First American Financial Corp quarterly report, Q3 FY2023

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First American Financial Corporation — Q3 2023 Form 10-Q

Business context and reporting period: The filing covers the quarter and nine months ended September 30, 2023. First American provides title insurance and real-estate transaction services, home warranties, and related financial services. Results are highly exposed to real-estate and mortgage transaction volumes. Figures below are in U.S. dollars; financial statement amounts are in millions unless otherwise noted.

Financial performance

  • Q3 revenue: $1,481.2, down 18.8% from $1,824.3 in Q3 2022. The decline primarily reflected lower title premiums and escrow fees, partly offset by higher investment income and smaller investment losses.
  • Q3 earnings: Net loss attributable to the Company was $1.7, or $0.02 per diluted share, versus net income of $2.0, or $0.02 per diluted share, a year earlier. The quarter included $163.6 of net investment losses, including $138.8 of unrealized venture-portfolio losses. Title Insurance and Services nevertheless recorded $160.3 of pretax income.
  • Nine-month results: Revenue was $4,574.2, down 22.7%; net income attributable to the Company was $182.7, down from $208.7. Diluted EPS was $1.75 versus $1.93.
  • Segment margins: Title Insurance and Services pretax margin was 10.5% in Q3 versus 9.8% a year earlier, and 9.9% for nine months versus 10.9%. Home Warranty pretax margin was 8.7% versus 4.0% in Q3 and 12.4% versus 9.3% for nine months.
  • Cash flow: Operating cash flow for the first nine months was $396.0, down from $532.2. Cash and cash equivalents increased by $355.6 during the period to $1,579.1.
  • Balance sheet and debt: Total assets were $14,677.6 and total equity was $4,542.0 at September 30. Deposits were $5,613.1; notes and contracts payable were $1,392.2; secured financings payable were $530.4. The reported debt-to-capitalization ratio was 29.7%; the company’s adjusted, non-GAAP ratio was 20.0%.
  • Liquidity and shareholder returns: The company had an undrawn $900.0 million unsecured revolving facility maturing in 2028 and reported compliance with its financial covenants. Management said resources should cover anticipated operational needs and obligations for at least 12 months. The quarterly dividend was raised 2% to $0.53 per share; $231.5 remained under the $400.0 million share-repurchase authorization.

Material changes versus the prior comparable period

  • Title Insurance and Services revenue fell 19.0% in Q3 and 25.8% for the first nine months. Q3 direct premiums and escrow fees declined 24.7%, while agent premiums declined 27.0%.
  • Direct operations closed 120,000 domestic title orders in Q3, down 25.2% year over year. Daily orders opened were down 22.5%; management cited weaker residential purchase, refinance, and commercial activity.
  • Higher interest rates lifted nine-month net investment income to $423.4 from $199.2. However, investment-portfolio volatility remained significant: Q3 net investment losses were $163.6, compared with $226.1 in Q3 2022.
  • Personnel and other operating costs declined with lower volumes and headcount, while interest expense rose to $35.8 in Q3 from $24.0, primarily due to higher banking-operation deposit balances.
  • Available-for-sale debt securities had $1,189.9 of gross unrealized losses at September 30, compared with $1,009.5 at December 31, 2022. Management attributed the losses to non-credit factors and said it did not intend, and was not likely required, to sell the affected securities before recovery.
  • In May 2023, the company replaced its $700.0 million revolving credit agreement with a $900.0 million facility. It also repaid $250.0 million of senior notes at maturity in February.

Outlook, risks, contingencies, and unusual items

  • The filing provides no specific revenue, earnings, or other numerical financial guidance. Management expects to continue paying quarterly dividends at or above the then-current level, subject to board discretion and other factors.
  • Management highlighted sensitivity to interest rates, real-estate conditions, mortgage availability, affordability, and seasonal transaction patterns. Higher rates and reduced affordability have weighed on purchase and refinance activity; management said elevated mortgage rates could continue to affect volumes.
  • Venture investments are high-risk, relatively illiquid, and can create material earnings volatility. The company recorded $122.4 of Q3 unrealized losses and impairment charges related to private venture-stage investments; the quarter’s total net investment losses also included other items.
  • Title insurance claim reserves totaled $1,299.5. The reported title loss rate was 3.0% for Q3 and 3.33% for the nine-month period, including releases of prior-year reserves. Actual claims experience may differ materially from estimates.
  • The company and subsidiaries face routine litigation and regulatory matters, including class-action claims and ongoing regulatory inquiries. A New York Department of Financial Services matter related to the 2019 information-security incident remains unresolved; management did not expect it or other pending inquiries to materially affect results, though investigations could require changes to business practices.
  • Escrow, trust, like-kind exchange, and mortgage-subservicing funds are administered on behalf of customers and are generally excluded from the company’s balance sheet. The company could be contingently liable for their disposition. At September 30, administered escrow deposits were $9.2 billion and like-kind exchange funds were $2.4 billion.
  • Other disclosed risks include cybersecurity and data protection, financial-institution failures, regulatory and title-rate changes, agent conduct, investment losses, catastrophe events, and possible reductions in deposits at the company’s federal savings bank subsidiary.

Important facts for investors to verify

  • Whether title order volumes, particularly residential refinance and purchase activity, stabilize or continue to weaken.
  • How much of earnings remains exposed to venture-investment marks, impairments, and other investment gains or losses.
  • Whether title claims and reserve releases develop as expected, given the long-tail nature of title claims.
  • The composition and availability of reported cash and liquidity, including subsidiary and regulatory limits on transfers to the holding company.
  • Progress and potential financial or operational consequences of outstanding regulatory inquiries and litigation, including the New York DFS matter.
  • Whether dividend and repurchase plans remain supportable if transaction volumes, earnings, or subsidiary cash flows decline.