First American Financial Corp (FAF) 2013 Q1 法說會逐字稿

Welcome, and thank you for standing by. At this time, all lines are in a listen-only mode until the question-and-answer session. A copy of today's press release is available on First American's website at www.firstam.com/investor. Please note that the call is being recorded and will be available for replay from the Company's investor website and for a short time by dialing 203-369-1472.

We will now turn the call over to Craig Barberio, Director of Investor Relations, to make an introductory statement.

Good morning, everyone, and thank you for joining us for our first-quarter 2013 earnings conference call. On today's call, you will hear from our Chief Executive Officer, Dennis Gilmore, and our newly-appointed Chief Financial Officer, Mark Seaton.

At this time, we would like to remind listeners that management's commentary and responses to your questions may contain forward-looking statements, such as those described on page four of today's news release, and other statements that do not relate strictly to historical or current fact. The forward-looking statements speak only as of the date they are made, and the Company does not undertake to update forward-looking statements to reflect circumstances or events that may occur after the date the forward-looking statements are made.

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 are also described on page four of today's news release.

Management's commentary contains, and responses to your questions today may also contain, certain financial measures that are not presented in accordance with generally accepted accounting principles, including personnel and other operating expense ratios. 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 today's news release that we filed, which is available on our website, www.firstam.com, the non-GAAP financial measures disclosed in management's commentary are 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.

With that, I will now turn the call over to Dennis Gilmore.

Thank you, Craig. Good morning, and thank you for joining our earnings call. I will begin with a review of our first-quarter highlights, provide a few comments on the outlook, and then Mark will cover our financial results in more detail.

Total revenues in the first quarter were $1.1 billion, up 19% compared to last year. The increase was driven by strong refinance and resale closings in our Title Insurance segment. Our earnings per share were $0.33, including net realized gains of $0.05 per share.

In terms of market outlook, we continue to see strength across the majority of our business lines. The resale market continues to grow as we closed 12% more orders than we did in the first quarter of last year. In addition, the average revenue per resale order was up 11% over last year due to higher real estate values. Most importantly, however, the spring selling season is off to a strong start. So far in April, our resale orders are running 4% higher than March and up 21% compared to last year.

In terms of the refinance market, it has been relatively steady during the last four months, with open orders averaging 2800 orders per day. So far in April, our refinance volumes have increased to approximately 3300 orders per day, driven by a decline in mortgage rates. Although refinance volumes are down from their mid-2012 peak, we believe that the low rates will support good volumes throughout 2013.

Revenues in our National Commercial division were $87 million, up 7% from last year, despite the fact that some transactions were pulled into the fourth quarter due to the anticipation of higher tax rates in 2013. And we are seeing broad strength in our commercial market, with a healthy pipeline of transactions.

Our results in the Title segment were negatively impacted by our loss ratio, 8.7%. The current quarter includes $29 million in reserve strengthening, primarily due to a few large commercial claims from policy years 2006, 2007. Although it is unusual to have this level of large commercial claims in a single quarter, we continue to see a general decline in the overall pay claims as our problematic policy years become more seasoned and recent policy years demonstrate lower claim activity. Putting aside the impact of these large claims, our first-quarter results indicate that the year is off to a strong start.

Our Specialty Insurance segment delivered strong results for the quarter, with total revenues in our property and casualty and our home warranty business up 10%. Combined with favorable claims experience, this segment achieved a pretax margin of nearly 20%.

While we are still uncertain about the impact and the timing of the expected decline in refinance activity, the decline in interest rates and the two-year extension of the HARP program are positive developments. The current growth in the resale market is encouraging and supports our optimism that the housing market is in the early stages of a multiyear recovery.

And given the Company's efficient cost structure, our financial strength and flexibility and the commitment of our employees, we are confident in our ability to take advantage of the ongoing recovery in the housing market.

I'd now like to turn the call over to Mark for a more detailed review of our financial results.

Thank you, Dennis. Total revenue in the first quarter was $1.1 billion, up 19% compared to the first quarter of 2012. Net income was $36 million, or $0.33 per diluted share, compared with net income of $31 million, or $0.29 per diluted share, in the same quarter of last year.

The current quarter results include net realized investment gains of $0.05 per diluted share, compared with net realized investment losses of $0.01 per diluted share in the prior year.

In the Title Insurance and Services segment, direct premium and escrow fees were up 16% compared to last year due to a 12% increase in the number of closed title orders and a 4% increase in the average revenue per order. The average revenue per order increased to $1373, as the average revenue per order for resale transactions increased 11%, while the average for commercial transactions increased 14%.

Agent premiums were up 29%, reflecting the normal reporting lag in agent revenues of approximately one quarter. The agent split improved to 80.0% of agent premiums, a slight reduction from 80.2% last year.

Information and Other revenues were down 2% compared to last year, driven by lower demand for title-related services in Canada, largely offset by demand for the Company's default information products.

Personnel costs were $317 million, up 14%, primarily due to higher staffing levels required to support the increase in order volumes, as well as an increase in revenue-generating employees.

Other operating expenses were $189 million, up 10% from last year, primarily due to higher production-related expenses and temporary labor costs that resulted from higher order activity. The ratio of personnel and other operating expenses to net operating revenue declined slightly to 78% compared to last year, reflecting the continued trend of improving operating leverage.

In the first quarter, the provision for title losses was 8.7% of title premiums and escrow fees. The loss rate reflects an ultimate loss rate of 5.6% for the current policy year and a $29 million reserve strengthening for prior policy years. The reserve strengthening for prior policy years reflects claims development above expected levels during the first quarter of 2013, primarily from policy years 2006 and 2007, which were adversely impacted by a few large commercial claims. Claims development was favorable for policy years 2008 through 2012, as the most recent policy years continue to perform well.

Pretax income for the Title Insurance and Services segment was $64 million in the first quarter compared with $61 million in the first quarter of 2012. Pretax margin was 6.0%, down from 6.8% last year, reflecting the higher loss provision we experienced this quarter.

Turning to the Specialty Insurance segment, total revenues were $82 million, up 10% compared with the same quarter of the prior year, driven by a 14% increase in our home warranty business. The loss ratio for this segment was 50%, essentially flat compared with last year. Higher premiums and favorable loss experience combined to deliver a pretax margin of nearly 20%, up from 17% in the first quarter of 2012.

Net expenses in our Corporate segment were $21 million in the first quarter, in line with the results from the first quarter of last year.

In terms of cash flow, cash used for operations in the first quarter was $51 million versus $8 million in the first quarter of last year. It is typical in our business to have a drawdown on cash in the first quarter due to the seasonality of our operations and the timing of certain cash payments.

Capital expenditures during the quarter were $19 million, most of which is related to capitalized software development for system enhancements and conversions.

Debt on our balance sheet totaled $317 million as of March 31. Our debt consists of $250 million of senior notes, $41 million of trustee notes and $26 million of other notes. Our debt-to-capital ratio as of March 31 was 11.8%. We also have the entire amount available on a $600 million credit facility, so financial flexibility remains strong.

I would now like to turn the call back over to the operator to take your questions.

(Operator Instructions) Bose George, KBW.

Good morning and congratulations, Mark, on your appointment as CFO. I had a couple of questions. If you wanted to start with the commercial reserves strengthening charge, just curious if you could provide any more detail on what drove that, and should we just think of that as one time in terms of what could happen down the road.

Really what happened in the first quarter is we had a few large commercial claims that were mechanical in nature from policy years 2006, 2007. We always will have experience of large claims on our business; that's inherent. But what I think is pretty unique here is the grouping we saw in the first quarter. So while I can't guarantee it, obviously, I think it is unlikely that it will reoccur.

Okay, great. Thanks. And actually wanted to go back to the comment you guys made on the increase in revenue per order on resales in Commercial. Is that being driven by rising prices, or bigger transactions or something else?

Really, on the resale side it is just being driven by the increase in home values. That is probably the biggest driver, because the fee per file is really a function of the price of the home.

And on the Commercial side, we are just seeing larger transactions than we have last year. So it is really just a function of higher asset prices.

Okay, great. Thanks a lot.

Jim Ryan, Morningstar.

Good morning. I just had a question on the refinance open orders. It says down 7% per day. I assume that is year-over-year. Is that correct?

Yes, that is year-over-year, from first quarter of 2013 relative to the first quarter of 2012, down 7%.

What is the change, do you know, on a sequential basis from the fourth quarter?

Sequential basis was down 14%. So we've seen a deceleration in refi activity in the last few months, and that is a trend that has kind of been happening since the summer of 2012. But just in April, we are starting to see a surge in refis as mortgage rates have come down during the month.

One final question. I'd like to know if you could get a better handle on the total C&I revenues to your total revenue. Now, I know what you report there is what comes through your national order system. But I'm wondering, on a direct basis -- I know you can't do it for agents -- what would you guess to be about the percent of C&I revenue compared to total Title revenue?

We don't break it out and I don't want to just guess at that number. The number we're using right now is coming from our National Commercial division itself. So maybe off-line I'll take a look at it and we can get back to you.

Okay. Thank you very much.

John Campbell, Stephens Inc.

Good morning. Just two quick questions here. First, on the HARP extension to 2015, I mean, obviously good news. But if you guys could just talk a little bit about kind of what that means for you guys, and maybe just give us an idea of kind of where your head is at as far as just that total bucket or total pool of remaining HARP refis.

We are pretty optimistic right now. I think the HARP program gained momentum in 2012. I think that momentum will continue into 2013, number one.

Number two, is clearly it's a benefit for us going into 2014 and 2015, and I think it is a broader probably trend on our refinance right now. When we started the year, we were expecting a fairly steep drop-off in refinances. And with the current reduction in rates, the HARP extension, we're a little more optimistic now in our refinance volumes going throughout the year. So we actually think we're going to have a pretty good trend on refinance. It's down, but a more positive trend than we started the year at.

Okay, great. And then did I hear you guys correctly in that you are seeing those purchase or resale or volumes trending up 21% year-over-year in April?

You did. We've had a good start to spring. We're optimistic that it will last well into the summer. We're up 21% year-over-year right now.

And then 1Q was 13%?

Yes, the first quarter was -- our opens were up 13% on the resale side relative to the first quarter of 2012.

Okay. And so if you take a look at the MBA expectations out there, I think there looking for 18% year-over-year for 2013. Where do you guys stand against that?

Again, I think we are trending at their forecast now, right now, maybe a little better. The real question will be is how long does it last, and we are encouraged right now with what we are seeing.

Super. Thanks for taking our questions.

(Operator Instructions) Mark DeVries, Barclays.

Thanks. What led to the increase in the provision rate for the current policy year relative to 4Q? It looked like it was 5.6% versus 5.1% in the fourth quarter.

There is nothing that specifically led to it. The last couple of years, 2010, 2011, 2012, we've been around 5%, 5.0%. I think we are just looking at 5.6% in 2013 because we are just taking a conservative view going into the year. Certainly if the experience performs better than that, we will take it down.

Okay, so 5.6% is the run rate for 2013 we should expect?

Well, I would say that for the current policy year, I think 5.6% is appropriate. When you just look at what we are actually provisioning on the P&L, probably 6.5% to 7% is probably a more reasonable estimate in terms of what to expect for the remainder of the year.

Okay. I apologize if you've covered this, but what was the percentage of open and closed orders that were refi in the first quarter?

In the first quarter, the percentage of refi was 64% in Q1. That is on the open side. On the closed side, it was 70%.

Okay, and through April so far, you are kind of looking same mix?

April, it is a little bit lower. April is probably 62% or 63% on the open side. Similar on the closed.

Got it. Okay. How much revenue are you currently generating from default information products, and how do you expect that to trend in 2013?

Let me answer the broader question. Mark can cover the actual revenue amount. We've seen a nice uptick, actually, here in this segment. We've seen an overall reduction in our TSG business in our default world from the foreclosure moratoriums, et cetera. But we've offset that by a nice uptick in our default information business that is associated with workouts, short sales and modifications. So it has been a nice offset for us.

In the first quarter, we had $47 million of default revenue.

Okay, great. Finally, what is your outlook for Commercial volumes in 2013?

It's actually strong. The segment continued to be strong. We were actually quarter-over-quarter up 7%, and that was with that pull-in effect we saw late -- early in the first quarter. We're seeing strength right now across all marketplaces and asset classes right now. So what -- I would anticipate modest growth with our Commercial business in 2013.

Okay, would this 7% growth -- that would kind of be in the ball park, you think?

Again, we don't give specific forecasts. I would just say we expect modest growth in the business across the year.

Okay, got it. Thanks.

Thank you, and that's all the time we have for questions today. That concludes this morning's call. We'd like to remind listeners that today's call will be available for replay on the Company's website or by dialing 203-369-1472.

The Company would like to thank you for your participation. This concludes today's conference call. You may now disconnect.