First American Corporation (New) · NYSE:FAF
First American Corporation (New) — First American Financial — Investor Day (May 2015)
100 slides from First American Corporation (New)'s investor day presentation, May 20, 2015
Slide 1: First American Financial Investor Day
First American Financial Investor Day May 20, 2015 ©2015 First American Financial Corporation and/or its affiliates. All rights reserved. q NYSE: FAF
Slide 2: Safe Harbor Statement
Safe Harbor Statement Certain statements made in this presentation and the related management commentary and responses to investor questions, including but not limited to those related to an improving economy, the outlook for the real estate market; strategic initiatives; growing the company’s core
Slide 3: Use of non-GAAP Financial Measures
Use of non-GAAP Financial Measures This slide presentation contains 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 ex
Slide 4: Agenda
Agenda • Welcome Craig Barberio, Director of Investor Relations • Strategy & Business Objectives Dennis Gilmore, Chief Executive Officer • U.S. Title Operations Chris Leavell, COO, FA Title Insurance Company • International Division Ken DeGiorgio, Executive Vice President • Q&A • Break • Mortgage &
Slide 5: Strategy & Business Objectives
Strategy & Business Objectives Dennis Gilmore Chief Executive Officer ©2015 First American Financial Corporation and/or its affiliates. All rights reserved. q NYSE: FAF
Slide 6: A Brief History of First American
A Brief History of First American • 1889: Orange County Title Company founded • 1957: Initiated geographic expansion plan • 1964: IPO on NASDAQ • 1982: Footprint reaches all 50 states • 1985: Began product expansion with acquisitions of home warranty and tax services • 1993: Listed on NYSE • 2008: I
Slide 7: Organizational Structure
Organizational Structure First American Financial Specialty Insurance Title Insurance and Services Segment Segment International Mortgage & Banking & U.S. Title Title Data Solutions Services Mortgage Property & Direct Canada Trust & Banking Solutions Casualty Database Real Estate Agency Europe Home
Slide 8: Historical Timeline
Historical Timeline Grow Core 35% Businesses Restructuring Market Share Growth • Disciplined growth • Customer experience 30% • Grow data business • Regulatory preparedness • Decentralized • Multiple brands • Highly acquisitive • Expanded product offering 25% • Transformed operating model • Expense
Slide 9: Restructuring Results
Restructuring Results Actions Financial Results Peak(1) 2014 2007 2014 Operations: Total revenues $6.1B $4.7B National brands 3 1 Mortgage originations(3) $2.3T $1.1T Title market share(4) 30.0% 27.9% Residential title divisions 16 2 Personnel & other operating (2) $3.1B $2.2B Total employees 24,200
Slide 10: Title Insurance Segment Margins
Title Insurance Segment Margins Mortgage Originations(1) Pretax Margin $4,200 14% $3,500 12% 10% $ in Billions $2,800 8% 6% $2,100 4% $1,400 2% 0% $700 -2% $- -4% 2015E 2016E 2002 2000 2001 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 (1) Source: Mortgage Bankers Association 10
Slide 11: First American's Strategy
First American’s Strategy Vision: To be the premier title insurance and settlement services company Gain Expand and Manage profitable leverage data to complementary market share strengthen core businesses in in the core and pursue new ways that title and opportunities; support or settlement develop
Slide 12: Market Share Trend
Market Share Trend FAF Market Share(1) 35% • Focused on key markets +1.6% – Top 5 states 30% 26.9% 27.9% – Organic growth emphasis complemented 26.3% 25% with disciplined acquisitions 15.7% – Sales, closing and underwriting personnel 20% 15.5% 14.3% • Customer-facing technology 15% – Improves custom
Slide 13: Expand and Leverage Data
Expand and Leverage Data 2011 2013 2015 Phase Post-spin Strengthen Core Market Expansion Positioning • Reduce critical reliance • Assemble industry- • Leverage platform to on vendors for data leading data team expand real estate – Data driven • Build out property finance presence products informat
Slide 14: Complementary Businesses
Complementary Businesses Strategic businesses that leverage core title business to create value Description Strategic Fit • Federal Savings Bank with $3 • Enables efficient banking billion in demand deposits tied processes for title offices to real estate transactions • Natural hazard disclosures, •
Slide 15: Regulatory Landscape in Transition
Regulatory Landscape in Transition • CFPB is primary federal regulator post-financial crisis ‒ New regulations ‒ Active enforcement • Mortgage industry focused on quality and compliance including 3rd party providers ‒ Financial penalties ‒ Reputational risk • Integrated mortgage disclosure brings si
Slide 16: First American Objectives
First American Objectives • Gain profitable market share in core title insurance and settlement • Grow data business to strengthen the core and expand real estate Operational Objectives finance presence • Manage complementary businesses that leverage and support the core Title Insurance Pretax Margi
Slide 17: Investment Considerations
Investment Considerations • “Pure play” in title and mortgage markets • Strong competitive position in title and settlement services ‒ Pursuing continued market share gains • Opportunity to expand data and analytics business • Structural cost reductions have enhanced earnings power ‒ Expect earnings
Slide 18: Total Shareholder Return
Total Shareholder Return 200 FAF S&P 500 Russell 2000 150 100 50 Since 1 year(1) 3 year(2) 0 Spin-off(3) First American 35.0% 30.6% 22.1% S&P 500 13.0% 16.7% 16.4% Russell 2000 9.7% 15.9% 14.8% -50 6/1/2010 6/1/2011 5/31/2012 5/31/2013 5/31/2014 4/30/2015 (1) For the 1 year period April 30, 2014 thr
Slide 19: U.S. Title Operations
U.S. Title Operations Chris Leavell Chief Operating Officer First American Title Insurance Company ©2015 First American Financial Corporation and/or its affiliates. All rights reserved. q NYSE: FAF
Slide 20: U.S. Title Overview
U.S. Title Overview U.S. Title Direct Agency Commercial First American Financial 2014 Revenue: $4.7B Total Revenue Trend 4.0 $3.7 $3.5 3.5 $3.2 0.6 0.6 $ in Billions 3.0 $2.6 0.4 2.5 0.4 1.0 U.S. Title 1.0 1.0 74% 2.0 0.7 $3.5B 1.5 1.0 1.8 2.1 1.9 1.5 0.5 - 2011 2012 2013 2014 Agency Direct Commerci
Slide 21: Industry Premiums by State
Industry Premiums by State Top 20 = 84% of premiums 20% Top 5 = 50% of premiums 16% 15% Percent of Industry Premiums 12% 10% 10% 9% Direct Agent 5% 4% IL NJ OH AZ MI CO VA WA GA MA MD UT OR TN WI TX CA FL NY PA 0% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Cumulative Percent of Industry Premiums 21
Slide 22: Industry Distribution by State
Industry Distribution by State Western states have a greater mix of direct distribution Direct Premium Mix(1) Less than 20% 20% - 35% 35% - 50% Greater than 50% (1) Source: ALTA; data for 2014 22
Slide 23: First American Footprint
First American Footprint Distribution Strategy Direct • Local presence in 27 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 FAF Direct Operations 2
Slide 24: Direct Operations Overview
Direct Operations Overview • Residential purchase and refinance • Local commercial Business • Homebuilder • Title premiums and escrow services • 27 states • 625 offices Operations • ~5,000 employees • 75% of orders leverage offshore platform Sales Channels & • Realtors • Lenders • Escrow officers •
Slide 25: Integrated Production System
Integrated Production System FAST Purchase • Enterprise-wide production system Refinance Title Order Policy Issued • Efficient automated workflow Default Entry – Title searches Commercial 1 5 • Customer interface – Settlement processes • myFirstAm – Milestone notifications • AgentNet • Integrated wi
Slide 26: Direct Strategy
Direct Strategy Top 5 States(1) Strategy 400 300 Growth Change in Market Share 200 NY 100 CA • Focus on metro areas in top 5 states TX • Recruit, develop and retain (bps 2012-2014) 0 -100 exceptional people -200 AZ WA -300 • Develop customer facing technologies -400 10 20 30 40 50 Market Share Effic
Slide 27: Agency Operations Overview
Agency Operations Overview • Residential purchase and refinance • Commercial (local and national) Business • Title premiums – Average agent split of 80% • Provide search and production services • National agency platform • 49 states Operations • 100 offices • ~800 employees • Attorneys • Lenders Sal
Slide 28: Agent Splits by State
Agent Splits by State 2014 Agent Split Greater than 85% 80% - 85% 75% - 80% 70% - 75% Less than 70% Factors Determining Split • Level of support – Underwriting Promulgated split – Technology • Claims experience • Size of agents • Competition 28
Slide 29: Agency Strategy
Agency Strategy Top 5 States(1) Strategy 800 Growth 600 Change in Market Share 400 NY PA • Expand commercial agency business • Increase use of search and production (bps 2012-2014) 200 TX IL 0 FL services -200 • Recruit, develop and retain -400 exceptional people 10 20 30 40 50 Market Share FAF Agen
Slide 30: Commercial Operations Overview
Commercial Operations Overview • Purchase and refinance • 1031 tax deferred exchanges Business • Title premiums and escrow services – Due diligence services • 49 states • 48 offices Operations • ~1,150 employees • Unique operating platform • Private equity/debt • Insurance companies Sales Channels &
Slide 31: Commercial Business Outlook
Commercial Business Outlook Commercial Market Sales Volume(1) Direct Revenues $800 $800 Local NCS 596 $600 $600 546 $ in Millions $ in Billions 89 573 440 81 $400 427 $400 67 424 362 298 465 507 $200 234 $200 373 175 146 68 $0 $0 2006 2007 2008 2009 2010 2011 2012 2013 2014 2012 2013 2014 Commercial
Slide 32: Commercial Strategy
Commercial Strategy Commercial Market Share(1) Sales Strategy Total • Actionable business intelligence to identify target customers FAF • Customized sales plan for each market 30% ‒ Capital markets ‒ Strategic markets Direct Agent • Focus on key target accounts • Track wallet share by customer FAF F
Slide 33: Expense Management
Expense Management • Centralized administration functions ‒ Procurement, real estate, accounting, technology • Well-developed offshore platform • Disciplined personnel hiring process ‒ Favor overtime and temps in current environment • Highly variable compensation – Pay for performance • Operating me
Slide 34: Title Segment Success Ratio
Title Segment Success Ratio 2014 Calculation Target ($ in millions) 2014 2013 Change • < 60% when NOR increases • > 60% when NOR decreases Personnel and other operating expenses $2,075 $2,155 (80) • 60% target is only sustainable until optimized margin is achieved Total revenues 4,304 4,606 • Succes
Slide 35: One First American
One First American FAF businesses directly support core title operations Trust & Banking • Automates banking Mortgage Solutions processes (account Real Estate Services openings, wires) • Provides reconciliation • Coordinates local of trust accounts for FAF closing for centralized and third parties l
Slide 36: Integrated Mortgage Disclosure
Integrated Mortgage Disclosure New Forms = New Processes = New Data Requirements = Significant Change • Closing Disclosure must be delivered to borrower 3 days prior to closing (effectively 7-10 days ahead) ‒ Changes add further delay • Tight tolerances measured relative to Loan Estimate (delivered
Slide 37: Key Takeaways
Key Takeaways • Focused on gaining profitable share in top 5 states ‒ Strategy is translating into results • Customer centric organization creating opportunities ‒ Both direct and agency channels benefitting • One First American ‒ Early successes as business units work together more closely • Integr
Slide 38: International Division
International Division Ken DeGiorgio Executive Vice President ©2015 First American Financial Corporation and/or its affiliates. All rights reserved. q NYSE: FAF
Slide 39: International Overview
International Overview International Canada Europe Australia International Division 2014 Revenue: $324M Total Revenue Trend Other 400 Canada $347 3% 64% 350 $329 $315 $324 $9M 300 $ in Millions $208M 250 Australia 14% $46M 200 150 100 $61M 50 - Europe 2011 2012 2013 2014 19% International 39
Slide 40: International Highlights
International Highlights • Largest provider of international title insurance • 25 years of operating experience • Office locations in 7 countries • Open to issue title insurance policies in 40 approved countries • ~7% of First American revenue • Mix of risk and non-risk bearing products and services
Slide 41: International Footprint
International Footprint GREENLAND SWEDEN ICELAND ALASKA (USA) FINLAND RUSSIAN FEDERATION NORWAY ESTONIA CANADA LATVIA LITHUANIA Canada UK REPULIC OF IRELAND BELGIUM GERMANY POLAND BELARUS FRANCE SWITZ. CZECH REPUBLIC AUSTRIA Serbia SLOVAKIA HUNGARY ROMANIA Hungary UKRAINE KAZAKHSTAN MONGOLIA ITALY C
Slide 42: Country Selection
Country Selection • Goal: Improve the real estate settlement process • Selection criteria – Reliable legal and land title system – Country population and level of home ownership – Volume of real estate transactions: cash vs. financed – Cultural fit • Investment considerations ‒ Must have conviction
Slide 43: International Overview by Geography
International Overview • Provide title insurance, settlement and other related services to lenders. Also issue residential and Canada commercial title policies via lawyers and other real estate professionals to facilitate transactions. • 750 employees; 8 offices Geographies • Provide title insurance
Slide 44: Product Mix
Product Mix Product Mix Risk-based: 52% Canada Europe ANZ Residential Residential Title Title 35% Commercial Title Commercial 15% Title Other 2% Mortgage Other Processing 4% Mortgage Default Processing / Conveyancing Solutions Conveyancing 5% 39% Default Solutions Non-risk based: 48% 44
Slide 45: International Strategy
International Strategy • Grow in our core geographies • Improve profit margins • Explore new markets which can have a meaningful impact on the long-term financial results of the division • Complete exits from non-core markets 45
Slide 46: Question and Answer
Question and Answer ©2015 First American Financial Corporation and/or its affiliates. All rights reserved. q NYSE: FAF
Slide 47: Break
First American Financial Investor Day May 20, 2015 BREAK ©2015 First American Financial Corporation and/or its affiliates. All rights reserved. q NYSE: FAF
Slide 48: Mortgage & Data Solutions
Mortgage & Data Solutions George Livermore Executive Vice President ©2015 First American Financial Corporation and/or its affiliates. All rights reserved. q NYSE: FAF
Slide 49: Mortgage & Data Solutions Overview
Mortgage & Data Solutions Overview Mortgage & Data Solutions Mortgage Database Solutions Solutions First American Financial 2014 Revenue: $4.7B Total Revenue Trend Refinance Originations ($ in Billions) 800 1,600 $609 Total Revenue ($ in Millions) Mortgage & Data 700 1,400 Solutions 600 $552 1,200 $
Slide 50: Mortgage Industry in Transition
Mortgage Industry in Transition • Lenders focused on producing a defect free mortgage • Financially strong, dependable, compliant partners are in demand • Tighter integration between loan underwriting & settlement is needed • Mortgage industry is re-organizing around quality & compliance • Lenders f
Slide 51: First American Positioning
First American Positioning First American is uniquely positioned to serve mortgage lenders 125 year history of leadership with strong reputation Demonstrated commitment to real estate financing Financially strong National title and settlement infrastructure Breadth of products and services to fill c
Slide 52: Mortgage Industry Value Chain
Mortgage Industry Value Chain First American serves the mortgage industry across the entire value chain Origination Acquisition Processing Underwriting Closing Post Close • Property data • Flood certifications • AVMs • Centralized title & • Appraisal Risk • Portfolio monitoring • SSN verification •
Slide 53: Mortgage Solutions Customers
Mortgage Solutions Customers # of Target Customers Customers TAM(1) Top money center 20-30 $2.5B • National footprint banks • Title & settlement services Super regionals 30-40 $500M • Centralized fulfillment • Refinance Regional banks and • Equity 200-300 $500M • Default credit unions Mortgage banke
Slide 54: Mortgage Solutions Operations
Mortgage Solutions Operations • One sales force Sales • One national brand • Client centric go-to-market process • 3 primary production centers – Dallas – Phoenix Operations – Santa Ana • Production leverages automation and offshore resources • Established six-sigma processes • Integrated with corpo
Slide 55: Mortgage Solutions Strategy
Mortgage Solutions Strategy Key Customer Mandates First American Response Improve operational capabilities Help lenders produce a • Re-engineer operations with a quality orientation defect free mortgage • Established lean six-sigma programs • Developing quality metrics and measurements criteria • Id
Slide 56: Database Solutions
Database Solutions ©2015 First American Financial Corporation and/or its affiliates. All rights reserved. q NYSE: FAF
Slide 57: Industry Leading Databases
Industry Leading Databases Competitive % of U.S. Position Population Description Database of 500 counties including liens, Title Plants #1 71% encumbrances, and easements 5.5 billion images of publicly recorded Land Record #1 88% documents such as mortgages, deeds of trust Documents and liens Owners
Slide 58: Strengthening the Core
Strengthening the Core Data Independence People • Minimize reliance on third party • Hired top talent to strengthen vendors data leadership • Continually enhance property – Sales information database – Product development • Control long-term quality of Title & – Data specialists data content Settlem
Slide 59: Market Expansion
Market Expansion First American is in the early stages of expanding our data business • Lenders need help with “defect-free” Competitive Advantages Market mortgage process Depth and breadth of data coverage Opportunity • Data validation of all incoming forms in origination process is critical No leg
Slide 60: Strategy
Strategy • Use data to strengthen core title and settlement business • Minimize long-term need to rely on third party data vendors • Improve operational efficiency and reduce costs • Leverage data to serve the real estate finance industry • Develop innovative products and services 60
Slide 61: Specialty Insurance Segment
Specialty Insurance Segment Larry Davidson Chief Operating Officer, Specialty Insurance ©2015 First American Financial Corporation and/or its affiliates. All rights reserved. q NYSE: FAF
Slide 62: Specialty Insurance Segment
Specialty Insurance Segment Specialty Insurance Segment Property & Home Casualty Warranty First American Financial 2014 Revenue: $4.7B Total Revenue Trend 400 $369 350 $340 $315 300 $287 132 $ in Millions Specialty 120 250 118 Insurance Title Insurance 109 $0.4B Segment 200 Segment 8% 92% 150 $4.3B
Slide 63: Specialty Segment Financial Summary
Specialty Segment Financial Summary ($ in Millions) 2012 2013 2014 Total revenues $315 $340 $369 Pretax income $47 $42 $53 Pretax margin 15.1% 12.4% 14.4% Loss ratio 54.1% 56.8% 55.7% Expense ratio 34.9% 33.1% 33.2% Combined ratio 89.0% 89.9% 88.9% 63
Slide 64: Property & Casualty Overview
Property & Casualty Overview • Provides homeowners insurance and renters insurance Business • One year, renewable contracts • Regulated by each state’s department of insurance • 45 states with 287,000 policies in force • 760 independent agents Operations • Multiple call centers • Centralized claims
Slide 65: P&C Distribution Channel
P&C Distribution Channel 2014 Retention 2014 Premiums Channel Rate Independent Licensed agents who Renters Escrow 92% Agents sell our homeowner policies 17% and Direct 14% Other 3% Direct sales by company Escrow and primarily associated with 91% Direct real estate transactions Independent Agents 66%
Slide 66: Property & Casualty Strategy
Property & Casualty Strategy • Maximize escrow/real estate channel – Focused efforts underway to increase participation • Optimize product line profitability ‒ Policy pricing and coverage terms • Grow renters channel – Expand distribution 66
Slide 67: Home Warranty Overview
Home Warranty Overview • Provides home warranty plans covering repair and replacement of major household systems and appliances Business • One year, renewable contracts • Regulated in most states • 38 states • 443,000 active contracts Operations • 3,300 independent contractors • 4 call centers (2 U.
Slide 68: Home Warranty Distribution Channels
Home Warranty Distribution Channels 2014 Retention 2014 Premiums Channel Rate Real Sales driven by home Real 21% Estate Direct-to- Estate purchases/sales (1st Year) Consumer 33% (1st Year) 8% Sales through direct Direct-to- marketing to consumer 83% Consumer (direct mail, internet, TV) Renewals 59%
Slide 69: Direct-to-Consumer
Direct-to-Consumer Low Homeowner Penetration Direct-to-Consumer Direct Premiums(1) U.S. single family housing stock ~76M $60 19% CAGR Home Warranty industry # contracts ~4M $50 $52.9 $ in Millions $40 $46.2 Penetration Rate ~5% $37.2 $30 $20 Annual sales turnover of housing stock ~7% $10 $- Direct-t
Slide 70: Home Warranty Market Share
Home Warranty Market Share 2014 Market Share FAF Geographic Mix HMS/Cross Country Top 5 States % of Total Old 10% Other Republic 22% California 35.0% 11% Texas 18.0% First American Arizona 5.5% 14% American Tennessee 4.9% Home Shield Virginia 4.0% 43% Total 67.4% 70
Slide 71: Home Warranty Strategy
Home Warranty Strategy • Continue focus on real estate channel ‒ Leverages core title and settlement business • Grow direct-to-consumer business – Low market penetration – Media (TV) advertising underway – Optimize customer acquisition cost • Upgrade customer experience – New technology platform des
Slide 72: Financial Update
Financial Update Mark Seaton Executive Vice President, Chief Financial Officer ©2015 First American Financial Corporation and/or its affiliates. All rights reserved. q NYSE: FAF
Slide 73: Capital Management Strategy
Capital Management Strategy • Objective: Create long-term shareholder value • 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 ‒
Slide 74: Capital Expenditures
Capital Expenditures Capital Expenditures • Fixed Assets $120 – ~$30 million annually $100 • Software – Customer-facing technology $ in Millions $80 $60 – Integrated mortgage disclosure readiness $40 – Production system (FAST) $20 enhancements $0 • Title Plant 2011 2012 2013 2014 – Title plant expan
Slide 75: Mergers & Acquisitions
Mergers & Acquisitions Company Description 2010 • Acquire companies strategic Nazca Solutions Property database service with key technology for assembling disparate to our core business that: property related information in real-time 2011 – Strengthen - - geographic presence 2012 – Enhance product T
Slide 76: Dividends
Dividends Dividends per share Dividend Considerations $1.20 $1.00 • First American expects to pay a meaningful $1.00 $0.84 dividend given the company’s cash flow generation $0.80 and investment opportunities $0.48 $0.60 $0.36 $0.40 $0.24 • Dividend increases should be sustainable $0.20 $0.00 • Divid
Slide 77: Share Repurchases
Share Repurchases Share Repurchase History $40 Share Buyback Period • Share repurchases will be $38 $36 considered when: $34 $32 – Excess capital is available $30 $28 – Stock price < Intrinsic value $26 $24 – Most attractive use of $22 $20 capital Mar-13 Mar-14 Jan-13 Jan-14 Jul-14 Mar-15 Jan-15 Jul
Slide 78: Credit Ratings
Credit Ratings First American’s objective is to maintain at least A-/A3 financial strength ratings through the cycle Financial Strength Senior Debt S&P A- (stable) BBB- (stable) Moody’s A3 (stable) Baa3 (stable) Fitch A (stable) BBB (stable) A.M. Best A- (positive) BBB- (stable) 78
Slide 79: Capital Structure
Capital Structure As of March 31, 2015 ($ in millions) 4.3% senior notes due 2023 $249 • Management’s target debt-to-capital 4.6% senior notes due 2024 300 ratio is 18-20% Trust deed notes 34 – Supports target financial Other notes 3 strength ratings Revolving credit facility - • No significant matu
Slide 80: Legal Organization - 2012
Legal Organization - 2012 First American Financial Corp First American First American Title Insurance Property and Company Casualty 50% 50% First American Ohio Bar First American First American Home Buyers (Underwriter) Trust Data Company Protection First American Title First American First American
Slide 81: Legal Organization - 2015
Legal Organization - 2015 First American Financial Corp First American First American First American Republic Title Title Insurance Home Buyers Property and (Agent) Company Protection Casualty First American Title First American First American Ohio Bar First American Guaranty Company Professional Re
Slide 82: Statutory Surplus Trend
Statutory Surplus Trend First American has improved the quality of capital by reducing the amount of affiliated investments within the title underwriter Statutory Surplus $1,100 140% $1,000 120% Surplus ($ in Millions) $900 100% % Affiliates $800 80% $700 60% $600 40% $500 20% $400 0% 2010 2011 2012
Slide 83: Holding Company Liquidity
Holding Company Liquidity As of March 31, 2015 ($ in millions) • Liquidity objectives Holding company cash $207 – 1 year cash at holding company Cash held in tax/benefit accounts 55 – Maintain ample financial flexibility Holding company operating cash $152 • Have recently expanded sources of cash to
Slide 84: Cash
Cash As of March 31, 2015 ($ in millions) • Unrestricted cash used for holding Holding company (23%) $207 US regulated (53%) $477 company obligations - FA Trust 234 • Supports capital and liquidity - FATICO 194 - Home Warranty 22 requirements at regulated - Other title underwriters 19 subsidiaries -
Slide 85: Investment Portfolio
Investment Portfolio Insurance Portfolio $1.7 Billion Gov't Agency Consolidated Portfolio 4% Municipal 17% $4.3 Billion US Treasury 6% Corporate Gov't Agency Equity 36% 8% 16% Municipal US Treasury Gov't 15% Corporate 2% Agency Avg. Rating: A Foreign 17% MBS 10% Duration: 4.7 11% Book Yield: 2.7% Eq
Slide 86: Defined Benefit Plans
Defined Benefit Plans As of December 31, 2014 ($ in millions) Pension Pension SERP Total • Pension plan adopted in 1975 Assets $339 - $339 • New participation frozen and salary levels Liabilities (450) (262) (712) capped in 2001 Funded status $(111) $(262) $(373) • Benefit service accruals frozen in
Slide 87: 2014 Incurred Claims Detail
2014 Incurred Claims Detail Claim Cause Process Cause Underwriting Basic Risks Other (13%) Exam (9%) (12%) (15%) Permit Defective Violation Escrow/Closing Title (6%) Search (7%) Fraud (13%) (4%) (17%) Other (7%) File Shortage (2%) Encumbrances (15%) No Error Liens (30%) Escrow/Closing (45%) Unclassi
Slide 88: Ultimate Loss Ratios by Policy Year
Ultimate Loss Ratios by Policy Year (2) (1) Paid to Date Ultimate Loss Ratio - Policy Year Paid Losses - Calendar Year(2) Forecast 14.0% 400 13.0% 350 12.0% Paid Losses by Calendar Year ($ in Millions) Ultimate Loss Ratios by Policy Year 10.1% 300 10.0% 9.5% 9.3% 84% ~$50M 250 8.0% 7.3% 88% 200 86%
Slide 89: Incremental Incurred Losses by Development Period
Incremental Incurred Losses by Development Period $120 $100 $80 $ in Millions $60 2007 $40 2013 2014 $20 2006 2010 2008 2012 2011 2009 2005 $0 0 12 24 36 48 60 72 84 96 108 120 Age of Policy Year (Months) 89
Slide 90: Cumulative Losses by Policy Year
Cumulative Losses by Policy Year 11% 10% 2007 9% 8% 2006 2008 7% Cumulative Loss Ratio 2005 6% 5% 2009 4% Long Term Average (1) 2011 2010 3% 2% 2014 2012 2013 1% 0% 0 12 24 36 48 60 72 84 Age of Policy Year (Months) (1) 1995 – 2014, Excluding 2005 - 2008 90
Slide 91: Claim Severity Distribution
Claim Severity Distribution Claim Count by Severity Group Paid Claims by Severity Group Large Claims Minor Claims (2%) (1%) Minor Claims Large (38%) Typical Claims Typical Claims (39%) Claims (60%) (60%) Large claims: $250,000 and greater Typical claims: $1,000 to $250,000 Minor claims: Less than $1
Slide 92: Title Insurance Margin Objective
Title Insurance Margin Objective Downside Base Case Upside Pretax margin < 10% 10% - 12% > 12% Mortgage originations < $1.0 Trillion ~ $1.2 Trillion > $1.5 Trillion % Refinance ~ 35% ~ 35% ~ 35% 92
Slide 93: Title Insurance Segment Margins
Title Insurance Segment Margins Mortgage Originations(1) Pretax Margin $4,200 14% $3,500 12% Objective 10% $ in Billions $2,800 8% 6% $2,100 4% $1,400 2% 0% $700 -2% $- -4% 2015E 2016E 2008 2000 2001 2002 2003 2004 2005 2006 2007 2009 2010 2011 2012 2013 2014 (1) Source: Mortgage Bankers Association
Slide 94: Impact of Higher Interest Rates
Impact of Higher Interest Rates Benefits Risks Insurance portfolio investment income Decreased value of fixed income portfolio • Yield on new investments will be Impact to refinance volumes greater than current book yield • Refinance represented 12% of title direct Banking Profitability premiums and
Slide 95: Investment Considerations
Investment Considerations • “Pure play” in title and mortgage markets • Strong competitive position in title and settlement services ‒ Pursuing continued market share gains • Opportunity to expand data and analytics business • Structural cost reductions have enhanced earnings power ‒ Expect earnings
Slide 96: Question and Answer
Question and Answer ©2015 First American Financial Corporation and/or its affiliates. All rights reserved. q NYSE: FAF
Slide 97: Appendix
Appendix ©2015 First American Financial Corporation and/or its affiliates. All rights reserved. q NYSE: FAF
Slide 98: U.S. Direct Title Orders
U.S. Direct Title Orders Note: Totals may not foot due to rounding (1) Includes default and other orders 98 (2) Calculated as closed orders per day x business days x ARPO
Slide 99: Information & Other Revenue
Information & Other Revenue ($ in millions) 2011 2012 2013 2014 U.S. Title $192 $198 $194 $186 Database Solutions 114 127 124 114 International 140 129 115 113 Mortgage Solutions – Default 104 121 130 101 Mortgage Solutions – Other 58 59 53 90 Other 12 9 10 14 Title Insurance Segment $620 $643 $626
Slide 100: Direct Orders – Closing Ratio
Direct Orders – Closing Ratio 2014 Opened & Closed Direct Orders 120,000 100% Closing Ratio by Month After Opening Order(1) 100,000 Month Resale Refinance 90% 0 14% 11% Total Direct Orders Closing Ratio 80,000 80% 1 34% 33% 60,000 2 14% 18% 70% 3 4% 5% 40,000 4-12 8% 5% 60% 20,000 True Closing Ratio