First American shares soar on earnings news

By Harvard Zhang

First American Financial Corp. shares jumped Thursday after the title insurance company reported better-than-expected fourth-quarter profits.

In the latest quarter the Santa Ana, Calif.-based company reported net income of $81.6 million, or 74 cents per diluted share, up a modest 1.3 percent from $80.5 million, or 74 cents in the year-ago period.

First American posted revenues of $1.36 billion in the fourth quarter, up 8.1 percent from $1.26 billion in the year-earlier period.

The financial services company’s per-share results beat by 7 cents the 67 cents analysts surveyed by Bloomberg had been expecting.

That upside performance got a warm reception from investors: on a day when the broad market suffered a heavy selloff, First American shares rose $2.13, or 6.5 percent, to close on the New York Stock Exchange at $34.95.

“Strong earnings in the fourth quarter capped off a great year for First American,” Dennis Gilmore, CEO of the financial services company, said in a press release. “Despite uncertainties in the economy, we remain optimistic about the housing market.”

First American’s title insurance business reported pre-tax income of $128.7 million in the fourth quarter, up 3.3 percent from the year-ago period. In a conference call with analysts, Chief Financial Officer Mark Seaton attributed the growth to increasing direct premiums and escrow fees.

Margins narrowed, however, as the 3.3 percent profit upturn came on an 8.2 percent increase in revenue at the title insurance group; revenues for the unit were $1.25 billion, up from $1.16 billion a year ago.

Title insurance, most frequently used for mortgages, protects lenders or homeowners against losses in property ownership disputes.

“We successfully implemented the significant changes required as part of the new mortgage rule that went into effect in October,” Gilmore said during a Thursday earnings call. New disclosure rules went into effect last year requiring lenders to provide home buyers documents that detail their loan terms.

The company posted a net realized investment loss of $6.3 million, or 4 cents per diluted share, in the latest quarter, as opposed to a realized gain of $6.8 million, or 4 cents per share, in the year-earlier period.

First American’s specialty insurance business including property insurance and home warranty posted sagging pre-tax income in the last three months of 2015 comparing with that in 2014 despite growing revenue.

Seaton said the loss ratio in home warranty — the ratio between losses paid by an insurer for claims and premiums it collected — rose to a more typical 59.1 percent comparing with an unusually low ratio of 52.5 percent at the end of 2014.

Looking forward to 2016, First American said it expects income growth to slow.

“We’re well positioned to capitalized on anticipated growth in the purchase market,” Gilmore said during the earnings call. “However we expect our growth rate to moderate relative to what we experienced last year.”

First American reported net income of $288.1 million, or $2.62 per share, in full year 2015, up 23.4 percent from $233.5 million, or $2.15 per share, in 2014.

The company had $5.18 billion in revenue in full year 2015, up 10.6 percent from $4.68 billion in 2014.

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