Market Overview

First American Financial Reports Second Quarter 2018 Results

Share:

Reports Earnings of $1.37 per Diluted Share

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.

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 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 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 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.
 

View Comments and Join the Discussion!