The First American Corporation Reports Financial Results For The Second Quarter Of 2007
August 2, 2007
SANTA ANA, Calif., -- The First American Corporation (NYSE: FAF) announced financial results for the second quarter and six months ended June 30, 2007.
Total revenues for the second quarter of 2007 were $2.2 billion, essentially unchanged from the second quarter of 2006. Net loss was $66.0 million in the second quarter of 2007, compared with net income of $25.5 million in the second quarter of 2006. Loss per diluted share was 68 cents in the second quarter of 2007, versus earnings per share of 26 cents in the second quarter of the prior year. The results for the current quarter included a reserve-strengthening adjustment of $243.6 million, $158.3 million net of tax, or $1.64 per diluted share, due to adverse claims development for policy years prior to 2007. Included also in the current quarter were pretax losses of $27.6 million, or 18 cents per diluted share, related to asset write downs and the consolidation of selected title branches.
Title Insurance Loss Provision
The company recorded a provision for title policy losses and other claims of $342.1 million and $439.1 million during the three and six months ended June 30, 2007, respectively. The provision included a reserve-strengthening adjustment, which reflects a change in estimate for expected ultimate losses, primarily from policy years 2004 through 2006. The change in estimate resulted primarily from higher than expected claims experienced for those policy years during the first half of 2007. These increases were substantially driven by the adverse market conditions that developed during 2007 in the real estate market, including a significant increase in defaults, foreclosures and mortgage fraud. Given the increase in claims frequency that became apparent during the quarter, management now expects that ultimate losses for policy years 2004 through 2006 will be significantly higher than anticipated.
Management is taking action to address the adverse claims development by enhancing efforts to: 1) review and monitor the claims experience of selected lender-oriented national agents and to cancel or modify underwriting agreements where appropriate, 2) analyze the claims experience of certain products and modify the terms and conditions where appropriate and 3) improve the underwriting and claims settlement process.
“The increase in the title insurance loss provision was disappointing, but necessary, as higher than expected claims caused us to strengthen our reserves,” stated Parker S. Kennedy, chairman and chief executive officer of The First American Corporation. “The Title Insurance segment continues to focus on margin improvement by centralizing certain administrative activities, reducing headcount and consolidating selected title branches. Our other segments had reasonably good results in light of the challenging real estate economy.”
Title Insurance. During the second quarter of 2007, operating revenues in the Title Insurance segment declined 5 percent to $1.5 billion from $1.6 billion in the same quarter of 2006, a result of declining mortgage originations, offset in part by an increase in revenues contributed by default, national lenders, commercial and international activity, as well as $16.0 million from new acquisitions. Average revenue per direct title order increased to $1,695, or 1 percent relative to the second quarter of 2006. The company’s direct operations closed 482,900 title orders for the second quarter of 2007, essentially unchanged, when compared with 484,700 title orders closed in the second quarter of 2006.
Direct premiums made up approximately 55 percent of the total title premiums for the second quarter of 2007, compared with 52 percent in the same quarter of 2006.
Improvements in treasury practices resulted in a 39 percent increase in investment income during the second quarter of 2007, to $66.8 million, up from $48.1 million in the prior year.
Salary and other personnel costs increased by 3 percent, compared with the second quarter of 2006. The increase includes $3.7 million of employee separation costs related to the company’s restructuring of certain title branches, as well as $10.1 million due to new acquisitions. Other operating expenses increased 5 percent, compared with the second quarter of 2006. The increase includes $3.7 million of costs related to the company’s consolidation of selected title facilities, as well as $4.3 million due to new acquisitions.
Specialty Insurance. Total revenues at First American’s Specialty Insurance segment grew 1 percent in the second quarter of 2007, compared with the second quarter of 2006, to $82.2 million. Pretax profits were down 9 percent in the second quarter of this year to $13.5 million, compared with the second quarter last year, due in part to an increase in the average cost per claim and growth of operations in new states.
Mortgage Information. The Mortgage Information segment experienced a 5 percent decline in revenue, to $132.9 million, in the second quarter of 2007, compared with $139.8 million in the second quarter of 2006. The decline was primarily a result of a decrease in mortgage originations and an increase in the estimated servicing life of the tax service loan portfolio due to a slowdown in prepayment speeds. Pretax profits during the quarter decreased 14 percent, to $28.2 million, from $32.6 million in the second quarter of 2006.
Property Information. During the second quarter of 2007, the Property Information segment grew its total revenues 45 percent versus the second quarter of 2006. Total revenues were positively affected by an increase in the appraisal business, which grew by 115 percent, and the addition of incremental revenues from the CoreLogic transaction. Pretax profits increased 17 percent in the second quarter of 2007, compared with the second quarter last year.
First Advantage During the second quarter of 2007, First Advantage Corporation (NASDAQ: FADV) increased its service revenues 8 percent, compared with the second quarter of 2006. Pretax profits increased $1.4 million, compared with the second quarter of last year. First American owns shares of Class B common stock, representing a 75 percent economic interest in First Advantage.
First American’s board of directors declared a regular quarterly cash dividend of 22 cents per common share. The cash dividend is payable on Oct. 15, 2007, to shareholders of record as of Sept. 28, 2007. First American has paid a cash dividend for each of the last 98 years.
Share Repurchase Program
Year-to-date, the company has repurchased 3.9 million shares of its common stock at a total cost of $193.6 million. Under the share repurchase program, which has no expiration date, the company has the authority to repurchase additional shares totaling $172.7 million.
Management’s outlook for 2007 contemplates a continued slowdown in housing activity impacting the company’s title, tax monitoring and flood certification businesses. Given this outlook, management of these businesses will focus on expense management. The company expects 2007 to be a transition year, as actions are taken to improve the company’s pretax margins in future years.
Source: The First American Corporation