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FIRST AMERICAN FINANCIAL CORP – 10-K – Management's Discussion and Analysis of Financial Condition and Results of Operations
CERTAIN STATEMENTS IN THIS ANNUAL REPORT ON FORM 10-K 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," "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 4-5 OF THIS ANNUAL 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 certain financial measures
that are not presented in accordance with generally accepted accounting
principles ("GAAP"), including adjusted information and other revenues, adjusted
personnel costs, and adjusted other operating expenses, in each case excluding
the effects of recent acquisitions, and adjusted debt to capitalization ratio as
it excludes the effect of secured financings payable. The Company is presenting
these non-GAAP financial measures because they provide the Company's management
and readers of this Annual Report on Form 10-K with additional insight into the
operational performance of the Company relative to earlier periods and
additional insight into the financial leverage of the Company. The Company does
not intend for these non-GAAP financial measures to be a substitute for any GAAP
financial information. In this Annual Report on Form 10-K, these non-GAAP
financial measures have been presented with, and reconciled to, the most
directly comparable GAAP financial measures. Readers of this Annual Report on
Form 10-K should use these non-GAAP financial measures only in conjunction with
the comparable GAAP financial measures. 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.
Principles of Consolidation
The consolidated financial statements have been prepared in accordance with GAAP and reflect the consolidated operations of the Company. The consolidated financial statements include the accounts ofFirst American Financial Corporation and all controlled subsidiaries. All significant intercompany transactions and balances have been eliminated. Equity investments in which the Company exercises significant influence but does not control and is not the primary beneficiary, are accounted for using the equity method of accounting. Equity investments in which the Company does not exercise significant influence over the investee and without readily determinable fair values, or non-marketable equity securities, are accounted for at cost, less impairment, and are adjusted up or down for any observable price changes.
Reportable Segments
The Company consists of the following reportable segments:
•
The Company's title insurance and services segment issues title insurance policies on residential and commercial property inthe United States and offers similar or related products and services internationally. This segment also provides closing and/or escrow services; accommodates tax-deferred exchanges of real estate; provides products, services and solutions designed to mitigate risk or otherwise facilitate real estate transactions; maintains, manages and provides access to title plant data and records; provides appraisals and other valuation-related products and services; provides lien release, document custodial and default-related products and services; provides warehouse lending services; subservices mortgage loans; and provides banking, trust and wealth management services. The Company, through its principal title insurance subsidiary and such subsidiary's affiliates, transacts its title insurance business through a network of direct operations and agents. Through this network, the Company issues policies in the 49 states that permit the issuance of title insurance policies, theDistrict of Columbia and certainUnited States territories. The Company also offers title insurance, closing services and similar or related products 25 --------------------------------------------------------------------------------
and services, either directly or through third parties in other countries,
including
various other established and emerging markets.
•
The Company's specialty insurance segment sells home warranty products including residential service contracts that cover residential systems, such as heating and air conditioning systems, and certain appliances against failures that occur as the result of normal usage during the coverage period. This business currently operates in 35 states and theDistrict of Columbia .
The Company's property and casualty insurance business, which is in the final
stages of its wind-down.
•
The Company's corporate segment includes its investments in venture-stage
companies, certain financing facilities and corporate services that support the
Company's business operations.
Critical Accounting Estimates
The preparation of financial statements in accordance with GAAP requires the application of accounting policies that often involve a significant degree of judgment. The Company's management considers the accounting policies described below to be the most dependent on the application of estimates and assumptions in preparing the Company's consolidated financial statements. See Note 1 Basis of Presentation and Significant Accounting Policies to the consolidated financial statements for a more detailed description of the Company's significant accounting policies.
Provision for policy losses
The Company provides for title insurance losses through a charge to expense when
the related premium revenue is recognized. The amount charged to expense is
generally determined by applying a rate (the loss provision rate) to total title
insurance premiums and escrow fees. The Company's management estimates the loss
provision rate at the beginning of each year and reassesses the rate quarterly
to ensure that the resulting incurred but not reported ("IBNR") loss reserve and
known claims reserve included in the Company's consolidated balance sheets
together reflect management's best estimate of the total costs required to
settle all IBNR and known claims. If the ending IBNR reserve is not considered
adequate, an adjustment is recorded.
The process of assessing the loss provision rate and the resulting IBNR reserve
involves an evaluation of the results of an in-house actuarial review. The
Company's in-house actuary performs a reserve analysis utilizing generally
accepted actuarial methods that incorporate cumulative historical claims
experience and information provided by in-house claims and operations personnel.
Current economic and business trends are also contemplated as part of the
reserve analysis. These include conditions in the real estate and mortgage
markets, changes in residential and commercial real estate values, and changes
in the levels of defaults and foreclosures that may affect claims levels and
patterns of emergence, as well as any company-specific factors that may be
relevant to past and future claims experience. Results from the analysis
include, but are not limited to, a range of IBNR reserve estimates and a single
point estimate for IBNR as of the balance sheet date.
For recent policy years at early stages of development (generally the last three
years), IBNR is generally estimated using a combination of expected loss rate
and multiplicative loss development factor calculations. For more mature policy
years, IBNR generally is estimated using multiplicative loss development factor
calculations. The expected loss rate method estimates IBNR by applying an
expected loss rate to total title insurance premiums and escrow fees and by
adjusting for policy year maturity using estimated loss development patterns.
Multiplicative loss development factor calculations estimate IBNR by applying
factors derived from loss development patterns to losses realized to date. The
expected loss rate and loss development patterns are based on historical
experience and the relationship of the history to the applicable policy years.
The Company's management uses the IBNR point estimate from the in-house
actuary's analysis and other relevant information concerning claims to determine
what it considers to be the best estimate of the total amount required for the
IBNR reserve.
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The volume and timing of title insurance claims are subject to cyclical
influences from both the real estate and mortgage markets. Title policies issued
to lenders constitute a large portion of the Company's title insurance volume.
These policies insure lenders against losses on mortgage loans due to title
defects in the collateral property. Even if an underlying title defect exists
that could result in a claim, often the lender must realize an actual loss, or
at least be likely to realize an actual loss, for a title insurance liability to
exist. As a result, title insurance claims exposure is sensitive to lenders'
losses on mortgage loans and is affected in turn by external factors that affect
mortgage loan losses, particularly macroeconomic factors.
A general decline in real estate prices can expose lenders to greater risk of
losses on mortgage loans, as loan-to-value ratios increase and defaults and
foreclosures increase. Title insurance claims exposure for a given policy year
is also affected by the quality of mortgage loan underwriting during the
corresponding origination year. The Company believes that the sensitivity of
claims to external conditions in the real estate and mortgage markets is an
inherent feature of title insurance's business economics that applies broadly to
the title insurance industry.
Title insurance policies are long-duration contracts with the majority of the
claims reported to the Company within the first few years following the issuance
of the policy. Generally, 70% to 80% of claim amounts become known in the first
six years of the policy life, and the majority of IBNR reserves relate to the
six most recent policy years. Changes in expected ultimate losses and
corresponding loss rates for recent policy years are considered likely and could
result in a material adjustment to the IBNR reserves. Based on historical
experience, management believes a 50 basis point change to the loss rates for
recent policy years, positive or negative, is reasonably likely given the long
duration nature of a title insurance policy. In uncertain economic times an even
larger change is more likely. As examples, if the expected ultimate losses for
each of the last six policy years increased or decreased by 50 basis points, the
resulting impact on the Company's IBNR reserve would be an increase or decrease,
as the case may be, of $158 million , and if expected ultimate losses for those
same years were to fluctuate by 100 basis points, the resulting impact would be
$316 million . A material change in expected ultimate losses and corresponding
loss rates for older policy years is also possible, particularly for policy
years with loss ratios exceeding historical norms. The estimates made by
management in determining the appropriate level of IBNR reserves could
ultimately prove to be materially different from actual claims experience.
The Company provides for claims losses relating to its home warranty business
based on the average cost per claim and historical loss experience as applied to
the total of current claims incurred. The average cost per home warranty claim
is calculated using the average of the most recent 12 months of claims
experience adjusted for estimated future increases in costs.
A summary of the Company's loss reserves is as follows:
December 31,
2022 2021
(dollars in millions)
Known title claims $ 62 4.7 % $ 67 5.2 %
IBNR title claims 1,207 91.1 % 1,143 89.0 %
Total title claims 1,269 95.8 % 1,210 94.2 %
Non-title claims 56 4.2 % 74 5.8 %
Total loss reserves $ 1,325 100.0 % $ 1,284 100.0 %
Activity in the reserve for known title claims is summarized as follows:
December 31,
2022 2021 2020
(in millions)
Balance at beginning of year $ 67 $ 64 $ 83
Provision transferred from IBNR title claims related to:
Current year 29 31 20
Prior years 144 126 125
173 157 145
Payments, net of recoveries, related to:
Current year 26 28 18
Prior years 151 126 146
177 154 164
Other (1 ) - -
Balance at end of year $ 62 $ 67 $ 64
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Activity in the reserve for IBNR title claims is summarized as follows:
December 31,
2022 2021 2020
(in millions)
Balance at beginning of year $ 1,143 $ 1,026 $ 904
Provision related to:
Current year 248 275 237
Prior years - - 26
248 275 263
Provision transferred to known title claims related to:
Current year 29 31 20
Prior years 144 126 125
173 157 145
Other (11 ) (1 ) 4
Balance at end of year $ 1,207 $ 1,143 $ 1,026
The provision for title insurance losses, expressed as a percentage of title
insurance premiums and escrow fees, was 4.0% for 2022 and 2021, and 5.0% for
2020. The current year loss 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 provision in 2022 related to current year decreased by $27 million , or 9.8%,
from 2021 as a result of decreases in title premiums and escrow fees in 2022
from 2021. The provision in 2021 related to current year increased by $38
million , or 16.0%, from 2020 as a result of increases in title premiums and
escrow fees in 2021 from 2020.
For further discussion of title provision recorded in 2022, 2021 and 2020, see
Results of Operations, page 34.
Fair value of debt securities
The Company categorizes the fair values of its debt securities using a
three-level hierarchy for fair value measurements that distinguishes between
market participant assumptions developed based on market data obtained from
sources independent of the Company (observable inputs) and the Company's own
assumptions about market participant assumptions developed based on the best
information available in the circumstances (unobservable inputs). The hierarchy
for inputs used in determining fair value maximizes the use of observable inputs
and minimizes the use of unobservable inputs by requiring that observable inputs
be used when available. The hierarchy level assigned to each security was based
on management's assessment of the transparency and reliability of the inputs
used to estimate the fair values at the measurement date. See Note 17 Fair Value
Measurements to the consolidated financial statements for a more detailed
description of the three-level hierarchy and a description for each level.
The fair values of debt securities were based on the market values obtained from
independent pricing services that were evaluated using pricing models that vary
by asset class and incorporate available trade, bid and other market information
and price quotes from well-established, independent broker-dealers. The
independent pricing services monitor market indicators, industry and economic
events, and for broker-quoted only securities, obtain quotes from market makers
or broker-dealers that they recognize to be market participants. The pricing
services utilize the market approach in determining the fair values of the debt
securities held by the Company. The Company obtains an understanding of the
valuation models and assumptions utilized by the services and has controls in
place to determine that the values provided represent fair values. The Company's
validation procedures include comparing prices received from the pricing
services to quotes received from other third-party sources for certain
securities with market prices that are readily verifiable. If the price
comparison results in differences over a predefined threshold, the Company will
assess the reasonableness of the changes relative to prior periods given the
prevailing market conditions and assess changes in the issuers' credit
worthiness, performance of any underlying collateral and prices of the
instrument relative to similar issuances. To date, the Company has not made any
material adjustments to the fair value measurements provided by the pricing
services.
Typical inputs and assumptions to pricing models used to value the Company's
debt securities include, but are not limited to, benchmark yields, reported
trades, broker-dealer quotes, credit spreads, credit ratings, bond insurance (if
applicable), benchmark securities, bids, offers, reference data and industry and
economic events. For mortgage-backed securities, inputs
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and assumptions may also include the structure of issuance, characteristics of
the issuer, collateral attributes and prepayment speeds.
Credit losses on debt securities
When the fair value of an available-for-sale debt security falls below its amortized cost, the Company must determine whether the decline in fair value is due to credit-related factors or noncredit-related factors. Declines in fair value that are credit-related are recorded on the balance sheet through an allowance for credit losses with a corresponding adjustment to earnings and declines that are noncredit-related are recognized through other comprehensive income/loss. If the Company intends to sell a debt security in an unrealized loss position or determines that it is more likely than not that the Company will be required to sell a debt security before it recovers its amortized cost basis, the debt security is impaired and it is written down to fair value with all losses recognized in earnings. As ofDecember 31, 2022 , the Company did not intend to sell any debt securities in an unrealized loss position and it is not more likely than not that the Company will be required to sell any debt securities before recovery of their amortized cost basis. For debt securities in an unrealized loss position for which the Company does not intend to sell the debt security and it is not more likely than not that the Company will be required to sell the debt security, the Company determines whether the loss is due to credit-related factors or noncredit-related factors. For debt securities in an unrealized loss position for which the losses are primarily due to credit-related factors, the Company's policy is to recognize the entire loss in earnings. For debt securities in an unrealized loss position for which the losses are determined to be the result of both credit-related and noncredit-related factors, the credit loss is determined as the difference between the present value of the cash flows expected to be collected and the amortized cost basis of the debt security. The cash flows expected to be collected are discounted using the effective interest rate (i.e., purchase yield) and for variable rate securities the interest rate is fixed at the rate in effect at the credit loss measurement date. Expected future cash flows for debt securities are based on qualitative and quantitative factors specific to each security, including the probability of default and the estimated timing and amount of recovery. The detailed inputs used to project expected future cash flows may be different depending on the nature of the individual debt security.
Impairment assessment for goodwill
The Company is required to perform an annual goodwill impairment assessment for
each reporting unit for which goodwill has been allocated. The reporting units
that have been allocated goodwill include title insurance and home warranty. The
Company's trust and other services reporting unit has no allocated goodwill and
is, therefore, not assessed for impairment. The Company has elected to perform
this annual assessment in the fourth quarter of each fiscal year or sooner if
circumstances indicate possible impairment. Based on accounting guidance, the
Company has the option to perform a qualitative assessment to determine if the
fair value is more likely than not (i.e., a likelihood of greater than 50%) less
than the carrying amount as a basis for determining whether it is necessary to
perform a quantitative impairment test, or may choose to forego a qualitative
assessment and perform a quantitative impairment test. The qualitative factors
considered in this assessment may include macroeconomic conditions, industry and
market considerations, overall financial performance as well as other relevant
events and circumstances as determined by the Company. The Company evaluates the
weight of each factor to determine whether it is more likely than not that
impairment may exist. If the results of a qualitative assessment indicate the
more likely than not threshold was not met, the Company may choose not to
perform a quantitative impairment test. If, however, the more likely than not
threshold is met, the Company will perform a quantitative test as required and
discussed below.
Management's quantitative impairment testing compares the fair value of each
reporting unit to its carrying amount. The fair value of each reporting unit is
determined by using discounted cash flow analysis and, where appropriate, market
approach valuations. If the fair value of the reporting unit exceeds its
carrying amount, the goodwill is not considered impaired and no additional
analysis is required. However, if the carrying amount is greater than the fair
value, an impairment charge is recognized for the amount by which the carrying
amount exceeds the reporting unit's fair value, with the loss recognized limited
to the total amount of goodwill allocated to that reporting unit.
The quantitative impairment test for goodwill utilizes a variety of valuation
techniques, all of which require the Company to make estimates and judgments.
Fair value is determined by employing an expected present value technique, which
utilizes expected cash flows and an appropriate discount rate. The use of
comparative market multiples (the "market approach") compares the reporting unit
to other comparable companies (if such comparables are present in the
marketplace) based on valuation multiples to arrive at a fair value. In
assessing the fair value, the Company utilizes the results of the valuations
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(including the market approach to the extent comparables are available) and
considers the range of fair values determined under all methods and the extent
to which the fair value exceeds the carrying amount of the reporting unit.
The valuation of each reporting unit includes the use of assumptions and estimates of many critical factors, including revenue growth rates and operating margins, discount rates and future market conditions, determination of market multiples and the establishment of a control premium, among others. Forecasts of future operations are based, in part, on operating results and the Company's expectations as to future market conditions. These types of analyses contain uncertainties because they require the Company to make assumptions and to apply judgments to estimate industry economic factors and the profitability of future business strategies. However, if actual results are not consistent with the Company's estimates and assumptions, the Company may be exposed to future impairment losses that could be material. The Company chose to perform qualitative assessments for its title insurance and home warranty reporting units for 2022 and 2021, and performed quantitative impairment tests for 2020. The results of the Company's qualitative assessments in 2022 and 2021 supported the conclusion that the reporting unit fair values were not more likely than not less than their carrying amounts and, therefore, a quantitative impairment test was not considered necessary. Based on the results of the quantitative tests in 2020, the Company determined that the fair values for both reporting units exceeded their carrying amounts and no additional analysis was required. As a result of the Company's annual goodwill impairment assessments for the title insurance and home warranty reporting units, the Company did not record any goodwill impairment losses related to either reporting unit for 2022, 2021 or 2020.
Income taxes
The Company accounts for income taxes under the asset and liability method, whereby deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The Company evaluates the need to establish a valuation allowance for deferred tax assets based upon the amount of existing temporary differences, the period in which they are expected to be recovered and expected levels of taxable income. A valuation allowance is established when it is considered more likely than not that some or all of the deferred tax assets will not be realized. The Company recognizes the effect of income tax positions only if sustaining those positions is considered more likely than not. Changes in recognition or measurement of uncertain tax positions are reflected in the period in which a change in judgment occurs. The Company recognizes interest and penalties, related to uncertain tax positions in income tax expense.
Pending Accounting Pronouncements
See Note 1 Basis of Presentation and Significant Accounting Policies to the
consolidated financial statements included in "Item 8. Financial Statements and
Supplementary Data" of Part II of this report.
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Results of Operations
Overview
2022 2021 2020 2022 vs. 2021 2021 vs. 2020
$ Change % Change $ Change % Change
(dollars in millions)
Revenues by Segment
Title insurance and services $ 7,547 $ 8,320 $ 6,535 $ (773 ) (9.3 ) $ 1,785 27.3
Specialty insurance 437 541 532 (104 ) (19.2 ) 9 1.7
Corporate and eliminations (379 ) 360 19 (739 ) (205.3 ) 341 NM1
$ 7,605 $ 9,221 $ 7,086 $ (1,616 ) (17.5 ) $ 2,135 30.1
(1)
Not meaningful
A substantial portion of the revenues for the Company's title insurance and
services segment result from sales of, and refinancings of loans on, 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 in the United States and abroad, can cause fluctuations in the
traditional pattern of real estate activity.
The Company's total revenues for 2022 were $7.6 billion , which reflected a
decrease of $1.6 billion , or 17.5%, when compared with $9.2 billion for 2021.
This decrease was primarily attributable to decreases in direct premiums and
escrow fees of $513 million , or 14.3%, agent premiums of $209 million , or 5.6%,
and information and other revenue of $67 million , or 5.5%. The Company's total
revenues for 2022 also included $516 million of net investment losses compared
to $436 million of net investment gains for the prior year. The decrease in
direct premiums and escrow fees attributable to the title insurance and services
segment was $437 million , or 14.1%. Direct premiums and escrow fees in the title
insurance and services segment from domestic residential refinance transactions
and residential purchase transactions decreased $340 million , or 63.6% and $115
million , or 9.0%, respectively, in 2022 when compared to 2021. Direct premiums
and escrow fees from domestic commercial transactions in the title insurance and
services segment increased $16 million , or 1.6%, in 2022 when compared to 2021.
Direct premiums and escrow fees in the title insurance and services segment from
domestic commercial and residential purchase transactions increased $388
million , or 60.8%, and $235 million , or 22.5%, respectively, in 2021 when
compared to 2020. Direct premiums and escrow fees in the title insurance and
services segment from residential refinance transactions decreased $107 million ,
or 16.7%, in 2021 when compared to 2020.
According to the Mortgage Bankers Association's January 19, 2023 Mortgage
Finance Forecast (the "MBA Forecast"), residential mortgage originations in the
United States (based on the total dollar value of the transactions) decreased
49.4% in 2022 when compared with 2021. According to the MBA Forecast, the dollar
amount of purchase originations decreased 15.3% and refinance originations
decreased 74.1%. This volume of domestic residential mortgage origination
activity contributed to decreases in direct premiums and escrow fees for the
Company's direct title operations of 9.0% from domestic residential purchase
transactions and 63.6% from domestic refinance transactions in 2022 when
compared to 2021.
During 2022, the level of domestic title orders opened per day by the Company's
direct title operations decreased by 30.0% when compared to 2021. Also, during
2022, residential refinance opened orders per day, residential purchase opened
orders per day and commercial opened orders per day decreased by 65.3%, 18.9%,
and 8.8% when compared to 2021.
The Company recorded net investment losses of $516 million in 2022, which
included unrealized losses of $329 million related to the Company's venture
investment portfolio. Investments within the Company's venture portfolio are
expected from time to time to cause material fluctuations in the Company's
results of operations due to the recognition of gains or losses in connection
with observable price changes, such as from liquidity events, equity sales,
price changes in investments that trade publicly, or from impairment charges,
which changes can be volatile.
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2022 2021 2020 2022 vs. 2021 2021 vs. 2020
$ Change % Change $ Change % Change
(dollars in millions)
Revenues
Direct premiums and escrow
fees $ 2,663 $ 3,100 $ 2,490 $ (437 ) (14.1 ) $ 610 24.5
Agent premiums 3,548 3,757 2,759 (209 ) (5.6 ) 998 36.2
Information and other 1,127 1,203 1,001 (76 ) (6.3 ) 202 20.2
Net investment income 359 188 199 171 91.0 (11 ) (5.5 )
Net investment (losses)
gains (150 ) 72 86 (222 ) (308.3 ) (14 ) (16.3 )
7,547 8,320 6,535 (773 ) (9.3 ) 1,785 27.3
Expenses
Personnel costs 2,273 2,235 1,834 38 1.7 401 21.9
Premiums retained by agents 2,830 2,987 2,184 (157 ) (5.3 ) 803 36.8
Other operating expenses 1,155 1,198 1,000 (43 ) (3.6 ) 198 19.8
Provision for policy losses
and other
claims 248 275 263 (27 ) (9.8 ) 12 4.6
Depreciation and
amortization 162 152 141 10 6.6 11 7.8
Premium taxes 87 94 70 (7 ) (7.4 ) 24 34.3
Interest 34 21 17 13 61.9 4 23.5
6,789 6,962 5,509 (173 ) (2.5 ) 1,453 26.4
Income before income taxes $ 758 $ 1,358 $ 1,026 $ (600 ) (44.2 ) $ 332 32.4
Pretax margin 10.0 % 16.3 % 15.7 % (6.3 )% (38.7 ) 0.6 % 3.8
Direct premiums and escrow fees decreased $437 million , or 14.1%, in 2022 from
2021 and increased $610 million , or 24.5%, in 2021 from 2020. The decrease in
direct premiums and escrow fees in 2022 from 2021 was primarily due to
reductions in the number of domestic title orders closed by the Company's direct
title operations, partially offset increases in domestic average revenues per
order. The increase in direct premiums and escrow fees in 2021 from 2020 was
primarily due to an increase in the average domestic revenues per order closed.
The domestic average revenues per order closed were $3,498 , $2,718 and $2,232
for 2022, 2021 and 2020, respectively. The 28.7% increase in average revenues
per order closed in 2022 from 2021 was primarily due to a shift in mix from
lower premium residential refinance transactions to higher premium commercial
transactions, home price appreciation and, to a lesser extent, higher average
revenues per order from residential purchase transactions due primarily to
recent acquisitions of escrow companies, which have contributed escrow revenue
to the numerator when determining average revenues per order without a
corresponding title order included in the denominator. The 21.8% increase in
average revenues per order closed in 2021 from 2020 was primarily due to higher
average revenues per order from commercial transactions, higher average revenues
per order from residential purchase products due to higher residential real
estate values and, to a lesser extent, a shift in the mix of direct revenues
generated from higher premium commercial products from lower premium residential
refinance products. The Company's direct title operations closed 695,900,
1,050,700 and 1,043,800 domestic title orders during 2022, 2021 and 2020,
respectively. The 33.8% decrease in orders closed in 2022 from 2021 and the 0.7%
increase in orders closed in 2021 from 2020 were generally consistent with the
changes in residential mortgage origination activity in the United States as
reported in the MBA Forecast.
Agent premiums decreased $209 million , or 5.6%, in 2022 from 2021 and increased
$998 million , or 36.2%, in 2021 from 2020. 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, full year agent premiums typically reflect mortgage
origination activity from the fourth quarter of the prior year through the third
quarter of the current year. The decrease in agent premiums in 2022 from 2021
was generally consistent with the 1.3% decrease in the Company's direct premiums
and escrow fees in the twelve months ended September 30, 2022 as compared with
the twelve months ended September 30, 2021 . The increase in agent premiums in
2021 from 2020 was generally consistent with the 28.9% increase in the Company's
direct premiums and escrow fees in the twelve months ended September 30, 2021 as
compared with the twelve months ended September 30, 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.
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Information and other revenues decreased $76 million , or 6.3%, in 2022 from 2021
and increased $202 million , or 20.2%, in 2021 from 2020. Excluding the $142
million impact from recent acquisitions for the year ended December 31, 2022 ,
information and other revenues decreased $218 million , or 18.2% in 2022 compared
to 2021. The decrease in information and other revenues in 2022 from 2021,
adjusted for the impact of recent acquisitions, was primarily due to decreased
demand for the Company's information products, post-close services and document
generation services. The increase in information and other revenues in 2021 from
2020 was primarily attributable to strength in the purchase and commercial
markets that led to higher demand for the Company's information products, the
impact of acquisitions totaling $35 million for 2021, an increase in demand for
the Company's post-close services 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 increased $171 million , or 91.0%, in 2022 from 2021 and
decreased $11 million , or 5.5%, in 2021 from 2020. The increase in 2022 from
2021 was primarily attributable to higher short-term interest rates in the
Company's investment portfolio and escrow, like-kind exchange and subservicing
deposits. The decrease in 2021 from 2020 was primarily attributable to lower
short-term interest rates which drove lower income from the Company's cash
balances, escrow balances, and tax-deferred property exchange business,
partially offset by increases in interest income from the Company's warehouse
lending business and investment portfolio due to higher balances.
Net investment losses of $150 million for 2022 were primarily attributable to
losses recognized on sales of debt securities and changes in the fair values of
marketable equity securities, partially offset by a $52 million gain realized on
the sale of an investment in a title insurance business. Net investment gains
were $72 million for 2021 and were primarily from increases in the fair values
of marketable equity securities totaling $57 million and from sales of debt
securities totaling $15 million . Net investment gains totaled $86 million for
2020 and were primarily from increases in the fair values of marketable equity
securities of $39 million and gains from the sales of debt securities. Net
investment gains for 2020 also included gains recognized on certain
non-marketable equity securities.
Direct operations in the title insurance and services segment are labor
intensive; accordingly, a major expense component is personnel costs. Labor
costs are driven by two primary considerations: the need to optimize staffing
levels to match the level of corresponding or anticipated new orders and the
need to provide quality service. The Company continues to closely monitor order
volumes and related staffing levels and adjusts staffing levels as considered
necessary. The Company's direct title operations opened 895,500, 1,275,000 and
1,470,900 domestic title orders in 2022, 2021 and 2020, respectively,
representing a decrease of 29.8% in 2022 from 2021 and 13.3% in 2021 from 2020.
Personnel costs increased $38 million , or 1.7%, in 2022 from 2021 and $401
million , or 21.9%, in 2021 from 2020. Excluding the $205 million impact from
recent acquisitions for year ended December 31, 2022 , personnel expenses
decreased $167 million , or 7.5% in 2022 compared to 2021. The decrease in 2022,
adjusted for the impact of recent acquisitions, was due to lower incentive
compensation resulting from lower revenue and profitability, lower expense
related to the Company's 401(k) savings plan match and lower overtime expense,
partially offset by higher severance expense. The increase in personnel costs in
2021 from 2020 was primarily attributable to higher incentive compensation,
salaries, employee benefits including 401(k) savings plan match, and payroll
taxes resulting from the higher headcount and costs associated with the increase
in revenues and profitability. Personnel costs included severance expenses of
$35 million , $5 million , and $6 million for 2022, 2021, and 2020, respectively.
A summary of premiums retained by agents and agent premiums is as follows:
2022 2021 2020
(dollars in millions)
Premiums retained by agents $ 2,830 $ 2,987 $ 2,184
Agent premiums $ 3,548 $ 3,757 $ 2,759
% retained by agents 79.8 % 79.5 % 79.2 %
The premium split between underwriter and agents is in accordance with the
respective agency contracts and can vary from region to region due to
divergences in real estate closing practices and state regulations. As a result,
the percentage of title premiums retained by agents can vary due to the
geographic mix of revenues from agency operations. The changes in the percentage
of title premiums retained by agents in 2022 from 2021 and in 2021 from 2020
were primarily due to changes in the geographic mix of agency revenues.
Other operating expenses decreased $43 million , or 3.6%, in 2022 from 2021 and
increased $198 million , or 19.8%, in 2021 from 2020. Excluding the $80 million
impact from recent acquisitions for the year ended December 31, 2022 , other
33
--------------------------------------------------------------------------------
operating expenses decreased $123 million , or 10.3% in 2022 compared to 2021.
The decrease in 2022, adjusted for the impact of recent acquisitions, was due to
lower production expense due to lower transaction volumes, partially offset by
higher software expense. The increase in 2021 from 2020 was primarily
attributable to higher production related costs due to higher transaction
volumes in the Company's commercial, default and international businesses,
higher software expense and higher professional services.
The provision for policy losses and other claims, expressed as a percentage of
title insurance premiums and escrow fees, was 4.0% for 2022 and 2021, and 5.0%
for 2020.
The current year rate of 4.0% reflects the ultimate loss rate for the current
policy year and no change in loss reserve estimates for prior policy years.
As ofDecember 31, 2022 , the IBNR claims reserve for the title insurance and services segment was$1.2 billion , which reflected management's best estimate. The Company's internal actuary determined a range of reasonable estimates of$995 million to$1.2 billion . The range limits are$212 million below and$36 million above management's best estimate, respectively, and represent an estimate of the range of variation among reasonable estimates of the IBNR reserve. Actuarial estimates are sensitive to assumptions used in models, as well as the structures of the models themselves, and to changes in claims payment and incurral patterns, which can vary materially due to economic conditions, among other factors.
The 2021 rate of 4.0% reflected the ultimate loss rate for policy year 2021 and
no change in loss reserve estimates for prior policy years.
The 2020 rate of 5.0% reflected the ultimate loss rate of 4.5% for policy year
2020 and a net increase in loss reserve estimates for prior policy years of
0.5%, or
Depreciation and amortization expense increased$10 million , or 6.6%, in 2022 from 2021 and$11 million , or 7.8%, in 2021 from 2020. The increase in depreciation and amortization expense in 2022 from 2021 was primarily attributable to higher amortization of software and intangible assets related to recent acquisitions. The increase in depreciation and amortization expense in 2021 from 2020 was primarily attributable to higher amortization of software and other intangible assets related to acquisitions. Insurers generally are not subject to state income or franchise taxes. However, in lieu thereof, a premium tax is imposed on certain operating revenues, as defined by statute. Tax rates and bases vary from state to state; accordingly, the total premium tax burden is dependent upon the geographical mix of operating revenues. The Company's noninsurance subsidiaries are subject to state income tax and do not pay premium tax. Accordingly, the Company's total tax burden at the state level for the title insurance and services segment is composed of a combination of premium taxes and state income taxes. Premium taxes as a percentage of title insurance premiums and escrow fees were 1.4%, 1.4% and 1.3% for 2022, 2021 and 2020, respectively.
Interest expense increased
million
primarily attributable to higher deposit balances at the Company's banking
operations. The increase in 2021 from 2020 was primarily attributable to an
increase in interest paid on secured financings payable due to higher average
balances outstanding.
Pretax 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 in the title
insurance business, pretax margins generally improve as closed order volumes
increase. Pretax margins are also impacted by (1) net investment income and net
investment gains and losses, which may not move in the same direction as closed
order volumes, (2) the composition (residential or commercial) and type (resale,
refinancing or new construction) of real estate activity and (3) the percentage
of title insurance premiums generated by agency operations as 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 title
insurance and services segment recorded pretax margins of 10.0%, 16.3% and 15.7%
for 2022, 2021 and 2020, respectively.
34
--------------------------------------------------------------------------------
Specialty Insurance 2022 2021 2020 2022 vs. 2021 2021 vs. 2020 $ Change % Change $ Change % Change (dollars in millions) Revenues Direct premiums$ 422 $ 498 $ 498 $ (76 ) (15.3 ) $ - - Information and other 22 13 13 9 69.2 - - Net investment income 6 7 9 (1 ) (14.3 ) (2 ) (22.2 ) Net investment (losses) gains (13 ) 23 12 (36 ) (156.5 ) 11 91.7 437 541 532 (104 ) (19.2 ) 9 1.7 Expenses Personnel costs 81 90 86 (9 ) (10.0 ) 4 4.7 Other operating expenses 82 89 83 (7 ) (7.9 ) 6 7.2 Provision for policy losses and other claims 238 314 317 (76 ) (24.2 ) (3 ) (0.9 ) Depreciation and amortization 5 6 8 (1 ) (16.7 ) (2 ) (25.0 ) Impairment losses on exit of business - - 55 - - (55 ) (100.0 ) Premium taxes 4 6 8 (2 ) (33.3 ) (2 ) (25.0 ) 410 505 557 (95 ) (18.8 ) (52 ) (9.3 ) Income (loss) before income taxes$ 27 $ 36 $ (25 ) $ (9 ) (25.0 )$ 61 244.0 Pretax margin 6.2 % 6.7 % (4.7 )% (0.5 )% (7.5 ) 11.4 % 242.6 Direct premiums decreased$76 million , or 15.3% in 2022 compared to 2021 and were flat in 2021 compared to 2020. The decrease in 2022 from 2021 was primarily due to a reduction in direct premiums in the property and casualty insurance business of$89 million , reflecting the Company's wind-down of the business. Direct premiums in the home warranty business increased$13 million in 2022 from 2021 and was primarily driven by an increase in the average price charged per contract, increases in renewals within the direct-to-consumer channel and from a shift in expected claims experience resulting from a return to pre-pandemic levels. Direct premiums in the home warranty business increased by$29 million , or 7.7%, in 2021 from 2020 driven by an increase in the number of home warranty residential service contracts issued and an increase in the average price charged per contract, which was offset by a$29 million decline in direct premiums in the property and casualty insurance business. Net investment losses were$13 million for 2022 primarily due to losses recognized on sales of debt securities and from decreases in the fair values of marketable equity securities. Net investment gains were$23 million for 2021 and were primarily from the sale of the Company's property and casualty insurance agency operations and from sales of debt and equity securities. Net investment gains were$12 million for 2020 and were primarily from increases in the fair values of marketable equity securities of$7 million and also from the sale of real estate. Personnel costs and other operating expenses decreased$16 million , or 8.9%, in 2022 from 2021 and increased$10 million , or 5.9%, in 2021 from 2020. The decrease in 2022 from 2021 was primarily attributable to decreases in deferred policy costs and lower agent commission expense in the property and casualty insurance business, incentive compensation, software expense, lower expense related to the Company's 401(k) savings plan match and salary expense, partially offset by higher advertising expense in the home warranty business. The increase in 2021 from 2020 was primarily attributable to an increase in deferred policy acquisition costs in the property and casualty insurance business, higher offshore vendor expense due to higher volumes in the home warranty business, higher incentive compensation, higher employee benefits expense due to an increase in the Company's 401(k) saving plan match and higher advertising expense, offset by lower agent commissions. The provision for home warranty claims, expressed as a percentage of home warranty premiums, was 51.3% in 2022, 54.5% in 2021 and 53.0% in 2020. The decrease in the claims rate in 2022 from 2021 was primarily attributable to lower claims frequency, partially offset by higher claims severity. The increase in the claims rate in 2021 from 2020 was primarily attributable to higher claims severity driven by increases in the costs of equipment, parts and the use of out of network contractors.
The Company's property and casualty business was in the final stages of its
wind-down in 2022.
The property and casualty insurance business recorded revenues of$18 million ,$119 million and$138 million for 2022, 2021, and 2020, respectively. Losses before income taxes for 2022 and 2020 were$18 million and$86 million , respectively. Loss before income taxes for 2021, which was partially offset by a gain of$12 million from the sale of the agency operations during 2021, was$17 million . 35 --------------------------------------------------------------------------------
Premium taxes, expressed as a percentage of specialty insurance direct premiums,
were 0.9% in 2022, 1.2% in 2021 and 1.6% in 2020.
A large part of the revenues for the specialty insurance segment are generated
by renewals and are not dependent on the level of real estate activity in the
year of renewal. With the exception of policy losses, the majority of the
expenses for this segment are variable in nature and, therefore, generally
fluctuate with revenue. Accordingly, pretax margins (before policy losses) are
relatively constant, although as a result of some fixed expenses, profit margins
(before policy losses) should nominally improve as premium revenues increase.
Pretax margins are also impacted by net investment income and net investment
gains and losses, which may not move in the same direction as premium revenues.
The specialty insurance segment recorded pretax margins for 2022 and 2021 of
6.2% and 6.7%, respectively, and, for 2020, recorded a pretax margin loss of
(4.7)%.
Corporate
2022 2021 2020 2022 vs. 2021 2021 vs. 2020
$ Change % Change $ Change % Change
(dollars in millions)
Revenues
Net investment (losses) income $ (23 ) $ 21 $ 14 $ (44 ) (209.5 ) $ 7 50.0
Net investment (losses) gains (353 ) 341 7 (694 ) (203.5 ) 334 NM1
(376 ) 362 21 (738 ) (203.9 ) 341 NM1
Expenses
Personnel costs (14 ) 25 21 (39 ) (156.0 ) 4 19.0
Other operating expenses 36 37 37 (1 ) (2.7 ) - -
Interest 61 52 41 9 17.3 11 26.8
83 114 99 (31 ) (27.2 ) 15 15.2
(Loss) income before income taxes
(707 ) (285.1 )$ 326 417.9 (1) Not meaningful Net investment losses totaled$23 million in 2022, and net investment income totaled$21 million and$14 million in 2021 and 2020, respectively. The changes in net investment income for all three years were primarily attributable to fluctuations in earnings and losses on investments associated with the Company's deferred compensation plan. Net investment losses of$353 million for 2022 were primarily attributable to impairment charges of$140 million related to venture portfolio investments and$191 million in unrealized losses related to the Company's investment in Offerpad Solutions Inc. ("Offerpad"). Net investment gains of$341 million for 2021 included unrealized gains of$210 million related to venture portfolio investments and unrealized gains of$121 million resulting from an increase in fair value of the company's investment in Offerpad. Net investment gains totaled$7 million for 2020 and were primarily from the sale of real estate. Personnel costs and other operating expenses were$22 million ,$62 million and$58 million in 2022, 2021 and 2020, respectively. The decrease in 2022 when compared to 2021 was primarily attributable to lower expenses, which reflects lower returns on participant investments within the Company's deferred compensation plan. The increase in 2021 when compared to 2020 was primarily attributable to higher expenses reflecting higher returns on participant investments within the Company's deferred compensation plans. Interest expense increased$9 million , or 17.3%, in 2022 from 2021 and$11 million , or 26.8%, in 2021 from 2020. The increases in 2022 and 2021 were due to the additional interest accrued on the$650 million of 2.4% senior unsecured notes issued by the Company inAugust 2021 and the increase in 2021 was also due to the$450 million of 4.00% senior unsecured notes issued by the Company inMay 2020 . Eliminations
The Company's inter-segment eliminations were not material for 2022, 2021 and
2020.
36 --------------------------------------------------------------------------------
Income Taxes
The Company's actual income tax expense differs from the expense computed by
applying the federal income tax rate of 21% for 2022, 2021 and 2020. A
reconciliation of these differences is as follows:
Year ended December 31,
2022 2021 2020
(dollars in millions)
Taxes calculated at federal rate $ 68 21.0 % $ 345 21.0 % $ 194 21.0 %
State taxes, net of federal benefit (5 ) (1.5 ) 48 2.9 22 2.4
Change in liability for tax positions (1 ) (0.3 ) - - - -
Foreign income taxed at different rates 2 0.6 1 0.1 5 0.6
Unremitted foreign earnings - - 1 0.1 (2 ) (0.2 )
Other items, net (3 ) (1.1 ) (2 ) (0.2 ) 4 0.3
$ 61 18.7 % $ 393 23.9 % $ 223 24.1 %
The Company's effective income tax rates (income tax expense as a percentage of
income before income taxes) were 18.7% for 2022, 23.9% for 2021 and 24.1% for
2020. The differences in the effective tax rates year over year are typically
due to changes in state and foreign income taxes resulting from fluctuations in
the Company's noninsurance and foreign subsidiaries' contributions to pretax
income and changes in the ratio of permanent differences to income before income
taxes. The effective tax rate for 2022 also reflects the recognition of losses
and impairments on equity securities and benefits from the resolution of state
tax matters from prior years. The effective tax rates for 2021 and 2020 also
reflect benefits related to foreign tax law changes and, for 2020, also reflects
the impairment of nondeductible goodwill related to the Company's wind-down of
its property and casualty insurance business.
Net Income and Net Income Attributable to the Company
Net income and per share information are summarized as follows:
Year ended December 31,
2022 2021 2020
(in millions, except per share amounts)
Net income attributable to the Company $ 263 $ 1,241 $ 696
Net income per share attributable to the Company's
stockholders (1):
Basic $ 2.46 $ 11.18 $ 6.18
Diluted $ 2.45 $ 11.14 $ 6.16
Weighted-average common shares outstanding:
Basic 107.0 111.0 112.7
Diluted 107.3 111.4 113.0
(1)
Net income per share may not recalculate due to rounding.
See Note 15 Earnings Per Share to the consolidated financial statements for
further discussion of earnings per share.
37 --------------------------------------------------------------------------------
Liquidity and Capital Resources
Cash requirements. The Company generates cash primarily from sales of its products and services and from 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. Cash provided by operating activities totaled$780 million ,$1.2 billion and$1.1 billion for 2022, 2021 and 2020, respectively, after claim payments, net of recoveries, of$434 million ,$482 million and$471 million , respectively. The principal nonoperating uses of cash and cash equivalents for 2022, 2021 and 2020 were advances and repayments under secured financing agreements, purchases of debt and equity securities, repurchases of company shares, acquisitions, capital expenditures and dividends to common stockholders. The most significant nonoperating sources of cash and cash equivalents for 2022, 2021 and 2020 were borrowings and collections under secured financing agreements, proceeds from the sales and maturities of debt and equity securities, and for 2021 and 2020, proceeds from issuance of unsecured senior notes. In addition, the increase in deposits at the Company's banking operations for 2022 and 2021 also reflected a nonoperating source of cash and cash equivalents. The net effect of all activities on total cash and cash equivalents were decreases of$4 million ,$47 million and$211 million for 2022, 2021 and 2020, respectively. The Company continually assesses its capital allocation strategy, including decisions relating to dividends, stock repurchases, capital expenditures, acquisitions and investments. InAugust 2022 , the quarterly cash dividend was increased to52 cents per common share, representing an 2% increase. The dividend increase was effective beginning with theSeptember 2022 dividend. 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. InJune 2022 , the Company's board of directors approved a new share repurchase plan and terminated its prior share repurchase plan. The Company's new share repurchase plan authorizes the repurchase of up to$400 million of the Company's common stock, of which$287 million remained as ofDecember 31, 2022 . 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 year endedDecember 31, 2022 , the Company repurchased and retired, under both the Company's prior authorization and the current authorization, 7.5 million shares of its common stock for a total purchase price of$441 million and, as ofDecember 31, 2022 , had cumulatively repurchased and retired 10.4 million shares of its common stock for a total purchase price of$598 million .
During the year ended
an aggregate purchase price of
38 -------------------------------------------------------------------------------- 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 amounts of dividends, loans and advances available to the holding company are limited, principally for the protection of policyholders. As ofDecember 31, 2022 , under such regulations, the maximum amounts available to the holding company from its insurance subsidiaries in 2023, without prior approval from applicable regulators, were dividends of$689 million and loans and advances of$113 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 ofDecember 31, 2022 , the holding company's sources of liquidity included$597 million of cash and cash equivalents and$700 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.
On
notes, upon maturity, through available cash at the holding company.
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 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 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. AtDecember 31, 2022 , the Company had no outstanding borrowings under the facility. 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) until LIBOR is discontinued, 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 by Moody'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 ofDecember 31, 2022 , 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:
•
FirstFunding, Inc. , a specialized warehouse lender to correspondent mortgage lenders, maintains secured warehouse lending facilities with several banking institutions. AtDecember 31, 2022 , outstanding borrowings under these facilities totaled$366 million .
•
First American Trust , FSB ("FA Trust "), a federal savings bank, maintains a secured line of credit with theFederal Home Loan Bank and federal funds lines of credit with certain correspondent institutions. In addition,FA Trust is a party to master repurchase agreements under which securities may be loaned or sold. AtDecember 31, 2022 , no amounts were outstanding under any of these facilities. 39 --------------------------------------------------------------------------------
•
First Canadian Title Company Limited , a Canadian title insurance and services company, maintains credit facilities with certain Canadian banking institutions. AtDecember 31, 2022 , no amounts were outstanding under these facilities. The Company's debt to capitalization ratios were 30.0% and 27.4% atDecember 31, 2022 and 2021, respectively. The Company's adjusted debt to capitalization ratios, excluding secured financings payable of$366 million and$538 million and accumulated other comprehensive loss of$868 million and$92 million atDecember 31, 2022 and 2021, were 22.9% and 21.9%, respectively. Investment portfolio. The Company maintains a high quality, liquid investment portfolio that is primarily held at its insurance and banking subsidiaries. As ofDecember 31, 2022 , 97% of the Company's investment portfolio consisted of debt securities, of which 67% were eitherUnited States government-backed or ratedAAA and 98% 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 atDecember 31, 2022 , see Note 3Debt Securities to the consolidated financial statements. In addition to its debt and marketable equity securities portfolio, 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 4Equity Securities to the consolidated financial statements. Capital expenditures. Capital expenditures, which are primarily related to software development costs and purchases of property and equipment and software licenses, totaled$275 million ,$172 million and$121 million for 2022, 2021 and 2020, respectively. Off-balance sheet arrangements. The Company administers escrow deposits and trust assets as a service to its direct customers. Escrow deposits totaled$10.0 billion and$10.8 billion atDecember 31, 2022 and 2021, respectively, of which$4.6 billion and$4.8 billion , respectively, were held atFA Trust . The remaining deposits were held at third-party financial institutions. Trust assets held or managed byFA Trust totaled$4.1 billion and$4.6 billion atDecember 31, 2022 and 2021, 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 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 for the disposition of these assets. 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 administered by the Company totaled$2.8 billion and$6.0 billion atDecember 31, 2022 and 2021, 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 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. In conducting its residential mortgage loan subservicing operations, the Company administers cash deposits on behalf of its clients. Cash deposits totaled$1.1 billion atDecember 31, 2022 , of which$0.7 billion were held atFA Trust . The remaining deposits were held at third-party financial institutions. Cash deposits totaled$0.4 billion atDecember 31, 2021 , all of which were held at third-party financial institutions. Cash deposits held at third-party financial institutions are not considered assets of the Company and, therefore, are not included in the accompanying consolidated balance sheets. All such amounts are placed 40 -------------------------------------------------------------------------------- in deposit accounts insured, up to applicable limits, by theFederal Deposit Insurance Corporation . The Company could be held contingently liable for the disposition of these assets. In connection with certain accounts, the Company has ongoing programs for realizing economic benefits with various financial institutions whereby it earns economic benefits either as income or as a reduction in expense.
Deposit balances held at
equivalents and debt securities, with offsetting liabilities included in
deposits in the accompanying consolidated balance sheets.
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