First American Financial Corporation ( FAF)

Q2 2011 Earnings Call

July 28, 2011, 11:00 a.m. ET

Executives

Craig Barberio – Director, IR

Dennis Gilmore – CEO

Max Valdes – EVP and CFO

Mark Seaton – SVP, Finance

Analysts

Mark Devries – Barclays Capital

Presentation

Operator

Welcome, and thank you for standing by. After the presentation, we will conduct a question-and-answer session. (Operator instructions).

A copy of today’s press release is available on First American’s website at www.firstam.com/investory.

Please note that the call is being recorded and will be available for replay from the company’s investor website, and for a short time by dialing 203-369-1939.

We will now turn the call over to Craig Barberio, Director of Investor Relations to make an introductory statement.

Craig Barberio

Good morning, everyone, and thank you for joining us for our second 2011 earnings conference call. Joining us on today’s call will be our chief executive officer, Dennis Gillmore, Max Valdes, executive vice president and chief financial officer, and Mark Seaton, senior vice president of finance.

At this time we would like to remind listeners that management’s commentary and responses to your questions may contain forward-looking statements, such as those described on page four of today’s news release and other statements that do not relate strictly to historical or current fact.

The forward-looking statements speak only as of the date they are made, and 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. Risks and uncertainties exist that may cause results to differ materially from those set forth in the forward-looking statements. Factors that could cause the anticipated results to differ from those described in the forward-looking statements are described on page four of the news release.

With that, I will now turn the call over to Dennis Gilmore.

Dennis Gilmore

Thank you, Craig. Good morning and thank you for joining the call.

For the second quarter financial results, total revenues were 927 million, down 4% from the second quarter of 2010, with net income of 32 million or $0.30 per share.

Despite an 18% drop in closed orders, the title segments margin was 6.6% for the quarter, essentially flat from the second quarter of 2010. Our open orders averaged 4,700 orders per day in the second quarter, up 2% on a sequential basis. Refinanced transactions were 50% of open, residential orders, compared with 53% in the first quarter.

Resale transactions were up 9% from the first quarter, reflecting a weak selling season.

Our national commercial division continues to perform well with revenues of 84 million, up 28% compared with the second quarter of 2010, up 25% on a sequential basis.

Our commercial pipeline is strong, with open levels in the second quarter at their highest levels since the third quarter of 2007.

In the second quarter, we executed on a $40 million annualized cost reduction initiative, focused on our shared services and our title segment. We expect cost savings of 9 million in the third quarter and the full 10 million run rate in the beginning of the fourth quarter.

The savings from this initiative are an addition to our company’s ongoing expense management efforts.

Our special insurance segment had pre-tax earnings of 10 million, for a 14.3% margin. The overall loss ratio was 54% in the current quarter, compared with 49% in the prior year.

Both the property casualty, home warranty businesses continue to perform well.

In regards to the Bank of America law suit, as in the past, I can’t say a lot about it, but I can tell you that First American, Bank of America and FICA began a mediation process in June of 2011 that is scheduled to conclude by the end of August.

Turning to current market conditions, open orders are down 7% compared to June, with refinance orders running approximately 53% of residential orders. Our closed orders are trending essentially flat with June levels. And as I mentioned earlier, the commercial pipeline remains strong.

Going forward, we will pursue opportunities for organic growth and strategic investments in our core business, while we continue to focus on operating efficiencies, while maintaining a conservative balance sheet.

I’d now like to turn the call over to Max Valdes for a more detailed review of our financial results.

Max Valdes

Thank you, Dennis.

The company generated total revenues of 927 million for the quarter, down 4% from the same quarter of the prior year. Net income for the quarter was 32.3 million for $0.30 per share, compared with net income of 33.8 million, or $0.32 per share of the same quarter of the prior year.

The results for the current quarter include 2.9 million in net realized investment losses, and 6.8 million in severance, then on the combined basis, reduced earnings per share by $0.05.

In the title, insurance and services segment, total revenues for the quarter were 857 million, down 5% compared with the same quarter of the prior year.

Direct premium and escrow fees were down 8%, driven by an 18% decline in closed orders, partially offset by higher average revenue per order closed.

Average revenue per order closed increased 12%, for $1,548, compared to the same quarter of last year.

This increase primarily reflects the strength of higher premium commercial title business.

Agent premiums were down 4% in the second quarter, compared to the 8% decline in our direct premiums. The better relative performance in agent premiums reflects stronger title order activity in the first quarter of 2011, as compared to 2010 due to the normal reporting lag in agent revenues of approximately one quarter.

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