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First American Financial Reports Second Quarter 2022 Results

FAF

First American Financial Corporation (NYSE: FAF), a premier provider of title, settlement and risk solutions for real estate transactions and the leader in the digital transformation of its industry, today announced financial results for the second quarter ended June 30, 2022.

Current Quarter Highlights

  • Earnings per diluted share of $1.01, or $1.97 excluding 96 cents of net investment losses
  • Total revenue of $2.1 billion, down 9 percent compared with last year
    • Excluding net investment losses, total revenue was $2.2 billion, up 1 percent compared with last year
  • Net investment losses of $133 million, primarily due to a decline in the fair value of marketable equity securities
  • Title Insurance and Services segment pretax margin of 11.7 percent
    • 13.9 percent excluding net investment losses
  • Title Insurance and Services segment investment income of $70 million, up 49 percent compared with last year
  • Commercial revenues of $289 million, up 30 percent compared with last year
  • Specialty Insurance segment pretax margin of 3.8 percent
    • 7.4 percent excluding net investment losses
  • Repurchased 3.9 million shares for a total of $227 million at an average price of $57.93
    • Through July 27, repurchased an additional 963,000 shares for a total of $52 million at an average price of $54.20
  • Board of directors approved a new $400 million share repurchase authorization
  • Debt-to-capital ratio of 29.6 percent, or 25.0 percent excluding secured financings payable of $429 million
  • Cash flow from operations of $191 million compared with $253 million last year

Selected Financial Information
($ in millions, except per share data)

Three Months Ended

June 30,

2022

2021

Total revenue

$

2,062

$

2,266

Income before taxes

$

141

$

399

Net income

$

109

$

302

Net income per diluted share

$

1.01

$

2.72

Total revenue for the second quarter of 2022 was $2.1 billion, down 9 percent compared with the second quarter of 2021. Net income in the current quarter was $109 million, or $1.01 per diluted share, compared with net income of $302 million, or $2.72 per diluted share, in the second quarter of 2021. Net investment losses in the current quarter were $133 million, or 96 cents per diluted share, compared with net investment gains of $86 million, or 59 cents per diluted share, in the second quarter of last year. The net investment losses in the current quarter were primarily due to a decline in the fair value of marketable equity securities, compared with net investment gains in the second quarter of last year that were primarily driven by an unrealized gain recognized on a venture investment and an increase in the fair value of marketable equity securities.

“Our second quarter business results were strong, with our title segment delivering a pretax margin of 13.9 percent, excluding net investment losses,” said Ken DeGiorgio, chief executive officer at First American Financial Corporation. “Total revenue, excluding net investment losses, was up 1 percent, as continued strength in the commercial business, growth in investment income and revenue from recent acquisitions offset the decline in residential refinance and purchase activity.

“Given the decline in residential real estate activity and uncertainty in the economic outlook, we are maintaining our focus on expense management, particularly in business units most impacted by the decline in residential transactions. While we continue to effectively manage our cost structure, we also remain steadfastly committed to investing in strategic initiatives that support our company’s growth and operational efficiency, including our digital closing and title automation initiatives, and the expansion and enhancement of the data assets that fuel them.

“In terms of capital allocation, we continued to prioritize share repurchases, acquiring 3.9 million shares for a total of $227 million during the quarter and through July 27 an additional 963,000 shares. Since the beginning of the year, we repurchased approximately 6 percent of our shares outstanding as of the end of last year. Reflecting its confidence in the long-term prospects of our company, our board recently approved a new $400 million share repurchase authorization which enhances our capital deployment flexibility going forward.”

Title Insurance and Services
($ in millions, except average revenue per order)

Three Months Ended

June 30,

2022

2021

Total revenues

$

2,053

$

2,064

Income before taxes

$

240

$

358

Pretax margin

11.7

%

17.3

%

Title open orders(1)

257,200

329,500

Title closed orders(1)

205,000

271,100

U.S. Commercial

Total revenues

$

289

$

223

Open orders

35,600

37,100

Closed orders

22,000

20,200

Average revenue per order

$

13,200

$

11,100

(1) U.S. direct title insurance orders only.

Total revenues for the Title Insurance and Services segment during the second quarter were $2.1 billion, down 0.5 percent compared with the same quarter of 2021. Direct premiums and escrow fees were up 1 percent compared with the second quarter of 2021, driven by a 33 percent increase in the average revenue per direct title order closed that was largely offset by a 24 percent decline in the number of direct title orders closed. The average revenue per direct title order increased to $3,523, primarily attributable to an increase in the average deal size in our commercial business and a shift in the mix to higher premium commercial transactions from lower premium refinance transactions. Agent premiums, which are recorded on approximately a one-quarter lag relative to direct premiums, were up 4 percent in the current quarter as compared with last year.

Information and other revenues were $305 million during the quarter, up $6 million, or 2 percent compared with the same quarter of last year. Excluding the impact of recent acquisitions, information and other revenues declined by $41 million, or 14 percent. This decline was the result of lower transaction levels across several business units driven by the decline in residential mortgage originations.

Investment income was $70 million in the second quarter, up $23 million from the same quarter last year. The increase was primarily due to higher interest income from the company’s investment portfolio, escrow balances and tax-deferred property exchange balances as a result of rising interest rates and higher average invested balances. Net investment losses totaled $52 million in the current quarter, compared with net investment gains of $26 million in the second quarter of 2021. Net investment losses and gains in each period, respectively, were primarily attributable to the change in the fair value of marketable equity securities.

Personnel costs were $613 million in the second quarter, an increase of $57 million, or 10 percent, compared with the same quarter of 2021, primarily due to the impact of recent acquisitions. Excluding the impact of recent acquisitions, personnel costs declined by $3 million due to lower incentive compensation, employee benefit and overtime costs. These lower costs were largely offset by higher salary expense and $10 million in severance expense incurred as part of a reduction-in-force this quarter.

Other operating expenses were $316 million in the second quarter, up $16 million, or 5 percent, compared with the second quarter of 2021. The increase was primarily due to the impact of recent acquisitions, which added $27 million to expenses.

The provision for policy losses and other claims was $69 million in the second quarter, or 4.0 percent of title premiums and escrow fees, in line with the 4.0 percent loss provision rate in the prior year. The current quarter rate reflects an ultimate loss rate of 4.0 percent for the current policy year with no change in the loss reserve estimates for prior policy years.

Depreciation and amortization expense was $41 million in the second quarter, up $1 million, or 3 percent, compared with the same period last year, due to higher amortization of software and other intangibles related to recent acquisitions.

Pretax income for the Title Insurance and Services segment was $240 million in the second quarter, compared with $358 million in the second quarter of 2021. Pretax margin was 11.7 percent in the current quarter, compared with 17.3 percent last year. Excluding the impact of net investment losses and gains, the pretax margin was 13.9 percent this year, compared with 16.3 percent last year.

Specialty Insurance
($ in millions)

Three Months Ended

June 30,

2022

2021

Total revenues

$

104

$

152

Income before taxes

$

4

$

20

Pretax margin

3.8

%

13.2

%

Total revenues for the Specialty Insurance segment were $104 million in the second quarter of 2022, a decline of 32 percent compared with the second quarter of 2021. Pretax income for the segment was $4 million, compared with $20 million last year which included a $12 million gain from the sale of agency operations. In addition, the current quarter net investment losses were $4 million, compared with $4 million in net investment gains last year.

Home warranty total revenues were $102 million this quarter, down 5 percent compared with last year. Excluding net investment losses and gains, total revenues were up 2 percent. The loss rate was 52.4 percent, compared with 55.5 percent last year, driven by lower claim frequency partly offset by higher severity as pressure on average claim cost continued. Home warranty’s pretax income was $9 million, compared with $13 million last year. Excluding the impact of net investment losses and gains, pretax income was $13 million this year, compared with $10 million last year.

The wind-down of the property and casualty business remains on track for completion in the third quarter of 2022. At the close of the second quarter, the company had no active homeowner policies and only approximately 800 renters policies remained in force. The property and casualty business ended the quarter with a pretax loss of $5 million.

Teleconference/Webcast

First American’s second-quarter 2022 results will be discussed in more detail on Thursday, July 28, 2022, at 11 a.m. EDT, via teleconference. The toll-free dial-in number is 877-407-8293. Callers from outside the United States may dial +1-201-689-8349.

The live audio webcast of the call will be available on First American’s website at www.firstam.com/investor. An audio replay of the conference call will be available through August 11, 2022, by dialing 201-612-7415 and using the conference ID 13731471. An audio archive of the call will also be available on First American’s investor website.

About First American

First American Financial Corporation (NYSE: FAF) is a premier provider of title, settlement and risk solutions for real estate transactions. With its combination of financial strength and stability built over more than 130 years, innovative proprietary technologies, and unmatched data assets, the company is leading the digital transformation of its industry. First American also provides data products to the title industry and other third parties; valuation products and services; mortgage subservicing; home warranty

products; banking, trust and wealth management services; and other related products and services. With total revenue of $9.2 billion in 2021, the company offers its products and services directly and through its agents throughout the United States and abroad. In 2022, First American was named one of the 100 Best Companies to Work For by Great Place to Work® and Fortune Magazine for the seventh consecutive year. More information about the company can be found at www.firstam.com.

Website Disclosure

First American posts information of interest to investors at www.firstam.com/investor. This includes opened and closed title insurance order counts for its U.S. direct title insurance operations, which are posted approximately 10 to 12 days after the end of each month.

Forward-Looking Statements

Certain statements made in this press release and the related management commentary contain, and responses to investor questions may contain, forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts and may contain the words “believe,” “anticipate,” “expect,” “intend,” “plan,” “predict,” “estimate,” “project,” “will be,” “will continue,” “will likely result,” or other similar words and phrases or future or conditional verbs such as “will,” “may,” “might,” “should,” “would,” or “could.” These forward-looking statements include, without limitation, statements regarding future operations, performance, financial condition, prospects, plans and strategies. These forward-looking statements are based on current expectations and assumptions that may prove to be incorrect. Risks and uncertainties exist that may cause results to differ materially from those set forth in these forward-looking statements. Factors that could cause the anticipated results to differ from those described in the forward-looking statements include, without limitation: interest rate fluctuations; changes in conditions of the real estate markets; volatility in the capital markets; unfavorable economic conditions; impairments in the company’s goodwill or other intangible assets; failures at financial institutions where the company deposits funds; regulatory oversight and changes in applicable laws and government regulations, including privacy and data protection laws; heightened scrutiny by legislators and regulators of the company’s title insurance and services segment and certain other of the company’s businesses; regulation of title insurance rates; limitations on access to public records and other data; climate change, health crises, severe weather conditions and other catastrophe events; changes in relationships with large mortgage lenders and government-sponsored enterprises; changes in measures of the strength of the company’s title insurance underwriters, including ratings and statutory capital and surplus; losses in the company’s investment portfolio or venture investment portfolio; material variance between actual and expected claims experience; defalcations, increased claims or other costs and expenses attributable to the company’s use of title agents; any inadequacy in the company’s risk management framework or use of models; systems damage, failures, interruptions, cyberattacks and intrusions, or unauthorized data disclosures; innovation efforts of the company and other industry participants and any related market disruption; errors and fraud involving the transfer of funds; failures to recruit and retain qualified personnel; the company’s use of a global workforce; inability of the company’s subsidiaries to pay dividends or repay funds; inability to realize anticipated synergies or produce returns that justify investment in acquired businesses; and other factors described in the company’s annual report on Form 10-K for the year ended December 31, 2021, as filed with the Securities and Exchange Commission. The forward-looking statements speak only as of the date they are made. The company does not undertake to update forward-looking statements to reflect circumstances or events that occur after the date the forward-looking statements are made.

Use of Non-GAAP Financial Measures

This news release and related management commentary contain certain financial measures that are not presented in accordance with generally accepted accounting principles (GAAP), including an adjusted debt to capitalization ratio, personnel and other operating expense ratios, success ratios, net operating revenues; and adjusted revenues, adjusted pretax income, adjusted earnings per share, and adjusted pretax margins for the company, its title insurance and services segment and its specialty insurance segment. The company is presenting these non-GAAP financial measures because they provide the company’s management and investors with additional insight into the financial leverage, operational efficiency and performance of the company relative to earlier periods and relative to the company’s competitors. The company does not intend for these non-GAAP financial measures to be a substitute for any GAAP financial information. In this news release, these non-GAAP financial measures have been presented with, and reconciled to, the most directly comparable GAAP financial measures. Investors should use these non-GAAP financial measures only in conjunction with the comparable GAAP financial measures.

First American Financial Corporation

Summary of Consolidated Financial Results and Selected Information

(in millions, except per share amounts and title orders, unaudited)

Three Months Ended

Six Months Ended

June 30,

June 30,

2022

2021

2022

2021

Total revenues

$

2,062

$

2,266

$

4,096

$

4,292

Income before income taxes

$

141

$

399

$

271

$

705

Income tax expense

31

95

63

167

Net income

110

304

208

538

Less: Net income attributable to noncontrolling interests

1

2

1

2

Net income attributable to the Company

$

109

$

302

$

207

$

536

Net income per share attributable to stockholders:

Basic

$

1.01

$

2.73

$

1.89

$

4.83

Diluted

$

1.01

$

2.72

$

1.89

$

4.81

Cash dividends declared per share

$

0.51

$

0.46

$

1.02

$

0.92

Weighted average common shares outstanding:

Basic

107.9

110.9

109.1

111.0

Diluted

108.1

111.2

109.4

111.3

Selected Title Insurance Segment Information

Title orders opened(1)

257,200

329,500

536,200

692,700

Title orders closed(1)

205,000

271,100

410,100

558,700

Paid title claims

$

59

$

33

$

98

$

73

(1) U.S. direct title insurance orders only.

First American Financial Corporation

Selected Consolidated Balance Sheet Information

(in millions, unaudited)

June 30,

December 31,

2022

2021

Cash and cash equivalents

$

1,745

$

1,228

Investments

9,486

10,596

Goodwill and other intangible assets, net

2,023

1,806

Total assets

16,262

16,451

Reserve for claim losses

1,308

1,284

Notes and contracts payable

1,646

1,648

Total stockholders’ equity

$

4,916

$

5,767

Segment Information

(in millions, unaudited)

Three Months Ended

Title

Specialty

Corporate

June 30, 2022

Consolidated

Insurance

Insurance

(incl. Elims.)

Revenues

Direct premiums and escrow fees

$

897

$

793

$

104

$

Agent premiums

937

937

Information and other

308

305

3

Net investment income

53

70

1

(18

)

Net investment losses

(133

)

(52

)

(4

)

(77

)

2,062

2,053

104

(95

)

Expenses

Personnel costs

618

613

20

(15

)

Premiums retained by agents

748

748

Other operating expenses

344

316

20

8

Provision for policy losses and other claims

127

69

58

Depreciation and amortization

42

41

1

Premium taxes

23

22

1

Interest

19

4

15

1,921

1,813

100

8

Income (loss) before income taxes

$

141

$

240

$

4

$

(103

)

Three Months Ended

Title

Specialty

Corporate

June 30, 2021

Consolidated

Insurance

Insurance

(incl. Elims.)

Revenues

Direct premiums and escrow fees

$

917

$

787

$

130

$

Agent premiums

905

905

Information and other

302

299

4

(1

)

Net investment income

56

47

2

7

Net investment gains

86

26

16

44

2,266

2,064

152

50

Expenses

Personnel costs

588

556

23

9

Premiums retained by agents

719

719

Other operating expenses

331

300

23

8

Provision for policy losses and other claims

150

67

83

Depreciation and amortization

41

40

1

Premium taxes

22

20

2

Interest

16

4

12

1,867

1,706

132

29

Income before income taxes

$

399

$

358

$

20

$

21

First American Financial Corporation

Segment Information

(in millions, unaudited)

Six Months Ended

Title

Specialty

Corporate

June 30, 2022

Consolidated

Insurance

Insurance

(incl. Elims.)

Revenues

Direct premiums and escrow fees

$

1,671

$

1,459

$

212

$

Agent premiums

1,885

1,885

Information and other

617

607

10

Net investment income

99

122

3

(26

)

Net investment losses

(176

)

(22

)

(6

)

(148

)

4,096

4,051

219

(174

)

Expenses

Personnel costs

1,220

1,196

42

(18

)

Premiums retained by agents

1,506

1,506

Other operating expenses

681

620

42

19

Provision for policy losses and other claims

249

134

115

Depreciation and amortization

83

81

2

Premium taxes

47

45

2

Interest

39

8

31

3,825

3,590

203

32

Income (loss) before income taxes

$

271

$

461

$

16

$

(206

)

Six Months Ended

Title

Specialty

Corporate

June 30, 2021

Consolidated

Insurance

Insurance

(incl. Elims.)

Revenues

Direct premiums and escrow fees

$

1,703

$

1,445

$

258

$

Agent premiums

1,750

1,750

Information and other

581

575

7

(1

)

Net investment income

105

90

4

11

Net investment gains

153

48

19

86

4,292

3,908

288

96

Expenses

Personnel costs

1,123

1,060

47

16

Premiums retained by agents

1,390

1,390

Other operating expenses

627

565

45

17

Provision for policy losses and other claims

290

127

163

Depreciation and amortization

79

76

3

Premium taxes

45

41

4

Interest

33

11

22

3,587

3,270

262

55

Income before income taxes

$

705

$

638

$

26

$

41

First American Financial Corporation

Reconciliation of Pretax Margins and Earnings per Diluted Share

Excluding Net Investment Gains and Losses ("NIG(L)")

(in millions, except margin and per share amounts, unaudited)

Three Months Ended

Six Months Ended

June 30,

June 30,

2022

2021

2022

2021

Consolidated

Total revenues

$

2,062

$

2,266

$

4,096

$

4,292

Less: NIG(L)

(133

)

86

(176

)

153

Total revenues excluding NIG(L)

$

2,195

$

2,180

$

4,272

$

4,139

Pretax income

$

141

$

399

$

271

$

705

Less: NIG(L)

(133

)

86

(176

)

153

Pretax income excluding NIG(L)

$

274

$

313

$

447

$

552

Pretax margin

6.8

%

17.6

%

6.6

%

16.4

%

Less: Pretax margin impact of NIG(L)

(5.7

)%

3.2

%

(3.9

)%

3.1

%

Pretax margin excluding NIG(L)

12.5

%

14.4

%

10.5

%

13.3

%

Earnings per diluted share (EPS)

$

1.01

$

2.72

$

1.89

$

4.81

Less: EPS impact of NIG(L)

(0.96

)

0.59

(1.23

)

1.05

EPS excluding NIG(L)

$

1.97

$

2.13

$

3.12

$

3.76

Title Insurance and Services Segment

Total revenues

$

2,053

$

2,064

$

4,051

$

3,908

Less: NIG(L)

(52

)

26

(22

)

48

Total revenues excluding NIG(L)

$

2,105

$

2,038

$

4,073

$

3,860

Pretax income

$

240

$

358

$

461

$

638

Less: NIG(L)

(52

)

26

(22

)

48

Pretax income excluding NIG(L)

$

292

$

332

$

483

$

590

Pretax margin

11.7

%

17.3

%

11.4

%

16.3

%

Less: Pretax margin impact of NIG(L)

(2.2

)%

1.0

%

(0.5

)%

1.0

%

Pretax margin excluding NIG(L)

13.9

%

16.3

%

11.9

%

15.3

%

Specialty Insurance Segment

Total revenues

$

104

$

152

$

219

$

288

Less: NIG(L)

(4

)

16

(6

)

19

Total revenues excluding NIG(L)

$

108

$

136

$

225

$

269

Pretax income

$

4

$

20

$

16

$

26

Less: NIG(L)

(4

)

16

(6

)

19

Pretax income excluding NIG(L)

$

8

$

4

$

22

$

7

Pretax margin

3.8

%

13.2

%

7.3

%

9.0

%

Less: Pretax margin impact of NIG(L)

(3.6

)%

10.3

%

(2.5

)%

6.4

%

Pretax margin excluding NIG(L)

7.4

%

2.9

%

9.8

%

2.6

%

Totals may not sum due to rounding.

First American Financial Corporation

Expense and Success Ratio Reconciliation

Title Insurance and Services Segment

($ in millions, unaudited)

Three Months Ended

Six Months Ended

June 30,

June 30,

2022

2021

2022

2021

Total revenues

$

2,053

$

2,064

$

4,051

$

3,908

Less: Net investment (losses) gains

(52

)

26

(22

)

48

Net investment income

70

47

122

90

Premiums retained by agents

748

719

1,506

1,390

Net operating revenues

$

1,287

$

1,272

$

2,445

$

2,380

Personnel and other operating expenses

$

929

$

856

$

1,816

$

1,625

Ratio (% net operating revenues)

72.2

%

67.3

%

74.3

%

68.3

%

Ratio (% total revenues)

45.3

%

41.5

%

44.8

%

41.6

%

Change in net operating revenues

$

15

$

65

Change in personnel and other operating expenses

73

191

Success Ratio(1)

487

%

294

%

(1) Change in personnel and other operating expenses divided by change in net operating revenues.

First American Financial Corporation

Supplemental Direct Title Insurance Order Information(1)

(unaudited)

Q222

Q122

Q421

Q321

Q221

Open Orders per Day

Purchase

2,094

2,098

1,849

2,191

2,381

Refinance

663

1,061

1,342

1,771

1,752

Refinance as % of residential orders

24

%

34

%

42

%

45

%

42

%

Commercial

557

572

539

540

579

Default and other

705

769

520

479

436

Total open orders per day

4,019

4,500

4,250

4,981

5,148

Closed Orders per Day

Purchase

1,667

1,391

1,687

1,782

1,873

Refinance

648

938

1,299

1,435

1,628

Refinance as % of residential orders

28

%

40

%

44

%

45

%

47

%

Commercial

343

295

379

316

315

Default and other

546

684

495

416

420

Total closed orders per day

3,203

3,308

3,860

3,948

4,236

Average Revenue per Order (ARPO)(2)

Purchase

$

3,441

$

3,252

$

3,031

$

3,044

$

3,001

Refinance

1,321

1,333

1,254

1,246

1,260

Commercial

13,195

13,243

16,070

12,993

11,078

Default and other

309

207

120

179

161

Total ARPO

$

3,523

$

2,969

$

3,339

$

2,884

$

2,651

Business Days

64

62

62

64

64

(1) U.S. operations only.

(2) Average revenue per order (ARPO) defined as direct premiums and escrow fees divided by closed title orders.

Totals may not sum due to rounding.