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First American Financial (FAF) Q1 Earnings Beat, Improve Y/Y

First American Financial Corporation FAF reported first-quarter 2020 operating income per share of $1.06, which surpassed the Zacks Consensus Estimate by 10.4%. Moreover, the bottom line improved 43.2% year over year.

The company’s results reflect strong performance at its Title Insurance and Services segment, which was partially offset by increase in expenses.

Results in Details

Operating revenues of $1.4 billion increased 8.4% year over year. The improvement came on the back of strong direct premiums and escrow fees, and higher agent premiums. However, the top line missed the Zacks Consensus Estimate by 4.9%.

Net investment income declined 44.2% to $45.9 million.

Closed title orders increased 34%, which can be attributed to 144% increase in refinance orders.

Average revenue per order decreased 6%, driven by the shift to refinance transactions.

Total expense of $1.3 billion increased 15.4% year over year, primarily due to rise in personnel costs, premiums retained by agents, other operating expenses, provision for policy losses and other claims, premium taxes and interest.

First American Financial Corporation Price, Consensus and EPS Surprise

First American Financial Corporation Price, Consensus and EPS Surprise
First American Financial Corporation Price, Consensus and EPS Surprise

First American Financial Corporation price-consensus-eps-surprise-chart | First American Financial Corporation Quote

Segment Results

Title Insurance and Services: Total revenues increased nearly 11% year over year to $1.3 billion. The upside came on the back of improved premiums and escrow fees, which can be primarily attributed to higher number of direct title orders closed. However, pre-tax margin contracted 650 bps year over year to 5.6%.

Direct open orders increased 55.6% year over year to 354,400 while direct closed orders improved 34.3% to 202,700 year over year.

Specialty Insurance: Total revenues remained flat year over year at $122 million. Strong property and casualty (P&C) and home warranty business have contributed to the segment’s top line. However, pre-tax margin contracted 410 bps year over year to 10.5%.

Share Repurchase Update

In the first quarter, the company bought back 1.7 million shares worth $65.8 million. Such shareholder friendly moves reflect the company’s strong liquidity position.

Financial Update

First American Financial exited first-quarter 2020 with cash and cash equivalents of $1.1 billion, down 29.3% from Dec 31, 2019-level. Notes and contracts payable were $847 million, up 16.3% from 2019-end level.

As of Mar 31, 2020, the company had stockholders’ equity of $4.4 billion, down 1.4% from Dec 31, 2019-end level.

2020 Outlook

The interest rate cut by the Federal Reserve in the United States is likely to keep investment yields under pressure.

For its Title Insurance and Services segment, First American Financial expects investment income in the range of $40-$45 million for each remaining quarter of 2020. This segment’s pretax margin is estimated between 9% and 11% in 2020.

Q2 Guidance

The company’s open purchase orders are expected to witness a year-over-year decline of 45% in second-quarter 2020. Moreover, revenues from the company’s commercial business are also estimated to decline 50% year over year in the second quarter.

Zacks Rank

First American Financial carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Among other insurance industry players, which have reported first-quarter earnings so far, the bottom line of Chubb Limited CB outpaced the Zacks Consensus Estimate, while that of Globe Life Inc. GL matched the same.

Upcoming Releases

A stock from the insurance space with the right combination of elements to surpass estimates this reporting cycle is as follows:

Assurant, Inc. AIZ has an Earnings ESP of +4.28% and a Zacks Rank of 3, at present. The company is slated to release first-quarter 2020 results on May 5.

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First American Financial Corporation (FAF) : Free Stock Analysis Report
 
Chubb Limited (CB) : Free Stock Analysis Report
 
Assurant, Inc. (AIZ) : Free Stock Analysis Report
 
Globe Life Inc. (GL) : Free Stock Analysis Report
 
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