The First American Corporation

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The First American Corporation

1 First American Way
Santa Ana, California 92707-5913
U.S.A.
Telephone: (714) 800-3000
Toll Free: (800) 854-3643
Fax: (714) 541-6372
Web site: http://www.firstam.com

Public Company
Incorporated: 1968 as The First American Financial Corporation
Employees: 22,597
Sales: $3.75 billion (2001)
Stock Exchanges: New York
Ticker Symbol: FAF
NAIC: 524127 Direct Title Insurance Carriers; 541191 Title Abstract and Settlement Offices

Originally devoted solely to the title insurance business, The First American Corporation, as a result of diversification efforts, now bills itself as a provider of business information and related products and services. The Santa Ana, California, company is divided into three business segments: title insurance and services; real estate information and services, and consumer information and services. Title insurance remains First American’s flagship operation, its subsidiary First American Title Insurance Company trailing only Fidelity National Financial Inc. in size. In brief, title insurance provides protection against loss in real estate transactions for purchasers and mortgage lenders in the event that the title to the property has problems, whether they be claims to ownership, liens, encumbrances, or other adverse complications. First American operates in all states and the District of Columbia—with the exception of Iowa where title insurance is not permitted and the company only provides abstracts of titles. Over 70 percent of First American’s revenues are generated from the title insurance segment. The real estate information segment offers a number of diverse products and services: tax monitoring, to advise lenders about the status of tax payments on properties securing their loans; mortgage credit reporting provides credit reports to mortgage lenders; property database services offers mortgage lenders property valuations, title information, tax information, and imaged title documents; the flood determination service tells mortgage lenders the flood zone status of a property, based on government-determined flood hazard areas; and default management services assists mortgage lenders in such areas as foreclosure and claims processing. First American’s third business segment is consumer information, much of which represents a recent attempt to diversify beyond the cyclical real estate industry. This segment includes home warranties, one-year protection for homeowners against defects in plumbing, heating, and other household systems and appliances; property and casualty insurance; resident screening, to provide background information on potential tenants for multifamily residences; pre-employment screening to help employers check the backgrounds on job candidates; substance abuse management and testing, offered in conjunction with pre-employment screening services; specialized credit reporting to provide information to non-real estate lenders; automotive insurance tracking and other services, applying First American’s real estate title insurance expertise to automobiles; and investment advisory and trust and thrift services, taking advantage of a thrift acquired by a subsidiary in 1988. Although a publicly traded company, First American is in essence a family-run business, headed by the fourth generation of its founder.

Original Company Founded in 1894

First American’s growth mirrored that of its home, Orange County, California, which was very much a rural community 100 years ago. In 1889 Orange broke away from the county of Los Angeles, which 20 years before the rise of the film industry in southern California was itself an unassuming, agricultural area. To serve the title abstract needs of Orange County two companies were launched, then in 1894 area businessman Charles Edward Parker combined them to form First American’s direct ancestor, Orange County Title Company. He then became president of the Santa Ana firm and remained in charge for many years. Although not displaying spectacular growth, Orange County Title grew at a steady pace. Starting in 1909 it would pay a cash dividend every year for the rest of the century. By 1924 it began to offer title insurance, one of the first abstract companies in the state permitted to do so.

It was not until Parker’s grandson, Donald Parker Kennedy, joined the business in 1948 that Orange County Title began its rise to the top ranks of the title insurance industry, ultimately becoming a company with $3.7 billion in sales. Kennedy was an only child who had never planned to carry on the family legacy with Orange County Title. After earning an undergraduate degree from Stanford University, he received a law degree from the University of Southern California School of Law. He then took his bar exam and while waiting to learn the results began to help out his father and uncle who ran the title insurance company. More than 50 years later he would still be working there. Kennedy was the one who recognized that the business had to expand beyond the boundaries of Orange County if it were to survive. In 1957 the board of directors approved an expansion plan and soon the company’s first branch office was established in Ventura, California. In a few short years it was operating in four states. To reflect the company’s expansive agenda, Orange County Title changed its name in 1960 to First American Title Insurance. In 1963 Kennedy replaced his uncle, George Parker, as president of the firm, the highest ranking officer because the company had no CEO position. A year later, in order to fund expansion, the firm made its initial public offering, relying on the over-the-counter market.

The business was restructured in 1968 with the formation of The First American Financial Corporation as a holding company. First American Title now operated as a subsidiary, and a trust business was conducted through First American Trust Company. First American Title and other subsidiaries continued to grow the title side of the business, both internally by opening new offices and externally by acquiring existing title and abstract companies. Business was so strong that the company had to expand its Santa Ana headquarters in 1976. By the early 1980s the company was involved in all parts of the country, although it adopted a decentralized approach, in keeping with a belief that the real estate business varies from region to region. As a result, First American granted a great deal of autonomy to its local managers. Not only was the amount of bureaucracy curtailed so that customers enjoyed the advantage of working with a local company, they also knew they had the backing of a major concern.

Fourth Generation Joins Company in 1970s

In the meantime, a fourth generation of the Parker and Kennedy families joined the firm. Parker S. Kennedy was familiar with the title business since childhood, but appeared to be headed in a different direction than his forebears. He went to the University of Southern California on a track scholarship, rather than attending Stanford like his father and grandfather. After earning a law degree from Hastings College of Law in San Francisco he became a member of the California Bar Association then went to practice insurance law for four years with Levinson & Liverman, a Beverly Hills, California, law firm. One of the firm’s clients happened to be First American. In 1977 it was the head of the Los Angeles office of First American Title who hired Parker Kennedy, but not before making sure it was acceptable to his father. According to Donald Kennedy, his response was “Absolutely. It saves me from doing it.” Not only did the younger Kennedy come to the business with an outside perspective, he also worked at both the Los Angeles and Ventura county offices before teaming up with his father at the Orange County headquarters. Just as his father was instrumental in making a national enterprise out of First American, Parker Kennedy would play a major role in the company’s expansion beyond the real estate title business.

Early on, First American did not stray far from its area of expertise. In 1984 it established a home warranties business, followed a year later by a real estate tax service to monitor whether a borrower was paying property taxes. In 1986 the company launched a diversification program which sought to acquire business information companies involved in the real estate transfer business. The tax monitoring service was introduced in 1987, a business that was then greatly enhanced by the 1991 purchase of TRTS Data Services, which made First American the second largest provider of tax monitoring services in the country. In 1988 a subsidiary acquired a southern California thrift. During this period, First American experienced explosive growth, due to a residential real estate boom rather then the company’s diversification efforts. Revenues grew from $399.1 million in 1985 to $699.4 million in 1989, a 75 percent increase. When the real estate industry suffered a downturn as a result of poor economic conditions in the early 1990s, First American was adversely impacted. From 1989 to 1991 the company was forced to cut its workforce by 20 percent, but by 1992 First American began to rebound. After posting net income of little more than $3 million in 1991, the company reported $43.3 million in 1992, while revenues ballooned from $757.8 million to more than $1.11 billion over the same period.

First American’s diversification efforts continued in the 1990s, but they were seen more and more as a way to provide some protection from future real estate slumps. A credit reporting company was acquired in early 1990, as was a flood certification company, which determined if properties should be required to carry flood insurance. In 1991 these ventures were merged with the tax monitoring service to create a new subsidiary, First American Real Estate Information Services, Inc. It would pursue its own path of aggressive growth through acquisitions, not only to bolster its original businesses but to also move into high-tech areas, such as servicing software systems, and providing database products and services—including property information, appraisal, automated title plans, and document imaging.

Company Perspectives:

The information needed to make economic-transaction decisions must be timelier and more accurate than ever before. The need for this information is the engine that powers The First American Corporation.

Leadership Under Parker Kennedy: 1997-2000s

Parker Kennedy, who had served as president of First American Title since 1989, assumed the presidency of the parent corporation in 1993 and maintained the company’s ambitious expansion drive, while his father remained as chairman of the board. Also in that year, First American began trading on the New York Stock Exchange. While continuing to build up its core title insurance business, which contributed the lion share of revenues, First American was especially active in building up its mortgage credit reporting business. In 1994 the company acquired Metropolitan Credit Reporting Services, Inc. and Metropolitan Property Reporting Services, Inc.; California Credit Data, Inc.; and Prime Credit Reports, Inc. The following year First American added CREDCO, Inc., making it the largest mortgage credit reporting service in the country, based on the number of reports issued. The flood determination business was bolstered by the 1995 acquisition of Flood Data Services, Inc.

Increasingly, First American turned to technology to gain a competitive edge, despite lacking e-mail capabilities until 1994. In 1995 the company began to construct a wide-area network to connect all of its offices in order to achieve end-to-end connectivity and system integration. Because title insurance was a high volume but low-margin business, the application of technology to speed up processing time had a major impact on the balance sheet by cutting the cost of production. Moreover, First American was then able to leverage its electronic infrastructure and take advantage of the Internet to offer new services, as well as move beyond real estate and better meet the company’s goal of diversification. In 1996, to build on its real estate information products business, First American acquired Excelis Mortgage Loan Servicing System and its advanced real-time, online system, capable of being customized to fit user needs. In July 1998 First American added ShadowNet Mortgage Technologies, involved in electronic mortgage preparation, which then began operating under the First American Nationwide Documents brand name. Also in 1998 First American launched the consumer information segment to truly branch out beyond the housing industry, offering such products and services as credit reports to used-car dealers, pre-employment screening to employers, and collateral insurance for commercial loans secured by property other than real estate.

First American was also experiencing growth during the late 1990s in its traditional title business with the emergence of an international market. Although common in the United States, title insurance was essentially nonexistent until recent years. In 1990, in fact, less than 100 policies were written outside the country, despite the fact that for more than 20 years U.S. companies have been licensed to sell title insurance in a number of countries, including Canada and the United Kingdom. First American Title was in the vanguard of companies who found a way to crack the international market by selling a package of benefits that resulted in a quicker, cheaper way to make real estate transfers, with title insurance serving as an underlying guarantee rather than the marketing focal point. A major innovation by First American Title was the introduction of a standardized policy of title insurance that could be used in almost every country in the world, aimed at U.S. buyers of foreign real estate. In 1998 First American Title sold over 110,000 international title policies, a major improvement over what the entire industry achieved just eight years prior.

To reflect its broader range of business, in 2000 First American changed its name to The First American Corporation. In 2001 First American achieved stellar results, cracking the $3 billion mark in revenues with a total of $3.75 billion, and net income of $167.3 million. Nonetheless, the price of First American Stock failed to show movement, after languishing in the $20 range for many months. Because the title business continued to grow, fueled by low interest rates and heavy refinancing activity, it continued to generate more than 70 percent of the corporation’s revenues, despite impressive strides the company had taken in diversifying beyond real estate. First whether American remained truly vulnerable to the vicissitudes of the housing industry or not, the company had to accept that verdict as the reality under which it had to operate. Management would continue to focus on non-real estate ventures, and was particularly excited about the auto market, where the number of transactions each year dwarfed those in real estate. The monetary goal in this area was to post $1 billion in annual revenues by 2006, a number the company hoped to reach by acquisitions as well as internal growth. First American’s ability to continue its remarkable growth for a second century was very much dependent on the success of its consumer segment.

Principal Subsidiaries

First American Title Insurance Company; First American Property & Casualty Insurance Company; Data Tree Corporation; First American CMSI; First American Capital Management, Inc.; First American Trust; First American Thrift.

Principal Competitors

Fidelity National Corporation; LandAmerica Financial Group, Inc.; Old Republic International Corporation.

Key Dates:

1889:: Orange County Title Company is formed after merger of two companies.
1924:: Company first offers title insurance.
1960:: Name is changed to First American Title Insurance.
1968:: The First American Financial Corporation is formed as a holding company.
1986:: Diversification program is launched.
1993:: Stock begins trading on New York Stock Exchange.
2000:: Name is changed to The First American Corporation.