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

All right. I think we're going to go ahead and get started here. Thanks for joining us. We're still on obviously, day 1 here. This is our second meeting at the Stephens Investment Conference. We're here in Nashville live. We've done this last couple of year. So super excited about hosting First American here, that's ticker FAF. The nation's #2 title insurer. Company has a really, I think, underappreciated offering as far as outside of core title. You've got obviously kind of outsized exposure investment income. You've got a really good data business. You've got home warranty. You've got a couple of other areas of the business I think are pretty interesting. I think Mark is going to talk to that in a second. But on the stage, representing First American is CFO, Mark Seaton and IR, Craig Barberio. For those who don't know, I'm the analyst, John Campbell. I cover real estate services here for Stephens. But happy to have these guys on the stage. We'll go through some back-and-forth Q&A and then we're going to open up to the audience if you guys have any questions. But with that, thanks for joining us guys.

If maybe we can start off, and this is kind of a traditional for us, we typically pull all of our resi-related companies on some of these kind of high-level macro questions. Just kind of compare and contrast what you guys are thinking out there. But maybe Mark, if you want to start off with -- for the next year, kind of what you think about U.S. housing, whether you think that's going to be up sharply, modestly unchanged, down modestly or down sharply?

That's just a quick answer for me here, John.

Yes.

Well, before I give that quick answer, I just want to thank you for hosting us here, and we've had a long relationship with Stephens for a long time. So it's good to be here. But our view is it will be up modestly next year not something...

Yes. And let me back up in a second because I think you were going to do a little bit of an intro. So I'm sorry, I jump right into the questions. Go ahead. Why don't you frame up the business for us a little bit, and then I get into these question.

Okay. Well, Yes. Thanks for being here, and thanks for taking an interest in First American. Just a minute or 2 here. So we're a national title insurance and settlement services company. You want to buy a house, you want to refinance your house, you want to buy a commercial property, you're going to need someone like First American to help you with that. And in terms of the market, I mean, we're at a -- it's a tough times in our business now. I mean, ever since mid-2022 when originations volumes fell, I mean, it's been very, very tough in our business. The good news is we think we're in the first pitch of the first inning of a recovery here. And there's really a few key drivers to our business, and I'm sure we'll get into these later, but we've got our commercial business. We've got a refinance business, and we have a purchase business, and we feel like they're all going to grow next year. And there's debates about how well they're going to grow, but we feel like we're going to have growth next year. We also feel like our investment income is going to grow. We did a big tax harvesting project, which we might get into as well, but our earnings everything else being equal in that are going to go up about $70 million next year. And we've been really focused the last 2 years on innovation and making our business more productive. At the end of the day, we issue a product called the title policy and we perform a service called a closing or an escrow. And both of those have been very manually intensive in the past. And we've invested a lot in the last 5 years to improve our productivity. And we're -- we've built some gems and we're in the early stages of rolling those out nationally. And so we feel like certainly next year, the market will be better. But over the next couple of years, not only will we get benefits from just the improvement in the markets, but we're going to have higher productivity improvement over time. And just from a strategic perspective, I'd say we're just all in on title and escrow like we're not going to get into businesses that have no synergistic value with us. We're not exactly a pure play because we've got a data business, we have a bank, we've got a home warranty company. We do other things in just title and escrow, but all those other businesses that we're in have really tight synergies with our core title business. So I'm sure we'll get into some of those issues, John.

Yes, for sure. All right. So after my 5-yard penalty false start, we'll go back into the polling questions on the macro. So we talked -- you gave us an answer on the U.S. housing. And just to frame this up and to be fair, if we look at the Fannie Mae, Freddie Mac, MBA, NAR estimates the last couple of years, it's like weatherman, right? And it's been tough, right? So just to frame it up, this is really hard to call, especially right now, but your views on mortgage rates next year.

Maybe I'll start with just kind of the range out there. We don't -- we typically look at our orders. That's what we live and die by, and we adjust accordingly. But I mean, Fannie is sitting at 5.7% for 30-year mortgage rates next year on average. MBAs it's 5.8%. Other forecasters are as high as 6.1%. Most of the ending -- most folks have the ending rate just below 6%. And if you look more recently with the election results, there's the more recent forecast are for higher rates still. We don't know. It all depends on what policy comes out. But it feels like the best we're going to see next year is just a shade under 6% by the end of the year. That's what I'm hearing -- reading.

What's your take?

My take is we will be about 6% at the end of the year.

Yes.

Yes. I think the new administration is serious about tariffs, and I think the inflation is going to stay higher for longer my personal view not...

Yes. I mean, we talked about this last session, but Trump said he's made an initiative to get to 3% rates. So we'll see how that happens. It would be fantastic to be a boon for your business, if that's the case. So I guess, optionality at this point. What about home prices?

It seems like they've just been moderating for a while. I think there was some view that they might have actually come down these last couple of years, just given some of the challenges we've had economically. But we just haven't seen that. We haven't seen that just because there's just not much supply in that those supply issues that we've had, even though they've got a little bit better, they continue to persist. So I mean our house view is that we'll just have a moderate increase in housing prices like low single digits next year, which is kind of where we've been. We don't see any big change there.

Yes. And that feels more supply and demand than anything else. But for those who are kind of newer to the space, how closely correlated, how much is home price appreciation reflected in your revenue per order for purchase?

So the rule of thumb is if housing prices went up 10%, let's say, over a period of time, our fee per file on the purchase side would go up about 6%, about 60% falls to the fee per file line. So we have this sort of natural price increase built into our product when housing prices rise.

Yes. And then on refi, you're getting less revenue per order, but what is -- what should investors be looking at that will help guide views on revenue per order for refi?

I would say with refis, it's more about -- our pricing is a function of the amount of the mortgage, right? So when you look over a long period of time, we haven't seen that fee per file increase on the refi side that we have on the purchase side. I mean, several years ago, we -- our average fee per file and purchase was about double what it is on refi today, it's more than 2.5x on refi. And so we don't get that same leverage. And a part of it is because we have different channels of our business and some are more price-sensitive than others. The refi channel, I'd say, is probably the most price-sensitive and the purchase channel is one of the least price-sensitive that we have.

So those numbers pulled out to be $3,500 on average for a purchase and $1,200 for refi. And that, as Mark said, that the refi were pretty stable. I think you went back 6, 7 years ago, they might have been closer with the housing.

Yes. Makes sense. Okay. So I always hate asking any kind of question that has the word politic in it or politics. So I'm going to duck and ask this question. But taking feelings aside, how do you think the change or the shift in the political environment is going to impact housing? Is it positive, negative or neutral?

In terms of the impact to housing first of all, we've been around for 135 years. So we've seen a lot of that things not me personally, I haven't seen all those cycles, but I've seen a few.

Craig has, right?

So maybe one more than me. But regardless of the administration, there would have been pluses and minuses for First American on both counts. So I think with the Trump administration now, what we're dealing with is we're dealing with less -- just less regulations now. And there's good and bad about that for us. I think the corporate tax rate is probably going to be better than it otherwise would have been. So those are positives. But there's positives and negatives. And I think for housing, it's just hard to say if there would be that much of a difference.

Yes. understood. What do you characterize as a normalized market? And any rough sense on how long it takes to get there?

And you can frame that up anyway. I'll start with some numbers, right? Yes, that's always a difficult question. I'm not sure what a normalized market is anymore, but we are going to -- we're ending this year at about 4 million existing home sales and about 700,000 new homes. So that's 4.7. Most projections I've seen are looking for existing homes to rise to 4.2% next year and maybe we get to 800,000 on new homes. So we're right around 5 million mark. But I'm kind of -- in my mind, I'm kind of feeling like 5 million existing homes is more normal. And it's going to take -- it's not happening next year. But I think we're 2 or 3 years away from that kind of market. But so I'd say the normalized mortgage closer to 5 million existing and then 4 million. That gets us back to more of a 5% turnover rate in the housing stock. That will be a very healthy market. But it's a couple of 2 or 3 years down the road. Does it mean -- in the meantime, we got tailwinds [ and a lot of pros ].

Yes. Makes sense. I saw a metric the other day. I think it was maybe Redfin, 30:1. So renters are now 30:1 for every home buyer, right? It's stocking. Because if you think about this, you would think that normalized existing home sales should rise with population, but it hasn't, right? We were doing 5 million decades ago, right? So it's a bit of a peculiar situation we're in right now. But the last one on the polling questions that we've been asking. You guys obviously aren't directly involved in the resi brokerage side of the universe, but you do play with residential brokers, you have to keep track of what's going on in the space. From the NAR settlement changes, any high-level view of where you think commission rates go, if there's going to be a material impact over the next year or so? Any kind of thoughts there?

They're going to creep down. They're going to creep down over time. The listing agent is going to be a lot more important than the buyer's agent. The buyer's agents are trying to figure out what they're going to do with all these changes. We have seen too consumers are aware of this. They're aware of this. Consumers are asking a lot of buyers, agents will -- how is this going to work, let's try to negotiate this upfront. So we -- I think there's a lot of consumer awareness. We haven't seen any changes in our transactions from what we -- we just -- we kind of care about the transaction. We haven't seen that. We have seen that there is more complications with some transactions. A lot of times, now people will try to renegotiate the splits like at the time of closing, which creates complications when you're trying to close transactions. But over time, yes, I mean, we think that commission rates, they're going to come down, not going to go -- come down in favor of the listing agent.

Yes. You often hear that the real estate agent is kind of like the quarterback of the transaction. But I would almost point to you guys as like the escrow after like the closing process, right? At least from a technical standpoint, you're finishing it out, right? And so do you have insights on commissions from that point as part of the closing documents?

We do. We do because we're paying out the commissions, right? So we collect all the funds and then we pay it out to the sellers and to the buyer's agents and to the seller's agents. And so we see all that, and we have seen them come down not dramatically, and it kind of depends on the market, but they have been shifting down, yes.

And that doesn't affect your revenue at all?

No.

It's a flat fee for the closing process.

Yes.

All right. Staying on the macro theme. Current state of U.S. housing. Obviously, you mentioned it's very challenging. Outside of rates, and it might just be all rates. But like outside of rates, what do you view as the 1 or 2 kind of other influencing factors that investors need to be paying attention to?

Just for our name here?

Just for the broader macro U.S. housing environment, like what are the things outside of rates that kind of move the needle?

The big thing for the purchase market, the resale market, people buying and selling homes, there's a couple of factors. We've got rates. We just got family formation too. And there's just a lot of young people who were getting married, getting ready to have their first child, that second child. You could start to get that family, you're going to need to buy a house, right? Whether the mortgage rate is 6.5% or 5.5%. So family formation is a big driver. And then also just housing prices, which rates and prices kind of go into affordability. And so we've got -- there's good news and bad news. The bad news is affordability is not great right now. It's gotten better, but it's just not great. The good news is there's just a lot of millennials that are at that age where they're going to buy houses. We have tailwinds. We have demographic tailwinds and at some point that's going to have to break over.

Yes. I'm with you there. We've been trying to figure this out for years now, but like sizing up what kind of demand looks like? Like can you put an actual figure on that? Because to your point, if you've got -- if you're living in a shoebox in Manhattan with your newly led wife and you've got a 1-year-old child, you can put that all for a while, but what happens when that child turns 3 or 4, [ been mobile ], and then you've got another child on the way, right? Life events do push you out. And I would venture to guess that the casual move-up buyer has just been nonexistent in the last couple of years. And what we're seeing today is probably almost all life events that happen, like the death, diapers, divorce, diplomas, the 5Ds, right, that's kind of happening. So I'm with you there. All right. So a little bit more near term rates obviously sharply went down in September, I think, 70, 80 bps, something like that, crept right back up in October. Talk to us about what that -- how that influenced demand, what you guys kind of saw in your order count.

I mean we weren't -- I'd say there's been -- talked about pent-up demand. I mean October results were pretty good, relatively speaking. And November so far is continuing that trend. First 2 weeks in November, the purchase markets up 7% -- 6.6%. Now before you get too excited, but you can't. You cannot get too excited in the short run. Resale is up 2%. And new home sales are volatile. So they're up 26%, 27%, but that's just the vagaries of how communities open and close. So we're up 2% in resale, and that's down 2% sequentially. Overall, though, we're up 7% and it's up 7% sequentially, too, which is -- it's holding up better than you would expect. In the commercial market, we're up 6.8% year-over-year. That's an 11% jump sequentially. And these are open orders per day. And then refinance is up 26% year-over-year, down 38% sequentially. So we are seeing it start to tail off. But overall, talk about pent-up demand. It does feel like the residential market, there's people that are out there that are coming up with the cash somehow. I don't know how they do it, but a lot of cash buyers about 1 of every 3 homes sold is cash. And then commercial kind of broke out in the third quarter seems to be continuing.

Yes. That's great to hear. I mean because I think you guys directly saw the impact of lower rates in September. You put up really good September numbers. But as rates came back, October was down. I think you guys had mentioned on the earnings call, it was down 3% year-over-year, and that was the first 3 weeks of the month. And so I think you closed the month down 1%, which implies a jump last week.

Again, that was mostly the new home swung back to the positive.

And you typically see the last week of the month is usually weighted a little bit heavier.

It depends on just the vagaries of when a community opens or closes. But the closing orders obviously come in very strong at the end of the quarter. Opening are more ratable throughout the quarter.

Seasonally weaker period. I think 1Q is probably January, February is the weakest, but seeing a weaker period, so you don't want to wave the victory flag and I know it's only a couple of weeks, so it can be volatile. But I think the message for us, it's encouraging at the minimum, as rates have risen again, you're seeing -- and granted, there's potentially easier comps to fight that. There's a lot of nuance stuff there, but the fact that it's not down 5% or 10%, and you're not breaking the seasonal pattern, right? You're actually doing better than what you typically see, I think, is encouraging at the least. So we'll wait and see what the next couple of weeks to months bring. All right. So on the commercial side, you mentioned that things are better there that you kind of broke out, I think, is what you mentioned in 3Q. As best as you can tell, like if you can break the market across local versus national deals, the national deals, I'm thinking about closing the GM building in Manhattan and the big energy deals and stuff like that, that really can move the needle like as best you can tell, break those 2 markets apart and the health of those 2 markets.

We've seen the national deals come alive here more than the local, probably just in the last for 4 months or so, 5 months or so. I mean on commercial, the first 6 months this year, our revenue was down 2% versus the prior year. And then in Q3, it really shot up, we were up 19%. And commercial is lumpy and that can happen. But so far, in Q4, we're up more than that. So -- and it's really driven because of these national deals. So anything that is not kind of a central business district office is we're seeing transactions, multifamily. We're doing a lot of data center deals too. I mean, data center is hot, a lot of data center deals because of the AI revolution here. And so as a general statement, our commercial business is doing well. I wouldn't say it's in the trough. I mean the last 2 years has been a trough, but now it's doing well. And just the residential is just -- it's going to -- there's a little bit of a lag there just like we saw in 2009, 2010. Commercial, we're happy with what we're seeing, and national is outperforming local.

Okay. And how would you characterize that? Is that mostly like a fee per file like the lumpiness of orders? Or is it overall order count? Is it a little bit of both?

It's most -- it's -- the vast majority of it is fee per file. We're just seeing very high-quality transactions. And as you know, I mean, it just -- we can close a $1 million premium deal and that would matter a lot than a $10,000 premium deal. So we're seeing it all in really the fee per file. Now our order counts in the last couple of months have been increasing or at least this month they're up, but it's really all about fee per file.

And then I know this can vary widely across each of the asset classes. But on average, kind of the -- I don't know want, to stack rank all of them, but like kind of the highest impactful area, the highest fee per file area on average versus the lowest, whether it'd be office or energy or what have you.

Well, energy would be the highest just because those are big complex transactions. And so the order counts are very low in energy, but the fee per file is very high because you've got these big, large transactions. I think the rest, I'd have to look. I don't have [indiscernible] but energy is definitely the biggest.

And very largest deals. It's been pretty well spread amongst our top asset classes. So it's been consistent. It's really hitting in different areas across the asset class.

And this is a granular question, so we might have to follow up on this one. But like office, just generally, exposure like revenue mix in the past, order mix or however you want to frame it up versus just trying to get a sense for how much that's declined over the last 5, 10 years?

It's actually -- it's been about -- it's about best I can tell, it's about 15%. If you look at the actual asset class mix out there, but it's been about 5%, 6% of our revenue for the last 2 or 3 years. So it's been a deemphasized asset class for quite a while.

Yes. Makes sense. Is there any area in commercial that you're particularly overindexed to or overexposed to?

No. No. I mean the thing about us is we're kind of like an index for the commercial market. We've got 44 commercial offices, all in the major capital market centers in the U.S. And I wouldn't say we're stronger or weaker in anything geographically or by asset class. I mean, if you're going to do a big transaction, I mean, there's really 2 underwriters you're going to use and we're one of them. So pretty much see everything.

Yes. Makes sense. All right. Maybe I want to come back to some of the regulatory stuff later, but let's get into the title business. So for those who are fairly new to the story, just maybe kind of frame up the competitive landscape, how you guys differ from the other guys, maybe starting off with investment income?

So I would say that we're 1 of 2 title companies that have real scale. Fidelity and us are -- we're roughly 25% market share. I think they're probably low 30s. And I would say that's a big difference. And another big difference is these adjacent assets that we have. So we've got more title plan and property record data than anybody in the industry by far. And it's a big advantage for us. And as we go more towards data and technology and more toward automation and more toward AI, you can't really benefit from those things unless you have the data. And we've got more data than anybody else. We've got 1,800 title plans, which is the data you need in our business to underwrite a transaction. And our largest competitor has just a fraction of that. So the data is a huge advantage and becoming more important every day. Another advantage that we have is we have a bank. We're the only title underwriter that has a bank and there's a few advantages with this. One is that it makes our escrow operations more efficient. I mean we're constantly sending wires and opening accounts and closing accounts. And our bank is tightly integrated from a tech perspective. So it's just easier to work with banks at First American and in other places just because of those integrations. But the other thing, too, is it's a financial arbitrage. We're able to monetize in various ways all of our escrow deposits and our competitors are only able to monetize some of those escrow deposits. So because we have the bank, we can monetize all of those. So there's a financial advantage for having it too. So we're really a pure play. I mean, our focus is on title and escrow, but we do have some businesses like data and the bank that really helps supercharge our title business.

All right. So on your exposure, short-term rates, maybe talk about duration, what the sensitivity is. I think you guys have talked about kind of rule thumb, every 25 bps rate cut as equates to I think you said $15 million. So maybe walk through the moving parts there.

Yes. So we have some -- we have -- well, there's a few different things. On our -- for our escrow deposits that we have at third-party banks, every time the Fed cuts 25 basis points, they all call us and say, guess what, your rate is now 25 basis points lower, right? They were giving us 25 basis points on the way up, and they're going to get 25 basis points on the way down. So that has an immediate impact. And we also have floating rate securities in our bank that we have in that not a lot -- not as many as we used to, but we still have some. And so those are really the biggest drivers. The third thing I'd say is we just got operating cash. I mean today, for different reasons, we got over $1 billion of operating cash. A lot of that is at our bank. So it's not like it's just sitting at the holding company, it's for liquidity purposes at our bank. But the cash balances, the operating cash balances we have, those are very, very sensitive to. So yes, every time the Fed cuts, now we feel like we'll lose $15 million a year of annualized investment income.

And I've got you guys pegged I don't know, [ 5 20, 5 25 ] or so of investment income in title. How much of that is tied directly to the bank?

Yes. So year-to-date, it's running about 35% of just kind of looking at the gross net investment income that's coming from the bank [indiscernible] trust.

Okay. And then you guys also had a rebalancing effort that you announced that drove a pretty substantial kind of uptick and it's sustainable. It feels like investment income walk through the effort why do that now and the efforts you took and then kind of frame up the financial impact?

It was really kind of a tax planning strategy that we started to think about. So we have bank and our bank is required to invest at least 65% of their assets in mortgages. And we invest in Fannie and Freddie. I mean, that's what we do. We have some corporates and some munis, but most of our bank's assets are mortgage. Well, guess what, rates go up, mortgages go down. And so -- and we sort of -- from a GAAP perspective, we mark everything to market. From a regulatory perspective, we don't. And so we thought, hey, let's just do some tax laws harvesting in our bank. The nice thing about our bank too as opposed to our insurance company is that when we take a loss, it's an operating loss. So you can recognize the loss for tax purposes right away. For the insurance company, it's a capital loss, and you may or may not be able to recognize it depending on different factors. But with the bank, we just said, hey, let's realize these $300-plus million of losses and we can get an immediate tax write-off for that. And so we feel like in the next 12 months, we'll save $90 million of cash taxes over the next 12 months. And so as we kind of looked into this, we also thought, hey, there's another benefit to0 and that is when we sell our $2.8 billion of securities, which we did and we bought $2.8 billion. Our earnings go up $67 million. just by the fact that we did that on a GAAP basis. So...

Yes, I didn't fully appreciate the cash tax savings angle because I think you guys have outlined the $70 million of direct investment income upside, but the $90 million, even more impactful. That's pretty interesting. Okay. As far as the other key drivers, maybe I think commercial is a pretty important driver of investment income. Maybe talk about the escrow balances today what that looks like in the past and how sensitive that is to the overall CRE activity?

So for commercial I think it's maybe underappreciated how much exposure we have to commercial, I would say, and really because we've got our commercial business, which I know everybody appreciates. But the escrow deposits that we generate as a company roughly about 60% of those are commercial related because for a refinance transaction, we don't hold a lot of deposits. The cash goes in and out in the same day oftentimes. For a resale or purchase transaction, we'll hold the deposits for 45, 50 days. But the balances are so much less. The fee per file is much less than on the commercial side, where a, the transaction sizes are bigger, but B, a lot of times, we can hold these deposits for a long time. I mean, in some cases, we could hold on to them for a year or 2 in an extreme situation. So as a result, of that, there's not as much velocity on the commercial side, and we can hold these deposits for a longer period of time.

Makes sense. All right. Let's take a step back up. The title business, you guys have talked to kind of a normalized title range of 11% to 13%. For those fairly new to the story, maybe frame up kind of the directionally where you're kind of heading this year without obviously giving too much on 4Q. But just kind of directionally maybe year-to-date where you're heading, typically what 4Q looks like rather than 3Q. And then as you think about next year, assuming -- I think you assumed or you're expecting maybe that refi is up purchase up commercial is up. So you're going to get hopefully, a level -- a certain level of growth. I think it could be pretty good next year. We'll have to see how that ends up shaking out. But if that can get you kind of comfortably in that 11% to 13% range. So I know that's about 15 questions into one. So good luck.

Yes. Yes. Let me talk about margins, and I'll address a lot of those questions here. For the rest of the year, I mean at the beginning of the year, we said that our margins were going to be similar to what they were in 2023. 2023, I think we were like 9.9% title margins, excluding realized gains and losses. And so we said we'd be similar to that, and we're going to be similar to that. So we're going to be very close to that. And a lot of it is -- a lot of it will come down to like how strong the commercial market is in December. Commercial is always seasonally the strongest in December, and we don't exactly know what it's going to be. But commercial volumes are picking up. So we'll be close to where we were last year, just like we said at the beginning of the year. In terms of our normalized margin, I mean, the 11% to 13% is a little -- that's old and stale. When we talk about like our normalized margins, the peak margin we ever had was 15%. That was in 2021. And the trough, the last year or 2 has been, let's just call it, 10%, I'm slightly rounding up. So if we're 15 in the peak, and we're 10% in the trough, we'll be at 12.5% during the normalized market -- I mean on average, you take the average 12.5%. Now the one thing though, and we've been very public about this, is our margins have had about a 100 basis point drag because of these innovation efforts that we've put in recently. And those things were either going to -- they're either going to work, which we feel confident about those. But if they don't, we'll just shut them down. So I think that like you got to add the 100 basis points of drag, that's not going to be in perpetuity. So I think about our normalized margins is like 13.5%. 11%, I mean, we're going to -- I don't know, we're putting our plans together next year, but 11% is certainly not a -- that's not a normalized margin for us. I'd say it's 13.5% plus or minus. So when we talk about margins for next year, we've got tailwinds with commercial. We've got tailwinds with purchase and there's a debate about well, how big is that tailwind, but it will be better than in 2024. And then we're not expecting a big pop in refis, someday we will, but even if we don't, we'll have a little bit of a benefit there. So all of our major markets, purchased commercial refi will be up next year, and that helps us. The second thing that helps us is, again, we're going to have roughly $70 million more of -- $67 million is what we disclosed of investment income next year because it's tax loss harvesting. So that will be a tailwind. And the other tailwind that we have is right now, there's an opportunity for us to reduce our technology expenses. And so we're working on that. And the last thing I would say, too, is next year, as volumes come back, we're not going to have to hire people as much because we're running relatively low in terms of our productivity metrics just because the market is so low. So the first 15%, 20% of revenue growth, we won't have to hire -- we should expect a better success ratio than we normally would. So for all those reasons, I mean, we're looking at margin expansion next year and then the headwind we have is the Fed. So again, every time the Fed cuts, we're going to lose $15 million of investment income. But the tax loss harvesting thing we did, well, that's basically funds 4-plus Fed cuts.

Yes. That's a good point. I mean, I think if you look at consensus numbers, obviously, anything that like a P&L like yours that is going to be very exposed to transactions, right, and to the broader macro, you tend to see out year consensus numbers all over the board. I think it's the first time, Craig, you've probably seen this yourself, but it's a very tight kind of group right now. And I think people do expect a degree of recovery overall for revenues, given the credit for the investment income, I don't think there's a lot of credit on commercial, but on the success ratio, I think everybody is kind of managing historical. So it does seem like you've got a little bit of excess capacity right now where you could see maybe slightly better. So that's a good way to kind of frame it up. All right. On the title business, you did talk about success ratio. So maybe just quickly, why do you establish that? How strictly you follow that? And then also from the investment you're making right now on technology, how impactful that's been? I think you said 100 bps, but maybe just kind of give us a broad sense of success ratio.

It's a metric we came up with a while back, and it's really just for every dollar of net operating revenue that we get. So we take our operating revenue, not investment income, just our operating revenue and then we subtract out our agent retention expense. So it's really the net revenue dollars that flow to us. For every dollar of net revenue that we get, we want to spend $0.60 on the dollar in terms of our other operating expenses and our personnel expenses. And if we do that, that's success. We're doing a good job of managing our expenses. And the same thing it works on the way down. Like if our revenue is falling in dollar like it was in 2022, we want to cut $0.60 on the dollar. And it's kind of a lagging indicator like we kind of look at it at the end of the month or the end of quarter and say, okay, have we done a good job here? Because we're managing -- our operators are managing like an orders per employee basis. Now over time, it's like if you're doing that, if you're managing a 60% success ratio, like you're improving your margins over time. So at some point, you're going to get capped out, right? But that's kind of how we think about it.

Yes, makes sense. All right. I want to get maybe one or 2 more big-picture questions and then we'll turn it over to the audience before we run out of time here. You mentioned data, how important data is. I think this is a really overlooked angle to this whole industry is the competitive moats that come with title data plans, title data, that the records you have, the ability to automate those, the ability to create insights off of that. Putting that all together, I think probably one of the more transformational things you guys are working on right now that maybe was one of the most transformational things you've ever done as a company that is not being talked about with like the investment community generally is around automated title underwriting on purchase. So I think you guys call it Sequoia. You've had other competitors out there kind of try to do it. It's mostly on refi, purchase is a totally different animal. So talk to us about how you bring all that together? How impactful that could be? Where you are in the process of piloting it? How real of a potential that is over time?

So there's several companies, underwriters, including us that have automated title for refinance transactions. That's not special or unique or differentiated. A purchase transaction is a lot more complex, a lot more challenging. The property is changing hands. You've got to deal with CC&Rs, you got to deal with easements. You've got to deal with things that you don't have to worry about a refinance transaction. And so we set out maybe 2 years ago or so to say, hey, let's try to do that. Let's try to do it because we have the data, can we turn it into a product? And we had to cross some significant data hurdles, but we've crossed them. And the goal, the vision is that for counties where we have title plans, we've got title plans now in 1,800 of the 3,200 counties in the U.S. we want to be able to get 50% hit rates, 50% of the time when we get an order in those counties, we want to be able to have an instant title policy. And that was kind of the vision. If we could do that, that's enough to productize it. And so we're 2 years into it, we're very confident we can get there. And actually, we feel like the hit rate is going to be higher than 50%. So we haven't rolled out right now in Maricopa County. It's just as a pilot and in Riverside counties. And we're still testing it, but we're -- as we sit here today, we feel like the hit rates are going to be better and the cost to produce this is going to be lower than our initial projections. And so what we're really doing is we're trying to master it. We want to make sure that we get to those 50% hit rates in those counties and kind of make sure that the product works before we start to roll it out nationally.

Yes. So I suppose to asking you the 19th question of what rates do and what your volume. Let me ask this question. So let's just say this does roll out instead of 13.5% being the mean on title, what would title margin be on an automated underwriting purchase-only product?

The question from the audience is what title margins could look like under a fully automated Sequoia purchase transaction.

Yes. I'll answer it this way. So when you think about like our title production costs, like what is the cost to produce today, we have a centralized unit that does 70% of our orders today. And we spend about $50 million on data, and that's not going away. We spend about $100 million on labor. Okay. And that's including our commercial transactions and our purchase transaction, that's everything. So we're really attacking that $100 million labor pool. And then we also do -- there is work that's done in the field too. So I would say that, a, it's -- we believe we can save costs with this. Do I think the normalized margin will go from 13.5% to 15%? No. 13.5% to 14%? Maybe. It's not maybe significant, but the other thing it allows us to do is there's at least a view that we can gain market share because of this too because if we could deliver a product faster than anybody else and at a lower cost and it matters a lot on the agency. There's some speculation that, well, listen, right now, the way we do it today, we get an order for a customer and 24 hours later, we did deliver a purchase commitment. So what's the difference if it's 24 hours or 24 milliseconds. What does it really matter? Well, I'll tell you what it matters if it's a labor product versus a data product because if we can produce it for half the cost that our competitors can, it really helps with our agency business because a lot of our agents buy production from us, and that is price sensitive. If we can sell them production for lower cost that will give more business.

From a competitive advantage or like a competitive moat standpoint, what prohibits -- it seems like FNF, or Fidelity National would have the best opportunity to replicate this. But like what type of advantage do you have on the rest of the industry?

I think it's significant because we've got years and years of title plan history. We've got more title plans. And you can't do what I'm talking about unless you the title plan data. And so you need to have these deep rich title plans, which we have. You can't automate something unless you have the data. And since we have more data than anybody else, it really puts us in the driver's seat to capitalize on this.

And so historically, to survey to go and do the title policy, you would go to the county court house, right? You would go below the desktop of old files and look at it. What are the efforts you've taken to digitize that? How long did that process take? It seems like that was an effort maybe a couple of years ago and you guys maybe got full national coverage or close to it. So just talk about that process as well.

You think about title production and the history, we used to have literally file cabinets in every county and title would be searched in every single county locally. And then maybe, I don't know, 30 years ago or so, we said, well, let's have these centralized hubs to search it. And so we save cost by doing it centrally, and then we offshored that as much as we could. And really, you think about like the final step is you can just automate it and make it a data product. And so that's where we're going.

Is that data yours?

It's ours because it's all public. A lot of it, if not all of it, it's public information, right? So we go to the counties and we buy it from the counties. But then we reindex it and we organize it in a way that the industry can actually search. So you could go to -- I live in Orange County. You can go to Orange County, and ask them for documents on Mark Seaton, and they'll give you a whole list of documents that say Mark Seaton on it. But you can't go to Orange County and say, give me the documents for 123 Main Street. They won't know what to do. And so we take all those documents, we re-index it so that the industry can type in 123 Main Street and get all the documents associated with that.

And you can go and capture all that data at once or you capture it as you do a transaction and then you have the data?

We capture it every day we go to the counties and we get all of the -- any recorded documents related on that day. And then we index them so that when we get the order, we have it, we don't need to go to accounts because we have it in our database.

I've got one more, and we can see if we can end with an audience question as well. On the home warranty business, like I said, I feel like that's an underestimated side of the story, too. I think some would argue that it would carry a higher valuation will be more valuable than the title business. That's up for debate. But your business is 3x larger than Fidelity Nationals despite being smaller on the title side, talk to us about how important that business is. And I've got to ask this question because I get it asked from investors all the time, but about the potential spend. You've had favorable transaction comps out there, maybe not apples-to-apples exactly. But your largest public player trades at -- has traded a pretty frothy multiple times. So talk to us about that as well.

Well, we have no intention to spend now. So that's not something we're focused on at all. What we are focused on and why we have home warranty is there's a lot of white space and home warranty. There's a lot -- like unlike title, we're pretty -- every property America has title insurance, and we're all fighting for the same deal on home warranty, there's only 4% of homes that have a home warranty contract on it. So we've always been very good at home warranty in what we call the real estate channel, where you're going to buy a home and oftentimes, the seller is going to buy you a home warranty policy is a good faith gesture for the appliances, the major appliances in the home. We've always been good in that channel. And maybe about 10 years ago, we woke up and said, hey, let's try this direct-to-consumer channel because a lot of people that would potentially want a home warranty contract that aren't in connection with the real estate transaction. So 10 years ago, direct consumer was 0% of our business. Today, 42% of the contracts we have in force were emanated from the direct-to-consumer channel. And so we're just -- and we saw this last quarter, we're taking even a more aggressive view of direct-to-consumer. The thing with direct-to-consumer is you spend marketing dollars and your cash flow negative that first year because you got to spend the dollars to get the consumer. There is a higher claims ratio the first year, but when you look at the lifetime value of that channel, it's very attractive. On the real estate side, there's only about a low 20% chance that somebody renews. On the direct-to-consumer side, it's low 80% chance that they renew. And so you extrapolate that out, it's extremely attractive, losing money in the first year. After that, it's very attractive. And so the toggle that we've had is, well, the more that we grow direct-to-consumer, the worse the earnings are in the short term. But it's all about lifetime value. And so we're ramping up consumer spend because we just feel like it's going to be a good investment for the business in the long term.

Yes, makes sense.

And we're the second largest home warranty company out there. We have scale. We've got a big contractor network. I mean it's a really good business. We've got a great management team. And so there's a lot of growth opportunities there. Our home warranty business, and I can say this about our adjacent businesses, whether it's the bank or the home warranty business or the data business, they all have higher margins and will grow faster than the title business unless we're in some big refi boom. But overall, those have higher growth prospects in our overall title business.

And from a return standpoint, I don't know how you measure as ROE, ROIC, but it's a couple of points better than title typically.

Yes. It's actually -- and one of the things we've done in home warranty is we've taken dividends out. So when you look at the ROE and home warranty, it's not a capital-intensive business. It's very attractive economically.

Yes. Any last questions from the audience? All right. I think that's a wrap. Appreciate the time, guys. Thanks a lot.

Thanks for having us here, John. Appreciate it.

Yes. My pleasure. Thank you.