First American Financial Reports Results for the Fourth Quarter and Full Year of 2018

Reports Fourth Quarter Earnings of $0.81 per Share or $1.27 per
Share Excluding
Net Realized Investment Losses

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
fourth quarter and year ended Dec. 31, 2018.

Current Quarter Highlights

  • Total revenue of $1.4 billion, down 4 percent compared with last year

    • Closed title orders down 14 percent, driven by a 42 percent
      decline in refinance orders and a 9 percent decline in purchase
      orders
    • Average revenue per order up 17 percent, driven by the shift in
      the mix to higher-premium purchase and commercial transactions
  • Investment income of $63.3 million, up 40 percent compared with last
    year
  • Net realized investment losses of $67.5 million, primarily due to
    change in the fair value of equity securities
  • Title Insurance and Services segment pretax margin of 10.4 percent

    • 14.2 percent excluding net realized investment losses
  • Commercial revenues of $232.2 million, up 18 percent compared with
    last year
  • Specialty Insurance segment pretax margin of 0.7 percent

    • 8.5 percent excluding net realized investment losses
  • Repurchased $20.9 million in shares at an average price of $44.20 per
    share, including $2.1 million during the first quarter of 2019

Full Year 2018 Highlights

  • Total revenue of $5.7 billion, down 0.4 percent compared with last year
  • Record Title Insurance and Services segment pretax margin of 12.4
    percent

    • 13.2 percent excluding net realized investment losses
  • Record commercial revenues of $753.3 million, up 8 percent compared
    with last year
  • Investment income of $230.3 million, up 42 percent compared with last
    year
  • Net realized investment losses of $56.5 million, primarily due to
    change in the fair value of equity securities
  • Closed acquisitions totaling $82.9 million
  • Raised common stock dividend 11 percent to an annual rate of $1.68 per
    share
  • Cash flow from operations of $793.2 million, up 25 percent from last
    year
  • Return on equity of 13.1 percent

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

       
Three Months Ended Full Year Ended
December 31, December 31,
2018   2017 2018   2017
Total revenue $ 1,417.1 $ 1,481.3 $ 5,747.8 $ 5,772.4
Income before taxes 118.9 159.3 609.5 445.3
 
Net income $ 91.6 $ 221.1 $ 474.5 $ 423.0
Net income per diluted share 0.81 1.96 4.19 3.76
 
 

Total revenue for the fourth quarter of 2018 was $1.4 billion, a decline
of 4 percent relative to the fourth quarter of 2017. Net income in the
current quarter was $91.6 million, or $0.81 per diluted share, compared
with net income of $221.1 million, or $1.96 per diluted share, in the
fourth quarter of 2017. Net realized investment losses in the current
quarter were $67.5 million, or $0.47 per diluted share, primarily due to
the change in the fair value of equity securities.

Total revenue for the full year of 2018 was $5.7 billion, a decline of
0.4 percent relative to the prior year. Net income was $474.5 million,
or $4.19 per diluted share, compared with net income of $423.0 million,
or $3.76 per diluted share, in 2017.

“The company had a strong finish to a record year in 2018, achieving
annual earnings per share of $4.19 and a return on equity of 13.1
percent,” said Dennis J. Gilmore, chief executive officer at First
American Financial Corporation. “For the year, total revenue was
relatively flat, with growth in our commercial business and rising
investment income largely offsetting the decline in refinance
transactions. We continued to manage the company at a high level of
efficiency, enabling our title segment to deliver a record pretax margin
of 12.4 percent, or 13.2 percent excluding net realized losses.

“Looking forward to 2019, we expect strong performance in our commercial
business and growth in investment income, however, we anticipate
continued pressure in our residential business. We have adjusted our
cost structure accordingly and, as a result, we expect to meet our
long-term financial objectives for the year.

“As part of our growth strategy, during the year we will continue to
focus on developing innovative solutions that improve the customer
experience and increase our efficiency. These include the expansion of
our digital closing services, further automation of our title production
process, and utilization of artificial intelligence to expand and
leverage our extensive data assets.”

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

   
Three Months Ended
December 31,
2018   2017
Total revenues $ 1,314.4 $ 1,356.0
 
Income before taxes $ 136.4 $ 165.6
Pretax margin 10.4 % 12.2 %
 
Direct open orders 202,400 231,500
Direct closed orders 176,500 204,200
 
U.S. Commercial
Total revenues $ 232.2 $ 196.2
Open orders 29,700 30,300
Closed orders 20,800 20,600
Average revenue per order $ 11,200 $ 9,500
 
 

Total revenues for the Title Insurance and Services segment during the
fourth quarter were $1.3 billion, down 3 percent compared with the same
quarter of 2017. Direct premiums and escrow fees were up 1 percent
compared with the fourth quarter of 2017, driven by a 17 percent
increase in the average revenue per direct title order that was largely
offset by a 14 percent decline in the number of direct title orders
closed. The growth in the average revenue per direct title order to
$2,824 was primarily attributable to the shift in the order mix to
higher-premium residential purchase and commercial transactions and the
increase in the number of large commercial transactions in the current
quarter. Agent premiums, which are recorded on approximately a
one-quarter lag relative to direct premiums, were down 3 percent in the
current quarter as compared with last year.

Information and other revenues were $182.6 million this quarter, down 3
percent compared with the same quarter of last year. Higher revenues
from recent acquisitions were offset by lower revenues from the
company’s centralized lender business.

Investment income was $69.3 million in the fourth quarter, up $31.0
million, or 81 percent, benefiting from both an increase in average
balances due primarily to strength in our commercial business and rising
short-term interest rates that drove higher interest income in the
company’s investment portfolio and cash balances. Net realized
investment losses totaled $58.0 million in the current quarter, compared
with losses of $2.7 million in the fourth quarter of 2017.

Personnel costs were $425.6 million in the fourth quarter, an increase
of $11.4 million, or 3 percent, compared with the same quarter of 2017.
This increase was primarily driven by severance expense and the impact
of recent acquisitions.

Other operating expenses were $199.2 million in the fourth quarter, down
$9.3 million, or 4 percent, compared with the fourth quarter of 2017.
The decline was due to an increase in earnings credits, a reduction in
discretionary spending and lower production-related costs due to the
decline in order volume, that was partially offset by a write-off of
uncollectible balances and the impact of recent acquisitions.

The provision for policy losses and other claims was $44.8 million in
the fourth quarter, or 4.0 percent of title premiums and escrow fees,
compared with a 4.0 percent loss provision rate in the fourth quarter of
2017. 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.

Depreciation and amortization expense was $31.6 million in the fourth
quarter, an increase of $1.5 million, or 5 percent, compared with the
same period last year. The increase was primarily attributable to higher
amortization expense associated with recent acquisitions.

Pretax income for the Title Insurance and Services segment was $136.4
million in the fourth quarter, compared with $165.6 million in the
fourth quarter of 2017. Pretax margin was 10.4 percent in the current
quarter, compared with 12.2 percent last year. Excluding the impact of
net realized investment losses, the pretax margin was 14.2 percent this
year, compared with 12.4 percent last year.

Specialty Insurance
($ in millions)

   
Three Months Ended
December 31,
2018   2017
Total revenues $ 111.6 $ 121.1
 
Income before taxes $ 0.8 $ 11.1
Pretax margin 0.7 % 9.2 %
 
 

Total revenues for the Specialty Insurance segment were $111.6 million
in the fourth quarter of 2018, a decrease of 8 percent compared with the
fourth quarter of 2017. The home warranty business benefited from policy
renewals bolstered by an improvement in its retention rate. The
company’s property and casualty business experienced high claim losses
due to California wildfires, with losses exceeding its $5 million
reinsurance retention limit for one event in the current quarter,
compared with two such events last year. As a result, the overall loss
ratio for the segment declined moderately to 61.9 percent this quarter,
compared with 63.5 percent in the prior year. The segment’s pretax
margin in the current quarter was 0.7 percent, compared with 9.2 percent
in the fourth quarter of last year. However, excluding net realized
losses, the current quarter’s pretax margin was 8.5 percent, compared
with 6.8 percent last year, excluding net realized gains.

Teleconference/Webcast

First American’s fourth-quarter and year-end 2018 results will be
discussed in more detail on Thursday, Feb. 14, 2019, at 11 a.m. EST, 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 Feb.
28, 2019, by dialing 201-612-7415 and using the conference ID 13686642.
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 $5.7 billion in 2018, 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 and other 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 September 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, success ratios, adjusted earnings per share,
and adjusted pretax margins for the company, its title insurance and
services segment and its specialty insurance segment. 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 Year Ended
December 31, December 31,
2018 2017 2018 2017
Total revenues $ 1,417,113 $ 1,481,323 $ 5,747,844 $ 5,772,363
 
Income before income taxes $ 118,918 $ 159,335 $ 609,538 $ 445,331
Income tax expense (benefit)   25,744   (61,378 )   133,640   23,468
Net income 93,174 220,713 475,898 421,863
Less: Net income (loss) attributable to noncontrolling interests   1,525   (414 )   1,402   (1,186 )
Net income attributable to the Company $ 91,649 $ 221,127 $ 474,496 $ 423,049
 
Net income per share attributable to stockholders:
Basic $ 0.81 $ 1.98 $ 4.21 $ 3.79
Diluted $ 0.81 $ 1.96 $ 4.19 $ 3.76
 
Cash dividends declared per share $ 0.42 $ 0.38 $ 1.60 $ 1.44
 
Weighted average common shares outstanding:
Basic 112,768 111,904 112,613 111,668
Diluted 113,387 112,846 113,279 112,435
 
Selected Title Insurance Segment Information
Title orders opened(1) 202,400 231,500 981,800 1,069,000
Title orders closed(1) 176,500 204,200 730,800 823,700
Paid title claims 43,342 51,262 165,771 200,350
(1)   U.S. direct title insurance orders only.
 
 
First American Financial Corporation
Selected Consolidated Balance Sheet Information
(in thousands, unaudited)
       
December 31, December 31,
2018 2017
Cash and cash equivalents $ 1,467,129 $ 1,387,226
Investments 6,225,520 5,378,303
Goodwill and other intangible assets, net 1,253,538 1,212,918
Total assets 10,630,635 9,573,222
Reserve for claim losses 1,042,679 1,028,933
Notes and contracts payable 732,019 732,810
Total stockholders’ equity $ 3,741,881 $ 3,479,955
 
 
First American Financial Corporation
Segment Information
(in thousands, unaudited)
         
Three Months Ended Title Specialty Corporate
December 31, 2018 Consolidated Insurance Insurance (incl. Elims.)
Revenues
Direct premiums and escrow fees $ 652,834 $ 537,414 $ 115,420 $
Agent premiums 583,075 583,075
Information and other 185,377 182,646 2,995 (264 )
Net investment income 63,289 69,307 2,629 (8,647 )
Net realized investment losses   (67,462 )   (58,011 )   (9,451 )  
  1,417,113   1,314,431   111,593   (8,911 )
Expenses
Personnel costs 436,494 425,605 18,122 (7,233 )
Premiums retained by agents 458,028 458,028
Other operating expenses 225,123 199,200 17,841 8,082
Provision for policy losses and other claims 116,238 44,820 71,418
Depreciation and amortization 33,393 31,615 1,740 38
Premium taxes 17,938 16,245 1,693
Interest   10,981   2,481     8,500
  1,298,195   1,177,994   110,814   9,387
Income (loss) before income taxes $ 118,918 $ 136,437 $ 779 $ (18,298 )
 
Three Months Ended Title Specialty Corporate
December 31, 2017 Consolidated Insurance Insurance (incl. Elims.)
Revenues
Direct premiums and escrow fees $ 642,661 $ 530,126 $ 112,535 $
Agent premiums 602,863 602,863
Information and other 190,035 187,469 2,832 (266 )
Net investment income 45,293 38,258 2,595 4,440
Net realized investment gains (losses)   471   (2,679 )   3,150  
  1,481,323   1,356,037   121,112   4,174
Expenses
Personnel costs 435,969 414,249 17,973 3,747
Premiums retained by agents 475,748 475,748
Other operating expenses 235,346 208,547 17,225 9,574
Provision for policy losses and other claims 116,715 45,285 71,430
Depreciation and amortization 31,761 30,068 1,655 38
Premium taxes 17,274 15,572 1,702
Interest   9,175   950     8,225
  1,321,988   1,190,419   109,985   21,584
Income (loss) before income taxes $ 159,335 $ 165,618 $ 11,127 $ (17,410 )
 
 
First American Financial Corporation
Segment Information
(in thousands, unaudited)
         
Year Ended Title Specialty Corporate
December 31, 2018 Consolidated Insurance Insurance (incl. Elims.)
Revenues
Direct premiums and escrow fees $ 2,507,669 $ 2,052,951 $ 454,718 $
Agent premiums 2,284,906 2,284,906
Information and other 781,467 770,725 11,802 (1,060 )
Net investment income 230,289 223,318 10,190 (3,219 )
Net realized investment losses   (56,487 )   (49,119 )   (7,368 )  
  5,747,844   5,282,781   469,342   (4,279 )
Expenses
Personnel costs 1,748,949 1,671,846 75,355 1,748
Premiums retained by agents 1,799,836 1,799,836
Other operating expenses 900,208 793,364 74,025 32,819
Provision for policy losses and other claims 452,633 173,520 279,113
Depreciation and amortization 125,927 119,053 6,721 153
Premium taxes 69,775 62,646 7,129
Interest   40,978   7,513     33,465
  5,138,306   4,627,778   442,343   68,185
Income (loss) before income taxes $ 609,538 $ 655,003 $ 26,999 $ (72,464 )
 
Year Ended Title Specialty Corporate
December 31, 2017 Consolidated Insurance Insurance (incl. Elims.)
Revenues
Direct premiums and escrow fees $ 2,461,854 $ 2,022,384 $ 439,470 $
Agent premiums 2,360,659 2,360,659
Information and other 776,214 766,018 11,259 (1,063 )
Net investment income 162,402 137,439 9,713 15,250
Net realized investment gains   11,234   6,656   4,578  
  5,772,363   5,293,156   465,020   14,187
Expenses
Personnel costs 1,723,539 1,636,429 71,604 15,506
Premiums retained by agents 1,863,356 1,863,356
Other operating expenses 1,055,886 788,074 67,813 199,999
Provision for policy losses and other claims 450,410 175,322 275,088
Depreciation and amortization 128,053 121,540 6,351 162
Premium taxes 69,801 62,545 7,256
Interest   35,987   3,526     32,461
  5,327,032   4,650,792   428,112   248,128
Income (loss) before income taxes $ 445,331 $ 642,364 $ 36,908 $ (233,941 )
 
 
First American Financial Corporation
Reconciliation of Pretax Margins and Earnings per Diluted Share
Excluding Net Realized Investment Gains and Losses (“NRIG(L)”)
(in thousands, except margin and per share amounts, unaudited)
           
Three Months Ended Year Ended
December 31, December 31,
2018 2017 2018 2017
Consolidated
Total revenues $ 1,417,113 $ 1,481,323 $ 5,747,844 $ 5,772,363
Less: NRIG(L)   (67,462 )   471   (56,487 )   11,234
Total revenues excluding NRIG(L) $ 1,484,575 $ 1,480,852 $ 5,804,331 $ 5,761,129
 
Pretax income $ 118,918 $ 159,335 $ 609,538 $ 445,331
Less: NRIG(L)   (67,462 )   471   (56,487 )   11,234
Pretax income excluding NRIG(L) $ 186,380 $ 158,864 $ 666,025 $ 434,097
 
Pretax margin 8.4 % 10.8 % 10.6 % 7.7 %
Less: Pretax margin impact of NRIG(L)   (4.2 )%   0.1 %   (0.9 )%   0.2 %
Pretax margin excluding NRIG(L)   12.6 %   10.7 %   11.5 %   7.5 %
 
Earnings per diluted share (EPS) $ 0.81 $ 1.96 $ 4.19 $ 3.76
Less: EPS impact of NRIG(L)   (0.47 )     (0.39 )   0.08
EPS excluding NRIG(L) $ 1.27 $ 1.96 $ 4.58 $ 3.68
 
Title Insurance and Services Segment
Total revenues $ 1,314,431 $ 1,356,037 $ 5,282,781 $ 5,293,156
Less: NRIG(L)   (58,011 )   (2,679 )   (49,119 )   6,656
Total revenues excluding NRIG(L) $ 1,372,442 $ 1,358,716 $ 5,331,900 $ 5,286,500
 
Pretax income $ 136,437 $ 165,618 $ 655,003 $ 642,364
Less: NRIG(L)   (58,011 )   (2,679 )   (49,119 )   6,656
Pretax income excluding NRIG(L) $ 194,448 $ 168,297 $ 704,122 $ 635,708
 
Pretax margin 10.4 % 12.2 % 12.4 % 12.1 %
Less: Pretax margin impact of NRIG(L)   (3.8 )%   (0.2 )%   (0.8 )%   0.1 %
Pretax margin excluding NRIG(L)   14.2 %   12.4 %   13.2 %   12.0 %
 
Specialty Insurance Segment
Total revenues $ 111,593 $ 121,112 $ 469,342 $ 465,020
Less: NRIG(L)   (9,451 )   3,150   (7,368 )   4,578
Total revenues excluding NRIG(L) $ 121,044 $ 117,962 $ 476,710 $ 460,442
 
Pretax income $ 779 $ 11,127 $ 26,999 $ 36,908
Less: NRIG(L)   (9,451 )   3,150   (7,368 )   4,578
Pretax income excluding NRIG(L) $ 10,230 $ 7,977 $ 34,367 $ 32,330
 
Pretax margin 0.7 % 9.2 % 5.8 % 7.9 %
Less: Pretax margin impact of NRIG(L)   (7.8 )%   2.4 %   (1.4 )%   0.9 %
Pretax margin excluding NRIG(L)   8.5 %   6.8 %   7.2 %   7.0 %
Note: 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. Totals may not sum due to rounding.
 
 
First American Financial Corporation
Expense and Success Ratio Reconciliation
Title Insurance and Services Segment
($ in thousands, unaudited)
           
Three Months Ended Year Ended
December 31, December 31,
2018 2017 2018 2017
Total revenues $ 1,314,431 $ 1,356,037 $ 5,282,781 $ 5,293,156
Less: Net realized investment (losses) gains (58,011 ) (2,679 ) (49,119 ) 6,656
Net investment income 69,307 38,258 223,318 137,439
Premiums retained by agents   458,028   475,748   1,799,836   1,863,356

Net operating revenues

$ 845,107 $ 844,710 $ 3,308,746 $ 3,285,705
 
 
Personnel and other operating expenses $ 624,805 $ 622,796 $ 2,465,210 $ 2,424,503
Ratio (% net operating revenues) 73.9 % 73.7 % 74.5 % 73.8 %
Ratio (% total revenues) 47.5 % 45.9 % 46.7 % 45.8 %
 
 
Change in net operating revenues $ 397 $ 23,041
Change in personnel and other operating expenses 2,009 40,707
Success Ratio(1) 506 % 177 %

Contacts

Media Contact:
Marcus Ginnaty
Corporate Communications
First
American Financial Corporation
714-250-3298

Investor Contact:
Craig Barberio
Investor Relations
First
American Financial Corporation
714-250-5214

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