FIRST AMERICAN FINANCIAL CORP - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations. - Insurance News

CERTAIN STATEMENTS IN THIS QUARTERLY REPORT ON FORM 10-Q 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," "INTEND," "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 3-4 OF THIS QUARTERLY
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 the financial measure
adjusted debt to capitalization ratio that is not presented in accordance with
generally accepted accounting principles ("GAAP"), as it excludes the effect of
secured financings payable. The Company is presenting this non-GAAP financial
measure because it provides the Company's management and readers of this
Quarterly Report on Form 10-Q with additional insight into the financial
leverage of the Company. The Company does not intend for this non-GAAP financial
measure to be a substitute for any GAAP financial information. In this Quarterly
Report on Form 10-Q, this non-GAAP financial measure has been presented with,
and reconciled to, the most directly comparable GAAP financial measure. Readers
of this Quarterly Report on Form 10-Q should use this non-GAAP financial measure
only in conjunction with the comparable GAAP financial measure. 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.

CRITICAL ACCOUNTING ESTIMATES

A summary of the Company's significant accounting policies that it considers to
be the most dependent on the application of estimates and assumptions can be
found in the Management's Discussion and Analysis section of the Company's
Annual Report on Form 10-K for the year ended December 31, 2020.

Recently Adopted Accounting Pronouncements


In December 2019, the FASB issued updated guidance intended to simplify and
improve the accounting for income taxes. The updated guidance eliminates certain
exceptions and clarifies and amends certain areas of the guidance. The updated
guidance is effective for interim and annual reporting periods beginning after
December 15, 2020. The adoption of this guidance on a prospective basis,
effective January 1, 2021, did not have a material impact on its condensed
consolidated financial statements.

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Results of Operations

Summary of Third Quarter

A substantial portion of the revenues for the Company's title insurance and
services segment results from the sale and refinancing of 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 increased $642.2 million, or 33.6%, in the third
quarter of 2021 when compared with the third quarter of 2020. This increase was
primarily attributable to increases in agent premiums of $276.1 million, or
38.2%, and an increase in direct premiums and escrow fees of $113.4 million, or
14.0%. Net realized investment gains also increased $230.3 million from the
prior year. Direct premiums and escrow fees in the title insurance and services
segment from domestic residential purchase and commercial transactions increased
$29.7 million and $119.8 million, or 9.4% and 84.0%, respectively.

According to the Mortgage Bankers Association's October 17, 2021 Mortgage
Finance Forecast (the "MBA Forecast"), residential mortgage originations in the
United States (based on the total dollar value of the transactions) decreased
20.5% in the third quarter of 2021 when compared with the third quarter of
2020. According to the MBA Forecast, the dollar amount of purchase originations
decreased 3.5% and refinance originations decreased 30.7%. This volume of
domestic residential mortgage origination activity coupled with increases in
residential real estate values contributed to increases in direct premiums and
escrow fees for the Company's direct title operations of 9.4% from domestic
residential purchase transactions and a decline of 36.0% from domestic refinance
transactions in the third quarter of 2021 when compared with the third quarter
of 2020.

During the third quarter of 2021, the level of domestic title orders opened per
day by the Company's direct title operations decreased 22.4% when compared with
the third quarter of 2020. Commercial opened orders per day increased 11.1%,
offset by a decline in residential purchase and refinance opened orders of 8.9%
and 43.8%, respectively, when compared to the third quarter of 2020.

The Company recorded net realized investment gains of $275.2 million in the
third quarter of 2021, which included an unrealized gain of $195.3 million
related to the Company's investment in a company that began trading publicly as
discussed in more detail below. A substantial majority of the Company's
investments in non-marketable equity securities are in private venture-stage
companies that operate in the real estate and related industries and many of
which offer technology-enabled products and services. These investments are
expected from time to time to cause material fluctuations in the Company's
quarterly results of operations due to the recognition of gains or losses in
connection with observable price changes, such as from liquidity events,
subsequent equity sales, or price changes in investments that begin trading
publicly, which changes can be volatile.

On September 1, 2021, Offerpad, Inc., a leading tech-enabled real estate
solutions platform in which the Company maintains an ownership interest, and
Supernova Partners Acquisition Company, Inc., a publicly traded special purpose
acquisition company, completed their previously announced merger and combined to
form Offerpad Solutions Inc. ("Offerpad"), a publicly traded company. The fair
value of the Company's investment in Offerpad as of September 30, 2021 was
$280.3 million, which resulted in the Company recognizing an unrealized gain of
$195.3 million during the third quarter of 2021.

In the third quarter of 2020, the Company initiated a plan to exit its property
and casualty insurance business resulting in the remeasurement of the assets and
liabilities of the business at fair value. Upon remeasurement, the Company
recorded impairment losses to certain assets totaling $73.3 million for the
three and nine months ended September 30, 2020. In January 2021, the Company
entered into book transfer agreements with two third-party insurers and will
seek to non-renew policies that are not transferred. The Company expects the
transfers to be completed by the end of the third quarter of 2022.

Effective July 1, 2021, the Company expanded its corporate segment to include
investing in, and management of, its developing portfolio of private
venture-stage companies. The operating results for certain of the Company's
investments in private venture-stage companies were previously reported within
the title insurance and services segment. This change serves to better align the
Company's segment reporting with a comparable change in internal management
reporting during the current quarter. As a result of this change, the Company
reclassified $85.8 million in net realized investment gains previously reported
during the six months ended June 30, 2021 from the title insurance and services
segment to the corporate segment. The Company did not reclassify prior year
segment results as amounts were not material. The Company's corporate segment
also consists of certain financing facilities as well as corporate services that
support the Company's business operations.

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Title Insurance and Services



                                        Three Months Ended September 30,                                   Nine Months Ended September 30,
(in thousands, except
percentages)                  2021            2020           $ Change        % Change          2021            2020            $ Change         % Change
Revenues
Direct premiums and
escrow fees                $   794,215     $   680,910       $ 113,305            16.6 %    $ 2,238,956     $ 1,712,946       $   526,010            30.7 %
Agent premiums                 998,534         722,434         276,100            38.2        2,748,723       1,920,011           828,712

43.2

Information and other 307,616 282,671 24,945

       8.8          881,262         719,196           162,066

22.5

Net investment income           49,827          44,726           5,101            11.4          139,963         147,628            (7,665 )          (5.2 )
Net realized investment
(losses) gains                  (3,413 )        41,252         (44,665 )        (108.3 )         45,405          35,777             9,628            26.9
                             2,146,779       1,771,993         374,786            21.2        6,054,309       4,535,558         1,518,751            33.5
Expenses
Personnel costs                561,461         481,417          80,044            16.6        1,622,432       1,320,097           302,335            22.9
Premiums retained by
agents                         794,165         572,780         221,385            38.7        2,183,890       1,520,559           663,331            43.6
Other operating expenses       298,149         251,304          46,845            18.6          860,223         700,090           160,133            22.9
Provision for policy
losses and other claims         71,710          70,167           1,543             2.2          199,508         181,648            17,860             9.8
Depreciation and
amortization                    37,792          36,194           1,598             4.4          113,976         104,705             9,271             8.9
Premium taxes                   25,679          17,522           8,157            46.6           67,195          47,360            19,835            41.9
Interest                         5,457           5,129             328             6.4           16,500          12,838             3,662            28.5
                             1,794,413       1,434,513         359,900            25.1        5,063,724       3,887,297         1,176,427            30.3
Income before income
taxes                      $   352,366     $   337,480       $  14,886             4.4 %    $   990,585     $   648,261       $   342,324            52.8 %
Pretax margins                    16.4 %          19.0 %          (2.6 )%        (13.7 )%          16.4 %          14.3 %             2.1 %          14.7 %


Direct premiums and escrow fees were $794.2 million and $2.2 billion for the
three and nine months ended September 30, 2021, respectively, increases of
$113.3 million, or 16.6%, and $526.0 million, or 30.7%, when compared with the
respective periods of the prior year. The increase for the three months ended
September 30, 2021 was primarily due to an increase in the average domestic
revenues per order, offset by a reduction in the number of domestic title orders
closed by the Company's direct title operations. The increase for the nine
months ended September 30, 2021 was due to an increase in the average domestic
revenues per order and an increase in the number of domestic title orders closed
by the Company's direct title operations. The domestic average revenues per
order closed were $2,884 and $2,535 for the three and nine months ended
September 30, 2021, respectively, increases of 31.5% and 18.3% when compared
with $2,193 and $2,143 for the respective periods of the prior year due to
higher average revenues per order from residential products due to higher
residential real estate values and higher average revenues per order from
commercial transactions.  The increase in average revenues per order for the
three months ended September 30, 2021 was also due to a shift in mix from the
lower premium residential refinance transactions to higher premium commercial
and residential resale transactions. The Company's direct title operations
closed 252,700 and 811,400 domestic title orders during the three and nine
months ended September 30, 2021, respectively, a decrease of 13.3% and an
increase of 8.4% when compared with 291,500 and 748,700 title orders closed
during the respective periods of the prior year, which was generally consistent
with the changes in residential mortgage origination activity in the United
States as reported in the MBA Forecast. For the three and nine months ended
September 30, 2021, domestic residential refinance orders closed per day
decreased by 38.1% and 7.9%, respectively, and domestic residential purchase
orders closed per day decreased by 2.1% and increased by 16.9%, respectively,
when compared to the respective periods of the prior year.

Agent premiums were $998.5 million and $2.7 billion for the three and nine
months ended September 30, 2021, respectively, increases of $276.1 million, or
38.2%, and $828.7 million, or 43.2%, when compared with the respective periods
of the prior year. 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,
current quarter agent premiums typically reflect prior quarter mortgage
origination activity. The increase in agent premiums for the three months ended
September 30, 2021 is generally consistent with the 48.3% increase in the
Company's direct premiums and escrow fees in the second quarter of 2021 as
compared with the second quarter of 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 were $307.6 million and $881.3 million for the
three and nine months ended September 30, 2021, respectively, increases of
$24.9 million, or 8.8%, and $162.1 million, or 22.5%, when compared with the
respective periods of the prior year. The increases were primarily attributable
to continued strength in the purchase and commercial markets that led to higher
demand for the Company's information products, an increase in demand for the
Company's post-close and document generation services, and an increase in demand
for the Company's default information products as a result of an increase in
loss mitigation activities. The increase for the three months ended September
30, 2021, was partially offset by a decline in the Company's Canadian operations
due to services provided in 2020 in support of a government program related to
the coronavirus pandemic.

Net investment income totaled $49.8 million and $140.0 million for the three and
nine months ended September 30, 2021, respectively, an increase of $5.1 million,
or 11.4%, and a decrease of $7.7 million, or 5.2%, when compared with the
respective periods of the prior year. The increase for the three months ended
September 30, 2021 was primarily due to interest income from the Company's
portfolio, due to higher balances, and its warehouse lending business. The
decrease for the nine months ended September 30, 2021 was primarily attributable
to lower short-term interest rates, partially offset by an increase in interest
income from the Company's warehouse lending business.

Net realized investment losses totaled $3.4 million for the three months ended
September 30, 2021 and were primarily from the decrease in fair value of equity
securities. Net realized investment gains totaled $45.4 million for the nine
months ended September 30, 2021 and were primarily attributable to an increase
in fair value of equity securities and gains on the sale of debt securities. Net
realized investment gains totaled $41.3 million and $35.8 million for the three
and nine months ended September 30, 2020, respectively. The net realized
investment gains for the three and nine months ended September 30, 2020 were
primarily attributable to increases in the fair values of equity securities and
gains from the sales of debt securities. Net realized investment gains for the
nine months ended September 30, 2020 also included a gain recognized upon
purchase of the remaining equity ownership in an investment in an affiliate
during the first quarter of 2020.

The title insurance and services segment (primarily direct operations) is labor
intensive; accordingly, a major expense component is personnel costs. This
expense component is affected by two primary factors: the need to monitor
personnel changes to match the level of corresponding or anticipated new orders
and the need to provide quality service.

Personnel costs were $561.5 million and $1.6 billion for the three and nine
months ended September 30, 2021, respectively, increases of $80.0 million, or
16.6%, and $302.3 million, or 22.9%, when compared with the respective periods
of the prior year. The increases were primarily due to higher salary, incentive
compensation, employee benefit expense, and payroll tax expense. The increase in
personnel costs for the nine months ended September 30, 2021 was also partially
attributable to higher overtime and temporary labor expense. The increases in
salary and payroll tax expense were driven by higher headcount. The increase in
incentive compensation expense was due to higher revenues and profitability. The
increases in employee benefit expense were primarily due to the impact of higher
expense related to the Company's 401(k) saving plan match and higher medical
claims. The increases in overtime and temporary labor expense were due to higher
volumes.

Agents retained $794.2 million and $2.2 billion of title premiums generated by
agency operations for the three and nine months ended September 30, 2021, which
compares with $572.8 million and $1.5 billion for the respective periods of the
prior year. The percentage of title premiums retained by agents was 79.5% for
the three and nine months ended September 30, 2021, compared to 79.3% and 79.2%
for the respective periods of the prior year.

Other operating expenses for the title insurance and services segment were
$298.1 million and $860.2 million for the three and nine months ended
September 30, 2021, respectively, increases of $46.8 million, or 18.6%, and
$160.1 million, or 22.9%, when compared with the respective periods of the prior
year. The increases were primarily attributable to higher production related
costs, higher software expense, and higher professional services.

The provision for policy losses and other claims, expressed as a percentage of
title premiums and escrow fees, was 4.0% for the three and nine months ended
September 30, 2021 compared to 5.0% for the three and nine months ended
September 30, 2020, respectively. The current year 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 5.0% rate for 2020 reflected an ultimate
loss rate of 4.5% for the 2020 policy year and a net increase in the loss
reserve estimates for prior policy years of 0.5%, or $7.0 million and
$18.2 million for the three and nine months ended September 30, 2020,
respectively.

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Title claims generally increase when economic conditions deteriorate and
foreclosure activity increases. The Company increased its calendar year loss
rate from 4.0% in 2019 to 5.0% in 2020 in anticipation of higher claims due to
the economic impact of the coronavirus pandemic. However, the Company has not
experienced an increase in title claims as a result of the pandemic, but rather
claims have been significantly below the Company's actuarial expectation. As a
result, and in anticipation of lower claims due to a generally strengthening
economy, high levels of home equity and foreclosure moratoriums, the Company
lowered the current year loss rate to 4.0%. The Company will continue to monitor
economic conditions and actual claims experience and will consider this
information, among other factors, when determining the appropriate loss rate and
reserve balance for incurred but not reported claims in future periods.

Depreciation and amortization expense was $37.8 million and $114.0 million for
the three and nine months ended September 30, 2021, respectively, increases of
$1.6 million, or 4.4%, and $9.3 million, or 8.9%, when compared with the
respective periods of the prior year. The increase for the nine months ended
September 30, 2021 was primarily attributable to higher amortization of software
and other intangible assets related to recent acquisitions.

Premium taxes were $25.7 million and $67.2 million for the three and nine months
ended September 30, 2021, respectively, increases of $8.2 million, or 46.6%, and
$19.8 million, or 41.9%, respectively, compared to $17.5 million and
$47.4 million for the same periods of the prior year. Premium taxes as a
percentage of title insurance premiums and escrow fees were 1.4% and 1.3% for
the three and nine months ended September 30, 2021, respectively, and were 1.2%
and 1.3% for the three and nine months ended September 30, 2020.

Interest expense was $5.5 million and $16.5 million for the three and nine
months ended September 30, 2021, respectively, increases of $0.3 million, or
6.4%, and $3.7 million, or 28.5%, when compared with the respective periods of
the prior year.

The profit 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, title
insurance profit margins generally improve as closed order volumes
increase. Title insurance profit margins are also impacted by the segment's net
investment income and net realized investment gains or losses, which may not
move in the same direction as closed order volumes. Title insurance profit
margins are affected by the composition (residential or commercial) and type
(resale, refinancing or new construction) of real estate activity. Title
insurance profit margins are also affected by the percentage of title insurance
premiums generated by agency operations. Profit 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 pretax margins for the
three and nine months ended September 30, 2021 were 16.4% compared with 19.0%
and 14.3% in the respective periods of the prior year.

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Specialty Insurance


                                  Three Months Ended September 30,                            Nine Months Ended September 30,
(in thousands, except
percentages)              2021           2020         $ Change      % Change         2021          2020         $ Change        % Change
Revenues
Direct premiums         $ 127,121      $ 127,037      $      84           0.1 %    $ 385,506     $ 367,622      $  17,884             4.9 %

Information and other       2,789          3,450           (661 )       (19.2 )        9,994         9,992              2               -
Net investment income       1,682          2,105           (423 )       (20.1 )        5,432         7,005         (1,573 )         (22.5 )
Net realized
investment gains              634          3,740         (3,106 )       (83.0 )       19,403         7,199         12,204           169.5
                          132,226        136,332         (4,106 )        (3.0 )      420,335       391,818         28,517             7.3

Expenses

Personnel costs            22,708         22,271            437           2.0         69,361        64,398          4,963             7.7
Other operating
expenses                   25,103         20,899          4,204          20.1         71,468        61,731          9,737            15.8
Provision for policy
losses and other
claims                     83,590         87,669         (4,079 )        (4.7 )      246,169       232,353         13,816             5.9
Depreciation and
amortization                1,410          1,995           (585 )       (29.3 )        4,392         5,832         (1,440 )         (24.7 )
Impairment losses on
exit of business                -         73,264        (73,264 )      (100.0 )            -        73,264        (73,264 )        (100.0 )
Premium taxes               1,302          2,363         (1,061 )       (44.9 )        4,839         6,194         (1,355 )         (21.9 )
                          134,113        208,461        (74,348 )

(35.7 ) 396,229 443,772 (47,543 ) (10.7 )
(Loss) income before
income taxes

            $  (1,887 )    $ (72,129 )    $  70,242          97.4 %    $  24,106     $ (51,954 )    $  76,060           146.4 %
Margins                      (1.4 )%       (52.9 )%        51.5 %        97.4 %          5.7 %       (13.3 )%        19.0 %         142.9 %


Direct premiums were $127.1 million and $385.5 million for the three and nine
months ended September 30, 2021, respectively, increases of $0.1 million, or
0.1%, and $17.9 million, or 4.9%, when compared with the respective periods of
the prior year. The increases were attributable to higher premiums earned in the
home warranty business, partially offset by lower premiums in the property and
casualty business.

Net realized investment gains for the specialty insurance segment totaled
$0.6 million and $19.4 million for the three and nine months ended
September 30, 2021, respectively. Net realized investment gains for the three
months ended September 30, 2021 were primarily from the sale of debt
securities. Net realized investment gains for the nine months ended September
30, 2021 were primarily from the sale of our Property and Casualty agency
operations and to a lesser extent, the sale of debt securities. Net realized
investment gains for the specialty insurance segment totaled $3.7 million and
$7.2 million for the three and nine months ended September 30, 2020. The net
realized investment gains for the three months ended September 30, 2020 were
primarily from the increase in the fair values of equity securities. The net
realized investment gains for the nine months ended September 30, 2020 were
primarily from a gain from the sale of real estate.

Personnel costs and other operating expenses were $47.8 million and
$140.8 million for the three and nine months ended September 30, 2021,
respectively, increases of $4.6 million, or 10.8%, and $14.7 million, or 11.7%,
when compared with the respective periods of the prior year. The increases were
primarily attributable to an increase in deferred policy acquisition expense in
the property and casualty business, higher incentive compensation, higher
offshore vendor expense due to higher volumes in the home warranty business, and
higher employee benefit expense due to the impact of higher expense related to
the Company's 401(k) saving plan match, offset by lower agent commissions.

The provision for home warranty claims, expressed as a percentage of home
warranty premiums, was 56.8% and 55.4% for the three and nine months ended
September 30, 2021, respectively, compared with 64.5% and 54.1% for the
respective periods of the prior year. The decrease in the claims rate for the
three months ended September 30, 2021, was primarily attributable to lower
claims frequency, slightly offset by higher claims severity. The increase for
the nine months ended September 30, 2021, was attributable to higher severity
and frequency partially due to higher appliance, plumbing, and electrical claims
likely due to people spending more time at home. The provision for property and
casualty claims, expressed as a percentage of property and casualty insurance
premiums, was 106.5% and 94.1% for the three and nine months ended
September 30, 2021, respectively, compared with 82.7% and 89.9% for the
respective periods of the prior year. The increases in the claims rate were
primarily attributable to higher claims frequency and, to a lesser extent,
higher claims severity.

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Premium taxes were $1.3 million and $4.8 million for the three and nine months
ended September 30, 2021, respectively, compared with $2.4 million and
$6.2 million for the respective periods of the prior year. Premium taxes as a
percentage of specialty insurance segment premiums were 1.0% and 1.3% for the
three and nine months ended September 30, 2021, and 1.9% and 1.7% for the three
and nine months ended September 30, 2020, respectively. The decline is due to a
shift in the mix of premiums to home warranty.

In the third quarter of 2020, the Company initiated a plan to exit its property
and casualty insurance business resulting in impairment losses to certain assets
totaling $73.3 million for the three and nine months ended September 30, 2020.
In January 2021, the Company entered into book transfer agreements with two
third-party insurers related to its property and casualty insurance business and
will seek to non-renew policies that are not transferred. The Company's policies
in force had declined by approximately 49% as of September 30, 2021 and the
Company expects an approximate 70% reduction to policies in force by the end of
2021 and decreasing revenues over time. The Company expects the transfers to be
completed by the end of the third quarter of 2022.

The property and casualty insurance business recorded revenues of $24.3 million
and $103.0 million for the three and nine months ended September 30, 2021,
respectively, and $35.3 million and $101.3 million for the three and nine months
ended September 30, 2020, respectively. Losses before income taxes, which were
partially offset by a gain of $12.2 million from the sale of the agency
operations in the second quarter of 2021, were $10.5 million and $11.1 million
for the three and nine months ended September 30, 2021, respectively. Losses
before income taxes for the three and nine months ended September 30, 2020 were
$75.7 million and $91.5 million, respectively.

A large part of the revenues for the specialty insurance businesses are
generated by renewals and are not dependent on the level of real estate activity
in the year of renewal. With the exception of loss expense, the majority of the
expenses for this segment are variable in nature and therefore generally
fluctuate consistent with revenue fluctuations. Accordingly, profit margins for
this segment (before loss expense) are relatively constant, although as a result
of some fixed expenses, profit margins (before loss expense) should nominally
improve as premium revenues increase. Specialty insurance profit margins are
also impacted by the segment's net investment income and net realized investment
gains or losses, which may not move in the same direction as premium
revenues. The pretax margin loss for the three months ended September 30, 2021
was (1.4%) and the pretax margin for the nine months ended September 30, 2021
was 5.7%, compared with pretax margin losses of (52.9%) and (13.3%) in the
respective periods of the prior year.

Corporate


                                    Three Months Ended September 30,                          Nine Months Ended September 30,
(in thousands, except
percentages)                 2021          2020        $ Change      % Change         2021          2020        $ Change       % Change
Revenues
Net investment (losses)
income                     $    (648 )   $   6,055     $  (6,703 )      (110.7 )%   $  11,403     $   2,745     $   8,658          315.4 %
Net realized investment
gains                        278,022             -       278,022             -        363,782         6,515       357,267             NM 1
                             277,374         6,055       271,319            NM 1      375,185         9,260       365,925             NM 1
Expenses
Personnel costs                  480         7,610        (7,130 )       (93.7 )       16,304         7,950         8,354          105.1
Other operating expenses      10,203         9,115         1,088          11.9         28,406        27,211         1,195            4.4
Depreciation and
amortization                      36            38            (2 )        (5.3 )          107           115            (8 )         (7.0 )
Interest                      13,960        11,272         2,688          23.8         36,447        29,301         7,146           24.4
                              24,679        28,035        (3,356 )       (12.0 )       81,264        64,577        16,687           25.8
Income (loss) before                       (21,980

                        (55,317
income taxes               $ 252,695     $         )   $ 274,675            NM 1%   $ 293,921     $         )   $ 349,238             NM 1%




(1) Not meaningful


Net investment losses totaled $0.6 million and net investment income totaled
$11.4 million for the three and nine months ended September 30, 2021,
respectively, compared with net investment income of $6.1 million and
$2.7 million for the respective periods of the prior year. The decrease in net
investment income for the three months ended September 30, 2021 was primarily
attributable to lower earnings on investments associated with the Company's
deferred compensation plan when compared to the same period of 2020. The
increase in net investment income for the nine months ended September 30, 2021
was primarily attributable to higher earnings on investments associated with the
Company's deferred compensation plan when compared to the same period of 2020.

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Net realized investment gains for the corporate segment totaled $278.0 million
and $363.8 million, respectively, for the three and nine months ended
September 30, 2021 and were primarily from the increase in fair value of the
company's investment in Offerpad and gains recognized on certain non-marketable
equity investments. Net realized investment gains for the corporate segment
totaled $6.5 million for the nine months ended September 30, 2020 and were
primarily from the sale of real estate.

Corporate personnel costs and other operating expenses were $10.7 million and
$44.7 million for the three and nine months ended September 30, 2021,
respectively, compared with $16.7 million and $35.2 million for the respective
periods of the prior year. The decrease for the three months ended
September 30, 2021, was primarily attributable to lower expense related to the
Company's deferred compensation plan. The increase for the nine months ended
September 30, 2021, was primarily attributable to higher expense related to the
Company's deferred compensation plan.

Interest expense was $14.0 million and $36.4 million for the three and nine
months ended September 30, 2021, respectively, increases of $2.7 million, or
23.8%, and $7.1 million, or 24.4%, when compared with the respective periods of
the prior year. The increase is attributable to the interest accrued on the
$450.0 million of 4.00% senior unsecured notes that the Company issued in May
2020 and on the $650.0 million of 2.4% senior unsecured notes that the Company
issued in August 2021.

Eliminations

The Company's inter-segment eliminations were not material for the three and
nine months ended September 30, 2021 and 2020.

INCOME TAXES


The Company's effective income tax rates (income tax expense as a percentage of
income before income taxes) were 25.3% and 24.5% for the three and nine months
ended September 30, 2021, respectively, compared with 24.6% and 22.5% for the
respective periods of the prior year. The differences in the effective tax rates
are primarily due to state income taxes related to the Company's noninsurance
businesses in 2021, foreign tax law changes in 2021 and 2020, and the
recognition of additional excess tax benefits associated with share-based
payment transactions in 2020.

The Company evaluates the realizability of its deferred tax assets by assessing
the valuation allowance and makes adjustments to the allowance as necessary. The
factors used by the Company to assess the likelihood of realization include its
forecast of future taxable income and available tax planning strategies that
could be implemented to realize its deferred tax assets. The Company's ability
or inability to achieve forecasted taxable income in the applicable taxing
jurisdictions could affect the ultimate realization of its deferred tax
assets. Based on future operating results in certain jurisdictions, it is
possible that the current valuation allowance positions of those jurisdictions
could be adjusted during the next 12 months.

NET INCOME AND NET INCOME ATTRIBUTABLE TO THE COMPANY


Net income for the three and nine months ended September 30, 2021 was
$450.5 million and $988.3 million, respectively, compared with $183.6 million
and $419.1 million for the respective periods of the prior year. Net income
attributable to the Company for the three and nine months ended
September 30, 2021 was $445.3 million, or $4.00 per diluted share, and
$981.2 million, or $8.81 per diluted share, respectively, compared with
$182.3 million, or $1.62 per diluted share, and $416.1 million, or $3.68 per
diluted share, for the respective periods of the prior year.

LIQUIDITY AND CAPITAL RESOURCES


Cash requirements.  The Company generates cash primarily from the sale of its
products and services and 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.

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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 $876.0 million and $681.0 million
for the nine months ended September 30, 2021 and 2020, respectively, after claim
payments, net of recoveries, of $356.4 million and $342.7 million,
respectively. The principal nonoperating uses of cash and cash equivalents for
the nine months ended September 30, 2021 and 2020 were advances and repayments
related to secured financing transactions, purchases of debt and equity
securities, dividends to common stockholders, capital expenditures, repurchases
of Company shares, business acquisitions, and for the nine months ended
September 30, 2020, repayment of borrowings under the unsecured credit
facility. The principal nonoperating sources of cash and cash equivalents for
the nine months ended September 30, 2021 and 2020 were borrowings and
collections related to secured financing transactions, increases in the deposit
balances at the Company's banking operations, proceeds from the sales and
maturities of debt and equity securities, proceeds from the issuance of
unsecured senior notes and for the nine months ended September 30, 2020,
borrowings under the unsecured credit agreement. The net effect of all
activities on cash and cash equivalents were increases of $678.5 million and
$48.0 million for the nine months ended September 30, 2021 and 2020,
respectively.

The Company continually assesses its capital allocation strategy, including
decisions relating to dividends, stock repurchases, capital expenditures,
acquisitions and investments. In August 2021, the quarterly cash dividend was
increased to 51 cents per common share, representing an 11% increase. The
dividend increase was effective beginning with the September 2021
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.

In August 2021, the Company's board of directors approved an increase in size of
the Company's stock repurchase plan from $300.0 million to $600.0 million, of
which $463.1 million remained as of September 30, 2021. 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 nine months ended
September 30, 2021, the Company repurchased and retired 1.4 million shares of
its common stock for a total purchase price of $78.8 million and, as of
September 30, 2021, had repurchased and retired 2.6 million shares of its common
stock under the current authorization for a total purchase price of
$136.9 million.

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 amount
of dividends, loans and advances available to the holding company is limited,
principally for the protection of policyholders. As of September 30, 2021, under
such regulations, the maximum amount available to the holding company from its
insurance subsidiaries for the remainder of 2021, without prior approval from
applicable regulators, was dividends of $438.7 million and loans and advances of
$116.3 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 of September 30, 2021, the holding company's sources of liquidity included
$713.6 million of cash and cash equivalents and $700.0 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.

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Financing.  In August 2021, the Company issued $650.0 million of 2.40% senior
unsecured notes due in 2031. Interest is due semi-annually on February 15 and
August 15, beginning February 15, 2022.

The Company maintains a credit agreement with JPMorgan Chase Bank, N.A. in its
capacity as administrative agent and the lenders party thereto. The credit
agreement, which is comprised of a $700.0 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 $350.0 million. Unless
terminated earlier, the credit agreement will terminate on April 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. At September 30, 2021, 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) 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/or Fitch 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 of September 30, 2021, 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:

• SUSA Financial, Inc. (dba FirstFunding, Inc.), a specialized warehouse

           lender to correspondent mortgage lenders, maintains secured

warehouse

           lending facilities with several banking institutions. At
           September 30, 2021, outstanding borrowings under these

facilities

           totaled $593.6 million.


       •   First American Trust, FSB, a federal savings bank, maintains a secured
           line of credit with the Federal Home Loan Bank and federal funds lines
           of credit with certain correspondent institutions. In addition, First
           American Trust, FSB is a party to master repurchase agreements under
           which securities may be loaned or sold. At September 30, 2021, no
           amounts were outstanding under any of these facilities.

• First Canadian Title Company Limited, a Canadian title insurance and

           services company, maintains credit facilities with certain

Canadian

           banking institutions. At September 30, 2021, no amounts were
           outstanding under these facilities.


The Company's debt to capitalization ratios were 28.5% and 23.7% at
September 30, 2021 and December 31, 2020, respectively. The Company's adjusted
debt to capitalization ratios, excluding secured financings payable of
$593.6 million and $516.2 million at September 30, 2021 and December 31, 2020,
were 22.7% and 17.0%, respectively.

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Investment Portfolio.  The Company maintains a high quality, liquid portfolio of
debt and marketable equity securities that is primarily held at its insurance
and banking subsidiaries. As of September 30, 2021, 95% of the Company's
investment portfolio consisted of debt securities, of which 67% were either
United States government-backed or rated AAA 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 at September 30, 2021, see Note 4 Debt Securities to the condensed
consolidated financial statements.

In addition to its portfolio of debt and marketable equity securities, 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 5 Equity Securities to the condensed consolidated
financial statements.

Off-balance sheet arrangements.  The Company administers escrow deposits and
trust assets as a service to its customers. Escrow deposits totaled
$11.7 billion and $7.1 billion at September 30, 2021 and December 31, 2020,
respectively, of which $5.2 billion and $3.1 billion, respectively, were held at
First American Trust, FSB. The escrow deposits held at First American Trust, FSB
are temporarily invested in cash and cash equivalents and debt securities, with
offsetting liabilities included in deposits in the accompanying condensed
consolidated balance sheets. The remaining escrow deposits were held at
third-party financial institutions.

Trust assets held or managed by First American Trust, FSB totaled $4.6 billion
and $4.4 billion at September 30, 2021 and December 31, 2020,
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 condensed consolidated balance sheets. All such
amounts are placed in deposit accounts insured, up to applicable limits, by the
Federal 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 held by the
Company totaled $5.1 billion and $2.9 billion at September 30, 2021 and
December 31, 2020, 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
condensed consolidated balance sheets. All such amounts are placed in deposit
accounts insured, up to applicable limits, by the Federal 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.

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