First American Financial Corporation (NYSE: FAF) — 2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020. This is an annual report; fourth-quarter figures below are unaudited. The company provides title insurance, settlement and real-estate data services, banking and wealth-management services, home warranties, and property and casualty insurance.
Financial performance
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Revenue | $7.087 billion | $6.202 billion | +14.3% |
| Income before taxes | $923.3 million | $905.0 million | +2.0% |
| Net income attributable to FAF | $696.4 million | $707.4 million | -1.6% |
| Diluted EPS | $6.16 | $6.22 | -1.0% |
| Operating cash flow | $1.085 billion | $913.1 million | +18.8% |
| Cash and cash equivalents, year-end | $1.275 billion | $1.486 billion | Down $210.5 million |
Consolidated pretax margin was approximately 13.0%, compared with 14.6% in 2019; net margin was approximately 9.8%, versus 11.4%. Return on average stockholders’ equity declined to 14.9% from 17.3%. Total assets were $12.796 billion and stockholders’ equity was $4.910 billion at year-end.
- Title Insurance and Services: Revenue was $6.536 billion, up 15.1%; pretax income was $1.026 billion, up 12.4%. Pretax margin eased to 15.7% from 16.1%. Residential refinance activity drove growth: direct refinance premiums and escrow fees rose 113.2%, while commercial direct premiums and escrow fees fell 16.8%.
- Specialty Insurance: Revenue was $532.4 million, up 5.2%; the segment recorded a $25.3 million pretax loss versus $66.6 million pretax income in 2019. Results included $54.9 million of impairment charges tied to the planned exit from property and casualty insurance.
- Investment income and gains: Net investment income fell 29.8% to $221.3 million, principally due to lower short-term rates. Net realized investment gains increased to $105.0 million from $66.4 million.
- Cash flow and claims: Operating cash flow rose despite claim payments, net of recoveries, increasing to $471.3 million from $415.3 million. Capital expenditures were $120.6 million.
Fourth quarter: Revenue was $2.151 billion versus $1.729 billion in Q4 2019; net income attributable to the company was $280.3 million versus $224.0 million. Diluted EPS was $2.49 versus $1.97.
Debt and liquidity
- Notes and contracts payable were $1.011 billion at year-end, including $450 million of 4.00% senior notes due 2030 issued in May 2020. Secured warehouse financing payable was $516.2 million.
- The company had no borrowings on its $700 million unsecured revolving credit facility at December 31, 2020; it reported compliance with its financial covenants.
- Debt-to-capitalization was 23.7%, up from 18.5%; adjusted debt-to-capitalization, excluding secured financings, was 17.0%, up from 14.1%.
- At the parent company, cash was $206.9 million and the full $700 million revolver was available. Management said resources were sufficient for anticipated obligations for at least the next 12 months.
- Dividends paid were $198.7 million. The quarterly dividend was raised to $0.46 per share; the company also repurchased $138.6 million of stock during 2020.
Material changes, outlook and risks
- The pandemic initially reduced residential purchase and commercial order activity, while low mortgage rates substantially boosted refinancing. Direct domestic orders opened per day increased 34.0% for 2020; refinance orders rose 103.1%, purchase orders 4.2%, and commercial orders declined 9.1%. Management expected elevated residential activity to continue well into 2021; commercial activity returned to historical levels in Q4, with recovery differing by asset class.
- In January 2021, FAF agreed to transfer eligible property and casualty policies to Safeco and, in certain circumstances, Heritage. Transfers were expected to finish by the end of Q3 2022; remaining policies would be considered for non-renewal. This is a book transfer, not a completed sale.
- Title claims provision rose to 5.0% of title premiums and escrow fees from 4.0%. The title IBNR reserve was $1.026 billion; a 50-basis-point change in recent-year loss rates could change the reserve by approximately $134.3 million. Management noted that 2020 incurred title claims were below the prior year, but pandemic-related economic uncertainty informed the higher provision.
- Other risks include interest-rate and real-estate market changes, investment valuation and credit risk, agent-related losses, cyberattacks and fund-transfer fraud, regulatory scrutiny, and uncertainty in long-tail claims. A 100-basis-point rate increase was estimated to reduce the year-end debt-securities portfolio fair value by about $200 million.
- Cybersecurity matters remained outstanding: the 2019 data incident involved 32 consumers. The SEC staff issued a Wells Notice in September 2020 concerning disclosures and disclosure controls; the New York Department of Financial Services filed charges. The company disputed the allegations and did not expect these matters to materially affect overall financial condition, results or cash flows. Several class actions and regulatory inquiries were also unresolved, with losses generally not estimable. A Canadian tax assessment of $15.7 million was under appeal; no liability was recorded.
- Management disclosed that one or more strategic investments could produce gains in coming quarters that might be material in an individual period, but the timing and amount were uncertain. The filing provides no quantitative earnings or revenue guidance.
Most important facts for investors to verify
- Whether refinancing demand and purchase activity remain strong, and how changing mortgage rates affect transaction mix and margins.
- Development of the $1.026 billion title IBNR reserve, including actual claims relative to assumptions and the potential for reserve revisions.
- Progress, costs and policy-retention effects of the property and casualty book transfers through the expected 2022 completion.
- Final outcomes and potential costs of the SEC, New York DFS, class-action and other regulatory matters, plus the Canadian tax appeal.
- Debt and capital trends, subsidiary dividend capacity, and the sustainability of dividends and repurchases amid acquisitions and market volatility.