First American Financial Corporation — FY2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. The filing also reports unaudited fourth-quarter results. The company provides title insurance and real-estate settlement, data, banking and trust services, plus property and casualty insurance and home warranties. Title insurance and services generated 91.5% of 2019 consolidated revenue.
Financial performance
| Metric | FY2019 | FY2018 | Change |
|---|---|---|---|
| Revenue | $6.202 billion | $5.748 billion | +7.9% |
| Income before taxes | $905.0 million | $609.5 million | +48.5% |
| Net income attributable to First American | $707.4 million | $474.5 million | +49.1% |
| Diluted EPS | $6.22 | $4.19 | +$2.03 |
| Operating cash flow | $913.1 million | $793.2 million | +$119.9 million |
- Margins: Title Insurance and Services pre-tax margin rose to 16.1% from 12.4%; Specialty Insurance rose to 13.2% from 5.8%. Consolidated pre-tax margin was approximately 14.6%, versus 10.6% in 2018.
- Drivers and earnings quality: Revenue gains included higher direct premiums and escrow fees, agent premiums and investment income. Net investment income increased 37.0% to $315.4 million. Net realized investment gains were $66.4 million, compared with $56.5 million of losses in 2018, a significant contributor to the year-over-year earnings increase.
- Claims: Total claims provision was $446.0 million, down from $452.6 million. The title loss provision rate remained 4.0%. Title IBNR reserves were $904.0 million; the company’s actuarial range was $708.8 million–$945.7 million.
- Cash, debt and liquidity: Year-end cash and cash equivalents were $1.486 billion; total assets were $11.519 billion and stockholders’ equity was $4.420 billion. Notes and contracts payable were $728.2 million and secured financings payable were $278.4 million. Debt-to-capitalization was 18.5%, up from 17.8%. The $700 million revolving facility had $160 million drawn, leaving $540 million available; the company reported covenant compliance. Management said resources were sufficient for anticipated needs over at least 12 months.
- Capital returns: Dividends declared were $1.68 per share for 2019. In January 2020, the board raised the quarterly dividend to $0.44 per share, effective with the March payment. The company repurchased $2.1 million of shares in 2019; $161.6 million remained authorized.
Fourth-quarter results and comparable period
For the quarter ended December 31, 2019, revenue was $1.729 billion, income before taxes was $288.5 million, net income attributable to the company was $224.0 million, and diluted EPS was $1.97. In fourth-quarter 2018, the corresponding figures were $1.417 billion, $118.9 million, $91.6 million and $0.81. The filing does not provide a clear quarterly cash-flow figure in the presented quarterly data.
Outlook, risks and unusual items
- Management expects lower short-term interest rates, following Federal Reserve rate cuts totaling 75 basis points in the second half of 2019, to weigh on 2020 net investment income. No specific full-year 2020 revenue or earnings guidance is provided.
- The business is cyclical and seasonal, with substantial exposure to real-estate transactions and mortgage originations. In 2019, refinancing activity increased sharply; direct residential refinance orders opened per day rose 51.0%, while residential purchase orders declined 1.6%.
- On February 13, 2020, the company announced a planned $350 million acquisition of a mortgage document, eClose and fulfillment technology provider, expected to close by March 31, 2020, subject to customary conditions and regulatory review. It expected to use operating cash.
- A 2019 information-security incident involved documents containing personal information of 32 consumers that likely were accessed without authorization. The company reported immaterial 2019 costs and expected future incident-specific costs to be immaterial, but the event prompted government inquiries and private lawsuits.
- The company faces class-action lawsuits and regulatory inquiries, including matters related to the data incident and title-industry practices. It says potential losses for certain class actions cannot yet be assessed or estimated; it does not believe the matters will materially affect overall financial condition or liquidity, while acknowledging business-practice changes could have a material impact.
- A Canadian tax authority assessed $14.8 million in excise tax and interest. The company disputes the assessment, intends to appeal, believes it is reasonably likely to prevail and recorded no liability because it did not consider a loss probable.
- Claims estimates are a key judgment and were identified as a critical audit matter. Management estimates that a 50-basis-point change in loss rates for each of the six most recent title policy years would change the IBNR reserve by approximately $125.8 million.
- Other notable items include $6.0 million of internally developed software impairments and $7.5 million of commercial lease impairments in 2019. The company adopted lease accounting guidance in 2019, recognizing $291.4 million of operating lease assets and $322.8 million of operating lease liabilities at year-end.
- Auditors issued unqualified opinions on the financial statements and internal control over financial reporting; management and the auditor concluded controls were effective at year-end.
Important facts for investors to verify
- How much of the earnings increase came from recurring operations versus investment income and realized investment gains.
- Actual 2020 effects of lower interest rates on investment income and of changing mortgage volumes on title revenue and margins.
- Development of the $904.0 million title IBNR reserve, including the actuarial range and sensitivity to assumptions.
- Resolution and potential costs of the data-security lawsuits and regulatory inquiries, title-industry investigations, and the $14.8 million Canadian tax assessment.
- Funding, closing and integration of the announced $350 million acquisition, and its effect on liquidity and capital allocation.
- Availability of subsidiary dividends and the distinction between company cash and customer escrow or trust assets, which are not generally company assets but can create contingent responsibilities.