First American Financial Corporation — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019. The company provides title insurance and real-estate-related services, specialty insurance, and related financial services. Comparisons below are year over year unless noted. Dollar amounts are in millions except per-share data.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Total revenue | $1,498.6 | $1,491.2 | $2,802.2 | $2,788.5 |
| Income before taxes | $229.5 | $202.0 | $371.2 | $295.0 |
| Net income attributable to company | $186.7 | $155.1 | $296.2 | $231.4 |
| Diluted EPS | $1.64 | $1.37 | $2.61 | $2.05 |
| Cash provided by operating activities | — | — | $301.1 | $254.1 |
- Q2 revenue rose 0.5%; pretax income rose 13.6% and diluted EPS rose 19.7%. Six-month revenue increased 0.5%, while pretax income rose 25.8%.
- Q2 gains were led by net investment income, up 37.9% to $77.7 million, and net realized investment gains of $8.4 million. Direct premiums and escrow fees increased 1.0%; agent premiums declined 2.7% and information and other revenue declined 3.9%.
- Title Insurance and Services Q2 pretax margin was 17.0%, versus 15.3%; Specialty Insurance margin was 12.8%, versus 8.4%. Specialty Insurance pretax income increased 55.5%, supported in part by lower claim provisions.
- Six-month net income included $41.1 million of net realized investment gains, compared with a $0.2 million loss in 2018. Investment results, including equity-security fair-value changes, contributed to the year-over-year improvement.
Cash, liquidity and debt
- At June 30, cash and cash equivalents were $1.412 billion, down $55.2 million from year-end 2018. Total assets were $11.443 billion and total equity was $4.088 billion.
- Six-month operating cash flow was $301.1 million. Investing activities used $367.3 million and financing activities provided $8.6 million.
- Notes and contracts payable were $729.6 million; the company also reported $190.1 million of secured financings payable. Debt-to-capitalization was 18.4%, compared with 17.8% at December 31, 2018.
- A new $700 million unsecured revolving credit facility runs to April 2024 and includes a potential $350 million expansion. The company had $160 million drawn at 3.90%, leaving $540 million available; it reported compliance with financial covenants.
- Management said available cash, operating cash generation and revolving credit capacity should meet anticipated obligations for at least 12 months. It expects quarterly dividends at or above the current level, subject to board discretion. The quarterly dividend declared was $0.42 per share.
- Customer escrow deposits were $8.2 billion and like-kind exchange funds were $2.4 billion at June 30. Much of these customer funds, along with $4.0 billion of trust assets held or managed, is not included as company assets; the company may nevertheless face contingent responsibility for their disposition or transfer.
Changes, outlook and material risks
- Real-estate activity was mixed: direct residential refinance premiums increased 34.1% in Q2, while purchase and commercial premiums declined. Direct title orders opened per day increased 7.0%, driven by a 41.1% increase in refinance orders; purchase and commercial opened orders fell 2.8% and 8.4%, respectively. Domestic direct title orders closed increased 0.2% in Q2 but fell 6.0% for the first half.
- Higher investment income benefited from rising short-term rates and higher average balances. Management cautioned that lower rates or balances would reduce future investment income. No specific revenue or earnings guidance was provided.
- The company adopted lease accounting guidance in January 2019, recognizing $300.7 million of operating lease assets and $325.4 million of operating lease liabilities at June 30. Adoption included a $1.3 million retained-earnings adjustment.
- A security incident involving a software vulnerability was investigated; documents containing personal information for 32 consumers likely were accessed without authorization. Consumers were notified. The filing says costs and business impact were expected to be immaterial, while also describing related class-action lawsuits and regulatory inquiries whose outcomes cannot yet be estimated.
- In July 2019, the company received a $14.3 million Canadian excise-tax assessment and said it intends to appeal; it did not consider a loss probable and recorded no liability. An Indiana insurance regulator also pursued a civil penalty relating to alleged historical title-policy overcharges; the company said it would defend itself.
- Key exposures include real-estate and mortgage-market cycles, interest-rate and investment-market changes, title-claim reserve estimation, agent conduct, regulation and litigation, data privacy and cybersecurity, and disruptive industry technology. Management estimated that a 50-basis-point change in expected loss rates for each of the six most recent policy years could change IBNR reserves by approximately $122.9 million.
Important facts for investors to verify
- Whether refinance-driven order growth and higher investment income persist, particularly if interest rates or escrow balances change.
- Future title order volumes, segment margins, and the effect of purchase and commercial activity declines.
- Developments in the security incident lawsuits and regulatory inquiries, and whether related costs remain immaterial.
- Outcomes of the Canadian tax assessment and Indiana regulatory matter, including any required payments or business-practice changes.
- Changes in claims experience and reserve estimates, including the sensitivity disclosed for recent policy years.
- Availability of subsidiary cash distributions, compliance with credit-facility covenants, and the board’s future dividend decisions.