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First American Financial Reports Third Quarter 2018 Results

Oct 25, 2018

—Reports Earnings of $1.34 per Diluted Share—

SANTA ANA, Calif.--(BUSINESS WIRE)-- 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, 2018.

Current Quarter Highlights

  • Total revenue of $1.5 billion, up 1 percent compared with last year
  • Investment income of $67.9 million, up 53 percent compared with last year
  • Title Insurance and Services segment pretax margin of 14.6 percent
  • Purchase revenues up 1 percent compared with last year
    • Average revenue per order up 6 percent
    • Closed orders per day down 4 percent
  • Commercial revenues of $183.5 million, up 5 percent compared with last year
  • Specialty Insurance segment total revenues up 5 percent, with a pretax margin of 5.0 percent
  • Cash flow from operations of $230.8 million, up 4 percent compared with last year

Selected Financial Information
($ in millions, except per share data)

   
Three Months Ended
September 30,
2018   2017
Total revenue $ 1,542.2 $ 1,519.6
Income before taxes 195.6 18.0
 
Net income $ 151.5 $ 21.4
Net income per diluted share 1.34 0.19
 
 

Total revenue for the third quarter of 2018 was $1.5 billion, an increase of 1 percent relative to the third quarter of 2017. Net income in the current quarter was $151.5 million, or $1.34 per diluted share, compared with net income of $21.4 million, or $0.19 per diluted share, in the third quarter of 2017. Net realized investment gains in the current quarter were $11.1 million, or 8 cents per diluted share, compared with net realized investment losses of $7.0 million, or 4 cents per diluted share, last year. The current quarter’s results include a $5.7 million expense, or 4 cents per diluted share, related to a legacy regulatory matter. In addition, the third quarter results in 2017 included an expense of $152.4 million, or 89 cents per diluted share, for the completion of the company’s pension plan termination.

“Our strong financial results continued this quarter, as we achieved a pretax margin of 14.6 percent in the title business,” said Dennis J. Gilmore, chief executive officer at First American Financial Corporation. “Our commercial business had another good quarter, with revenue growth of 5 percent. We continue to benefit from increasing investment income driven by rising short-term interest rates, however higher mortgage rates have recently contributed to a slowdown in purchase activity.

“Despite the softening purchase market, our keen focus on operating efficiency, along with rising investment income and an overall healthy economy will enable us to maintain strong financial performance. Longer term, we are also well positioned given our market leadership, unique assets, investment in innovation and strong balance sheet.”

Title Insurance and Services
($ in millions, except average revenue per order)

   
Three Months Ended
September 30,
2018   2017
Total revenues $ 1,413.8 $ 1,397.3
 
Income before taxes $ 206.5 $ 181.2
Pretax margin 14.6 % 13.0 %
 
Direct open orders 249,100 278,300
Direct closed orders 184,500 214,300
 
U.S. Commercial
Total revenues $ 183.5 $ 175.5
Open orders 32,100 31,200
Closed orders 18,600 19,400
Average revenue per order $ 9,900 $ 9,000
 
 

Total revenues for the Title Insurance and Services segment during the third quarter were $1.4 billion, up 1 percent compared with the same quarter of 2017. Direct premiums and escrow fees were down 1 percent compared with the third quarter of 2017, reflecting a 14 percent decline in the number of direct title orders closed that was largely offset by a 16 percent increase in the average revenue per direct title order. The growth in the average revenue per direct title order to $2,667 was primarily attributable to the increase in the average revenue per commercial order, higher residential real estate values 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 down 2 percent in the current quarter compared with last year, largely driven by lower volumes in California.

Information and other revenues were $196.0 million this quarter, down 2 percent compared with the same quarter of last year. Declining revenues from lower mortgage origination and foreclosure activity were largely offset by revenues from recent acquisitions.

Investment income was $60.9 million in the third quarter, up $23.0 million, or 61 percent. Higher average balances and the increase in short-term interest rates drove higher interest income in the company’s investment portfolio and cash balances. Net realized investment gains of $9.1 million in the current quarter were primarily driven by an increase in the fair values of equity securities, partly offset by losses from the sale of debt securities. These net realized investment gains compare with losses of $7.2 million in the third quarter of 2017.

Personnel costs were $425.6 million in the third quarter, an increase of $3.7 million, or 1 percent, compared with the same quarter of 2017. The increase was primarily driven by higher personnel costs associated with recent acquisitions and higher employee benefit costs, which were significantly offset by a decline in incentive compensation expense in the current quarter.

Other operating expenses were $200.9 million in the third quarter, up $4.5 million, or 2 percent, compared with the third quarter of 2017. The increase was primarily driven by a $5.7 million expense related to a legacy regulatory matter.

The provision for policy losses and other claims was $45.9 million in the third 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 $206.5 million in the third quarter, compared with $181.2 million in the third quarter of 2017. Pretax margin was 14.6 percent in the current quarter, compared with 13.0 percent last year.

Specialty Insurance
($ in millions)

   
Three Months Ended
September 30,
2018   2017
Total revenues $ 124.2 $ 118.5
 
Income before taxes $ 6.2 $ 6.2
Pretax margin 5.0 % 5.2 %
 
 

Total revenues for the Specialty Insurance segment were $124.2 million in the third quarter of 2018, an increase of 5 percent compared with the third quarter of 2017. The loss ratio in the home warranty business was higher this quarter due to increased claim severity, while lower claim frequency drove a decline in the loss ratio in the property and casualty business. Overall, the loss ratio for the segment was nearly flat at 65.4 percent. The segment’s pretax margin was 5.0 percent this quarter, compared with 5.2 percent in the third quarter of last year.

Teleconference/Webcast

First American’s third quarter 2018 results will be discussed in more detail on Thursday, Oct. 25, 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 Nov. 8, 2018, by dialing 201-612-7415 and using the conference ID 13683867. 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 June 30, 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 Nine Months Ended
September 30, September 30,
2018 2017 2018 2017
Total revenues $ 1,542,186 $ 1,519,568 $ 4,330,731 $ 4,291,040
 
Income before income taxes $ 195,587 $ 17,962 $ 490,620 $ 285,996
Income tax expense (benefit)   44,126   (3,224 )   107,896   84,846
Net income 151,461 21,186 382,724 201,150
Less: Net loss attributable to noncontrolling interests   (19 )   (197 )   (123 )   (772 )
Net income attributable to the Company $ 151,480 $ 21,383 $ 382,847 $ 201,922
 
Net income per share attributable to stockholders:
Basic $ 1.34 $ 0.19 $ 3.40 $ 1.81
Diluted $ 1.34 $ 0.19 $ 3.38 $ 1.80
 
Cash dividends declared per share $ 0.42 $ 0.38 $ 1.18 $ 1.06
 
Weighted average common shares outstanding:
Basic 112,722 111,799 112,541 111,578
Diluted 113,365 112,575 113,213 112,254
 
Selected Title Insurance Segment Information
Title orders opened(1) 249,100 278,300 779,400 837,500
Title orders closed(1) 184,500 214,300 554,300 619,500
Paid title claims 41,073 50,317 122,429 149,088
 
(1) U.S. direct title insurance orders only.
 
 
First American Financial Corporation
Selected Consolidated Balance Sheet Information
(in thousands, unaudited)
       
 
September 30, December 31,
2018 2017
Cash and cash equivalents $ 2,205,319 $ 1,387,226
Investments 6,138,808 5,378,303
Goodwill and other intangible assets, net 1,256,733 1,212,918
Total assets 11,380,127 9,573,222
Reserve for claim losses 1,026,959 1,028,933
Notes and contracts payable 735,258 732,810
Total stockholders’ equity $ 3,674,215 $ 3,479,955
 
 
First American Financial Corporation
Segment Information
(in thousands, unaudited)
           
Three Months Ended Title Specialty Corporate
September 30, 2018 Consolidated Insurance Insurance (incl. Elims.)
Revenues
Direct premiums and escrow fees $ 649,375 $ 532,769 $ 116,606 $ —
Agent premiums 615,113 615,113 — —
Information and other 198,680 195,963 2,981 (264 )
Net investment income 67,874 60,871 2,573 4,430
Net realized investment gains   11,144   9,125   2,019   —
  1,542,186   1,413,841   124,179   4,166
Expenses
Personnel costs 449,839 425,565 19,416 4,858
Premiums retained by agents 485,621 485,621 — —
Other operating expenses 227,670 200,932 18,705 8,033
Provision for policy losses and other claims 122,196 45,916 76,280 —
Depreciation and amortization 31,729 29,978 1,713 38
Premium taxes 18,774 16,910 1,864 —
Interest   10,770   2,380   —   8,390
  1,346,599   1,207,302   117,978   21,319
Income (loss) before income taxes $ 195,587 $ 206,539 $ 6,201 $ (17,153 )
 
Three Months Ended Title Specialty Corporate
September 30, 2017 Consolidated Insurance Insurance (incl. Elims.)
Revenues
Direct premiums and escrow fees $ 651,104 $ 538,063 $ 113,041 $ —
Agent premiums 629,186 629,186 — —
Information and other 201,819 199,271 2,814 (266 )
Net investment income 44,460 37,901 2,468 4,091
Net realized investment (losses) gains   (7,001 )   (7,159 )   158   —
  1,519,568   1,397,262   118,481   3,825
Expenses
Personnel costs 443,992 421,892 18,478 3,622
Premiums retained by agents 497,911 497,911 — —
Other operating expenses 374,347 196,412 16,537 161,398
Provision for policy losses and other claims 120,349 46,689 73,660 —
Depreciation and amortization 36,000 34,363 1,599 38
Premium taxes 19,900 17,871 2,029 —
Interest   9,107   925   —   8,182
  1,501,606   1,216,063   112,303   173,240
Income (loss) before income taxes $ 17,962 $ 181,199 $ 6,178 $ (169,415 )
 
 
First American Financial Corporation
Segment Information
(in thousands, unaudited)
               
Nine Months Ended Title Specialty Corporate
September 30, 2018 Consolidated Insurance Insurance (incl. Elims.)
Revenues
Direct premiums and escrow fees $ 1,854,835 $ 1,515,537 $ 339,298 $ —
Agent premiums 1,701,831 1,701,831 — —
Information and other 596,090 588,079 8,807 (796 )
Net investment income 167,000 154,009 7,561 5,430
Net realized investment gains   10,975   8,891   2,084   —
  4,330,731   3,968,347   357,750   4,634
Expenses
Personnel costs 1,312,455 1,246,240 57,234 8,981
Premiums retained by agents 1,341,808 1,341,808 — —
Other operating expenses 675,085 594,164 56,184 24,737
Provision for policy losses and other claims 336,395 128,700 207,695 —
Depreciation and amortization 92,534 87,438 4,981 115
Premium taxes 51,837 46,401 5,436 —
Interest   29,997   5,031   —   24,966
  3,840,111   3,449,782   331,530   58,799
Income (loss) before income taxes $ 490,620 $ 518,565 $ 26,220 $ (54,165 )
 
Nine Months Ended Title Specialty Corporate
September 30, 2017 Consolidated Insurance Insurance (incl. Elims.)
Revenues
Direct premiums and escrow fees $ 1,819,193 $ 1,492,258 $ 326,935 $ —
Agent premiums 1,757,796 1,757,796 — —
Information and other 586,179 578,549 8,427 (797 )
Net investment income 117,109 99,181 7,118 10,810
Net realized investment gains   10,763   9,335   1,428   —
  4,291,040   3,937,119   343,908   10,013
Expenses
Personnel costs 1,287,570 1,222,180 53,632 11,758
Premiums retained by agents 1,387,608 1,387,608 — —
Other operating expenses 820,540 579,528 50,588 190,424
Provision for policy losses and other claims 333,695 130,037 203,658 —
Depreciation and amortization 96,292 91,471 4,697 124
Premium taxes 52,527 46,973 5,554 —
Interest   26,812   2,576   —   24,236
  4,005,044   3,460,373   318,129   226,542
Income (loss) before income taxes $ 285,996 $ 476,746 $ 25,779 $ (216,529 )
 
 
First American Financial Corporation
Consolidated Net Realized Investment Gains (Losses)
($ in thousands, except per share amounts, unaudited)
 
                   
Three Months Ended Nine Months Ended
September 30, September 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) $ 14,081 $ 0.10 N/A N/A $ 15,890 $ 0.11 N/A N/A
Other net realized investment (losses) gains   (2,937 )   (0.02 )   (7,001 )   (0.04 )   (4,915 )   (0.03 )   10,763   0.06
Net realized investment gains (losses) $ 11,144 $ 0.08 $ (7,001 ) $ (0.04 ) $ 10,975 $ 0.08 $ 10,763 $ 0.06
 
 
(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 Nine Months Ended
September 30, September 30,
2018 2017 2018 2017
Total revenues $ 1,413,841 $ 1,397,262 $ 3,968,347 $ 3,937,119
Less: Net realized investment gains (losses) 9,125 (7,159 ) 8,891 9,335
Net investment income 60,871 37,901 154,009 99,181
Premiums retained by agents   485,621   497,911   1,341,808   1,387,608
Net operating revenues $ 858,224 $ 868,609 $ 2,463,639 $ 2,440,995
 
 
Personnel and other operating expenses $ 626,497 $ 618,304 $ 1,840,404 $ 1,801,708
Ratio (% net operating revenues) 73.0 % 71.2 % 74.7 % 73.8 %
Ratio (% total revenues) 44.3 % 44.3 % 46.4 % 45.8 %
 
 
Change in net operating revenues $ (10,385 ) $ 22,644
Change in personnel and other operating expenses 8,193 38,696
Success Ratio (1) -79 % 171 %
 
(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)
         
 
Q318 Q218 Q118 Q417 Q317
Open Orders per Day
Purchase 2,067 2,315 2,027 1,686 2,156
Refinance 937 998 1,173 1,239 1,379
Refinance as % of residential orders 31 % 30 % 37 % 42 % 39 %
Commercial 509 562 509 489 495
Default and other   441   450   380   321   387
Total open orders per day   3,954   4,325   4,089   3,734   4,417
 
Closed Orders per Day
Purchase 1,647 1,718 1,313 1,550 1,724
Refinance 674 729 850 1,035 985
Refinance as % of residential orders 29 % 30 % 39 % 40 % 36 %
Commercial 295 311 306 333 309
Default and other   313   308   330   376   384
Total closed orders per day   2,929   3,066   2,800   3,294   3,402
 
Average Revenue per Order (ARPO)
Purchase $ 2,473 $ 2,483 $ 2,356 $ 2,389 $ 2,336
Refinance 1,045 985 936 962 928
Commercial 9,886 9,277 8,059 9,508 9,024
Default and other 389 314 282 203 230
 
Total ARPO $ 2,667 $ 2,599 $ 2,303 $ 2,411 $ 2,298
 
Business Days 63 64 62 62 63
 
(1) U.S. operations only.
 
Totals may not add due to rounding.

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

Source: First American Financial Corporation

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