first american financials21.q4cdn.com/992793803/files/doc_presentations/barclays...2017/05/17 ·...
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©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
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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.
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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.
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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
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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
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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
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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)
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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
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Closed Orders / Day
2015 2016 2017
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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
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Open Orders / Day
2015 2016 2017
1,000
1,200
1,400
1,600
1,800
2,000
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Closed Orders / Day
2015 2016 2017
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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
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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
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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)
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Capital Management
13
Operating Cash Flow Uses $2.2 Billion (2012 – 2016)
Note: Based on prior five year period 2012 – 2016 operating cash flow
Capital Expenditures
24%
Dividends 19%
Share Buyback 3%
Acquisitions 15%
Investments & Other
39%
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12.8%
8.9% 11.2%
18.6% 17.4% 19.6% 19.3%
5%
10%
15%
20%
25%
30%
35%
2011 2012 2013 2014 2015 2016 Q1-2017
Deb
t-to
-Cap
ital
rat
io
Financial Covenant
Debt-to-Capital Ratio
Capital Structure
• Management’s target debt-to-capital ratio is 18-20%
– Supports target financial strength ratings
• No significant maturities until 2023
• Majority of current debt has a fixed interest rate
– The credit facility rate floats at LIBOR + 175 basis points
• FAF has significant financial flexibility to seize strategic opportunities
As of March 31, 2017 ($ 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
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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%
Avg. Rating: AA Duration: 3.5 Book Yield: 2.7%
Gov't Agency
5%
Municipal 20%
Corporate 5%
Gov't Agency
MBS 70%
Avg. Rating: AA Duration: 2.9 Book Yield: 1.5%
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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: $8,245
Reduced housing affordability
Higher interest expense on credit facility
Risks
16
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Investment Considerations
• “Pure play” in title and mortgage markets
• Strong competitive position in title and settlement services
‒ Continue to pursue profitable market share gains
‒ Strengthening the enterprise through data capabilities
• Record title segment margins with longer-term upside remaining
‒ Expect earnings and margin growth as purchase market improves
‒ Anticipate cash flow to increase from both higher earnings and lower paid claims
• Strong balance sheet and financial flexibility
‒ Recently completed legal entity re-alignment increases dividend capacity and capital deployment opportunity
• Commitment to return capital to shareholders
‒ Raised dividend 36% in 2016
17
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Total Shareholder Return
18 Source: Annualized return through 4/30/2017
FAF Total Shareholder Return
13.7%
10.5%
18.0%
24.2%
21.4%
24.6%
0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0%
5 year
3 year
1 year
FAF S&P 500
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©2015 First American Financial Corporation and/or its affiliates. All rights reserved. q NYSE: FAF
Appendix
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Balance Sheet
20
As of March, 31 2017 ($ 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 $1,238
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Ultimate Loss Ratios by Policy Year
Paid
Lo
sses
by
Cal
end
ar Y
ear
($ 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%
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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%)
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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
First American Title Company
– Texas (Agent)
First American Title Company
(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 $83M
23
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US$ 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.)
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Capital Expenditures
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
Capital Expenditures
Software Fixed Assets Software Licenses Capitalized Data Title Plant
Note: excludes capital leases (1) The company began disclosing capitalized data expenditures in 2014
(1)
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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
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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 - $14.3B 2016
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Industry Premiums by State
28
15%
20%
15%
10%
5%
0%
Perc
ent
of
Ind
ust
ry P
rem
ium
s
0% 30% 60%
Cumulative Percent of Industry Premiums
Source: ALTA (2016 Data)
15% 45% 75% 90%
Top 5 = 49% of premiums Top 20 = 83% of premiums
TX CA FL NY PA
12%
10%
4%
8% Agent
Direct
IL AZ NJ
CO OH WA MI VA GA MD
MA OR
TN UT
WI
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First American Footprint
Distribution Strategy
Direct
• Local presence in 26 states
• Positioned in top metro areas
• Offices must support fixed costs through the cycle
Agency
• Underwriter in 49 states
• Business in both rural and metro areas
• Highly variable cost structure
29
FAF Direct Operations
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Direct Premium Mix(1)
Less than 20%
20% - 35%
35% - 50%
Greater than 50%
Industry Distribution by State
(1) Source: ALTA; data for 2016 30
Western states have a greater mix of direct distribution
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Title Segment Success Ratio
• < 60% when NOR increases
• > 60% when NOR decreases
• 60% target is only sustainable until optimized margin is achieved
• Success ratio is less meaningful when NOR is stable
• Due to the seasonality, success ratio is most useful when comparing period to prior year
Target Full Year 2016 Calculation
($ 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