First American Financial Reports Third Quarter 2014 Results

- Reports Earnings of 74 Cents per Diluted Share -


October 23, 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 third quarter ended Sept. 30, 2014.

Download the complete press release as a PDF (109KB)

Current Quarter Highlights

  • Total revenue of $1.3 billion, down 3 percent compared with last year
    • Direct title orders closed down 20 percent, driven by a decline in refinance orders
    • Average revenue per direct title order closed up 20 percent
  • Title Insurance and Services segment pretax margin of 10.4 percent
  • Commercial revenue of $149.0 million, up 7 percent compared with last year
  • Specialty Insurance segment total revenue up 10 percent, with a pretax margin of 11.0 percent
  • Debt-to-capital ratio of 14.9 percent as of Sept. 30, 2014

 

Selected Financial Information

($ in millions, except per share data)

 

For the Three Months Ended

Sept 30

 

        2014

 

         2013

Total revenue

     $ 1,259.7

 

$ 1,301.0

Income before taxes  116.0  

107.0

 

 

 

 

Net income

$      80.7

 

$      63.9

Net income per diluted share

0.74

 

0.59

 

Total revenue for the third quarter of 2014 was $1.3 billion, a decline of 3 percent relative to the third quarter of 2013. Net income in the current quarter was $80.7 million, or 74 cents per diluted share, compared with net income of $63.9 million, or 59 cents per diluted share, in the third quarter of 2013. The current quarter results include net realized investment gains of $14.4 million, or 9 cents per diluted share, compared with net realized investment losses of $7.0 million, or 4 cents per diluted share, in the same quarter of last year. The current quarter also benefited from a 30 percent tax rate, primarily due to a lower effective foreign tax rate and certain non-recurring tax benefits.

 "A continued emphasis on operating efficiency, coupled with seasonal strength in the purchase and commercial markets, had a favorable impact on the title segment’s results,” said Dennis J. Gilmore, chief executive officer at First American Financial Corporation. "In addition, the specialty insurance segment continued its strong performance driven by the home warranty business.

 "We continue to adjust our cost structure ahead of the normal seasonal slowdown in the residential purchase market. Expectations for a traditionally strong commercial market during the fourth quarter, along with the recent surge in refinance activity, should help soften the seasonal decline in earnings. Looking forward, we continue our focus on delivering innovative, industry-leading solutions to our customers.”

Title Insurance and Services

($ in millions, except average revenue per order)

 

For the Three Months Ended

Sept 30

 

2014

 

2013

Total revenue $   1,165.8    $  1,212.9
     

 

Income before taxes $      121.0   $     125.0
Pretax margin 10.4%   10.3%
 

 

 

 

Direct open orders      297,500       316,000
Direct closed orders      217,400       273,400
       
U.S. Commercial      
   Total revenue $      149.0     $     139.5
   Open orders

31,000

 

30,500

   Closed orders

   Average revenue per order

19,700

$      7,600

 

20,200

$     6,900

 

 

Total revenue for the Title Insurance and Services segment was $1.2 billion, a 4 percent decline from the same quarter of 2013. Direct premiums and escrow fees were down 3 percent from the third quarter of 2013, driven by a 20 percent decline in the number of direct title orders closed in the quarter, largely offset by a 20 percent increase in the revenue per direct title order to $1,926. The increase in revenue per direct title order closed was primarily attributable to a shift in the title order mix to higher-premium purchase and commercial transactions. In addition, the average fee per order for purchase and commercial transactions increased by 8 percent and 10 percent, respectively, during the third quarter. Agent premiums were down by 10 percent in the current quarter, which is consistent with the 13 percent decline in direct premiums experienced in the previous quarter, reflecting the typical reporting lag of approximately one quarter.

Information and other revenue was $160.6 million this quarter, up 1 percent compared with the same quarter of last year. The increase was driven by the impact of the recent Interthinx acquisition, offset by lower demand for the company’s default information products as a result of the decline in loss mitigation and foreclosure activity during the quarter.

Investment income was $22.0 million in the third quarter, down 1 percent from the third quarter of 2013. The decline was primarily related to lower earnings from investments accounted for using the equity method, partly offset by higher interest income from the investment portfolio. Net realized

investment gains totaled $12.8 million in the current quarter, compared with losses of $5.5 million in the third quarter of 2013.

Personnel costs were $345.8 million in the third quarter, a decline of $5.2 million, or 1 percent, compared with the same quarter of 2013. Excluding the $10.8 million impact of recent acquisitions, personnel costs declined by $16.0 million, or 5 percent. This decline was primarily attributable to lower salary, overtime, incentive compensation and severance costs in the current quarter.

Other operating expenses were $202.4 million in the third quarter, down $2.4 million, or 1 percent, compared with the third quarter of 2013. Excluding the $8.5 million impact of recent acquisitions, other operating costs declined by $10.9 million, or 5 percent. This decrease was primarily due to lower production-related expenses and temporary labor costs driven by the decline in order volumes in the current quarter.

The provision for policy losses and other claims was $65.1 million in the third quarter, or 6.7 percent of title premiums and escrow fees, an increase of $4.6 million compared with the same quarter of the prior year. The current quarter rate reflects an ultimate loss rate of 6.0 percent for the current policy year and a $6.8 million net increase in the loss reserve estimates for prior policy years.

Pretax income for the Title Insurance and Services segment was $121.0 million in the third quarter, compared with $125.0 million in the third quarter of 2013. Pretax margin was 10.4 percent in the current quarter, compared with 10.3 percent last year.

 

Specialty Insurance

($ in millions)

 

For the Three Months Ended

Sept 30

 

2014

 

2013

Total revenue  $   94.9     $   86.1
             
Income before taxes  $   10.4    $     4.0
Pretax margin 11.0%   4.7%

 

Total revenue for the Specialty Insurance segment was $94.9 million in the third quarter of 2014, an increase of 10 percent compared with the third quarter of 2013. The increase in revenue was primarily driven by higher premiums earned in both the home warranty and property and casualty business lines. In addition, net realized investment gains in the current quarter were $1.6 million, compared with losses of $1.5 million in same quarter last year. The overall loss ratio in the Specialty Insurance segment was 60 percent in the current quarter, compared with a 64 percent loss ratio in the prior year. The improvement in the loss ratio was driven by a significant decline in weather-related claims in the home warranty business. As a result, the pretax margin in the current quarter increased to 11.0 percent from 4.7 percent in the third quarter of 2013.

 

Teleconference/Webcast

First American’s third quarter 2014 results will be discussed in more detail on Thursday, Oct. 23, 2014, at 11 a.m. EDT, via teleconference. The toll-free dial-in number is 877-407-8293. Callers from outside the United States may dial 201-689-8349.

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 Nov. 11, 2014, by dialing 201-612-7415 and using the conference ID 13592885. 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 expense management; the outlook for the residential purchase market, the commercial market, and the refinance market; seasonal impacts on earnings; the effects of Federal Housing Finance Agency and other regulatory actions on the availability of credit and the recovery of the housing market; and improvement in the company’s tax rate, 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 and government-sponsored enterprises; 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; challenges and adverse effects arising from acquisitions and other factors described in the company’s quarterly report on Form 10-Q for the quarter ended June 30, 2014, 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 personnel and other operating expense ratios, adjusted personnel costs and adjusted other operating costs. 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 Nine Months Ended
        September 30           September 30
        2014       2013           2014       2013
                                     
                                     
Total revenues       $ 1,259,730       $ 1,300,978           $ 3,422,498       $ 3,736,205
                                     
Income before income taxes       $ 115,952       $ 107,045           $ 227,663       $ 225,861
Income tax expense         35,015         42,950             74,186         90,586
Net income         80,937         64,095             153,477         135,275

Less: Net income attributable to noncontrolling interests

        232         205             454         535
Net income attributable to the Company       $ 80,705       $ 63,890           $ 153,023       $ 134,740
                                     
Net income per share attributable to stockholders:                                    
Basic       $ 0.75       $ 0.60           $ 1.43       $ 1.25
Diluted       $ 0.74       $ 0.59           $ 1.41       $ 1.23
                                     
Cash dividends declared per share       $ 0.24       $ 0.12           $ 0.60       $ 0.36
                                     
Weighted average common shares outstanding:                                    
Basic         107,136         106,437             106,727         107,400
Diluted         108,863         108,437             108,546         109,490
                                     

Selected Title Information

                                   
                                     
Title orders opened         297,500         316,000             886,900         1,114,100
                                     
Title orders closed         217,400         273,400             611,700         886,100
                                     
Paid title claims       $ 57,160       $ 68,525           $ 204,556       $ 209,010
                                     
                                     
                   
First American Financial Corporation
Selected Balance Sheet Information
(in thousands)
(unaudited)
                           
       

September 30,

2014

               

December 31,

2013

                           
Cash and cash equivalents       $ 1,203,873                 $ 834,837
Investments         3,692,779                   3,385,328
Goodwill and other intangible assets, net         1,016,889                   892,373
Total assets         7,388,215                   6,559,183
Reserve for claim losses         1,011,344                   1,018,365
Notes and contracts payable         450,928                   310,285
Total stockholders' equity       $ 2,578,085                 $ 2,453,049
                           
                           
 
First American Financial Corporation
Segment Information
(in thousands, unaudited)
                                 
For the Three Months Ended               Title       Specialty       Corporate

September 30, 2014

      Consolidated       Insurance       Insurance       (incl. Elims.)
Revenues                                
Direct premiums and escrow fees       $ 564,396         $ 473,443         $ 90,953         $ -  
Agent premiums         496,887           496,887           -           -  
Information and other         161,227           160,636           596           (5 )
Investment income         22,828           22,048           1,734           (954 )
Net realized investment gains(1)         14,392           12,821           1,571           -  
          1,259,730           1,165,835           94,854           (959 )
Expenses                                
Personnel costs         365,304           345,751           16,419           3,134  
Premiums retained by agents         395,324           395,324           -           -  
Other operating expenses         219,536           202,362           10,778           6,396  
Provision for policy losses and other claims         119,390           65,073           54,317           -  
Depreciation and amortization         24,127           21,879           1,210           1,038  
Premium taxes         15,427           13,730           1,697           -  
Interest         4,670           716           -           3,954  
          1,143,778           1,044,835           84,421           14,522  
                                 
Income (loss) before income taxes       $ 115,952         $ 121,000         $ 10,433         $ (15,481 )
                                 
                                 
                                 
For the Three Months Ended               Title       Specialty       Corporate

September 30, 2013

      Consolidated       Insurance       Insurance       (incl. Elims.)
Revenues                                
Direct premiums and escrow fees       $ 573,116         $ 487,800         $ 85,316         $ -  
Agent premiums         549,052           549,052           -           -  
Information and other         159,775           159,344           437           (6 )
Investment income         26,001           22,234           1,829           1,938  
Net realized investment losses(1)         (6,966 )         (5,510 )         (1,456 )         -  
          1,300,978           1,212,920           86,126           1,932  
Expenses                                
Personnel costs         377,872           350,921           14,547           12,404  
Premiums retained by agents         440,453           440,453           -           -  
Other operating expenses         222,297           204,731           10,228           7,338  
Provision for policy losses and other claims         114,952           60,480           54,472           -  
Depreciation and amortization         18,554           16,495           1,239           820  
Premium taxes         15,771           14,157           1,614           -  
Interest         4,034           711           -           3,323  
          1,193,933           1,087,948           82,100           23,885  
                                 
Income (loss) before income taxes       $ 107,045         $ 124,972         $ 4,026         $ (21,953 )
                                 

(1)

   

Includes impairment losses recorded in earnings, except for impairments on investments accounted for under the equity method, which are recorded in investment income.

     

 

 
         
 
First American Financial Corporation
Segment Information
(in thousands, unaudited)
                                 
For the Nine Months Ended               Title       Specialty       Corporate

September 30, 2014

      Consolidated       Insurance       Insurance       (incl. Elims.)
Revenues                                
Direct premiums and escrow fees       $ 1,529,391       $ 1,266,171       $ 263,220       $ -  
Agent premiums         1,341,020         1,341,020         -         -  
Information and other         464,572         463,036         1,553         (17 )
Investment income         64,254         57,082         5,305         1,867  

Net realized investment gains(1)

        23,261         19,249         3,101         911  
          3,422,498         3,146,558         273,179         2,761  
Expenses                                
Personnel costs         1,045,955         973,249         47,420         25,286  
Premiums retained by agents         1,070,260         1,070,260         -         -  
Other operating expenses         622,024         569,494         32,606         19,924  
Provision for policy losses and other claims         337,739         188,378         149,361         -  
Depreciation and amortization         63,879         57,416         3,787         2,676  
Premium taxes         41,971         37,332         4,639         -  
Interest         13,007         1,955         -         11,052  
          3,194,835         2,898,084         237,813         58,938  
                                 
Income (loss) before income taxes       $ 227,663       $ 248,474       $ 35,366       $ (56,177 )
                                 
                                 
                                 
For the Nine Months Ended               Title       Specialty       Corporate

September 30, 2013

      Consolidated       Insurance       Insurance       (incl. Elims.)
Revenues                                
Direct premiums and escrow fees       $ 1,644,172       $ 1,399,702       $ 244,470       $ -  
Agent premiums         1,530,247         1,530,247         -         -  
Information and other         483,430         482,197         1,251         (18 )
Investment income         71,544         62,818         5,295         3,431  

Net realized investment gains(1)

        6,812         5,582         644         586  
          3,736,205         3,480,546         251,660         3,999  
Expenses                                
Personnel costs         1,087,139         1,007,810         43,783         35,546  
Premiums retained by agents         1,224,020         1,224,020         -         -  
Other operating expenses         660,408         609,575         30,306         20,527  
Provision for policy losses and other claims         429,744         287,374         142,370         -  
Depreciation and amortization         55,141         49,238         3,627         2,276  
Premium taxes         42,683         38,329         4,354         -  
Interest         11,209         1,920         -         9,289  
          3,510,344         3,218,266         224,440         67,638  
                                 
Income (loss) before income taxes       $ 225,861       $ 262,280       $ 27,220       $ (63,639 )
                                 

(1)

   

Includes impairment losses recorded in earnings, except for impairments on investments accounted for under the equity method, which are recorded in investment income.

     

 

 
         
                                 
First American Financial Corporation
Expense Ratio Reconciliation
Title Insurance and Services Segment
($ in thousands, unaudited)
                                 
        For the Three Months Ended       For the Nine Months Ended
        September 30       September 30
        2014       2013       2014       2013
                                 
Total revenues       $ 1,165,835         $ 1,212,920         $ 3,146,558         $ 3,480,546  

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

        12,821           (5,510 )         19,249           5,582  
Investment income         22,048           22,234           57,082           62,818  
Premiums retained by agents         395,324           440,453           1,070,260           1,224,020  
Net operating revenues       $ 735,642         $ 755,743         $ 1,999,967         $ 2,188,126  
                                 
                                 
Personnel and other operating expenses       $ 548,113         $ 555,652         $ 1,542,743         $ 1,617,385  
Ratio (% net operating revenues)         74.5 %         73.5 %         77.1 %         73.9 %
Ratio (% total revenues)         47.0 %         45.8 %         49.0 %         46.5 %
                                 

(1)

   

Includes impairment losses recorded in earnings, except for impairments on investments accounted for under the equity method, which are recorded in investment income.

     

 

 
         
 
First American Financial Corporation
Supplemental Direct Title Order Information
(unaudited)
                                         
        Q314       Q214       Q114       Q413       Q313
Open Orders per Day                                        
Purchase         2,033           2,189           1,892           1,626           2,054  
Refinance         1,521           1,554           1,397           1,462           1,628  
Refinance as % of residential orders         43 %         42 %         42 %         47 %         44 %
                                         
Commercial         485           528           475           480           477  
Other1         609           701           682           726           779  
Total open orders per day         4,648           4,972           4,446           4,294           4,938  
                                         
Closed Orders per Day                                        
Purchase         1,573           1,579           1,217           1,383           1,657  
Refinance         1,113           983           907           1,096           1,645  
Refinance as % of residential orders         41 %         38 %         43 %         44 %         50 %
                                         
Commercial         308           306           290           331           316  
Other1         404           479           538           640           653  
Total closed orders per day         3,397           3,347           2,952           3,449           4,272  
                                         
Average Revenue per Order (ARPO)2                                        
Purchase       $ 1,950         $ 1,918         $ 1,799         $ 1,829         $ 1,813  
Refinance         857           812           813           819           807  
Commercial         7,568           6,746           6,530           8,425           6,895  
Other1         480           488           489           409           504  
                                         
Total ARPO       $ 1,926         $ 1,830         $ 1,723         $ 1,878         $ 1,602  
                                         
Business Days         64           64           61           63           64  
                                         

(1)

   

Includes default and other orders

(2)

   

U.S. operations only

       
Totals may not foot due to rounding

 

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