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Healthy Housing Sends First American Financial Higher

By Dan Caplinger – Jul 21, 2016 at 10:59AM

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The title company benefited from a strong spring selling season and rising refinancing activity.

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Title insurance specialist First American Financial (FAF -0.76%) thrives when the real estate markets are healthy, and conditions in both the residential housing market and the commercial real estate market have been extremely favorable for a while. First American Financial has done its best to capitalize on both, and coming into Thursday's second-quarter financial report, the company's shareholders expected to see modest sales growth that would sustain its impressive earnings. The title insurer ended up delivering even better results than that, producing bottom-line growth as well. Let's take a closer look at First American Financial and what its most recent report says about the state of the housing market.

First American is one of housing's winners

First American Financial's second-quarter results continued the long streak of favorable results from the title insurer. Revenue climbed to $1.36 billion, up 3% from the year-ago quarter, which was essentially in line with what most investors were expecting from the company. Net income rose 9% to $102.1 million, and even after taking out the nickel-per-share impact of net realized investment gains, adjusted earnings of $0.87 per share were ahead of the consensus forecast by $0.04 per share.

Taking a closer look at First American's results, the impact of strong investment performance once again stood out. It posted gains of $8.1 million, which was more than double what First American produced in last year's second quarter.

First American also showed the overall balance in its business, with the residential sector taking the lead during the quarter. Total revenue for the title insurance and services division inched upward by 1%, but a boost of more than a full percentage point in margin helped drive pre-tax income higher by more than 11%. Average revenue per order rose due to higher residential real estate values, offsetting declines in the number of direct title orders closed during the quarter. Commercial activity was weaker, with a 2% drop in revenue stemming largely from closed order counts falling by 900 orders to 19,900 for the quarter. Information and other revenue posted a 1% advance, although lower demand for default information and falling sales for international mortgage processing operations weighed on the unit.

First American's special insurance segment once again had higher revenue but lower pre-tax income. Loss ratios climbed because of higher costs of home warranties, and that pulled the segment's bottom line lower.

CEO Dennis Gilmore was especially happy with the company's record pre-tax margin for the title segment. "We benefited from our continued focus on operating efficiency and from a solid spring selling season," Gilmore said, "that lifted purchase market revenues by 5% compared with last year." The CEO also noted a good quarter for the commercial refinance business.

Can First American Financial keep climbing?

First American also sees some positive trends continuing. As Gilmore noted, "Lower interest rates drove resident refinance open orders up 20%, [and] this trend accelerated into July, contributing to a strong pipeline for the second half of 2016."

The title insurance company has been especially pleased with the state of the housing market. Chief economist Mark Fleming noted that growth has occurred across the country, and inventories have held steady, helping to support price increases. Low interest rates are making homes more affordable, and a rise in new jobs in the U.S. economy has given more would-be buyers the financial capacity to move forward with purchase plans.

Even with the positive results, First American Financial shareholders didn't see any lasting benefits, and they quickly bid the stock down about 1.5% in the first hour of trading following the announcement. Nevertheless, as long as the real estate market remains strong, First American should keep finding ways to grow its title insurance business and produce better results in the future.

Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends First American Financial. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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