First American Financial Reports Third 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 third quarter ended Sept. 30, 2018.

Download the complete press release as a PDF

Current Quarter Highlights

• Total revenue of $1.5 billion, up 1 percent compared with last year
• Investment income of $67.9 million, up 53 percent compared with last year
• Title Insurance and Services segment pretax margin of 14.6 percent
• Purchase revenues up 1 percent compared with last year
  • Average revenue per order up 6 percent
  • Closed orders per day down 4 percent
• Commercial revenues of $183.5 million, up 5 percent compared with last year
• Specialty Insurance segment total revenues up 5 percent, with a pretax margin of 5.0 percent
• Cash flow from operations of $230.8 million, up 4 percent compared with last year

Selected Financial Information

($ in millions, except per share data)

Total revenue for the third quarter of 2018 was $1.5 billion, an increase of 1 percent relative to the third quarter of 2017. Net income in the current quarter was $151.5 million, or $1.34 per diluted share, compared with net income of $21.4 million, or $0.19 per diluted share, in the third quarter of 2017. Net realized investment gains in the current quarter were $11.1 million, or 8 cents per diluted share, compared with net realized investment losses of $7.0 million, or 4 cents per diluted share, last year. The current quarter's results include a $5.7 million expense, or 4 cents per diluted share, related to a legacy regulatory matter. In addition, the third quarter results in 2017 included an expense of $152.4 million, or 89 cents per diluted share, for the completion of the company's pension plan termination.

"Our strong financial results continued this quarter, as we achieved a pretax margin of 14.6 percent in the title business," said Dennis J. Gilmore, chief executive officer at First American Financial Corporation. "Our commercial business had another good quarter, with revenue growth of 5 percent. We continue to benefit from increasing investment income driven by rising short-term interest rates, however higher mortgage rates have recently contributed to a slowdown in purchase activity.

"Despite the softening purchase market, our keen focus on operating efficiency, along with rising investment income and an overall healthy economy will enable us to maintain strong financial performance. Longer term, we are also well positioned given our market leadership, unique assets, investment in innovation and strong balance sheet."

Title Insurance and Services

($ in millions, except average revenue per order)

Total revenues for the Title Insurance and Services segment during the third quarter were $1.4 billion, up 1 percent compared with the same quarter of 2017. Direct premiums and escrow fees were down 1 percent compared with the third quarter of 2017, reflecting a 14 percent decline in the number of direct title orders closed that was largely offset by a 16 percent increase in the average revenue per direct title order. The growth in the average revenue per direct title order to $2,667 was primarily attributable to the increase in the average revenue per commercial order, higher residential real estate values 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 down 2 percent in the current quarter compared with last year, largely driven by lower volumes in California.

Information and other revenues were $196.0 million this quarter, down 2 percent compared with the same quarter of last year. Declining revenues from lower mortgage origination and foreclosure activity were largely offset by revenues from recent acquisitions.

Investment income was $60.9 million in the third quarter, up $23.0 million, or 61 percent. Higher average balances and the increase in short-term interest rates drove higher interest income in the company's investment portfolio and cash balances. Net realized investment gains of $9.1 million in the current quarter were primarily driven by an increase in the fair values of equity securities, partly offset by losses from the sale of debt securities. These net realized investment gains compare with losses of $7.2 million in the third quarter of 2017.

Personnel costs were $425.6 million in the third quarter, an increase of $3.7 million, or 1 percent, compared with the same quarter of 2017. The increase was primarily driven by higher personnel costs associated with recent acquisitions and higher employee benefit costs, which were significantly offset by a decline in incentive compensation expense in the current quarter.

Other operating expenses were $200.9 million in the third quarter, up $4.5 million, or 2 percent, compared with the third quarter of 2017. The increase was primarily driven by a $5.7 million expense related to a legacy regulatory matter.

The provision for policy losses and other claims was $45.9 million in the third 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 $206.5 million in the third quarter, compared with $181.2 million in the third quarter of 2017. Pretax margin was 14.6 percent in the current quarter, compared with 13.0 percent last year.

Specialty Insurance

($ in millions)

Total revenues for the Specialty Insurance segment were $124.2 million in the third quarter of 2018, an increase of 5 percent compared with the third quarter of 2017. The loss ratio in the home warranty business was higher this quarter due to increased claim severity, while lower claim frequency drove a decline in the loss ratio in the property and casualty business. Overall, the loss ratio for the segment was nearly flat at 65.4 percent. The segment's pretax margin was 5.0 percent this quarter, compared with 5.2 percent in the third quarter of last year.

Teleconference/Webcast

First American's third quarter 2018 results will be discussed in more detail on Thursday, Oct. 25, 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 www.firstam.com/investor. An audio replay of the conference call will be available through Nov. 8, 2018, by dialing 201-612-7415 and using the conference ID 13683867. 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 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 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 June 30, 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.