First American Financial Earnings 2020-03-31

First American Financial Earnings 2020-03-31

FAF 10Q Quarterly Report

Balance Sheet	Income Statement	Cash Flow
Assets, Equity	Rev, G Profit, Net Income	Ops, Inv, Fin

faf-10q_20200331.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2020

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ______ to ______

Commission file number 001-34580

FIRST AMERICAN FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)

Delaware		26-1911571
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

1 First American Way, Santa Ana, California		92707-5913
(Address of principal executive offices)		(Zip Code)

(714) 250-3000

(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class		Trading Symbol(s)		Name of each exchange on which registered
Common stock, $0.00001 par value		FAF		New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

On April 21, 2020 there were 111,421,080 shares of common stock outstanding.

FIRST AMERICAN FINANCIAL CORPORATION

AND SUBSIDIARY COMPANIES

INFORMATION INCLUDED IN REPORT

PART I: FINANCIAL INFORMATION

Item 1.	Financial Statements (unaudited)

	A. Condensed Consolidated Balance Sheets as of March 31, 2020 and December 31, 2019	5

	B. Condensed Consolidated Statements of Income for the three months ended March 31, 2020 and 2019	6

	C. Condensed Consolidated Statements of Comprehensive Income for the three months ended March 31, 2020 and 2019	7

	D. Condensed Consolidated Statements of Stockholders’ Equity for the three months ended March 31, 2020 and 2019	8

	E. Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2020 and 2019	10

	F. Notes to Condensed Consolidated Financial Statements	11

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	35

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	46

Item 4.	Controls and Procedures	46

PART II: OTHER INFORMATION

Item 1.	Legal Proceedings	46

Item 1A.	Risk Factors	48

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	57

Item 6.	Exhibits	58

Items 3 through 5 of Part II have been omitted because they are not applicable with respect to the current reporting period.

THIS QUARTERLY REPORT ON FORM 10-Q CONTAINS 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 THE PERFORMANCE OF THE REAL ESTATE MARKETS;

•

VOLATILITY IN THE CAPITAL MARKETS;

•

UNFAVORABLE ECONOMIC CONDITIONS;

•

THE CORONAVIRUS PANDEMIC AND RESPONSES THERETO;

•

IMPAIRMENTS IN THE COMPANY’S GOODWILL OR OTHER INTANGIBLE ASSETS;

•

UNCERTAINTY FROM THE EXPECTED DISCONTINUANCE OF LIBOR AND TRANSITION TO ANY OTHER INTEREST RATE BENCHMARK;

•

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;

•

USE OF SOCIAL MEDIA BY THE COMPANY AND OTHER PARTIES;

•

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;

•

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;

•

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;

•

THE COMPANY’S USE OF A GLOBAL WORKFORCE;

•

INABILITY OF THE COMPANY’S SUBSIDIARIES TO PAY DIVIDENDS OR REPAY FUNDS; AND

•

OTHER FACTORS DESCRIBED IN THIS QUARTERLY REPORT ON FORM 10-Q, INCLUDING UNDER THE CAPTION “RISK FACTORS” IN ITEM 1A OF PART II.

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.

PART I: FINANCIAL INFORMATION

Item 1.Financial Statements.

FIRST AMERICAN FINANCIAL CORPORATION

AND SUBSIDIARY COMPANIES

Condensed Consolidated Balance Sheets

(in thousands, except par values)

(unaudited)

	March 31, 2020			December 31, 2019
Assets
Cash and cash equivalents	$	1,049,985		$	1,485,959
Accounts and accrued income receivable, less allowances of $11,576 and $12,676		404,541			324,385
Income taxes receivable		11,870			10,967
Investments:
Deposits with banks		39,425			44,422
Debt securities, includes pledged securities of $92,261 and $91,636 (amortized cost $5,711,924 and $5,796,755; allowance for credit losses of $7,493 at March 31, 2020)		5,839,530			5,913,636
Equity securities		377,296			392,318
Other investments		292,726			239,067
		6,548,977			6,589,443
Secured financings receivable		480,160			287,459
Property and equipment, net		488,490			442,014
Operating lease assets		295,387			291,385
Title plants and other indexes		580,255			579,674
Deferred income taxes		18,283			18,283
Goodwill		1,381,495			1,150,908
Other intangible assets, net		183,961			91,833
Other assets		232,081			246,857
	$	11,675,485		$	11,519,167
Liabilities and Equity
Deposits	$	3,431,347		$	3,337,431
Accounts payable and accrued liabilities		664,023			820,356
Deferred revenue		237,500			252,331
Reserve for known and incurred but not reported claims		1,057,538			1,063,044
Income taxes payable		36,427			25,475
Deferred income taxes		266,108			266,108
Operating lease liabilities		324,804			322,776
Secured financings payable		441,657			278,412
Notes and contracts payable		847,159			728,232
		7,306,563			7,094,165
Commitments and contingencies (Note 15 and Note 18)
Stockholders’ equity:
Preferred stock, $0.00001 par value; Authorized—500 shares; Outstanding—none		—			—
Common stock, $0.00001 par value; Authorized—300,000 shares; Outstanding—111,417 shares and 112,476 shares		1			1
Additional paid-in capital		2,247,569			2,300,926
Retained earnings		2,173,720			2,161,049
Accumulated other comprehensive loss		(61,945	)		(41,492	)
Total stockholders’ equity		4,359,345			4,420,484
Noncontrolling interests		9,577			4,518
Total equity		4,368,922			4,425,002
	$	11,675,485		$	11,519,167

See notes to condensed consolidated financial statements.

FIRST AMERICAN FINANCIAL CORPORATION

AND SUBSIDIARY COMPANIES

Condensed Consolidated Statements of Income

(in thousands, except per share amounts)

(unaudited)

	Three Months Ended March 31,
	2020			2019
Revenues
Direct premiums and escrow fees	$	620,637		$	514,202
Agent premiums		599,682			501,537
Information and other		211,512			172,892
Net investment income		45,874			82,268
Net realized investment (losses) gains		(64,762	)		32,682
		1,412,943			1,303,581
Expenses
Personnel costs		429,660			411,612
Premiums retained by agents		475,381			396,607
Other operating expenses		257,240			196,447
Provision for policy losses and other claims		117,477			97,712
Depreciation and amortization		31,449			32,934
Premium taxes		17,315			14,663
Interest		12,097			11,936
		1,340,619			1,161,911
Income before income taxes		72,324			141,670
Income taxes		8,478			31,866
Net income		63,846			109,804
Less: Net income attributable to noncontrolling interests		642			229
Net income attributable to the Company	$	63,204		$	109,575
Net income per share attributable to the Company’s stockholders (Note 9):
Basic	$	0.56		$	0.97
Diluted	$	0.55		$	0.97
Cash dividends declared per share	$	0.44		$	0.42
Weighted-average common shares outstanding (Note 9):
Basic		113,556			112,703
Diluted		113,959			113,224

See notes to condensed consolidated financial statements.

FIRST AMERICAN FINANCIAL CORPORATION

AND SUBSIDIARY COMPANIES

Condensed Consolidated Statements of Comprehensive Income

(in thousands)

(unaudited)

	Three Months Ended March 31,
	2020			2019
Net income	$	63,846		$	109,804
Other comprehensive income (loss), net of tax:
Unrealized gains on debt securities		12,619			59,505
Unrealized gains on debt securities for which credit-related portion was recognized in earnings		85			—
Foreign currency translation adjustment		(33,556	)		6,888
Pension benefit adjustment		399			(76	)
Total other comprehensive (loss) income, net of tax		(20,453	)		66,317
Comprehensive income		43,393			176,121
Less: Comprehensive income attributable to noncontrolling interests		642			228
Comprehensive income attributable to the Company	$	42,751		$	175,893

See notes to condensed consolidated financial statements.

FIRST AMERICAN FINANCIAL CORPORATION

AND SUBSIDIARY COMPANIES

Condensed Consolidated Statements of Stockholders’ Equity

(in thousands)

(unaudited)

	First American Financial Corporation Stockholders
	Shares			Common stock		Additional paid-in capital			Retained earnings			Accumulated other comprehensive loss			Total stockholders’ equity			Noncontrolling interests		Total
Balance at December 31, 2019		112,476		$	1	$	2,300,926		$	2,161,049		$	(41,492	)	$	4,420,484		$	4,518	$	4,425,002
Net income for three months ended March 31, 2020		—			—		—			63,204			—			63,204			642		63,846
Dividends on common shares		—			—		—			(49,702	)		—			(49,702	)		—		(49,702	)
Purchase of Company shares		(1,703	)		—		(65,785	)		—			—			(65,785	)		—		(65,785	)
Shares issued in connection with share-based compensation		644			—		(13,547	)		(831	)		—			(14,378	)		—		(14,378	)
Share-based compensation		—			—		25,903			—			—			25,903			—		25,903
Net activity related to noncontrolling interests		—			—		72			—			—			72			4,417		4,489
Other comprehensive loss		—			—		—			—			(20,453	)		(20,453	)		—		(20,453	)
Balance at March 31, 2020		111,417		$	1	$	2,247,569		$	2,173,720		$	(61,945	)	$	4,359,345		$	9,577	$	4,368,922

See notes to condensed consolidated financial statements.

FIRST AMERICAN FINANCIAL CORPORATION

AND SUBSIDIARY COMPANIES

Condensed Consolidated Statements of Stockholders’ Equity – (Continued)

(in thousands)

(unaudited)

	First American Financial Corporation Stockholders
	Shares			Common stock		Additional paid-in capital			Retained earnings			Accumulated other comprehensive loss			Total stockholders’ equity			Noncontrolling interests			Total
Balance at December 31, 2018		111,496		$	1	$	2,258,290		$	1,644,165		$	(160,575	)	$	3,741,881		$	3,507		$	3,745,388
Cumulative-effect adjustment		—			—		—			1,283			—			1,283			—			1,283
Net income for three months ended March 31, 2019		—			—		—			109,575			—			109,575			229			109,804
Dividends on common shares		—			—		—			(47,021	)		—			(47,021	)		—			(47,021	)
Purchase of Company shares		(47	)		—		(2,066	)		—			—			(2,066	)		—			(2,066	)
Shares issued in connection with share-based compensation		623			—		(10,618	)		(862	)		—			(11,480	)		—			(11,480	)
Share-based compensation		—			—		19,597			—			—			19,597			—			19,597
Net activity related to noncontrolling interests		—			—		(60	)		—			—			(60	)		(1,226	)		(1,286	)
Other comprehensive income (loss)		—			—		—			—			66,318			66,318			(1	)		66,317
Balance at March 31, 2019		112,072		$	1	$	2,265,143		$	1,707,140		$	(94,257	)	$	3,878,027		$	2,509		$	3,880,536

See notes to condensed consolidated financial statements.

FIRST AMERICAN FINANCIAL CORPORATION

AND SUBSIDIARY COMPANIES

Condensed Consolidated Statements of Cash Flows

(in thousands)

(unaudited)

	Three Months Ended March 31,
	2020			2019
Cash flows from operating activities:
Net income	$	63,846		$	109,804
Adjustments to reconcile net income to cash provided by operating activities:
Provision for policy losses and other claims		117,477			97,712
Depreciation and amortization		31,449			32,934
Amortization of premiums and accretion of discounts on debt securities, net		9,952			5,464
Net realized investment losses (gains)		64,762			(32,682	)
Share-based compensation		25,903			19,597
Equity in earnings of equity method investments, net		228			180
Dividends from equity method investments		1,402			545
Changes in assets and liabilities excluding effects of acquisitions and noncash transactions:
Claims paid, including assets acquired, net of recoveries		(108,538	)		(99,992	)
Net change in income tax accounts		5,181			29,186
(Increase) decrease in accounts and accrued income receivable		(45,747	)		2,543
Decrease in accounts payable and accrued liabilities		(149,960	)		(118,318	)
Decrease in deferred revenue		(15,753	)		(13,447	)
Other, net		23,952			945
Cash provided by operating activities		24,154			34,471
Cash flows from investing activities:
Net cash effect of acquisitions/dispositions		(386,231	)		(225	)
Net decrease (increase) in deposits with banks		2,095			(8,824	)
Purchases of debt and equity securities		(588,327	)		(727,001	)
Proceeds from sales of debt and equity securities		211,370			461,447
Proceeds from maturities of debt securities		320,523			136,670
Investments in unconsolidated entities		(44,795	)		(

Price	57.94	EPS	5
Shares	114	P/E	11
MCap	6,590	P/FCF	11
Net Debt	-1,711	EBIT	746
TEV	4,879	TEV/EBIT	7
TTM 2019-09-30, in MM, except price, ratios

10-Q	2020-03-31	Filed 2020-04-29
10-K	2019-12-31	Filed 2020-02-18
10-Q	2019-09-30	Filed 2019-10-24
10-Q	2019-06-30	Filed 2019-07-25
10-Q	2019-03-31	Filed 2019-04-25
10-K	2018-12-31	Filed 2019-02-20
10-Q	2018-09-30	Filed 2018-10-25
10-Q	2018-06-30	Filed 2018-07-26
10-Q	2018-03-31	Filed 2018-04-26
10-K	2017-12-31	Filed 2018-02-16
10-Q	2017-09-30	Filed 2017-10-26
10-Q	2017-06-30	Filed 2017-07-27
10-Q	2017-03-31	Filed 2017-04-27
10-K	2016-12-31	Filed 2017-02-17
10-Q	2016-09-30	Filed 2016-10-20
10-Q	2016-06-30	Filed 2016-07-21
10-Q	2016-03-31	Filed 2016-04-21
10-K	2015-12-31	Filed 2016-02-19
10-Q	2015-09-30	Filed 2015-10-22
10-Q	2015-06-30	Filed 2015-07-23
10-Q	2015-03-31	Filed 2015-04-23
10-K	2014-12-31	Filed 2015-02-23
10-Q	2014-09-30	Filed 2014-10-23
10-Q	2014-06-30	Filed 2014-07-24
10-Q	2014-03-31	Filed 2014-04-24
10-K	2013-12-31	Filed 2014-02-25
10-Q	2013-09-30	Filed 2013-10-24
10-Q	2013-06-30	Filed 2013-07-25
10-Q	2013-03-31	Filed 2013-04-26
10-K	2012-12-31	Filed 2013-02-28
10-Q	2012-09-30	Filed 2012-10-26
10-Q	2012-06-30	Filed 2012-07-30
10-Q	2012-03-31	Filed 2012-05-01
10-K	2011-12-31	Filed 2012-02-27
10-Q	2011-09-30	Filed 2011-11-02
10-Q	2011-06-30	Filed 2011-08-02
10-Q	2011-03-31	Filed 2011-05-02
10-K	2010-12-31	Filed 2011-03-01
10-Q	2010-09-30	Filed 2010-11-01
10-Q	2010-06-30	Filed 2010-08-09
10-Q	2010-03-31	Filed 2010-05-28

8-K	2020-05-15	Enter Agreement, Off-BS Arrangement, Other Events, Exhibits
8-K	2020-05-08	Enter Agreement, Exhibits
8-K	2020-05-05	Enter Agreement, Shareholder Vote, Exhibits
8-K	2020-04-23	Earnings, Exhibits
8-K	2020-02-13	Earnings, Exhibits
8-K	2019-10-24	Earnings, Exhibits
8-K	2019-07-25	Earnings, Exhibits
8-K	2019-05-28	Regulation FD, Exhibits
8-K	2019-05-07	Shareholder Vote
8-K	2019-04-30	Enter Agreement, Leave Agreement, Off-BS Arrangement
8-K	2019-04-25	Earnings, Exhibits
8-K	2019-02-14	Earnings, Exhibits
8-K	2018-10-25	Earnings, Exhibits
8-K	2018-07-26	Earnings, Exhibits
8-K	2018-05-08	Officers, Shareholder Vote, Exhibits
8-K	2018-04-26	Earnings, Exhibits
8-K	2018-02-08	Earnings, Exhibits

EX-31.A	faf-ex31a_205.htm
EX-31.B	faf-ex31b_204.htm
EX-32.A	faf-ex32a_203.htm
EX-32.B	faf-ex32b_202.htm

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company