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First American(FAF) - 2020 Q4 - Annual Report

PART I Business The company is a leading provider of title insurance and settlement services, with a strategy focused on core business growth and technology - The company's business is primarily focused on title insurance, settlement services, and other financial services and risk solutions20 - The Title Insurance and Services segment is the company's largest, contributing 92.2% of consolidated revenues in 202022 - The company's strategy focuses on growing its core title business, strengthening its enterprise through data, and investing in complementary businesses21 - In October 2020, the company announced a plan to exit its property and casualty insurance business, with completion expected by Q3 202254 - As of December 31, 2020, the company employed 19,597 people, with 12,849 in the U.S. and 6,748 internationally58 Title Insurance and Services Segment This segment offers title insurance and related services for real estate transactions and includes banking and wealth management operations - This segment provides title insurance, closing/escrow services, and other risk mitigation products for real estate transactions22 - The company is the second-largest provider of title insurance in the United States47 - International operations contributed approximately 5.2% of the segment's revenues in 202038 - The company's federal savings bank subsidiary had assets of $4.4 billion and deposits of $3.9 billion as of December 31, 202050 Specialty Insurance Segment This segment provides home warranty contracts and property/casualty insurance, though the company is exiting the latter business - The Home Warranty business provides one-year residential service contracts covering systems like HVAC and appliances51 - The company initiated a process to exit the Property and Casualty business in October 2020 and entered into book transfer agreements in January 20215254 Regulation The company's operations are subject to extensive regulation by various state and federal authorities, including the CFPB and FDIC - The company and its subsidiaries are subject to extensive regulation by state insurance regulators, the CFPB, the OCC, the FDIC, and the Federal Reserve Board59616668 - Insurance regulations place limits on the ability of insurer subsidiaries to pay dividends to the parent company61 Investment Policies The company maintains a high-quality, investment-grade portfolio, with the vast majority of assets held in debt securities - As of December 31, 2020, 93% of the investment portfolio consisted of debt securities, with 98% rated investment grade73 Risk Factors The company faces strategic, operational, legal, and financial risks tied to the real estate market, cybersecurity, and regulation - Strategic risks include potential inadequacy of the risk management framework and risks associated with innovative initiatives7879 - Operational risks are significantly influenced by the real estate market, interest rates, and general economic conditions82[83](index=83&type=chunk]86 - The company is exposed to systems failures and cyberattacks, with a 2019 incident triggering governmental inquiries and lawsuits939597 - Legal and compliance risks arise from extensive regulation by federal and state agencies, including the CFPB103107108 - Financial risks include potential impairment of goodwill and other intangible assets ($1.6 billion as of Dec 31, 2020) and investment portfolio losses115117119 Properties The company's executive offices are located in a five-building campus in Santa Ana, California, totaling 490,000 square feet - The main executive office campus is in Santa Ana, California, consisting of five office buildings and a technology center127 Legal Proceedings The company is involved in various lawsuits and regulatory investigations, none of which are expected to materially impact its finances - The company is involved in several putative class action lawsuits challenging practices in its title insurance and other businesses131134 - The company is subject to two investigations related to a 2019 information security incident by the SEC and the New York Department of Financial Services141 - The company received a $15.7 million excise tax assessment from Canadian taxing authorities, which it is appealing142 PART II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's stock trades on the NYSE, with an active dividend policy and a share repurchase program authorized in late 2020 - In November 2020, the company terminated a prior share repurchase program and authorized a new one for up to $300.0 million of its common stock148 - In January 2021, the board of directors declared a cash dividend of $0.46 per share147 Issuer Purchases of Equity Securities (Q4 2020) | Period | Total Shares Purchased | Average Price Paid per Share | Maximum Dollar Value Remaining Under Program | | :--- | :--- | :--- | :--- | | Oct 1 - Oct 31, 2020 | 172,925 | $47.44 | $84,502,964 | | Nov 1 - Nov 30, 2020 | 676,272 | $48.33 | $270,843,728 | | Dec 1 - Dec 31, 2020 | 568,270 | $50.77 | $241,994,465 | | Total Q4 2020 | 1,417,467 | $49.20 | $241,994,465 | Selected Financial Data The company shows consistent revenue growth over five years, with stable net income in 2020 and increasing stockholders' equity Five-Year Selected Financial Data | Metric | 2020 | 2019 | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | :--- | :--- | | Revenues ($ thousands) | $7,086,667 | $6,202,061 | $5,747,844 | $5,772,363 | $5,575,846 | | Net Income Attributable to Company ($ thousands) | $696,429 | $707,410 | $474,496 | $423,049 | $342,993 | | Diluted EPS | $6.16 | $6.22 | $4.19 | $3.76 | $3.09 | | Total Assets ($ thousands) | $12,795,988 | $11,519,167 | $10,630,635 | $9,573,222 | $8,831,777 | | Stockholders' Equity ($ thousands) | $4,909,972 | $4,420,484 | $3,741,881 | $3,479,955 | $3,008,179 | | Return on Average Stockholders' Equity | 14.9% | 17.3% | 13.1% | 13.0% | 11.9% | | Cash Dividends Declared per Share | $1.78 | $1.68 | $1.60 | $1.44 | $1.20 | | Title Orders Opened (thousands) | 1,471 | 1,093 | 982 | 1,069 | 1,281 | Management's Discussion and Analysis of Financial Condition and Results of Operations Revenues grew 14.3% in 2020, driven by residential refinance activity, though this was offset by impairment charges and lower investment income Critical Accounting Estimates Key estimates include the provision for policy losses, goodwill impairment, and the fair value of the investment portfolio - The provision for policy losses is a critical estimate; a 50 basis point change in the loss rate would impact the IBNR reserve by $134.3 million171172178 - The company assesses goodwill for impairment annually, resulting in a $34.2 million goodwill impairment loss in Q3 2020203207 - The company uses independent pricing services to determine the fair value of its debt securities portfolio189190 Results of Operations Revenue growth was driven by residential transactions, while impairment losses and a higher tax rate impacted net income - Domestic residential refinance and purchase transactions drove revenue growth, while commercial transaction fees decreased 16.8%222 - The company recorded impairment losses of $54.9 million in 2020 related to the planned disposition of its property and casualty insurance business225 - The effective income tax rate was 24.1% in 2020, up from 21.6% in 2019, due to nondeductible goodwill impairment and foreign tax law changes271 Key Financial Metrics | Metric | 2020 | 2019 | % Change | | :--- | :--- | :--- | :--- | | Total Revenues | $7.1B | $6.2B | 14.3% | | Direct Premiums & Escrow Fees | $3.0B | $2.7B | 12.3% | | Agent Premiums | $2.8B | $2.4B | 16.3% | | Net Investment Income | $221.3M | $315.4M | (29.8%) | | Net Realized Investment Gains | $105.0M | $66.4M | 58.2% | Liquidity and Capital Resources The company maintained strong liquidity with increased operating cash flow, a senior notes issuance, and a new share repurchase plan - Cash provided by operating activities was $1.1 billion in 2020, up from $913.1 million in 2019276 - In May 2020, the company issued $450.0 million of 4.00% senior unsecured notes due in 2030283 - The company repurchased 3.2 million shares for $138.6 million in 2020 and approved a new $300.0 million share repurchase plan278 - The debt-to-capitalization ratio was 23.7% at year-end 2020, up from 18.5% at year-end 2019289 - The maximum amount of dividends available from insurance subsidiaries in 2021 without prior regulatory approval was $555.4 million281 Quantitative and Qualitative Disclosures About Market Risk The company's primary market risks are interest rate, equity price, and credit risk, which are actively managed and monitored - The company's main market risk exposures are interest rate risk, equity price risk, and credit risk299 - A hypothetical 100 basis point increase in interest rates is estimated to decrease the debt securities portfolio's fair value by approximately $200 million (3.1%)302304 - A hypothetical 10% decline in equity market prices would decrease the equity securities portfolio's fair value by $44.5 million307 Financial Statements and Supplementary Data This section contains the audited consolidated financial statements, with the auditor identifying the IBNR loss reserve as a critical audit matter - The independent auditor, PricewaterhouseCoopers LLP, issued an unqualified opinion on the financial statements and internal controls319 - The auditor identified the 'Valuation of the Incurred But Not Reported Loss Reserve - Title Claims' as a critical audit matter327328 Consolidated Balance Sheets | (in thousands) | 2020 | 2019 | | :--- | :--- | :--- | | Total Assets | $12,795,988 | $11,519,167 | | Total Liabilities | $7,874,340 | $7,094,165 | | Total Stockholders' Equity | $4,909,972 | $4,420,484 | Consolidated Statements of Income | (in thousands) | 2020 | 2019 | 2018 | | :--- | :--- | :--- | :--- | | Total Revenues | $7,086,667 | $6,202,061 | $5,747,844 | | Net Income Attributable to Company | $696,429 | $707,410 | $474,496 | Controls and Procedures Management concluded that the company's disclosure controls, procedures, and internal control over financial reporting were effective - Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2020678 - Management assessed the company's internal control over financial reporting as effective as of December 31, 2020, using the COSO framework682 Other Information The company entered into amended employment agreements with four key executives, extending their terms through December 2023 - On February 11, 2021, the company extended the employment agreements for CEO Dennis J. Gilmore and three other executives through December 31, 2023686 PART III This part incorporates by reference information on directors, compensation, and ownership from the company's 2021 proxy statement Directors, Executive Officers and Corporate Governance Information is incorporated by reference from the 2021 Proxy Statement - The information required by this item will be set forth in the 2021 Proxy Statement and is incorporated herein by reference694 Executive Compensation Information is incorporated by reference from the 2021 Proxy Statement - The information required by this item will be set forth in the 2021 Proxy Statement and is incorporated herein by reference695 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information is incorporated by reference from the 2021 Proxy Statement - The information required by this item will be set forth in the 2021 Proxy Statement and is incorporated herein by reference696 Certain Relationships and Related Transactions, and Director Independence Information is incorporated by reference from the 2021 Proxy Statement - The information required by this item will be set forth in the 2021 Proxy Statement and is incorporated herein by reference697 Principal Accountant Fees and Services Information is incorporated by reference from the 2021 Proxy Statement - The information required by this item will be set forth in the 2021 Proxy Statement and is incorporated herein by reference698 PART IV Exhibits and Financial Statement Schedules This section lists all financial statements, schedules, and exhibits filed as part of the annual report - This section contains the index of financial statements, schedules, and all exhibits filed with the Form 10-K707708