First American Financial Reports Second Quarter 2018 Results

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 second quarter ended June 30, 2018.

Download the complete press release as a PDF

Current Quarter Highlights

• Total revenue of $1.5 billion, up 3 percent compared with last year
• Title Insurance and Services segment pretax margin of 15.3 percent
• Purchase revenues up 7 percent compared with last year
  • Average revenue per order up 7 percent
  • Closed orders per day unchanged
• Commercial revenues of $184.8 million, up 4 percent compared with last year
• Specialty Insurance segment total revenues up 4 percent, with a pretax margin of 8.4 percent
• Closed four acquisitions for an initial cash consideration of $53.2 million
• Cash flow from operations of $210.9 million

Selected Financial Information

($ in millions, except per share data)

		Three Months Ended
		June 30,
		2018				2017
Total revenue		$	1,491.2			$	1,454.4
Income before taxes			202.0			184.2
Net income		$	155.1			$	122.3
Net income per diluted share			1.37			1.09

 

Total revenue for the second quarter of 2018 was $1.5 billion, an increase of 3 percent relative to the second quarter of 2017. Net income in the current quarter was $155.1 million, or $1.37 per diluted share, compared with net income of $122.3 million, or $1.09 per diluted share, in the second quarter of 2017. Net realized investment gains in the current quarter were $5.5 million, or 4 cents per diluted share, compared with net realized investment gains of $17.9 million, or 11 cents per diluted share, last year.

"The company's performance this year continues to be strong, as demonstrated by the 15.3 percent pretax title margin we achieved in the second quarter," said Dennis J. Gilmore, chief executive officer at First American Financial Corporation. "Our purchase and commercial businesses more than offset the impact of the decline in refinance transactions, resulting in revenue growth of 3 percent this quarter. These favorable conditions, combined with prudent management of our investment portfolio and our bank, discipline in our underwriting process, and efficient management of our cost structure, position us well as we enter the second half of 2018."

Title Insurance and Services

($ in millions, except average revenue per order)

		Three Months Ended
		June 30,
		2018				2017
Total revenues		$	1,369.0			$	1,336.9
Income before taxes		$	209.6			$	197.3
Pretax margin			15.3	%			14.8	%
Direct open orders			276,800				299,600
Direct closed orders			196,200				213,900
U.S. Commercial
Total revenues		$	184.8			$	177.9
Open orders			36,000				32,400
Closed orders			19,900				20,700
Average revenue per order		$	9,300			$	8,600

 

Total revenues for the Title Insurance and Services segment during the second quarter were $1.4 billion, up 2 percent compared with the same quarter of 2017. Direct premiums and escrow fees were up 3 percent compared with the second quarter of 2017, driven by a 13 percent increase in the average revenue per direct title order that was largely offset by an 8 percent decline in the number of direct title orders closed. The growth in the average revenue per direct title order to $2,599 was primarily attributable to higher residential real estate values, the increase in the average revenue per commercial order, and the shift in the order mix to higher-premium commercial transactions. Agent premiums, which are recorded on approximately a one-quarter lag relative to direct premiums, were up 1 percent in the current quarter compared with last year.

Information and other revenues were $206.1 million this quarter, up 3 percent compared with the same quarter of last year. Higher revenues from recent acquisitions were partly offset by the impact of lower refinance activity.

Investment income was $51.7 million in the second quarter, up $17.1 million, or 49 percent, primarily due to the increase in short-term interest rates that drove higher interest income in the company's investment portfolio and cash balances. Net realized investment gains totaled $3.6 million in the current quarter, compared with gains of $16.7 million in the second quarter of 2017.

Personnel costs were $427.0 million in the second quarter, an increase of $11.6 million, or 3 percent, compared with the same quarter of 2017. The increase was primarily driven by personnel costs associated with recent acquisitions.

Other operating expenses were $202.4 million in the second quarter, up $2.5 million, or 1 percent, compared with the second quarter of 2017. The increase was primarily driven by the impact of recent acquisitions largely offset by a decline in production-related expenses.

The provision for policy losses and other claims was $44.3 million in the second quarter, or 4.0 percent of title premiums and escrow fees, unchanged from last year. The current quarter rate reflects an ultimate loss rate of 4.0 percent for the current policy year and no change in the loss reserve estimates for prior policy years.

Pretax income for the Title Insurance and Services segment was $209.6 million in the second quarter, compared with $197.3 million in the second quarter of 2017. Pretax margin was 15.3 percent in the current quarter, compared with 14.8 percent last year.

Specialty Insurance

($ in millions)

		Three Months Ended
		June 30,
		2018				2017
Total revenues		$	120.2			$	115.2
Income before taxes		$	10.1			$	9.6
Pretax margin			8.4	%			8.3	%

 

Total revenues for the Specialty Insurance segment were $120.2 million in the second quarter of 2018, an increase of 4 percent compared with the second quarter of 2017. The results in the home warranty business benefited from lower claim frequency in the current quarter. While higher severity drove an increase in the loss ratio in the property and casualty business, the loss ratio for the segment declined slightly to 61.4 percent. The segment's pretax margin was 8.4 percent this quarter, compared with 8.3 percent in the second quarter of last year.

Teleconference/Webcast

First American's second quarter 2018 results will be discussed in more detail on Thursday, July 26, 2018, 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 +1-201-689-8349.

The live audio webcast of the call will be available on First American's website at http://www.firstam.com/investor. An audio replay of the conference call will be available through August 9, 2018, by dialing 201-612-7415 and using the conference ID 13681408. 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; banking, trust and wealth management services; and other related products and services. With total revenue of $5.8 billion in 2017, the company offers its products and services directly and through its agents throughout the United States and abroad. In 2018, First American was named to the Fortune 100 Best Companies to Work For^® list for the third consecutive year. More information about the company can be found at http://www.firstam.com.

Website Disclosure

First American posts information of interest to investors at http://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 10 to 12 days after the end of each month.

Forward-Looking Statements

Certain statements made in this press release and the related management commentary contain, and responses to investor questions may contain, 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 can be identified by the fact that they do not relate strictly to historical or current facts and may contain the words "believe," "anticipate," "expect," "intend," "plan," "predict," "estimate," "project," "will be," "will continue," "will likely result," or other similar words and phrases or future or conditional verbs such as "will," "may," "might," "should," "would," or "could." These forward-looking statements include, without limitation, statements regarding future operations, performance, financial condition, prospects, plans and strategies. These forward-looking statements are based on current expectations and assumptions that may prove to be incorrect. 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, without limitation: interest rate fluctuations; changes in the performance of the real estate markets; volatility in the capital markets; unfavorable economic conditions; failures at financial institutions where the company deposits funds; changes in applicable laws and 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; use of social media by the company and other parties; regulation of title insurance rates; 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; 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 management framework; systems damage, failures, interruptions and intrusions or unauthorized data disclosures; process automation; technological developments that change the way real estate transactions are conducted and related documents are processed; errors and fraud involving the transfer of funds; the company's use of a global workforce; 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, 2018, 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 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)
		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2018				2017				2018				2017
Total revenues		$	1,491,157			$	1,454,429			$	2,788,545			$	2,771,472
Income before income taxes		$	201,968			$	184,154			$	295,033			$	268,034
Income taxes			46,877				62,259				63,770				88,070
Net income			155,091				121,895				231,263				179,964
Less: Net loss attributable to noncontrolling interests			(49	)			(362	)			(104	)			(575	)
Net income attributable to the Company		$	155,140			$	122,257			$	231,367			$	180,539
Net income per share attributable to stockholders:
Basic		$	1.38			$	1.10			$	2.06			$	1.62
Diluted		$	1.37			$	1.09			$	2.05			$	1.61
Cash dividends declared per share		$	0.38			$	0.34			$	0.76			$	0.68
Weighted average common shares outstanding:
Basic			112,556				111,549				112,406				111,374
Diluted			113,117				112,199				113,093				112,026
Selected Title Insurance Segment Information
Title orders opened(1)			276,800				299,600				530,300				559,200
Title orders closed(1)			196,200				213,900				369,800				405,200
Paid title claims			44,731				47,763				81,356				98,771
(1) U.S. direct title insurance orders only.

 

First American Financial Corporation
Selected Consolidated Balance Sheet Information
(in thousands, unaudited)
		June 30,				December 31,
		2018				2017
Cash and cash equivalents		$	1,226,510			$	1,387,226
Investments			5,716,111				5,378,303
Goodwill and other intangible assets, net			1,271,234				1,212,918
Total assets			9,959,396				9,573,222
Reserve for claim losses			1,022,928				1,028,933
Notes and contracts payable			736,393				732,810
Total stockholders’ equity		$	3,569,523			$	3,479,955

 

First American Financial Corporation
Segment Information
(in thousands, unaudited)
Three Months Ended						Title				Specialty				Corporate
June 30, 2018		Consolidated				Insurance				Insurance				(incl. Elims.)
Revenues
Direct premiums and escrow fees		$	661,582			$	548,616			$	112,966			$	—
Agent premiums			559,004				559,004				—				—
Information and other			208,752				206,095				2,924				(267	)
Net investment income			56,334				51,737				2,401				2,196
Net realized investment gains			5,485				3,588				1,897				—
			1,491,157				1,369,040				120,188				1,929
Expenses
Personnel costs			448,974				427,049				19,066				2,859
Premiums retained by agents			439,550				439,550				—				—
Other operating expenses			228,935				202,383				18,062				8,490
Provision for policy losses and other claims			113,619				44,304				69,315				—
Depreciation and amortization			31,058				29,343				1,677				38
Premium taxes			17,049				15,102				1,947				—
Interest			10,004				1,667				—				8,337
			1,289,189				1,159,398				110,067				19,724
Income (loss) before income taxes		$	201,968			$	209,642			$	10,121			$	(17,795	)
Three Months Ended						Title				Specialty				Corporate
June 30, 2017		Consolidated				Insurance				Insurance				(incl. Elims.)
Revenues
Direct premiums and escrow fees		$	641,080			$	532,236			$	108,844			$	—
Agent premiums			554,028				554,028				—				—
Information and other			201,851				199,243				2,874				(266	)
Net investment income			39,609				34,665				2,321				2,623
Net realized investment gains			17,861				16,738				1,123				—
			1,454,429				1,336,910				115,162				2,357
Expenses
Personnel costs			436,441				415,452				17,891				3,098
Premiums retained by agents			435,771				435,771				—				—
Other operating expenses			230,791				199,845				16,766				14,180
Provision for policy losses and other claims			110,958				43,486				67,472				—
Depreciation and amortization			30,145				28,557				1,547				41
Premium taxes			17,179				15,253				1,926				—
Interest			8,990				1,241				—				7,749
			1,270,275				1,139,605				105,602				25,068
Income (loss) before income taxes		$	184,154			$	197,305			$	9,560			$	(22,711	)

 

First American Financial Corporation
Segment Information
(in thousands, unaudited)
Six Months Ended						Title				Specialty				Corporate
June 30, 2018		Consolidated				Insurance				Insurance				(incl. Elims.)
Revenues
Direct premiums and escrow fees		$	1,205,460			$	982,768			$	222,692			$	—
Agent premiums			1,086,718				1,086,718				—				—
Information and other			397,410				392,116				5,826				(532	)
Net investment income			99,126				93,137				4,989				1,000
Net realized investment (losses) gains			(169	)			(234	)			65				—
			2,788,545				2,554,505				233,572				468
Expenses
Personnel costs			862,616				820,675				37,818				4,123
Premiums retained by agents			856,187				856,187				—				—
Other operating expenses			447,415				393,232				37,479				16,704
Provision for policy losses and other claims			214,199				82,785				131,414				—
Depreciation and amortization			60,805				57,460				3,269				76
Premium taxes			33,063				29,492				3,571				—
Interest			19,227				2,651				—				16,576
			2,493,512				2,242,482				213,551				37,479
Income (loss) before income taxes		$	295,033			$	312,023			$	20,021			$	(37,011	)
Six Months Ended						Title				Specialty				Corporate
June 30, 2017		Consolidated				Insurance				Insurance				(incl. Elims.)
Revenues
Direct premiums and escrow fees		$	1,168,089			$	954,195			$	213,894			$	—
Agent premiums			1,128,610				1,128,610				—				—
Information and other			384,360				379,278				5,613				(531	)
Net investment income			72,649				61,280				4,650				6,719
Net realized investment gains			17,764				16,494				1,270				—
			2,771,472				2,539,857				225,427				6,188
Expenses
Personnel costs			843,578				800,288				35,154				8,136
Premiums retained by agents			889,697				889,697				—				—
Other operating expenses			446,193				383,116				34,051				29,026
Provision for policy losses and other claims			213,346				83,348				129,998				—
Depreciation and amortization			60,292				57,108				3,098				86
Premium taxes			32,627				29,102				3,525				—
Interest			17,705				1,650				—				16,055
			2,503,438				2,244,309				205,826				53,303
Income (loss) before income taxes		$	268,034			$	295,548			$	19,601			$	(47,115	)

 

First American Financial Corporation
Consolidated Net Realized Investment Gains (Losses)
($ in thousands, except per share amounts, unaudited)
		Three Months Ended																Six Months Ended
		June 30,																June 30,
		2018								2017								2018								2017
		Amount				Per Share				Amount				Per Share				Amount				Per Share				Amount				Per Share
Change in fair value of equity securities held(1)		$	8,784			$	0.06			N/A				N/A				$	1,808			$	0.01			N/A				N/A
Other net realized investment (losses) gains			(3,299	)			(0.02	)			17,861				0.11				(1,977	)			(0.01	)			17,764				0.11
Net realized investment gains (losses)		$	5,485			$	0.04			$	17,861			$	0.11			$	(169	)		$	(0.00	)		$	17,764			$	0.11
(1) Beginning in the first quarter of 2018, the company adopted new accounting guidance, which requires investments in equity securities to be measured at fair value, with changes in fair value recognized through net income rather than through the balance sheet as previously required.

 

First American Financial Corporation
Expense and Success Ratio Reconciliation
Title Insurance and Services Segment
($ in thousands, unaudited)
		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2018				2017				2018				2017
Total revenues		$	1,369,040			$	1,336,910			$	2,554,505			$	2,539,857
Less: Net realized investment gains (losses)			3,588				16,738				(234	)			16,494
Net investment income			51,737				34,665				93,137				61,280
Premiums retained by agents			439,550				435,771				856,187				889,697
Net operating revenues		$	874,165			$	849,736			$	1,605,415			$	1,572,386
Personnel and other operating expenses		$	629,432			$	615,297			$	1,213,907			$	1,183,404
Ratio (% net operating revenues)			72.0	%			72.4	%			75.6	%			75.3	%
Ratio (% total revenues)			46.0	%			46.0	%			47.5	%			46.6	%
Change in net operating revenues		$	24,429							$	33,029
Change in personnel and other operating expenses			14,135								30,503
Success Ratio(1)			58	%							92	%
(1) Change in personnel and other operating expenses divided by change in net operating revenues.

 

First American Financial Corporation
Supplemental Direct Title Insurance Order Information(1)
(unaudited)
		Q218				Q118				Q417				Q317				Q217
Open Orders per Day
Purchase			2,315				2,027				1,686				2,156				2,313
Refinance			998				1,173				1,239				1,379				1,319
Refinance as % of residential orders			30	%			37	%			42	%			39	%			36	%
Commercial			562				509				489				495				506
Default and other			450				380				321				387				544
Total open orders per day			4,325				4,089				3,734				4,417				4,681
Closed Orders per Day
Purchase			1,718				1,313				1,550				1,724				1,718
Refinance			729				850				1,035				985				910
Refinance as % of residential orders			30	%			39	%			40	%			36	%			35	%
Commercial			311				306				333				309				324
Default and other			308				330				376				384				390
Total closed orders per day			3,066				2,800				3,294				3,402				3,342
Average Revenue per Order (ARPO)
Purchase		$	2,483			$	2,356			$	2,389			$	2,336			$	2,319
Refinance			985				936				962				928				907
Commercial			9,277				8,059				9,508				9,024				8,589
Default and other			314				282				203				230				201
Total ARPO		$	2,599			$	2,303			$	2,411			$	2,298			$	2,294
Business Days		64				62				62				63				64
(1) U.S. operations only.
Totals may not add due to rounding.