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First American Financial Reports Third Quarter 2014 Results

Reports Earnings of 74 Cents per Diluted Share

SANTA ANA, Calif.--(BUSINESS WIRE)--Oct. 23, 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 third quarter ended Sept. 30, 2014.

Current Quarter Highlights

  • Total revenue of $1.3 billion, down 3 percent compared with last year
    • Direct title orders closed down 20 percent, driven by a decline in refinance orders
    • Average revenue per direct title order closed up 20 percent
  • Title Insurance and Services segment pretax margin of 10.4 percent
  • Commercial revenue of $149.0 million, up 7 percent compared with last year
  • Specialty Insurance segment total revenue up 10 percent, with a pretax margin of 11.0 percent
  • Debt-to-capital ratio of 14.9 percent as of Sept. 30, 2014
               

Selected Financial Information

($ in millions, except per share data)

 
For the Three Months Ended

Sept 30

2014                 2013
Total revenue $ 1,259.7                 $ 1,301.0
Income before taxes 116.0 107.0
 
Net income $ 80.7 $ 63.9
Net income per diluted share 0.74 0.59
 

Total revenue for the third quarter of 2014 was $1.3 billion, a decline of 3 percent relative to the third quarter of 2013. Net income in the current quarter was $80.7 million, or 74 cents per diluted share, compared with net income of $63.9 million, or 59 cents per diluted share, in the third quarter of 2013. The current quarter results include net realized investment gains of $14.4 million, or 9 cents per diluted share, compared with net realized investment losses of $7.0 million, or 4 cents per diluted share, in the same quarter of last year. The current quarter also benefited from a 30 percent tax rate, primarily due to a lower effective foreign tax rate and certain non-recurring tax benefits.

“A continued emphasis on operating efficiency, coupled with seasonal strength in the purchase and commercial markets, had a favorable impact on the title segment’s results,” said Dennis J. Gilmore, chief executive officer at First American Financial Corporation. “In addition, the specialty insurance segment continued its strong performance driven by the home warranty business.

“We continue to adjust our cost structure ahead of the normal seasonal slowdown in the residential purchase market. Expectations for a traditionally strong commercial market during the fourth quarter, along with the recent surge in refinance activity, should help soften the seasonal decline in earnings. Looking forward, we continue our focus on delivering innovative, industry-leading solutions to our customers.”

               

Title Insurance and Services

($ in millions, except average revenue per order)

 
For the Three Months Ended

Sept 30

2014                 2013
Total revenue $ 1,165.8                 $ 1,212.9
 
Income before taxes $ 121.0 $ 125.0
Pretax margin 10.4 % 10.3 %
 
Direct open orders 297,500 316,000
Direct closed orders 217,400 273,400
 
U.S. Commercial
Total revenue $ 149.0 $ 139.5
Open orders 31,000 30,500
Closed orders 19,700 20,200
Average revenue per order $ 7,600 $ 6,900
 

Total revenue for the Title Insurance and Services segment was $1.2 billion, a 4 percent decline from the same quarter of 2013. Direct premiums and escrow fees were down 3 percent from the third quarter of 2013, driven by a 20 percent decline in the number of direct title orders closed in the quarter, largely offset by a 20 percent increase in the revenue per direct title order to $1,926. The increase in revenue per direct title order closed was primarily attributable to a shift in the title order mix to higher-premium purchase and commercial transactions. In addition, the average fee per order for purchase and commercial transactions increased by 8 percent and 10 percent, respectively, during the third quarter. Agent premiums were down by 10 percent in the current quarter, which is consistent with the 13 percent decline in direct premiums experienced in the previous quarter, reflecting the typical reporting lag of approximately one quarter.

Information and other revenue was $160.6 million this quarter, up 1 percent compared with the same quarter of last year. The increase was driven by the impact of the recent Interthinx acquisition, offset by lower demand for the company’s default information products as a result of the decline in loss mitigation and foreclosure activity during the quarter.

Investment income was $22.0 million in the third quarter, down 1 percent from the third quarter of 2013. The decline was primarily related to lower earnings from investments accounted for using the equity method, partly offset by higher interest income from the investment portfolio. Net realized investment gains totaled $12.8 million in the current quarter, compared with losses of $5.5 million in the third quarter of 2013.

Personnel costs were $345.8 million in the third quarter, a decline of $5.2 million, or 1 percent, compared with the same quarter of 2013. Excluding the $10.8 million impact of recent acquisitions, personnel costs declined by $16.0 million, or 5 percent. This decline was primarily attributable to lower salary, overtime, incentive compensation and severance costs in the current quarter.

Other operating expenses were $202.4 million in the third quarter, down $2.4 million, or 1 percent, compared with the third quarter of 2013. Excluding the $8.5 million impact of recent acquisitions, other operating costs declined by $10.9 million, or 5 percent. This decrease was primarily due to lower production-related expenses and temporary labor costs driven by the decline in order volumes in the current quarter.

The provision for policy losses and other claims was $65.1 million in the third quarter, or 6.7 percent of title premiums and escrow fees, an increase of $4.6 million compared with the same quarter of the prior year. The current quarter rate reflects an ultimate loss rate of 6.0 percent for the current policy year and a $6.8 million net increase in the loss reserve estimates for prior policy years.

Pretax income for the Title Insurance and Services segment was $121.0 million in the third quarter, compared with $125.0 million in the third quarter of 2013. Pretax margin was 10.4 percent in the current quarter, compared with 10.3 percent last year.

               

Specialty Insurance

($ in millions)

 
For the Three Months Ended

Sept 30

2014                 2013
Total revenue $ 94.9                 $ 86.1
 
Income before taxes $ 10.4 $ 4.0
Pretax margin 11.0 % 4.7 %
 

Total revenue for the Specialty Insurance segment was $94.9 million in the third quarter of 2014, an increase of 10 percent compared with the third quarter of 2013. The increase in revenue was primarily driven by higher premiums earned in both the home warranty and property and casualty business lines. In addition, net realized investment gains in the current quarter were $1.6 million, compared with losses of $1.5 million in same quarter last year. The overall loss ratio in the Specialty Insurance segment was 60 percent in the current quarter, compared with a 64 percent loss ratio in the prior year. The improvement in the loss ratio was driven by a significant decline in weather-related claims in the home warranty business. As a result, the pretax margin in the current quarter increased to 11.0 percent from 4.7 percent in the third quarter of 2013.

Teleconference/Webcast

First American’s third quarter 2014 results will be discussed in more detail on Thursday, Oct. 23, 2014, 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 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. 11, 2014, by dialing 201-612-7415 and using the conference ID 13592885. 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 expense management; the outlook for the residential purchase market, the commercial market, and the refinance market; seasonal impacts on earnings; the effects of Federal Housing Finance Agency and other regulatory actions on the availability of credit and the recovery of the housing market; and improvement in the company’s tax rate, 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; product migration; 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; 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; 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; challenges and adverse effects arising from acquisitions and other factors described in the company’s quarterly report on Form 10-Q for the quarter ended June 30, 2014, 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, adjusted personnel costs and adjusted other operating costs. 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)
                           
For the Three Months Ended For the Nine Months Ended
September 30 September 30
2014       2013 2014       2013
 
 
Total revenues $ 1,259,730 $ 1,300,978 $ 3,422,498 $ 3,736,205
 
Income before income taxes $ 115,952 $ 107,045 $ 227,663 $ 225,861
Income tax expense   35,015   42,950   74,186   90,586
Net income 80,937 64,095 153,477 135,275

Less: Net income attributable to noncontrolling interests

  232   205   454   535
Net income attributable to the Company $ 80,705 $ 63,890 $ 153,023 $ 134,740
 
Net income per share attributable to stockholders:
Basic $ 0.75 $ 0.60 $ 1.43 $ 1.25
Diluted $ 0.74 $ 0.59 $ 1.41 $ 1.23
 
Cash dividends declared per share $ 0.24 $ 0.12 $ 0.60 $ 0.36
 
Weighted average common shares outstanding:
Basic 107,136 106,437 106,727 107,400
Diluted 108,863 108,437 108,546 109,490
 

Selected Title Information

 
Title orders opened 297,500 316,000 886,900 1,114,100
 
Title orders closed 217,400 273,400 611,700 886,100
 
Paid title claims $ 57,160 $ 68,525 $ 204,556 $ 209,010
 
 
               
First American Financial Corporation
Selected Balance Sheet Information
(in thousands)
(unaudited)
     

September 30,

2014

               

December 31,

2013

 
Cash and cash equivalents $ 1,203,873 $ 834,837
Investment portfolio 3,692,779 3,385,328
Goodwill and other intangible assets 1,016,889 892,373
Total assets 7,388,215 6,559,183
Reserve for claim losses 1,011,344 1,018,365
Notes payable 450,928 310,285
Total stockholders' equity $ 2,578,085 $ 2,453,049
 
 
 
First American Financial Corporation
Segment Information
(in thousands, unaudited)
                       
For the Three Months Ended Title Specialty Corporate

September 30, 2014

Consolidated Insurance Insurance (incl. Elims.)
Revenues
Direct premiums and escrow fees $ 564,396 $ 473,443 $ 90,953 $ -
Agent premiums 496,887 496,887 - -
Information and other 161,227 160,636 596 (5 )
Investment income 22,828 22,048 1,734 (954 )
Net realized investment gains(1)   14,392     12,821     1,571     -  
  1,259,730     1,165,835     94,854     (959 )
Expenses
Personnel costs 365,304 345,751 16,419 3,134
Premiums retained by agents 395,324 395,324 - -
Other operating expenses 219,536 202,362 10,778 6,396
Provision for policy losses and other claims 119,390 65,073 54,317 -
Depreciation and amortization 24,127 21,879 1,210 1,038
Premium taxes 15,427 13,730 1,697 -
Interest   4,670     716     -     3,954  
  1,143,778     1,044,835     84,421     14,522  
       
Income (loss) before income taxes $ 115,952   $ 121,000   $ 10,433   $ (15,481 )
 
 
 
For the Three Months Ended Title Specialty Corporate

September 30, 2013

Consolidated Insurance Insurance (incl. Elims.)
Revenues
Direct premiums and escrow fees $ 573,116 $ 487,800 $ 85,316 $ -
Agent premiums 549,052 549,052 - -
Information and other 159,775 159,344 437 (6 )
Investment income 26,001 22,234 1,829 1,938
Net realized investment losses(1)   (6,966 )   (5,510 )   (1,456 )   -  
  1,300,978     1,212,920     86,126     1,932  
Expenses
Personnel costs 377,872 350,921 14,547 12,404
Premiums retained by agents 440,453 440,453 - -
Other operating expenses 222,297 204,731 10,228 7,338
Provision for policy losses and other claims 114,952 60,480 54,472 -
Depreciation and amortization 18,554 16,495 1,239 820
Premium taxes 15,771 14,157 1,614 -
Interest   4,034     711     -     3,323  
  1,193,933     1,087,948     82,100     23,885  
       
Income (loss) before income taxes $ 107,045   $ 124,972   $ 4,026   $ (21,953 )
 

(1)

   

Includes impairment losses recorded in earnings, except for impairments on investments accounted for under the equity method, which are recorded in investment income.

 

 
 
First American Financial Corporation
Segment Information
(in thousands, unaudited)
                       
For the Nine Months Ended Title Specialty Corporate

September 30, 2014

Consolidated Insurance Insurance (incl. Elims.)
Revenues
Direct premiums and escrow fees $ 1,529,391 $ 1,266,171 $ 263,220 $ -
Agent premiums 1,341,020 1,341,020 - -
Information and other 464,572 463,036 1,553 (17 )
Investment income 64,254 57,082 5,305 1,867

Net realized investment gains(1)

  23,261   19,249   3,101   911  
  3,422,498   3,146,558   273,179   2,761  
Expenses
Personnel costs 1,045,955 973,249 47,420 25,286
Premiums retained by agents 1,070,260 1,070,260 - -
Other operating expenses 622,024 569,494 32,606 19,924
Provision for policy losses and other claims 337,739 188,378 149,361 -
Depreciation and amortization 63,879 57,416 3,787 2,676
Premium taxes 41,971 37,332 4,639 -
Interest   13,007   1,955   -   11,052  
  3,194,835   2,898,084   237,813   58,938  
       
Income (loss) before income taxes $ 227,663 $ 248,474 $ 35,366 $ (56,177 )
 
 
 
For the Nine Months Ended Title Specialty Corporate

September 30, 2013

Consolidated Insurance Insurance (incl. Elims.)
Revenues
Direct premiums and escrow fees $ 1,644,172 $ 1,399,702 $ 244,470 $ -
Agent premiums 1,530,247 1,530,247 - -
Information and other 483,430 482,197 1,251 (18 )
Investment income 71,544 62,818 5,295 3,431

Net realized investment gains(1)

  6,812   5,582   644   586  
  3,736,205   3,480,546   251,660   3,999  
Expenses
Personnel costs 1,087,139 1,007,810 43,783 35,546
Premiums retained by agents 1,224,020 1,224,020 - -
Other operating expenses 660,408 609,575 30,306 20,527
Provision for policy losses and other claims 429,744 287,374 142,370 -
Depreciation and amortization 55,141 49,238 3,627 2,276
Premium taxes 42,683 38,329 4,354 -
Interest   11,209   1,920   -   9,289  
  3,510,344   3,218,266   224,440   67,638  
       
Income (loss) before income taxes $ 225,861 $ 262,280 $ 27,220 $ (63,639 )
 

(1)

   

Includes impairment losses recorded in earnings, except for impairments on investments accounted for under the equity method, which are recorded in investment income.

 

 
                       
First American Financial Corporation
Expense Ratio Reconciliation
Title Insurance and Services Segment
($ in thousands, unaudited)
 
For the Three Months Ended For the Nine Months Ended
September 30 September 30
2014 2013 2014 2013
 
Total revenues $ 1,165,835 $ 1,212,920 $ 3,146,558 $ 3,480,546

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

12,821 (5,510 ) 19,249 5,582
Investment income 22,048 22,234 57,082 62,818
Premiums retained by agents   395,324     440,453     1,070,260     1,224,020  
Net operating revenues $ 735,642   $ 755,743   $ 1,999,967   $ 2,188,126  
 
 
Personnel and other operating expenses $ 548,113 $ 555,652 $ 1,542,743 $ 1,617,385
Ratio (% net operating revenues) 74.5 % 73.5 % 77.1 % 73.9 %
Ratio (% total revenues) 47.0 % 45.8 % 49.0 % 46.5 %
 

(1)

   

Includes impairment losses recorded in earnings, except for impairments on investments accounted for under the equity method, which are recorded in investment income.

 

 
 
First American Financial Corporation
Supplemental Direct Title Order Information
(unaudited)
                             
Q314 Q214 Q114 Q413 Q313
Open Orders per Day
Purchase 2,033 2,189 1,892 1,626 2,054
Refinance 1,521 1,554 1,397 1,462 1,628
Refinance as % of residential orders 43 % 42 % 42 % 47 % 44 %
 
Commercial 485 528 475 480 477
Other1   609     701     682     726     779  
Total open orders per day   4,648     4,972     4,446     4,294     4,938  
 
Closed Orders per Day
Purchase 1,573 1,579 1,217 1,383 1,657
Refinance 1,113 983 907 1,096 1,645
Refinance as % of residential orders 41 % 38 % 43 % 44 % 50 %
 
Commercial 308 306 290 331 316
Other1   404     479     538     640     653  
Total closed orders per day   3,397     3,347     2,952     3,449     4,272  
 
Average Revenue per Order (ARPO)2
Purchase $ 1,950 $ 1,918 $ 1,799 $ 1,829 $ 1,813
Refinance 857 812 813 819 807
Commercial 7,568 6,746 6,530 8,425 6,895
Other1 480 488 489 409 504
 
Total ARPO $ 1,926 $ 1,830 $ 1,723 $ 1,878 $ 1,602
 
Business Days 64 64 61 63 64
 

(1)

   

Includes default and other orders

(2)

U.S. operations only

 
Totals may not foot due to rounding
 

Source: First American Financial Corporation

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