Please ensure Javascript is enabled for purposes of website accessibility
Free Article Join Over 1 Million Premium Members And Get More In-Depth Stock Guidance and Research

First American Financial Rides the New Housing Boom Higher

By Dan Caplinger - Jul 23, 2015 at 10:50AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The title insurance specialist has benefited from the recovery in housing.


Source: First American Financial.

The housing industry is a key driver of economic activity in the U.S. economy, supporting not just homebuilders but also a large network of associated businesses. Title insurance provider First American Financial ( FAF 1.81% ) has seen firsthand the impact of the ups and downs in the housing industry on its business, taking a big hit during the housing bust but seeing a dramatic recovery since then. Coming into Thursday morning's second-quarter financial report, First American Financial shareholders were looking for the company to keep growing in the favorable environment for the industry, but even they were surprised at just how well the title insurance specialist did during the quarter. Let's take a closer look at First American Financial's latest results and what they say about the health of the company going forward.

How First American Financial kept climbing
First American Financial's second-quarter results were even better than investors had expected. Total revenue climbed 15% to $1.32 billion, easily topping the $1.27 billion in sales that those following the stock were looking to see. Net income soared 84% to $93.3 million, and that produced earnings of $0.85 per share, which was one-fourth higher than the $0.68 per share consensus forecast.

Within First American Financial's business, the impact of the Title Insurance and Services segment was clearly positive. Revenue for the segment jumped 16%, driven by both a rise in the number of direct title orders closed during the quarter and an increase in the average revenue that the company brought in per title order. The company said that an increase in the average size of commercial deals closed helped contribute to the segment's positive performance, as did higher real estate values generally. A shift in the quality of refinancing transactions weighed on growth slightly, but agent premiums climbed by 17% compared to the year-ago quarter.

Growth in revenue from Information and other revenue within the segment, however, mostly disappeared. An acquisition was primarily responsible for overall growth in information sales of about 3%. The company saw lower demand for products offering default-related information, which makes sense given the increase in credit quality that the economy has helped spur in recent years, but higher demand for non-insured products and services benefited from higher transaction volume.

Elsewhere, First American Financial's Specialty Insurance segment saw mixed results. Revenue climbed 7%, but pre-tax income fell slightly as weather-related claims raised the company's loss ratios in the home warranty business.

Overall, though, First American Financial has benefited from the reduction of risk in its title insurance business. The company has seen its provisions for policy losses and other claims fall by more than $10 million over the past year, and its current provision allows for an ultimate loss rate of about 6%.

CEO Dennis Gilmore had good things to say about the company's results. "Our strong second quarter results were driven by a healthy spring selling season, continued growth in our commercial business, and elevated refinance activity," Gilmore said. He also pointed to improvements in operating efficiency that helped drive margins and earnings higher.

What's next for First American Financial?
First American Financial is optimistic about the future. As Gilmore said, "We expect that an improving economy will continue to bolster the housing market." Given how much exposure the company has to transaction-based activity, a strong housing environment should continue to help First American Financial grow both in its key title insurance business and in other areas.

In particular, title insurance revenue will depend in large part on continued increases in pricing as well as higher transaction volumes. Premiums for title insurance are determined by the value of the home, so rising home prices tend to boost First American Financial's revenue per title order. At the same time, though, even stagnant prices won't necessarily hurt its title insurance business if they bring would-be buyers out of the woodwork and spur greater amounts of buying and selling in the housing market.

It took a while after the recession for the housing market to recover, but First American Financial shareholders have seen the long-term benefits from their patience. As long as conditions remain favorable, First American Financial is looking to make the most of the good times and ride the housing wave higher as far as it will take the company.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

First American Financial Corporation Stock Quote
First American Financial Corporation
FAF
$76.34 (1.81%) $1.36

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
624%
 
S&P 500 Returns
140%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 12/06/2021.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Our Most Popular Articles

Premium Investing Services

Invest better with the Motley Fool. Get stock recommendations, portfolio guidance, and more from the Motley Fool's premium services.