First American Financial Corporation (FAF) reported second quarter 2014 operating income of 43 cents per share, missing the Zacks Consensus Estimate by 12.2%. However, earnings improved 48.3% year over year due to lower expenses.
Including net realized investment gain of 4 cents, net income of First American Financial came in at 47 cents per share, up nearly 52% year over year.
First American Financial experienced normal seasonal growth in purchase transactions, improvement in commercial business and benefits of controlled expenses in the quarter.
Operational Performance
First American Financial generated total revenue of $1.15 billion, down 11% year over year. However, results outperformed Zacks Consensus Estimate by 2.5%. Revenues decreased due to a fall in direct premiums and escrow fees, agent premiums as well as information and other revenues.
Total expenses of First American Financial declined 12.6% to $1.1 billion year over year due to a decrease in personnel costs, premiums retained by agents, other operating expenses and provision for policy losses and other claims.
Closed orders per day during the quarter declined 33.3% largely due to a 57% decrease in refinance orders.
Title orders opened in second-quarter 2014 were $318 million, down 24.5% year over year. Title orders closed were $214 million, down 3.33% from the year-ago quarter.
Average revenue per direct order of First American Financial in the reported quarter improved 27.1% due to higher-premium purchase and commercial transactions.
Segment details
Title Insurance and Services: Total revenue declined 12% to $1.1 billion year over year due to a 13% fall in direct premiums and escrow fees. Average fee per order increased 6% due to rise in home value. Agent premiums declined 15% year over year.
Information and other revenues decreased 3% year over year due to low demand for the company’s default and title plant information products. However, revenues from Interthinx acquisition limited the downside.
Investment income declined 10.5% due to lower investment earnings.
Pre-tax income for the Title Insurance and Services segment fell 16.1% year over year. Pre-tax margin rose 190 basis points (bps) to 8% year over year.
Specialty Insurance: Total revenue increased by 9% to $91.2 million year over year, driven by higher premiums earned in the home warranty as well as property and casualty business lines.
The loss ratio improved 200 bps in the current quarter due to weather-related claims and decline in the home warranty business that led pre-tax margin to increase 340 bps.
Corporate: The segment recorded revenue of $3.4 million compared with negative $0.6 million in the year-ago quarter.
Pre-tax loss narrowed to $19.4 million from $21 million loss incurred in the year ago quarter.
Financial Update
First American Financial exited 2014 with cash and cash equivalents of $1.04 billion, up 24.5% from Dec 31, 2013.
Total assets of First American Financial of $7.01 billion increased 7.0% from the 2013 year-end level.
Total shareholders’ equity came in at nearly $2.5 billion as of Jun 30, 2014, up 3.7% from the 2013 year-end level.
Performance of Other Property and Casualty Insurers
While ACE Limited (ACE) outperformed the Zacks Consensus Estimate, RLI Corporation’s (RLI) earnings were in line with the same. The Travelers Companies Inc. (TRV), on the other hand, missed the Zacks Consensus Estimate on higher-than-expected catastrophe losses.
Zacks Rank
First American Financial currently has Zacks Rank #3 (Hold).
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