Just like other “Big Four” member Old Republic last week, First American Financial announced record-breaking earnings during its fourth quarter earnings call on Thursday.
The company’s total revenue for 2021 was up 30% from 2020 to a record of $9.2 billion, with $2.4 billion earned during the fourth quarter. However, the firm’s net income dropped to $260 million during Q4 compared to $280 million a year ago, which can be attributed to an uptick in operating costs.
During the fourth quarter of 2021, First American saw personnel costs rise 19% year-over-year to $612 million, which the company attributed to higher salary expenses due to an increase in the number of employees, higher incentive compensation driven by growth in revenues and profitability, and higher employee benefit costs. Non-payroll related expenses were also up during the fourth quarter, rising 12% year over year to $337 million, due to increase software expenses, production-related costs, and professional services.
Despite this increase, First American’s newly appointed CEO, Ken DeGiorgio, said on an earnings call with investors that everyone at the company is proud of these achievements.
“Our focus continues to be on the things that will drive future growth,” DeGiorgio said during the call. “At the beginning of 2021, we announced our intention to expand our title plant footprint from 500 counties to 1500 by the end of that year. Leveraging our proprietary data extraction technology, we are currently maintaining more than 1,600 title plants covering nearly 80% of the U.S. population. This data is critical as it fuels our operational efficiency initiatives are title automation efforts and our ongoing efforts to digitize the real estate closing experience. You can’t automate unless you have data and we are the industry undisputed leader in title data.”
During the fourth quarter, First American generated a total of $2.3 billion in revenue from its title insurance and services segments, a 13% year-over-year increase. Most notably, commercial title revenue was up 66% to $377 million, contributing to a record of $1 billion in commercial title revenue for all of 2021.
The average revenue generated per direct title order rose to $3,339, primarily due to an increase in the average deal size in the firm’s commercial business and the impact of strong home price appreciation on residential purchase transactions. The shift in the order type from lower-premium residential refinance transactions to higher-premium commercial and purchase transactions also played a role in the increase in the average revenue per order.
Just as with Stewart’s earnings call earlier in the day, these record breaking numbers were somewhat overshadowed by discussions of the impact rising mortgage rates will have on the volume of title insurance premiums written.
First American reported that its purchase revenue was up 2% during the fourth quarter due to a 7% increase in the average revenue per order partially offset by a 3% decline in the number of orders closed. Meanwhile refinance revenue decline 46% relative to the previous.
“In January 2021, we opened 2,000 purchase orders per day, a 9% increase relative to January of 2020,” DeGiorgio said during the call. “Our refinance orders were 1200 per day steady with what we experienced in December. Mortgage rates are still relatively low and we’ve got some demographic benefits, millennials, for example, coming into the market. But of course, there is low inventory, but I think we remain hopeful and expect to see some inventory coming on to the market which is good for our purchase business. Refinances have a strong correlation with rates. So, we expect it to wane as rates go up, but we are in a great position to offset that with investment income.”
In the third quarter, First American generated headlines for its investments in proptech companies, most notable Offerpad, Orchard and Pacaso. During Q4, First American’s investment in come was $49 million, down 8% from a year prior. The company attributed this decrease to lower interest income from its warehouse lending business and escrow and other cash balances, significantly offset by an increase in interest income from higher balances in the company’s investment portfolio.
According to DeGiorgio, a positive outlook on the commercial market is another source of optimism for the firm as we enter into 2022.
“2022 will be a year of transition we are well positioned for,” DeGiorgio said during the call. “We expect market conditions in our purchase and commercial businesses, which account for approximately 80% of our direct revenue, to remain favorable. Refinance volumes will continue to wane as mortgage rates pick up, but we believe increased investment income due to a rise in short-term rates will help offset the decline.”
In early January, First American announced that it had acquired California-based title insurance, underwriting and escrow services provider Mother Lode Holding Company. During the call, company executives said that the deal was still subject to regulatory approval.
