First American Financial Corporation — Q1 2023 Form 10-Q
Business context and reporting period
Unaudited results for the three months ended March 31, 2023, compared with Q1 2022. First American provides title insurance and real estate-related services, mortgage and banking services, and home warranties. Its results are highly exposed to real estate and mortgage transaction volumes, interest rates, and seasonality.
Financial performance and liquidity
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Revenue | $1,446.1 million | $2,033.7 million |
| Income before income taxes | $59.6 million | $129.8 million |
| Net income attributable to the Company | $45.9 million | $97.9 million |
| Diluted earnings per share | $0.44 | $0.88 |
| Operating cash flow | $(92.3) million | $38.3 million |
- Title Insurance and Services revenue was $1,348.6 million, down 32.5%; pretax income was $88.2 million and pretax margin was 6.5%, versus 11.0% a year earlier.
- Home Warranty revenue was $103.7 million, essentially flat; pretax income was $15.9 million and margin was 15.3%, versus 15.4%.
- Net investment income increased to $134.0 million from $46.2 million, principally reflecting higher short-term rates and higher escrow and exchange balances. Net investment losses were $7.4 million, compared with losses of $42.6 million in Q1 2022.
- Cash and cash equivalents were $1,983.4 million at quarter-end, up from $1,223.5 million at December 31, 2022. Investing and financing activities provided $426.9 million and $423.7 million, respectively; the increase in cash occurred despite negative operating cash flow.
- Notes and contracts payable were $1,394.5 million, down from $1,645.8 million; secured financings payable were $502.9 million, up from $366.3 million. The Company repaid $250 million of senior unsecured notes at maturity in February. It had no borrowings on its $700 million revolving credit facility, which expires April 30, 2024.
- Debt-to-capitalization was 28.4%; the Company’s non-GAAP adjusted ratio, excluding secured financings and accumulated other comprehensive loss, was 20.1%. The filing reports total equity of $4,778.9 million.
Material changes and management commentary
- Revenue fell 28.9% year over year, primarily because title premiums and escrow fees and agent premiums declined amid lower transaction activity. Direct premiums and escrow fees fell 39.1%; agent premiums fell 37.7%.
- Management cited rising mortgage rates and weaker housing and mortgage activity. Company direct operations’ domestic title orders opened per day decreased 38.1%; orders closed decreased 48.0%. U.S. mortgage originations by dollar value were down 51.7%, according to the MBA forecast cited in the filing.
- Lower title volumes reduced personnel and operating costs, but not enough to offset the revenue decline. Title claims provision as a percentage of title premiums and escrow fees was 3.5%, versus 4.0%; prior-year reserve estimates decreased by $2.5 million in Q1 2023.
- Debt securities had $869.8 million of gross unrealized losses at March 31, 2023, down from $1,009.5 million at year-end. Management attributed these losses to non-credit factors and stated it did not intend, nor expect to be required, to sell the securities before recovery of amortized cost.
- The Company changed the name of its specialty insurance segment to Home Warranty and moved results of its property and casualty business, which no longer has policies in force, to Corporate. The 2022 comparison was reclassified accordingly.
Outlook, risks and contingencies
- No numerical earnings or revenue guidance is provided. Management believes operating cash generation, liquid assets, and available credit are sufficient for anticipated obligations for at least the next 12 months. Management expects quarterly dividends to continue at or above the current level, subject to board discretion and other conditions.
- Key risks include further weakness in real estate and mortgage markets, interest-rate and investment-value volatility, changes in claims experience and reserve estimates, and the possibility of financial-institution failures affecting deposits.
- The Company administers substantial customer funds outside its balance sheet, including $9.8 billion of escrow deposits, $2.2 billion of like-kind exchange funds, and $1.3 billion of mortgage-subservicing cash deposits at March 31, 2023. The Company could be contingently liable for their disposition or transfer.
- Litigation and regulatory matters include a New York Department of Financial Services investigation and charges related to the 2019 information-security incident. The matter’s outcome is not determinable; the Company does not expect pending proceedings to have a material adverse effect, though investigations could result in changes to business practices.
- Other stated exposures include cyberattacks, data privacy and security requirements, title-agent conduct, regulatory scrutiny, venture investment volatility, and potential differences between actual and estimated claims. The Company recorded $17.2 million of unrealized losses on non-marketable venture investments in Q1 2023, including $12.9 million of impairments.
Most important facts for investors to verify
- Whether title orders and real estate transaction volumes stabilize, and how further volume changes affect segment margins and earnings.
- Whether operating cash flow recovers and whether the reported liquidity remains available at the holding company and regulated subsidiaries.
- Changes in investment portfolio valuations, especially unrealized debt-security losses and volatile venture investments.
- Developments in claims reserves, the NYDFS matter, and other regulatory inquiries or litigation.
- Dividend and repurchase decisions: Q1 dividends were $0.52 per share; the Company repurchased $30.4 million of shares, with $256.2 million remaining under its authorization.