Year in review: First American which vies with Jacksonville, Fla.-based Fidelity National Financial Inc. as the country’s top title insurer, saw the rapid title industry growth of recent years come to a halt in 2006, the result of a slowing national housing market.
Sales for 2006 were up 5% to $8.5 billion, but net income fell 41% to $287.7 million.
“This year was marked by a number of challenges for our company, including a general decline in real estate activity, home price depreciation and increased industry regulation,” Chief Executive Parker Kennedy said. “We achieved reasonable top-line growth with a 5% increase in revenues to a record level. However, we feel our margins fell short of where they can and will be.”
Title insurance still is the bulk of the company’s business. First American posted a 44% fourth-quarter decline in profit for title insurance, which peaked in 2003.
With its core title business slowing, the company continued its strategy of diversifying its business through acquisitions, eyeing data services related to real estate, which it provides to lenders, real estate agents and appraisers.
In February, it paid $100 million in cash plus stock for Sacramento-based CoreLogic Systems Inc., which provides fraud detection software to mortgage lenders, investors and insurers. It’s First American’s largest buy yet, and has been getting plenty of national interest since the subprime mortgage industry began tanking earlier this year.
Two housekeeping items hanging over First American also were resolved.
The company put a $35.7 million price tag on mispriced and improperly accounted stock option grants during the past 10 years, after noting the issue in late 2006. It described the cumulative impact of the issue on the company’s shareholders’ equity as “negligible.”
And in May, it paid $2 million to settle a dispute with former New York Attorney General Eliot Spitzer, who led a probe into alleged improper business practices at the company and other title insurers.
What’s ahead: Expect more of the same from First American this year.
2007 “will be a transitional year for our title company,” Kennedy said a recent call. “In our quest to improve margins and returns on allocated capital, we may not experience the same level of revenue growth that we have seen historically.”
First American’s management is expecting a continued slowdown in home sales and an increase in defaults and foreclosures in 2007.
That will likely result in the company’s title, tax and flood businesses seeing a slower level of growth than that seen during the past several years. These businesses will focus on keeping down expenses next year, and improving profit margins, the company said.
Stronger growth is projected for First American’s other business lines, particularly default, mortgage-risk analytics and employment screening, which are all expected to grab a bigger share of the spotlight this year.
The company plans to continue to acquire other businesses, but probably not too many title companies, executives said.
Wall Street’s take:
The stock market is slowly coming around to Kennedy’s belief that his company is seriously undervalued and that too much emphasis is given to First American’s title operations.
Kennedy said last year the company should be valued at about $6 billion. It now counts a market value of $5 billion.
That’s a big improvement,First American shares have steadily increased since November, boosting the company’s market value by about $1.3 billion. The company’s stock actually increased following its buy of CoreLogic,a rarity on Wall Street. Shares now trade near their six-year high.
Analysts note that while the housing slump is likely to affect the company’s title operations, other First American units, such as those which help lenders manage defaults on mortgage payments, should get more business.
First American folded CoreLogic into its First American Real Estate Solutions subsidiary. Analysts have suggested the division could be spun off in an initial public offering in the not-too-distant future. The unit could see a market value of $1 billion or more, according to analysts.
,Mark Mueller
WHO’S IN CHARGE
PARKER KENNEDY
Chairman, chief executive, First American;
chairman, First American Title Insurance
Joined company: 1977, great-grandfather started company
Education: bachelor’s in economics from USC; law degree from Hastings College of Law, San Francisco
Career: Before joining First American, spent four years with Beverly Hills law firm Levinson & Lieberman. Became First American vice president in 1979, executive vice president in 1983. Became president in 1993 (company didn’t use chief executive title back then). Added chairman’s title in 1999 upon retirement of father Donald Kennedy.
Notable: Has run Los Angeles Marathon. Likes fly-fishing and golf.
Headquarters: One First American Way, Santa Ana
Employees: 39,670; 2,678 in OC
Business: title insurance, financial services
Market value, as of April 2: $4.9 billion
2006 revenue: $8.5 billion, up 5%
2006 net income: $287.7 million, down 41%
