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First American Financial (FAF) Q3 Earnings Miss, Revenues Top

Zacks Equity Research
·4 min read

First American Financial Corporation FAF reported third-quarter 2020 operating income per share of $1.31, which missed the Zacks Consensus Estimate by about 3%. The bottom line declined 20.1% year over year.

The purchase and refinance businesses continued to perform well, benefiting from strong order trends and continued focus on cost efficiency. However, expenses increased.

Behind the Headlines

Operating revenues of $1.9 billion increased 15% year over year on the back of higher agent premiums, direct premiums and escrow fees and information and other revenues. Moreover, the top line beat the Zacks Consensus Estimate by 13.2%.

Net investment income however decreased 31.5% to $52.5 million.

Total expense of $1.7 billion increased 17.1% year over year due to higher personnel costs, premiums retained by agents, provision for policy losses and other claims, depreciation and amortization, interest, and other operating expenses.

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 15% over year to $1.8 billion. The upside was driven by improved direct premium and escrow fees; increased agent premiums as well as higher information and other revenues, which can be primarily attributed to the recent acquisition of Docutech and growth in mortgage originations that led to higher demand for the company’s title information products.

However, pretax margin expanded 250 basis points (bps) year over year to 19%.

Title open orders increased 29.4% to 410,600 while Title closed orders increased 30% year over year to 291,500, driven by an 85% increase in refinance orders.

Average revenue per order decreased 13%, driven by the shift to refinance transactions.

Average revenue per direct title order declined to $2,193, primarily attributable to shift in the mix of direct title orders to lower premium refinance transactions.

Average revenue per order for purchase transactions increased 8% while average revenue per order for commercial transactions decreased 17%.

Specialty Insurance: Total revenues increased 6% year over year to $136.3 million, driven by higher direct premiums and escrow fees.

However, pretax margin was (52.9%) against 8.5% in the year-ago quarter.

The company initiated a process to divest the property and casualty business. While this business has performed well over the years, the title insurer has decided to focus on its core business and redeploy capital to areas with higher expected returns.

A pretax impairment of assets held for sale of $73.3 million or 49 cents per share was recorded related to the property and casualty business.

Financial Update

First American exited the quarter with cash and cash equivalents of $1.5 billion, up 1.8% from 2019 end. Notes and contracts payable were $1 billion, up 38.9% from 2019 end.

Stockholders’ equity was $4.7 billion, up 6.9% from 2019 end.

Cash flow from operations was $313.3 million, up 0.8% year over year.

Outlook

Given low mortgage rates and robust demand for housing, the company expects refinance and purchase activity to remain at elevated levels for the remainder of the year.

Zacks Rank

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

Performance of Other Insurers

Of the insurance industry players, which have reported third-quarter results so far, earnings of The Progressive Corporation PGR, W.R. Berkley WRB and The Travelers Companies TRV beat the respective Zacks Consensus Estimate.

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