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 (NYSE:FAF) 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.
Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends First American Financial. Try any of our Foolish newsletter services free for 30 days. 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.