First American Financial Corporation — Q2 2022 Form 10-Q
Business context and period: Unaudited results for the quarter and six months ended June 30, 2022, compared with the corresponding 2021 periods. The company operates title insurance and services, specialty insurance, and corporate businesses; activity is significantly influenced by real estate and mortgage markets.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $2.062 billion | $2.266 billion | $4.096 billion | $4.292 billion |
| Income before taxes | $141 million | $399 million | $271 million | $705 million |
| Net income attributable to company | $109 million | $302 million | $207 million | $536 million |
| Diluted EPS | $1.01 | $2.72 | $1.89 | $4.81 |
| Cash provided by operating activities | Not separately reported for quarter | Not separately reported for quarter | $229 million | $477 million |
- Q2 revenue fell 9.0%; first-half revenue fell 4.6%. The decline reflects investment losses and lower refinance-related business, partly offset by higher agent premiums.
- Q2 net investment losses were $133 million, versus $86 million of gains a year earlier. First-half net investment losses were $176 million, versus $153 million of gains. Q2 losses included $92 million related to Offerpad, partly offset by gains on other venture investments.
- Title Insurance and Services pretax margin declined to 11.7% from 17.3% in Q2 and to 11.4% from 16.3% for the first half. Specialty Insurance pretax margin was 3.8% versus 13.2% in Q2, and 7.3% versus 9.0% for the first half.
- Title order volumes weakened: domestic title orders closed fell 24.4% in Q2; residential refinance orders closed per day fell 60.2%. Commercial and residential purchase activity partly offset refinance weakness.
- Cash and cash equivalents were $1.745 billion at June 30, up from $1.228 billion at year-end. Operating cash flow was $229 million; cash used in investing was $193 million and financing activities provided $489 million for the first half.
- Debt and capitalization: notes and contracts payable were $1.646 billion and secured financings payable were $429 million. Debt-to-capitalization was 29.6%, compared with 27.4% at year-end; adjusted ratio excluding secured financings was 25.0%, versus 22.2%.
Material changes, outlook, and risks
- Higher mortgage rates sharply reduced refinancing activity. Management noted that rising or persistently high rates generally weigh on residential real estate transactions and related revenue.
- Debt-security market declines drove substantial other comprehensive losses: first-half unrealized losses on debt securities were $638 million after tax, and accumulated other comprehensive loss widened to $750 million from $92 million at year-end. Management attributed unrealized debt-security losses to non-credit factors and said it did not intend, and was not likely required, to sell the securities before recovery.
- The company acquired a California title, underwriting, and escrow services provider in May for $300 million cash. It contributed $36 million in revenue and $6 million in pretax income after acquisition. First-half cash purchase consideration for acquisitions was $308 million.
- The property and casualty insurance business continued to wind down; policy transfers were expected to be completed by the end of Q3 2022. Policies in force had declined approximately 99.5% year over year by June 30.
- Management said available resources, operating cash flow, liquid assets, and the revolving credit facility were sufficient for anticipated requirements for at least 12 months. The $700 million revolver had no borrowings outstanding. Management expected quarterly dividends to continue at or above the current level, subject to board discretion. A new $400 million repurchase authorization was approved; $392 million remained at quarter-end. The company repurchased 5.5 million shares for $335 million during the first half.
- Material risks include further real-estate and mortgage-market contraction, interest-rate and investment-market volatility, venture investment losses, changes in title claims experience, regulatory scrutiny, cyber and data-security exposures, and acquisition integration risks. The company also faces putative consumer class actions tied to its 2019 information-security incident; loss probability and range were not estimable. A New York Department of Financial Services matter related to the incident remained unresolved.
- No numerical earnings or revenue guidance is provided in the filing. The company reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Investor verification priorities
- Track mortgage rates, purchase and refinance orders, and the effect of transaction declines on title segment margins.
- Reconcile reported earnings with investment valuation changes, especially Offerpad and other venture holdings, and monitor further changes in accumulated other comprehensive loss.
- Review the company’s claims-reserve assumptions: management said a 50-basis-point change in recent policy-year loss rates could change the IBNR reserve by approximately $155 million.
- Confirm progress and costs of the property and casualty wind-down, acquisition integration, and remaining share repurchases and dividends.
- Monitor the 2019 incident-related litigation and regulatory matters, along with liquidity, debt capitalization, and restrictions on subsidiary distributions.