First American Financial Reports Results For The Fourth Quarter And Full Year Of 2013

—Reports Earnings of 48 Cents per Diluted Share for the Fourth Quarter—

February 13, 2014, Santa Ana, Calif.

First American Financial Corporation (NYSE: FAF), a leading global provider of title insurance, settlement services and risk solutions for real estate transactions, today announced financial results for the fourth quarter and year ended Dec. 31, 2013.

Download the complete press release as a PDF (127 KB)

Current Quarter Highlights

  • Total revenues down 4 percent compared with last year

- Closed orders per day down 35 percent, driven by 61 percent decline in refinance orders

- Average revenue per direct order up 34 percent due to higher purchase and commercial mix

  • Title Insurance and Services segment pretax margin of 7.8 percent
  • Commercial revenues of $175.7 million, up 12 percent compared with last year
  • Specialty Insurance segment pretax margin of 17.0 percent
  • Cash flow from operations of $132.6 million
  • Signed definitive agreement to acquire Interthinx, Inc. for $155 million on Feb. 5, 2014

- Expected to close by March 31, 2014

 

Selected Financial Information

($ in millions, except per share data)

                         
             

For the Three Months Ended
December 31

     

 

For the Full Year Ended
December 31

              2013         2012         2013         2012
    Total revenues         $ 1,219.9         $ 1,276.8         $ 4,956.1         $ 4,541.8
    Income before taxes           84.8           147.7           310.7           467.4
                                             
    Net income         $ 51.6         $ 93.3         $ 186.4         $ 301.0
    Net income per diluted share           0.48           0.85           1.71           2.77
                                                     

Total revenues for the fourth quarter of 2013 were $1.2 billion, a decline of 4 percent relative to the fourth quarter of 2012. Net income in the current quarter was $51.6 million, or 48 cents per diluted share, compared with net income of $93.3 million, or 85 cents per diluted share, in the fourth quarter of 2012. The current quarter results include net realized investment gains of $2.4 million and impairment of equity investments of $7.8 million, which together reduced net income by 3 cents per diluted share. The fourth quarter of 2012 included net realized investment gains of $6.2 million, or 4 cents per diluted share.

Total revenues for the full year of 2013 were $5.0 billion, an increase of 9 percent relative to the prior year. Net income was $186.4 million, or $1.71 per diluted share, compared with $301.0 million, or $2.77 per diluted share, in 2012. The results for the full year 2013 include net realized investment gains of $9.2 million, or 5 cents per diluted share, compared with $64.1 million of net realized investment gains, or 38 cents per diluted share, in 2012. In addition, the current year results include reserve additions of $148.5 million, or 84 cents per diluted share, primarily due to claims from policy years 2005 to 2008, compared with reserve additions of $62.1 million, or 37 cents per diluted share, in 2012.

“In 2013, revenue grew by 9 percent, driven by strength in our resale and commercial businesses,” said Dennis J. Gilmore, chief executive officer at First American Financial Corporation. “Revenue growth was led by our purchase business, which grew 26 percent, as both transaction volumes and real estate prices increased. Our commercial business had its strongest year ever, with revenue up 23 percent.

“In the fourth quarter, however, we felt the full impact of the drop-off in refinance activity, with closed title orders declining to the lowest level of the year. The effect was offset in part by the growth in our resale and commercial businesses, which drove average revenue per order up 34 percent. We are actively managing expenses and, going into 2014, will continue to adjust our cost structure to market conditions.

“Throughout 2014 we will focus on responding to our customers’ desire for tighter integration between loan origination activities, loan quality verification and title and settlement services,” continued Gilmore. “As part of this effort, we recently announced our agreement to acquire Interthinx, a leading provider of loan quality analytics, decision support tools and loan review processes for the mortgage industry. The combination of Interthinx’s powerful offerings with the risk mitigation we already provide through our title insurance and settlement services products gives us a compelling solution for customers’ compliance and loan-quality assurance requirements. This transaction also provides us further opportunity to leverage our extensive data assets and enhances our ability to innovate in response to the increasing demands of the marketplace.”

Title Insurance and Services

($ in millions, except average revenue per order)

               
             

For the Three Months Ended
December 31

              2013         2012
    Total revenues         $ 1,125.5           $ 1,197.0  
                         
    Income before taxes         $ 87.9           $ 152.5  
    Pretax margin           7.8%             12.7%  
                         
    Direct open orders           270,500             408,100  
    Direct closed orders           217,300             335,300  
                         
    U.S. Commercial                    
    Total revenues         $ 175.7           $ 156.6  
    Open orders           30,200             30,700  
    Closed orders           20,900             21,400  
    Average revenue per order         $ 8,400           $ 7,300  
                                 

Total revenues for the Title Insurance and Services segment were $1.1 billion in the fourth quarter of 2013, a decline of 6 percent from the same quarter of 2012. Direct premiums and escrow fees were down 12 percent compared with the fourth quarter of 2012, due to a 35 percent decline in the number of direct title orders closed in the quarter that was largely offset by the increase in average revenue per order. Average revenue per direct title order was $1,878, an increase of 34 percent compared with the fourth quarter of 2012, due to the shift in the mix of revenues to higher-premium commercial and purchase transactions, as well as an increase in the average revenue per closed order for commercial and purchase transactions. Agent premiums were up by 5 percent in the current quarter, reflecting the normal reporting lag of approximately one quarter.

Information and other revenues were $143.8 million this quarter, down 11 percent compared with the same quarter of last year, primarily due to lower demand for the company’s title plant information and default information products, driven by the overall decline in transaction activity. Total investment income was down $15.3 million compared with the fourth quarter of 2012, due in part to a $6.8 million decline in net realized investment gains. In addition, investment income in the current quarter was impacted by impairment of equity investments totaling $5.8 million.

Personnel costs were $330.6 million in the fourth quarter, down $8.5 million, or 3 percent, compared with the fourth quarter of 2012. This decline was primarily due to reduced incentive-based compensation driven by lower revenues and profitability resulting from the slowdown in order volume compared with the prior year.

Other operating expenses were $207.3 million in the fourth quarter, down $3.6 million, or 2 percent, compared with the fourth quarter of 2012. This decline was primarily due to lower production-related expenses and temporary labor costs driven by the reduced order volumes in the current quarter, partly offset by higher legal settlement costs.

The provision for policy losses and other claims was $56.1 million in the fourth quarter, or 5.8 percent of title premiums and escrow fees, compared with a loss provision rate of 7.0 percent in the same quarter of the prior year.

Pretax income for the Title Insurance and Services segment was $87.9 million in the fourth quarter, compared with $152.5 million in the fourth quarter of 2012. Pretax margin was 7.8 percent in the current quarter, compared with 12.7 percent last year.

Specialty Insurance

($ in millions)

               
             

For the Three Months Ended
December 31

              2013         2012
    Total revenues         $ 88.0           $ 80.0  
                         
    Income before taxes         $ 14.9           $ 13.2  
    Pretax margin           17.0%             16.6%  

Total revenues for the Specialty Insurance segment were $88.0 million in the fourth quarter of 2013, up 10 percent compared with the fourth quarter of 2012. The overall loss ratio for the Specialty Insurance segment was 53 percent in the current quarter, up from 51 percent in the prior year. Higher premiums for the segment contributed to a pretax margin of 17.0 percent, up from 16.6 percent in the fourth quarter of 2012.

Teleconference/Webcast

First American’s fourth quarter and full year 2013 results will be discussed in more detail on Thursday, Feb. 13, 2014, at noon EST, via teleconference. The toll-free dial-in number is 800-779-1598. Callers from outside the United States may dial 415-228-4861. 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 Feb. 19, 2014, by dialing 203-369-0421. 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, settlement services and risk solutions for real estate transactions, 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 $5.0 billion in 2013, 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 acquisition of Interthinx and its anticipated closing, benefits, opportunities and synergies; headcount reduction and other expense management; a focus during 2014 on responding to the company’s customers’ desire for tighter integration between loan origination activities, loan quality verification and title and settlement services; the making of value-creating investments in the company’s core business; future acquisitions; the return of capital to stockholders; the outlook for the housing market, including a weaker refinance market, decreased transaction volumes, and growth in both the home purchase and commercial markets; a focus on gaining profitable market share; title claims expectations; the company’s liquidity, including draw downs on its credit facility, its debt-to-capital ratio and the duration of liabilities; and the timing and results of the reorganization of certain subsidiaries, 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; 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; any inadequacy in the company’s risk mitigation efforts; 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 September 30, 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 a personnel and other operating expense ratio. 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.

(Additional Financial Data Follows)

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 Twelve Months Ended
          December 31     December 31
          2013     2012     2013     2012
                             
                             
Total revenues         $ 1,219,872     $ 1,276,823       $ 4,956,077     $ 4,541,821
                             
Income before income taxes         $ 84,847     $ 147,684       $ 310,708     $ 467,406
Income tax expense           33,058       54,482         123,644       165,678
Net income           51,789       93,202         187,064       301,728

Less: Net income (loss) attributable to noncontrolling interests

          162       (75)         697       687
Net income attributable to the Company         $ 51,627     $ 93,277       $ 186,367     $ 301,041
                             
Net income per share attributable to stockholders:                            
Basic         $ 0.49     $ 0.87       $ 1.74     $ 2.83
Diluted         $ 0.48     $ 0.85       $ 1.71     $ 2.77
                             
Cash dividends declared per share         $ 0.12     $ 0.08       $ 0.48     $ 0.36
                             
Weighted average common shares outstanding:                            
Basic           105,765       106,929         106,991       106,307
Diluted           107,974       109,477         109,102       108,542
                             

Selected Title Information

                           
                             
Title orders opened           270,500       408,100         1,384,600       1,634,900
                             
Title orders closed           217,300       335,300         1,103,400       1,191,800
                             
Paid title claims         $ 86,972     $ 66,261       $ 295,982     $ 285,210
                                       
                                       
First American Financial Corporation
Selected Balance Sheet Information
(in thousands)
(unaudited)
                     
         

December 31,
2013

       

December 31,
2012

                     
Cash and cash equivalents         $ 834,837         $ 670,529
Investment portfolio           3,385,328           3,070,239
Goodwill and other intangible assets           892,373           902,952
Total assets           6,520,600           6,050,847
Reserve for claim losses           1,018,365           976,462
Notes payable           310,285           229,760
Total stockholders' equity         $ 2,453,049         $ 2,348,065
                     
                     
First American Financial Corporation
Segment Information
(in thousands, unaudited)
                             
For the Three Months Ended               Title     Specialty     Corporate

December 31, 2013

       

Consolidated

   

Insurance

   

Insurance

   

(incl. Elims.)

Revenues                            
Direct premiums and escrow fees         $ 540,292     $ 455,567       $ 84,725     $ -  
Agent premiums           514,615       514,615         -       -  
Information and other           144,215       143,820         401       (6)  
Investment income           18,351       13,788         2,047       2,516  

Net realized investment gains (losses)(1)

          2,399       (2,248)         781       3,866  
            1,219,872       1,125,542         87,954       6,376  
Expenses                            
Personnel costs           358,443       330,551         14,478       13,414  
Premiums retained by agents           412,674       412,674         -       -  
Other operating expenses           225,397       207,295         11,419       6,683  
Provision for policy losses and other claims           100,612       56,086         44,526       -  
Depreciation and amortization           19,775       17,717         1,239       819  
Premium taxes           14,032       12,651         1,381       -  
Interest           4,092       682         -       3,410  
            1,135,025       1,037,656         73,043       24,326  
                             
Income (loss) before income taxes         $ 84,847     $ 87,886       $ 14,911     $ (17,950)  
                             
                             
                             
For the Three Months Ended               Title     Specialty     Corporate

December 31, 2012

       

Consolidated

   

Insurance

   

Insurance

   

(incl. Elims.)

Revenues                            
Direct premiums and escrow fees         $ 594,820     $ 518,753       $ 76,067     $ -  
Agent premiums           489,530       489,530         -       -  
Information and other           162,333       161,931         408       (6)  
Investment income (losses)           23,954       22,233         1,859       (138)  
Net realized investment gains(1)           6,186       4,567         1,619       -  
            1,276,823       1,197,014         79,953       (144)  
Expenses                            
Personnel costs           363,404       339,081         13,775       10,548  
Premiums retained by agents           391,490       391,490         -       -  
Other operating expenses           228,411       210,938         11,808       5,665  
Provision for policy losses and other claims           109,441       70,710         38,731       -  
Depreciation and amortization           20,006       18,071         1,202       733  
Premium taxes           14,758       13,565         1,193       -  
Interest           1,629       653         -       976  
            1,129,139       1,044,508         66,709       17,922  
                             
Income (loss) before income taxes         $ 147,684     $ 152,506       $ 13,244     $ (18,066)  
                             
(1) Includes other-than-temporary impairment (OTTI) losses recorded in earnings.
 
 
First American Financial Corporation
Segment Information
(in thousands, unaudited)
                       
For the Twelve Months Ended             Title   Specialty   Corporate

December 31, 2013

       

Consolidated

 

Insurance

 

Insurance

 

(incl. Elims.)

Revenues                      
Direct premiums and escrow fees         $ 2,184,464   $ 1,855,270   $ 329,194   $ -  
Agent premiums           2,044,862     2,044,862     -     -  
Information and other           627,645     626,016     1,652     (23)  
Investment income           89,895     76,606     7,342     5,947  

Net realized investment gains(1)

          9,211     3,334     1,425     4,452  
            4,956,077     4,606,088     339,613     10,376  
Expenses                      
Personnel costs           1,445,582     1,338,361     58,261     48,960  
Premiums retained by agents           1,636,694     1,636,694     -     -  
Other operating expenses           885,805     816,870     41,725     27,210  
Provision for policy losses and other claims           530,356     343,461     186,895     -  
Depreciation and amortization           74,916     66,956     4,865     3,095  
Premium taxes           56,715     50,980     5,735     -  
Interest           15,301     2,601     -     12,700  
            4,645,369     4,255,923     297,481     91,965  
                       
Income (loss) before income taxes         $ 310,708   $ 350,165   $ 42,132   $ (81,589)  
                       
                       
                       
For the Twelve Months Ended             Title   Specialty   Corporate

December 31, 2012

       

Consolidated

 

Insurance

 

Insurance

 

(incl. Elims.)

Revenues                      
Direct premiums and escrow fees         $ 2,041,740   $ 1,745,687   $ 296,053   $ -  
Agent premiums           1,709,905     1,709,905     -     -  
Information and other           645,023     643,433     1,605     (15)  
Investment income           81,031     71,350     8,923     758  

Net realized investment gains(1)

          64,122     30,145     8,590     25,387  
            4,541,821     4,200,520     315,171     26,130  
Expenses                      
Personnel costs           1,334,866     1,233,203     55,453     46,210  
Premiums retained by agents           1,370,193     1,370,193     -     -  
Other operating expenses           836,319     769,477     42,395     24,447  
Provision for policy losses and other claims           397,717     237,427     160,290     -  
Depreciation and amortization           74,950     67,610     4,553     2,787  
Premium taxes           51,304     46,283     5,021     -  
Interest           9,066     2,646     -     6,420  
            4,074,415     3,726,839     267,712     79,864  
                       
Income (loss) before income taxes         $ 467,406   $ 473,681   $ 47,459   $ (53,734)  
                       
(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 Twelve Months Ended
          December 31     December 31
          2013     2012     2013     2012
                             
                             
Total revenues         $ 1,125,542       $ 1,197,014       $ 4,606,088       $ 4,200,520  

Less: Net realized investment (losses) gains(1)

          (2,248)         4,567         3,334         30,145  
Investment income           13,788         22,233         76,606         71,350  
Premiums retained by agents           412,674         391,490         1,636,694         1,370,193  
Net operating revenues         $ 701,328       $ 778,724       $ 2,889,454       $ 2,728,832  
                             
                             
Personnel and other operating expenses         $ 537,846       $ 550,019       $ 2,155,231       $ 2,002,680  
Ratio (% net operating revenues)           76.7%         70.6%         74.6%         73.4%  
Ratio (% total revenues)           47.8%         45.9%         46.8%         47.7%  
                             
(1) Includes other-than-temporary impairment (OTTI) losses recorded in earnings.
 
 
First American Financial Corporation
Supplemental Direct Title Order Information

(unaudited)

                                   
          Q413     Q313     Q213     Q113     Q412
Open Orders per Day                                  
Purchase           1,626         2,054         2,199         1,900         1,529  
Refinance           1,462         1,628         2,967         2,905         3,363  

Refinance as % of residential orders

          47%         44%         57%         60%         69%  
                                   
Commercial           480         477         548         482         487  
Other1           726         779         872         887         1,099  
Total open orders per day           4,294         4,938         6,586         6,174         6,478  
                                   
Closed Orders per Day                                  
Purchase           1,383         1,657         1,637         1,218         1,320  
Refinance           1,096         1,645         2,311         2,496         2,840  
Refinance as % of residential orders           44%         50%         59%         67%         68%  
                                   
Commercial           331         316         313         278         340  
Other1           640         653         759         785         823  
Total closed orders per day           3,449         4,272         5,020         4,777         5,322  
                                   
Average Revenue per Order (ARPO)2                                  
Purchase         $ 1,829       $ 1,813       $ 1,810       $ 1,700       $ 1,758  
Refinance           819         807         802         820         823  
Commercial           8,425         6,895         6,886         5,465         7,313  
Other1           409         504         337         367         403  
                                   
Total ARPO         $ 1,878       $ 1,602       $ 1,440       $ 1,240       $ 1,404  
                                   
Business Days           63         64         64         61         63  
                                   
(1) Includes default and other orders
(2) U.S. operations only
                                   
Totals may not add due to rounding

 

Download the complete press release as a PDF (127 KB)

 

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