First American Financial Reports Second Quarter 2013 Results

—Reports Earnings of 31 Cents per Diluted Share, Including an $89 Million Reserve Strengthening—

July 25, 2013, Santa Ana, Calif.,

First American Financial Corporation (NYSE: FAF), a leading global provider of title insurance and settlement services for residential and commercial real estate transactions, today announced financial results for the second quarter ended June 30, 2013.

Download the complete press release as a PDF (244 KB)

Current Quarter Highlights

  • Total revenues up 18 percent compared with last year
  • Title Insurance and Services segment pretax margin of 6.1 percent
    - Adjusted pretax title margin of 13.4 percent, excluding $89.0 million reserve strengthening, or 730 basis points, primarily due to domestic lender claims for policy years 2004-2008
  • Title order mix continues to shift toward higher-premium resale transactions
    - Resale open orders per day up 19 percent compared with last year
    - Refinance open orders per day down 9 percent compared with last year
  • Commercial division revenues of $133.0 million, up 35 percent compared with last year
  • Specialty Insurance segment total revenues up 6 percent, with a pretax margin of 8.7 percent
  • Cash flow from operations of $209.3 million
  • Repurchased 1.6 million common shares for $35.6 million in June and July

 

Selected Financial Information

($ in millions, except per share data)

                   
                  For the Three Months Ended

June 30

                  2013                 2012
          Total revenues       $ 1,288.5                 $ 1,089.8
          Income before taxes         59.2                   112.3
                                     
          Net income       $ 34.7                 $ 73.0
          Net income per diluted share         0.31                   0.68
                                     

Total revenues for the second quarter of 2013 were $1.3 billion, an increase of 18 percent relative to the second quarter of 2012. Net income in the current quarter was $34.7 million, or 31 cents per diluted share, compared with net income of $73.0 million, or 68 cents per diluted share, in the second quarter of 2012. The current quarter results include an $89.0 million reserve strengthening, or 48 cents per diluted share net of tax. The current quarter results also include net realized investment gains of $4.5 million, or 2 cents per diluted share, compared with net realized investment gains of $11.6 million, or 6 cents per diluted share, in the second quarter of 2012.

“Our business gained momentum in the second quarter as the housing market continued to improve,” said Dennis J. Gilmore, chief executive officer for First American Financial Corporation. “Strength in our title insurance segment drove revenue up 18 percent. Our commercial division’s performance was particularly strong, with revenues up 35 percent compared with last year.

“Year to date, our paid title claims are down 8 percent as compared with the prior year and our most recent policy years continue to perform well, with ultimate loss rates below historical averages. While claims from our legacy policy years have generally declined, they are not falling at the pace that we expected and, as a result, we strengthened our reserves in the quarter. Although the reserve strengthening impacted our otherwise strong results, it does not alter our long-term outlook for the business.

“The strong spring selling season has continued into summer, with resale orders in July remaining at the peak levels of May and June. On the refinance side, the surge in mortgage rates beginning in May impacted transaction activity with orders declining sharply through the end of June, but leveling out thus far in July.

“In June and July, we repurchased 1.6 million common shares at an average price of $21.92 for a total of $36 million. We purchased these shares based on our strong capital position and the long-term value we see in our stock relative to other investment opportunities.”

                   

Title Insurance and Services

($ in millions, except average revenue per order)

                   
                  For the Three Months Ended

June 30

                  2013                 2012
          Total revenues       $ 1,205.0                   $ 1,012.0  
                                     
          Income before taxes       $ 73.0                   $ 118.4  
          Pretax margin         6.1 %                   11.7 %
                                     
          Direct open orders         421,500                     411,200  
          Direct closed orders         321,300                     289,300  
                                     
          Commercial*                          
          Total revenues       $ 133.0                   $ 98.2  
          Open orders         23,600                     19,100  
          Closed orders         11,800                     12,100  
          Average revenue per order       $ 10,200                   $ 7,100  
                                             
         

* Includes commercial activity from the National Commercial Services division only.

                                             

Total revenues for the Title Insurance and Services segment were $1.2 billion, a 19 percent increase from the same quarter of 2012. Direct premiums and escrow fees were up 21 percent from the second quarter of 2012, driven by an 11 percent increase in the number of direct title orders closed in the quarter and a 9 percent increase in the revenue per direct title order to $1,593. The increase in revenue per direct title order was primarily attributable to higher real estate prices and an increase in the number of large commercial deals that closed in the quarter. Agent premiums were up 24 percent in the current quarter, which is consistent with the increase in direct premiums during the previous quarter, reflecting the typical reporting lag of approximately one quarter.

Information and other revenues were $171.1 million this quarter, up 2 percent compared with the same quarter of last year. The increase was primarily due to higher demand for the company’s residential and commercial title information products, partially offset by lower demand for title-related services in Canada.

Total investment income was $25.3 million in the second quarter, an increase of $5.2 million from the second quarter of 2012. This increase was primarily due to higher interest and dividends from the investment portfolio and the impact of certain impairments that negatively affected the second quarter of 2012, partly offset by lower net realized investment gains in the current quarter.

Personnel costs were $340.0 million in the second quarter, an increase of $40.7 million, or 14 percent, compared with the second quarter of 2012. This increase was primarily due to higher staffing levels required to support the increase in order volume and higher incentive compensation driven by the growth in revenues.

Other operating expenses were $216.2 million in the second quarter, up $26.5 million, or 14 percent, compared with the second quarter of 2012. The increase was primarily due to higher production-related expenses and temporary labor costs driven by the increase in order volumes.

The provision for policy losses and other claims was $149.5 million in the second quarter, or 14.8 percent of title premiums and escrow fees, up $94.7 million compared with the same quarter of the prior year. The current quarter rate of 14.8 percent reflects an ultimate loss rate of 5.8 percent for the current policy year and an $89.0 million net increase in the loss reserve estimates for prior policy years. The increase in loss reserve estimates for prior policy years reflects claims development above expected levels, primarily attributable to domestic lender policies from policy years 2004 through 2008.

Pretax income for the Title Insurance and Services segment was $73.0 million in the second quarter, compared with $118.4 million in the second quarter of 2012. Pretax margin was 6.1 percent in the current quarter, compared with 11.7 percent last year.

                   

Specialty Insurance

($ in millions)

                   
                  For the Three Months Ended

June 30

                  2013                 2012
          Total revenues       $ 84.0                   $ 79.6  
                                     
          Income before taxes       $ 7.3                   $ 13.3  
          Pretax margin         8.7 %                   16.7 %
                                     

Total revenues for the Specialty Insurance segment were $84.0 million in the second quarter of 2013, an increase of 6 percent compared with the second quarter of 2012. The increase in revenues was driven by higher premiums earned in both the home warranty and property and casualty business lines, partially offset by lower net realized gains in the current quarter. The overall loss rate in the Specialty Insurance segment was 61 percent in the current quarter, above the 56 percent loss rate in the prior year. Both business lines experienced higher losses in the quarter, resulting in a pretax margin of 8.7 percent, down from 16.7 percent in the second quarter of 2012.

Teleconference/Webcast

First American’s second quarter 2013 results will be discussed in more detail on Thursday, July 25, 2013, at 11 a.m. ET, via teleconference. The toll-free dial-in number is (800) 619-2658. Callers from outside the United States may dial (773) 756-4600. The passcode for the event is “First American.”

The live audio webcast of the call will be available on First American’s website at www.firstam.com/investor. An audio replay of the conference call will be available through July 31, 2013, by dialing (203) 369-3836. An audio archive of the call will also be available on First American’s investor website.

About First American

First American Financial Corporation (NYSE: FAF) is a leading provider of title insurance and settlement services to the real estate and mortgage industries, that traces its heritage back to 1889. First American also provides title plant management services; title and other real property records and images; valuation products and services; home warranty products; property and casualty insurance; and banking, trust and investment advisory services. With revenues of $4.5 billion in 2012, the company offers its products and services directly and through its agents throughout the United States and abroad. More information about the company can be found at www.firstam.com.

Website Disclosure

First American posts information of interest to investors at www.firstam.com/investor. This includes opened and closed title insurance order counts for its direct title insurance operations, which are posted approximately 12 days after the end of each month.

Forward-Looking Statements

Certain statements made in this press release and the related management commentary and responses to investor questions, including but not limited to those related to the outlook for the housing market and its effects on the company; future refinance, purchase and commercial volumes; the decline in refinance business being offset by future strength in the company’s purchase and commercial businesses; focus on organic growth in the core title business; and future title claims experience and loss rates, are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements may contain the words “believe,” “anticipate,” “expect,” “plan,” “predict,” “estimate,” “project,” “will be,” “will continue,” “will likely result,” or other similar words and phrases. Risks and uncertainties exist that may cause results to differ materially from those set forth in these forward-looking statements. Factors that could cause the anticipated results to differ from those described in the forward-looking statements include: interest rate fluctuations; changes in the performance of the real estate markets; volatility in the capital markets; unfavorable economic conditions; impairments in the company’s goodwill or other intangible assets; failures at financial institutions where the company deposits funds; changes in applicable government regulations; heightened scrutiny by legislators and regulators of the company’s title insurance and services segment and certain other of the company’s businesses; regulation of title insurance rates; reform of government-sponsored mortgage enterprises; limitations on access to public records and other data; product migration; changes in relationships with large mortgage lenders; changes in measures of the strength of the company’s title insurance underwriters, including ratings and statutory capital and surplus; losses in the company’s investment portfolio; expenses of and funding obligations to the pension plan; material variance between actual and expected claims experience; defalcations, increased claims or other costs and expenses attributable to the company’s use of title agents; systems interruptions and intrusions, wire transfer errors or unauthorized data disclosures; inability to realize the benefits of the company’s offshore strategy; inability of the company’s subsidiaries to pay dividends or repay funds; and other factors described in the company’s quarterly report on Form 10-Q for the quarter ended March 31, 2013, as filed with the Securities and Exchange Commission. The forward-looking statements speak only as of the date they are made. The company does not undertake to update forward-looking statements to reflect circumstances or events that occur after the date the forward-looking statements are made.

Use of Non-GAAP Financial Measures

This news release and related management commentary contain certain financial measures that are not presented in accordance with generally accepted accounting principles (GAAP), including an adjusted pretax title margin and personnel and other operating expense ratios. The company is presenting these non-GAAP financial measures because they provide the company’s management and investors with additional insight into the operational efficiency and performance of the company relative to earlier periods and relative to the company’s competitors. The company does not intend for these non-GAAP financial measures to be a substitute for any GAAP financial information. In this news release, these non-GAAP financial measures have been presented with, and reconciled to, the most directly comparable GAAP financial measures. Investors should use these non-GAAP financial measures only in conjunction with the comparable GAAP financial measures.

         
First American Financial Corporation
Summary of Consolidated Financial Results and Selected Information
(in thousands, except per share amounts and title orders)
(unaudited)
                                 
        For the Three Months Ended       For the Six Months Ended
        June 30       June 30
        2013       2012       2013       2012
                                 
Total revenues       $ 1,288,464       $ 1,089,833       $ 2,435,227       $ 2,056,596
                                 
Income before income taxes       $ 59,224       $ 112,290       $ 118,816       $ 163,840
Income tax expense         24,276         38,773         47,636         59,214
Net income         34,948         73,517         71,180         104,626

Less: Net income attributable to noncontrolling interests

        276         516         330         332
Net income attributable to the Company       $ 34,672       $ 73,001       $ 70,850       $ 104,294
                                 
Net income per share attributable to stockholders:                                
Basic       $ 0.32       $ 0.69       $ 0.66       $ 0.98
Diluted       $ 0.31       $ 0.68       $ 0.64       $ 0.97
                                 
Cash dividends declared per share       $ 0.12       $ 0.08       $ 0.24       $ 0.16
                                 
Weighted average common shares outstanding:                                
Basic         108,210         106,230         107,881         105,926
Diluted         110,311         107,945         110,072         107,681
                                 

Selected Title Information

                               
                                 
Title orders opened         421,500         411,200         798,100         788,400
                                 
Title orders closed         321,300         289,300         612,700         550,600
                                 
Paid title claims       $ 69,148       $ 71,850       $ 140,485       $ 152,305
                                 
                                 
                               
First American Financial Corporation
Selected Balance Sheet Information
(in thousands)
(unaudited)
                               
       

June 30,

2013

                   

December 31,

2012

                               
Cash and cash equivalents       $ 861,835                     $ 627,208
Investment portfolio         3,145,223                       3,113,560
Goodwill and other intangible assets         891,188                       902,952
Total assets         6,302,979                       6,050,847
Reserve for claim losses         1,054,450                       976,462
Notes payable         314,779                       229,760
Total stockholders' equity       $ 2,342,220                     $ 2,348,065
                               
                               
 
First American Financial Corporation
Segment Information
(in thousands, unaudited)
                                 
For the Three Months Ended               Title       Specialty       Corporate

June 30, 2013

      Consolidated       Insurance       Insurance       (incl. Elims.)
Revenues                                
Direct premiums and escrow fees       $ 593,205       $ 511,918       $ 81,287       $ -  
Agent premiums         496,730         496,730         -         -  
Information and other         171,522         171,104         424         (6 )
Investment income         22,485         21,599         1,787         (901 )
Net realized investment gains(1)         4,522         3,696         525         301  
          1,288,464         1,205,047         84,023         (606 )
Expenses                                
Personnel costs         364,767         340,046         14,905         9,816  
Premiums retained by agents         396,024         396,024         -         -  
Other operating expenses         232,765         216,230         9,859         6,676  
Provision for policy losses and other claims         198,766         149,534         49,232         -  
Depreciation and amortization         18,192         16,260         1,209         723  
Premium taxes         14,795         13,268         1,527         -  
Interest         3,931         645         -         3,286  
          1,229,240         1,132,007         76,732         20,501  
                                 
Income (loss) before income taxes       $ 59,224       $ 73,040       $ 7,291       $ (21,107 )
                                 
                                 
For the Three Months Ended               Title       Specialty       Corporate

June 30, 2012

      Consolidated       Insurance       Insurance       (incl. Elims.)
Revenues                                
Direct premiums and escrow fees       $ 497,288       $ 424,146       $ 73,142       $ -  
Agent premiums         400,361         400,361         -         -  
Information and other         167,827         167,411         418         (2 )
Investment income         12,789         12,283         2,231         (1,725 )
Net realized investment gains(1)         11,568         7,771         3,797         -  
          1,089,833         1,011,972         79,588         (1,727 )
Expenses                                
Personnel costs         322,043         299,348         13,717         8,978  
Premiums retained by agents         321,348         321,348         -         -  
Other operating expenses         205,647         189,759         9,594         6,294  
Provision for policy losses and other claims         95,389         54,820         40,569         -  
Depreciation and amortization         18,456         16,669         1,116         671  
Premium taxes         12,228         10,922         1,306         -  
Interest         2,432         661         -         1,771  
          977,543         893,527         66,302         17,714  
                                 
Income (loss) before income taxes       $ 112,290       $ 118,445       $ 13,286       $ (19,441 )
                                 
(1) Includes other-than-temporary impairment (OTTI) losses recorded in earnings.
 
 
 
First American Financial Corporation
Segment Information
(in thousands, unaudited)
                                 
For the Six Months Ended               Title       Specialty       Corporate

June 30, 2013

      Consolidated       Insurance       Insurance       (incl. Elims.)
Revenues                                
Direct premiums and escrow fees       $ 1,071,056       $ 911,902       $ 159,154       $ -  
Agent premiums         981,195         981,195         -         -  
Information and other         323,655         322,852         814         (11 )
Investment income         45,543         40,585         3,466         1,492  
Net realized investment gains (1)         13,778         11,092         2,100         586  
          2,435,227         2,267,626         165,534         2,067  
Expenses                                
Personnel costs         709,267         656,889         29,236         23,142  
Premiums retained by agents         783,567         783,567         -         -  
Other operating expenses         438,111         404,843         20,078         13,190  
Provision for policy losses and other claims         314,792         226,894         87,898         -  
Depreciation and amortization         36,587         32,744         2,387         1,456  
Premium taxes         26,912         24,172         2,740         -  
Interest         7,175         1,209         -         5,966  
          2,316,411         2,130,318         142,339         43,754  
                                 
Income (loss) before income taxes       $ 118,816       $ 137,308       $ 23,195       $ (41,687 )
                                 
                                 
For the Six Months Ended               Title       Specialty       Corporate

June 30, 2012

      Consolidated       Insurance       Insurance       (incl. Elims.)
Revenues                                
Direct premiums and escrow fees       $ 911,074       $ 767,785       $ 143,289       $ -  
Agent premiums         777,347         777,347         -         -  
Information and other         323,587         322,700         893         (6 )
Investment income         33,923         29,604         4,696         (377 )
Net realized investment gains (1)         10,665         5,757         4,908         -  
          2,056,596         1,903,193         153,786         (383 )
Expenses                                
Personnel costs         627,322         576,925         27,380         23,017  
Premiums retained by agents         623,512         623,512         -         -  
Other operating expenses         394,797         361,510         20,637         12,650  
Provision for policy losses and other claims         182,067         107,000         75,067         -  
Depreciation and amortization         36,515         33,002         2,172         1,341  
Premium taxes         23,076         20,655         2,421         -  
Interest         5,467         1,322         -         4,145  
          1,892,756         1,723,926         127,677         41,153  
                                 
Income (loss) before income taxes       $ 163,840       $ 179,267       $ 26,109       $ (41,536 )
                                 
(1) Includes other-than-temporary impairment (OTTI) losses recorded in earnings.
       
       
                                 
First American Financial Corporation
Expense Ratio Reconciliation
Title Insurance and Services Segment
($ in thousands, unaudited)
                                 
        For the Three Months Ended       For the Six Months Ended
        June 30       June 30
        2013       2012       2013       2012
                                 
Total revenues       $ 1,205,047         $ 1,011,972         $ 2,267,626         $ 1,903,193  

Less: Net realized investment gains(1)

        3,696           7,771           11,092           5,757  
Investment income         21,599           12,283           40,585           29,604  
Premiums retained by agents         396,024           321,348           783,567           623,512  
Net operating revenues       $ 783,728         $ 670,570         $ 1,432,382         $ 1,244,320  
                                 
Personnel and other operating expenses       $ 556,276         $ 489,107         $ 1,061,732         $ 938,435  
Ratio (% net operating revenues)         71.0 %         72.9 %         74.1 %         75.4 %
Ratio (% total revenues)         46.2 %         48.3 %         46.8 %         49.3 %
                                 
(1) Includes other-than-temporary impairment (OTTI) losses recorded in earnings.

 

Download the complete press release as a PDF (244 KB)

 

 

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