First American Financial Reports Third Quarter 2020 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, 2020.

Download the complete press release as a PDF

Current Quarter Highlights

• Total revenue of $1.9 billion, up 15 percent compared with last year
  • Closed title orders up 30 percent, driven by an 85 percent increase in refinance orders
  • Average revenue per order down 13 percent, driven by the shift to refinance transactions
• Net realized investment gains of $45.0 million, or 30 cents per diluted share, primarily due to the change in the fair value of equity securities
• Title Insurance and Services segment record pretax margin of 19.0 percent
  • 17.1 percent excluding net realized investment gains
• Commercial revenues of $142.6 million, down 29 percent compared with last year
• Cash flow from operations of $313.1 million, compared with $310.6 million last year
• Initiated a process for the sale of the property and casualty business
  • Recorded pretax impairment on assets held for sale of $73.3 million, or 49 cents per diluted share, within the Specialty Insurance segment

Selected Financial Information

($ in millions, except per share data)

		Three Months Ended
		September 30,
		2020				2019
Total revenue		$	1,913.7			$	1,671.2
Income before taxes			243.4				245.3
Net income		$	182.3			$	187.2
Net income per diluted share			1.62			1.65

 

Total revenue for the third quarter of 2020 was $1.9 billion, an increase of 15 percent relative to the third quarter of 2019. Net income in the current quarter was $182.3 million, or $1.62 per diluted share, compared with net income of $187.2 million, or $1.65 per diluted share, in the third quarter of 2019. Net realized investment gains in the current quarter were $45.0 million, or 30 cents per diluted share, compared with net realized investment gains of $1.5 million, or 1 cent per diluted share, in the third quarter of last year. In addition, a pretax impairment of assets held for sale of $73.3 million, or 49 cents per diluted share, was recorded related to the property and casualty business within the Specialty Insurance segment.

"Our third-quarter financial results were strong, achieving a record pretax title margin of 19 percent," said Dennis J. Gilmore, chief executive officer at First American Financial Corporation. "Our purchase and refinance businesses are performing well, benefiting from strong order trends and our continued focus on cost efficiency. Given low mortgage rates and robust demand for housing, we expect refinance and purchase activity to remain at elevated levels for the remainder of the year. The commercial market continued to improve during the quarter and we are optimistic, given a better pipeline, as we head into the seasonally strong fourth quarter.

"During the quarter, we initiated a process for the sale of our property and casualty business. While the business, until recently, has performed well, we decided to maintain focus on our core business and redeploy the capital to areas with higher expected returns."

Title Insurance and Services

($ in millions, except average revenue per order)

		Three Months Ended
		September 30,
		2020				2019
Total revenues		$	1,772.0			$	1,540.7
Income before taxes		$	337.5			$	253.6
Pretax margin			19.0	%			16.5	%
Title open orders(1)			410,600				317,300
Title closed orders(1)			291,500				224,100
U.S. Commercial
Total revenues		$	142.6			$	199.6
Open orders			31,100				33,500
Closed orders			15,900				18,500
Average revenue per order		$	9,000			$	10,800
(1) U.S. direct title insurance orders only.

 

Total revenues for the Title Insurance and Services segment during the third quarter were $1.8 billion, up 15 percent compared with the same quarter of 2019. Direct premiums and escrow fees were up 12 percent compared with the third quarter of 2019, driven by a 30 percent increase in the number of direct title orders closed that was partially offset by a 13 percent decline in the average revenue per direct title order closed. The average revenue per direct title order declined to $2,193, primarily due to the shift in the order mix from higher-premium commercial transactions to lower-premium residential refinance transactions. Agent premiums, which are recorded on approximately a one-quarter lag relative to direct premiums, were up 10 percent in the current quarter as compared with last year.

Information and other revenues were $282.7 million this quarter, up 38 percent compared with the same quarter of last year. The increase was primarily due to the growth in mortgage originations that led to higher demand for the company's title information products, the recent acquisition of Docutech and revenues from services provided to support a temporary pandemic-related government program in Canada.

Investment income was $44.7 million in the third quarter, down $27.3 million, or 38 percent, primarily due to the impact of the decline in short-term interest rates on the investment portfolio and cash balances. Net realized investment gains totaled $41.3 million in the current quarter, primarily due to the change in the fair value of equity securities, compared with gains of $0.4 million in the third quarter of 2019.

Personnel costs were $481.4 million in the third quarter, an increase of $33.6 million, or 8 percent, compared with the same quarter of 2019. This increase was primarily attributable to higher incentive compensation and salary expense, and higher costs as a result of recent acquisitions, partly offset by lower employee benefit expense.

Other operating expenses were $251.3 million in the third quarter, up $32.6 million, or 15 percent, compared with the third quarter of 2019. The increase was primarily due to higher production-related costs as a result of the growth in order volume.

The provision for policy losses and other claims was $70.2 million in the third quarter, or 5.0 percent of title premiums and escrow fees, an increase from a 4.0 percent loss provision rate in the prior year. The current quarter rate reflects an ultimate loss rate of 4.5 percent for the current policy year with a $7.0 million increase in the loss reserve estimates for prior policy years. In the third quarter, incurred title claims were $32.7 million, a 21 percent decline relative to 2019.

Depreciation and amortization expense was $36.2 million in the third quarter, up $6.4 million, or 21 percent, compared with the same period last year, primarily due to the amortization of intangibles related to recent acquisitions.

Pretax income for the Title Insurance and Services segment was $337.5 million in the third quarter, compared with $253.6 million in the third quarter of 2019. Pretax margin was 19.0 percent in the current quarter, compared with 16.5 percent last year. Excluding the impact of net realized investment gains, the pretax margin was 17.1 percent this year, compared with 16.4 percent last year.

Specialty Insurance

($ in millions)

		Three Months Ended
		September 30,
		2020				2019
Total revenues		$	136.3			$	129.2
Income before taxes		$	(72.1	)		$	11.0
Pretax margin			(52.9	%)			8.5	%

 

Total revenues for the Specialty Insurance segment were $136.3 million in the third quarter of 2020, an increase of 6 percent compared with the third quarter of 2019. This quarter, the segment's financial results were driven by a $73.3 million impairment on assets held for sale in the property and casualty business. The overall loss ratio for the segment was 69.0 percent, up from 60.9 percent last year due to higher claim losses in both the property and casualty and home warranty businesses. The home warranty business continued to experience higher claim frequency in the third quarter, significantly driven by claims in the appliance and plumbing trades likely due to the coronavirus pandemic.

Teleconference/Webcast

First American's third quarter 2020 results will be discussed in more detail on Thursday, October 22, 2020, 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 November 5, 2020, by dialing 201-612-7415 and using the conference ID 13711297. 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 $6.2 billion in 2019, the company offers its products and services directly and through its agents throughout the United States and abroad. In 2020, First American was named to the Fortune 100 Best Companies to Work For^® list for the fifth 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; the coronavirus pandemic and responses thereto; impairments in the company's goodwill or other intangible assets; uncertainty from the expected discontinuance of LIBOR and transition to any other interest rate benchmark; failures at financial institutions where the company deposits funds; regulatory oversight and changes in applicable laws and government regulations, including privacy and data protection laws; 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; climate change, health crises, severe weather conditions and other catastrophe events; 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, cyberattacks and intrusions, or unauthorized data disclosures; innovation efforts of the company and other industry participants and any related market disruption; 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, 2020, 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, success ratios, net operating revenues; and adjusted revenues, adjusted pretax income, adjusted earnings per share, and adjusted pretax margins for the company, its title insurance and services segment and its specialty insurance segment. 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								Nine Months Ended
		September 30,								September 30,
		2020				2019				2020				2019
Total revenues		$	1,913,721			$	1,671,196			$	4,935,393			$	4,473,397
Income before income taxes		$	243,371			$	245,338			$	540,990			$	616,505
Income tax expense			59,780				57,171				121,859				131,263
Net income			183,591				188,167				419,131				485,242
Less: Net income attributable to noncontrolling interests			1,312				985				2,993				1,830
Net income attributable to the Company		$	182,279			$	187,182			$	416,138			$	483,412
Net income per share attributable to stockholders:
Basic		$	1.62			$	1.65			$	3.69			$	4.28
Diluted		$	1.62			$	1.65			$	3.68			$	4.26
Cash dividends declared per share		$	0.44			$	0.42			$	1.32			$	1.26
Weighted average common shares outstanding:
Basic			112,584				113,163				112,913				112,983
Diluted			112,843				113,741				113,176				113,509
Selected Title Insurance Segment Information
Title orders opened(1)			410,600				317,300				1,116,300				841,300
Title orders closed(1)			291,500				224,100				748,700				571,600
Paid title claims		$	43,134			$	38,451			$	120,852			$	119,738
(1) U.S. direct title insurance orders only.

 

First American Financial Corporation
Selected Consolidated Balance Sheet Information
(in thousands, unaudited)
		September 30,				December 31,
		2020				2019
Cash and cash equivalents		$	1,512,369			$	1,485,959
Investments			6,699,607				6,589,443
Goodwill and other intangible assets, net			1,551,980				1,242,741
Total assets			12,638,810				11,519,167
Reserve for claim losses			1,069,859				1,063,044
Notes and contracts payable			1,011,758				728,232
Total stockholders' equity		$	4,723,770			$	4,420,484

 

First American Financial Corporation
Segment Information
(in thousands, unaudited)
Three Months Ended						Title				Specialty				Corporate
September 30, 2020		Consolidated				Insurance				Insurance				(incl. Elims.)
Revenues
Direct premiums and escrow fees		$	807,947			$	680,910			$	127,037			$	--
Agent premiums			722,434				722,434				--				--
Information and other			285,882				282,671				3,450				(239	)
Net investment income			52,466				44,726				2,105				5,635
Net realized investment gains			44,992				41,252				3,740				--
			1,913,721				1,771,993				136,332				5,396
Expenses
Personnel costs			511,298				481,417				22,271				7,610
Premiums retained by agents			572,780				572,780				--				--
Other operating expenses			281,079				251,304				20,899				8,876
Provision for policy losses and other claims			157,836				70,167				87,669				--
Depreciation and amortization			38,227				36,194				1,995				38
Impairments on assets held for sale			73,264				--				73,264				--
Premium taxes			19,885				17,522				2,363				--
Interest			15,981				5,129				--				10,852
			1,670,350				1,434,513				208,461				27,376
Income (loss) before income taxes		$	243,371			$	337,480			$	(72,129	)		$	(21,980	)
Three Months Ended						Title				Specialty				Corporate
September 30, 2019		Consolidated				Insurance				Insurance				(incl. Elims.)
Revenues
Direct premiums and escrow fees		$	728,610			$	606,812			$	121,798			$	--
Agent premiums			656,154				656,154				--				--
Information and other			208,297				205,282				3,270				(255	)
Net investment income			76,628				72,044				3,064				1,520
Net realized investment gains			1,507				449				1,058				--
			1,671,196				1,540,741				129,190				1,265
Expenses
Personnel costs			470,683				447,795				20,742				2,146
Premiums retained by agents			518,824				518,824				--				--
Other operating expenses			248,252				218,687				19,230				10,335
Provision for policy losses and other claims			124,683				50,519				74,164				--
Depreciation and amortization			31,719				29,822				1,859				38
Impairments on assets held for sale			--				--				--				--
Premium taxes			19,484				17,310				2,174				--
Interest			12,213				4,214				--				7,999
			1,425,858				1,287,171				118,169				20,518
Income (loss) before income taxes		$	245,338			$	253,570			$	11,021			$	(19,253	)

 

First American Financial Corporation
Segment Information
(in thousands, unaudited)
Nine Months Ended						Title				Specialty				Corporate
September 30, 2020		Consolidated				Insurance				Insurance				(incl. Elims.)
Revenues
Direct premiums and escrow fees		$	2,080,568			$	1,712,946			$	367,622			$	--
Agent premiums			1,920,011				1,920,011				--				--
Information and other			728,563				719,196				9,992				(625	)
Net investment income			156,760				147,628				7,005				2,127
Net realized investment gains			49,491				35,777				7,199				6,515
			4,935,393				4,535,558				391,818				8,017
Expenses
Personnel costs			1,392,445				1,320,097				64,398				7,950
Premiums retained by agents			1,520,559				1,520,559				--				--
Other operating expenses			788,407				700,090				61,731				26,586
Provision for policy losses and other claims			414,001				181,648				232,353				--
Depreciation and amortization			110,652				104,705				5,832				115
Impairments on assets held for sale			73,264				--				73,264				--
Premium taxes			53,554				47,360				6,194				--
Interest			41,521				12,838				--				28,683
			4,394,403				3,887,297				443,772				63,334
Income (loss) before income taxes		$	540,990			$	648,261			$	(51,954	)		$	(55,317	)
Nine Months Ended						Title				Specialty				Corporate
September 30, 2019		Consolidated				Insurance				Insurance				(incl. Elims.)
Revenues
Direct premiums and escrow fees		$	1,910,830			$	1,561,926			$	348,904			$	--
Agent premiums			1,701,538				1,701,538				--				--
Information and other			581,858				573,150				9,490				(782	)
Net investment income			236,607				213,067				8,496				15,044
Net realized investment gains			42,564				35,114				7,450				--
			4,473,397				4,084,795				374,340				14,262
Expenses
Personnel costs			1,329,322				1,251,590				60,246				17,486
Premiums retained by agents			1,344,517				1,344,517				--				--
Other operating expenses			667,047				581,455				57,284				28,308
Provision for policy losses and other claims			331,525				130,539				200,986				--
Depreciation and amortization			97,537				92,043				5,379				115
Impairments on assets held for sale			--				--				--				--
Premium taxes			50,887				44,988				5,899				--
Interest			36,057				11,271				--				24,786
			3,856,892				3,456,403				329,794				70,695
Income (loss) before income taxes		$	616,505			$	628,392			$	44,546			$	(56,433	)

 

First American Financial Corporation
Reconciliation of Pretax Margins and Earnings per Diluted Share
Excluding Net Realized Investment Gains and Losses ("NRIG(L)")
(in thousands, except margin and per share amounts, unaudited)
		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2020				2019				2020				2019
Consolidated
Total revenues		$	1,913,721			$	1,671,196			$	4,935,393			$	4,473,397
Less: NRIG(L)			44,992				1,507				49,491				42,564
Total revenues excluding NRIG(L)		$	1,868,729			$	1,669,689			$	4,885,902			$	4,430,833
Pretax income		$	243,371			$	245,338			$	540,990			$	616,505
Less: NRIG(L)			44,992				1,507				49,491				42,564
Pretax income excluding NRIG(L)		$	198,379			$	243,831			$	491,499			$	573,941
Pretax margin			12.7	%			14.7	%			11.0	%			13.8	%
Less: Pretax margin impact of NRIG(L)			2.1	%			0.1	%			0.9	%			0.8	%
Pretax margin excluding NRIG(L)			10.6	%			14.6	%			10.1	%			13.0	%
Earnings per diluted share (EPS)		$	1.62			$	1.65			$	3.68			$	4.26
Less: EPS impact of NRIG(L)			0.30				0.01				0.34				0.30
EPS excluding NRIG(L)		$	1.31			$	1.63			$	3.34			$	3.96
Title Insurance and Services Segment
Total revenues		$	1,771,993			$	1,540,741			$	4,535,558			$	4,084,795
Less: NRIG(L)			41,252				449				35,777				35,114
Total revenues excluding NRIG(L)		$	1,730,741			$	1,540,292			$	4,499,781			$	4,049,681
Pretax income		$	337,480			$	253,570			$	648,261			$	628,392
Less: NRIG(L)			41,252				449				35,777				35,114
Pretax income excluding NRIG(L)		$	296,228			$	253,121			$	612,484			$	593,278
Pretax margin			19.0	%			16.5	%			14.3	%			15.4	%
Less: Pretax margin impact of NRIG(L)			1.9	%			0.1	%			0.7	%			0.8	%
Pretax margin excluding NRIG(L)			17.1	%			16.4	%			13.6	%			14.6	%
Specialty Insurance Segment
Total revenues		$	136,332			$	129,190			$	391,818			$	374,340
Less: NRIG(L)			3,740				1,058				7,199				7,450
Total revenues excluding NRIG(L)		$	132,592			$	128,132			$	384,619			$	366,890
Pretax income		$	(72,129	)		$	11,021			$	(51,954	)		$	44,546
Less: NRIG(L)			3,740				1,058				7,199				7,450
Pretax income excluding NRIG(L)		$	(75,869	)		$	9,963			$	(59,153	)		$	37,096
Pretax margin			(52.9	)%			8.5	%			(13.3	)%			11.9	%
Less: Pretax margin impact of NRIG(L)			4.3	%			0.7	%			2.1	%			1.8	%
Pretax margin excluding NRIG(L)			(57.2	)%			7.8	%			(15.4	)%			10.1	%
Totals may not sum due to rounding.

 

First American Financial Corporation
Expense and Success Ratio Reconciliation
Title Insurance and Services Segment
($ in thousands, unaudited)
		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2020				2019				2020				2019
Total revenues		$	1,771,993			$	1,540,741			$	4,535,558			$	4,084,795
Less: Net realized investment gains			41,252				449				35,777				35,114
Net investment income			44,726				72,044				147,628				213,067
Premiums retained by agents			572,780				518,824				1,520,559				1,344,517
Net operating revenues		$	1,113,235			$	949,424			$	2,831,594			$	2,492,097
Personnel and other operating expenses		$	732,721			$	666,482			$	2,020,187			$	1,833,045
Ratio (% net operating revenues)			65.8	%			70.2	%			71.3	%			73.6	%
Ratio (% total revenues)			41.4	%			43.3	%			44.5	%			44.9	%
Change in net operating revenues		$	163,811							$	339,497
Change in personnel and other operating expenses			66,239								187,142
Success Ratio(1)			40	%							55	%
(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)
		Q320				Q220				Q120				Q419				Q319
Open Orders per Day
Purchase			2,405				1,919				1,978				1,622				2,108
Refinance			3,154				2,898				2,884				1,487				1,922
Refinance as % of residential orders			57	%			60	%			59	%			48	%			48	%
Commercial			486				362				510				522				523
Default and other			370				310				345				364				405
Total open orders per day			6,416				5,489				5,716				3,995				4,958
Closed Orders per Day
Purchase			1,820				1,310				1,277				1,469				1,639
Refinance			2,320				2,222				1,451				1,391				1,256
Refinance as % of residential orders			56	%			63	%			53	%			49	%			43	%
Commercial			248				232				265				332				289
Default and other			167				213				276				366				318
Total closed orders per day			4,555				3,977				3,269				3,559				3,502
Average Revenue per Order (ARPO)
Purchase		$	2,726			$	2,581			$	2,526			$	2,541			$	2,528
Refinance			1,204				1,194				1,165				1,195				1,159
Commercial			8,993				7,373				9,690				11,425				10,791
Default and other			46				41				299				209				257
Total ARPO		$	2,193			$	1,950			$	2,315			$	2,603			$	2,513
Business Days			64				64				62				63				64
(1) U.S. operations only.
Totals may not sum due to rounding.