First American Financial Earnings 2020-09-30

First American Financial Earnings 2020-09-30

FAF 10Q Quarterly Report

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

faf-10q_20200930.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 September 30, 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 October 19, 2020 there were 111,645,048 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 September 30, 2020 and December 31, 2019	5

	B. Condensed Consolidated Statements of Income for the three and nine months ended September 30, 2020 and 2019	6

	C. Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2020 and 2019	7

	D. Condensed Consolidated Statements of Stockholders’ Equity for each of the quarters within the nine months ended September 30, 2020 and 2019	8

	E. Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2020 and 2019	10

	F. Notes to Condensed Consolidated Financial Statements	12

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	39

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	51

Item 4.	Controls and Procedures	51

PART II: OTHER INFORMATION

Item 1.	Legal Proceedings	52

Item 1A.	Risk Factors	54

Item 6.	Exhibits	64

Items 2 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)

	September 30, 2020		December 31, 2019
Assets
Cash and cash equivalents	$	1,512,369	$	1,485,959
Accounts and accrued income receivable, less allowances of $12,600 and $12,676		392,885		324,385
Income taxes receivable		8,814		10,967
Investments:
Deposits with banks		41,551		44,422
Debt securities, includes pledged securities of $88,049 and $91,636 (amortized cost of $5,732,761 and $5,796,755; allowance for credit losses of $821 at September 30, 2020)		5,939,224		5,913,636
Equity securities		393,180		392,318
Other investments		325,652		239,067
		6,699,607		6,589,443
Secured financings receivable		722,156		287,459
Property and equipment, net		442,409		442,014
Operating lease assets		272,367		291,385
Title plants and other indexes		580,462		579,674
Deferred income taxes		18,283		18,283
Goodwill		1,355,289		1,150,908
Other intangible assets, net		196,691		91,833
Assets held for sale		198,283		—
Other assets		239,195		246,857
	$	12,638,810	$	11,519,167
Liabilities and Equity
Deposits	$	3,499,640	$	3,337,431
Accounts payable and accrued liabilities		830,050		820,356
Deferred revenue		202,291		252,331
Reserve for known and incurred but not reported claims		1,069,859		1,063,044
Income taxes payable		47,817		25,475
Deferred income taxes		266,108		266,108
Operating lease liabilities		301,525		322,776
Liabilities held for sale		148,283		—
Secured financings payable		526,544		278,412
Notes and contracts payable		1,011,758		728,232
		7,903,875		7,094,165
Commitments and contingencies (Note 17)
Stockholders’ equity:
Preferred stock, $0.00001 par value; Authorized—500 shares; Outstanding—none		—		—
Common stock, $0.00001 par value; Authorized—300,000 shares; Outstanding—111,645 shares and 112,476 shares		1		1
Additional paid-in capital		2,273,007		2,300,926
Retained earnings		2,426,949		2,161,049
Accumulated other comprehensive income (loss)		23,813		(41,492	)
Total stockholders’ equity		4,723,770		4,420,484
Noncontrolling interests		11,165		4,518
Total equity		4,734,935		4,425,002
	$	12,638,810	$	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				Nine Months Ended
	September 30,				September 30,
	2020		2019		2020		2019
Revenues
Direct premiums and escrow fees	$	807,947	$	728,610	$	2,080,568	$	1,910,830
Agent premiums		722,434		656,154		1,920,011		1,701,538
Information and other		285,882		208,297		728,563		581,858
Net investment income		52,466		76,628		156,760		236,607
Net realized investment gains		44,992		1,507		49,491		42,564
		1,913,721		1,671,196		4,935,393		4,473,397
Expenses
Personnel costs		511,298		470,683		1,392,445		1,329,322
Premiums retained by agents		572,780		518,824		1,520,559		1,344,517
Other operating expenses		281,079		248,252		788,407		667,047
Provision for policy losses and other claims		157,836		124,683		414,001		331,525
Depreciation and amortization		38,227		31,719		110,652		97,537
Impairments on assets held for sale (Note 2)		73,264		—		73,264		—
Premium taxes		19,885		19,484		53,554		50,887
Interest		15,981		12,213		41,521		36,057
		1,670,350		1,425,858		4,394,403		3,856,892
Income before income taxes		243,371		245,338		540,990		616,505
Income taxes		59,780		57,171		121,859		131,263
Net income		183,591		188,167		419,131		485,242
Less: Net income attributable to noncontrolling interests		1,312		985		2,993		1,830
Net income attributable to the Company	$	182,279	$	187,182	$	416,138	$	483,412
Net income per share attributable to the Company's stockholders (Note 11):
Basic	$	1.62	$	1.65	$	3.69	$	4.28
Diluted	$	1.62	$	1.65	$	3.68	$	4.26
Cash dividends declared per share	$	0.44	$	0.42	$	1.32	$	1.26
Weighted-average common shares outstanding (Note 11):
Basic		112,584		113,163		112,913		112,983
Diluted		112,843		113,741		113,176		113,509

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 September 30,						Nine Months Ended September 30,
	2020			2019			2020			2019
Net income	$	183,591		$	188,167		$	419,131		$	485,242
Other comprehensive income (loss), net of tax:
Unrealized gains on debt securities		1,991			13,493			73,077			126,172
Unrealized (losses) gains on debt securities for which credit-related portion was recognized in earnings		(7	)		—			140			—
Foreign currency translation adjustment		10,074			(7,373	)		(9,109	)		2,959
Pension benefit adjustment		399			(76	)		1,197			(227	)
Total other comprehensive income, net of tax		12,457			6,044			65,305			128,904
Comprehensive income		196,048			194,211			484,436			614,146
Less: Comprehensive income attributable to noncontrolling interests		1,312			985			2,993			1,829
Comprehensive income attributable to the Company	$	194,736		$	193,226		$	481,443		$	612,317

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 income (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

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	2020-09-30	Filed 2020-10-22
10-Q	2020-06-30	Filed 2020-07-23
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	2020-10-30	Regulation FD, Exhibits
8-K	2020-10-22	Earnings, Exhibits
8-K	2020-07-23	Earnings, Exhibits
8-K	2020-05-15
8-K	2020-05-08
8-K	2020-05-05
8-K	2020-04-23
8-K	2020-02-13
8-K	2019-10-24
8-K	2019-07-25
8-K	2019-05-28
8-K	2019-05-07
8-K	2019-04-30
8-K	2019-04-25
8-K	2019-02-14
8-K	2018-10-25
8-K	2018-07-26
8-K	2018-05-08
8-K	2018-04-26
8-K	2018-02-08

EX-31.A	faf-ex31a_80.htm
EX-31.B	faf-ex31b_81.htm
EX-32.A	faf-ex32a_79.htm
EX-32.B	faf-ex32b_78.htm

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company