First American Financial Corp quarterly report, Q1 FY2022

First American Financial Corporation — Q1 2022 Form 10-Q

Reporting period: Three months ended March 31, 2022. Unaudited results; comparisons are with Q1 2021 unless stated otherwise. First American provides title insurance and related real estate services, as well as specialty insurance and mortgage-related services.

Financial performance

Metric	Q1 2022	Q1 2021	Change
Total revenue	$2.034 billion	$2.026 billion	+0.4%
Income before tax	$130 million	$306 million	-57.5%
Net income	$98 million	$234 million	-58.1%
Diluted EPS	$0.88	$2.10	-$1.22
Operating cash flow	$40 million	$224 million	-$184 million

Revenue was supported by agent premiums of $948 million (+12.2%) and information and other revenue of $309 million (+10.8%). Direct premiums and escrow fees were $774 million (-1.5%). Net investment results shifted from a $67 million gain to a $43 million loss.
Net investment losses included $71 million of unrealized losses on venture investments, partly offset by a $51 million realized gain on the sale of an investment in a title insurance business. The Offerpad investment accounted for $44 million of losses.
Expenses rose to $1.904 billion from $1.720 billion. Personnel costs increased to $602 million from $535 million; premiums retained by agents rose to $758 million from $671 million. The provision for policy losses and other claims decreased to $122 million from $140 million.
Consolidated pretax margin was approximately 6.4%, versus 15.1%; net margin was approximately 4.8%, versus 11.6%. Title Insurance and Services pretax income fell to $220 million from $280 million, and its pretax margin declined to 11.0% from 15.2%. Specialty Insurance pretax income rose to $12 million from $6 million.
Q1 comprehensive loss was $271 million, compared with comprehensive income of $138 million, largely reflecting a $371 million after-tax unrealized loss on debt securities. Accumulated other comprehensive loss increased to $461 million from $92 million at year-end 2021.

Liquidity, debt and capital

Cash and cash equivalents were $1.704 billion at March 31, 2022, up from $1.228 billion at December 31, 2021. Total assets were $16.527 billion and total equity was $5.379 billion.
Notes and contracts payable were $1.647 billion; secured financings payable were $558 million. The reported debt-to-capitalization ratio was 29.1%, or 23.4% excluding secured financings. The $700 million revolving credit facility was undrawn; it matures April 30, 2024.
Operating cash flow fell to $40 million, including a $246 million decrease in accounts payable and accrued liabilities. Investing activities used $107 million; financing activities provided $543 million. Cash increased by $476 million during the quarter.
Management said available cash, operating cash flows and credit availability were sufficient for anticipated obligations for at least 12 months. The holding company reported $813 million in cash and $700 million available under the revolver.
The company declared a quarterly dividend of $0.51 per share and said management expects quarterly dividends to continue at or above the current level, subject to board discretion. It repurchased 1.6 million shares for $108 million; $335 million remained under its $600 million authorization.

Material changes and management commentary

Real estate and mortgage activity diverged: domestic direct title revenue from residential purchases increased 10.1%, while refinance revenue fell 58.7%. Domestic title orders opened per day declined 24.4%; closed domestic title orders declined 28.7%.
Title Insurance and Services revenue grew 8.4%, but expenses increased 13.7%, contributing to lower pretax income. Management cited acquisition impacts, higher salaries and incentive compensation, and increased professional services and software expenses.
Specialty Insurance revenue declined 15.4%, primarily because of the continuing exit from property and casualty insurance. Policies in force in that business were down approximately 87% year over year; the company expected policy transfers to be completed by the end of Q3 2022. Home warranty claims as a percentage of premiums improved to 46.5% from 53.6%.
Management attributed the broad decline in mortgage originations to weaker refinance activity amid rising rates. The company’s results are seasonal and sensitive to real estate transaction volumes, interest rates and transaction mix. The filing provides no formal earnings or revenue guidance.

Risks, contingencies and unusual items

Investment-market volatility affected earnings and equity: marketable equity securities generated a $65 million net loss, while debt-security fair value declines were recorded primarily in other comprehensive loss. Management attributed debt-security unrealized losses to non-credit factors and did not consider the securities credit-impaired at quarter-end.
Title claims reserve was $1.301 billion, including $1.154 billion for incurred-but-not-reported claims. The reported title loss rate was 4.0%. The filing says a 50-basis-point change in expected loss rates for the six most recent policy years could change the IBNR reserve by approximately $152 million.
Ongoing legal matters include putative class actions and a securities class action related to the 2019 information-security incident; the company said it could not yet assess the probability or range of loss. A New York Department of Financial Services cyber-security matter and other regulatory inquiries also remain unresolved. The company did not expect these matters to materially affect overall financial condition, results or cash flows, but acknowledged some investigations could lead to business-practice changes with material effects.
Principal stated risks include rising interest rates and weaker real estate markets, investment and venture-portfolio losses, claims experience differing from estimates, cyberattacks and fraud, regulatory scrutiny, agent-related losses, and constraints on subsidiary distributions. Escrow, trust and other customer funds administered by the company are substantial and may entail contingent liability; many are not company assets.

Important facts for investors to verify

How falling refinance volumes and rising rates affect order counts, revenue mix and title-segment margins in subsequent quarters.
Whether venture investment valuations—particularly Offerpad—and debt-security fair values produce further earnings or equity volatility.
Actual claims development versus the $1.301 billion reserve and the sensitivity disclosed for recent policy-year loss assumptions.
Progress and financial effects of the property and casualty runoff, and whether transfers are completed by the stated Q3 2022 target.
Developments in the 2019 cyber-incident litigation and regulatory matters, as well as acquisition-related integration and costs.
Cash conversion, capital allocation, debt leverage and the company’s ability to sustain dividends and repurchases as operating conditions change.