First American Corporation (New) · NYSE:FAF
First American Corporation (New) — First American Financial — Barclays Global Financial Services Conference 2019
37 slides from First American Corporation (New)'s conference presentation, Sep 10, 2019
Slide 1: First American Financial - Barclays Global Financial Services Conference
FIRST AMERICAN FINANCIAL Barclays Global Financial Services Conference September 10, 2019 ©2018 First American Financial Corporation and/or its affiliates. All rights reserved. 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 AND RELATED MANAGEMENT COMMENTARY CONTAIN CERTAIN FINANCIAL MEASURES THAT ARE NOT PRESENTED IN ACCORDANCE WITH GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP), INCLUDING PERSONNEL AND OTHER OPERATING EXPENSE RATIOS, SUCCESS RATIOS, ADJUSTED
Slide 4: Agenda
AGENDA Strong Track Record of Results Favorable Market Conditions Consistent Strategy and Capital Management Priorities 4
Slide 5: Leader in the Title and Settlement Services Industry
Leader in the Title and Settlement Services Industry $5.7B Total Revenue 18,300 Employees % 92 of Revenue, Title Segment % 25.8 Title Market Share 800 Offices % 8 Insurance Segment of Revenue, Specialty $10.6B Total Assets 9 Countries Trusted National Brand Largest Title Plant and Property Fortune 1
Slide 6: Past 5 Years: Achieved Strong Financial Results
Past 5 Years: Achieved Strong Financial Results TOTAL REVENUE EARNINGS PER SHARE $6.0 $5.8 $5.7 $4.50 $4.19 $5.6 $4.00 $3.76 $5.5 $5.2 $3.50 $3.09 $2.62 $ in Billions $5.0 $3.00 $4.7 $4.5 $2.50 $2.15 $2.00 $4.0 $1.50 $1.00 $3.5 $0.50 $3.0 $0.00 2014 2015 2016 2017 2018 2014 2015 2016 2017 2018 CASH
Slide 7: Historical Title Insurance Margin
Historical Title Insurance Margin $4,500 14% $4,000 12% Target $3,500 10% $3,000 8% $ in Billions $2,500 6% $2,000 4% $1,500 2% $1,000 0% $500 -2% $0 -4% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Mortgage Originations Pretax Margin 7 Source: Augus
Slide 8: Total Shareholder Return
8 40 60 80 20 0 -20 100 120 140 160 180 9/30/2014 10/31/2014 11/30/2014 12/31/2014 S&P 500 1/31/2015 2/28/2015 First American 3/31/2015 4/30/2015 5/31/2015 FAF US Equity 6/30/2015 2.4% 6.4% 1 year 7/31/2015 8/31/2015 Source: Bloomberg – Weekly as of August 31, 2019 9/30/2015 10/31/2015 Total Annuali
Slide 9: Agenda
AGENDA Strong Track Record of Results Favorable Market Conditions Consistent Strategy and Capital Management Priorities 9
Slide 10: Declining Rates Once Again Driving Higher Refinance Activity
10 Daily Open Orders 1,000 3,000 4,000 5,000 6,000 2,000 - Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Refinance Sep-17 Oct-17 Nov-17 Dec-17 Jan-18 Feb-18 10-Year % Mar-18 Apr-18 May-18 Jun-18 Jul-18 Aug-
Slide 11: Purchase Activity Improving as Market Resets
Purchase Activity Improving as Market Resets PURCHASE DIRECT REVENUE $1,000 $900 $800 GROWTH RATE vs. PRIOR YEAR $ in Millions $700 $600 10% $500 8% $400 $300 6% FY17 FY18 4% Purchase Market 2% ▪ Good economic backdrop with job and 0% wage growth -2% ▪ Near term affordability improving as -4% market
Slide 12: Commercial Outlook Remains Favorable
Commercial Outlook Remains Favorable Commercial Market Sales Volume(1) Direct Revenues $ Billions $800 $ Millions NCSD Local $800 753 696 696 $700 661 112 $600 98 104 595 580 $600 102 570 562 546 89 512 535 $500 81 489 500 $400 432 453 480 $400 378 $300 599 642 310 559 592 261 465 506 $200 $200 181
Slide 13: Declining Short-term Rates a Headwind to Investment Income
Declining Short-term Rates a Headwind to Investment Income $76 2.75% Title Segment (1) Investment Income Fed Funds Rate 2.50% $66 2.25% Title Segment Investment Income ($ in Millions) 2.00% $56 Each 25 basis point Fed move 1.75% impacts investment income Fed Funds Rate 1.50% $46 by ~$12 - $15 millio
Slide 14: Agenda
AGENDA Strong Track Record of Results Favorable Market Conditions Consistent Strategy and Capital Management Priorities 14
Slide 15: First American Strategy
First American Strategy VISION: To Be the Premier Title Insurance and Settlement Services Company Manage and Actively Profitably Strengthen Invest in Grow Our the Enterprise Complementary Core Title Through Data Businesses and and Process Settlement Where First Advantage American has a Business Stra
Slide 16: Profitably Grow our Core Title and Settlement Business
Profitably Grow our Core Title and Settlement Business ▪ Sustain leadership in Title – focusing on top 10 states ▪ Maintain and grow profitable market share ▪ Drive digital transformation ▪ Develop value-added services that strengthen customer relationships Pillar 1 ▪ Win with emerging customers Str
Slide 17: Strengthen the Enterprise through Data and Process Advantage
Strengthen the Enterprise through Data and Process Advantage ▪ Further develop data advantage ▪ Expand coverage of property data elements and geographies ▪ Achieve market-leading title automation Leverage data advantage together with data science capability Pillar 2 Strategic ▪ Find new businesses t
Slide 18: FAF has Strongest Data Foundation in the Industry
FAF has Strongest Data Foundation in the Industry No. of counties Population (%) Market position Assessor/property ownership 3,144 100 1st Proprietary title plants 546 60 1st Deeds, Mortgages, Foreclosures 2,947 99 1st Assignments and releases 2,308 96 1st Parcel Boundaries 2,984 99 1st Homeowner as
Slide 19: Manage and Actively Invest in Complementary Businesses
Manage and Actively Invest in Complementary Businesses where First American has a Strategic Advantage ▪ Grow Home Warranty Accelerate direct-to-consumer growth while maintaining strong operating margins ▪ Grow international business in core geographies Pillar 3 Invest for long-term growth in Canada,
Slide 20: 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 strategy ▪ Return excess capital to shareholders through dividends and share repurchases ▪ Main
Slide 21: Disciplined M&A Strategy Drives Growth
Disciplined M&A Strategy Drives Growth Focused Strategy ▪ Title companies that expand our footprint in key markets ▪ Data and information companies that enhance our data capabilities or advance title automation Pursuing targets ▪ Opportunities complementary to title that support or leverage our core
Slide 22: Dividends
Dividends DIVIDENDS PER SHARE Dividend Considerations $1.75 $1.60 $1.44 ▪ First American expects to pay a meaningful dividend $1.50 given the company’s cash flow generation and $1.20 $1.25 $1.00 investment opportunities $1.00 $0.84 ▪ Dividend increases are intended to be sustainable $0.75 $0.48 in p
Slide 23: Investment Considerations
Investment Considerations ▪ Focused strategy as “pure play” in title and settlement markets ▪ Attractive industry characteristics ▪ Strong competitive position in title and settlement services ▪ Opportunity to grow through focus on innovation and by leveraging unique assets (e.g. bank and data) ▪ Ex
Slide 24: Appendix
APPENDIX 24
Slide 25: Title Segment Net Investment Income Reconciliation
Title Segment Net Investment Income Reconciliation Net Investment Income Less Affiliate Investments $ in Millions Q1 '16 Q2 '16 Q3 '16 Q4 '16 Q1 '17 Q2 '17 Q3 '17 Q4 '17 Q1 '18 Q2 '18 Q3 '18 Q4’18 Q1’19 Q2’19 Net Investment Income $24.9 $27.5 $29.0 $29.4 $26.6 $34.7 $37.9 $38.3 $41.4 $51.7 $60.9 $69
Slide 26: Organizational Structure
ORGANIZATIONAL STRUCTURE FIRST AMERICAN FINANCIAL CORPORATION TITLE INSURANCE AND SERVICES SEGMENT SPECIALTY INSURANCE SEGMENT U.S. Title International Title Mortgage & Data Banking & Solutions Services Direct Canada Mortgage Solutions Trust & Banking Home Warranty Agency United Kingdom Database Sol
Slide 27: U.S. Title Revenue
U.S. TITLE DIRECT AGENCY COMMERCIAL First American Financial Total Revenue Total Revenue Trend $4.5 $4.2 $4.4 $4.4 $4.0 $4.0 0.7 0.8 $2.3B $3.5 0.7 Agent $3.5 0.7 40% 0.6 $ in Billions $3.0 1.3 1.3 1.3 $2.5 1.2 1.0 $4.4B $2.0 $5.7B U.S. Title 76% $1.5 $1.0 2.1 2.3 2.3 2.3 $1.3B 1.9 $0.8B Direct $0.5
Slide 28: Specialty Insurance Revenue
SPECIALTY INSURANCE PROPERTY & CASUALTY HOME WARRANTY First American Financial Total Revenue Total Revenue Trend $500 $465 $469 $450 $436 $400 $369 $394 125 139 $350 137 134 $ in Millions $300 132 Specialty $250 Segment $0.5B 8% $5.7B $200 $150 260 299 327 344 $100 237 $50 $0 2014 2015 2016 2017 201
Slide 29: 2018 Revenue Breakdown
2018 Revenue Breakdown FIRST AMERICAN FINANCIAL 8% 92% Specialty Segment $5.7B Title Segment SPECIALTY SEGMENT TITLE SEGMENT Agency 44% 73% International Home 6% $0.5B Warranty $5.3B U.S. Title Mortgage & Data 27% Solutions Commercial Direct Property & 9% 26% 15% Casualty 29
Slide 30: Paid Losses and Ultimate Loss Ratios
Ultimate Loss Ratios by Policy Year 14.0% $400 13.2% $350 12.0% 11.2% $300 Paid Losses by Calendar Year ($ in Millions) 10.0% 9.8% 9.8% Ultimate Loss Ratios by Policy Year $250 8.0% 7.6% $200 6.5% 6.0% 93% 5.3% 5.4% 5.2% $150 91% 94% 4.6% 90% 4.0% 4.0% 3.7% 3.8% 3.9% 94% 3.4% 3.3% $100 87% 95% 85% 8
Slide 31: 2018 Incurred Claims Detail
2018 Incurred Claims Detail CLAIM CAUSE PROCESS CAUSE Underwriting Basic Risks 8% Other Exam 20% 14% 11% Escrow/Closing Unclassified 14% 3% Defective Title Search Fraud 6% 13% 13% Permit Violation 6% File Shortage 0% Other 2% Encumbrances Escrow/Closing 18% 5% Liens No Error 18% GAP 49% 0% 49% Direc
Slide 32: Claim Severity Distribution
Claim Severity Distribution CLAIM COUNT BY SEVERITY GROUP PAID CLAIMS BY SEVERITY GROUP Large Claims Minor Claims 1% 0% Minor Claims Large Claims 33% 44% Typical Typical Claims Claims 66% 56% Large claims: $250,000 and greater Typical claims: $1,000 to $250,000 Minor claims: Less than $1,000 32 Note
Slide 33: Title Insurance Margin Objective
Title Insurance Margin Objective Downside Base Case Upside Pretax Margin <11% 11% - 13% >13% Mortgage Originations <$1.4 Trillion $1.4 - $1.8 Trillion >$1.8 Trillion % Refinance ~25% ~25% ~25% 33
Slide 34: Share Repurchases
Share Repurchases SHARE REPURCHASE HISTORY ▪ Share repurchases will be dependent $65 upon capital levels, market conditions $60 and alternative uses of capital among $55 other factors Share Buyback Period $50 $45 ▪ $160 million remaining under share repurchase authorization Share Buyback Period $40
Slide 35: Uses of Free Cash Flow and Debt Proceeds
Uses of Free Cash Flow and Debt Proceeds CUMULATIVE 5 YEAR USES Pension Termination Share Repurchases 1% 4% Dividends 30% ▪ ~44% of cash flow used for investment portfolio to strengthen the balance sheet 44% Net Cash & Investments ▪ Moving forward, portfolio strengthening not necessary as capital le
Slide 36: Capital Structure
Capital Structure As of June 30, 2019 ($ in Millions) 4.3% Senior Notes Due 2023 $249 4.6% Senior Notes Due 2024 $298 ▪ Management’s target debt-to-capital ratio is 18-20% Trust Deed Notes $18 ▪ Supports target financial strength ratings Other Notes $5 ▪ $160 million drawn on $700 million revolving
Slide 37: Investment Portfolio
Investment Portfolio CONSOLIDATED PORTFOLIO INSURANCE PORTFOLIO Gov't Agency Municipal 4% 17% US Municipal Treasury Corporate 17% 9% 17% Avg. Rating : AA- Gov't Corporate Equity $2.9B Duration: 4.0 Agency 12% Book Yield: 3.3% 14% US Treasury 6% Gov't 4% Agency MBS Equity Avg. Rating : AA Foreign 31%
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