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First American Financial Reports Results for the Fourth Quarter and Full Year of 2013

Reports Earnings of 48 Cents per Diluted Share for the Fourth Quarter

SANTA ANA, Calif.--(BUSINESS WIRE)--Feb. 13, 2014-- 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 fourth quarter and year ended Dec. 31, 2013.

Current Quarter Highlights

  • Total revenues down 4 percent compared with last year
    • Closed orders per day down 35 percent, driven by 61 percent decline in refinance orders
    • Average revenue per direct order up 34 percent due to higher purchase and commercial mix
  • Title Insurance and Services segment pretax margin of 7.8 percent
  • Commercial revenues of $175.7 million, up 12 percent compared with last year
  • Specialty Insurance segment pretax margin of 17.0 percent
  • Cash flow from operations of $132.6 million
  • Signed definitive agreement to acquire Interthinx, Inc. for $155 million on Feb. 5, 2014
    • Expected to close by March 31, 2014
Selected Financial Information

($ in millions, except per share data)

                   

For the Three Months Ended
December 31

     

 

For the Full Year Ended
December 31

2013         2012         2013         2012
Total revenues $ 1,219.9         $ 1,276.8 $ 4,956.1         $ 4,541.8
Income before taxes 84.8 147.7 310.7 467.4
 
Net income $ 51.6 $ 93.3 $ 186.4 $ 301.0
Net income per diluted share 0.48 0.85 1.71 2.77
 

Total revenues for the fourth quarter of 2013 were $1.2 billion, a decline of 4 percent relative to the fourth quarter of 2012. Net income in the current quarter was $51.6 million, or 48 cents per diluted share, compared with net income of $93.3 million, or 85 cents per diluted share, in the fourth quarter of 2012. The current quarter results include net realized investment gains of $2.4 million and impairment of equity investments of $7.8 million, which together reduced net income by 3 cents per diluted share. The fourth quarter of 2012 included net realized investment gains of $6.2 million, or 4 cents per diluted share.

Total revenues for the full year of 2013 were $5.0 billion, an increase of 9 percent relative to the prior year. Net income was $186.4 million, or $1.71 per diluted share, compared with $301.0 million, or $2.77 per diluted share, in 2012. The results for the full year 2013 include net realized investment gains of $9.2 million, or 5 cents per diluted share, compared with $64.1 million of net realized investment gains, or 38 cents per diluted share, in 2012. In addition, the current year results include reserve additions of $148.5 million, or 84 cents per diluted share, primarily due to claims from policy years 2005 to 2008, compared with reserve additions of $62.1 million, or 37 cents per diluted share, in 2012.

“In 2013, revenue grew by 9 percent, driven by strength in our resale and commercial businesses,” said Dennis J. Gilmore, chief executive officer at First American Financial Corporation. “Revenue growth was led by our purchase business, which grew 26 percent, as both transaction volumes and real estate prices increased. Our commercial business had its strongest year ever, with revenue up 23 percent.

“In the fourth quarter, however, we felt the full impact of the drop-off in refinance activity, with closed title orders declining to the lowest level of the year. The effect was offset in part by the growth in our resale and commercial businesses, which drove average revenue per order up 34 percent. We are actively managing expenses and, going into 2014, will continue to adjust our cost structure to market conditions.

“Throughout 2014 we will focus on responding to our customers’ desire for tighter integration between loan origination activities, loan quality verification and title and settlement services,” continued Gilmore. “As part of this effort, we recently announced our agreement to acquire Interthinx, a leading provider of loan quality analytics, decision support tools and loan review processes for the mortgage industry. The combination of Interthinx’s powerful offerings with the risk mitigation we already provide through our title insurance and settlement services products gives us a compelling solution for customers’ compliance and loan-quality assurance requirements. This transaction also provides us further opportunity to leverage our extensive data assets and enhances our ability to innovate in response to the increasing demands of the marketplace.”

Title Insurance and Services

($ in millions, except average revenue per order)

           

For the Three Months Ended
December 31

2013         2012
Total revenues $ 1,125.5         $ 1,197.0
 
Income before taxes $ 87.9 $ 152.5
Pretax margin 7.8 % 12.7 %
 
Direct open orders 270,500 408,100
Direct closed orders 217,300 335,300
 
U.S. Commercial
Total revenues $ 175.7 $ 156.6
Open orders 30,200 30,700
Closed orders 20,900 21,400
Average revenue per order $ 8,400 $ 7,300
 

Total revenues for the Title Insurance and Services segment were $1.1 billion in the fourth quarter of 2013, a decline of 6 percent from the same quarter of 2012. Direct premiums and escrow fees were down 12 percent compared with the fourth quarter of 2012, due to a 35 percent decline in the number of direct title orders closed in the quarter that was largely offset by the increase in average revenue per order. Average revenue per direct title order was $1,878, an increase of 34 percent compared with the fourth quarter of 2012, due to the shift in the mix of revenues to higher-premium commercial and purchase transactions, as well as an increase in the average revenue per closed order for commercial and purchase transactions. Agent premiums were up by 5 percent in the current quarter, reflecting the normal reporting lag of approximately one quarter.

Information and other revenues were $143.8 million this quarter, down 11 percent compared with the same quarter of last year, primarily due to lower demand for the company’s title plant information and default information products, driven by the overall decline in transaction activity. Total investment income was down $15.3 million compared with the fourth quarter of 2012, due in part to a $6.8 million decline in net realized investment gains. In addition, investment income in the current quarter was impacted by impairment of equity investments totaling $5.8 million.

Personnel costs were $330.6 million in the fourth quarter, down $8.5 million, or 3 percent, compared with the fourth quarter of 2012. This decline was primarily due to reduced incentive-based compensation driven by lower revenues and profitability resulting from the slowdown in order volume compared with the prior year.

Other operating expenses were $207.3 million in the fourth quarter, down $3.6 million, or 2 percent, compared with the fourth quarter of 2012. This decline was primarily due to lower production-related expenses and temporary labor costs driven by the reduced order volumes in the current quarter, partly offset by higher legal settlement costs.

The provision for policy losses and other claims was $56.1 million in the fourth quarter, or 5.8 percent of title premiums and escrow fees, compared with a loss provision rate of 7.0 percent in the same quarter of the prior year.

Pretax income for the Title Insurance and Services segment was $87.9 million in the fourth quarter, compared with $152.5 million in the fourth quarter of 2012. Pretax margin was 7.8 percent in the current quarter, compared with 12.7 percent last year.

Specialty Insurance

($ in millions)

           

For the Three Months Ended
December 31

2013         2012
Total revenues $ 88.0         $ 80.0
 
Income before taxes $ 14.9 $ 13.2
Pretax margin 17.0 % 16.6 %

Total revenues for the Specialty Insurance segment were $88.0 million in the fourth quarter of 2013, up 10 percent compared with the fourth quarter of 2012. The overall loss ratio for the Specialty Insurance segment was 53 percent in the current quarter, up from 51 percent in the prior year. Higher premiums for the segment contributed to a pretax margin of 17.0 percent, up from 16.6 percent in the fourth quarter of 2012.

Teleconference/Webcast

First American’s fourth quarter and full year 2013 results will be discussed in more detail on Thursday, Feb. 13, 2014, at noon EST, via teleconference. The toll-free dial-in number is 800-779-1598. Callers from outside the United States may dial 415-228-4861. The passcode for the event is “First American.”

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 Feb. 19, 2014, by dialing 203-369-0421. 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 $5.0 billion in 2013, 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 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 acquisition of Interthinx and its anticipated closing, benefits, opportunities and synergies; headcount reduction and other expense management; a focus during 2014 on responding to the company’s customers’ desire for tighter integration between loan origination activities, loan quality verification and title and settlement services; the making of value-creating investments in the company’s core business; future acquisitions; the return of capital to stockholders; the outlook for the housing market, including a weaker refinance market, decreased transaction volumes, and growth in both the home purchase and commercial markets; a focus on gaining profitable market share; title claims expectations; the company’s liquidity, including draw downs on its credit facility, its debt-to-capital ratio and the duration of liabilities; and the timing and results of the reorganization of certain subsidiaries, 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; 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; 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 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; and other factors described in the company’s quarterly report on Form 10-Q for the quarter ended September 30, 2013, 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 a personnel and other operating expense ratio. 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.

(Additional Financial Data Follows)

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 Twelve Months Ended
December 31 December 31
2013   2012 2013   2012
 
 
Total revenues $ 1,219,872 $ 1,276,823 $ 4,956,077 $ 4,541,821
 
Income before income taxes $ 84,847 $ 147,684 $ 310,708 $ 467,406
Income tax expense   33,058   54,482     123,644   165,678
Net income 51,789 93,202 187,064 301,728

Less: Net income (loss) attributable to noncontrolling interests

  162   (75 )   697   687
Net income attributable to the Company $ 51,627 $ 93,277   $ 186,367 $ 301,041
 
Net income per share attributable to stockholders:
Basic $ 0.49 $ 0.87 $ 1.74 $ 2.83
Diluted $ 0.48 $ 0.85 $ 1.71 $ 2.77
 
Cash dividends declared per share $ 0.12 $ 0.08 $ 0.48 $ 0.36
 
Weighted average common shares outstanding:
Basic 105,765 106,929 106,991 106,307
Diluted 107,974 109,477 109,102 108,542
 

Selected Title Information

 
Title orders opened 270,500 408,100 1,384,600 1,634,900
 
Title orders closed 217,300 335,300 1,103,400 1,191,800
 
Paid title claims $ 86,972 $ 66,261 $ 295,982 $ 285,210
 
 
First American Financial Corporation
Selected Balance Sheet Information
(in thousands)
(unaudited)
               

December 31,
2013

 

December 31,
2012

 
Cash and cash equivalents $ 834,837 $ 670,529
Investment portfolio 3,385,328 3,070,239
Goodwill and other intangible assets 892,373 902,952
Total assets 6,520,600 6,050,847
Reserve for claim losses 1,018,365 976,462
Notes payable 310,285 229,760
Total stockholders' equity $ 2,453,049 $ 2,348,065
 
 
First American Financial Corporation
Segment Information
(in thousands, unaudited)
                   
For the Three Months Ended Title Specialty Corporate

December 31, 2013

Consolidated

Insurance

Insurance

(incl. Elims.)

Revenues
Direct premiums and escrow fees $ 540,292 $ 455,567 $ 84,725 $ -
Agent premiums 514,615 514,615 - -
Information and other 144,215 143,820 401 (6 )
Investment income 18,351 13,788 2,047 2,516

Net realized investment gains (losses)(1)

  2,399   (2,248 )   781   3,866  
  1,219,872   1,125,542     87,954   6,376  
Expenses
Personnel costs 358,443 330,551 14,478 13,414
Premiums retained by agents 412,674 412,674 - -
Other operating expenses 225,397 207,295 11,419 6,683
Provision for policy losses and other claims 100,612 56,086 44,526 -
Depreciation and amortization 19,775 17,717 1,239 819
Premium taxes 14,032 12,651 1,381 -
Interest   4,092   682     -   3,410  
  1,135,025   1,037,656     73,043   24,326  
       
Income (loss) before income taxes $ 84,847 $ 87,886   $ 14,911 $ (17,950 )
 
 
 
For the Three Months Ended Title Specialty Corporate

December 31, 2012

Consolidated

Insurance

Insurance

(incl. Elims.)

Revenues
Direct premiums and escrow fees $ 594,820 $ 518,753 $ 76,067 $ -
Agent premiums 489,530 489,530 - -
Information and other 162,333 161,931 408 (6 )
Investment income (losses) 23,954 22,233 1,859 (138 )
Net realized investment gains(1)   6,186   4,567     1,619   -  
  1,276,823   1,197,014     79,953   (144 )
Expenses
Personnel costs 363,404 339,081 13,775 10,548
Premiums retained by agents 391,490 391,490 - -
Other operating expenses 228,411 210,938 11,808 5,665
Provision for policy losses and other claims 109,441 70,710 38,731 -
Depreciation and amortization 20,006 18,071 1,202 733
Premium taxes 14,758 13,565 1,193 -
Interest   1,629   653     -   976  
  1,129,139   1,044,508     66,709   17,922  
       
Income (loss) before income taxes $ 147,684 $ 152,506   $ 13,244 $ (18,066 )
 
(1) Includes other-than-temporary impairment (OTTI) losses recorded in earnings.
 
 
First American Financial Corporation
Segment Information
(in thousands, unaudited)
             
For the Twelve Months Ended Title Specialty Corporate

December 31, 2013

Consolidated

Insurance

Insurance

(incl. Elims.)

Revenues
Direct premiums and escrow fees $ 2,184,464 $ 1,855,270 $ 329,194 $ -
Agent premiums 2,044,862 2,044,862 - -
Information and other 627,645 626,016 1,652 (23 )
Investment income 89,895 76,606 7,342 5,947

Net realized investment gains(1)

  9,211   3,334   1,425   4,452  
  4,956,077   4,606,088   339,613   10,376  
Expenses
Personnel costs 1,445,582 1,338,361 58,261 48,960
Premiums retained by agents 1,636,694 1,636,694 - -
Other operating expenses 885,805 816,870 41,725 27,210
Provision for policy losses and other claims 530,356 343,461 186,895 -
Depreciation and amortization 74,916 66,956 4,865 3,095
Premium taxes 56,715 50,980 5,735 -
Interest   15,301   2,601   -   12,700  
  4,645,369   4,255,923   297,481   91,965  
       
Income (loss) before income taxes $ 310,708 $ 350,165 $ 42,132 $ (81,589 )
 
 
 
For the Twelve Months Ended Title Specialty Corporate

December 31, 2012

Consolidated

Insurance

Insurance

(incl. Elims.)

Revenues
Direct premiums and escrow fees $ 2,041,740 $ 1,745,687 $ 296,053 $ -
Agent premiums 1,709,905 1,709,905 - -
Information and other 645,023 643,433 1,605 (15 )
Investment income 81,031 71,350 8,923 758

Net realized investment gains(1)

  64,122   30,145   8,590   25,387  
  4,541,821   4,200,520   315,171   26,130  
Expenses
Personnel costs 1,334,866 1,233,203 55,453 46,210
Premiums retained by agents 1,370,193 1,370,193 - -
Other operating expenses 836,319 769,477 42,395 24,447
Provision for policy losses and other claims 397,717 237,427 160,290 -
Depreciation and amortization 74,950 67,610 4,553 2,787
Premium taxes 51,304 46,283 5,021 -
Interest   9,066   2,646   -   6,420  
  4,074,415   3,726,839   267,712   79,864  
       
Income (loss) before income taxes $ 467,406 $ 473,681 $ 47,459 $ (53,734 )
 
(1) Includes other-than-temporary impairment (OTTI) losses recorded in earnings.
 
 
First American Financial Corporation
Expense Ratio Reconciliation
Title Insurance and Services Segment
($ in thousands, unaudited)
                   
For the Three Months Ended For the Twelve Months Ended
December 31 December 31
2013 2012 2013 2012
 
 
Total revenues $ 1,125,542 $ 1,197,014 $ 4,606,088 $ 4,200,520

Less: Net realized investment (losses) gains(1)

(2,248 ) 4,567 3,334 30,145
Investment income 13,788 22,233 76,606 71,350
Premiums retained by agents   412,674     391,490     1,636,694     1,370,193  
Net operating revenues $ 701,328   $ 778,724   $ 2,889,454   $ 2,728,832  
 
 
Personnel and other operating expenses $ 537,846 $ 550,019 $ 2,155,231 $ 2,002,680
Ratio (% net operating revenues) 76.7 % 70.6 % 74.6 % 73.4 %
Ratio (% total revenues) 47.8 % 45.9 % 46.8 % 47.7 %
 
(1) Includes other-than-temporary impairment (OTTI) losses recorded in earnings.
 
 
First American Financial Corporation
Supplemental Direct Title Order Information

(unaudited)

                       
Q413 Q313 Q213 Q113 Q412
Open Orders per Day
Purchase 1,626 2,054 2,199 1,900 1,529
Refinance 1,462 1,628 2,967 2,905 3,363

Refinance as % of residential orders

47 % 44 % 57 % 60 % 69 %
 
Commercial 480 477 548 482 487
Other1   726     779     872     887     1,099  
Total open orders per day   4,294     4,938     6,586     6,174     6,478  
 
Closed Orders per Day
Purchase 1,383 1,657 1,637 1,218 1,320
Refinance 1,096 1,645 2,311 2,496 2,840
Refinance as % of residential orders 44 % 50 % 59 % 67 % 68 %
 
Commercial 331 316 313 278 340
Other1   640     653     759     785     823  
Total closed orders per day   3,449     4,272     5,020     4,777     5,322  
 
Average Revenue per Order (ARPO)2
Purchase $ 1,829 $ 1,813 $ 1,810 $ 1,700 $ 1,758
Refinance 819 807 802 820 823
Commercial 8,425 6,895 6,886 5,465 7,313
Other1 409 504 337 367 403
 
Total ARPO $ 1,878 $ 1,602 $ 1,440 $ 1,240 $ 1,404
 
Business Days 63 64 64 61 63
 
(1) Includes default and other orders
(2) U.S. operations only
 
Totals may not add due to rounding
 
 

Source: First American Financial Corporation

First American Financial Corporation
Media Contact:
Sandra Bell
Corporate Communications
714-250-3298
or
Investor Contact:
Craig Barberio
Investor Relations
714-250-5214