First American Warns on Q4 Losses; Will Spin Off Title Insurance Business

One day after competitor Fidelity National affirmed its earnings target for the fourth quarter, The First American Corp. warned Tuesday that it will post an after-tax loss in Q4 that could be as high as $50 million, and announced dramatic plans to spin off its title insurance and specialty insurance businesses.

The title giant, not typically known for commenting on its earnings expectations, said that its fourth quarter results “will include losses related to catastrophic losses from the California wildfires, write-downs of certain private strategic investments and operational assets, litigation reserves and severance payments,” as well as higher provisions for title claims.

Likely underscoring near-term expectations for its title business, First American said separately that it will take the surprising step of spinning off its title and specialty insurance operations into a new public company. The company will be called First American Financial Corporation, according to a press statement.

The remaining segment, Information Solutions, will consist primarily of First American’s property and mortgage information operations, as well as First American’s 75 percent interest in risk mitigation outfit First Advantage Corporation. The holding company will be renamed prior to the separation of the title business, First American said.

“Over the last two decades we have built the preeminent real estate information and title insurance businesses,â€? said Parker S. Kennedy, chairman and CEO at First American. “We believe that this transaction will unlock the unrealized value of our information businesses, while strengthening the competitive positions of both companies.”

The new Financial Services company is expected to pay the same aggregate dividend as First American; the Information Solutions company is not expected to pay a dividend, but will trade under the existing FAF symbol. Current shareholders will own 100 percent of equity in both companies. First American said it expects to complete the split-up of its operations by the end of the third quarter.

It’s pretty clear that the mortgage mess is finally starting to head towards the title side of the primary mortgage market, although I’m interested to see what “private strategic investments” are dragging on earnings when First American reports on February 28. Investors took the news as a net positive, however, with FAF trading up nearly 8 percent to $31.63 in heavy morning trading.

For more information, visit http://www.firstam.com.

Disclosure: At the time this post was published, the author held no positions in FAF or FIS.