First American Financial Corp annual report, FY2022

Business context and reporting period

First American Financial Corporation’s Form 10-K covers the fiscal year ended December 31, 2022; it is an annual report, not a quarter-only filing. The company primarily provides title insurance and real estate settlement services, alongside home warranties, mortgage-related and other financial services. Its title insurance and services segment generated 99.2% of consolidated revenue in 2022.

Financial performance and condition

Amounts are in U.S. dollars; figures are rounded.

Metric	2022	2021
Revenue	$7.605 billion	$9.221 billion
Income before income taxes	$326 million	$1.642 billion
Net income attributable to First American	$263 million	$1.241 billion
Diluted earnings per share	$2.45	$11.14
Cash from operating activities	$780 million	$1.220 billion
Cash and cash equivalents at year-end	$1.224 billion	$1.228 billion
Total equity	$4.688 billion	$5.783 billion

Consolidated pretax margin was approximately 4.3%, down from 17.8%. The title insurance and services segment’s pretax margin fell to 10.0% from 16.3%.
Net investment losses were $516 million, versus $436 million of gains in 2021. Losses included $329 million related to venture investments, including $191 million of unrealized losses on Offerpad and $140 million of impairment charges on venture investments.
Title claims reserves totaled $1.325 billion, including $1.207 billion of incurred-but-not-reported title claims. Management’s estimate for the title IBNR reserve was $1.207 billion; the actuary’s reasonable range was $995 million to $1.243 billion.
Notes and contracts payable were $1.646 billion and secured financings payable were $366 million at year-end. Debt-to-capitalization was 30.0% (22.9% excluding secured financings and accumulated other comprehensive loss). No borrowings were outstanding under the $700 million revolving facility.
The company reported $597 million of cash at the holding company and $700 million available on its revolver. It said liquidity was sufficient for anticipated needs for at least 12 months. It repaid $250 million of notes at maturity on February 1, 2023.
Debt securities had a fair value of $8.170 billion, with $1.009 billion of gross unrealized losses at year-end, attributed to non-credit factors. Accumulated other comprehensive loss increased to $868 million from $92 million.

Material changes versus the prior comparable period

Revenue declined 17.5%, principally reflecting lower direct premiums and escrow fees, agent premiums, and information revenue, as well as the swing from investment gains to losses.
Higher mortgage rates weighed on real estate activity. Direct title orders closed fell 33.8%; direct premiums and escrow fees from residential refinance transactions declined 63.6%, and residential purchase transactions declined 9.0%.
Operating cash flow decreased to $780 million from $1.220 billion. Year-end cash was broadly stable.
The specialty insurance segment’s revenue fell 19.2%, mainly as the company wound down its property and casualty insurance business. Four renters’ policies remained in force at year-end; home warranties continued.
The company repurchased 7.5 million shares for $441 million during 2022 and paid $217 million in dividends. The quarterly dividend was raised to $0.52 per share in 2022.
Acquisitions cost $311 million in cash. A California title, underwriting and escrow provider acquired in May contributed $110 million of revenue and $12 million of pretax income from acquisition through year-end.

Outlook, risks and unusual items

No specific earnings or revenue guidance was provided. Management said it expected quarterly cash dividends to continue at or above the then-current level, subject to board discretion and applicable restrictions.
Management warned that higher mortgage rates had reduced residential and refinance activity and affected commercial volumes in late 2022; it expected higher rates to continue weighing on volumes in 2023.
Key sensitivities include real estate and mortgage market activity, title claims and reserve estimates, interest-rate-driven investment values, venture portfolio volatility, and the composition and movement of customer and mortgage-servicing deposits.
The company is subject to ongoing regulatory examinations and investigations and is a party to class action lawsuits. A New York Department of Financial Services matter relates to a 2019 information-security incident; its outcome was not determinable. The company did not expect the pending matters to materially affect its financial condition, results or cash flows, while noting that changes to business practices could have adverse effects.
Other important risks include cyberattacks and fund-transfer fraud, regulatory changes, dependence on agents and large lenders, and the possibility that actual title claims differ materially from reserves. A 50-basis-point change in expected loss rates for the six most recent policy years could change the IBNR reserve by about $158 million, according to the filing.
The auditors issued unqualified opinions on the financial statements and internal control over financial reporting. Valuation of the title IBNR reserve was identified as a critical audit matter.

Important facts for investors to verify

Whether title order volumes, especially refinance and purchase activity, stabilized or continued to decline after year-end.
How title claims emergence compares with the $1.207 billion IBNR estimate and the disclosed actuarial range.
How much reported earnings and equity remain exposed to venture investments, Offerpad, and further interest-rate-driven changes in securities values.
Whether the company’s deposit base—particularly custodial deposits linked to mortgage subservicing clients—changes materially and affects bank liquidity.
Developments in the NYDFS investigation, class action matters, and any resulting financial exposure or operational changes.
Progress on cost adjustments, acquisition returns, capital spending, debt repayment, dividends, and the remaining share-repurchase authorization.