FIRST AMERICAN FINANCIAL CORPORATION
CERTAIN STATEMENTS IN THIS QUARTERLY REPORT ON FORM 10-Q ARE 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 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.
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 THE FACTORS SET FORTH ON PAGES 3-4 OF THIS QUARTERLY
REPORT. 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.
This Management's Discussion and Analysis contains the financial measure
adjusted debt to capitalization ratio that is not presented in accordance with
generally accepted accounting principles ("GAAP"), as it excludes the effect of
secured financings payable. The Company is presenting this non-GAAP financial
measure because it provides the Company's management and readers of this
Quarterly Report on Form 10-Q with additional insight into the financial
leverage of the Company. The Company does not intend for this non-GAAP financial
measure to be a substitute for any GAAP financial information. In this Quarterly
Report on Form 10-Q, this non-GAAP financial measure has been presented with,
and reconciled to, the most directly comparable GAAP financial measure. Readers
of this Quarterly Report on Form 10-Q should use this non-GAAP financial measure
only in conjunction with the comparable GAAP financial measure. Because not all
companies use identical calculations, the presentation of adjusted debt to
capitalization ratio may not be comparable to other similarly titled measures of
other companies.
CRITICAL ACCOUNTING ESTIMATES
A summary of the Company's significant accounting policies that it considers to
be the most dependent on the application of estimates and assumptions can be
found in the Management's Discussion and Analysis section of the Company's
Annual Report on Form 10-K for the year ended December 31, 2020 .
Recently Adopted Accounting Pronouncements
InDecember 2019 , the FASB issued updated guidance intended to simplify and improve the accounting for income taxes. The updated guidance eliminates certain exceptions and clarifies and amends certain areas of the guidance. The updated guidance is effective for interim and annual reporting periods beginning afterDecember 15, 2020 . The adoption of this guidance on a prospective basis, effectiveJanuary 1, 2021 , did not have a material impact on its condensed consolidated financial statements. 33 --------------------------------------------------------------------------------
Results of Operations Summary of Second Quarter A substantial portion of the revenues for the Company's title insurance and services segment results from the sale and refinancing of residential and commercial real estate. In the Company's specialty insurance segment, revenues associated with the initial year of coverage in the home warranty operations are impacted by volatility in residential purchase transactions. Traditionally, the greatest volume of real estate activity, particularly residential purchase activity, has occurred in the spring and summer months. However, changes in interest rates, as well as other changes in general economic conditions inthe United States and abroad, can cause fluctuations in the traditional pattern of real estate activity. The Company's total revenues increased$657.6 million , or 40.9%, in the second quarter of 2021 when compared with the second quarter of 2020. This increase was primarily attributable to increases in agent premiums of$307.0 million , or 51.3%, and an increase in direct premiums and escrow fees of$265.5 million , or 40.7%. Direct premiums and escrow fees in the title insurance and services segment from domestic residential purchase and commercial transactions increased$143.3 million and$113.8 million , or 66.2% and 103.9%, respectively. According to theMortgage Bankers Association's July 21, 2021 Mortgage Finance Forecast (the "MBA Forecast"), residential mortgage originations inthe United States (based on the total dollar value of the transactions) increased 2.1% in the second quarter of 2021 when compared with the second quarter of 2020. According to the MBA Forecast, the dollar amount of purchase originations increased 18.7% and refinance originations decreased 8.7%. This volume of domestic residential mortgage origination activity contributed to increases in direct premiums and escrow fees for the Company's direct title operations of 66.2% from domestic residential purchase transactions and a decline of 22.7% from domestic refinance transactions in the second quarter of 2021 when compared with the second quarter of 2020. During the second quarter of 2021, the level of domestic title orders opened per day by the Company's direct title operations decreased 6.2% when compared with the second quarter of 2020. Residential purchase and commercial opened orders per day increased 24.1% and 59.9%, respectively, offset by a decline of 39.5% in residential refinance opened orders when compared to the second quarter of 2020. The Company recorded net realized investment gains of$86.5 million in the second quarter of 2021, which included an unrealized gain of$43.7 million related to the Company's investment in a private company where a recent fund raising provided an observable price change resulting in an increase in the carrying value of the Company's investment. A substantial majority of the Company's investments in non-marketable equity securities are in private venture-stage companies that operate in the real estate and related industries and many of which offer technology-enabled products and services. These investments are expected from time to time to cause material fluctuations in the Company's quarterly results of operations due to the recognition of gains or losses in connection with observable price changes, such as from liquidity events, subsequent equity sales, or price changes in investments that begin trading publicly, which changes can be volatile. Among the Company's investments in venture-stage companies is its investment inOfferpad Inc. ("Offerpad"), a leading tech-enabled real estate solutions platform. OnMarch 18, 2021 , Offerpad announced that it entered into a definitive merger agreement with Supernova Partners Acquisition Company, Inc. ("Supernova"), a publicly traded special purpose acquisition company. In its Current Report on Form 8-K, Supernova announced that the value of the aggregate equity consideration to be paid to Offerpad's stockholders and optionholders will be equal to$2.25 billion . At that value, the Company would recognize a gain of approximately$237 million . Also, a venture-stage company in which the Company maintains an equity investment expects to enter into a transaction with a publicly-traded special purpose acquisition company, which, if consummated at the current expected valuation, on the expected timeline and on the terms reported to the Company, would result in the Company recognizing a gain of approximately$55 million on that investment around the end of 2021. One of the Company's venture-stage investments has closed a transaction, and others are in various stages of executing transactions, to raise additional capital that have resulted in, or may result in, observable price changes that could trigger the recognition of additional gains of approximately$80 million during the remainder of 2021. 34 -------------------------------------------------------------------------------- While the potential gains related to the Company's investments in venture-stage companies noted above are based only on transactions for which at least a letter of intent, term sheet or similar commitment has been made, none of these pending transactions are certain to close at the valuations or on the timelines or terms reported to the Company, if they close at all. Whether the Company recognizes such future gain(s), and the amount and, consequently, the materiality of such gain(s), is dependent upon a number of factors, including the condition of the general economy, the general availability of capital, the performance of and volatility in the public markets, the regulatory and political environments, the condition of the real estate industry, the competitive environment for such companies and operational and financial performance of such companies. In addition, the Company may be subject to restrictions on resale or may choose to continue to hold the investment for strategic or other reasons and, as a result, the Company may not monetize the value of its investment during periods in which it could be financially advantageous to sell the investment. During 2020, the Company initiated a plan to exit its property and casualty insurance business. InJanuary 2021 , the Company entered into book transfer agreements with two third-party insurers and will seek to non-renew policies that are not transferred. The Company expects the transfers to be completed by the end of the third quarter of 2022. 35 --------------------------------------------------------------------------------
Three Months Ended June 30, Six Months Ended June 30,
(in thousands, except
percentages) 2021 2020 $ Change % Change 2021 2020 $ Change % Change
Revenues
Direct premiums and
escrow fees $ 787,244 $ 530,735 $ 256,509 48.3 % $ 1,444,741 $ 1,032,036 $ 412,705 40.0 %
Agent premiums 904,897 597,895 307,002 51.3 1,750,189 1,197,577 552,612 46.1
Information and other 298,242 228,252 69,990
30.7 573,646 436,525 137,121 31.4
Net investment income 47,482 43,234 4,248 9.8 90,135 102,902 (12,767 ) (12.4 )
Net realized investment
gains (losses) 70,364 62,823 7,541 12.0 134,578 (5,476 ) 140,054 NM 1
2,108,229 1,462,939 645,290 44.1 3,993,289 2,763,564 1,229,725 44.5
Expenses
Personnel costs 556,827 417,066 139,761 33.5 1,060,970 838,681 222,289 26.5
Premiums retained by
agents 718,424 472,398 246,026 52.1 1,389,725 947,779 441,946 46.6
Other operating expenses 297,586 222,192 75,394 33.9 562,074 448,787 113,287 25.2
Provision for policy
losses and other claims 67,686 56,431 11,255 19.9 127,798 111,481 16,317 14.6
Depreciation and
amortization 39,470 38,995 475 1.2 76,183 68,512 7,671 11.2
Premium taxes 20,698 14,319 6,379 44.5 41,516 29,837 11,679 39.1
Interest 5,187 3,736 1,451 38.8 11,043 7,709 3,334 43.2
1,705,878 1,225,137 480,741 39.2 3,269,309 2,452,786 816,523 33.3
Income before income
taxes $ 402,351 $ 237,802 $ 164,549 69.2 % $ 723,980 $ 310,778 $ 413,202 133.0 %
Pretax margins 19.1 % 16.3 % 2.8 % 17.2 % 18.1 % 11.2 % 6.9 % 61.6 %
(1) Not meaningful
Direct premiums and escrow fees were $787.2 million and $1.4 billion for the
three and six months ended June 30, 2021 , respectively, increases of
$256.5 million , or 48.3%, and $412.7 million , or 40.0%, when compared with the
respective periods of the prior year. The increases were primarily due to an
increase in the average domestic revenues per order and the number of domestic
title orders closed by the Company's direct title operations. The domestic
average revenues per order closed were $2,651 and $2,376 for the three and six
months ended June 30, 2021 , respectively, increases of 35.9% and 12.5% when
compared with $1,950 and $2,112 for the respective periods of the prior year due
to higher average revenues per order from residential products due to higher
residential real estate values and higher average revenues per order from
commercial transactions. The increase in average revenues per order for the
three months ended June 30, 2021 was also due to a shift in mix from the lower
premium residential refinance transactions to higher premium commercial and
residential resale transactions. The Company's direct title operations closed
271,100 and 558,700 domestic title orders during the three and six months ended
June 30, 2021 , respectively, increases of 6.5% and 22.2% when compared with
254,500 and 457,200 title orders closed during the respective periods of the
prior year, which was generally consistent with the changes in residential
mortgage origination activity in the United States as reported in the MBA
Forecast. For the three and six months ended June 30, 2021 , domestic residential
refinance orders closed per day decreased by 26.7% and increased by 11.6%,
respectively, and domestic residential purchase orders closed per day increased
by 42.9% and 30.5%, respectively, when compared to the respective periods of the
prior year.
Agent premiums were $904.9 million and $1.8 billion for the three and six months
ended June 30, 2021 , respectively, increases of $307.0 million , or 51.3%, and
$552.6 million , or 46.1%, when compared with the respective periods of the prior
year. Agent premiums are recorded when notice of issuance is received from the
agent, which is generally when cash payment is received by the Company. As a
result, there is generally a delay between the agent's issuance of a title
policy and the Company's recognition of agent premiums. Therefore, current
quarter agent premiums typically reflect prior quarter mortgage origination
activity. The increase in agent premiums for the three months ended
June 30, 2021 is generally consistent with the 31.2% increase in the Company's
direct premiums and escrow fees in the first quarter of 2021 as compared with
the first quarter of 2020.
Information and other revenues primarily consist of revenues generated from fees
associated with title search and related reports, title and other real property
records and images, other non-insured settlement services, and risk mitigation
products and services. These revenues generally trend with direct premiums and
escrow fees but are typically less volatile since a portion of the revenues are
subscription based and do not fluctuate with transaction volumes.
36
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Information and other revenues were $298.2 million and $573.6 million for the
three and six months ended June 30, 2021 , respectively, increases of
$70.0 million , or 30.7%, and $137.1 million , or 31.4%, when compared with the
respective periods of the prior year. The increases were primarily attributable
to growth in mortgage origination activity that led to higher demand for the
Company's information products, an increase in activity in the commercial
markets, higher volume in our international operations, and an increase in
demand for the Company's default information products as a result of an increase
in loss mitigation activities.
Net investment income totaled $47.5 million and $90.1 million for the three and
six months ended June 30, 2021 , respectively, an increase of $4.2 million , or
9.8%, and a decrease of $12.8 million , or 12.4%, when compared with the
respective periods of the prior year. The increase for the three months ended
June 30, 2021 was primarily due to interest income from the Company's warehouse
lending business. The decrease for the six months ended June 30, 2021 were
primarily attributable to lower short-term interest rates, which drove lower
income from the Company's cash and investment portfolio, escrow balances, and
tax-deferred property exchange business, partially offset by an increase in
interest income from the Company's warehouse lending business.
Net realized investment gains totaled $70.4 million and $134.6 million for the
three and six months ended June 30, 2021 , respectively. Net realized investment
gains for the three and six months ended June 30, 2021 were primarily
attributable to gains recognized on certain non-marketable equity investments
and increases in the fair values of marketable equity securities. Net realized
investment gains totaled $62.8 million and net realized investment losses
totaled $5.5 million for the three and six months ended June 30, 2020 ,
respectively. The net realized investment gains for the three months ended
June 30, 2020 were primarily attributable to increases in the fair values of
marketable equity securities. The net realized investment losses for the six
months ended June 30, 2020 were primarily attributable to declines in the fair
values of marketable equity securities.
The title insurance and services segment (primarily direct operations) is labor
intensive; accordingly, a major expense component is personnel costs. This
expense component is affected by two primary factors: the need to monitor
personnel changes to match the level of corresponding or anticipated new orders
and the need to provide quality service.
Personnel costs were $556.8 million and $1.1 billion for the three and six
months ended June 30, 2021 , respectively, increases of $139.8 million , or 33.5%,
and $222.3 million , or 26.5%, when compared with the respective periods of the
prior year. The increases were primarily due to higher incentive compensation,
salary, employee benefit expense, overtime, temporary labor, and payroll tax
expense. The increases in incentive compensation expense was due to higher
revenues and profitability. The increases in salary and payroll tax expense were
driven by higher headcount. The increases in overtime and temporary labor
expense was due to higher volumes. The increases in employee benefit expense was
primarily due to the impact of higher expense related to the Company's 401(k)
saving plan match and higher medical claims.
Agents retained $718.4 million and $1.4 billion of title premiums generated by
agency operations for the three and six months ended June 30, 2021 , which
compares with $472.4 million and $947.8 million for the respective periods of
the prior year. The percentage of title premiums retained by agents was 79.4%
for the three and six months ended June 30, 2021 , compared to 79.0% and 79.1%
for the respective periods of the prior year.
Other operating expenses for the title insurance and services segment were
$297.6 million and $562.1 million for the three and six months ended
June 30, 2021 , respectively, increases of $75.4 million , or 33.9%, and
$113.3 million , or 25.2%, when compared with the respective periods of the prior
year. The increases were primarily attributable to higher production related
costs due to increased transaction volumes, higher software expense, and higher
professional services.
The provision for policy losses and other claims, expressed as a percentage of
title premiums and escrow fees, was 4.0% for the three and six months ended
June 30, 2021 compared to 5.0% for the three and six months ended June 30, 2020 ,
respectively. The current year rate of 4.0% reflects the ultimate loss rate for
the current policy year and no change in the loss reserve estimates for prior
policy years. The 5.0% rate for 2020 reflected an ultimate loss rate of 4.5% for
the 2020 policy year and a net increase in the loss reserve estimates for prior
policy years of 0.5%, or $5.6 million and $11.1 million for the three and six
months ended June 30, 2020 , respectively.
37
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Title claims generally increase when economic conditions deteriorate and
foreclosure activity increases. The Company increased its calendar year loss
rate from 4.0% in 2019 to 5.0% in 2020 in anticipation of higher claims due to
the economic impact of the coronavirus pandemic. However, the Company has not
experienced an increase in title claims as a result of the pandemic, but rather
claims have been significantly below the Company's actuarial expectation. As a
result, and in anticipation of lower claims due to a generally strengthening
economy, high levels of home equity and ongoing foreclosure moratoriums, the
Company lowered the current year loss rate to 4.0%. The Company will continue to
monitor economic conditions and actual claims experience and will consider this
information, among other factors, when determining the appropriate loss rate and
reserve balance for incurred but not reported claims in future periods.
Depreciation and amortization expense was $39.5 million and $76.2 million for
the three and six months ended June 30, 2021 , respectively, increases of
$0.5 million , or 1.2%, and $7.7 million , or 11.2%, when compared with the
respective periods of the prior year. The increase for the six months ended June
30, 2021 was primarily attributable to higher amortization of software and other
intangible assets related to recent acquisitions.
Premium taxes were $20.7 million and $41.5 million for the three and six months
ended June 30, 2021 , respectively, increases of $6.4 million , or 44.5%, and
$11.7 million , or 39.1%, respectively, compared to $14.3 million and
$29.8 million for the same periods of the prior year. Premium taxes as a
percentage of title insurance premiums and escrow fees were 1.2% and 1.3% for
the three and six months ended June 30, 2021 , respectively, and were 1.3% for
the three and six months ended June 30, 2020 .
Interest expense was $5.2 million and $11.0 million for the three and six months
ended June 30, 2021 , respectively, increases of $1.5 million , or 38.8%, and
$3.3 million , or 43.2%, when compared with the respective periods of the prior
year.
The profit margins for the title insurance business reflect the high cost of
performing the essential services required before insuring title, whereas the
corresponding revenues are subject to regulatory and competitive pricing
restraints. Due to the relatively high proportion of fixed costs, title
insurance profit margins generally improve as closed order volumes
increase. Title insurance profit margins are also impacted by the segment's net
investment income and net realized investment gains or losses, which may not
move in the same direction as closed order volumes. Title insurance profit
margins are affected by the composition (residential or commercial) and type
(resale, refinancing or new construction) of real estate activity. Title
insurance profit margins are also affected by the percentage of title insurance
premiums generated by agency operations. Profit margins from direct operations
are generally higher than from agency operations due primarily to the large
portion of the premium that is retained by the agent. The pretax margins for the
three and six months ended June 30, 2021 were 19.1% and 18.1%, respectively,
compared with 16.3% and 11.2% in the respective periods of the prior year.
38
--------------------------------------------------------------------------------Specialty Insurance Three Months Ended June 30, Six Months Ended June 30, (in thousands, except percentages) 2021 2020 $ Change % Change 2021 2020 $ Change % Change Revenues Direct premiums$ 130,207 $ 121,249 $ 8,958 7.4 %$ 258,385 $ 240,585 $ 17,800 7.4 % Information and other 3,457 3,103 354 11.4 7,205 6,542 663 10.1
Net investment income 1,816 2,316 (500 ) (21.6 ) 3,750 4,900 (1,150 ) (23.5 ) Net realized investment gains
16,150 6,850 9,300 135.8 18,769 3,460 15,309 NM 1
151,630 133,518 18,112 13.6 288,109 255,487 32,622 12.8
Expenses
Personnel costs 22,727 20,681 2,046 9.9 46,654 42,126 4,528 10.7
Other operating 23,726 4,443 23.0 46,365 5,534 13.6
expenses 19,283 40,831
Provision for policy
losses and other
claims 82,244 82,257 (13 ) - 162,579 144,684 17,895 12.4
Depreciation and
amortization 1,433 1,943 (510 ) (26.2 ) 2,983 3,837 (854 ) (22.3 )
Premium taxes 1,769 2,035 (266 ) (13.1 ) 3,537 3,832 (295 ) (7.7 )
131,899 126,199 5,700 4.5 262,118 235,310 26,808 11.4
Income before income 19,731 12,412 169.6 25,991 5,814 28.8
taxes $ $ 7,319 $ % $ $ 20,177 $ %
Margins 13.0 % 5.5 % 7.5 % 136.4 % 9.0 % 7.9 % 1.1 % 13.9 %
(1) Not meaningful
Direct premiums were $130.2 million and $258.4 million for the three and six
months ended June 30, 2021 , respectively, increases of $9.0 million , or 7.4%,
and $17.8 million , or 7.4%, when compared with the respective periods of the
prior year. The increases were primarily attributable to higher premiums earned
in the home warranty business.
Net realized investment gains for the specialty insurance segment totaled
$16.2 million and $18.8 million for the three and six months ended
June 30, 2021 , respectively, and were primarily from the sale of our Property
and Casualty agency operations and to a lesser extent, an increase in the fair
values of equity securities. Net realized investment gains for the specialty
insurance segment totaled $6.9 million and $3.5 million for the three and six
months ended June 30, 2020 . The net realized investment gains for the three
months ended June 30, 2020 were primarily from the increase in the fair values
of equity securities. The net realized investment gains for the six months ended
June 30, 2020 were primarily from a gain from the sale of real estate.
Personnel costs and other operating expenses were $46.5 million and
$93.0 million for the three and six months ended June 30, 2021 , respectively,
increases of $6.5 million , or 16.2%, and $10.1 million , or 12.1%, when compared
with the respective periods of the prior year. The increases were primarily
attributable to an increase in deferred policy acquisition expense in the
property and casualty business, higher incentive compensation, higher salary
expense due to higher average salaries, higher offshore vendor expense due to
higher volumes in the home warranty business, and higher employee benefit
expense due to the impact of higher expense related to the Company's 401(k)
saving plan match, offset by lower agent commissions.
The provision for home warranty claims, expressed as a percentage of home
warranty premiums, was 55.5% and 54.7% for the three and six months ended
June 30, 2021 , respectively, compared with 54.7% and 48.5% for the respective
periods of the prior year. The increase in the claims rate for the three months
ended June 30, 2021 , was primarily attributable to higher claims severity. The
increase for the six months ended June 30, 2021 , was primarily attributable to
higher severity and frequency partially due to higher claims in the appliance
and plumbing trades due to people spending more time at home. The provision for
property and casualty claims, expressed as a percentage of property and casualty
insurance premiums, was 89.1% and 89.4% for the three and six months ended
June 30, 2021 , respectively, compared with 106.2% and 93.6% for the respective
periods of the prior year. The decreases in the claims rate were primarily
attributable to low claims severity.
39
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Premium taxes were $1.8 million and $3.5 million for the three and six months
ended June 30, 2021 , respectively, compared with $2.0 million and $3.8 million
for the respective periods of the prior year. Premium taxes as a percentage of
specialty insurance segment premiums were 1.4% for the three and six months
ended June 30, 2021 , and 1.7% and 1.6% for the three and six months ended
June 30, 2020 , respectively.
A large part of the revenues for the specialty insurance businesses are
generated by renewals and are not dependent on the level of real estate activity
in the year of renewal. With the exception of loss expense, the majority of the
expenses for this segment are variable in nature and therefore generally
fluctuate consistent with revenue fluctuations. Accordingly, profit margins for
this segment (before loss expense) are relatively constant, although as a result
of some fixed expenses, profit margins (before loss expense) should nominally
improve as premium revenues increase. Specialty insurance profit margins are
also impacted by the segment's net investment income and net realized investment
gains or losses, which may not move in the same direction as premium
revenues. The pretax margins for the three and six months ended June 30, 2021
were 13.0% and 9.0%, respectively, compared with 5.5% and 7.9% in the respective
periods of the prior year.
In January 2021 , the Company entered into book transfer agreements with two
third-party insurers related to its property and casualty insurance business and
will seek to non-renew policies that are not transferred. The Company's policies
in force had declined by approximately 22% as of June 30, 2021 and the Company
expects an approximate 70% reduction in policies in force by the end of 2021 and
decreasing revenues over time. The Company expects the transfers to be completed
by the end of the third quarter of 2022. The property and casualty insurance
business recorded revenues of $44.0 million and $78.6 million for the three and
six months ended June 30, 2021 , respectively, and $36.0 million and
$66.0 million for the three and six months ended June 30, 2020 ,
respectively. Income (loss) before income taxes, which includes a gain of $12.2
million from the sale of the agency operations in the second quarter of 2021,
was $6.0 million and $(0.6) million for the three months and six months ended
June 30, 2021 , respectively. Loss before income taxes was $8.5 million and
$15.8 million for the three and six months ended June 30, 2020 , respectively.
40
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Corporate
Three Months Ended June 30, Six Months Ended June 30,
(in thousands, except
percentages) 2021 2020 $ Change % Change 2021 2020 $ Change % Change
Revenues
Net investment income
(losses) $ 6,986 $ 12,928 $ (5,942 ) (46.0 )% $ 12,052 $ (3,310 ) $ 15,362 NM 1%
Net realized investment
(losses) gains - (412 ) 412 100.0 - 6,515 (6,515 ) (100.0 )
6,986 12,516 (5,530 ) (44.2 ) 12,052 3,205 8,847 276.0
Expenses
Personnel costs 8,712 13,740 (5,028 ) (36.6 ) 15,824 340 15,484 NM 1
Other operating expenses 9,667 8,799 868 9.9 18,203 18,096 107 0.6
Depreciation and
amortization 36 38 (2 ) (5.3 ) 71 76 (5 ) (6.6 )
Interest 11,237 9,765 1,472 15.1 22,487 18,029 4,458 24.7
29,652 32,342 (2,690 )
(8.3 ) 56,585 36,541 20,044 54.9
Loss before income taxes
(1) Not meaningful Net investment income totaled$7.0 million and$12.1 million for the three and six months endedJune 30, 2021 , respectively, compared with net investment income of$12.9 million and net investment losses of$3.3 million for the respective periods of the prior year. The decrease in net investment income for the three months endedJune 30, 2021 was primarily attributable to lower earnings on investments associated with the Company's deferred compensation plan when compared to the same period of 2020. The increase in net investment income for the six months endedJune 30, 2021 was primarily attributable to higher earnings on investments associated with the Company's deferred compensation plan when compared to the same period of 2020.
Net realized investment gains for the corporate segment totaled
Corporate personnel costs and other operating expenses were$18.4 million and$34.0 million for the three and six months endedJune 30, 2021 , respectively, compared with$22.5 million and$18.4 million for the respective periods of the prior year. The decrease for the three months endedJune 30, 2021 , was primarily attributable to lower expense related to the Company's deferred compensation plan. The increase for the six months endedJune 30, 2021 , was primarily attributable to higher expense related to the Company's deferred compensation plan. Interest expense was$11.2 million and$22.5 million for the three and six months endedJune 30, 2021 , respectively, increases of$1.5 million , or 15.1%, and$4.5 million , or 24.7%, when compared with the respective periods of the prior year. The increase is attributable to the interest accrued on the$450.0 million of 4.00% 10-year senior unsecured notes that the company issued inMay 2020 . 41
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Eliminations
The Company's inter-segment eliminations were not material for the three and six
months ended
INCOME TAXES
The Company's effective income tax rates (income tax expense as a percentage of income before income taxes) were 24.0% and 23.8% for the three and six months endedJune 30, 2021 , respectively, compared with 23.8% and 20.9% for the respective periods of the prior year. The difference in the effective tax rates is primarily due to benefits related to foreign tax law changes and the recognition of additional excess tax benefits associated with share-based payment transactions in the six months endedJune 30, 2020 . The Company evaluates the realizability of its deferred tax assets by assessing the valuation allowance and makes adjustments to the allowance as necessary. The factors used by the Company to assess the likelihood of realization include its forecast of future taxable income and available tax planning strategies that could be implemented to realize its deferred tax assets. The Company's ability or inability to achieve forecasted taxable income in the applicable taxing jurisdictions could affect the ultimate realization of its deferred tax assets. Based on future operating results in certain jurisdictions, it is possible that the current valuation allowance positions of those jurisdictions could be adjusted during the next 12 months.
NET INCOME AND NET INCOME ATTRIBUTABLE TO THE COMPANY
Net income for the three and six months endedJune 30, 2021 was$303.4 million and$537.9 million , respectively, compared with$171.7 million and$235.5 million for the respective periods of the prior year. Net income attributable to the Company for the three and six months endedJune 30, 2021 was$302.3 million , or$2.72 per diluted share, and$535.9 million , or$4.81 per diluted share, respectively, compared with$170.7 million , or$1.52 per diluted share, and$233.9 million , or$2.06 per diluted share, for the respective periods of the prior year.
LIQUIDITY AND CAPITAL RESOURCES
Cash requirements. The Company generates cash primarily from the sale of its
products and services and investment income. The Company's current cash
requirements include operating expenses, taxes, payments of principal and
interest on its debt, capital expenditures, dividends on its common stock, and
may include business acquisitions, investments in private companies, primarily
those in the venture-stage, and repurchases of its common stock. Management
forecasts the cash needs of the holding company and its primary subsidiaries and
regularly reviews their short-term and long-term projected sources and uses of
funds, as well as the asset, liability, investment and cash flow assumptions
underlying such forecasts. Based on the Company's ability to generate cash flows
from operations, its liquid-asset position and amounts available on its
revolving credit facility, management believes that its resources are sufficient
to satisfy its anticipated operational cash requirements and obligations for at
least the next twelve months.
The substantial majority of the Company's business is dependent upon activity in
the real estate and mortgage markets, which are cyclical and seasonal. Periods
of increasing interest rates and reduced mortgage financing availability
generally have an adverse effect on residential real estate activity and
therefore typically decrease the Company's revenues. In contrast, periods of
declining interest rates and increased mortgage financing availability generally
have a positive effect on residential real estate activity, which typically
increases the Company's revenues. Residential purchase activity is typically
slower in the winter months with increased volumes in the spring and summer
months. Residential refinance activity is typically more volatile than purchase
activity and is highly impacted by changes in interest rates. Commercial real
estate volumes are less sensitive to changes in interest rates but fluctuate
based on local supply and demand conditions for space and mortgage financing
availability.
42
-------------------------------------------------------------------------------- Cash provided by operating activities totaled$477.0 million and$368.0 million for the six months endedJune 30, 2021 and 2020, respectively, after claim payments, net of recoveries, of$231.4 million and$214.6 million , respectively. The principal nonoperating uses of cash and cash equivalents for the six months endedJune 30, 2021 and 2020 were advances and repayments related to secured financing transactions, purchases of debt and equity securities, capital expenditures, repurchases of Company shares, dividends to common stockholders, and for the six months endedJune 30, 2020 , business acquisitions and repayment of borrowings under the unsecured credit facility. The principal nonoperating sources of cash and cash equivalents for the six months endedJune 30, 2021 and 2020 were borrowings and collections related to secured financing transactions, proceeds from the sales and maturities of debt and equity securities, increases in the deposit balances at the Company's banking operations, and for the six months endedJune 30, 2020 , proceeds from the issuance of unsecured senior notes and borrowings under the unsecured credit agreement. The net effect of all activities on cash and cash equivalents were increases of$947.2 million and$37.4 million for the six months endedJune 30, 2021 and 2020, respectively. The Company continually assesses its capital allocation strategy, including decisions relating to dividends, stock repurchases, capital expenditures, acquisitions and investments. InJune 2021 , the Company paid a second quarter cash dividend of46 cents per common share. Management expects that the Company will continue to pay quarterly cash dividends at or above the current level. The timing, declaration and payment of future dividends, however, falls within the discretion of the Company's board of directors and will depend upon many factors, including the Company's financial condition and earnings, the capital requirements of the Company's businesses, restrictions imposed by applicable law and any other factors the board of directors deems relevant from time to time. The Company maintains a stock repurchase plan with authorization up to$300.0 million , of which$177.2 million remained as ofJune 30, 2021 . Purchases may be made from time to time by the Company in the open market at prevailing market prices or in privately negotiated transactions. During the six months endedJune 30, 2021 , the Company repurchased and retired 1.2 million shares of its common stock for a total purchase price of$64.8 million and, as ofJune 30, 2021 , had repurchased and retired 2.4 million shares of its common stock under the current authorization for a total purchase price of$122.8 million . Holding Company.First American Financial Corporation is a holding company that conducts all of its operations through its subsidiaries. The holding company's current cash requirements include payments of principal and interest on its debt, taxes, payments in connection with employee benefit plans, dividends on its common stock and other expenses. The holding company is dependent upon dividends and other payments from its operating subsidiaries to meet its cash requirements. The Company's target is to maintain a cash balance at the holding company equal to at least twelve months of estimated cash requirements. At certain points in time, the actual cash balance at the holding company may vary from this target due to, among other factors, the timing and amount of cash payments made and dividend payments received. Pursuant to insurance and other regulations under which the Company's insurance subsidiaries operate, the amount of dividends, loans and advances available to the holding company is limited, principally for the protection of policyholders. As ofJune 30, 2021 , under such regulations, the maximum amount available to the holding company from its insurance subsidiaries for the remainder of 2021, without prior approval from applicable regulators, was dividends of$436.7 million and loans and advances of$116.3 million . However, the timing and amount of dividends paid by the Company's insurance subsidiaries to the holding company falls within the discretion of each insurance subsidiary's board of directors and will depend upon many factors, including the level of total statutory capital and surplus required to support minimum financial strength ratings by certain rating agencies. Such restrictions have not had, nor are they expected to have, an impact on the holding company's ability to meet its cash obligations. As ofJune 30, 2021 , the holding company's sources of liquidity included$335.1 million of cash and cash equivalents and$700.0 million available on the Company's revolving credit facility. Management believes that liquidity at the holding company is sufficient to satisfy anticipated cash requirements and obligations for at least the next twelve months. Financing. The Company maintains a credit agreement withJPMorgan Chase Bank, N.A . in its capacity as administrative agent and the lenders party thereto. The credit agreement, which is comprised of a$700.0 million revolving credit facility, includes an expansion option that permits the Company, subject to satisfaction of certain conditions, to increase the revolving commitments and/or add term loan tranches in an aggregate amount not to exceed$350.0 million . Unless terminated earlier, the credit agreement will terminate onApril 30, 2024 . The obligations of the Company under the credit agreement are neither secured nor guaranteed. Proceeds under the credit agreement may be used for general corporate purposes. AtJune 30, 2021 , the Company had no outstanding borrowings under the facility. 43 -------------------------------------------------------------------------------- At the Company's election, borrowings of revolving loans under the credit agreement bear interest at (a) the Alternate Base Rate plus the applicable spread or (b) the Adjusted LIBOR rate plus the applicable spread (in each case as defined in the credit agreement). The Company may select interest periods of one, two, three or six months or (if agreed to by all lenders) such other number of months for Eurodollar borrowings of loans. The applicable spread varies depending upon the debt rating assigned byMoody's Investor Service, Inc. ,Standard & Poor's Rating Services and/orFitch Ratings Inc. The minimum applicable spread for Alternate Base Rate borrowings is 0.25% and the maximum is 1.00%. The minimum applicable spread for Adjusted LIBOR rate borrowings is 1.25% and the maximum is 2.00%. The rate of interest on any term loans incurred in connection with the expansion option will be established at or about the time such loans are made and may differ from the rate of interest on revolving loans. The credit agreement includes representations and warranties, reporting covenants, affirmative covenants, negative covenants, financial covenants and events of default customary for financings of this type. Upon the occurrence of an event of default the lenders may accelerate the loans. Upon the occurrence of certain insolvency and bankruptcy events of default the loans will automatically accelerate. As ofJune 30, 2021 , the Company was in compliance with the financial covenants under the credit agreement. In addition to amounts available under its credit facility, certain subsidiaries of the Company maintain separate financing arrangements. The primary financing arrangements maintained by subsidiaries of the Company are as follows:
•
lender to correspondent mortgage lenders, maintains securedwarehouse
lending facilities with several banking institutions. At June 30, 2021,
outstanding borrowings under these facilities totaled $611.0 million .
• First American Trust , FSB, a federal savings bank, maintains a secured
line of credit with the Federal Home Loan Bank and federal funds lines
of credit with certain correspondent institutions. In addition, First
American Trust , FSB is a party to master repurchase agreements under
which securities may be loaned or sold. At June 30, 2021 , no amounts
were outstanding under any of these facilities.
•
services company, maintains credit facilities with certainCanadian
banking institutions. At June 30, 2021 , no amounts were outstanding
under these facilities.
The Company's debt to capitalization ratios were 23.5% and 23.7% at
June 30, 2021 and December 31, 2020 , respectively. The Company's adjusted debt
to capitalization ratios, excluding secured financings payable of $611.0 million
and $516.2 million at June 30, 2021 and December 31, 2020 , were 16.0% and 17.0%,
respectively.
Investment Portfolio. The Company maintains a high quality, liquid portfolio of
debt and marketable equity securities that is primarily held at its insurance
and banking subsidiaries. As of June 30, 2021 , 95% of the Company's investment
portfolio consisted of debt securities, of which 67% were either United States
government-backed or rated AAA and 97% were either rated or classified as
investment grade. Percentages are based on the estimated fair values of the
securities. Credit ratings reflect published ratings obtained from globally
recognized securities rating agencies. If a security was rated differently among
the rating agencies, the lowest rating was selected. For further information on
the credit quality of the Company's debt securities portfolio at June 30, 2021 ,
see Note 4 Debt Securities to the condensed consolidated financial statements.
In addition to its portfolio of debt and marketable equity securities, the
Company maintains investments in non-marketable equity securities and securities
accounted for under the equity method. For further information on the Company's
equity securities see Note 5 Equity Securities to the condensed consolidated
financial statements.
Off-balance sheet arrangements. The Company administers escrow deposits and
trust assets as a service to its customers. Escrow deposits totaled
$11.6 billion and $7.1 billion at June 30, 2021 and December 31, 2020 ,
respectively, of which $5.1 billion and $3.1 billion , respectively, were held at
First American Trust , FSB. The escrow deposits held at First American Trust , FSB
are temporarily invested in cash and cash equivalents and debt securities, with
offsetting liabilities included in deposits in the accompanying condensed
consolidated balance sheets. The remaining escrow deposits were held at
third-party financial institutions.
Trust assets held or managed by First American Trust , FSB totaled $4.5 billion
and $4.4 billion at June 30, 2021 and December 31, 2020 , respectively. Escrow
deposits held at third-party financial institutions and trust assets are not
considered assets of the Company and, therefore, are not included in the
accompanying condensed consolidated balance sheets. All such amounts are placed
in deposit accounts insured, up to applicable limits, by the Federal Deposit
Insurance Corporation . The Company could be held contingently liable for the
disposition of these assets.
44
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In conducting its operations, the Company often holds customers' assets in escrow, pending completion of real estate transactions and, as a result, the Company has ongoing programs for realizing economic benefits with various financial institutions. The results from these programs are included as income or a reduction in expense, as appropriate, in the consolidated statements of income based on the nature of the arrangement and benefit received. The Company facilitates tax-deferred property exchanges for customers pursuant to Section 1031 of the Internal Revenue Code and tax-deferred reverse exchanges pursuant to Revenue Procedure 2000-37. As a facilitator and intermediary, the Company holds the proceeds from sales transactions and takes temporary title to property identified by the customer to be acquired with such proceeds. Upon the completion of each such exchange, the identified property is transferred to the customer or, if the exchange does not take place, an amount equal to the sales proceeds or, in the case of a reverse exchange, title to the property held by the Company is transferred to the customer. Like-kind exchange funds held by the Company totaled$3.9 billion and$2.9 billion atJune 30, 2021 andDecember 31, 2020 , respectively. The like-kind exchange deposits are held at third-party financial institutions and, due to the structure utilized to facilitate these transactions, the proceeds and property are not considered assets of the Company and, therefore, are not included in the accompanying condensed consolidated balance sheets. All such amounts are placed in deposit accounts insured, up to applicable limits, by theFederal Deposit Insurance Corporation . The Company could be held contingently liable to the customer for the transfers of property, disbursements of proceeds and the returns on such proceeds.
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