First American Financial Corporation (NYSE: FAF) — 2023 Form 10-K
Reporting period: Fiscal year ended December 31, 2023. This is an annual filing, not a standalone fourth-quarter report; fourth-quarter information below is limited to the cybersecurity incident disclosure.
Business context
First American provides title insurance, settlement and related real-estate services, as well as residential home warranties. The title insurance and services segment generated 95.4% of consolidated revenue in 2023. Results are highly exposed to real-estate and mortgage transaction volumes, interest rates, and the mix of purchase, refinance and commercial activity.
Financial performance and liquidity
| Metric | 2023 | 2022 |
|---|---|---|
| Revenue | $6.00 billion | $7.61 billion |
| Income before taxes | $274.4 million | $325.7 million |
| Net income attributable to First American | $216.8 million | $263.0 million |
| Diluted EPS | $2.07 | $2.45 |
| Cash provided by operating activities | $354.3 million | $777.6 million |
| Cash and cash equivalents at year-end | $3.61 billion | $1.22 billion |
- Revenue declined 21.1%, principally reflecting lower title premiums and escrow fees, agent premiums, and information and other revenue. Net investment losses were $206.4 million, compared with $515.8 million in 2022.
- Title insurance and services revenue fell 24.1% to $5.72 billion; pretax income fell 34.8% to $494.0 million and pretax margin declined to 8.6% from 10.0%. Domestic direct-title orders closed fell 34.5% to 455,500.
- Home warranty revenue was nearly flat at $417.2 million. Pretax income rose to $54.3 million from $44.6 million, and margin increased to 13.0% from 10.6%.
- Corporate reported a pretax loss of $273.8 million, compared with a $476.2 million loss in 2022. Corporate results included venture investment losses; 2023 consolidated results included $155.0 million of net unrealized losses and impairment charges from the venture portfolio.
- Net investment income increased to $570.0 million from $340.1 million, primarily due to higher interest rates and warehouse lending income. The overall loss-provision rate for title insurance and escrow fees was 3.25%, versus 4.0% in each of the prior two years, including a $21.6 million release for prior policy years.
- Year-end total assets were $16.80 billion and total equity was $4.86 billion. Notes and contracts payable were $1.394 billion; secured financings payable were $553.3 million. Debt to capitalization was 28.6%, or 20.2% on the company’s adjusted, non-GAAP basis.
- The company had a $900 million undrawn revolving credit facility maturing in 2028 and $179.3 million of cash at the parent company. Management said available resources were sufficient for anticipated obligations for at least 12 months. The company expects quarterly dividends at or above $0.53 per share, subject to board discretion and applicable restrictions.
Material changes and unusual items
- Residential and commercial real-estate activity weakened amid higher mortgage rates. Company direct-title orders opened per day fell 29.5%; refinance, purchase and commercial opened orders declined 46.7%, 20.4% and 22.0%, respectively.
- Operating cash flow dropped by more than half year over year. Cash and deposits increased sharply at year-end partly because the December cyber incident delayed closings and left a higher proportion of escrow balances at the company’s bank.
- The December 2023 cyber incident took certain systems offline and delayed customer transactions. Management’s internal fourth-quarter adjusted EPS forecast was $1.00; actual adjusted EPS was $0.69, including a five-cent tax benefit. The company estimated a 36-cent shortfall against its forecast, including $11 million of direct incident expenses, but said the precise incident impact was unknowable.
- The company revised prior-period financial statements for an understated deferred-compensation obligation, primarily relating to periods before 2020. It said the adjustment was not material to previously issued financial statements.
- Management’s title IBNR claims reserve was $1.187 billion. The actuary’s range of reasonable estimates was approximately $926.5 million to $1.230 billion; reserve assumptions remain sensitive to claims development and economic conditions.
Outlook, risks and contingencies
The filing provides no quantified revenue or earnings guidance. Management describes continued investment in automation, data and digital closing capabilities, alongside efforts to align staffing and costs with transaction volumes. Its outlook remains dependent on housing and commercial property activity, mortgage rates, credit availability and market conditions.
Material risks include real-estate market contraction, title-claims reserve variability, investment and venture portfolio losses, interest-rate exposure, cyberattacks and payment fraud, regulation and litigation, reliance on independent title agents, and potential deposit losses or liquidity pressure at financial institutions. The company disclosed ongoing regulatory examinations and investigations and class-action litigation; it did not expect pending matters to materially adversely affect its financial condition, results or cash flows, though proceedings could prompt business-practice changes. No goodwill impairment was recorded in 2023.
Most important facts for investors to verify
- Whether real-estate order volumes and title margins stabilize, and how purchase, refinance and commercial activity evolve.
- Subsequent developments from the December 2023 cyber incident, including remediation, customer impacts, insurance recovery and any further costs.
- Whether title IBNR reserves prove adequate as recent policy years mature and claims experience develops.
- Venture portfolio valuations and additional impairments, particularly the company’s Offerpad investment.
- Liquidity and debt needs, including repayment of $300 million of senior notes due November 2024 and the movement of escrow and subservicing deposits.
- Regulatory inquiries, class-action cases, and any outcomes that could affect operations or capital distributions.