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First American Financial Reports Second Quarter 2016 Results

Reports Earnings of 92 Cents per Diluted Share

SANTA ANA, Calif.--(BUSINESS WIRE)--Jul. 21, 2016-- 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, 2016.

Current Quarter Highlights

  • Total revenue of $1.4 billion, up 3 percent compared with last year
    • Direct title orders closed were down 1 percent
    • Average revenue per direct title order was up 3 percent
  • Title Insurance and Services segment pretax margin of 13.7 percent
    • Highest pretax margin in the company’s history
  • Title Insurance and Services segment loss provision rate of 5.5 percent
  • Commercial revenue of $166.5 million, down 2 percent compared with last year
  • Specialty Insurance segment total revenue up 7 percent, with a pretax margin of 4.5 percent
  • Announced termination of legacy pension plan
   
Selected Financial Information

($ in millions, except per share data)

 

For the Three Months Ended
June 30

2016   2015
Total revenue $ 1,361.5   $ 1,323.8
Income before taxes 153.6 141.6
 
Net income $ 102.1 $ 93.3
Net income per diluted share 0.92 0.85
 

Total revenue for the second quarter of 2016 was $1.4 billion, an increase of 3 percent relative to the second quarter of 2015. Net income in the current quarter was $102.1 million, or 92 cents per diluted share, compared with net income of $93.3 million, or 85 cents per diluted share, in the second quarter of 2015. The current quarter results include net realized investment gains of $8.1 million, or 5 cents per diluted share, compared with gains of $3.9 million, or 2 cents per diluted share, in the second quarter of last year.

“The strong momentum in our business continued into the second quarter, with our title segment achieving a pretax margin of 13.7 percent, the highest in the company’s history,” said Dennis J. Gilmore, chief executive officer at First American Financial Corporation. “We benefited from our continued focus on operating efficiency and from a solid spring selling season that lifted purchase market revenues by 5 percent compared with last year. Our commercial business also had a good quarter, as we experienced healthy transaction activity across our major markets. Lower interest rates drove residential refinance open orders up 20 percent. This trend accelerated into July, contributing to a strong pipeline for the second half of 2016.”

   
Title Insurance and Services

($ in millions, except average revenue per order)

 

For the Three Months Ended
June 30

2016   2015
Total revenue $ 1,255.9   $ 1,227.1
 
Income before taxes $ 172.4 $ 154.7
Pretax margin 13.7 % 12.6 %
 
Direct open orders 347,800 335,200
Direct closed orders 244,200 246,500
 
U.S. Commercial
Total revenue $ 166.5 $ 170.1
Open orders 32,100 34,800

Closed orders

19,900

20,800

Average revenue per order

$

8,400

$

8,200

 

Total revenue for the Title Insurance and Services segment was $1.3 billion, a 2 percent increase from the same quarter of 2015. Direct premiums and escrow fees were up 1 percent from the second quarter of 2015, driven by a 3 percent increase in the average revenue per direct title order, partially offset by a 1 percent decline in the number of direct title orders closed in the quarter. The average revenue per direct title order closed increased to $1,972, primarily attributable to higher residential real estate values. Agent premiums were up 3 percent in the current quarter compared with last year, reflecting the typical reporting lag of approximately 1 quarter.

Information and other revenue was $182.0 million this quarter, an increase of 1 percent compared with the same quarter of last year. The increase was driven by acquisitions, largely offset by lower demand for the company’s default information products and lower revenue in our international mortgage processing operations.

Investment income was $27.5 million in the second quarter, up $1.5 million, or 6 percent, from the second quarter of 2015. The increase was primarily due to higher interest income driven by growth in the size of the investment portfolio, offset by lower income from investments accounted for using the equity method. Net realized investment gains totaled $7.8 million in the current quarter, compared with gains of $4.2 million in the second quarter of 2015.

Personnel costs were $389.8 million in the second quarter, an increase of $8.8 million, or 2 percent, compared with the same quarter of 2015. Excluding the $6.1 million impact related to acquisitions, the increase was primarily attributable to higher salary and stock-based compensation expense, offset by lower incentive compensation.

Other operating expenses were $195.5 million in the second quarter, up $1.2 million, or 1 percent, compared with the second quarter of 2015.

The provision for policy losses and other claims was $57.1 million in the second quarter, or 5.5 percent of title premiums and escrow fees, compared with a 6.6 percent loss provision rate in the second quarter of 2015.

Pretax income for the Title Insurance and Services segment was $172.4 million in the second quarter, compared with $154.7 million in the second quarter of 2015. Pretax margin was 13.7 percent in the current quarter, compared with 12.6 percent last year. The increase in the pretax margin was primarily driven by the improvement in the loss provision rate and higher net realized investment gains.

   
Specialty Insurance

($ in millions)

 

For the Three Months Ended
June 30

2016   2015
Total revenue $ 104.4   $ 97.7
 
Income before taxes $ 4.7 $ 10.6
Pretax margin 4.5 % 10.8 %
 

Total revenue for the Specialty Insurance segment was $104.4 million in the second quarter of 2016, an increase of 7 percent compared with the second quarter of 2015. The increase in revenue was primarily driven by higher premiums earned in the home warranty business line. The loss ratio in the Specialty Insurance segment was 65 percent in the current quarter, compared with 60 percent in the prior year, primarily as a result of higher contract servicing costs in the home warranty business. As a result, the pretax margin in the current quarter declined to 4.5 percent from 10.8 percent in the second quarter of 2015.

Teleconference/Webcast

First American’s second quarter 2016 results will be discussed in more detail on Thursday, July 21, 2016, 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 4, 2016, by dialing 201-612-7415 and using the conference ID 13640685. 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 $5.2 billion in 2015, the company offers its products and services directly and through its agents throughout the United States and abroad. In 2016, First American was recognized by Fortune® magazine as one of the 100 best companies to work for in America. 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; 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; the effects of the TILA-RESPA integrated disclosure rule; 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 or unauthorized data disclosures; errors and fraud involving the transfer of funds; inability to realize the benefits of the company’s offshore operations; 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, 2016, 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
2016   2015 2016   2015
 
Total revenues $ 1,361,533 $ 1,323,789 $ 2,563,245 $ 2,434,873
 
Income before income taxes $ 153,607 $ 141,622 $ 229,199 $ 200,570
Income tax expense   51,156   48,043   74,076   69,195
Net income 102,451 93,579 155,123 131,375

Less: Net income attributable to noncontrolling interests

  302   232   473   396
Net income attributable to the Company $ 102,149 $ 93,347 $ 154,650 $ 130,979
 
Net income per share attributable to stockholders:
Basic $ 0.92 $ 0.86 $ 1.40 $ 1.21
Diluted $ 0.92 $ 0.85 $ 1.40 $ 1.19
 
Cash dividends declared per share $ 0.26 $ 0.25 $ 0.52 $ 0.50
 
Weighted average common shares outstanding:
Basic 110,480 108,459 110,327 108,102
Diluted 110,978 109,796 110,842 109,586
 

Selected Title Information

 
Title orders opened (1) 347,800 335,200 650,700 672,200
 
Title orders closed (1) 244,200 246,500 437,300 454,100
 
Paid title claims $ 54,251 $ 66,234 $ 110,941 $ 155,402
 
(1) U.S. direct title insurance orders only
 
 
First American Financial Corporation
Selected Balance Sheet Information
(in thousands)
(unaudited)
     

June 30,
2016

December 31,
2015

 
Cash and cash equivalents $ 1,241,814 $ 1,027,321
Investment portfolio 5,086,865 4,785,033
Goodwill and other intangible assets,net 1,033,766 1,012,456
Total assets 8,836,713 8,250,301
Reserve for claim losses 994,764 983,880
Notes and contracts payable 579,474 581,052
Total stockholders' equity $ 2,941,062 $ 2,758,502
 
 
First American Financial Corporation
Segment Information
(in thousands, unaudited)
         
For the Three Months Ended Title Specialty Corporate

June 30, 2016

Consolidated

Insurance

Insurance

(incl. Elims.)

Revenues
Direct premiums and escrow fees $ 623,975 $ 522,871 $ 101,104 $ -
Agent premiums 515,792 515,792 - -
Information and other 182,771 181,958 819 (6 )
Net investment income 30,925 27,478 2,254 1,193
Net realized investment gains (1)   8,070   7,823   247   -  
  1,361,533   1,255,922   104,424   1,187  
Expenses
Personnel costs 417,725 389,799 17,023 10,903
Premiums retained by agents 403,669 403,669 - -
Other operating expenses 216,361 195,495 14,209 6,657
Provision for policy losses and other claims 122,360 57,126 65,234 -
Depreciation and amortization 23,994 22,439 1,459 96
Premium taxes 16,027 14,246 1,781 -
Interest   7,790   711   -   7,079  
  1,207,926   1,083,485   99,706   24,735  
       
Income (loss) before income taxes $ 153,607 $ 172,437 $ 4,718 $ (23,548 )
 
 
For the Three Months Ended Title Specialty Corporate

June 30, 2015

Consolidated

Insurance

Insurance

(incl. Elims.)

Revenues
Direct premiums and escrow fees (2) $ 609,606 $ 515,292 $ 94,314 $ -
Agent premiums (2) 501,613 501,613 - -
Information and other (2) 180,838 179,989 856 (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 (2) 407,452 381,038 16,817 9,597
Premiums retained by agents (2) 395,278 395,278 - -
Other operating expenses (2) 211,824 194,285 11,116 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 )
 
(1)   Includes impairment losses recorded in earnings, except for impairments on investments accounted for under the equity method, which are recorded in investment income.
 
(2) Prior year amounts have been revised to reflect reclassifications made to certain revenues and expenses during the fourth quarter of 2015.
 
 
First American Financial Corporation
Segment Information
(in thousands, unaudited)
         
For the Six Months Ended Title Specialty Corporate

June 30, 2016

Consolidated

Insurance

Insurance

(incl. Elims.)

Revenues
Direct premiums and escrow fees $ 1,125,889 $ 926,911 $ 198,978 $ -
Agent premiums 1,028,037 1,028,037 - -
Information and other 337,848 336,220 1,640 (12 )
Net investment income 58,295 52,404 4,490 1,401
Net realized investment gains (1)   13,176   10,819   2,357   -  
  2,563,245   2,354,391   207,465   1,389  
Expenses
Personnel costs 800,437 744,879 33,802 21,756
Premiums retained by agents 808,708 808,708 - -
Other operating expenses 403,036 360,993 28,961 13,082
Provision for policy losses and other claims 229,458 107,642 121,816 -
Depreciation and amortization 46,414 43,515 2,707 192
Premium taxes 30,404 27,187 3,217 -
Interest   15,589   1,356   -   14,233  
  2,334,046   2,094,280   190,503   49,263  
       
Income (loss) before income taxes $ 229,199 $ 260,111 $ 16,962 $ (47,874 )
 
 
For the Six Months Ended Title Specialty Corporate

June 30, 2015

Consolidated

Insurance

Insurance

(incl. Elims.)

Revenues
Direct premiums and escrow fees (2) $ 1,111,018 $ 926,551 $ 184,467 $ -
Agent premiums (2) 934,533 934,533 - -
Information and other (2) 337,985 336,371 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 (2) 773,575 720,277 32,441 20,857
Premiums retained by agents (2) 738,014 738,014 - -
Other operating expenses (2) 411,982 374,883 24,208 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 )
 
(1)   Includes impairment losses recorded in earnings, except for impairments on investments accounted for under the equity method, which are recorded in investment income.
 
(2) Prior year amounts have been revised to reflect reclassifications made to certain revenues and expenses during the fourth quarter of 2015.
 
         
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
2016 2015 2016 2015
 
Total revenues $ 1,255,922 $ 1,227,058 $ 2,354,391 $ 2,246,830
Less: Net realized investment gains 7,823 4,168 10,819 1,605
Net investment income 27,478 25,996 52,404 47,770
Premiums retained by agents   403,669     395,278     808,708     738,014  
Net operating revenues $ 816,952   $ 801,616   $ 1,482,460   $ 1,459,441  
 
 
Personnel and other operating expenses $ 585,294 $ 575,323 $ 1,105,872 $ 1,095,160
Ratio (% net operating revenues) 71.6 % 71.8 % 74.6 % 75.0 %
Ratio (% total revenues) 46.6 % 46.9 % 47.0 % 48.7 %
 
 
Change in net operating revenues $ 15,336 $ 23,019
Change in personnel and other operating expenses 9,971 10,712
Success Ratio (1) 65 % 47 %
 
(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)

       
Q216 Q116 Q415 Q315 Q215
Open Orders per Day
Purchase 2,272 1,966 1,649 2,099 2,324
Refinance 2,128 1,971 1,616 1,629 1,758
Refinance as % of residential orders 48 % 50 % 49 % 44 % 43 %
 
Commercial 501 512 507 532 544
Default and other   533     435     653     596     612  
Total open orders per day   5,434     4,885     4,424     4,856     5,238  
 
Closed Orders per Day
Purchase 1,667 1,248 1,443 1,687 1,681
Refinance 1,428 1,206 1,112 1,152 1,420
Refinance as % of residential orders 46 % 49 % 44 % 41 % 46 %
 
Commercial 310 305 341 321 325
Default and other   410     356     347     339     425  
Total closed orders per day   3,816     3,115     3,243     3,500     3,852  
 
Average Revenue per Order (ARPO) (2)
Purchase $ 2,138 $ 2,046 $ 2,053 $ 2,071 $ 2,028
Refinance 879 877 867 857 865
Commercial 8,379 7,567 9,591 8,357 8,179
Default and other 257 378 152 299 222
 
Total ARPO $ 1,972 $ 1,943 $ 2,236 $ 2,077 $ 1,918
 
Business Days 64 62 63 64 64
 
(1)   U.S. operations only.
(2) The amounts included in the calculation of ARPO for the first three quarters of 2015 have been revised to reflect reclassifications made to certain revenues during the fourth quarter of 2015.
 
Totals may not add 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