest to use and we have national -- not national, but we have 70% coverage, which is kind of at scale. So if you're like a national title company, there's lenders that have national companies, there's a big national agent, you're pretty much going to use our plants because we've got -- you don't have to cobble together multiple different relationships across the country. And so we've got a lot of success. Now the next phase of our data business that we're having a lot of success in is selling property record data. So we've got our title plants, which is -- we sell to the tile industry. And that's lien to judgments and title information. And then we have property record information, bedrooms, bathrooms, square foot, when was the property built. All that information comes from the same images that we have, right? But you don't need that property record data to make a title underwriting decision. But we're selling more and more of that. We're licensing the data. We're selling it through our application called datatree.com. And we've had a lot of success And we feel like our data is deeper and better than our competitors in a lot of the regions because we have to insure opted data, right? I mean like our data is insurable, so the quality is a lot better. And we're having a lot of success recently, and that's why you've seen this growth in our information and other line item is because we're getting more success selling our data, our property record data to third-parties.

Got it. Can you just talk about how long it might take before all of these new plants really contribute to title searches into the revenues?

It's kind of incremental, right? So when you fast forward 12 months from now or 18 months from now, we'll be able to use the plant in maybe -- the new plants that we -- the incremental 1,000 plants, 20%-ish plus or minus of transactions, we can use it. But over time, that will just grow more and more and more. So one of the benefits that happened is because we have so much refinance activities last couple of years, we have more recent starters, right? You only have to search back typically the industry. You only search back until the most recent purchase policy or refinance policy to be trusted. And so the fact that there's a lot of refinance activity here, it's just going to make our plants -- the newer plants more valuable because you don't have to do like a 20-year search. You can just go back to the most recent refi. So the rough estimate is we can use it, these new plants, maybe 20% of the time, 80%, we're still going to have to go get some information from the abstracter or scrape the county website. But every day that goes forward, that number is just going to increase. And again, we can always make a decision to go in key 15 years of history for those 1,000 plants if we want. So we haven't -- we're still thinking about that because we have the images. We have to -- that's a decision to be made later down the road.

Yes. And how meaningful is the margin advantage you could pick up from using your own title plants as opposed to having to rent access to someone else's?

It's interesting to say. I mean, I would say when you look at First American as a whole, well, it's a big margin advantage because if we have a title plants, it's basically at some cost. It doesn't really cost us anything extra to search title. If we don't have a plant, we got to go use somebody else, well that's an incremental cost. So when you're looking at it as a First American, I mean every time we got to go outside, whether it's another title plant from a different title company or whether it's an abstractor that's a cost that we're going to have to incur as opposed to if we have it internal. But the interesting thing here is that we feel strongly that, we've got a low-cost advantage here for data. I mean the extraction process that I talked about, we can automatically populate our database. We've got several patents around that. And we feel like there are certain parts of our business, for example, searches like if you're going to provide a title agent a search package, you're going to get more search package more and more underwriting if your search package is 20% less than the competitor. I mean, that matters. It's price-sensitive in some markets. And we feel like we've got a low-cost advantage there. So longer term, we feel like we can leverage our data maybe more than we have in the past.

Okay. Got it. Just talk about how your expense profile maybe has changed since year-end when refi demand was at its peak, while the purchase market had a seasonally strong period of demand as well? And how do you kind of think about managing expenses if we continue to see kind of the refinance activity slow?

Well, one of the things we look at is we look at kind of our U.S. title headcount, okay? I mean we've got offshore employees. We got our International segment. We got Specialty Insurance segment. But I think the nature of your question is title business in the U.S., what's the employee count or how you're managing expenses? So as of March 31, we had 12,400 employees in the U.S. in title. And relative to the end of the year, we had 11,900 as of 12/31/2020. And so we have been hiring. Some of those have become -- some of those are because of acquisitions, but we have been hiring. We've been hiring in technology. We hire a little bit in production for purchase transactions. I think our expense structure, I mean, one way to think about is it's just relative to the markets, okay? So with purchase, purchase growing the way it is, we're going to have to hire incremental, but not -- it's not going to be dramatic. Refi is falling, we're going to be reducing our headcount in refinance. You just need fewer people. And so it's something that we monitor. I think, right now, we're definitely trimming on our refi business because the orders have gone from 3,000 to 1,800. But that's not going to be the case on the purchase side. Purchase side, we're going to continue to grow. The last thing I'd say just on the headcount is that I think given the use of technology and title automation that we talked about earlier, it's going to be -- over time, it's going to be less boom and bust with employee counts, right? We're going to be able to leverage technology more. And so when you look at like the boom we just went through in 2020, there's no way we would have been able to process those orders without the use of title automation. So 50% of our orders right now are fully automated on the refi side. There's no way we would have been able to process as many orders as we did without that. So we didn't need to ramp up nearly as much as we would have had to if we didn't have the same thing on the way down, right? So on the way down, we're not going to have to cut as much because we've used technology. So we're monitoring headcount, but we're not going to have the dramatic cuts that we had like 10 years ago.

Okay. Makes sense. So just moving to the venture investments. Could you just talk about some of the -- I mean you've had some chunky gains around that. Can you tell us what to expect? What kind of returns you're seeing? And also what kind of strategic benefits you think you're able to approve from the investments and the relationships you build with the fintech.

Yes. Yes. This is a strategy that we're really excited about, and we've had a tremendous amount of success in a very short period of time. 2017, 2018, there were a few companies that approached us and they want to venture capital. And we kind of said, no. It just didn't make sense to us. It just didn't seem like it was a good use of capital for a lot of different reasons and they -- companies kept coming. And we thought about it harder. We said, it actually does make a lot of sense for us. And so we did our first one in early 2019. And since then, we've done about 10 to 12 direct investments, and then we have a few funds that we've invested in. But strategically, if we want to grow, we got to be trying the customers shoes on, and we've got to be in markets that are growing. And so a lot of these companies, fintechs and proptech companies, they're really small today, tiny, but they're doubling and tripling in size every year. And some of these will be big companies at some point. And it's good to get in early, very early. And so we've been able to have a lot of these fintechs that we've invested in to be very good customers of ours. In some cases, they help -- we get preferred access to technology that helps us with either title automation or digitizing the closing process in some way. And we sit on boards of roughly half of our investments, so we lead about half the rounds or so. We can help influence the strategic direction. We can have our finger on the pulse of what's going on with fintech. Companies and prospect companies and understand how they think, understand how they develop products. It's helped us think about how we should develop products better, more nimbly. All those reasons have been huge on the strategic side. And I would also say that some of them could be acquisition candidates. We haven't bought any of those companies yet. But long term, we -- they're -- the fact that we've got good relationships, and we really get out of the coverage, and we can monitor them over a long period of time, they could be acquisition targets, too. So all that strategic thesis has played out. All that is we're very happy with. Then there's the financial side of things where I think if you were going to invest in a venture capital fintech company, there was Series A, Series B, Series C in 2019, 2020, that was a great time to be looking at companies. And so from that perspective, we kind of got lucky with the timing. There's companies that we've invested in that are trying to remove frictions from the home buying process, from getting a mortgage process. And those lanes are -- we're all filling up, right? So a lot of those lanes have been filled now. And we got in really early, and we're seeing -- a lot of the companies that we've invested in, they're doing -- they're in the process now doing up rounds. We've got multiple companies that are talking about going public via SPAC. We'll see if those happen or not. But we started to recognize gains, I would say, in an immaterial way in the fourth quarter of last year. Q1, we had $42 million of realized gains because of up rounds on 2 of our portfolio companies. We've talked about this investment in an offer pad publicly, how they've agreed to go public via the SPAC, and we expect if they went forward at that price, we'd have over $300 million gain. There's risk in that, but we think that will be a home run for us. And there's others that we haven't talked about that we think that we'll have gains, potentially material gains this year, too. So It's been a win on the strategic side and it's been a win on the financial side. And some of the theme has come off fintech in the last couple of weeks. But even with that, we're going to have big financial upside. I think going forward, too, we're still looking at companies, but I -- we put $225 million of cash into fintechs and we're going to -- in all those companies we've invested in are in the money, all of them. I think, going forward, we're seeing fewer opportunities now, but we are still -- we're active. And we have a team that's dedicated to this, and I think we're getting a reputation in the marketplace as a prospect investor. So it's been all good news for us. And you'll hear us talk more about as time goes on.

Okay. Great. That's really helpful. Switching gears, let's just move to buybacks. Have you been active in the repurchase market quarter-to-date? And how should we think about your sensitivity to the share price on buyback activity?

We have not bought any shares so far this quarter. We've -- when COVID hit, we went big into buybacks. In hindsight, we wish we would have bought back a lot more. But we were -- a lot of companies, they've paused buybacks. I mean that's what we kind of started it in March of last year. And we've repurchased about $200 million worth in the last year. It's as much as we pay in annual dividend. I think there's an acknowledgment that we've got to buy back more shares maybe in the future than we have in the past. But we haven't bought any this quarter so far. And in terms of price sensitivity, yes, we are price sensitive. I mean there's different philosophies on buybacks, I guess. But yes, we're price sensitive. I mean the lower the price, the more we're going to buy. The higher the prices, the less we're going to buy. But the way we think about it is we want to make sure it's going to be a great return for our shareholders. I mean we don't buy back stock just so we can improve our EPS. We don't buy it because we got nothing to do with our capitalized buy back stock. We're opportunistic about it. And admittedly, I think we're conservative at the prices that we've repurchased our shares. But I'll tell you, I mean, every single share we've ever purchased has worked out well for our shareholders. And we want to do more of it going forward. We think it's -- we're going to be more aggressive than we have in the past. But we haven't bought back any so far in the second quarter, though.

Okay. How are you thinking about your current dividend and payout ratio? What payout ratio would you be comfortable with over time as origination demand starts to normalize?

The dividend, we've taken a hard look at, call it, in the last 5 years, maybe longer 5, 7 years, I mean there's 2 different occasions where we doubled the dividend. The short answer, Mark, is we'd be very comfortable with the 40% payout ratio through the cycle, very, very comfortable. Historically, we're about 20%, and we got a new normal. 40% is kind of our new normal. Now we're less than that now, right? I mean since we had this surge in earnings last year, I think we're 28% or high 20s, somewhere around there. But through the cycle, 40% is no problem. So we've got really great investment opportunities that we're excited about, but the reality is we generate more cash flow than we have great opportunities, and that's why we pay dividend. And we're -- I think going forward, we're -- it's not like we don't have this goal of raising dividend every single year no matter what. That's not the -- we're a cyclical business. We understand that we're going to have good years and bad years. But we do want to pay a healthy dividend to good discipline to have. And we want to -- I don't see us doubling the dividend. I see us kind of incrementally raising dividend with our long-term outlook.

You just alluded to like the great investment opportunities. It sounds like the venture opportunities are getting a little bit pricey. Where do you see opportunity? Are there still opportunity to buy agents? Are you thinking about pulling forward some of those investments in the new title plants in recording more years of history? Where do you see the best opportunities to deploy capital in the business?

Well, I mean, I'll talk about a few areas here. So like on the M&A side, there are a lot of opportunities out there with M&A. I think one of the things was -- so the opportunities with M&A are a lot. I mean, I think our M&A pipeline is pretty robust right now. We do have disagreements with sellers, though, in terms of the prices, which we seem to have quite often. But we're coming off a record mortgage origination year last year, right? So you've got sellers that say we want 8x EBITDA off of peak earnings. And so there is a little bit of this bid-ask spread right now. But I'd say the M&A pipeline, even with that, I mean, we have come to terms with sellers, and I think we will have a pretty good M&A year this year. On the title side of things, I mean, there's always title agents we buy. I think the more attractive deals to us, at least in the recent history, have been these, I'll call them just vertical bets, whether it's Docutech, right? Or that's not a title deal, but it makes sense strategically to have Docutech. Well, there was ServiceMac, which we're really excited about, which is a subservicer that we're in the process of buying the other 90% of it out once we get regulatory approval in the fourth quarter. Those are really interesting because it's just a different products and services that we can sell customers, but yet still there's big strategic value to our core, which I can go into. Those are very interesting to us, and we got some other of those type things coming down the pipe. Yes. Venture prices are high. Again, I thought we kind of hit the perfect timing in terms of the vintages. We typically like to go more A and B and to smaller checks anyways before the valuations get ahead of themselves. So we're just trying to be opportunistic. I think one area we're really trying to focus on spending capital is just organically, right? So we're spending a lot on just every business unit that we have. We've got significant technology projects to make it easier for customers to do business with us, improve the customer experience, to digitize our products. So everywhere you go, every business, we're investing a lot in technology to improve the customer experience. That's probably where the biggest opportunity is right now.

Okay. The -- you mentioned Docutech. Can you just talk about what your expectations are for that as originations start to go off?

Docutech has been a home run deal for us. And it's interesting because we still talk about it now. It's been over a year and yet we still get a lot of questions about it. Most acquisitions, we don't really get questions after a quarter or 2. The reason why we bought Docutech was because it accelerates our digital closing strategy. They've got tight integrations with lenders. They do mortgage docs. We do title docs. It's a way for us to do mortgage and title docs together. It accelerates the e-close process for lenders. And so it's all -- strategically, it makes a lot of sense for us. And then, of course, financially, it's a big deal for us. I mean we spent $350 million of our investors' capital at the time was like 5% of our market cap. And when we do big deals like that, we want to make sure they pay off for our investors and that one certainly has. So our plans for that are to continue to grow market share for them. I mean they want to get tied into more and more lenders. And also let's integrate our title and our mortgage docks into 1 offering to simplify the close process. So that's our plan for Docutech. It's been a great deal financially and strategically.

Okay. Can you just update us on your expectations around exiting the P&C business?

It's progressing on plan. By the end of this year, we'll have over 50% of our policies will have run off. By the -- I think it's the fourth quarter of next year, early fourth quarter, let's say, or end of the third quarter, we'll have completely wound it down. So it's progressing on plan. And the challenge now is just to preserve as much book value as we can.

Okay. The claims experience has been -- in your title business, has been pretty benign so far. What do you need to see to improvise your planned assumptions?

So we lowered the loss rate in the first quarter from 5% to 4%. I think that's a real normalized rate now. I think that's -- we don't have any plans to change the loss rate from 4.0 until something changes. Now something could change next quarter. We can always have a big claim. There's always something that can happen. But right now, I think a 4% loss rate, which is what we're looking at is very normalized. I think there's -- on the one hand, there's an argument to say claims could go even lower because we're instituting automation, and we're in our title production process, and we're eliminating manual errors and our loss rates can go higher. On the other hand, there's a case that says, "Hey, once the foreclosure moratoriums expire and there's more foreclosures, we can have higher claims." I don't see either 1 of those 2 being material. I think 4% is a really good rate. And so we feel good about that going forward. I don't foresee it changing in the near term.

And will there be a need to do any kind of reserve adjustments for reserves you've already taken?

No. So last year, when we booked 5%, that equated to 53 million more of IBNR that we have because of the nature that we did that. And there's no plans to release that. I think the only thing that would make us do that is if we have some disagreement with our auditors over the size of our reserves and we don't right now. So I don't see us taking a reserve release.

Okay. Great. Well, I think we're out of time. Just want to thank everyone still listening in for joining us, and thank you, Mark and Craig, both for your time today. We really appreciate it.

Thanks a lot for your time and support, Mark. Appreciate. Have a good day.

All right. You, too.

Take care.