First American Financial (FAF) Q2 Earnings, Revenues Beat

Shares of First American Financial Corporation (NYSE:FAF) gained marginally after the company reported second-quarter 2016 adjusted net income of 92 cents per share, which surpassed the Zacks Consensus Estimate of 81 cents by 13.5%. The bottom line also improved 8.2% year over year after including net realized investment gains of 5 cents.

First American Financial’s results were driven by better performance at its Title segment. The specialty insurance segment also improved on the back of higher premiums earned in the home warranty business lines.

Operational Performance

First American Financial generated total revenue of $1.36 billion, up 3% year over year. The upside was driven by a rise in direct premiums and escrow fees, information and other as well as net realized investment gains and net investment income. The top line also outperformed the Zacks Consensus Estimate of $1.32 billion by 3%.

Total expenses of First American Financial inched up 1.7% year over year to $1.20 billion. Increase in personnel costs, premium retained by agents and other operating expenses resulted in the overall rise in expenses.

Total orders closed per day during the quarter dipped 0.9% due to a decline of 3.5% in default and other orders and a 4.6% fall in commercial orders.

The company’s average revenue per direct order closed improved 3.1% in the reported quarter due to an increase in purchase, refinance, commercial and other transactions.

FIRST AMER FINL Price, Consensus and EPS Surprise

FIRST AMER FINL Price, Consensus and EPS Surprise | FIRST AMER FINL Quote

Segment details

Title Insurance and Services: Total revenue inched up 2% year over year to $1.30 billion due to a 1% rise in direct premiums and escrow fees. Average revenue per order increased 3%, primarily owing to higher residential real estate values. Agent premiums were up 3%. Information and other revenues grew 1% year over year to $182.0 million on the back of recent acquisitions. This was, however, partly offset by low demand for the company’s default information products and lower revenues in international mortgage processing operations.

Pre-tax income for the Title Insurance and Services segment jumped 11.4% to $172.4 million, while pre-tax margin expanded 110 basis points (bps) to 13.7%, both on a year-over-year basis.

Specialty Insurance: Total revenue increased 7% from the year-ago quarter to $104.4 million. Higher premiums earned in the home warranty business lines drove the upside.

The loss ratio in the Specialty Insurance segment was 65% in the reported quarter as against 60% in the prior year due to higher contract servicing costs in the home warranty business. Pre-tax margin thus contracted to 4.5% from 10.8% in the year-ago comparable quarter.

Financial Update

First American Financial exited second quarter with cash and cash equivalents of $1.2 billion, up 20% from that as of Dec 31, 2015.

Total assets of First American Financial of $8.8 billion in the second quarter increased 6% from the 2015-end level.

Total shareholders’ equity came in at nearly $2.9 billion as of Jun 30, 2016, up 6.5% from the 2015-end level.

Dividend Update

Dividend paid in the quarter was 26 cents per share, up 4% from year ago quarter.

Zacks Rank

Currently, First American Financial holds a Zacks Rank #2 (Buy).

Performance of Other Property and Casualty Insurers

Among the other players in the insurance industry that have reported their earnings so far, the bottom line at Brown & Brown Inc. (NYSE:BRO) and MGIC Investment Corp. (NYSE:MTG) beat their respective Zacks Consensus Estimate, while Progressive Corp.’s (NYSE:PGR) earnings missed the same.