First American Financial Reports Third Quarter 2015 Results

- Reports Earnings of 69 Cents per Diluted Share -


October 22, 2015, 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, 2015.

Download the complete press release as a PDF (117KB)

Current Quarter Highlights

  • Total revenue of $1.4 billion, up 10 percent compared with last year
    • Direct title orders closed were up 3 percent
    • Average revenue per direct title order closed was up 10 percent
  • Title Insurance and Services segment pretax margin of 10.6 percent
  • Commercial revenue of $171.9 million, up 15 percent compared with last year
  • Specialty Insurance segment total revenue was up 7 percent, with a pretax margin of 1.7 percent
    • Includes $3.5 million in claim losses as a result of northern California wildfires
  • Cash flow from operations of $185.3 million compared with $121.3 million last year
 
Selected Financial Information

($ in millions, except per share data)

   

For the Three Months Ended
Sept. 30

2015     2014
Total revenue $ 1,383.9     $ 1,259.7
Income before taxes 115.4 116.0
 
Net income $ 75.5 $ 80.7
Net income per diluted share 0.69 0.74
 

Total revenue for the third quarter of 2015 was $1.4 billion, an increase of 10 percent relative to the third quarter of 2014. Net income in the current quarter was $75.5 million, or 69 cents per diluted share, compared with net income of $80.7 million, or 74 cents per diluted share, in the third quarter of 2014. The current quarter results include net realized investment losses of $3.1 million, or 2 cents per diluted share, compared with gains of $14.4 million, or 9 cents per diluted share, in the third quarter of last year.

“Our third-quarter results in the title segment were strong, driven by higher closing activity in the residential purchase market and continued growth in our commercial business,” said Dennis J. Gilmore, chief executive officer at First American Financial Corporation. “Our continued effective management of expenses enabled the title segment to generate strong operating leverage and a pretax margin in line with our 10 to 12 percent target range.

“Earnings in our specialty insurance segment were lower than expected this quarter, primarily due to $3.5 million in claim losses from recent wildfires in northern California. In addition, the losses in our home warranty business were higher than last year, but in line with historical third-quarter claim rates.

“The Consumer Financial Protection Bureau’s new mortgage disclosure rule went into effect on October 3 and, while it is still too early to evaluate the ultimate impact, we continue to expect temporary delays in closings as the industry adapts to the changes required. Despite these anticipated delays, we are optimistic that the market environment will continue to be favorable in 2016.”

 
Title Insurance and Services

($ in millions, except average revenue per order)

   

For the Three Months Ended
Sept. 30

2015     2014
Total revenue $ 1,288.2     $ 1,165.8
 
Income before taxes $ 137.0 $ 121.0
Pretax margin 10.6 % 10.4 %
 
Direct open orders 310,800 297,500
Direct closed orders 224,000 217,400
 
U.S. Direct Commercial
Total revenue $ 171.9 $ 149.0
Open orders 34,100 31,000
Closed orders 20,600 19,700
Average revenue per order $ 8,400 $ 7,600
 

Total revenue for the Title Insurance and Services segment was $1.3 billion, a 10 percent increase from the same quarter of 2014. Direct premiums and escrow fees were up 11 percent from the third quarter of 2014, driven by a 3 percent increase in the number of direct title orders closed in the quarter and a 10 percent increase in the average revenue per direct title order to $2,119. The increase in revenue per direct title order closed was primarily attributable to an increase in the average size of commercial transactions and the number of large commercial deals closed in the quarter, as well as higher residential real estate values. Agent premiums were up 16 percent in the current quarter compared with last year.

Information and other revenue was $161.9 million this quarter, up 1 percent compared with the same quarter of last year. Excluding the $4.0 million impact of a recent acquisition, information and other revenue was down 2 percent from the same period last year, reflecting the continued reduction in demand for the company’s default information products. This decline was significantly offset by higher demand for certain non-insured products and services driven by the increase in transaction activity during the quarter.

Investment income was $25.4 million in the third quarter, up 15 percent from the third quarter of 2014. The increase was primarily attributable to higher interest income driven by growth in average invested balances in the debt securities portfolio. Net realized investment losses totaled $3.1 million in the current quarter, compared with gains of $12.8 million in the third quarter of 2014.

Personnel costs were $379.5 million in the third quarter, an increase of $33.8 million, or 10 percent, compared with the same quarter of 2014. This increase was primarily attributable to higher incentive compensation expense driven by improved revenue and profitability.

Other operating expenses were $201.8 million in the third quarter, essentially flat compared with the third quarter of 2014. Production-related expenses declined due to a shift in the mix to products with lower production-related expenses as a percentage of revenues, which offset increases in temporary labor costs from higher order volume.

The provision for policy losses and other claims was $71.8 million in the third quarter, or 6.5 percent of title premiums and escrow fees, an increase of $6.7 million compared with the same quarter of the prior year due to an increase in title premiums and escrow fees. The current quarter rate includes an ultimate loss rate of 6.0 percent for the current policy year.

Pretax income for the Title Insurance and Services segment was $137.0 million in the third quarter, compared with $121.0 million in the third quarter of 2014. Pretax margin was 10.6 percent in the current quarter, compared with 10.4 percent last year.

 
Specialty Insurance

($ in millions)

   

For the Three Months Ended
Sept. 30

2015     2014
Total revenue $ 101.2     $ 94.9
 
Income before taxes $ 1.7 $ 10.4
Pretax margin 1.7 % 11.0 %
 

Total revenue for the Specialty Insurance segment was $101.2 million in the third quarter of 2015, an increase of 7 percent compared with the third quarter of 2014. The increase in revenue was primarily driven by higher premiums earned in the home warranty business line. Both the home warranty and property and casualty business lines experienced higher losses in the current quarter, which resulted in a segment loss ratio of 68.7 percent, compared with 59.7 percent in the prior year. The increase in the loss ratio in the home warranty business was primarily attributable to higher claim frequency, as well as higher contract servicing costs. This business experienced unusually low claims activity in the third quarter of last year, while the loss ratio this quarter reflects its typical third-quarter claims experience. In the property and casualty business, the increase in the loss ratio was due to higher claim severity, primarily driven by $3.5 million in losses from the recent wildfires in northern California, partly offset by lower claim frequency. As a result, the pretax margin in the current quarter declined to 1.7 percent from 11.0 percent in the third quarter of 2014.

Teleconference/Webcast

First American’s third quarter 2015 results will be discussed in more detail on Thursday, Oct. 22, 2015, 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. 5, 2015, by dialing 201-612-7415 and using the conference ID 13621641. 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 $4.7 billion in 2014, 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 U.S. 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 impact of the new integrated mortgage disclosure rule; an improving economy; the outlook for the housing market, including sustained growth in the purchase market; outlook for the commercial business; the company’s ability to capitalize on an improving housing market; expense management; and the expected normalized 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; the Consumer Financial Protection Bureau’s exercise of its broad rulemaking and supervisory powers; compliance with the Consumer Financial Protection Bureau’s integrated disclosure rules; 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 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; any inadequacy in the company’s risk mitigation efforts; systems damage, failures, 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; inability to realize the benefits of, and challenges arising from, the company’s acquisition strategy; and other factors described in the company’s quarterly report on Form 10-Q for the quarter ended June 30, 2015, 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 adjusted earnings per share (diluted), adjusted pretax margin, personnel and other operating expense ratios and success 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 Nine Months Ended
September 30 September 30
2015     2014 2015     2014
 
 
Total revenues $ 1,383,915 $ 1,259,730 $ 3,818,788 $ 3,422,498
 
Income before income taxes $ 115,396 $ 115,952 $ 315,966 $ 227,663
Income tax expense   39,637   35,015   108,831   74,186
Net income 75,759 80,937 207,135 153,477

Less: Net income attributable to noncontrolling interests

  217   232   615   454
Net income attributable to the Company $ 75,542 $ 80,705 $ 206,520 $ 153,023
 
Net income per share attributable to stockholders:
Basic $ 0.69 $ 0.75 $ 1.91 $ 1.43
Diluted $ 0.69 $ 0.74 $ 1.88 $ 1.41
 
Cash dividends declared per share $ 0.25 $ 0.24 $ 0.75 $ 0.60
 
Weighted average common shares outstanding:
Basic 108,647 107,136 108,284 106,727
Diluted 110,004 108,863 109,706 108,546
 

Selected Title Information

 
Title orders opened 310,800 297,500 983,000 886,900
 
Title orders closed 224,000 217,400 678,100 611,700
 
Paid title claims $ 50,260 $ 57,160 $ 205,662 $ 204,556
 
 
First American Financial Corporation
Selected Balance Sheet Information
(in thousands)
(unaudited)
       

September 30,
2015

December 31,
2014

 
Cash and cash equivalents $ 894,430 $ 1,190,080
Investment portfolio 4,766,051 4,033,892
Goodwill and other intangible assets,net 1,019,437 1,015,757
Total assets 8,121,148 7,666,100
Reserve for claim losses 971,453 1,011,780
Notes and contracts payable 584,952 587,337
Total stockholders' equity $ 2,690,070 $ 2,572,917
 
 
First American Financial Corporation
Segment Information
(in thousands, unaudited)
               
For the Three Months Ended Title Specialty Corporate

September 30, 2015

Consolidated

Insurance

Insurance

(incl. Elims.)

Revenues
Direct premiums and escrow fees $ 625,652 $ 527,592 $ 98,060 $ -
Agent premiums 576,450 576,450 - -
Information and other 162,671 161,882 795 (6 )
Net investment income 22,272 25,381 2,336 (5,445 )
Net realized investment (losses) gains (1)   (3,130 )   (3,149 )   19   -  
  1,383,915     1,288,156     101,210   (5,451 )
Expenses
Personnel costs 400,884 379,509 16,854 4,521
Premiums retained by agents 462,087 462,087 - -
Other operating expenses 220,623 201,793 12,290 6,540
Provision for policy losses and other claims 139,126 71,768 67,358 -
Depreciation and amortization 21,072 19,753 1,197 122
Premium taxes 17,439 15,612 1,827 -
Interest   7,288     650     -   6,638  
  1,268,519     1,151,172     99,526   17,821  
       
Income (loss) before income taxes $ 115,396   $ 136,984   $ 1,684 $ (23,272 )
 
 
 
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 )
Net 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 )
 
 

(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, 2015

Consolidated

Insurance

Insurance

(incl. Elims.)

Revenues
Direct premiums and escrow fees $ 1,772,581 $ 1,490,054 $ 282,527 $ -
Agent premiums 1,495,879 1,495,879 - -
Information and other 479,849 477,447 2,422 (20 )
Net investment income 70,694 73,151 6,552 (9,009 )
Net realized investment (losses) gains (1)   (215 )   (1,544 )   1,897   (568 )
  3,818,788     3,534,987     293,398   (9,597 )
Expenses
Personnel costs 1,155,500 1,081,340 48,782 25,378
Premiums retained by agents 1,199,375 1,199,375 - -
Other operating expenses 652,290 595,849 37,010 19,431
Provision for policy losses and other claims 363,550 194,053 169,497 -
Depreciation and amortization 63,389 59,443 3,579 367
Premium taxes 46,920 41,836 5,084 -
Interest   21,798     1,868     -   19,930  
  3,502,822     3,173,764     263,952   65,106  
       
Income (loss) before income taxes $ 315,966   $ 361,223   $ 29,446 $ (74,703 )
 
 
 
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 )
Net 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 )
 
 

(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 and Success Ratio Reconciliation
Title Insurance and Services Segment
($ in thousands, unaudited)
               
 
For the Three Months Ended For the Nine Months Ended
September 30 September 30
2015 2014 2015 2014
 
 
Total revenues $ 1,288,156 $ 1,165,835 $ 3,534,987 $ 3,146,558
Less: Net realized investment (losses) gains (3,149 ) 12,821 (1,544 ) 19,249
Net investment income 25,381 22,048 73,151 57,082
Premiums retained by agents   462,087     395,324     1,199,375     1,070,260  
Net operating revenues $ 803,837   $ 735,642   $ 2,264,005   $ 1,999,967  
 
 
Personnel and other operating expenses $ 581,302 $ 548,113 $ 1,677,189 $ 1,542,743
Ratio (% net operating revenues) 72.3 % 74.5 % 74.1 % 77.1 %
Ratio (% total revenues) 45.1 % 47.0 % 47.4 % 49.0 %
 
 
Change in net operating revenues $ 68,195 $ 264,038
Change in personnel and other operating expenses 33,189 134,446
Success Ratio (1) 49 % 51 %
 
 

(1) Change in personnel and other operating expenses divided by change in net operating revenues

 
 
 
 
First American Financial Corporation
Pretax Margin Reconciliation
Title Insurance and Services Segment
($ in thousands, unaudited)
 
 
For the Three Months Ended
September 30
2015 2014
 
GAAP total revenues $ 1,288,156 $ 1,165,835
Less: Net realized investment (losses) gains   (3,149 )   12,821  
Adjusted total revenues $ 1,291,305   $ 1,153,014  
 
GAAP pretax income $ 136,984 $ 121,000
Less: Net realized investment (losses) gains   (3,149 )   12,821  
Adjusted pretax income $ 140,133   $ 108,179  
 
GAAP pretax margin 10.6 % 10.4 %
Adjusted pretax margin 10.9 % 9.4 %
 
 
 
 
First American Financial Corporation
Earnings Per Diluted Share (EPS) Reconciliation
(unaudited)
 
 
For the Three Months Ended
September 30
2015 2014
 
EPS (Diluted) $ 0.69 $ 0.74
Less: Net realized investment (losses) gains per share
(after tax)   (0.02 )   0.09  
Adjusted EPS (Diluted) $ 0.71   $ 0.65  
 
 
First American Financial Corporation
Supplemental Direct Title Order Information

(unaudited)

                   
Q315 Q215 Q115 Q414 Q314
Open Orders per Day
Purchase 2,099 2,324 2,002 1,611 2,033
Refinance 1,629 1,758 2,379 1,627 1,521
Refinance as % of residential orders 44 % 43 % 54 % 50 % 43 %
 
Commercial 532 544 532 505 485
Other (1)   596     612     612     522     609  
Total open orders per day   4,856     5,238     5,525     4,263     4,648  
 
Closed Orders per Day
Purchase 1,687 1,681 1,247 1,420 1,573
Refinance 1,152 1,420 1,471 1,122 1,113
Refinance as % of residential orders 41 % 46 % 54 % 44 % 41 %
 
Commercial 321 325 300 330 308
Other (1)   339     425     386     377     404  
Total closed orders per day   3,500     3,852     3,403     3,249     3,397  
 
Average Revenue per Order (ARPO) (2)
Purchase $ 2,080 $ 2,036 $ 1,921 $ 1,944 $ 1,950
Refinance 863 871 880 869 857
Commercial 8,360 8,182 8,117 9,558 7,568
Other (1) 670 477 580 437 480
 
Total ARPO $ 2,119 $ 1,953 $ 1,865 $ 2,171 $ 1,926
 
Business Days 64 64 61 63 64
 
 
(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 (117KB)

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