first american financials21.q4cdn.com/992793803/files/doc_presentations/barclays...2017/05/17 ·...

©2015 First American Financial Corporation and/or its affiliates. All rights reserved. q NYSE: FAF

First American Financial Barclays Americas Select Franchise Conference

May 17, 2017

Safe Harbor Statement

2

CERTAIN STATEMENTS MADE IN THIS PRESS RELEASE AND THE RELATED MANAGEMENT COMMENTARY CONTAIN, AND RESPONSES TO INVESTOR QUESTIONS MAY CONTAIN, FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. THESE FORWARD-LOOKING STATEMENTS CAN BE IDENTIFIED BY THE FACT THAT THEY DO NOT RELATE STRICTLY TO HISTORICAL OR CURRENT FACTS AND MAY CONTAIN THE WORDS “BELIEVE,” “ANTICIPATE,” “EXPECT,” “INTEND,” “PLAN,” “PREDICT,” “ESTIMATE,” “PROJECT,” “WILL BE,” “WILL CONTINUE,” “WILL LIKELY RESULT,” OR OTHER SIMILAR WORDS AND PHRASES OR FUTURE OR CONDITIONAL VERBS SUCH AS “WILL,” “MAY,” “MIGHT,” “SHOULD,” “WOULD,” OR “COULD.” THESE FORWARD-LOOKING STATEMENTS INCLUDE, WITHOUT LIMITATION, STATEMENTS REGARDING FUTURE OPERATIONS, PERFORMANCE, FINANCIAL CONDITION, PROSPECTS, PLANS AND STRATEGIES. THESE FORWARD-LOOKING STATEMENTS ARE BASED ON CURRENT EXPECTATIONS AND ASSUMPTIONS THAT MAY PROVE TO BE INCORRECT. RISKS AND UNCERTAINTIES EXIST THAT MAY CAUSE RESULTS TO DIFFER MATERIALLY FROM THOSE SET FORTH IN THESE FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE THE ANTICIPATED RESULTS TO DIFFER FROM THOSE DESCRIBED IN THE FORWARD-LOOKING STATEMENTS INCLUDE, WITHOUT LIMITATION: INTEREST RATE FLUCTUATIONS; CHANGES IN THE PERFORMANCE OF THE REAL ESTATE MARKETS; VOLATILITY IN THE CAPITAL MARKETS; UNFAVORABLE ECONOMIC CONDITIONS; IMPAIRMENTS IN THE COMPANY’S GOODWILL OR OTHER INTANGIBLE ASSETS; FAILURES AT FINANCIAL INSTITUTIONS WHERE THE COMPANY DEPOSITS FUNDS; CHANGES IN APPLICABLE LAWS AND GOVERNMENT REGULATIONS; HEIGHTENED SCRUTINY BY LEGISLATORS AND REGULATORS OF THE COMPANY’S TITLE INSURANCE AND SERVICES SEGMENT AND CERTAIN OTHER OF THE COMPANY’S BUSINESSES; USE OF SOCIAL MEDIA BY THE COMPANY AND OTHER PARTIES; REGULATION OF TITLE INSURANCE RATES; LIMITATIONS ON ACCESS TO PUBLIC RECORDS AND OTHER DATA; CHANGES IN RELATIONSHIPS WITH LARGE MORTGAGE LENDERS AND GOVERNMENT-SPONSORED ENTERPRISES; CHANGES IN MEASURES OF THE STRENGTH OF THE COMPANY’S TITLE INSURANCE UNDERWRITERS, INCLUDING RATINGS AND STATUTORY CAPITAL AND SURPLUS; LOSSES IN THE COMPANY’S INVESTMENT PORTFOLIO; MATERIAL VARIANCE BETWEEN ACTUAL AND EXPECTED CLAIMS EXPERIENCE; DEFALCATIONS, INCREASED CLAIMS OR OTHER COSTS AND EXPENSES ATTRIBUTABLE TO THE COMPANY’S USE OF TITLE AGENTS; ANY INADEQUACY IN THE COMPANY’S RISK MANAGEMENT FRAMEWORK; SYSTEMS DAMAGE, FAILURES, INTERRUPTIONS AND INTRUSIONS OR UNAUTHORIZED DATA DISCLOSURES; ERRORS AND FRAUD INVOLVING THE TRANSFER OF FUNDS; THE COMPANY’S USE OF A GLOBAL WORKFORCE; INABILITY OF THE COMPANY’S SUBSIDIARIES TO PAY DIVIDENDS OR REPAY FUNDS; INABILITY TO REALIZE THE BENEFITS OF, AND CHALLENGES ARISING FROM, THE COMPANY’S ACQUISITION STRATEGY; AND OTHER FACTORS DESCRIBED IN THE COMPANY’S QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED MARCH 31,2017, AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THE FORWARD-LOOKING STATEMENTS SPEAK ONLY AS OF THE DATE THEY ARE MADE. THE COMPANY DOES NOT UNDERTAKE TO UPDATE FORWARD-LOOKING STATEMENTS TO REFLECT CIRCUMSTANCES OR EVENTS THAT OCCUR AFTER THE DATE THE FORWARD-LOOKING STATEMENTS ARE MADE.

Use of non-GAAP Financial Measures

3

This slide presentation contains, and related commentary and answers to questions may contain certain financial measures that are not presented in accordance with generally accepted accounting principles (GAAP), including net operating revenue and success ratios. Although these exclusions represent actual gains, losses or expenses to the Company, they may mask the periodic income and financial and operating trends associated with the Company’s business. The Company is presenting these non-GAAP financial measures because they provide the Company’s management and investors with additional insight into the operational performance of the Company relative to earlier periods and relative to the Company’s competitors. The Company does not intend for these non-GAAP financial measures to be a substitute for any GAAP financial information. In the slide presentation these non-GAAP financial measures have been presented with, and reconciled to, the most directly comparable GAAP financial measures. Investors should use these non-GAAP financial measures only in conjunction with the comparable GAAP financial measures.

Company Overview

4

• Industry-leading technology infrastructure • Well-established, efficient cost structure • Achieving record title margins with longer-term upside remaining

Strong operating platform

• Since 1889, a market leader in title insurance and settlement services • 26.5% market share in U.S. title insurance market with single national brand • #2 market share position in the US • Pursuing profitable share growth in key markets • International title insurance & services market leader

Leading position in title insurance

markets

• $5.6 billion annual revenue in 2016 • Strong balance sheet, with financial leverage at 19.3% debt-to-capital ratio • High quality, conservative investment portfolio

Strong financial position

• Growth in purchase market expected to continue in 2017 and beyond • Commercial market conditions continue to be strong • Potential for regulatory reform over the next few years

Market Trends Favorable

Organizational Structure

5

2016 Revenue: $5.6B Total Revenue Trend

U.S. Title 78%

Specialty 8%

Mortgage & Data

Solutions 9%

International5%

U.S. Title 78%

3.3 3.7 3.5

4.0 4.3

0.6 0.6

0.4

0.5 0.5

0.3 0.3

0.4

0.4 0.4

0.3 0.3

0.3

0.3 0.3

-

1.0

2.0

3.0

4.0

5.0

6.0

2012 2013 2014 2015 2016

U.S. Title Mortgage & Data Solutions Specialty International

First American’s Strategy

6

Vision: To be the premier title insurance and settlement services company

Innovation

Compliance and risk management

Focus M&A on enhancing the core

Optimize capital management strategy

People and culture

Profitably grow our

core title and settlement

business

Strengthen the enterprise through data and process advantage

Manage and actively

invest in complementary businesses that

support or expand the core

Deploy our capital to maximize long-term shareholder returns

Target

(1) Source: Mortgage Bankers Association

Title Insurance Segment Margins

7

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

14%

$-

$700

$1,400

$2,100

$2,800

$3,500

$4,200

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

20

17

Mortgage Originations Pretax Margin

($ in

Bill

ion

s)

(1)

Refinance Market

8

Current Trend

Outlook

• Open orders have stabilized at ~1200 per day in 1Q

• Significantly reducing resource commitments in our refinance focused businesses

• Closely monitoring order levels as always

• Rising interest rates will likely continue to weigh on refinance transactions in 2017

• Longer term, expect refinance volumes to remain low

500

1,000

1,500

2,000

2,500

3,000

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Open Orders / Day

2015 2016 2017

500

700

900

1,100

1,300

1,500

1,700

1,900

2,100


Closed Orders / Day

2015 2016 2017

Purchase Market

9

Current Trend

Outlook

• 13% revenue growth in 1Q 2017

• Fees per file up 8%

• Closed orders up 4%

• Home price appreciation robust

• Strong buyer demand

• Lack of for sale inventory in existing homes a key factor

• Expect continued growth in 2017 and beyond

1,000

1,200

1,400

1,600

1,800

2,000

2,200

2,400

2,600


Open Orders / Day

2015 2016 2017

1,000

1,200

1,400

1,600

1,800

2,000


Closed Orders / Day

2015 2016 2017

10

Current Trend

Outlook

• Expect continued strength, albeit below 2015 record levels

• Well positioned national platform

• Revenues up 2% in 1Q 2017

• Seeing continued strength across most markets and asset classes

• Overall quality and size of deals remain high

• Capital availability and foreign flows continue to support market

$ in

mill

ion

s A

vera

ge R

even

ue

per

Ord

er

Clo

sed

Ord

ers

per

Day

Commercial Market

465 506 598 559

81 89

98 102

$0

$200

$400

$600

$800

2013 2014 2015 2016

Local NCS

661

546 595

696

6,989 7,652

8,583 8,245

310 309 322 318

200

250

300

350

400

$5,000

$6,000

$7,000

$8,000

$9,000

$10,000

2013 2014 2015 2016

ARPO Closed Orders per Day

Capital Management Strategy

11

• Capital Management Priorities:

• Make value-creating investments in our core business

• Acquire businesses that fit within our core strategy

• Return excess capital to shareholders through dividends and share repurchases

• Maintain adequate capital levels

• Manage our capital structure prudently

• Maintain ample financial flexibility and holding company liquidity

Objective: Create Long-Term Shareholder Value

Dividends

12

Dividend Considerations:

• First American expects to pay a meaningful dividend given the company’s cash flow generation and investment opportunities

• Dividend increases should be sustainable

• Dividends are reviewed by the board regularly, with a stronger emphasis in the first quarter to determine whether to adjust the dividend

• Dividend increases will be dependent upon expected holding company cash flows, market conditions and alternative uses of capital, among other factors

• The company is not committed to increasing the dividend every year

1) Calculated using Consensus EPS estimate for 2017. The Consensus EPS excludes the pension termination impact

$0.24 $0.36

$0.48

$0.84 $1.00

$1.20 $1.36

$0.00

$0.25

$0.50

$0.75

$1.00

$1.25

$1.50

$1.75

2011 2012 2013 2014 2015 2016E 2017E

Dividends per share

32%

15%

28%

39% 38% 38% 42%

0%

20%

40%

60%

2011 2012 2013 2014 2015 2016 2017E

Payout Ratio

(1)

Capital Management

13

Operating Cash Flow Uses $2.2 Billion (2012 – 2016)

Note: Based on prior five year period 2012 – 2016 operating cash flow

Capital Expenditures

24%

Dividends 19%

Share Buyback 3%

Acquisitions 15%

Investments & Other

39%

12.8%

8.9% 11.2%

18.6% 17.4% 19.6% 19.3%

5%

10%

15%

20%

25%

30%

35%

2011 2012 2013 2014 2015 2016 Q1-2017

Deb

t-to

-Cap

ital

rat

io

Financial Covenant

Debt-to-Capital Ratio

Capital Structure

• Management’s target debt-to-capital ratio is 18-20%

– Supports target financial strength ratings

• No significant maturities until 2023

• Majority of current debt has a fixed interest rate

– The credit facility rate floats at LIBOR + 175 basis points

• FAF has significant financial flexibility to seize strategic opportunities

As of March 31, 2017 ($ in millions)

4.3% senior notes due 2023 $248

4.6% senior notes due 2024 298

Trust deed notes 26

Other notes 4

Revolving credit facility 160

Total debt $736

Total equity $3,078

Debt-to-Capital ratio 19.3%

14

Investment Portfolio

Consolidated Portfolio $5.0 Billion

Insurance Portfolio $2.2 Billion

Bank Portfolio $2.8 Billion

15

Note: Debt and equity securities as of December 31, 2016

US Treasury 3%

Gov't Agency 4% Municipal

20%

Corporate 18%

Gov't Agency MBS 44%

Foreign 3%

Equity 8%

Avg. Rating: AA Duration: 3.5 Book Yield: 2.1%

US Treasury

7%

Gov't Agency

3% Municipal

20%

Corporate 35%

Gov't Agency

MBS 11% Foreign

6%

Equity 18%


Gov't Agency

5%

Municipal 20%

Corporate 5%

Gov't Agency

MBS 70%


Impact of Higher Interest Rates

Insurance portfolio investment income

• Yield on new investments will be greater than current book yield

Banking Profitability

• ~35% of banking portfolio in floating-rate securities

• Spread to deposit costs widen in higher interest rate environment

Reduced defined benefit plan obligations

• Defined benefit plans highly sensitive to interest rates

Higher investment income on escrow balances

• Deposits at third party banks

Higher earnings at FA Exchange

Benefits

Decreased value of fixed income portfolio

Impact to refinance volumes

• Refinance represented 17% of direct revenue premiums in 2016

• 2016 average revenue per order:

– Refinance: $885

– Resale: $2,134

– Commercial: $8,245

Reduced housing affordability

Higher interest expense on credit facility

Risks

16

Investment Considerations

• “Pure play” in title and mortgage markets

• Strong competitive position in title and settlement services

‒ Continue to pursue profitable market share gains

‒ Strengthening the enterprise through data capabilities

• Record title segment margins with longer-term upside remaining

‒ Expect earnings and margin growth as purchase market improves

‒ Anticipate cash flow to increase from both higher earnings and lower paid claims

• Strong balance sheet and financial flexibility

‒ Recently completed legal entity re-alignment increases dividend capacity and capital deployment opportunity

• Commitment to return capital to shareholders

‒ Raised dividend 36% in 2016

17

Total Shareholder Return

18 Source: Annualized return through 4/30/2017

FAF Total Shareholder Return

13.7%

10.5%

18.0%

24.2%

21.4%

24.6%

0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0%

5 year

3 year

1 year

FAF S&P 500

©2015 First American Financial Corporation and/or its affiliates. All rights reserved. q NYSE: FAF

Appendix

Balance Sheet

20

As of March, 31 2017 ($ millions)

Assets

Cash & equivalents $1,047

Investments 5,183

Other assets 1,548

Goodwill & intangibles 1,096

Total assets $8,874

Liabilities & Equity

Demand Deposits $2,883

Other Liabilities 1,164

Reserves 1,013

Debt 736

Equity 3,078

Total liabilities & equity $8,874

Return on Equity

TTM Net income $349

Average Equity $2,958

ROE 11.8%

Debt-to-capital 19.3%

Book value per share $27.80

Tangible equity $1,982

Statutory surplus $1,238

Ultimate Loss Ratios by Policy Year

Paid

Lo

sses

by

Cal

end

ar Y

ear

($ in

Mill

ion

s)

Ult

imat

e Lo

ss R

atio

s b

y Po

licy

Year

21 (1) Ultimate loss ratios are estimates and calculated as a percentage of title premiums and escrow fees for a given policy year as of February 28, 2017

(2)

7%

-

50

100

150

200

250

300

350

400

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Paid to Date Ultimate Loss Ratio - Policy Year Paid Losses - Calendar Year(1)

93%

91%

92%

89%

90%

86%

83%

79% 74%

64% 53% 48%

21%

5.2%

7.7%

9.8%

10.8%

13.1%

9.8%

6.3%

5.3% 5.1%

3.4% 3.7%

4.9%

4.1%

4.6%

4.0%

7% 2%

2016 Incurred Claims Detail

Claim Cause Process Cause

22

Liens (20%) Encumbrances (17%)

Fraud (12%)

Basic Risks (22%)

Other (9%) File Shortages (3%)

Defective Title (8%)

Disputed Procedure (0%)

Escrow/Closing (2%)

GVS / PVII (4%)

Escrow/Closing (6%)

No Error (53%)

Escrow/Closing (27%)

Underwriting (4%)

Exam (9%)

Other (5%)

Unclassified (3%) GVS / PVII (2%)

Legal Entity Re-alignment Increased Dividend Capacity

2015

First American Title

Insurance Company

First American Financial Corp

Republic Title (Agent)

First American Property and

Casualty

First American Data

Company

First American Trust

First American Home Buyers

Protection

First American Title Company

– Hawaii (Agent)

First American Professional Real Estate

Services


– Texas (Agent)


(Agent)

Note: Legal structure as of June 30, 2012; not a complete list of legal entities

2012 Actual dividends to Holding Company excluding FATICO

Other Subsidiaries $12M

2012

First American Property and

Casualty

Other Subsidiaries

First American Data

Company

50%

First American Financial Corp

First American Title

Insurance Company

50%

2015 Actual dividends to Holding Company excluding FATICO

Other Subsidiaries $83M

23

US$ in millions 2011 2012 2013 2014 2015 2016

Beginning Surplus 868 849 956 996 979 1,104

Net Income 92 301 199 393 192 150

Dividend to Parent (47) (219) (139) (263) (60) -

Other (65) 26 (20) (148) (7) (67)

Ending Surplus 849 956 996 979 1,104 1,187

Dividend to Parent:

Cash 45 - 40 - 60 -

Non-cash 2 219 99 263 - -

Total 47 219 139 263 60 -

Total Non-cash dividend to Parent for the prior 6 years 582

1,050 1,013 1,015 949

936

912

58%

86%

107%

121%

147% 165%

0%

50%

100%

150%

200%

0

200

400

600

800

1,000

1,200

1,400

2011 2012 2013 2014 2015 2016Reserves Mkt Securities % of Reserves

US$ in millions

849

956 996 979

1,104 1,187

105% 73%

54%

28% 15% 13%

0%

50%

100%

150%

200%

0

200

400

600

800

1,000

1,200

1,400

2011 2012 2013 2014 2015 2016

Surplus Affiliates % of Surplus

US$ in millions

Enhanced Statutory Capital

24

• Recently completed a multi-year effort to enhance the financial strength and flexibility of the company

• ~50% of free cash flow between 2011-2016 was used to grow the investment portfolio, primarily to strengthen the surplus quality of our primary underwriter - FATICO

• Future cash flows at FATICO will primarily be up-streamed to the holding company for capital deployment (dividend, M&A, etc.)


25

• Fixed Assets

– ~$35 million annually

• Software

– Customer-facing technology

– Integrated mortgage disclosure readiness

– Production system (FAST) enhancements

• Title Plant

– Title plant expansion

• Capitalized Data

– Supports property information expansion

• ~50% of capital expenditures are growth related

$0

$20

$40

$60

$80

$100

$120

$140

2011 2012 2013 2014 2015 2016

Mill

ion

s


Software Fixed Assets Software Licenses Capitalized Data Title Plant

Note: excludes capital leases (1) The company began disclosing capitalized data expenditures in 2014

(1)

2016 Revenue Breakdown

U.S. Title 78%

26

First American Financial 2016 Revenue: $5.6B

Specialty Segment 2016 Revenue: $0.4B

Title Segment 2016 Revenue: $5.1B

Agency 45%

Direct 26%

Commercial 13%

Mortgage & Data

Solutions 10%

International 6%

Home Warranty

69%

Property & Casualty

31%

Title Segment

92%

Specialty Segment

8%

U.S. Title

Industry Structure

27 Source: ALTA

Underwriter Market Share 2016

FAF, 26.5%

FNF, 33.1% ORI, 14.8%

STC, 11.2%

Regionals, 14.4%

Direct 38%

Agent 62%

Industry Premiums - $14.3B 2016

Industry Premiums by State

28

15%

20%

15%

10%

5%

0%

Perc

ent

of

Ind

ust

ry P

rem

ium

s

0% 30% 60%

Cumulative Percent of Industry Premiums

Source: ALTA (2016 Data)

15% 45% 75% 90%

Top 5 = 49% of premiums Top 20 = 83% of premiums

TX CA FL NY PA

12%

10%

4%

8% Agent

Direct

IL AZ NJ

CO OH WA MI VA GA MD

MA OR

TN UT

WI

First American Footprint

Distribution Strategy

Direct

• Local presence in 26 states

• Positioned in top metro areas

• Offices must support fixed costs through the cycle

Agency

• Underwriter in 49 states

• Business in both rural and metro areas

• Highly variable cost structure

29

FAF Direct Operations

Direct Premium Mix(1)

Less than 20%

20% - 35%

35% - 50%

Greater than 50%

Industry Distribution by State

(1) Source: ALTA; data for 2016 30

Western states have a greater mix of direct distribution

Title Segment Success Ratio

• < 60% when NOR increases

• > 60% when NOR decreases

• 60% target is only sustainable until optimized margin is achieved

• Success ratio is less meaningful when NOR is stable

• Due to the seasonality, success ratio is most useful when comparing period to prior year

Target Full Year 2016 Calculation

($ in millions) 2016 2015 Change

Personnel and other operating expenses Total revenues

$2,343

5,134

$2,237

4,788

+105

Less: Premiums retained by agents 1,802 1,657

Net investment income 111 98

Net realized investment gains 19 (7)

Net operating revenues (NOR) $3,203 $3,041 +162

Success Ratio 65% 31

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