First American Corporation (New) · NYSE:FAF
First American Corporation (New) — First American Financial — Investor Presentation (March 2019)
42 slides from First American Corporation (New)'s investor presentation, March 2019
Slide 1: First American Financial Spring Investor Presentation
FIRST AMERICAN FINANCIAL Spring Investor Presentation March 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 PRESENTATION AND THE RELATED MANAGEMENT COMMENTARY AND RESPONSES TO INVESTOR QUESTIONS 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
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 ADJUSTED INVESTMENT INCOME. ADJUSTED INVESTMENT INCOME EXCLUDES AFFILIATED INVESTMENTS AND IS PRESENTED
Slide 4: Agenda
AGENDA Strong Track Record of Results Well Positioned in a Changing Environment Attractive Growth Opportunities 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: First American Strategy
First American Strategy eS VISION: To Be the Premier Title Insurance and Settlement Services Company i ere i soak ae ie = Manage. Profitably Strengthen and Actively Grow Our the Enterprise Invest in Core Title Through Data Complementary and and Process Businesses that Settlement Advantage Support or
Slide 7: 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 8: 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 8 Source: Febru
Slide 9: Total Shareholder Return
Total Shareholder Return 180 FAF US Equity SPX Index 160 Total Annualized Return 140 1 year 3 year 5 year First American -8.4% 15.0% 17.4% 120 S&P 500 6.3% 15.1% 10.7% Fidelity -4.5% 17.2% n/a 100 80 60 40 20 0 -20 9 Source: Bloomberg - Weekly as of February 28, 2019
Slide 10: Agenda
AGENDA Strong Track Record of Results Well Positioned in a Changing Environment Attractive Growth Opportunities 10
Slide 11: Key Forces Driving Market Change
Key Forces Driving Market Change Real Estate and Mortgage Consumer Experience Process Becoming Faster Closing DIGITAL Purchase Commercial Artificial Intelligence Blockchain HIGHER EMERGING INTEREST RATES TECHNOLOGIES Affect Business Create Mix Opportunities Refinance Robotic Process Automation 11
Slide 12: Rising Rates Have Changed the Business Mix
12 Daily Open Orders 1,000 2,000 3,000 4,000 5,000 6,000 - 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 Refinance Jul-17 Aug-17 Sep-17 Oct-17 10-Year % Nov-17 Dec-17 Jan-18 Feb-18 Mar-18 Rising Rates Have Changed the Bu
Slide 13: Higher Short-term Rates Benefit Investment Income
… and Higher Short-term Rates Benefit Investment Income $76 2.50% Title Segment Investment Income(1) Fed Funds Rate 2.25% $66 2.00% Title Segment Investment Income ($ in Millions) 1.75% $56 1.50% Each 25 basis point Fed hike Fed Funds Rate $46 increases investment income 1.25% by ~$15 million/year(2
Slide 14: Purchase Market Slowing as Market Resets
Purchase Market Slowing as Market Resets PURCHASE DIRECT REVENUE $1,000 GROWTH RATE vs. PRIOR YEAR $900 $800 $ in Millions $700 10% $600 $500 8% $400 6% $300 FY17 FY18 4% 2% Purchase Market ▪ Good economic backdrop with job and 0% wage growth -2% ▪ Near term affordability improving as -4% market res
Slide 15: Digital Transformation of Mortgage and Closing Process Underway
Digital Transformation of Mortgage and Closing Process Underway ▪ Digital Experience ▪ Quality Service ▪ Transparency ▪ Proactive Communication Real Estate Consumers Agents First American Financial Lenders ▪ Faster Closings ▪ Reduced Costs ▪ Improved Accuracy 15
Slide 16: Emerging Technologies Create Opportunities
Emerging Technologies Create Opportunities Artificial Intelligence Blockchain ▪ High potential use case when coupled ▪ Opportunity to drive process efficiencies with proprietary data Emerging ▪ Collaborating with lenders on proof of concepts Technologies ▪ Enhanced data collection and predictive ▪ R
Slide 17: Agenda
AGENDA Strong Track Record of Results Well Positioned in a Changing Environment Attractive Growth Opportunities 17
Slide 18: Strong Outlook for Title and Settlement Business
Strong Outlook for Title and Settlement Business ▪ Purchase slowing as market resets Revenue Growth ▪ Commercial market fundamentals remain strong ▪ Investment income growing due primarily to higher short term rates ▪ Refinance activity has declined to 8% of direct revenue ▪ Disciplined cost managem
Slide 19: Agency Division has Maintained Market Share with Fewer Agents
Agency Division has Maintained Market Share with Fewer Agents NUMBER OF AGENTS 8,000 ▪ FAF has reduced number of smaller agents in recent 7,500 years to focus on larger, more profitable relationships 7,000 ▪ Reduced risk, audit and administrative costs by 6,500 terminating smaller agents 6,000 ▪ Gro
Slide 20: Commercial Business Outlook
Commercial Business Outlook Commercial Market Sales Volume(1) Direct Revenues $ Millions $800 NCSD Local ($ in Billions) $800 753 696 696 $700 661 112 595 98 104 $600 $600 102 546 582 569 89 $500 81 511 490 475 $400 453 450 $400 432 415 378 642 $300 599 559 592 310 506 $200 261 465 $200 181 155 $100
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 ▪ Companies that enhance our data capabilities or expand product and service offerings Pursuing targets that support or Disciplined Process leverage our core title and settlement busine
Slide 22: Mergers & Acquisitions
Mergers & Acquisitions TOTAL COMPANY TYPE SPEND(1) Bank America Lien Significantly enhances the company’s post-closing services business, while Title Release Business continuing to provide lien release services to Bank of America. 2018 First Funding Provides residential warehouse funding and managem
Slide 23: Attractive Growth Prospects in Our Property Data Business
Attractive Growth Prospects in Our Property Data Business Leveraging Data Assets to Drive Title Automation and Enhanced Risk Decisioning CURRENT DATA COVERAGE RANK Assessor/Property Ownership 100 100 1st Property Record Database 94 ▪ Largest property record database Deeds, Mortgages, Foreclosures 99
Slide 24: Agent Advantage
Offering a Wider Array of Products to Title Agents Title Insurance Primary Business Customer Benefits ▪ Reduced operating costs Title Production ▪ Risk mitigation ▪ Full Search ▪ Limited Search ▪ Process efficiency Agent Advantage Closing Solutions First American Benefits ▪ Document Preparation Back
Slide 25: Summary
SUMMARY Strong Track Record of Results ▪ 17% annualized total shareholder return past 5 years Well Positioned in a Changing Environment ▪ Financial performance remains strong despite higher interest rates ▪ Actively investing for the digital future ▪ Application of emerging technologies creates oppo
Slide 26: 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 27: 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 28: 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 Share Buyback Period $55 other factors $50 $45 ▪ $160 million remaining under share repurchase authorization Share Buyback Period $40
Slide 29: Uses of Free Cash Flow and Debt Proceeds
Uses of Free Cash Flow and Debt Proceeds CUMULATIVE 5 YEAR USES Pension Termination Share Repurchases 1% 4% ▪ ~44% of cash flow used for investment Dividends portfolio to strengthen the balance sheet 30% ▪ Moving forward, portfolio strengthening not necessary as capital levels exceed 44% current tar
Slide 30: Capital Structure
Capital Structure As of December 31st, 2018 ($ in Millions) 4.3% Senior Notes Due 2023 $249 ▪ Management’s target debt-to-capital ratio 4.6% Senior Notes Due 2024 $298 is 18-20% ▪ Supports target financial strength ratings Trust Deed Notes $19 Other Notes $6 ▪ $160 million drawn on $700 million revo
Slide 31: Investment Portfolio
Investment Portfolio CONSOLIDATED PORTFOLIO INSURANCE PORTFOLIO Gov't Agency 3% Municipal Gov't Agency 18% 5% US Treasury Corporate Municipal 6% 18% US Treasury Corporate Avg. Rating : AA- 17% 11% Duration: 5.1 3% Equity 13% $2.6B Book Yield: 3.4% Gov't Agency Foreign MBS Equity 6% 14% Avg. Rating :
Slide 32: Paid Losses and Ultimate Loss Ratios by Policy Year
Ultimate Loss Ratios by Policy Year 14.0% $400 13.2% $350 12.0% 11.2% Paid Losses by Calendar Year ($ in Millions) $300 9.8% 9.8% 10.0% Ultimate Loss Ratios by Policy Year $250 8.0% 6.5% $200 93% 92% 6.0% 92% 5.4% 5.2% $150 91% 4.6% 90% 94% 93% 90% 88% 4.0% 3.7% 3.8% 3.9% 4.0% 3.4% 3.3% $100 87% 85%
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: 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 35: Appendix
APPENDIX 35
Slide 36: 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 37: 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 38: 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 39: 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 Mortgage & Data $5.3B U.S. Title Solutions 27% 9% Commercial Direct Property & 26% 15% Casualty 39
Slide 40: 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 Other 0% 2% Encumbrances Escrow/Closing 18% 5% Liens No Error 18% GAP 49% 0% 49% Direc
Slide 41: 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 41 Note
Slide 42: Title Segment Net Investment Income Reconciliation
Title Segment Net Investment Income Reconciliation Net Investment Income Less Affiliate Investments $ in Millions Q1 '15 Q2 '15 Q3 '15 Q4 '15 Q1 '16 Q2 '16 Q3 '16 Q4 '16 Q1 '17 Q2 '17 Q3 '17 Q4 '17 Q1 '18 Q2 '18 Q3 '18 Q4’18 Net Investment Income $21.8 $26.0 $25.4 $24.4 $24.9 $27.5 $29.0 $29.4 $26.6
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