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FIRST AMERICAN FINANCIAL CORP – 10-Q – Management's Discussion and Analysis of Financial Condition and Results of Operations.
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, 2021 .
Results of Operations
Summary of First Quarter
Three Months Ended March 31,
(dollars in millions) 2022 2021 $ Change % Change
Revenues by Segment
Title insurance and services $ 1,998 $ 1,844 $ 154 8.4 %
Specialty insurance 115 136 (21 ) (15.4 )
Corporate and eliminations (79 ) 46 (125 ) (271.7 )
$ 2,034 $ 2,026 $ 8 0.4 %
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.
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The Company's total revenues increased $8 million , or 0.4%, in the first quarter
of 2022 when compared with the first quarter of 2021. This increase was
primarily attributable to increases in agent premiums of $103 million , or 12.2%,
and an increase in information and other revenue of $30 million , or 10.8%,
offset by a decrease in net investment gains/losses of $110 million . Direct
premiums and escrow fees in the title insurance and services segment from
domestic commercial and residential purchase transactions increased $79 million ,
or 48.3%, and $26 million , or 10.1%, respectively, while direct premiums and
escrow fees from domestic residential refinance transactions decreased $110
million , or 58.7%, in the first quarter of 2022 when compared to the first
quarter of 2021.
According to the Mortgage Bankers Association's April 13, 2022 Mortgage Finance
Forecast (the "MBA Forecast"), residential mortgage originations in the United
States (based on the total dollar value of the transactions) decreased 37% in
the first quarter of 2022 when compared with the first quarter of
2021. According to the MBA Forecast, the dollar amount of purchase originations
increased 19.1% and refinance originations decreased 60.2%. This volume of
domestic residential mortgage origination activity contributed an increase in
direct premiums and escrow fees for the Company's direct title operations of
10.1% from domestic residential purchase transactions and a decrease of 58.7%
from domestic refinance transactions in the first quarter of 2022 when compared
with the first quarter of 2021.
During the first quarter of 2022, the level of domestic title orders opened per
day by the Company's direct title operations decreased 24.4% when compared with
the first quarter of 2021. Residential purchase and refinance opened orders per
day decreased 7.7% and 60.0%, respectively, partially offset by an increase of
6.6% in commercial opened orders when compared to the first quarter of 2021.
The Company recorded net investment losses of $43 million in the first quarter
of 2022, which included unrealized losses totaling $71 million related to the
Company's venture investment portfolio, partially offset by a realized gain of
$51 million related to the sale of an investment in a title insurance
business. Included in unrealized losses in the venture investment portfolio were
losses of $44 million related to the Company's investment in Offerpad Solutions
Inc. and losses of $31 million related to the Company's investment in a
tech-enabled real estate company. 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,
subsequent equity sales, or price changes in investments that trade publicly,
which changes can be volatile.
Title Insurance and Services
Three Months Ended March 31,
(dollars in millions) 2022 2021 $ Change % Change
Revenues
Direct premiums and escrow fees $ 666 $ 658 $ 8 1.2 %
Agent premiums 948 845 103 12.2
Information and other 302 276 26 9.4
Net investment income 53 43 10 23.3
Net investment gains 29 22 7 31.8
1,998 1,844 154 8.4
Expenses
Personnel costs 583 504 79 15.7
Premiums retained by agents 758 671 87 13.0
Other operating expenses 305 265 40 15.1
Provision for policy losses and other claims 64 60 4 6.7
Depreciation and amortization 40 36 4 11.1
Premium taxes 23 21 2 9.5
Interest 5 7 (2 ) (28.6 )
1,778 1,564 214 13.7
Income before income taxes $ 220 $ 280 $ (60 ) (21.4 )%
Pretax margins 11.0 % 15.2 % (4.2 )% (27.6 )%
Direct premiums and escrow fees were $666 million for the three months ended
March 31, 2022 , an increase of $8 million , or 1.2%, when compared with the same
period of the prior year. The increase was primarily due to an increase in
premiums in the Canadian operations. The 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, resulted in flat domestic
direct premium and escrow fees when compared to the prior year. The domestic
average revenues per order closed was $2,969 for the three months
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ended March 31, 2022 , an increase of 40.2% when compared with $2,118 for the
three months ended March 31, 2021 due to higher average revenues per order from
commercial transactions, higher average revenues per order from residential
purchase transactions due to higher real estate values, an increase in
residential purchase escrow revenue attributed to recent acquisitions, and, to a
lesser extent, a shift in mix to higher premium commercial and purchase
transactions. The Company's direct title operations closed 205,100 domestic
title orders during the three months ended March 31, 2022 , a decrease of 28.7%
when compared with 287,600 domestic title orders closed during the same period
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. Domestic residential refinance orders closed per day decreased
by 62.6% and domestic residential purchase orders closed per day decreased by
7.0%.
Agent premiums were $948 million for the three months ended March 31, 2022 , an
increase of $103 million , or 12.2%, when compared with the same period 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
March 31, 2022 is generally consistent with the 10.9% increase in the Company's
direct premiums and escrow fees in the fourth quarter of 2021 as compared with
the fourth 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
Information and other revenues were $302 million for the three months ended
March 31, 2022 , an increase of $26 million , or 9.4%, when compared with the same
period of the prior year. The increase was primarily attributable to the impact
of recent acquisitions, which was $25 million in the current quarter.
Net investment income totaled $53 million for the three months ended
March 31, 2022 , an increase of $10 million , or 23.3%, when compared with the
same period of the prior year. The increase was primarily attributable to an
increase in interest income from the Company's investment portfolio due to
higher balances.
Net investment gains of $29 million for the three months ended March 31, 2022
were primarily attributable to a gain realized on the sale of an investment in a
title insurance business, partially offset by changes in the fair values of
marketable equity securities. Net investment gains of $22 million for the three
months ended March 31, 2021 were primarily attributable to changes in the fair
values of marketable equity securities. Net investment gains of $42 million for
the three months ended March 31, 2021 related to certain non-marketable
investments previously reported in the first quarter of 2021 have been
reclassified to the corporate segment.
Personnel costs were $583 million for the three months ended March 31, 2022 , an
increase of $79 million , or 15.7%, when compared with the same period of the
prior year. The increase was primarily attributable to the impact of recent
acquisitions, which was $39 million , and higher salaries and incentive
compensation expense. The increase in salary expense was due to higher headcount
and higher average salaries. The increase in incentive compensation expense was
due to higher revenue and profitability in our commercial business and an
increase in share-based compensation related to restricted stock awards.
Agents retained $758 million of title premiums generated by agency operations
for the three months ended March 31, 2022 , which compares with $671 million for
the same period of the prior year. The percentage of title premiums retained by
agents was 80.0% and 79.4% for the three months ended March 31, 2022 and 2021,
respectively.
Other operating expenses for the title insurance and services segment were
$305 million for the three months ended March 31, 2022 , an increase of
$40 million , or 15.1%, when compared with the same period of the prior year. The
increase was primarily attributable to the impact of recent acquisitions, which
was $17 million , and higher professional services and software expense.
The provision for policy losses and other claims, expressed as a percentage of
title premiums and escrow fees, was 4.0% for the three months ended
March 31, 2022 and 2021. The 4.0% loss rate reflects the ultimate loss rate for
both the 2022 and 2021 policy years and no change in the loss reserve estimates
for prior policy years.
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Depreciation and amortization expense was $40 million for the three months ended
March 31, 2022 , an increase of $4 million , or 11.1%, when compared with the same
period of the prior year. The increase was primarily due to higher amortization
of software and intangible assets related to recent acquisitions.
Premium taxes were
insurance premiums and escrow fees was 1.4% for the three months ended
Interest expense was$5 million for the three months endedMarch 31, 2022 , a decrease of$2 million , or 28.6%, when compared with the same period of the prior year. The decrease was primarily attributable to lower interest paid on secured financings payable due to lower 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 for the segment are also impacted by (1) net investment income and net investment gains or 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) by 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 11.0% and 15.2% for the three months endedMarch 31, 2022 and 2021, respectively.Specialty Insurance Three Months Ended March 31, (dollars in millions) 2022 2021 $ Change % Change Revenues Direct premiums$ 108 $ 128 $ (20 ) (15.6 )% Information and other 7 3 4 133.3 Net investment income 1 2 (1 ) (50.0 ) Net investment (losses) gains (1 ) 3 (4 ) (133.3 ) 115 136 (21 ) (15.4 ) Expenses Personnel costs 22 24 (2 ) (8.3 ) Other operating expenses 21 22 (1 ) (4.5 ) Provision for policy losses and other claims 58 80 (22 ) (27.5 ) Depreciation and amortization 1 2 (1 ) (50.0 ) Premium taxes 1 2 (1 ) (50.0 ) 103 130 (27 ) (20.8 ) Income before income taxes$ 12 $ 6 $ 6 100.0 % Pretax margins 10.4 % 4.4 % 6.0 % 136.4 % Direct premiums were$108 million for the three months endedMarch 31, 2022 , a decrease of$20 million , or 15.6%, when compared with the same period of the prior year. The decrease was primarily attributable to a$24 million decline in in direct premiums in the property and casualty business due to lower policy volumes resulting from the decision in 2020 to exit the business, partially offset by a$4 million increase in premiums in the home warranty business driven by an increase in the average price charged per contract. Net investment (losses) gains for the specialty insurance segment totaled losses of$1 million and gains of$3 million for the three months endedMarch 31, 2022 and 2021, respectively, and were primarily from changes in the fair values of marketable equity securities. Personnel costs and other operating expenses were$43 million and$46 million for the three months endedMarch 31, 2022 and 2021, respectively, a decrease of$3 million , or 6.5%. The decrease was primarily attributable to a decrease in agent commissions, incentive compensation, and salaries expense in the property and casualty business, partially offset by higher professional services expense in the home warranty business. 31 --------------------------------------------------------------------------------
The provision for home warranty claims, expressed as a percentage of home
warranty premiums, was 46.5% and 53.6% for the three months ended
and 2021, respectively. The decrease in the claims rate was primarily
attributable to lower claims frequency.
The Company is continuing its wind-down of the property and casualty insurance business through the transfer and non-renewal of policies. The Company's policies in force have declined by approximately 87% from prior year as ofMarch 31, 2022 and it expects the transfers to be completed by the end of the third quarter of 2022.
The property and casualty insurance business recorded revenues of
and
respectively. Losses before income taxes for the three months ended
Premium taxes were
specialty insurance segment premiums were 0.9% and 1.6% for the three months
ended
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, pretax 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 pretax margins are also impacted by the segment's net investment income and net investment gains or losses, which may not move in the same direction as premium revenues. The specialty insurance segment recorded pretax margins of 10.4% and 4.4% for the three months endedMarch 31, 2022 and 2021, respectively. Corporate Three Months Ended March 31, (dollars in millions) 2022 2021 $ Change % Change Revenues
Net investment (losses) income
Net investment (losses) gains
(71 ) 42 (113 ) (269.0 )
(79 ) 47 (126 ) (268.1 )
Expenses
Personnel costs (3 ) 7 (10 ) (142.9 )
Other operating expenses 11 9 2 22.2
Interest 15 11 4 36.4
23 27 (4 ) (14.8 )
(Loss) income before income taxes $ (102 ) $ 20 $ (122 ) NM 1%
(1) Not meaningful
Net investment (losses) income totaled losses of $8 million and income of
$5 million for the three months ended March 31, 2022 and 2021, respectively. The
decrease in net investment (losses) income for the three months ended
March 31, 2022 was primarily attributable to lower earnings on investments
associated with the Company's deferred compensation plan when compared to the
same period of 2021.
Net investment (losses) gains totaling losses of
were recognized on certain non-marketable equity investments, which were
classified within the title insurance and services segment in the prior year.
Corporate personnel costs and other operating expenses were$8 million and$16 million for the three months endedMarch 31, 2022 and 2021, respectively. The decrease was primarily attributable to lower expense related to the Company's deferred compensation plan, partially offset by higher legal expense. Interest expense was$15 million for the three months endedMarch 31, 2022 , an increase of$4 million , or 36.4%, when compared with the prior year. The increase was due to the additional interest accrued on the$650 million of 2.4% senior unsecured notes issued by the Company inAugust 2021 . 32 --------------------------------------------------------------------------------
Eliminations
The Company's inter-segment eliminations were not material for the three months
ended
INCOME TAXES
The Company's effective income tax rates (income tax expense as a percentage of income before income taxes) were 24.4% and 23.4% for the three months endedMarch 31, 2022 and 2021, respectively. The difference in the effective tax rates is primarily due to additional state income taxes related to non-insurance income in the current year and benefits related to foreign tax law changes in the prior year. 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 in assessing the likelihood of realization include forecasts of future taxable income and available tax planning strategies that could be implemented. 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
Net income for the three months ended
and
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.
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.
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Cash provided by operating activities totaled $40 million and $224 million for
the three months ended March 31, 2022 and 2021, respectively, after claim
payments, net of recoveries, of $101 million and $118 million , respectively. The
principal nonoperating uses of cash and cash equivalents for the three months
ended March 31, 2022 and 2021 were advances and repayments related to secured
financing transactions, purchases of debt and equity securities, repurchases of
Company shares and dividends to common stockholders. The principal nonoperating
sources of cash and cash equivalents for the three months ended March 31, 2022
and 2021 were borrowings and collections related to secured financing
transactions, proceeds from the sales and maturities of debt and equity
securities and increases in the deposit balances at the Company's banking
operations. The net effect of all activities on cash and cash equivalents were
increases of $476 million and $751 million for the three months ended
March 31, 2022 and 2021, respectively.
The Company continually assesses its capital allocation strategy, including
decisions relating to dividends, stock repurchases, capital expenditures,
acquisitions and investments. In March 2022 , the Company paid a first quarter
cash dividend of 51 cents per common share. 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.
The Company maintains a stock repurchase plan with authorization up to
$600 million , of which $335 million remained as of March 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 three months ended
March 31, 2022 , the Company repurchased and retired 1.6 million shares of its
common stock for a total purchase price of $108 million and, as of
March 31, 2022 , had repurchased and retired 4.4 million shares of its common
stock under the current authorization for a total purchase price of
$265 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 March 31, 2022 , under
such regulations, the maximum amount available to the holding company from its
insurance subsidiaries for the remainder of 2022, without prior approval from
applicable regulators, was dividends of $681.7 million and loans and advances of
$125.8 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
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.
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. AtMarch 31, 2022 , the Company had no outstanding borrowings under the facility. 34 -------------------------------------------------------------------------------- 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:
•
mortgage lenders, maintains secured warehouse lending facilities with
several banking institutions. At
under these facilities totaled
•
warehouse lending facilities with several banking institutions. AtMarch 31, 2022 , outstanding borrowings under these facilities totaled$2 million .
•
a secured line of credit with the
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. At
under any of these facilities.
•
services company, maintains credit facilities with certain Canadian
banking institutions. At
these facilities.
The Company's debt to capitalization ratios were 29.1% and 27.4% atMarch 31, 2022 andDecember 31, 2021 , respectively. The Company's adjusted debt to capitalization ratios, excluding secured financings payable of$558 million and$538 million atMarch 31, 2022 andDecember 31, 2021 , were 23.4% and 22.2%, respectively. Investment Portfolio. The Company maintains a high quality, liquid investment portfolio that is primarily held at its insurance and banking subsidiaries. As ofMarch 31, 2022 , 94% of the Company's investment portfolio consisted of debt securities, of which 67% were eitherUnited States government-backed or ratedAAA and 97% 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 atMarch 31, 2022 , see Note 3Debt Securities to the condensed 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 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$15.2 billion and$10.8 billion atMarch 31, 2022 andDecember 31, 2021 , respectively, of which$5.4 billion and$4.9 billion , respectively, were held atFA Trust . The escrow deposits held atFA Trust 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 byFA Trust totaled$4.4 billion and$4.6 billion atMarch 31, 2022 andDecember 31, 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 condensed 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. 35 -------------------------------------------------------------------------------- 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$5.7 billion and$6.0 billion atMarch 31, 2022 andDecember 31, 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 condensed 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 servicing, subservicing, originations and sales operations, the Company administers cash deposits on behalf of investors, mortgagors and subservicing clients. Cash deposits, which are held at third-party financial institutions, totaled$526 million and$433 million atMarch 31, 2022 andDecember 31, 2021 , respectively. These cash deposits 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 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. Item 3. Quantitative and Qualitative Disclosures About Market Risk. The Company's primary exposure to market risk relates to interest rate risk associated with certain financial instruments. Although the Company monitors its risk associated with fluctuations in interest rates, it does not currently use derivative financial instruments on any significant scale to hedge these risks.
There have been no material changes in the Company's market risks since the
filing of its Annual Report on Form 10-K for the year ended
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
The Company's chief executive officer and chief financial officer have concluded that, as ofMarch 31, 2022 , the end of the quarterly period covered by this Quarterly Report on Form 10-Q, the Company's disclosure controls and procedures, as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended, were effective, based on the evaluation of these controls and procedures required by Rule 13a-15(b) thereunder.
Changes in Internal Control Over Financial Reporting
There was no change in the Company's internal control over financial reporting during the quarter endedMarch 31, 2022 , that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. 36 --------------------------------------------------------------------------------
PART II: OTHER INFORMATION
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