First American Financial Corporation (FAF) — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. Unaudited results; comparisons are with the corresponding 2020 periods. The company provides title insurance and related real-estate services, specialty insurance, and corporate investment activities.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Total revenue | $2.556B | $1.914B | $6.848B | $4.935B |
| Income before taxes | $603.2M | $243.4M | $1.309B | $541.0M |
| Net income attributable to company | $445.3M | $182.3M | $981.2M | $416.1M |
| Diluted EPS | $4.00 | $1.62 | $8.81 | $3.68 |
| Operating cash flow | Not separately provided for quarter | Not separately provided for quarter | $876.0M | $681.0M |
- Q3 revenue rose 33.6%; nine-month revenue rose 38.8%. Results include net realized investment gains of $275.2M in Q3 and $428.6M year to date.
- The Q3 investment gains included a $195.3M unrealized gain on Offerpad, which became publicly traded in September. The company’s Offerpad holding was valued at $280.3M at quarter-end. Venture investment valuation changes can materially affect quarterly earnings.
- Title Insurance and Services Q3 revenue increased 21.2% to $2.147B, while pretax income rose 4.4% to $352.4M. Its pretax margin declined to 16.4% from 19.0%. Nine-month pretax income increased 52.8% to $990.6M, and margin rose to 16.4% from 14.3%.
- Specialty Insurance reported a Q3 pretax loss of $1.9M versus a $72.1M loss, including the prior-year $73.3M impairment related to the planned property and casualty (P&C) exit. Nine-month pretax income was $24.1M versus a $52.0M loss.
- Q3 dividends declared were $0.51 per share, up from $0.44; nine-month dividends were $1.43 versus $1.32. Nine-month share repurchases totaled $78.8M.
Balance sheet, liquidity and capital
- At September 30, 2021, cash and cash equivalents were $1.954B; total investments were $10.357B; total equity was $5.613B. Cash increased from $1.275B at December 31, 2020.
- Notes and contracts payable were $1.649B, and secured financings payable were $593.6M. The company issued $650M of 2.40% senior unsecured notes due 2031 in August. No borrowings were outstanding under its $700M revolving credit facility; it reported compliance with its financial covenants.
- Debt-to-capitalization was 28.5%, up from 23.7% at year-end; the company’s adjusted ratio, excluding secured financings payable, was 22.7%, up from 17.0%.
- Nine-month operating cash flow of $876.0M followed $356.4M of claim payments, net of recoveries. Investing activities used $2.828B and financing activities provided $2.633B; net cash increased $678.5M.
- Management said cash generation, liquid assets and revolving credit availability were sufficient for anticipated obligations for at least 12 months. Holding-company cash was $713.6M, with $700M available under the revolver.
- Customer escrow deposits and like-kind exchange funds are not all company assets. Escrow deposits totaled $11.7B and like-kind exchange funds $5.1B at quarter-end; the company notes possible contingent liability for their disposition and transfers.
Changes, outlook and risks
- Growth reflected higher agent premiums (+38.2% in Q3), direct premiums and escrow fees (+16.6%), and investment gains. Higher residential property values and commercial activity lifted average revenue per order, while refinance activity weakened: direct-operation refinance orders closed per day fell 38.1% year over year in Q3. Companywide direct title orders opened per day fell 22.4%.
- Management lowered the current-year title loss rate to 4.0% from 5.0% in 2020, citing claims below actuarial expectations and a strengthening economy, high home equity and foreclosure moratoria. Actual claims could differ materially from estimates; a 50-basis-point change in recent policy-year loss rates could change IBNR reserves by approximately $144.4M, according to the filing.
- The company is exiting P&C insurance. Policies in force had declined approximately 49% by September 30; management expected an approximately 70% reduction by year-end and completion of policy transfers by the end of Q3 2022. P&C revenues are expected to decline over time.
- The company increased its repurchase authorization to $600M, with $463.1M remaining at quarter-end. It increased the quarterly dividend to $0.51 per share and said it expected to continue paying quarterly dividends at or above that level, subject to board discretion and other factors. No specific earnings guidance was provided.
- Material risks include sensitivity to real-estate and mortgage activity, interest rates and economic conditions; title and specialty insurance claims; investment and venture-portfolio volatility; cyber incidents and data protection; regulatory scrutiny and title rate regulation; and access to customer deposits at financial institutions.
- Litigation and regulatory matters include title-business lawsuits, class actions connected with the 2019 information-security incident, and inquiries into title-industry practices. The company could not estimate possible losses for certain matters. A Canadian tax assessment of $16.2M is under appeal; the company recorded no liability, stating that loss was not probable. Management did not expect the described matters to materially adversely affect overall financial condition, results or cash flows, but noted investigations could require business-practice changes.
- Disclosure controls were reported effective as of September 30, 2021, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How much of reported earnings and revenue growth reflects recurring title and service operations versus volatile investment marks, especially the Offerpad gain.
- Whether title order volumes, agent premiums, average revenue per order and segment margins remain resilient as refinancing activity weakens.
- Whether the 4.0% title loss-rate assumption and $1.262B claims reserve remain adequate as claims emerge and economic or legal conditions change.
- Execution and financial effects of the P&C run-off, including policy transfers, continuing losses and declining revenue.
- Debt and liquidity trends, including the new notes, subsidiary secured financing, capital-return commitments and restrictions on distributions from regulated subsidiaries.
- Developments in the 2019 cybersecurity-related litigation and regulatory proceedings, title-industry investigations, and the Canadian tax appeal.