As the housing market goes, so go title insurance
Every time a home is sold or refinanced, they get a piece of
Title insurers are "probably the best pure-play way" for
investors to get exposure to a broad housing recovery, Keefe,
Bruyette & Woods analysts told their clients in a recent
The refinancing wave, fueled by low interest rates and
government programs, has been a boon for the industry after a
Santa Ana, Calif.-basedFirst American Financial (
) is among the prime beneficiaries.
The company dates back to 1889 when Orange County was newly
formed. It's the second-largest title insurance firm
afterFidelity National Financial (
It has operations nationwide and some business overseas. It
holds a 27% share of the U.S. title market to Fidelity National's
34% share, according to KBW.
Top states by market share include Arizona, Ohio, Pennsylvania
Shares of both companies climbed in 2012 as their financials
improved, but First American's more so with shares up 85% to
Fidelity National's 44%.
Four Quarterly Gains
First American is on track to post its fourth straight quarter
of revenue and earnings gains. Third-quarter revenue jumped 25%
over the prior year to $1.2 billion, driven mostly by refinance
Refis made up 65% of its mix of closed orders, up from 60% in
the second quarter.
Though home purchase volume has picked up, that part of the
market is still seen in early recovery. But it'll likely provide
the next leg of growth, analysts say, though they are unclear on
"Purchases generate twice the revenue and twice as much or
more of profits (than refinance volume)," said Stephens Inc.
analyst Brett Huff in an interview.
Even with only a partial home-purchase recovery, First
American's 2012 earnings are expected to rise 245% over 2011 to
$2.52 a share.
But they're seen edging down in 2013 and 2014 as refi activity
fades from current high levels and purchase volume doesn't yet
fully pick up the slack.
Some analysts, notably those at Barclays Capital, think that
the refi wave will remain relatively strong in 2013 and 2014.
They also note that the government's Home Affordable
Refinancing Program, or HARP, could keep refi volume elevated
through at least 2013.
Therefore, "the gap between a refi-driven and purchase-driven
market could be a manageable one," the Barclays analysts wrote in
a recent report.
Title companies perform more work on a home purchase than on a
refi, and so they charge more. And often they get escrow fees,
something they don't typically get on a refi transaction.
First American's average revenue per closed order in Q3 was
$1,502, down slightly from the same quarter a year earlier.
While low interest rates are important in the refi market, a
strong economy with good job growth is more reflective of a
healthy home-purchase market, Huff says.
"Refis at some point will start to taper off in 2013," Huff
said. "The question is will purchase volume be enough to offset
the refi decrease?"
KBW analysts note that First American's management considers
Mortgage Bankers Association forecasts of a 15% uptick in
purchase volume in 2013 and a 35% fall-off in refinancing volume
While under that scenario, total mortgage volume would fall by
more than 20%, they note, First American's revenue would drop by
only half that because purchase-related fees are about double
Barclays figures U.S. refi volume in 2013 will fall only 2%
from 2012's level, to $1.3 trillion. Its analysts expect purchase
transactions to go up 11% to $575 billion, for a total of $1.9
trillion in mortgage originations, but falling to $1.4 trillion
Barclays based estimates on models from the firm's securitized
products team and says estimates are more than 20% above the
average of three forecasts from the MBA,Fannie Mae (
) andFreddie Mac (
Even so, the analysts wrote that their above-consensus
estimates "are more likely to be too low than too high."
They reason that purchase-volume estimates are conservative
based on 2013 outlooks for total home sales growth of 6% to 7%
and home-price appreciation of 5% to 6%.
Barclays pegs First American earnings in 2013 at $2.30 a share
and $2.08 in 2014. In contrast, Wall Street's consensus calls for
$1.90 in 2013 and $1.83 in 2014, according to Thomson
First American's earnings have grown at a faster pace than
revenue, as fixed costs, which were trimmed during the downturn,
stayed relatively stable on higher volumes.
In Q3, profit jumped 375% to 95 cents a share.
First American has only modestly increased hiring to handle
higher volumes in 2012.
First American's Q3 also benefited from $47.3 million in net
investment gains from the sale of its remaining stake inCoreLogic
), a research arm it spun off in 2010.
Claims were also down. Management expects the trend to
continue as claims recede from the high-loss-policy years of 2005
"They still have the capacity to handle new revenue without
doing much hiring," Huff said. "However, there will come a time
when their capacity to handle new volume will require