Part I Item 1. Business First American Financial Corporation is a leading provider of title insurance and settlement services, its primary business segment, accounting for 95.4% of 2023 consolidated revenues, with a strategy focused on core growth, data leverage, and complementary investments - The company's business is divided into three main segments: Title Insurance and Services, Home Warranty, and Corporate, with the Title Insurance and Services segment being the dominant revenue generator17 Segment Revenue Contribution (2023) | Segment | Revenue Contribution | Source Chunk | | :--- | :--- | :--- | | Title Insurance and Services | 95.4% | 19 | | International Operations (as % of Title segment) | 6.5% | 34 | - The company's strategy involves profitably growing its core title insurance business, expanding its data advantage, and investing in complementary businesses, with a focus on digital transformation and customer experience18 - As of December 31, 2023, the company employed 19,210 people, with 12,244 in the U.S. and 6,966 internationally, and has received numerous awards for its workplace culture49 - The company's federal savings bank subsidiary held assets of $8.1 billion and deposits of $7.9 billion as of December 31, 202344 Item 1A. Risk Factors The company faces strategic, operational, legal, compliance, and financial risks, including real estate market cyclicality, cyberattacks, regulatory oversight, and investment portfolio volatility - Strategic risks include the potential inadequacy of the risk management framework, increased claims from innovative initiatives like process automation, and disruption from other industry participants666768 - Operational risks are significant, stemming from real estate market conditions (interest rates, inventory), unfavorable economic trends, and the integrity of IT systems, with explicit mention of cyberattack risks, referencing the December 2023 incident697184 - Legal and compliance risks arise from extensive government regulation (including CFPB), scrutiny of industry practices, and potential for class-action lawsuits, where changes in regulation, particularly in key states like California, Florida, and Texas, could significantly impact operations939799 - Financial risks include potential losses from failures at financial institutions where funds are deposited, impairment of goodwill, and volatility in both the primary investment portfolio and the high-risk venture investment portfolio, with actual claims experience potentially differing materially from reserves101103104 Item 1C. Cybersecurity The company's cybersecurity program, overseen by the Board, experienced a Q4 2023 incident resulting in an estimated 36-cent adjusted EPS shortfall and $11 million in direct expenses - Cybersecurity oversight is managed at the highest levels, with the Board's Audit Committee receiving quarterly reports from the CISO and the full Board receiving semi-annual briefings115 - A cybersecurity incident in Q4 2023 had a material impact on the quarter's results, with the company's internal forecast for adjusted EPS at $1.00, while the actual result was $0.69, implying a 36-cent shortfall largely attributed to the incident118 - The Q4 2023 incident resulted in $11 million of direct expenses, which included the company's $5 million insurance retention, though the company does not believe the incident will have a material impact on its overall financial condition or ongoing operations118 Part II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on NYSE, declared a $0.53 per share quarterly dividend in January 2024, and has an active share repurchase program with $213.8 million remaining authorization as of December 31, 2023 - In January 2024, the board of directors declared a quarterly cash dividend of $0.53 per share125 - As of December 31, 2023, the company had authority to repurchase an additional $213.8 million of its common stock under its share repurchase program126 Share Repurchases (Q4 2023) | Period | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | Oct 2023 | 168,406 | $52.90 | | Nov 2023 | 151,657 | $54.59 | | Dec 2023 | 8,800 | $59.45 | | Total Q4 | 328,863 | $53.85 | Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Total revenues for 2023 decreased 21.1% to $6.0 billion due to a real estate market downturn, impacting title insurance premiums, while the Home Warranty segment remained stable and liquidity remained strong Consolidated Revenue Overview (2023 vs. 2022) | Metric | 2023 | 2022 | Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Total Revenues | $6.0B | $7.6B | ($1.6B) | (21.1%) | - The revenue decline was primarily caused by a sharp drop in real estate transaction volumes, leading to a 27.0% decrease in direct premiums and escrow fees and a 31.0% decrease in agent premiums170 - Net investment losses were $206.4 million in 2023, an improvement from the $515.8 million loss in 2022, with the 2023 loss including $155.0 million in net unrealized losses and impairments from the venture investment portfolio170173 - The provision for title insurance losses was set at a rate of 3.25% of title premiums and escrow fees in 2023, down from 4.0% in 2022, reflecting a 3.75% ultimate loss rate for the current policy year and a 0.5% reserve release for prior policy years149185 Results of Operations by Segment Title Insurance and Services Segment Performance (2023 vs. 2022) | Metric | 2023 | 2022 | % Change | | :--- | :--- | :--- | :--- | | Total Revenues | $5,724.8M | $7,546.9M | (24.1%) | | Direct Premiums & Escrow Fees | $1,856.4M | $2,662.9M | (30.3%) | | Agent Premiums | $2,449.3M | $3,547.6M | (31.0%) | | Income Before Income Taxes | $494.0M | $757.4M | (34.8%) | | Pretax Margin | 8.6% | 10.0% | (1.4 pts) | Home Warranty Segment Performance (2023 vs. 2022) | Metric | 2023 | 2022 | % Change | | :--- | :--- | :--- | :--- | | Total Revenues | $417.2M | $419.0M | (0.4%) | | Income Before Income Taxes | $54.3M | $44.6M | 21.7% | | Pretax Margin | 13.0% | 10.6% | +2.4 pts | | Claims Provision Rate | 48.8% | 51.3% | (2.5 pts) | Corporate Segment Performance (2023 vs. 2022) | Metric | 2023 | 2022 | | :--- | :--- | :--- | | Net Investment Losses | ($162.3M) | ($353.4M) | | Loss Before Income Taxes | ($273.8M) | ($476.2M) | Liquidity and Capital Resources - Cash provided by operating activities decreased to $354.3 million in 2023 from $777.6 million in 2022208 - The holding company maintained liquidity of $179.3 million in cash and $900.0 million available on its revolving credit facility as of December 31, 2023213 - The company repaid its $250 million 4.30% senior unsecured notes upon maturity in February 2023213 Debt to Capitalization Ratio | Ratio | Dec 31, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Debt to Capitalization | 28.6% | 30.0% | | Adjusted Debt to Capitalization | 20.2% | 22.9% | - The company administers significant off-balance sheet customer funds, including $10.6 billion in escrow deposits and $1.8 billion in like-kind exchange funds as of year-end 2023222225 Item 7A. Quantitative and Qualitative Disclosures About Market Risk The company's primary market risks are interest rate, equity price, and credit risk, with a hypothetical 100 basis point interest rate increase impacting debt securities by $337.1 million - The company's main market risks are interest rate, equity price, and credit risk228 - A hypothetical 100 basis point parallel increase in interest rates would cause the fair value of the debt securities portfolio to decrease by an estimated $337.1 million, or 4.7%, as of December 31, 2023231 - A hypothetical 10% broad-based decline in equity market prices would decrease the fair value of the marketable equity securities portfolio by an estimated $42.5 million as of December 31, 2023234 - The debt securities portfolio maintains a high average credit quality rating of AA238 Item 8. Financial Statements and Supplementary Data This section presents audited consolidated financial statements for 2023-2021, including an unqualified auditor's opinion, with the valuation of the IBNR loss reserve for title claims identified as a critical audit matter Key Consolidated Financial Data (Year-End) | Metric (in millions) | 2023 | 2022 | | :--- | :--- | :--- | | Balance Sheet | | | | Total Assets | $16,802.8M | $14,955.3M | | Total Liabilities | $11,940.0M | $10,274.1M | | Total Stockholders' Equity | $4,848.1M | $4,657.8M | | Income Statement | | | | Total Revenues | $6,003.5M | $7,605.2M | | Net Income Attributable to Company | $216.8M | $263.0M | | Diluted EPS | $2.07 | $2.45 | - The independent auditor, PricewaterhouseCoopers LLP, issued an unqualified opinion on both the consolidated financial statements and the effectiveness of internal control over financial reporting as of December 31, 2023245 - The critical audit matter identified by the auditor was the valuation of the Incurred But Not Reported (IBNR) loss reserve for title claims, due to the significant management judgment and complex assumptions involved in the estimate254 Item 9A. Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2023, with no material changes during Q4 2023 - Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2023513 - Based on the COSO framework, management determined that the company's internal control over financial reporting was effective as of December 31, 2023517 - No changes in internal control over financial reporting occurred during Q4 2023 that materially affected, or are reasonably likely to materially affect, these controls519 Part III Items 10-14. Directors, Executive Compensation, and Corporate Governance Information for directors, executive compensation, and corporate governance is incorporated by reference from the company's forthcoming 2024 proxy statement - The detailed information for Part III (Items 10-14) is not included directly in the 10-K but is incorporated by reference from the forthcoming 2024 Proxy Statement525 Part IV Item 15. Exhibits and Financial Statement Schedules This section provides an index of all financial statements, schedules, and exhibits filed with or incorporated by reference into the Form 10-K report - This section provides an index of all financial statements, schedules, and exhibits included with or incorporated by reference into the Form 10-K filing533
First American(FAF) - 2023 Q4 - Annual Report