First American Corporation (New) · NYSE:FAF
First American Corporation (New) — First American Financial — Barclays Americas Select Franchise Conference 2017
31 slides from First American Corporation (New)'s conference presentation, May 17, 2017
Slide 1: First American Financial
First American Financial Barclays Americas Select Franchise Conference May 17, 2017 ©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 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 SECURITIE
Slide 3: Use of non-GAAP Financial Measures
Use of non-GAAP Financial Measures 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. A
Slide 4: Company Overview
Company Overview • Since 1889, a market leader in title insurance and settlement services Leading position in • 26.5% market share in U.S. title insurance market with single national brand • #2 market share position in the US title insurance • Pursuing profitable share growth in key markets markets
Slide 5: Organizational Structure
Organizational Structure 2016 Revenue: $5.6B Total Revenue Trend 6.0 0.3 5.0 0.3 0.3 0.4 International 0.3 0.4 0.5 0.3 0.3 5% 0.4 0.5 4.0 0.3 0.6 0.6 0.4 Mortgage & U.S. Title 3.0 Data U.S. Title 78% 78% Solutions 2.0 4.0 4.3 9% 3.7 3.5 3.3 1.0 Specialty 8% - 2012 2013 2014 2015 2016 U.S. Title Mort
Slide 6: First American's Strategy
First American’s Strategy Vision: To be the premier title insurance and settlement services company Manage Profitably Strengthen and actively grow our the enterprise invest in core title and through data complementary settlement and process businesses that business advantage support or expand the co
Slide 7: Title Insurance Segment Margins
Title Insurance Segment Margins Mortgage Originations (1) Pretax Margin $4,200 14% Target $3,500 12% 10% ($ in Billions) $2,800 8% 6% $2,100 4% $1,400 2% 0% $700 -2% $- -4% 2017 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 (1) Source: Mortgage Bankers Associat
Slide 8: Refinance Market
Refinance Market Open Orders / Day Current Trend 3,000 2,500 • Open orders have stabilized at ~1200 per day in 1Q 2,000 • Significantly reducing resource 1,500 commitments in our refinance 1,000 focused businesses • Closely monitoring order levels as 500 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov D
Slide 9: Purchase Market
Purchase Market Open Orders / Day Current Trend 2,600 2,400 • 13% revenue growth in 1Q 2017 2,200 2,000 • Fees per file up 8% 1,800 • Closed orders up 4% 1,600 1,400 • Home price appreciation robust 1,200 • Strong buyer demand 1,000 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec • Lack of for sale
Slide 10: Commercial Market
Commercial Market Current Trend $800 Local NCS 696 595 98 661 • Revenues up 2% in 1Q 2017 $600 546 102 81 89 • Seeing continued strength across $ in millions $400 most markets and asset classes 506 598 559 • Overall quality and size of deals 465 $200 remain high $0 • Capital availability and foreign
Slide 11: 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 • M
Slide 12: Dividends
Dividends Dividends per share Dividend Considerations: $1.75 $1.50 $1.36 • First American expects to pay a meaningful $1.20 dividend given the company’s cash flow $1.25 $1.00 generation and investment opportunities $1.00 $0.84 $0.75 $0.48 • Dividend increases should be sustainable $0.50 $0.36 $0.24
Slide 13: Capital Management
Capital Management Operating Cash Flow Uses $2.2 Billion (2012 – 2016) Capital Expenditures 24% Investments & Other 39% Dividends 19% Acquisitions 15% Share Buyback 3% Note: Based on prior five year period 2012 – 2016 operating cash flow 13
Slide 14: Capital Structure
Capital Structure As of March 31, 2017 ($ in millions) 4.3% senior notes due 2023 $248 • Management’s target debt-to-capital 4.6% senior notes due 2024 298 ratio is 18-20% Trust deed notes 26 – Supports target financial Other notes 4 strength ratings Revolving credit facility 160 • No significant ma
Slide 15: Investment Portfolio
Investment Portfolio Insurance Portfolio $2.2 Billion Gov't Agency Consolidated Portfolio 3% Municipal US $5.0 Billion Treasury 20% 7% Corporate Equity 35% Gov't Agency 18% 4% Municipal Gov't 20% Agency Avg. Rating: AA MBS Duration: 3.5 US Treasury Corporate Foreign 11% Book Yield: 2.7% 3% 18% 6% Eq
Slide 16: Impact of Higher Interest Rates
Impact of Higher Interest Rates Benefits Risks Insurance portfolio investment income Decreased value of fixed income portfolio • Yield on new investments will be Impact to refinance volumes greater than current book yield • Refinance represented 17% of direct Banking Profitability revenue premiums i
Slide 17: Investment Considerations
Investment Considerations • “Pure play” in title and mortgage markets • Strong competitive position in title and settlement services ‒ Continue to pursue profitable market share gains ‒ Strengthening the enterprise through data capabilities • Record title segment margins with longer-term upside rema
Slide 18: Total Shareholder Return
Total Shareholder Return FAF Total Shareholder Return FAF S&P 500 24.6% 1 year 18.0% 21.4% 3 year 10.5% 24.2% 5 year 13.7% 0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% Source: Annualized return through 4/30/2017 18
Slide 19: Appendix
Appendix ©2015 First American Financial Corporation and/or its affiliates. All rights reserved. q NYSE: FAF
Slide 20: Balance Sheet
Balance Sheet As of March, 31 2017 ($ millions) Assets Return on Equity Cash & equivalents $1,047 TTM Net income $349 Investments 5,183 Average Equity $2,958 Other assets 1,548 ROE 11.8% Goodwill & intangibles 1,096 Total assets $8,874 Debt-to-capital 19.3% Liabilities & Equity Demand Deposits $2,88
Slide 21: Ultimate Loss Ratios by Policy Year
Ultimate Loss Ratios by Policy Year (2) (1) Paid to Date Ultimate Loss Ratio - Policy Year Paid Losses - Calendar Year 14.0% 400 13.1% 350 Paid Losses by Calendar Year ($ in Millions) 12.0% Ultimate Loss Ratios by Policy Year 10.8% 9.8% 9.8% 300 10.0% 90% 250 89% 8.0% 7.7% 92% 86% 200 6.3% 6.0% 91%
Slide 22: 2016 Incurred Claims Detail
2016 Incurred Claims Detail Claim Cause Process Cause Underwriting File Shortages (3%) Other (9%) Escrow/Closing (4%) (27%) Basic Risks (22%) Defective Title (8%) Exam (9%) Disputed Procedure (0%) Escrow/Closing Escrow/Closing(2%) (6%) Other (5%) Fraud (12%) Unclassified GVS GVS/ /PVII PVII(4%) (2%)
Slide 23: Legal Entity Re-alignment Increased Dividend Capacity
Legal Entity Re-alignment Increased Dividend Capacity 2012 2015 First American First American Financial Corp Financial Corp First American First American First American First American First American Title Title Republic Title Property and Data Property and Insurance Insurance (Agent) Casualty Compan
Slide 24: Enhanced Statutory Capital
Enhanced Statutory Capital US$ in millions 2011 2012 2013 2014 2015 2016 Beginning Surplus 868 849 956 996 979 1,104 • Recently completed a multi-year effort to Net Income 92 301 199 393 192 150 enhance the financial strength and flexibility of Di vi dend to Pa rent (47) (219) (139) (263) (60) - the
Slide 25: Capital Expenditures
Capital Expenditures Capital Expenditures • Fixed Assets $140 – ~$35 million annually Millions $120 • Software $100 – Customer-facing technology $80 – Integrated mortgage disclosure $60 readiness $40 – Production system (FAST) $20 enhancements $0 • Title Plant 2011 2012 2013 2014 2015 2016 Software
Slide 26: 2016 Revenue Breakdown
2016 Revenue Breakdown First American Financial 2016 Revenue: $5.6B Specialty Title Segment Segment 8% 92% Specialty Segment Title Segment 2016 Revenue: $0.4B 2016 Revenue: $5.1B Agency U.S. Title Home 45% Warranty 69% International U.S. Title 6% 78% Property & Mortgage & Casualty Data Direct 31% So
Slide 27: Industry Structure
Industry Structure Industry Premiums - $14.3B Underwriter Market Share 2016 2016 Regionals, FAF, 26.5% 14.4% Direct 38% STC, 11.2% Agent 62% ORI, 14.8% FNF, 33.1% Source: ALTA 27
Slide 28: Industry Premiums by State
Industry Premiums by State 20% Top 5 = 49% of premiums Top 20 = 83% of premiums 15% 15% Percent of Industry Premiums 12% Direct 10% 10% Agent 8% 5% 4% IL NJ AZ CO OH WA MI VA GA MA MD OR UT TN WI TX CA FL NY PA 0% 0% 15% 30% 45% 60% 75% 90% Cumulative Percent of Industry Premiums Source: ALTA (2016
Slide 29: First American Footprint
First American Footprint Distribution Strategy Direct • Local presence in 26 states • Positioned in top metro areas • Offices must support fixed costs through the cycle Agency • Underwriter in 49 states • Business in both rural and metro areas • Highly variable cost structure FAF Direct Operations 2
Slide 30: Industry Distribution by State
Industry Distribution by State Western states have a greater mix of direct distribution Direct Premium Mix(1) Less than 20% 20% - 35% 35% - 50% Greater than 50% (1) Source: ALTA; data for 2016 30
Slide 31: Title Segment Success Ratio
Title Segment Success Ratio Full Year 2016 Calculation Target ($ in millions) 2016 2015 Change • < 60% when NOR increases • > 60% when NOR decreases Personnel and other operating expenses $2,343 $2,237 +105 • 60% target is only sustainable until optimized margin is achieved Total revenues 5,134 4,78
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