First American Financial Corporation — Q1 2024 Form 10-Q
Business context and period. Unaudited results cover the three months ended March 31, 2024, compared with Q1 2023. First American provides title insurance and related real estate services, home warranties, and corporate investment and financing activities. Its results are substantially exposed to real estate and mortgage transaction volumes.
Financial performance and key metrics
- Revenue: $1.425 billion, down 1.5% year over year. Title Insurance and Services revenue declined 2.1% to $1.320 billion; Home Warranty revenue rose 1.4% to $105.2 million.
- Profit: Income before tax was $58.3 million, down from $59.6 million. Net income attributable to the company was $46.7 million, versus $45.9 million; diluted EPS was $0.45 versus $0.44. The effective tax rate fell to 19.9% from 22.8%.
- Margins: Title Insurance and Services pretax margin fell to 5.5% from 6.5%. Home Warranty pretax margin improved to 19.3% from 15.3%.
- Cash flow: Operating activities provided $69.3 million, compared with $92.3 million used in Q1 2023. Cash and cash equivalents fell by $2.099 billion during the quarter to $1.506 billion; the company attributed the sharp movement largely to a return to normal escrow-deposit allocation at its bank after holding a higher proportion there at year-end following a December 2023 cybersecurity incident.
- Liquidity and debt: At March 31, cash was $1.506 billion; deposits were $5.303 billion; secured financings payable were $688.8 million; and notes and contracts payable were $1.396 billion. The $900 million revolving credit facility was undrawn. Holding-company cash was $104.1 million. Debt to capitalization was 30.3%; the company-reported adjusted ratio was 20.2%.
- Capital returns: The company paid a $0.53 per-share dividend. It repurchased 58,600 shares for $3.5 million during the quarter, with $210.4 million remaining under its authorization.
Changes versus Q1 2023
- Title Insurance and Services pretax income declined to $72.7 million from $88.2 million. Agent premiums fell 4.5%, and net investment income declined; higher investment gains partly offset these decreases.
- Domestic direct title orders closed fell 3.7% to 102,700, while average revenue per domestic order rose 2.6%. Domestic title orders opened per day declined 9.9% overall.
- Home Warranty pretax income increased to $20.3 million from $15.9 million, reflecting a lower claims rate, which decreased to 41.7% from 47.3% of premiums.
- Net investment gains were $9.0 million, versus net investment losses of $7.4 million. Comprehensive income attributable to the company was a loss of $18.0 million, compared with income of $158.9 million, primarily reflecting the reversal to unrealized losses on debt securities and foreign currency translation.
Outlook, commentary, risks and unusual items
- No specific revenue or earnings guidance is provided. Management says resources are sufficient for anticipated operational needs and obligations for at least 12 months, and expects quarterly cash dividends to continue at or above the current level, subject to board discretion.
- The company expects to repay its $300 million, 4.60% senior unsecured notes due November 15, 2024, using holding-company cash, credit-facility borrowings or additional bond issuance.
- Management cites high mortgage rates, affordability constraints and low housing inventory as pressures on real estate activity. Purchase activity is seasonal; refinancing is particularly sensitive to interest rates.
- A $6.2 million out-of-period adjustment increased Q1 2024 other operating expenses and accounts payable for previously unrecorded write-offs of uncollectible title-segment fee balances, primarily relating to 2023 and earlier.
- Title loss provision was 3.0% of title premiums and escrow fees, including $7.3 million of prior-year reserve releases. The total reserve for known and incurred-but-not-reported claims was $1.262 billion.
- Debt securities had $822.5 million of gross unrealized losses at quarter-end, largely attributed by the company to non-credit factors. Management said it did not intend, and was not more likely than not required, to sell those securities before recovery of amortized cost.
- The company reports ongoing governmental examinations or investigations and routine litigation, including class-action matters. It does not expect pending matters to have a material adverse effect, but says investigations could lead to business-practice changes with material effects.
- Key risks include real estate market weakness, interest-rate and investment-value changes, claims-reserve uncertainty, deposit or financial-institution exposure, regulation and title-agent conduct, and cyberattacks, fraud and technology risks. Management said disclosure controls were effective and there was no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether mortgage rates, housing supply and transaction volumes improve or further pressure title orders, agent premiums and margins.
- Whether the large debt-security unrealized losses recover, and how investment gains, Offerpad exposure and venture investments affect earnings and equity.
- Whether title claims experience supports current reserve assumptions and prior-year releases.
- How escrow and bank-deposit balances evolve following the post-cybersecurity return to normal allocation, including any liquidity or third-party deposit exposure.
- How the company funds the November 2024 $300 million note maturity while maintaining dividends and other capital uses.
- Any material developments in regulatory inquiries, litigation, cybersecurity remediation or related business practices.