First American Releases Q2 Earnings
August 3, 2010
Reporting earnings for the first time since splitting into separate companies, First American Financial’s (FAF) title insurance and services segment reported pretax income of $62 million.
While revenues declined 6 percent from the same quarter during 2009 due to a 30 percent decline in closed title orders, the loss was offset by higher average revenue per order and an increase in the company’s agency title premiums.
"I am pleased with the progress we are making in the face of difficult market conditions," said Dennis Gilmore, chief executive officer of FAF. "We expect real estate and mortgage markets to continue to be volatile, but they seem to be gradually improving. Today's low mortgage rates have improved the residential refinance market and the commercial pipeline appears to be building as the third quarter progresses."
In order to free up additional capital, the company will merge First American Title Insurance Co. of New York into its main brand, First American Title Insurance Co. The company hopes to finalize the merger by the end of the year.
Average revenue per direct title order was $1,565, an increase of 20 percent relative to the second quarter of 2009 primarily due to the increase in the mix of higher premium resale transactions.
First American opened 410,000 direct orders during the quarter, compared to 566,300 during the same period a year ago. The company reported it closed 309,000 orders during the second quarter of 2010, while closing 438,100 orders during the same period in 2009.
As the second quarter progressed and record-low mortgage rates emerged, new title orders for refinance transactions began to increase. First American began the quarter with about 30 percent of its business coming from refinance transactions. That spiked to 50 percent in July.
“This trend accelerated in July, with open orders per day up approximately 8 percent over June,” Gilmore said.
Also in the second quarter, the commercial business performed well as the level of transactions picked up across a broad range of markets. Commercial revenues were $61.5 million on closed orders that were up 17 percent from the prior year.
Salary and other personnel costs and other operating expenses were $469 million in the second quarter, down $48.1 million, or 9 percent, compared with the second quarter of 2009. These lower expenses were primarily due to a decline in title production costs from lower order counts, salary and other employee expense reductions, and other cost initiatives.
The loss provision during the second quarter was 5.8 percent of title premiums, escrow and other related fees, compared with 6.5 percent in the second quarter of 2009. The company reported the current rate reflects an expected claims rate of 4.8 percent for policy year 2010 and a net increase in the loss reserve estimates for policy years prior to 2010. First American paid $81 million in claims during the latest quarter, up from $78 million during the second quarter of 2009.
Gilmore said First American does have gaps in its product offerings due to the separation of CoreLogic, and that it will need to fill the holes in settlement service products and the default space.
“We will use our capital wisely and make sure we don’t overpay for any acquisitions,” he said.