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

Good morning. Welcome, everyone, to the Title session for today. We've got the management team from FAF. [Technical Difficulty] So with us, we have the management team from FAF, Dennis Gilmore, the CEO; Mark Seaton, the CFO; and Craig Barberio, the Head of Investor Relations. So let me just start out with trends for the quarter. You recently put out your August order count. Can you just give us an update on trends through August, and then also any color you can add about September order counts?

Hey, Bose. Before I do that, I think, Mark was going to give kind of an overview...

Sure. Go ahead. Please. Yes.

Speaking about -- Yes.

Yes. It's actually good. Absolutely, sorry about that.

Okay. Yes, I'll just talk for just a couple of minutes here, just to kind of give a flyby of what we're thinking about and what's happening. And then we can dive in any questions you want, Bose. But thanks again for having us at the KBW Title Day. I mean it has been a lot of years since we've been doing this, and first time virtual. But thanks again for hosting us.

Appreciate it. Thanks.

So just -- I'll just comment on 3 quick topics: the market, a little bit about our strategy and a little bit about capital. So the market is really strong right now. I mean, as you know by following our first quarter earnings and second quarter earnings and looking at order counts, which Craig will get into here in a minute or so. But -- yes, there's 3 markets that drive our business and the most important one is the purchase market. And the purchase market is really strong right now. I mean it's not going to be quite as strong as it was last year because the last 6 months of 2020 was just -- we just had incredible volumes and HPA. But it's going to be a really good year for the purchase market. We're still seeing a lot of momentum, and so we feel really great about purchase, especially considering there's still very little inventory out there. So that's our strong -- our biggest market, and it's going really strong and everything's going great there. Commercial is our second most important market to First American, and we expect a record year in commercial. There was a lot of transactions that didn't get closed last year, that kind of got pushed in this year. We're seeing a lot of transactions that are maybe accelerated from 2022, just because of the uncertainty with tax reform. We've seen that in the past, whenever taxes changed. So, we're seeing real broad-based strength and real strength in the commercial market, which is obviously great for our business. And then the third most important market for us is refinance. And refinance is still a good market for us, it's not a spectacular market like it was last year. And last year, for the last 6 months of the year, we were opening roughly 3,000 orders a day, and it's fallen to about 1,700 to 1,800 orders a day, somewhere in that range. But that's still good business for us. I mean, eventually it will go to 1,000 orders or below, but we have a really good refinance pipeline hitting in the back half of this year. So when you mix together, I mean, Hey, Bose. I think the fourth key driver for us is investment income too. I mean, what matters what happens with short rates, and as everybody knows, I mean, the Fed went to 0 in March of last year, we lost $120 million of annualized investment income when they did that. And it's really at a floor right now, and that's just kind of all upside for us. So, we don't really know when the Fed is going to raise and when they're going to taper, but when they do, that's just going to be all upside for us. And I would strongly argue that we'll do better than our peers in a rising rate environment. And we saw that the last cycle, I expect to see that again this cycle. There's a few reasons for that. But one of the reasons is just because we have a bank and our bank is going to do a lot better. It's doing well now, we'll do a lot better when rates rise. So that's a little bit on the market. Just to touch on strategy for a minute.

Hey, Mark. Can I make a statement?

Yes. Sorry. Go ahead.

Hey, Bose. When Mark mentions the rate that refis are going to go down to 1,000 a day. I mean, that's just our assumption, and ultimately, the rates start to rise, and then we'll get -- we'll have the offset probably by the short-term rate increase in our investment income. So, we've been wrong in this call, for example, on refinances and it's running hot. It's running still very healthy at the 1,700, 1,800 orders range. And it's kind of like anybody's guess on that. It could continue that way for at least 6 months from now.

In terms of what we're focused on with strategy, I mean, a lot of it is just digital. I mean, our business is going digital, and we're leading the effort there. We've got a dozen divisions at First American, commercial division, direct division, agency or bank and that can go on. And they're all focused on digital experiences with the customer. And so we've been making a lot of investments in the last couple of years, and now we're starting to roll out some new platforms. We've talked about those on the earnings call, whether it's ClarityFirst in our commercial business or IgniteRE in our residential business. But there's a big focus just to go digital, have digital experiences with our customers, and that's going really well. One of those initiatives is Endpoint, which we've talked a little bit about, I'd encourage everybody go to endpoint.com and check it out because it's basically reimagined escrow experience. Like we started this company a couple of years back, and we just said, "Hey, let's create like a brand-new escrow company, completely digital, completely reimagined." And we started in Seattle, and we went from 0% to 3% market share in Seattle in 3 years -- in 2.5 years. So, now we're expanding it. We'll be in 20 markets by the end of this year. It's just a great experience for the consumer. We're getting a lot of traction with proptech customers through Endpoint, and that's a big focus. You'll hear us talk more about Endpoint going forward. And then, of course, our data business, we've talked in the earnings calls about going from 500 title plants to 1,500 title plants. And our data business is a big strategic advantage for us. We've talked about that over the years, and that's something we're focused on. So, with strategy, there's a lot we can talk about, but a lot of it is just digital experiences. And the last point I'll mention, Bose, and we could jump into wherever you want to go is just capital management. One of the things that I think we're getting more and more questions on, for good reasons, is our venture portfolio. And we made our first venture investment in 2019 -- early 2019. And throughout 2019 and the first half of 2020, we made a lot more investments. And the reason why we're investing in venture-backed companies, proptech companies -- venture companies in the real estate ecosystem. The reason why we're doing that, isn't to just enhance the returns of our investment portfolio. That's not the reason why. The reason why is really strategic reasons. We need to be tied to customers who are growing. And as proptech companies are -- a lot of them are really small today, but they're growing quickly. And we have to be tied to customers who are growing. We get preferred access to technologies through -- that make our business a lot more efficient. So, every investment that we make, we look through the lens of, is there a strategic partnership opportunity with First American. And if yes, we'll consider; if no, we're not interested. So, there's a big, I'll call them, operational synergies that we can get from investing. A lot of times we said on the Boards of companies, we can influence our strategic direction, we understand how they build products and technologies. And we've really gotten to be one of the pre-eminent proptech investors out there. We've also invested in a few proptech funds that are more Series A and seed stage. We typically come in when there's a product, and we're in a position to evaluate whether this product and the business is going to be successful. But we partner with some early-stage funds to help feed our pipeline. And it's been really well. We've invested in 15 companies in terms of direct investments. We just had an 8-K on Offerpad. Offerpad was an investment that we made, and we put $85 million into Offerpad, and we own 32 million shares. So, I'll let you guys do the math on that. But that's one investment that we have, one of our more successful ones. So venture is going to be something we continue to do. And then, of course, we've recently increased the dividend of 11%. We increased our share repurchase authorization. So, we're always going to look at returning capital back to shareholders. And then M&A is always something that we're focused on, too. So, I've kind of talked a lot there, Bose. I'm happy to -- we're more happy to go deeper any area that you want.

Okay. Great. Sure. It's very helpful. I definitely want to switch back and spend time on the technology investments, et cetera, a little bit later. But just, I think to get the volume and stuff, can you just update on order trends through August and just anything you can give color on what you're seeing in September would be great.

And Bose, yes, I'll start just with your stats, and then I think Mark and Dennis will have some commentary on the qualitative. I'll start with the least important market, which is refinance. As Mark said, we've started accrual in the second quarter. We did 1,800 orders a day in the second quarter. With that level, [indiscernible] 1,800 orders a day, July and August. So far in September, it's come off just a notch. We're 1,500 to 1,800 orders, and we're running at 1,700 orders a day roughly. That's down 45% from last year, but still at an elevated level. So things are good there and rates seems to be staying lower for longer. So as Dennis said, that could continue, we think where rates go. Moving on to the purchase market, last year, we -- this year, we actually looked like we peaked in the second quarter. We were doing 2,400 orders per day in the second quarter on average. July came in at 2,300 orders, August came in at 2,200 orders, and so far in September, we're still running at 2,200 orders a day. The August number was down 11% year-over-year comparing to the full month -- excuse me, in the September so far it's down about 6% versus last year. But again, last year, we had a August peak, which was kind of seasonally unusual. We typically peak in the second quarter. So if you look at the August number down 11% year-over-year, it's up 9% on a 2-year basis. And looking at September, down 6% year-over-year, it's still up 9% on a year-over-year basis. So, on a 2-year basis, there's still good organic growth in the purchase market. In terms of the commercial market, we started to see some acceleration in the first quarter. It really picked up in the second quarter. We -- our open orders were about 580 orders a day. We're still running, both in July and August, we are north of 500 orders. And September year-to-date, we're almost -- kind of pushing up towards 600 orders a day. That's kind of -- for September, we're still -- for the -- let me go back. For the second quarter, we were up 60% and year-over-year, and those kind of year-over-year increases are pretty much holding through the third quarter. So again, the commercial market very strong on an order basis as well as the purchase market.

Okay. Great. Thanks. And then just on the refi side, can you talk about...

Just a commentary, if you don't mind. Craig, correct me on my numbers, but -- just so everybody is clear. In 2020, I'd call a distortion because of -- obviously, because of the pandemic issues happening. But, Craig made a quick comment there that when we look at '19 over '21, right? Go back to -- '19 was a good year, August, up 11%; September, up 9% on purchase orders. So that still classifies, this is a very, very healthy market on the purchase side.

Thanks. And then just in terms of fee profile, can you just talk about how that's trending on purchase and refi?

Yes. Bose, I think particularly on the purchase market and the refi -- on residential side, we were up in the second quarter, the purchase market was up 16%, and the refi market was up 6% year-over-year. And it has come up -- it's still very strong, it has come off a little bit, we're kind of running at 5% -- 4%, 5% in terms of refi ARPO year-over-year for July and August. We don't really track it on it until we get to the end of the month, but July and August are running just a little notch below the 6% that we saw in the second quarter. And then in terms of purchase, again, it's -- we had been running up 16% in the second quarter, running about up 13% in July and August. So, still very strong.

Okay. Great. And then just switching over to operating margins. I guess, the 12% to 14% range that you guys talked about historically as a normalized range. I mean is that still a good range? Or just given all the changes and efficiency, is that something you guys [indiscernible]

Well, I guess what I would say is that like last year, it was a great year for us, obviously. We had a 14.5% title margins. I mean, we're going to be close to that this year, I mean, very similar ballpark. So we're running above the 12% to 14% right now. And then of course, there's things that could help us, there's things that can hurt us. I think that over time, some of the things that we think are going to help us are, we think the purchase market is going to continue to be strong, I think commercial is going to be strong. We can always do better in terms of just making our business more efficient. It's just like -- it just never ends, right? I mean, if you look at our margins the last 10 years, I mean, generally speaking, we've always improved them. And even like you go back to 2003, which is the last time we had a really strong mortgage market. I mean, 2003, our margins were 11%, and that was -- at the time, that was the biggest mortgage market we've ever seen. So we -- I think we've proven we can structurally improve the margins, and we'll continue to do that. We're also going to get benefit from investment income, as we've talked about, which is like 100% margin business if you think about it that way. And then in terms of claims, we're running at 4% right now. We don't think it's going to change anytime soon. I mean, it's hard to say. I mean, we're doing a lot of things on the underwriting side and taking the manual errors out of the process by automating certain processes that we can -- that would lead us to believe that claims ratios can go down. On the other hand, the market has been really good for claims, right? There hasn't been any foreclosures, we've had rising housing prices. So lenders are manufacturing really high-quality loans. So from that perspective, it's been as far as good as it's going to get. So we think we can improve the margins over a long period of time, but in a short period of time, the market is kind of tended to what they are.

Okay. Great. And then just -- actually, in terms of the -- on the operating margin side, is there a way to think about fixed versus variable costs for you guys?

Yes. I mean, fixed versus variable, and we have to take it by line item in the title segment. So obviously, like we look at loss provision, we look at agent retention expense, we should look at premium tax, and those are 100% variable, right? When we look at our personnel expense line item, about 30% of our personnel expenses are variable -- I mean, completely variable, right, where volume goes up, and we're going to spend more; and volume goes less, we spend down. I mean, 100 -- completely variable is about 30% of our personnel costs, just with commissions and deferred comp, things like that. And then the last line item is other operating expenses and other operating expenses is about 50% variable. That line item. So that's how we would characterize it.

Okay. Great. And then actually on the investment income, Gil just spoke about that. Just in terms of how we should sort of think about the sensitivity? I mean you had given some guidance when rates were going down. Is there a way to look at it as rates were going up as well?

Yes. So we think it will be -- we'll make about $12 million to $15 million a year on an annualized basis, when -- yes, every time the Fed raises 25 basis points, $12 million to $15 million a year. Now one of the things that we're excited about that isn't included in that, it would just be upside to that is if we can grow our bank through third-party deposits. It's been -- we've made progress today, we only have about $300 million of third-party deposits, so it's not material. But that's something that, especially later next year, we're going to really start to open the aperture more for the bank. We've had to build some -- change the technology, build like a customer service infrastructure layer. But we think we can grow our bank deposits through third parties over time. And another component of that is ServiceMac. ServiceMac is a subservicer that we're in the process of acquiring. We should -- we own 10% of it now. We're in the process of buying the other 90%, which we think will close early in the fourth quarter. And some servicers have deposits. There are different types of deposits, right? There are principle and interest deposits or taxes and insurance deposits, but we can, over time, push those deposits to our bank. And so the $12 million to $15 million is -- think about that as that's the improvement in investment income, assuming the bank kind of stays where it is. And we can grow our third-party deposits, then the $12 million to $15 million just go up.

Okay. And actually, can you remind us in terms of the growth of the bank, is that with some of the efforts you're making on the agent side, or is there something else that is driving that as well?

The growth that we've seen, like in the last 2 months or going forward?

Yes. What you talked about in terms of the growth of the deposit phase today.

Well, the bank has grown -- it's grown a lot in the last 12 to 18 months. Part of it is because we've seen -- a lot of it's a function of the commercial market. So about 70% of the deposits that we have at First American are commercial related. So we see an increase in commercial transactions, we're going to see an increase in deposits at the company and a lot as we push to our bank. So, we've grown the bank through commercial deposits. Also, we have a lot of our operating cash is at the bank right now because we don't really get much of a rate for third-party banks just because rates are close to 0, and we can earn a better rate at the bank. So, historically, it's been a combination of growth in commercial and growth in our operating deposits of the bank. But when we look forward, the growth will be from getting deposits from our title agents. We've got 6,000 title agents out there. We want to get them to put their escrow deposits at our bank and the subservicing deposits, which I talked about. That's the future.

Yes. And I would add that, this is probably one of the more misunderstood parts of our company. I would think when the rates start to tick up, people are going to be worried that our volumes are going to go down. And clearly, that could happen with our refinance volumes. So, it could go down, but will offset that likely to increase the short-term rate in the investment income, Mark is talking about. And the strategy, as Mark laid it out, as we maximize the value out of our own company, now we're looking to seek third-party deposits to continue to grow our investment income.

Thanks. And then just if I could, you spoke about title losses, just that they are about as low as they can get. Just -- I mean, from the technology side, if things keep getting more efficient, do you feel like there is any more room for that to decline or that you feel like this is kind of the run rate?

Kind of both. I mean, I think economically, there's room -- there's always room for improvement. As we make more of these title plants, electronic, as we continue to automate and increase the hit rates of our title automation, there's always room for us to have fewer claims. On the other hand, we don't -- we want a strong reserve, we don't really want to bring the loss ratio down below 4%. I mean we want to -- we don't want to have no claims, right? So there's room for it to break it down. But at the same time, I don't expect our loss rate in our P&L to come down.

Okay...

At least in the next -- eventually, it's going to move and it could go up or down. But in the next couple of quarters, I don't see it moving.

Okay. And then just one more on loss. Is this -- the commercial versus residential, do you see a difference there in the loss ratios?

No, no. I would say, generally speaking, they're very similar. They're both kind of in that 4% range. Now with commercial, they're a lot less frequent, right? We don't see very many commercial claims, when we get them, they're bigger just because they're just liability policies. And there's just very -- I'll call it, we take great care on the front end to make sure that we don't have any losses because we're writing billion-dollar policies, we got to make sure that we're covered from a risk perspective. On the residential side, there's streamline processes, there's risks that we accept, right? So there's a higher frequency, but of course, the severity is well lower. But when you mix them together, the loss ratios are very similar for both.

Okay. Great. Thanks. Actually, let me just switch over to technology. You guys spoke about that increase in the title plants that you're -- So, I mean can you just talk about the timing, why now? What [indiscernible].

Yes. I'll start Mark and then you can comment. Well, it's a little bit of a longer answer. We have -- as you -- I think, now, we've been building out our databases for a number of years, and we have the largest public record database now. And we think that's a key strategic asset. And our database is, I would say, are slightly are a little different than others in the sense that we have to make sure we have the highest quality, the most accurate information. And because we're using them for insurance purposes, we're running writing policies of them, where actually the other data providers are not doing that. And it's very different to insure from a database versus use it as a lead gen database. So that's number 1. Number 2, over the last number of years, we've worked really aggressively to automate a lot of the data collection itself. So, we've got some very unique platform processes that we can extract information from public record documents in a highly accurate and automated manner, which is allowing us to exponentially start to expand the databases. And when we made the comment that we're going to add another 1,000 title plants, those are on a go-forward basis. Now, if we deem a need for us, we can build a back plant, and I'm getting a little technical. We can build a back plant much more efficiently than we have historically, and much cheaper. And so we're putting these plants in place right now, building them on a -- what they call go-forward basis, creating the data right now. And the 1,000 plants gets us to about 80% coverage in the U.S. And if you kind of think of it longer term, what we're really trying to strive for is about 80% of all the housing stock in an automated fashion so we can continue to automate the title process.

Okay. That makes sense. And then actually, in terms of the benefit, is it a loss, is it -- could it become [indiscernible] as well?

Well, I'll make a comment, and then Mark, you might have a comment on this one. The core benefit is we can access a title plant. We've severed the link for all intents and purposes of touching a county and all of that, slower manual abstracting. So that allows us to automate a titling process, obviously, far more efficiently than we could have without the data there.

Yes. We're going to spend -- it's $2 million a year to get these incremental plants. And a lot of it is because we already have the images, right? So we already have the images, and now we can apply our technology to extract the data off the images that we have. And that incremental cost is $2 million a year, which is immaterial. But as Dennis mentioned, it's more of a cost play, right? We can use that to drive better automation in our title company. And it's more of a cost play than a revenue play. Although we can offer that technology to agents to -- which could help us get more ordering, but the primary drivers reduce cost in title.

Okay. Got it. Makes sense. And then just switching over to your technology investments. You guys spoke about it earlier. But can you just sort of discuss the landscape for future investments, and then in terms of your current ones, I mean, generally, do you see these as kind of long-term strategic holdings for most of them?

Well, we think our technology investments, there's a couple of different categories. I mean, the first one is building, I'll call them, platforms within our existing divisions. And I'll give you one example, as Dennis talked about on an earnings call, which is ClarityFirst. So historically in our commercial business, business is done e-mails, phone calls, and there's dozens, if not hundreds of calls and e-mails to close a transaction, right? And that's how the whole industry is; us and Fidelity are the ones that really are strong in commercial, and it's just a very manually intensive process. We've rolled out a system, and it's -- these things are never -- they kind of never end. There's always improvements you can make. We roll out a system called ClarityFirst, where our customers log on to the platform. Our escrow and title people log on to the platform, and it's all done through a system now. And you can see the efficiencies that we get. All the wires are done through the system, so it really -- it reduces the risk of wire fraud, customers can get status updates on their transaction, without having to call us and say, where are we on this document or that. Everything is done in one central location, and it's a collaborative system, and it's getting really, really strong feedback from our customers. This is what we're talking about with digital experience with our customers. And there's similar type of things happening in every division that we're kind of in the process or already have rolled out. So those investments are just to improve the customer experience of our core business. We also have new businesses that we're starting. One of them is Endpoint, which we've talked about. So far, we've invested about $80 million into Endpoint. And it's having a lot of success such that we're likely to invest more in Endpoint to grow it out geographically. There's a lot of customers that have tested Endpoint that love it. And we just need to be able to scale geographically with the customers that want it, right? So that's another kind of category I'd put in. And there's other things that we have announced, but there's businesses, right, that we're building that are digital. And then I would say, we talked about the venture investments, where that be the kind of a third category.

You just think of it in this manner, and it's kind of related to the margin question earlier. Obviously, we want to maximize our margins on a quarterly basis, never -- I call it never in terms of our long-term strategies. And that's why we're doing such large investments across the enterprise. And it's a -- I'll call it process along the digital journey. And these are journeys in all of our divisions, and that's what we're talking about on the earnings call. Every division is on a digital journey to make the processes a more digital experience, improve the customer experience and drive greater efficiency.

And then let me just ask about 1 more acquisition. So Docutech, you guys acquired right before COVID. Can you just talk about the growth there, how things have -- how that's been impacted by the changes in the market?

Yes. Docutech, I mean -- we're excited about Docutech for a lot of different reasons. But the first is just the strategic nature of it. I mean we're -- the market's going to electronic closings and Docutech helps us with electronic closings. It helps us get documents into the lenders LOS systems in a seamless automated way that nobody else has. So there's a lot of reasons why strategically we wanted to have this eClosing capability Docutech provides. But of course, from a financial perspective, it's really strong, too. In the second quarter, we had revenue of $24 million for Docutech, and it had 23% EBITDA margins in the second quarter. And the growth has been quite significant year-over-year. Obviously, a lot of that is because of the market, but Docutech's also gaining share, and it's been a really good investment for us.

Okay. That's great. And then actually, just switching over to competition. Actually, last week, one of your smaller competitors, Radian announced a blockchain-backed title insurance offering. Can you just talk a little bit about blockchain that you guys have had pilots going for a while now? So just curious how you're thinking.

Yes. I read that release, and we had a couple of questions last week about it. I think blockchain is an interesting technology. We do -- we've had multiple pilots on this inside the company. And what we find right now is the technology is not that efficient for us internally. There are more efficient technologies for us to achieve the tasks we want to achieve. That's not to say longer-term because we continue to look at it. Longer term, there won't be a good application for us. Right now, though, we're far, far, far more focused on AI, machine learning, those type of tactics, those type of technologies to help automate the title line. So it may play a greater role in our technology arsenal in the future, but right now, I don't think it's the most efficient way to approach the technology problems we face.

Okay. And then just sticking on competition, let me ask about another competitor, Doma into the market earlier. This year as a public company, their I guess approach is that it could be run through artificial intelligence, but a little more, it seems like as a P&C approach as well. Just curious about your thoughts about them in particular, but just other approaches to title insurance that could change things.

Mark, you start, I'll come back.

Well, in terms of other approaches to title insurance, it could change things. What we do is -- we have -- one of our divisions is, we call it, mortgage solutions. It's kind of our centralized refinance channel. So we sell over-the-top 50 lenders on a centralized basis, right? The closing here done in one location. And most of the orders that we get through that channel are automated, right? So we can tell the customer instantly, are we -- we call it clear to go, are we clear to close on title instantly, right? And what we do is we go through, I'll call it, the traditional search. We're looking at liens, we're looking at judgments on the property, but we're doing it in an automated way, right, without compromising our underwriting standards, right? And we produce a tile insurance policy, right? Doma, they have a different approach. I mean they're using machine learning and AI, but they're doing this -- at the end of the day, they're producing a title policy instantly, right, similar to us. There's other couple of companies that can do it, too. And so at the end of the day, the customer is getting the same processing service, behind the scene, it's done differently. One is using AI and one looking at actually actual liens and the judgments, right, and making that assessment, right? So I guess that's how I would characterize it. I mean we're -- we've got 100 years of experience in this, using our data, and I would say that you just better hope the models are right because we know the way we're doing it is right.

Also I would add...

Dennis, anything to add to that?

Yes. I would add that, it's kind of related to your claims question, right? This is probably as good as it gets, but let me explain why. We're doing many things internally to continue to improve the claims process for us to eliminate high-risk claims, catch fraud, all of those issues you would expect. Mark mentioned this, the quality of the lenders product now is very high. So their underwriting standards are still very strong. And then the key thing happening also in the market is the market is very strong, high equity growth in the housing stock, all great, right, as good as it gets. But it won't always be that way. At some point, the markets turn, at some point, we have a lot more distress in the overall purchase market. And all these issues manifest themselves and flaws kick out. And I personally think that just to use a comparison, let's say, we're running at 4% now. And we could take a similar approach and maybe shortcut searches, ignore liens, whatever the case is, and make our claim rate 10% as an example, just as an example. And probably make the math work. But I think what people miss on that is, it is not a good experience at all for the consumer or the lender to have a title claim. When you think about yourself, someone took a shortcut, and all of a sudden, you're trying to either sell your house or buy a house and there's a judgment on your house, there's a lien on the house, there's a cloud on title. Those don't instantaneously go away, and it's a lot of work, and we would -- we always prefer to minimize that experience for our consumer. I think people really truly misunderstand the complexity and the impact of a title claim on either the lender or the consumer. A very different approach.

Yes. Thank you. I wanted to ask about the new entrants to the market, largely the number of them that are coming as title agents. I'm just curious if you see them as competitors, as partners, how do you see that?

I'll start, then I'll kick it to Mark. And Mark mentioned this quickly in his remarks. We're having great success with the new entrants with Endpoint. By the way, it matches up really well with the new fintechs because we run Endpoint the same way, and again, a fully digital native digital close experience, number 1. Number 2, if you look back over the course of time, this is not a new phenomenon for us. People come and go in our business. And what we do is, we don't try to steer in one way or another, we'll just accept how they want to distribute our product. It could be an agency structure, they could be through a direct structure. I will use the builders as an example because I think some of the fintechs will go this way also. They may start out saying they want to do a 50 state solution and take it all through an agency. But the reality is, some of the states are extremely difficult. Some are almost impossible take it through an agency. So what we see in the builders is, they have a certain subset of states they want us to support them in an agency structure, and then they have a subset of states, they want us to take them through direct. And we have a lot of experience with that model. I would predict that the fintechs will go that way also. And that's -- so I would argue that it changes at times our distribution model, but I would look at it as clearly as a partner, not as a new competitor. And that's a natural evolution in our business by the way. It's happened with the lenders, by the way, lenders, money center banks all -- many used to have title agencies, they've gotten rid of the title agencies. So again, ebbs and flows over the years. And so that's how we approach it. And then Mark also mentioned, too, we see a lot of benefit with our venture investments to have a very tight relationship to them -- with them to support them and however they want to distribute title.

Yes. I'd just add, the new entrants that we're seeing, which are the discounted brokers and the iBuyers and some of these companies that can control the purchase transaction in a lot of cases. We prefer direct and we get business for some of them directly, but we don't fight them if they want to have an agency because not only do we get underwriting, but we can sell them data, we can sell them banking services, they can put our deposits of the bank. There's other things that we can offer. It's all really good business for us. And the other thing I would say is that it's -- I think some of these fintech companies, it's a nice story to say, we're going to attach mortgage, we're going to attach title, and we're going to get all this ancillary business. But it's hard, and if you're doing 5 orders in Nashville, it doesn't make sense that has title in Nashville, right? And that's kind of an extreme example. But the point is that unlike mortgage -- the mortgage company, where it's kind of difficult to set up initially, but you can have a national mortgage company, and there's not necessarily business done different ways in different counties. The title company is very different, and we're seeing that -- the feedback that we're getting from these proptech customers that we know because we've invested in a lot of on this. This is actually a lot harder than we think it is, and so we're kind of helping advise through those challenges right now.

Okay. Interesting. Thank you. And then actually just a couple of other topics, just on the home warranty business. Can you just talk about the outlook there in terms of growth? Or is there anything to do on the M&A front? Or just any color on the business?

Why don't you start. I'll come back in some commentary probably.

I'm sorry, just on the M&A front? Or what was the question?

No, just on home warranty.

So, home warranty, we're the second largest home warranty company. We're very pleased and happy with our business. We've got a good team, we've got a good strategy, a good plan. We're growing in the high single digits, and we're going to grow faster than the overall mortgage market because of our direct-to-consumer strategy. We've been at direct-to-consumer for quite a few years now, and every year, we get better and better at it. So we feel good about the top line last year. We did have elevated claims because of COVID, everybody was staying at home. We had elevated claims, and the big question was, well, is this kind of the new normal now? And we don't think that's a new normal. We're seeing claims come back down to normalized levels. And it's a business that we have a right to win in, right? We're the second largest. We've got scale, we've got a national presence, and we have big growth opportunities for just with our direct-to-consumer. So we're very happy with home margin. And as you know, P&C is going to be -- we're winding P&C down. And so at one point -- at some point next year when that's all kind of flesh through, home warranty will effectively be its own segment.

But I also like the strategic aspect of the business, the direct-to-consumer, which we're continuing to grow, becoming more sophisticated, adding resources there. And when I say I like it is, I can't see this right now entitled that we have direct consumer play. But you never know what the future could hold. And if it did have any component of a direct consumer, I like having that internal skill set being built, being -- becoming more and more sophisticated. Again, I don't see that likely entitled right now, but you just never know, right? You never know.

Okay. We're getting closer to the end, but maybe just throw in a couple more. Just on the capital side, your debt-to-capital remains low at 16%, I guess, excluding the secured financings. Can you remind us where you like that ratio? And then just to tie in the dividend, can you just talk about sort of the payout ratio that you target on the dividend?

Yes. So on the debt to cap, we were at 16% last quarter, but we've done a -- we just did a recent bond deal. So we raised $650 million at a phenomenal rate of 2.4% and we're pleased with that trend. And so it will be in the low-20s this next quarter. And our target is 18% to 20%. I mean, that's our target. We need to maintain good ratings for our commercial business, and we have to have as modest financial ratings at least through the cycle to maintain commercial. And we want to have a good cost of debt at the holding company. And so we basically kind of triangulate into an 18% to 20% debt to cap. And so we're going to be higher than that at the end of September, but that's okay. We'll still be in a comfortable position. In terms of dividends, we just raised our dividend 11%. And we don't really have, I would say, a target debt-to-capital -- sorry, target dividend payout ratio. We've been at 40% -- I mean when you look at most of First American's history, we were at 20%. And then several years ago, we've made the strategic decision to just pay a much higher dividend. So we went to 40%. And we were at 40% for about 4 years in a row, maybe 5 years in a row. When our earnings really kind of shut up last year and this year, our payout ratio has fallen. And so even when we raised 11%, I think we're still in the high-20s, early-30s, somewhere in that range. But we're very comfortable paying 40% in dividends. And that's something we just -- we don't have this goal of raising the dividend every single year, come hell or high water, no matter what. We kind of have just because we -- the way we look at the dividend is, and just so you know how we said it is, we look at our projections in the next 5 years, and then we shock them for a downside scenario. So we say, okay, if we're in a tough environment in the next 5 years, there's 2 things we want to do: A, we want to maintain our dividend; and B, we don't want to have to pull back on our strategic spend, right? All these technology investments that we've talked about, we don't want to be faced with a decision on, okay, do we cut the dividend? Or do we cut our strategic spend? We want to be able to do both in a stressed environment, and we feel like we can do that with our current dividend. And we saw that a year ago in March of last year, when our orders were down 50% for a month there. There was no discussion of cutting the dividend, there was no discussion of pulling back on strategic spend. In fact, there was a discussion of accelerating things, investing when the market is pulling back. And that actually helped us a lot last year. So that's how we think about the dividend.

Okay. Great. Okay. We've run out of time. So thanks very much for joining us today, and once again, joining our Title Conference this year.

Thank you.

Thank you for hosting us.

Thanks a lot, Bose.

Thank you.