First American Financial Corporation — FY2021 Form 10-K
Business context and reporting period. The filing covers the fiscal year ended December 31, 2021, compared with 2020 and 2019. First American provides title insurance, real-estate closing and settlement services, related data and financial services, and home warranties. The title insurance and services segment generated about 90% of 2021 consolidated revenue. Results are highly dependent on real-estate and mortgage activity, including interest-rate-sensitive refinancing.
Financial performance
| Metric | 2021 | 2020 | Change |
|---|---|---|---|
| Revenue | $9.221 billion | $7.086 billion | Up 30.1% |
| Income before income taxes | $1.642 billion | $923 million | Up 77.9% |
| Net income attributable to First American | $1.241 billion | $696 million | Up 78.3% |
| Diluted earnings per share | $11.14 | $6.16 | Up 80.8% |
| Cash from operating activities | $1.220 billion | $1.085 billion | Up $135 million |
- Revenue mix and drivers: Title insurance and services revenue was $8.320 billion, up 27.3%. Higher agent premiums, direct premiums and escrow fees, and information and other revenue contributed. Residential purchase and commercial activity strengthened; direct premiums and escrow fees from refinancing declined 16.7%.
- Margins: Title insurance and services pretax margin rose to 16.3% from 15.7%. Specialty insurance reported pretax income of $36 million and a 6.7% margin, versus a $25 million pretax loss in 2020. Consolidated pretax margin was approximately 17.8%, compared with 13.0% in 2020.
- Investment gains and unusual items: Total net investment gains were $436 million, versus $105 million in 2020, materially boosting reported results. The corporate segment recorded $341 million of net investment gains, primarily from Offerpad and other venture investments. Offerpad’s annual fair-value gains included $121 million; a $75 million loss was recorded in Q4 as its share price declined.
- Cash, liquidity and capital: Year-end cash and cash equivalents were $1.228 billion, down $47 million year over year. Management said resources were sufficient for anticipated needs over at least the next 12 months. The parent company had $925 million cash and $700 million available on its revolving facility, with no revolver borrowings outstanding.
- Debt: Notes and contracts payable were $1.648 billion, including $650 million of 2.40% senior notes issued in August 2021 and due 2031. Secured financings payable were $538 million. Debt-to-capitalization was 27.4% (22.2% excluding secured financings), compared with 23.7% (17.0% adjusted) in 2020. The company reported compliance with credit-facility covenants.
- Other financial indicators: Total assets were $16.451 billion and total equity was $5.783 billion. The title-claims reserve was $1.284 billion, including $1.143 billion of IBNR title claims. The debt securities portfolio had a fair value of $9.362 billion; 97% was rated or classified as investment grade.
Material changes versus 2020
- Revenue, pretax income and attributable net income rose substantially, reflecting stronger real-estate transaction activity and much higher investment gains.
- Direct domestic title orders closed were nearly flat, up 0.7%; average domestic revenue per closed order increased 21.8%. Refinance opened orders per day fell 36.8%, while purchase and commercial opened orders per day rose 5.7% and 17.7%, respectively.
- Operating cash flow increased to $1.220 billion from $1.085 billion. Capital expenditures increased to $172 million from $121 million.
- The company increased its quarterly dividend to $0.51 per share in 2021 and expanded its repurchase authorization to $600 million. It repurchased $99 million of shares during 2021; $443 million remained authorized at year-end.
- Specialty insurance improved from its 2020 loss, when the property-and-casualty exit led to $55 million of impairment charges. The exit remains in progress.
Outlook, risks and contingencies
- No specific consolidated revenue or earnings guidance is provided. Management expects quarterly dividends to continue at or above $0.51 per share, subject to board discretion and legal and capital constraints.
- The company expected transfers of property-and-casualty policies to third-party insurers to be completed by the end of Q3 2022; policies in force had declined about 71% by year-end 2021.
- In January 2022, First American announced a definitive agreement to acquire a California title, underwriting and escrow-services provider for $300 million in cash, subject to customary conditions and regulatory review.
- Management cited rising interest rates as a headwind to refinancing activity. Other key risks include real-estate market downturns, inflation and rising costs, title-claims reserve uncertainty, investment-market volatility, cyber and data-security incidents, regulatory scrutiny, agent-related losses and catastrophe events.
- Title IBNR reserves are estimation-sensitive: management disclosed that a 50-basis-point change in expected loss rates for the six most recent policy years would change the reserve by approximately $148 million. The auditor identified valuation of the title-claims IBNR reserve as a critical audit matter.
- The company faces class-action litigation and regulatory matters related to its businesses and the 2019 information-security incident. The filing says outcomes were not determinable for certain matters; management did not expect them to materially affect overall financial condition, results or cash flows, though an adverse outcome could affect a particular period.
Most important facts for investors to verify
- How much of 2021 earnings growth came from recurring title and services operations versus volatile investment gains, especially venture holdings and Offerpad.
- Whether title-claims reserves remain adequate as real-estate conditions, defaults and claims experience evolve.
- The pace and profitability of purchase and commercial transactions if refinancing continues to weaken as rates rise.
- Progress, costs and financial effects of the property-and-casualty exit and the announced $300 million acquisition.
- Liquidity and capital flexibility, including debt maturities, regulated-subsidiary dividend limits, share repurchases and the sustainability of the dividend.
- Developments in cybersecurity-related litigation and regulatory inquiries, and any resulting costs or required changes to business practices.