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First American Financial Reports Second Quarter 2015 Results

Reports Earnings of 85 Cents per Diluted Share

SANTA ANA, Calif.--(BUSINESS WIRE)--Jul. 23, 2015-- 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, 2015.

Current Quarter Highlights

  • Total revenue of $1.3 billion, up 15 percent compared with last year
    • Direct title orders closed were up 15 percent
    • Average revenue per direct title order closed was up 7 percent
  • Title Insurance and Services segment pretax margin of 12.6 percent
  • Commercial revenue of $170.1 million, up 29 percent compared with last year
  • Specialty Insurance segment total revenue was up 7 percent, with a pretax margin of 10.8 percent
  • Cash flow from operations of $233.3 million compared with $149.5 million last year
   
Selected Financial Information

($ in millions, except per share data)

 

For the Three Months Ended
June 30

2015     2014
Total revenue $ 1,323.8     $ 1,150.0
Income before taxes 141.6 76.5
 
Net income $ 93.3 $ 50.6
Net income per diluted share 0.85 0.47
 

Total revenue for the second quarter of 2015 was $1.3 billion, an increase of 15 percent relative to the second quarter of 2014. Net income in the current quarter was $93.3 million, or 85 cents per diluted share, compared with net income of $50.6 million, or 47 cents per diluted share, in the second quarter of 2014. The current quarter results include net realized investment gains of $3.9 million, or 2 cents per diluted share, compared with gains of $6.3 million, or 4 cents per diluted share, in the second quarter of last year.

“Our strong second quarter results were driven by a healthy spring selling season, continued growth in our commercial business and elevated refinance activity,” said Dennis J. Gilmore, chief executive officer at First American Financial Corporation. “Our steady focus on operating efficiency enabled us to deliver strong margins and earnings in this favorable market environment.

“We expect that an improving economy will continue to bolster the housing market. Moving forward, we remain focused on creating shareholder value by growing our core title business, leveraging our unique collection of data assets and prudently managing our capital.”

   
Title Insurance and Services

($ in millions, except average revenue per order)

 

For the Three Months Ended
June 30

2015     2014
Total revenue $ 1,227.1     $ 1,055.4
 
Income before taxes $ 154.7 $ 84.8
Pretax margin 12.6 % 8.0 %
 
Direct open orders 335,200 318,200
Direct closed orders 246,500 214,200
 
U.S. Direct Commercial
Total revenue $ 170.1 $ 132.1
Open orders 34,800 33,800
Closed orders 20,800 19,600
Average revenue per order $ 8,200 $ 6,700
 

Total revenue for the Title Insurance and Services segment was $1.2 billion, a 16 percent increase from the same quarter of 2014. Direct premiums and escrow fees were up 20 percent from the second quarter of 2014, driven by a 15 percent increase in the number of direct title orders closed in the quarter and a 7 percent increase in the average revenue per direct title order to $1,953. The increase in revenue per direct title order closed was primarily attributable to an increase in the average size of commercial deals closed in the quarter and higher real estate values, partially offset by a shift in the mix toward lower-premium refinance transactions. Agent premiums were up 17 percent in the current quarter compared with last year.

Information and other revenue was $169.7 million this quarter, up 3 percent compared with the same quarter of last year. Excluding the impact of a recent acquisition, information and other revenue was essentially flat. The quarter benefitted from higher demand for certain non-insured products and services, reflecting growth in transaction activity, largely offset by lower demand for the company’s default information products.

Investment income was $26.0 million in the second quarter, up 34 percent from the second quarter of 2014. The increase was primarily due to higher interest income driven by growth in average invested balances in the debt securities portfolio and higher earnings in investments accounted for using the equity method. Net realized investment gains totaled $4.2 million in the current quarter, compared with gains of $4.3 million in the second quarter of 2014.

Personnel costs were $370.5 million in the second quarter, an increase of $43.2 million, or 13 percent, compared with the same quarter of 2014. This increase was primarily attributable to higher incentive compensation expense driven by higher revenue and profitability in the current quarter.

Other operating expenses were $205.3 million in the second quarter, up $8.3 million, or 4 percent, compared with the second quarter of 2014. This increase was primarily due to higher production-related expenses and temporary labor costs driven by the increase in order volumes in the current quarter.

The provision for policy losses and other claims was $66.7 million in the second quarter, or 6.5 percent of title premiums and escrow fees, a decline of $10.4 million compared with the same quarter of the prior year. The current quarter rate includes an ultimate loss rate of 6.0 percent for the current policy year.

Pretax income for the Title Insurance and Services segment was $154.7 million in the second quarter, compared with $84.8 million in the second quarter of 2014. Pretax margin was 12.6 percent in the current quarter, compared with 8.0 percent last year.

   
Specialty Insurance

($ in millions)

 

For the Three Months Ended
June 30

2015     2014
Total revenue $ 97.7     $ 91.2
 
Income before taxes $ 10.6 $ 11.0
Pretax margin 10.8 % 12.1 %
 

Total revenue for the Specialty Insurance segment was $97.7 million in the second quarter of 2015, an increase of 7 percent compared with the second quarter of 2014. The increase in revenue was driven by higher premiums earned in both the home warranty and the property and casualty business lines. The loss ratio in the Specialty Insurance segment was 59.5 percent in the current quarter, compared with 58.5 percent in the prior year. The increase in the loss ratio was primarily attributable to higher weather-related claims in the home warranty business. As a result, the pretax margin in the current quarter declined to 10.8 percent from 12.1 percent in the second quarter of 2014.

Teleconference/Webcast

First American’s second quarter 2015 results will be discussed in more detail on Thursday, July 23, 2015, 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 August 6, 2015, by dialing 201-612-7415 and using the conference ID 13614230. 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 $4.7 billion in 2014, 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 U.S. 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 an improving economy; the outlook for the housing market, including refinance transaction volumes and sustained growth in the purchase market; creating shareholder value, including through growth in the core title business, leveraging data assets and managing capital; expense management; the outlook for the commercial market; the company’s ability to capitalize on an improving housing market; the effects of the Consumer Financial Protection Bureau’s integrated disclosure rules; and the expected normalized 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; the Consumer Financial Protection Bureau’s exercise of its broad rulemaking and supervisory powers; compliance with the Consumer Financial Protection Bureau’s integrated disclosure rules; 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 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; any inadequacy in the company’s risk mitigation efforts; systems damage, failures, 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; inability to realize the benefits of, and challenges arising from, the company’s acquisition strategy; and other factors described in the company’s quarterly report on Form 10-Q for the quarter ended March 31, 2015, 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)
               
For the Three Months Ended For the Six Months Ended
June 30 June 30
2015     2014 2015     2014
 
 
Total revenues $ 1,323,789 $ 1,149,969 $ 2,434,873 $ 2,162,768
 
Income before income taxes $ 141,622 $ 76,458 $ 200,570 $ 111,711
Income tax expense   48,043   25,770   69,195   39,171
Net income 93,579 50,688 131,375 72,540

Less: Net income attributable to noncontrolling interests

  232   94   396   222
Net income attributable to the Company $ 93,347 $ 50,594 $ 130,979 $ 72,318
 
Net income per share attributable to stockholders:
Basic $ 0.86 $ 0.47 $ 1.21 $ 0.68
Diluted $ 0.85 $ 0.47 $ 1.19 $ 0.67
 
Cash dividends declared per share $ 0.25 $ - $ 0.50 $ 0.36
 
Weighted average common shares outstanding:
Basic 108,459 106,878 108,102 106,522
Diluted 109,796 108,647 109,586 108,423
 

Selected Title Information

 
Title orders opened 335,200 318,200 672,200 589,400
 
Title orders closed 246,500 214,200 454,100 394,300
 
Paid title claims $ 66,234 $ 69,466 $ 155,402 $ 147,396
 
 
First American Financial Corporation
Selected Balance Sheet Information
(in thousands)
(unaudited)
       

June 30,
2015

December 31,
2014

 
Cash and cash equivalents $ 1,269,660 $ 1,190,080
Investment portfolio 4,628,262 4,033,892
Goodwill and other intangible assets,net 1,024,048 1,015,757
Total assets 8,353,552 7,666,100
Reserve for claim losses 956,786 1,011,780
Notes and contracts payable 584,538 587,337
Total stockholders' equity $ 2,656,409 $ 2,572,917
 
 
First American Financial Corporation
Segment Information
(in thousands, unaudited)
               
For the Three Months Ended Title Specialty Corporate

June 30, 2015

Consolidated

Insurance

Insurance

(incl. Elims.)

Revenues
Direct premiums and escrow fees $ 628,425 $ 534,111 $ 94,314 $ -
Agent premiums 493,102 493,102 - -
Information and other 170,530 169,681 856 (7 )
Net investment income 27,864 25,996 2,215 (347 )
Net realized investment gains (losses) (1)   3,868   4,168   268   (568 )
  1,323,789   1,227,058   97,653   (922 )
Expenses
Personnel costs 396,616 370,459 16,560 9,597
Premiums retained by agents 394,828 394,828 - -
Other operating expenses 223,110 205,314 11,373 6,423
Provision for policy losses and other claims 122,870 66,735 56,135 -
Depreciation and amortization 21,463 20,164 1,177 122
Premium taxes 16,012 14,194 1,818 -
Interest   7,268   626   -   6,642  
  1,182,167   1,072,320   87,063   22,784  
       
Income (loss) before income taxes $ 141,622 $ 154,738 $ 10,590 $ (23,706 )
 
 
 
For the Three Months Ended Title Specialty Corporate

June 30, 2014

Consolidated

Insurance

Insurance

(incl. Elims.)

Revenues
Direct premiums and escrow fees $ 531,123 $ 443,365 $ 87,758 $ -
Agent premiums 423,209 423,209 - -
Information and other 165,703 165,222 487 (6 )
Net investment income 23,659 19,332 1,842 2,485
Net realized investment gains (1)   6,275   4,267   1,097   911  
  1,149,969   1,055,395   91,184   3,390  
Expenses
Personnel costs 354,133 327,218 15,487 11,428
Premiums retained by agents 338,271 338,271 - -
Other operating expenses 214,121 197,050 10,359 6,712
Provision for policy losses and other claims 128,466 77,089 51,377 -
Depreciation and amortization 19,780 17,623 1,338 819
Premium taxes 14,254 12,666 1,588 -
Interest   4,486   641   -   3,845  
  1,073,511   970,558   80,149   22,804  
       
Income (loss) before income taxes $ 76,458 $ 84,837 $ 11,035 $ (19,414 )
 
 

(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 Six Months Ended Title Specialty Corporate

June 30, 2015

Consolidated

Insurance

Insurance

(incl. Elims.)

Revenues
Direct premiums and escrow fees $ 1,146,929 $ 962,462 $ 184,467 $ -
Agent premiums 919,429 919,429 - -
Information and other 317,178 315,564 1,628 (14 )
Net investment income 48,422 47,770 4,216 (3,564 )
Net realized investment gains (losses) (1)   2,915   1,605   1,878   (568 )
  2,434,873   2,246,830   192,189   (4,146 )
Expenses
Personnel costs 754,616 701,830 31,929 20,857
Premiums retained by agents 737,288 737,288 - -
Other operating expenses 431,667 394,056 24,720 12,891
Provision for policy losses and other claims 224,424 122,286 102,138 -
Depreciation and amortization 42,317 39,690 2,382 245
Premium taxes 29,481 26,225 3,256 -
Interest   14,510   1,217   -   13,293  
  2,234,303   2,022,592   164,425   47,286  
       
Income (loss) before income taxes $ 200,570 $ 224,238 $ 27,764 $ (51,432 )
 
 
 
For the Six Months Ended Title Specialty Corporate

June 30, 2014

Consolidated

Insurance

Insurance

(incl. Elims.)

Revenues
Direct premiums and escrow fees $ 964,995 $ 792,728 $ 172,267 $ -
Agent premiums 844,133 844,133 - -
Information and other 303,345 302,400 957 (12 )
Net investment income 41,426 35,035 3,571 2,820
Net realized investment gains (1)   8,869   6,428   1,530   911  
  2,162,768   1,980,724   178,325   3,719  
Expenses
Personnel costs 680,651 627,498 31,001 22,152
Premiums retained by agents 674,936 674,936 - -
Other operating expenses 402,488 367,132 21,828 13,528
Provision for policy losses and other claims 218,349 123,305 95,044 -
Depreciation and amortization 39,752 35,537 2,577 1,638
Premium taxes 26,544 23,602 2,942 -
Interest   8,337   1,241   -   7,096  
  2,051,057   1,853,251   153,392   44,414  
       
Income (loss) before income taxes $ 111,711 $ 127,473 $ 24,933 $ (40,695 )
 
 

(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 and Success Ratio Reconciliation
Title Insurance and Services Segment
($ in thousands, unaudited)
               
 
For the Three Months Ended For the Six Months Ended
June 30 June 30
2015 2014 2015 2014
 
 
Total revenues $ 1,227,058 $ 1,055,395 $ 2,246,830 $ 1,980,724
Less: Net realized investment gains 4,168 4,267 1,605 6,428
Net investment income 25,996 19,332 47,770 35,035
Premiums retained by agents   394,828     338,271     737,288     674,936  
Net operating revenues $ 802,066   $ 693,525   $ 1,460,167   $ 1,264,325  
 
 
Personnel and other operating expenses $ 575,773 $ 524,268 $ 1,095,886 $ 994,630
Ratio (% net operating revenues) 71.8 % 75.6 % 75.1 % 78.7 %
Ratio (% total revenues) 46.9 % 49.7 % 48.8 % 50.2 %
 
 
Change in net operating revenues $ 108,541 $ 195,842
Change in personnel and other operating expenses 51,505 101,256
Success Ratio (1) 47 % 52 %
 
 

(1) Change in personnel and other operating expenses divided by change in net operating revenues

 

 
First American Financial Corporation
Supplemental Direct Title Order Information

(unaudited)

                   
Q215 Q115 Q414 Q314 Q214
Open Orders per Day
Purchase 2,324 2,002 1,611 2,033 2,189
Refinance 1,758 2,379 1,627 1,521 1,554
Refinance as % of residential orders 43 % 54 % 50 % 43 % 42 %
 
Commercial 544 532 505 485 528
Other (1)   612     612     522     609     701  
Total open orders per day   5,238     5,525     4,263     4,648     4,972  
 
Closed Orders per Day
Purchase 1,681 1,247 1,420 1,573 1,579
Refinance 1,420 1,471 1,122 1,113 983
Refinance as % of residential orders 46 % 54 % 44 % 41 % 38 %
 
Commercial 325 300 330 308 306
Other (1)   425     386     377     404     479  
Total closed orders per day   3,852     3,403     3,249     3,397     3,347  
 
Average Revenue per Order (ARPO) (2)
Purchase $ 2,036 $ 1,921 $ 1,944 $ 1,950 $ 1,918
Refinance 871 880 869 857 812
Commercial 8,182 8,117 9,558 7,568 6,746
Other (1) 477 580 437 480 488
 
Total ARPO $ 1,953 $ 1,865 $ 2,171 $ 1,926 $ 1,830
 
Business Days 64 61 63 64 64
 
 
(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:
Marcus Ginnaty, 714-250-3298
Corporate Communications
or
Investors:
Craig Barberio, 714-250-5214
Investor Relations