First American Financial Corp. — 2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012. The filing also reports fourth-quarter results. First American provides title insurance and related real-estate services, plus property and casualty insurance and home warranties. Title insurance and services generated 92.5% of consolidated revenue.
Financial results and key metrics
Amounts are in U.S. dollars; annual figures are for 2012 unless noted.
| Metric | 2012 | 2011 | Change |
|---|---|---|---|
| Revenue | $4.542 billion | $3.821 billion | +18.9% |
| Income before taxes | $467.4 million | $130.3 million | +258.7% |
| Net income attributable to First American | $301.0 million | $78.3 million | +284.6% |
| Diluted EPS | $2.77 | $0.73 | +279.5% |
| Cash from operating activities | $429.7 million | $136.7 million | +$293.0 million |
| Cash and cash equivalents, year-end | $627.2 million | $418.3 million | +$208.9 million |
| Notes and contracts payable, year-end | $229.8 million | $300.0 million | −$70.2 million |
Consolidated pretax margin was approximately 10.3%, versus 3.4% in 2011. Title Insurance and Services reported $4.201 billion of revenue and $473.7 million of pretax income, a pretax margin of 11.3% versus 4.9%. Specialty Insurance reported $315.2 million of revenue and $47.5 million of pretax income, a margin of 15.1% versus 13.9%.
In fourth-quarter 2012, revenue was $1.277 billion, income before taxes was $147.7 million, net income attributable to the Company was $93.3 million, and diluted EPS was $0.85.
At year-end, total assets were $6.051 billion and total equity was $2.352 billion. The investment portfolio included $2.652 billion of debt securities and $197.9 million of equity securities. About 99% of fixed-income investments were investment grade. The holding company had $163.5 million in cash and, before the subsequent debt issuance, $440 million of unused capacity on its $600 million revolver.
Material changes versus 2011
- Revenue rose as mortgage activity recovered: direct premiums and escrow fees increased 28.3%, agent premiums 14.6%, and direct domestic title orders closed increased to 1.192 million from 918,000. Management cited higher mortgage originations and low interest rates.
- Title segment pretax income increased to $473.7 million from $173.6 million. Its policy-loss provision rate declined to 6.9% from 9.5%; however, 2011 included substantial reserve strengthening and a $32.2 million charge related to the Bank of America settlement.
- Specialty Insurance pretax income increased 19.1% to $47.5 million. Direct premiums grew 8.2%, led by home warranty and property-and-casualty policy growth.
- Operating cash flow increased substantially, while year-end debt declined. Interest expense fell partly because the company refinanced its credit facility at a lower rate and reduced borrowings.
- Net realized investment gains were $60.5 million, compared with a $0.1 million loss in 2011. The 2012 results included gains from selling the remaining CoreLogic shares; First American held no CoreLogic stock at year-end.
Outlook, risks and unusual items
- Management said real-estate and mortgage conditions appeared to be stabilizing and improving, but continued to flag economic, regulatory and claims uncertainty. It provided no specific quantitative earnings or revenue guidance in the supplied filing text.
- Management expected quarterly dividends to continue at or above the then-current $0.12 per share, subject to board discretion, financial condition, legal limits and subsidiary dividend restrictions. The 2012 annual dividend declared was $0.36 per share.
- In January 2013, the company issued $250 million of 4.30% senior notes due 2023 and used part of the proceeds to repay all revolver borrowings, restoring the revolver’s available capacity to $600 million.
- Title claims reserves totaled $976.5 million, including $805.4 million of IBNR. Management recorded a net $62.1 million increase in estimates for prior policy years in 2012. The internal actuarial range for the title IBNR reserve was $700.9 million to $967.8 million; a 50-basis-point change in loss rates across the six latest policy years could change the reserve by about $110.5 million.
- The Canadian guaranteed valuation product remains a reserve uncertainty because claims generally follow foreclosure and historical loss experience is limited. 2012 included $11.8 million of reserve strengthening for that product.
- A $5.3 million release of a tax valuation allowance benefited 2012 tax expense. The company also reported $47.9 million of liabilities for uncertain tax positions, up from $17.3 million.
- The defined-benefit pension plan was underfunded by $130.2 million at year-end; the company expected 2013 contributions of $29.3 million to that plan and $13.7 million to supplemental plans.
- Numerous lawsuits and government inquiries remain pending, including matters alleging improper title rates, referral practices, anticompetitive conduct and other settlement-service practices. For many class actions, the company said loss probability or a loss range could not be estimated. It did not believe the identified matters would materially harm overall financial condition or liquidity, but acknowledged possible effects on practices and results.
- Other risks include dependence on real-estate and mortgage volumes, concentration among large lender customers, regulated title rates, agent conduct, investment and interest-rate exposure, cyber and wire-transfer risks, and possible adverse development in claims reserves. Goodwill and intangible assets totaled about $903 million; the 2012 impairment assessment identified no impairment.
Important facts for investors to verify
- Whether improved order volumes and profitability persist, and how much reflects transaction growth versus investment gains and other nonrecurring items.
- Subsequent development of title claims reserves, particularly for 2005–2007 lender policies, international business and the Canadian guaranteed valuation product.
- Cash generation and holding-company liquidity after the January 2013 notes issuance, including debt terms, covenant compliance and subsidiary dividend capacity.
- Progress and potential financial or operating effects of pending litigation, regulatory inquiries and any resulting changes to agency or customer relationships.
- Funding needs for pension and supplemental benefit plans, and the sensitivity of investment values and tax assets to market or assumption changes.
PricewaterhouseCoopers issued an unqualified audit opinion and reported effective internal control over financial reporting as of December 31, 2012.