First american financial reports third quarter 2020 results
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, 2020. current quarter highlights total revenue of $1.9 billion, up 15 percent compared with last year closed title orders up 30 percent, driven by an 85 percent increase in refinance orders average revenue per order down 13 percent, driven by the shift to refinance transactions closed title orders up 30 percent, driven by an 85 percent increase in refinance orders average revenue per order down 13 percent, driven by the shift to refinance transactions net realized investment gains of $45.0 million, or 30 cents per diluted share, primarily due to the change in the fair value of equity securities title insurance and services segment record pretax margin of 19.0 percent 17.1 percent excluding net realized investment gains 17.1 percent excluding net realized investment gains commercial revenues of $142.6 million, down 29 percent compared with last year cash flow from operations of $313.1 million, compared with $310.6 million last year initiated a process for the sale of the property and casualty business recorded pretax impairment on assets held for sale of $73.3 million, or 49 cents per diluted share, within the specialty insurance segment recorded pretax impairment on assets held for sale of $73.3 million, or 49 cents per diluted share, within the specialty insurance segment selected financial information ($ in millions, except per share data) three months ended september 30, 2020 2019 total revenue $ 1,913.7 $ 1,671.2 income before taxes 243.4 245.3 net income $ 182.3 $ 187.2 net income per diluted share 1.62 1.65 total revenue for the third quarter of 2020 was $1.9 billion, an increase of 15 percent relative to the third quarter of 2019. net income in the current quarter was $182.3 million, or $1.62 per diluted share, compared with net income of $187.2 million, or $1.65 per diluted share, in the third quarter of 2019. net realized investment gains in the current quarter were $45.0 million, or 30 cents per diluted share, compared with net realized investment gains of $1.5 million, or 1 cent per diluted share, in the third quarter of last year. in addition, a pretax impairment of assets held for sale of $73.3 million, or 49 cents per diluted share, was recorded related to the property and casualty business within the specialty insurance segment. “our third-quarter financial results were strong, achieving a record pretax title margin of 19 percent,” said dennis j. gilmore, chief executive officer at first american financial corporation. “our purchase and refinance businesses are performing well, benefiting from strong order trends and our continued focus on cost efficiency. given low mortgage rates and robust demand for housing, we expect refinance and purchase activity to remain at elevated levels for the remainder of the year. the commercial market continued to improve during the quarter and we are optimistic, given a better pipeline, as we head into the seasonally strong fourth quarter. “during the quarter, we initiated a process for the sale of our property and casualty business. while the business, until recently, has performed well, we decided to maintain focus on our core business and redeploy the capital to areas with higher expected returns.” title insurance and services ($ in millions, except average revenue per order) three months ended september 30, 2020 2019 total revenues $ 1,772.0 $ 1,540.7 income before taxes $ 337.5 $ 253.6 pretax margin 19.0 % 16.5 % title open orders(1) 410,600 317,300 title closed orders(1) 291,500 224,100 u.s. commercial total revenues $ 142.6 $ 199.6 open orders 31,100 33,500 closed orders 15,900 18,500 average revenue per order $ 9,000 $ 10,800 (1) u.s. direct title insurance orders only. total revenues for the title insurance and services segment during the third quarter were $1.8 billion, up 15 percent compared with the same quarter of 2019. direct premiums and escrow fees were up 12 percent compared with the third quarter of 2019, driven by a 30 percent increase in the number of direct title orders closed that was partially offset by a 13 percent decline in the average revenue per direct title order closed. the average revenue per direct title order declined to $2,193, primarily due to the shift in the order mix from higher-premium commercial transactions to lower-premium residential refinance transactions. agent premiums, which are recorded on approximately a one-quarter lag relative to direct premiums, were up 10 percent in the current quarter as compared with last year. information and other revenues were $282.7 million this quarter, up 38 percent compared with the same quarter of last year. the increase was primarily due to the growth in mortgage originations that led to higher demand for the company’s title information products, the recent acquisition of docutech and revenues from services provided to support a temporary pandemic-related government program in canada. investment income was $44.7 million in the third quarter, down $27.3 million, or 38 percent, primarily due to the impact of the decline in short-term interest rates on the investment portfolio and cash balances. net realized investment gains totaled $41.3 million in the current quarter, primarily due to the change in the fair value of equity securities, compared with gains of $0.4 million in the third quarter of 2019. personnel costs were $481.4 million in the third quarter, an increase of $33.6 million, or 8 percent, compared with the same quarter of 2019. this increase was primarily attributable to higher incentive compensation and salary expense, and higher costs as a result of recent acquisitions, partly offset by lower employee benefit expense. other operating expenses were $251.3 million in the third quarter, up $32.6 million, or 15 percent, compared with the third quarter of 2019. the increase was primarily due to higher production-related costs as a result of the growth in order volume. the provision for policy losses and other claims was $70.2 million in the third quarter, or 5.0 percent of title premiums and escrow fees, an increase from a 4.0 percent loss provision rate in the prior year. the current quarter rate reflects an ultimate loss rate of 4.5 percent for the current policy year with a $7.0 million increase in the loss reserve estimates for prior policy years. in the third quarter, incurred title claims were $32.7 million, a 21 percent decline relative to 2019. depreciation and amortization expense was $36.2 million in the third quarter, up $6.4 million, or 21 percent, compared with the same period last year, primarily due to the amortization of intangibles related to recent acquisitions. pretax income for the title insurance and services segment was $337.5 million in the third quarter, compared with $253.6 million in the third quarter of 2019. pretax margin was 19.0 percent in the current quarter, compared with 16.5 percent last year. excluding the impact of net realized investment gains, the pretax margin was 17.1 percent this year, compared with 16.4 percent last year. specialty insurance ($ in millions) three months ended september 30, 2020 2019 total revenues $ 136.3 $ 129.2 income before taxes $ (72.1 ) $ 11.0 pretax margin (52.9 %) 8.5 % total revenues for the specialty insurance segment were $136.3 million in the third quarter of 2020, an increase of 6 percent compared with the third quarter of 2019. this quarter, the segment’s financial results were driven by a $73.3 million impairment on assets held for sale in the property and casualty business. the overall loss ratio for the segment was 69.0 percent, up from 60.9 percent last year due to higher claim losses in both the property and casualty and home warranty businesses. the home warranty business continued to experience higher claim frequency in the third quarter, significantly driven by claims in the appliance and plumbing trades likely due to the coronavirus pandemic. teleconference/webcast first american’s third quarter 2020 results will be discussed in more detail on thursday, october 22, 2020, 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 november 5, 2020, by dialing 201-612-7415 and using the conference id 13711297. 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 $6.2 billion in 2019, the company offers its products and services directly and through its agents throughout the united states and abroad. in 2020, first american was named to the fortune 100 best companies to work for® list for the fifth 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; the coronavirus pandemic and responses thereto; impairments in the company’s goodwill or other intangible assets; uncertainty from the expected discontinuance of libor and transition to any other interest rate benchmark; failures at financial institutions where the company deposits funds; regulatory oversight and changes in applicable laws and government regulations, including privacy and data protection laws; 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; climate change, health crises, severe weather conditions and other catastrophe events; 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, cyberattacks and intrusions, or unauthorized data disclosures; innovation efforts of the company and other industry participants and any related market disruption; 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, 2020, 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, net operating revenues; and adjusted revenues, adjusted pretax income, 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 nine months ended september 30, september 30, 2020 2019 2020 2019 total revenues $ 1,913,721 $ 1,671,196 $ 4,935,393 $ 4,473,397 income before income taxes $ 243,371 $ 245,338 $ 540,990 $ 616,505 income tax expense 59,780 57,171 121,859 131,263 net income 183,591 188,167 419,131 485,242 less: net income attributable to noncontrolling interests 1,312 985 2,993 1,830 net income attributable to the company $ 182,279 $ 187,182 $ 416,138 $ 483,412 net income per share attributable to stockholders: basic $ 1.62 $ 1.65 $ 3.69 $ 4.28 diluted $ 1.62 $ 1.65 $ 3.68 $ 4.26 cash dividends declared per share $ 0.44 $ 0.42 $ 1.32 $ 1.26 weighted average common shares outstanding: basic 112,584 113,163 112,913 112,983 diluted 112,843 113,741 113,176 113,509 selected title insurance segment information title orders opened(1) 410,600 317,300 1,116,300 841,300 title orders closed(1) 291,500 224,100 748,700 571,600 paid title claims $ 43,134 $ 38,451 $ 120,852 $ 119,738 (1) u.s. direct title insurance orders only. first american financial corporation selected consolidated balance sheet information (in thousands, unaudited) september 30, december 31, 2020 2019 cash and cash equivalents $ 1,512,369 $ 1,485,959 investments 6,699,607 6,589,443 goodwill and other intangible assets, net 1,551,980 1,242,741 total assets 12,638,810 11,519,167 reserve for claim losses 1,069,859 1,063,044 notes and contracts payable 1,011,758 728,232 total stockholders’ equity $ 4,723,770 $ 4,420,484 first american financial corporation segment information (in thousands, unaudited) three months ended title specialty corporate september 30, 2020 consolidated insurance insurance (incl. elims.) revenues direct premiums and escrow fees $ 807,947 $ 680,910 $ 127,037 $ — agent premiums 722,434 722,434 — — information and other 285,882 282,671 3,450 (239 ) net investment income 52,466 44,726 2,105 5,635 net realized investment gains 44,992 41,252 3,740 — 1,913,721 1,771,993 136,332 5,396 expenses personnel costs 511,298 481,417 22,271 7,610 premiums retained by agents 572,780 572,780 — — other operating expenses 281,079 251,304 20,899 8,876 provision for policy losses and other claims 157,836 70,167 87,669 — depreciation and amortization 38,227 36,194 1,995 38 impairments on assets held for sale 73,264 — 73,264 — premium taxes 19,885 17,522 2,363 — interest 15,981 5,129 — 10,852 1,670,350 1,434,513 208,461 27,376 income (loss) before income taxes $ 243,371 $ 337,480 $ (72,129 ) $ (21,980 ) three months ended title specialty corporate september 30, 2019 consolidated insurance insurance (incl. elims.) revenues direct premiums and escrow fees $ 728,610 $ 606,812 $ 121,798 $ — agent premiums 656,154 656,154 — — information and other 208,297 205,282 3,270 (255 ) net investment income 76,628 72,044 3,064 1,520 net realized investment gains 1,507 449 1,058 — 1,671,196 1,540,741 129,190 1,265 expenses personnel costs 470,683 447,795 20,742 2,146 premiums retained by agents 518,824 518,824 — — other operating expenses 248,252 218,687 19,230 10,335 provision for policy losses and other claims 124,683 50,519 74,164 — depreciation and amortization 31,719 29,822 1,859 38 impairments on assets held for sale — — — — premium taxes 19,484 17,310 2,174 — interest 12,213 4,214 — 7,999 1,425,858 1,287,171 118,169 20,518 income (loss) before income taxes $ 245,338 $ 253,570 $ 11,021 $ (19,253 ) first american financial corporation segment information (in thousands, unaudited) nine months ended title specialty corporate september 30, 2020 consolidated insurance insurance (incl. elims.) revenues direct premiums and escrow fees $ 2,080,568 $ 1,712,946 $ 367,622 $ — agent premiums 1,920,011 1,920,011 — — information and other 728,563 719,196 9,992 (625 ) net investment income 156,760 147,628 7,005 2,127 net realized investment gains 49,491 35,777 7,199 6,515 4,935,393 4,535,558 391,818 8,017 expenses personnel costs 1,392,445 1,320,097 64,398 7,950 premiums retained by agents 1,520,559 1,520,559 — — other operating expenses 788,407 700,090 61,731 26,586 provision for policy losses and other claims 414,001 181,648 232,353 — depreciation and amortization 110,652 104,705 5,832 115 impairments on assets held for sale 73,264 — 73,264 — premium taxes 53,554 47,360 6,194 — interest 41,521 12,838 — 28,683 4,394,403 3,887,297 443,772 63,334 income (loss) before income taxes $ 540,990 $ 648,261 $ (51,954 ) $ (55,317 ) nine months ended title specialty corporate september 30, 2019 consolidated insurance insurance (incl. elims.) revenues direct premiums and escrow fees $ 1,910,830 $ 1,561,926 $ 348,904 $ — agent premiums 1,701,538 1,701,538 — — information and other 581,858 573,150 9,490 (782 ) net investment income 236,607 213,067 8,496 15,044 net realized investment gains 42,564 35,114 7,450 — 4,473,397 4,084,795 374,340 14,262 expenses personnel costs 1,329,322 1,251,590 60,246 17,486 premiums retained by agents 1,344,517 1,344,517 — — other operating expenses 667,047 581,455 57,284 28,308 provision for policy losses and other claims 331,525 130,539 200,986 — depreciation and amortization 97,537 92,043 5,379 115 impairments on assets held for sale — — — — premium taxes 50,887 44,988 5,899 — interest 36,057 11,271 — 24,786 3,856,892 3,456,403 329,794 70,695 income (loss) before income taxes $ 616,505 $ 628,392 $ 44,546 $ (56,433 ) 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 nine months ended september 30, september 30, 2020 2019 2020 2019 consolidated total revenues $ 1,913,721 $ 1,671,196 $ 4,935,393 $ 4,473,397 less: nrig(l) 44,992 1,507 49,491 42,564 total revenues excluding nrig(l) $ 1,868,729 $ 1,669,689 $ 4,885,902 $ 4,430,833 pretax income $ 243,371 $ 245,338 $ 540,990 $ 616,505 less: nrig(l) 44,992 1,507 49,491 42,564 pretax income excluding nrig(l) $ 198,379 $ 243,831 $ 491,499 $ 573,941 pretax margin 12.7 % 14.7 % 11.0 % 13.8 % less: pretax margin impact of nrig(l) 2.1 % 0.1 % 0.9 % 0.8 % pretax margin excluding nrig(l) 10.6 % 14.6 % 10.1 % 13.0 % earnings per diluted share (eps) $ 1.62 $ 1.65 $ 3.68 $ 4.26 less: eps impact of nrig(l) 0.30 0.01 0.34 0.30 eps excluding nrig(l) $ 1.31 $ 1.63 $ 3.34 $ 3.96 title insurance and services segment total revenues $ 1,771,993 $ 1,540,741 $ 4,535,558 $ 4,084,795 less: nrig(l) 41,252 449 35,777 35,114 total revenues excluding nrig(l) $ 1,730,741 $ 1,540,292 $ 4,499,781 $ 4,049,681 pretax income $ 337,480 $ 253,570 $ 648,261 $ 628,392 less: nrig(l) 41,252 449 35,777 35,114 pretax income excluding nrig(l) $ 296,228 $ 253,121 $ 612,484 $ 593,278 pretax margin 19.0 % 16.5 % 14.3 % 15.4 % less: pretax margin impact of nrig(l) 1.9 % 0.1 % 0.7 % 0.8 % pretax margin excluding nrig(l) 17.1 % 16.4 % 13.6 % 14.6 % specialty insurance segment total revenues $ 136,332 $ 129,190 $ 391,818 $ 374,340 less: nrig(l) 3,740 1,058 7,199 7,450 total revenues excluding nrig(l) $ 132,592 $ 128,132 $ 384,619 $ 366,890 pretax income $ (72,129 ) $ 11,021 $ (51,954 ) $ 44,546 less: nrig(l) 3,740 1,058 7,199 7,450 pretax income excluding nrig(l) $ (75,869 ) $ 9,963 $ (59,153 ) $ 37,096 pretax margin (52.9 )% 8.5 % (13.3 )% 11.9 % less: pretax margin impact of nrig(l) 4.3 % 0.7 % 2.1 % 1.8 % pretax margin excluding nrig(l) (57.2 )% 7.8 % (15.4 )% 10.1 % 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 nine months ended september 30, september 30, 2020 2019 2020 2019 total revenues $ 1,771,993 $ 1,540,741 $ 4,535,558 $ 4,084,795 less: net realized investment gains 41,252 449 35,777 35,114 net investment income 44,726 72,044 147,628 213,067 premiums retained by agents 572,780 518,824 1,520,559 1,344,517 net operating revenues $ 1,113,235 $ 949,424 $ 2,831,594 $ 2,492,097 personnel and other operating expenses $ 732,721 $ 666,482 $ 2,020,187 $ 1,833,045 ratio (% net operating revenues) 65.8 % 70.2 % 71.3 % 73.6 % ratio (% total revenues) 41.4 % 43.3 % 44.5 % 44.9 % change in net operating revenues $ 163,811 $ 339,497 change in personnel and other operating expenses 66,239 187,142 success ratio(1) 40 % 55 % (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) q320 q220 q120 q419 q319 open orders per day purchase 2,405 1,919 1,978 1,622 2,108 refinance 3,154 2,898 2,884 1,487 1,922 refinance as % of residential orders 57 % 60 % 59 % 48 % 48 % commercial 486 362 510 522 523 default and other 370 310 345 364 405 total open orders per day 6,416 5,489 5,716 3,995 4,958 closed orders per day purchase 1,820 1,310 1,277 1,469 1,639 refinance 2,320 2,222 1,451 1,391 1,256 refinance as % of residential orders 56 % 63 % 53 % 49 % 43 % commercial 248 232 265 332 289 default and other 167 213 276 366 318 total closed orders per day 4,555 3,977 3,269 3,559 3,502 average revenue per order (arpo) purchase $ 2,726 $ 2,581 $ 2,526 $ 2,541 $ 2,528 refinance 1,204 1,194 1,165 1,195 1,159 commercial 8,993 7,373 9,690 11,425 10,791 default and other 46 41 299 209 257 total arpo $ 2,193 $ 1,950 $ 2,315 $ 2,603 $ 2,513 business days 64 64 62 63 64 (1) u.s. operations only. totals may not sum due to rounding.
