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Tax Cuts Boost First American Financial Despite Slowing Refi Markets

By Dan Caplinger – Apr 26, 2018 at 9:50AM

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Find out why the title insurance company has high expectations for the future.

If you want to buy a home and need a mortgage to do it, then the odds are good that you'll need to get a title insurance policy to protect your lender from any former owners claiming a stake in the property. First American Financial (FAF 3.22%) is a leading provider of title insurance, with exposure to both the residential and commercial real estate markets. Given how strong real estate in general has been recently, First American has grown substantially over the past decade, although those who follow the market are nervous about higher rates that have caused levels of refinancing activity to slow to a standstill.

Coming into Thursday's first-quarter financial report, First American investors weren't looking for much additional revenue, but they still hoped that the title insurer would find ways to grow its bottom line. First American didn't disappoint on that score, and company executives have high hopes for the future even as the interest rate environment becomes a little more unfriendly to its business.

White eagle logo on blue background for First American Title.

Image source: First American Financial.

First American gets a big tax boost

First American Financial's first-quarter results reflected the changing mix in business that the title insurer has done lately. Revenue was down 1% to $1.30 billion, which was slightly weaker than the roughly flat performance that those following the stock were hoping to see. Net income, however, jumped more than 30% to $76.2 million, and the corresponding $0.67 per share in earnings matched up well with the high expectations reflected in the consensus forecast among investors.

Lower tax rates played a key role in helping to boost First American's bottom line. Despite a more than 10% jump in pre-tax income, First American's tax liability dropped by more than a third, saving the company nearly $9 million compared to last year's quarterly income tax provision.

First American did what it could to capitalize on its most promising opportunities. In title insurance and services, sales dropped 1% overall, but direct premiums and escrow fees managed to climb 3% thanks largely to a big jump in average revenue per direct title order to more than $2,300. That comes from the fact that purchase title insurance carries higher premiums than title insurance for refinancing transactions. Even so, the number of direct orders closed dropped by more than 17,000 to 173,600, and an 8% drop in agent premium revenue hurt First American's overall performance for the title segment. Pretax income was higher by 4% from year-ago levels.

First American got solid performance from its other businesses. In specialty insurance, revenue was higher by 3%, as home warranty insurance drew fewer claims that offset higher typical claim amounts. Investment losses weighed on the segment's bottom line. The information services unit saw revenue climb 3%, based largely on recent acquisitions.

What's next for First American Financial?

CEO Dennis Gilmore was happy with how the company responded to changing industry conditions. "Revenue growth in our purchase and commercial businesses largely offset the impact of the downward trend in refinance transactions," Gilmore said. The CEO also pointed to more efficient operations and greater investment income on its asset holdings in contributing to profitability.

First American sees a lot of good times ahead. In Gilmore's words, "Given the ongoing economic expansion and current trends in the housing market, we expect further revenue growth in our purchase business." First American sees continued activity in commercial real estate that should keep that part of the business healthy as well.

Investors are still nervous about the impact of higher rates on First American Financial, and the stock fell another 5% in morning trading following the announcement. Yet as long as rising rates are gradual in their uptick, it's likely that the real estate market will be able to weather the potential storm, leading to reliable transaction volumes on which First American can capitalize.

Dan Caplinger has no position in any of the stocks mentioned. The Motley Fool recommends First American Financial. The Motley Fool has a disclosure policy.

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