First American Financial KBW Mortgage Finance & Asset Management Conference June 1, 2017

Transcription

1 First American Financial KBW Mortgage Finance & Asset Management Conference June 1, First American Financial Corporation and/or its affiliates. All rights reserved. q NYSE: FAF

2 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 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. 2

3 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. 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. 3

4 Company Overview Leading position in title insurance markets 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 Strong operating platform Industry-leading technology infrastructure Well-established, efficient cost structure Achieving record title margins with longer-term upside remaining Strong financial position Market Trends Favorable $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 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 4

5 Organizational Structure International 5% Mortgage & Data Solutions 9% Specialty 8% 2016 Revenue: $5.6B Total Revenue Trend U.S. Title U.S. Title 78% 78% U.S. Title Mortgage & Data Solutions Specialty International 5

6 First American s Strategy Vision: To be the premier title insurance and settlement services company 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 Focus M&A Optimize capital management Deploy our capital to maximize long-term shareholder returns on enhancing the core strategy Innovation Compliance and risk management People and culture 6

7 Title Insurance Segment Margins ($ in Billions) $4,200 $3,500 Mortgage Originations (1) Pretax Margin Target 14% 12% $2,800 10% 8% $2,100 6% 4% $1,400 2% $700 $- 0% -2% -4% (1) Source: Mortgage Bankers Association 7

8 Refinance Market 3,000 2,500 2,000 1,500 1, Open Orders / Day Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Current Trend 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 ,100 1,900 1,700 1,500 1,300 1, Closed Orders / Day Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Outlook Rising interest rates will likely continue to weigh on refinance transactions in 2017 Longer term, expect refinance volumes to remain low 8

9 Purchase Market 2,600 2,400 2,200 2,000 1,800 1,600 1,400 1,200 1,000 Open Orders / Day Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Current Trend 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 2,000 1,800 1,600 Closed Orders / Day Outlook Expect continued growth in 2017 and beyond 1,400 1,200 1,000 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

10 Commercial Market Average Revenue per Order $ in millions Closed Orders per Day $800 $600 $400 $ Local NCS Current Trend 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 $10,000 $9,000 $8,000 $7,000 $6,000 ARPO ,652 6,989 Closed Orders per Day ,583 8, Outlook Expect continued strength, albeit below 2015 record levels Well positioned national platform $5,

11 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 Maintain adequate capital levels Manage our capital structure prudently Maintain ample financial flexibility and holding company liquidity 11

12 Dividends Dividends per share $1.75 $1.50 $1.36 $1.20 $1.25 $1.00 $1.00 $0.84 $0.75 $0.48 $0.50 $0.36 $0.24 $0.25 $ E 2017E 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 60% 40% 20% 32% 15% Payout Ratio 28% 39% 38% 38% 42% 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 0% E (1) 1) Calculated using Consensus EPS estimate for The Consensus EPS excludes the pension termination impact 12

13 Capital Management Operating Cash Flow Uses $2.2 Billion ( ) Capital Expenditures 24% Investments & Other 39% Dividends 19% Acquisitions 15% Share Buyback 3% Note: Based on prior five year period operating cash flow 13

14 Debt-to-Capital ratio Capital Structure As of March 31, 2017 ($ in millions) 4.3% senior notes due 2023 $ % senior notes due Management s target debt-to-capital ratio is 18-20% Trust deed notes 26 Other notes 4 Revolving credit facility 160 Total debt $736 Total equity $3,078 Debt-to-Capital ratio 19.3% Supports target financial strength ratings No significant maturities until 2023 Majority of current debt has a fixed interest rate 35% 30% 25% 20% Debt-to-Capital Ratio Financial Covenant 18.6% 19.6% 17.4% 19.3% The credit facility rate floats at LIBOR basis points FAF has significant financial flexibility to seize strategic opportunities 15% 12.8% 10% 8.9% 11.2% 5% Q

15 Investment Portfolio Insurance Portfolio $2.2 Billion Consolidated Portfolio $5.0 Billion US Treasury 7% Gov't Agency 3% Municipal 20% Gov't Agency 4% Municipal 20% US Treasury 3% Equity 8% Corporate 18% Equity 18% Foreign 6% Gov't Agency MBS 11% Corporate 35% Bank Portfolio $2.8 Billion Avg. Rating: AA Duration: 3.5 Book Yield: 2.7% Foreign 3% Gov't Agency MBS 44% Avg. Rating: AA Duration: 3.5 Book Yield: 2.1% Gov't Agency 5% Municipal 20% Corporate 5% Note: Debt and equity securities as of December 31, 2016 Gov't Agency MBS 70% Avg. Rating: AA Duration: 2.9 Book Yield: 1.5% 15

16 Impact of Higher Interest Rates Benefits Risks Insurance portfolio investment income Yield on new investments will be greater than current book yield Banking Profitability ~35% of banking portfolio in floatingrate securities Spread to deposit costs widen in higher interest rate environment Reduced defined benefit plan obligations Defined benefit plans highly sensitive to interest rates Decreased value of fixed income portfolio Impact to refinance volumes Refinance represented 17% of direct revenue premiums in average revenue per order: Refinance: $885 Resale: $2,134 Commercial: $8,245 Reduced housing affordability Higher interest expense on credit facility Higher investment income on escrow balances Deposits at third party banks Higher earnings at FA Exchange 16

17 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

18 Total Shareholder Return FAF Total Shareholder Return FAF S&P year 18.5% 18.0% 3 year 10.6% 19.8% 5 year 15.3% 26.0% 0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% Source: Annualized return through 5/25/

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

20 Balance Sheet As of March, ($ 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 $1,237 20

21 Ultimate Loss Ratios by Policy Year Paid Losses by Calendar Year ($ in Millions) Ultimate Loss Ratios by Policy Year (2) 14.0% (1) Paid to Date Ultimate Loss Ratio - Policy Year Paid Losses - Calendar Year 13.1% % % 9.8% 10.8% 9.8% % 6.0% 4.0% 2.0% 0.0% 90% 89% 7.7% 92% 86% 6.3% 5.2% 91% 5.3% 5.1% 4.9% 4.6% 93% 83% 4.1% 4.0% 3.7% 3.4% 79% 74% 64% 53% 48% 7% 21% 7% 2% (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,

22 2016 Incurred Claims Detail Claim Cause Process Cause Other (9%) File Shortages (3%) Escrow/Closing (27%) Underwriting (4%) Basic Risks (22%) Defective Title (8%) Disputed Procedure (0%) Exam (9%) Fraud (12%) Escrow/Closing Escrow/Closing (2%) (6%) GVS GVS // PVII PVII (4%) (2%) Other (5%) Unclassified (3%) Encumbrances (17%) Liens (20%) No Error (53%) 22

23 Legal Entity Re-alignment Increased Dividend Capacity First American Financial Corp First American Financial Corp First American Title Insurance Company 50% 50% First American Property and Casualty First American Title Insurance Company First American Data Company First American Property and Casualty Republic Title (Agent) Other Subsidiaries 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) 2012 Actual dividends to Holding Company excluding FATICO Other Subsidiaries $12M 2015 Actual dividends to Holding Company excluding FATICO Other Subsidiaries $83M Note: Legal structure as of June 30, 2012; not a complete list of legal entities 23

24 Enhanced Statutory Capital US$ in millions Beginning Surplus ,104 Net Income Dividend to Parent (47) (219) (139) (263) (60) - Other (65) 26 (20) (148) (7) (67) Ending Surplus ,104 1,187 Dividend to Parent: Cash Non-cash Total Total Non-cash dividend to Parent for the prior 6 years 582 Recently completed a multi-year effort to enhance the financial strength and flexibility of the company ~50% of free cash flow between 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.) US$ in millions 1,400 1,200 1, % % % 28% 1,104 1, % 150% 100% 50% US$ in millions 1,400 1,200 1,050 1, % 400 1,013 1,015 86% 107% % 147% 936 1, % 200% 150% 100% 50% % 13% Surplus Affiliates % of Surplus 0% Reserves Mkt Securities % of Reserves 0% 24

25 Millions Capital Expenditures Capital Expenditures $140 $120 $100 $80 $60 $40 $20 $ (1) Software Fixed Assets Software Licenses Capitalized Data Title Plant 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 Note: excludes capital leases (1) The company began disclosing capitalized data expenditures in

26 2016 Revenue Breakdown First American Financial 2016 Revenue: $5.6B Specialty Segment 8% Title Segment 92% Specialty Segment 2016 Revenue: $0.4B Title Segment 2016 Revenue: $5.1B Property & Casualty 31% Home Warranty 69% U.S. Title 78% International 6% Mortgage & Data Solutions 10% Commercial 13% Agency 45% Direct 26% U.S. Title 26

27 Industry Structure Industry Premiums - $14.3B 2016 Underwriter Market Share 2016 Agent 62% Direct 38% Regionals, 14.4% STC, 11.2% FAF, 26.5% ORI, 14.8% FNF, 33.1% Source: ALTA 27

28 Percent of Industry Premiums Industry Premiums by State 20% Top 5 = 49% of premiums Top 20 = 83% of premiums 15% 15% 12% 10% 10% 8% Direct Agent 5% 0% 0% 15% 30% 45% 60% 75% 90% Source: ALTA (2016 Data) 4% TX CA FL NY PA Cumulative Percent of Industry Premiums IL NJ AZ CO OH WA MI VA GA MA MD OR UT TN WI 28

29 First American Footprint Direct Distribution Strategy 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 29

30 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

31 Title Segment Success Ratio Full Year 2016 Calculation ($ in millions) Change Personnel and other operating expenses $2,343 $2, Total revenues 5,134 4,788 Less: Premiums retained by agents 1,802 1,657 Net investment income Net realized investment gains 19 (7) Target < 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 Net operating revenues (NOR) $3,203 $3, Success Ratio 65% 31