First American Financial Corporation Third Quarter 2026 Earnings Conference Call - FIRST AMERICAN FINANCIAL CORP

Greetings and welcome to the First American Financial Corporation Third Quarter Earnings Conference call. At this time all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference please press star zero on your telephone keypad. A copy of today's press release is available on First American's website at www.firstam.com forward slash investor. Please note that the call is being recorded and will be available for replay from the company's investor website. And for a short time, by dialing 877-660-6853 or 201-612-7415 and enter the conference ID 13763251. We will now turn the call over to Craig Barbario, Vice President, Investor Relations to make an introductory statement. Good morning, everyone, and welcome to First American's Earnings Conference Call for the third quarter of 2026. Joining us today on the call will be our Chief Executive Officer, Mark Seaton, and Matt Wagner, Chief Financial Officer. Some of the statements made today may contain forward-looking statements that do not relate strictly to historical or current fact. These forward- looking statements speak only as of the date they are made, and 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. Risks and uncertainties exist that may cause results to differ materially from those set forth in these forward- looking statements. For more information on these risks and uncertainities, please refer to yesterday's earnings release and the risk factors discussed in our Form 10-K and subsequent SEC filings. Our presentation today contains certain non-GAAP financial measures that we believe provide additional insight into the operational efficiency and performance of the company relative to earlier periods and relative to the company's competitors. For more details on these non-GAP financials measures, including presentation width and reconciliation too, the most directly comparable GAAP financial please refer to yesterday's earnings release, which is available on our website at www.firstam.com. I will now turn the call over to Mark Seaton. Thank you, Craig. Our adjusted earnings per share this quarter was $1.78, an increase of 5% from the prior year. Our commercial business had another outstanding quarter, with National Commercial Services generating its highest third quarter revenue on record. The strength was broad-based, with eight of our 11 asset classes growing year-over-year and our average revenue per order reaching a record for the fifth consecutive quarter. We closed 22 transactions, generating more than $1 million of premium during the quarter, up from 12 last year. Only six of these transactions were data centers, indicating a broader strength to the market that includes energy, industrial, and multifamily. Commercial refinance was another significant contributor, with premium revenue increasing 49% from the prior year. The residential side of the business remains more challenged. Purchase revenue decreased 3% as affordability constraints continued to weigh on existing home sales. Refinance revenue decreased 1%. Over the last six months, the 30-year fixed mortgage rate has increased approximately 100 basis points to 7.5%, the highest since the second quarter of 2024. Higher mortgage rates reinforce our expectation for a lower-for-longer residential origination environment. Our business is cyclical, and while higher rates extend the challenging environment we are operating in, they also provide us an opportunity to make transformational changes to our business. We are using this period to deepen our customer relationships and accelerate the rollout of our new AI-native title and settlement platforms. I'll start with Endpoint. During the third quarter, we launched wave two of our Washington pilot, expanding the platform to additional users in the Seattle metro area. Every day provides valuable learnings about both the product and how we train our team to work effectively on the new platform. We continue to make meaningful progress on automating the tasks required to close a transaction. Our automation rate increased from 30 percent in the first quarter to 34% in the second quarter and reach 42% in the third quarter. This represents a fundamental shift in how title and settlement work gets done. As workflows become more standardized and automated, the role of our people increasingly shifts from executing routine tasks to managing exceptions and focusing on higher value customer interactions. The result should be less time processing a file and more time spent with customers while also creating a more consistent and efficient experience. We are applying the lessons learned from our Washington pilot to prepare for an accelerated national rollout next year, where we intend to have the majority of our direct division revenue running through Endpoint by the end of 2027. We are also making significant progress with Sequoia, our instant title decisioning platform. During the third quarter, we launched Sequoias for purchase transactions in three additional counties in Southern California. We are now successfully completing 17% of California purchase transactions processed through Endpoint, up from 11% last quarter. We also expanded Sequoia for refinance transactions into 33 additional counties across Northern California and are now completing 34% of Carolina refinance transitions processed through the platform. Another important metric we tracked is human review time. As we scale Sequoia, we continue to review every order it generates, while the time required for each review continues to decline. The average review time for a purchase transaction fell from 83 minutes in the first quarter to 74 minutes in the second quarter and 56 minutes inthe third quarter. We expect further improvement, particularly as we introduce new tools in the fourth quarter to streamline the review process. Sequoia already reduces processing time by two-thirds compared with our traditional process, and we expect it to become even more efficient over time. One of First America's most important competitive advantages is our title plant data. We acquire source documents directly from counties, extract and structure the relevant data, and apply our underwriting expertise and advanced technology to produce fully insurable title commitments. As Sequoia matures, we believe we can produce these commitments faster and at a lower cost than anyone else in the industry by leveraging this unique end-to-end capability. Importantly, these commitments are backed by First America's balance sheet, combining speed and efficiency with the financial strength and underwriting certainty our customers expect. Looking ahead in the fourth quarter, we plan to launch Sequoias for purchase transactions throughout Northern California and expand into Florida across both our direct and agency operations. Similar to Endpoint, we expect to be processing a majority of our orders on the Sequoia platform by the end of 2027. Once fully mature, we believe Sequoias will give us the most modern title production platform in the industry, with a goal of automating approximately 80% of refinance transactions and 70% of purchase transactions in markets where we maintain title plants. Another important driver of our earnings is our bank, First American Trust, which provides a growing and increasingly diversified source of investment income. In Q3, title segment investment income grew 11%, driven by a 39% increase at First American Trust. Which is benefiting from growth outside our captive title business, including Service Mac and our 1031 exchange business. Turning to our outlook, we expect the recent trend of a strong commercial market and a sluggish residential market to continue. For the first three weeks of October, our open purchase orders are down 8%, refinance is down 35%, and commercial is down 7%. Based on our order pipeline, we still believe commercial will have a strong finish to the year. However, given the elevated mortgage rates, we'll be in a lower for longer residential origination environment. We expect these trends to continue into 2027, and in that backdrop, we will keep a laser focus on modernizing our capabilities in our core title business, and growing our adjacent businesses that are more cyclically resistant, including First American Trust, ServiceMac, Home Warranty, and our data business. Now, I'll turn the call over to Matt, who will discuss our financial results in greater detail. Thank you, Mark. This quarter, we generated gap earnings of $1.72 per diluted share. Our adjusted earnings, which exclude the impact of net investment losses and purchase-related intangible amortization were $1.78 per diluted share. In the title segment, total revenue was $2 billion, up 7% compared with the same quarter of 2025. Commercial revenue was $297 million, a 21% increase over last year driven by a 13% increase in average revenue per order and a 7% increase in closed orders. Purchase revenue was down 3% during the quarter due to a 5% decline in closed orders, partially offset by a 2% increase in average revenue per order. Refinance revenue was down 1% compared with last year due to a 4% decline in average revenue per border, partially upset by a 3% increase in closed borders. Refinace accounted for just 5% of our direct revenue this quarter, illustrating how depressed refinance activity remains relative to historical levels. In the agency business, revenue was $868 million, up 9% from last year. given the reporting lag in agent revenues of approximately one quarter these results primarily reflect remittances related to second quarter economic activity information and other revenues were 292 million dollars during the quarter up six percent compared with last year primarily driven by a 31 increase in fee revenue at service mac related to growth in its loan portfolio Investment income was $169 million in the third quarter, up 11% from last year, primarily driven by growth in our investment portfolio associated with higher deposit balances at First American Trust. Personnel costs were $574 million inthe third quarter of 6% compared with the same quarter of 2025. The increase was mainly due to higher salary and incentive compensation expense. Other operating expenses were $306 million in the quarter, up 11% compared with last year, primarily attributable to increased software expense and higher production expense. Our success ratio for the quarter was 87%, above our 60% target. We recorded $8 million of one-time expenses during the quarter related to an operational restructuring and an indirect tax matter. We also continue to invest in certain businesses outside of our domestic title operations, such as ServiceMac. The investments at ServiceMac are supporting the meaningful growth in its loan portfolio. The provision for policy losses and other claims was $45 million in the third quarter, or 3.0% of title premiums and escrow fees, unchanged from the prior year. The third quarter rate reflects an ultimate loss ratio of 3.75% for the current policy year and a net decrease of $11 million in the loss reserve estimate for prior policy years. Interest expense was $31 million inthe current quarter, up 27% compared with last year due to higher interest expense related to the growth in deposit balances at First American Trust. Pre-tax margin in the title segment was 12.4% or 12.7% on an adjusted basis. Moving to the home warranty segment, total revenue was $115 million this quarter, flat compared with last year. Pre-tax income was $11 million for the quarter, down 30% compared with this last year, primarily attributable to higher marketing expense to drive continued growth in our direct-to-consumer sales channel. The loss provision was 47%, essentially unchanged compared with the third quarter of 2025. margin in the home warranty segment was 9.9% or 9.7% on an adjusted basis. The effective tax rate in the quarter was 22.4%, which is slightly below the company's normalized tax rate of 24%. Our debt-to-capital ratio was 30.3%. Excluding secured financings payable, our debt-To-Capital ratio was 22%. Regarding dividends, we target a payout ratio of 40% over the cycle. Given our current year results and our future outlook, we raised our common stock dividend during the quarter by 11% to an annual rate of $2.44 per share to bring the dividend payout ratio more in line with our target. During the quarter, we repurchased 23,000 shares for a total of $1 million at an average price of $64.24. So far, in October, we repurchased 143,000 shares for a total of $9 million at an average price of $62.40. Now, I would like to turn the call over to the operator to take your questions. Thank you. We will now be conducting a question and answer session. If you would like a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please while we poll for questions. Thank you. Our first question is from Bose George with KBW. Please proceed with your question. Hey, guys. Good morning. Actually, just first on expenses, so you guys noted that, I guess, it was the one time of $8 million, but can you just talk a little more broadly about, you know, margin expectations in 2027 if volumes – if resi volumes remain around this $2 trillion, or even, I guess, MBA is looking for even less than that, and then commercial, potentially flat, just and the comps are going to get pretty challenging. Hi, Bose. Thanks for the question. Yeah, so, you know, I'll kind of take it by each of the major markets that we have. So where we sit today, based on the factors that, you just said there and what Mark talked about in his script, our outlook today is essentially flat for revenue year over year when we look at 27 compared to full year 26. We expect commercial, like you noted, to be strong next year. We, you know, as we said, we expect to have a record year this year. We do think we can have modest growth next year because we do think it's going to continue to be strong and could strengthen. So we expect Toxel to have some modest growth in commercial next year, which would make 27 a record year for us. Obviously, the residential market, we're more pessimistic about both for purchase and refi. So we would expect revenue to be down next year compared to this year. You know, one tailwind that we expect to see next year is investment income. You Know, it's been growing, especially investment income net of interest expense year to date has grown about 8% when compared to last year. We expect that to continue to be strong next year, given the expectation that rates will be higher, both short-term rates and U.S. Treasury rates think should benefit our investment portfolio, both the investment portfolio and the returns we get on our deposits. So we think we'll see some growth in investment income. And then when we turn to expenses, you know, we'll have, we expect to have the normal inflationary pressures around personnel and other operating expenses, primarily in salaries and technology costs. And the other thing that it's too early to say, but when we think about the loss ratio, right, we've been at 3% for this year, and we were at 3%, last year. And that's comprised of 3.75% for the current policy year with a release of prior years of 75 basis points. And, you know, when we Think about our business, it's typically a four to 5% loss rate over the cycle. And we've Been below that for several years now. And that's largely due to the fact that during the pandemic, when things were uncertain, we had a little bit of a higher loss rate, and it turned out that those claims didn't manifest, so we've been releasing some of that excess. I think it's likely that at some point here in the near future, we'll either slow the release or cease the release, but any changes will obviously be related to how claims come in. Okay, great. That's very helpful. And just sort of to sum that all up, Do you feel like the margin ends up being kind of, you know, flattish, or could there be room for upside? I mean, I would say the margin right now, I don't see a lot of room for expansion. I think it's all going to depend on how the commercial market does next year. You know, if commercial exceeds our expectations, we may be able to expand, but right now I don't See margin expansion next year, so okay, great. Thanks for that color. Then just actually one on Sequoia and Endpoint from the expense side, you know, as that rollout, you know, continues, does the benefit in terms of the initial benefits on expenses really happen when you shut down fully the other platforms? And, you know, is that something that happens potentially in 2028? Or is that a little while just as, you know,, as kind of some stuff remains on the older platforms? it it really depends on the platform we're talking about whether it's endpoint or sequoia i mean in the case of sequoias um we'll get benefit as we as we roll out sequoian i mean next year is going to be a big year for us strategically as we run these these both both these platforms and we'll start to get incremental benefit you know for example sequoial as we role out as we as our as our fulfillment rates improved as we ran more orders through sequoIA we save on every or that goes through Sequoia, and so we don't necessarily need to wait for the old platform to be decommissioned before we start saving. And I would say it's, you know, kind of a similar, different but similar with Endpoint. So next year is a big year strategically, and we'll start to really kind of start to see the benefits, you now, in 2028, if we can successfully execute next year. Okay, great, thanks. Thanks, Bose. Our next question is from Mark Hughes with Truvista Securities. Please proceed with your question. Mark Hughes, Truvistas Securities, Yeah. Thank you. Good morning. On the title pre-tax margin, I think you suggested you don't see margin expansion next year. If you take a little more investment income, a little higher expense, does that mean stable pre-tax? um yeah i would say i think we could be stable to i i think about stable is what i would expect right now um you know there may be a little bit of pressure so you know it could contract a little bit but i i don't know right now where we sit today i don' t see considerable deviation how about uh investment income for the third quarter how is that i'm sorry not third quarter but for the fourth quarter, how is that shaping up? I would expect investment income to follow the same growth rate that we saw the first three quarters. So when we think about investment income, I think I spoke about it last quarter, but we really look at investment income net of interest expense since a lot of the growth in investment income has been due to the growth in deposits at the bank, right? So there's an offsetting interest expense. So, when we look year-to-date, investment income is up 11% year-over-year, interest expense is up 31%, and the net increased by 8%. I think that net increase of 8% is a good number for Q4. I appreciate that. Then on the commercial side, it sounds like you've got good confidence next year. In your experience, how sensitive is that to interest rates if it's higher for longer on race. What does that mean for refi and then purchase? And just maybe as part of that, sounds like refi was quite strong in commercial this quarter. People trying to get under the wire or is that just a good underlying activity? Fortunately for us, Mark, it's just not as sensitive to interest rates. And I'm sure there's a little sensitivity, but I think especially for these big, you know, these big deals like data centers and big energy deals that we're doing just aren't sensitive to rates. I mean, we're seeing those deals close. And the other thing, too, on the commercial side is that you don't have 30-year mortgages, right, like you do on the residential side. I think a lot of these commercial loans are, they're shorter in duration now, too. I'm in there. They're typically five years. And I've talked to several clients that are coming in even less than that, just because they think that, hey, rates are high, and, you know, why should we take out, you know, a 10-year loan? We can do a three-year long. And so, that just creates more transaction activity, more refinance activity in our pipeline over the next couple of years. And, so, it's just, you now, commercial is just more, it is more of a stable business when it comes to refinance going in the residential side, which is obviously good for us. Very good. Thank you. Thanks, Mark. Once again, if you would like to ask a question, please press star 1 on your telephone keypad. Our next question is from Terry Ma with Barclays. Please proceed with your question. Hey. Thank you. Good morning. Maybe just to follow up on the margin outlook for 2027, how should we think about the ability to sustain title margins around this level, you know, if residential gets worse and some the momentum and commercial kind of softens like what additional levers do you have on the expense side if that happens um well i'll just talk about i'll i'll start with that um terry i just think you know when we look at it next year we're already at a just a tough tough market i mean the refinance market has been like a one out of ten here for the last couple years and now as i I mentioned, our open refinance orders are down, you know, 30 plus percent in October. But I mean, it's from a very, very low level here. And I could say something very similar about the purchase side. I mean the purchase side has been kind of at rock bottom for four years now. Our orders, our open orders in October are down 8%. You know, and so we have levers to pull. But I'll just say that our focus really is on next year in this tough market, and it's going to get a little bit tougher. We just want to get really close to our customers. We want to gain market share in a down market. We wanna invest in our business and roll out these new platforms next year. That's gonna be the focus to really prepare us for the next cycle. And it's really, that process is working. I mean, in the last 12 months, we've gained 60 basis points of market share and we've done zero acquisitions. And so we wanna just keep that momentum going. So we always have leverage. There's always things we can do, but we're thinking like three to five years out and not, you know, next quarter. So that's our film process right now. Got it. Makes sense. And then just on commercial, any color on what the pipeline kind of looks like as you look out into fourth quarter? And then for the ARPO growth this quarter, did decelerate notably? Like anything to kind of call out, was it kind of mixed driven or did you have some deals kind of slip into the next quarter? Any color around that would be helpful. Thank you. well the first part of that um you know we're very bullish on on commercial here in q4 very bullish um we've already closed three deals over a million in premium um we got a really good pipeline heading into q4 you never really know right i mean the last two weeks of december is when you kind of find out like how your how your quarter went um for q4 but the pipeline is just really strong. We've been saying that all year, and we just have a lot of momentum, a lot of momentum. And it's really broad-based. It's broad geographies. And we think, well, like Matt said, we think it's going to carry into next year, too. So we're very bullish on commercial for Q4. And in terms of the ARPO, maybe Matt can touch on that. Yeah, thanks. So the ARPA decelerated from Q2. So just to be clear, ARPA expanded year over year. It did decelerate from Q2. You know, that's largely when we, we've talked about this before, but when we think about commercial, you know, around 70% of our commercial revenue comes from our national commercial business, which Mark talked about in his prepared remarks. And 30% of it kind of comes from our local business. And actually in our NCS, which is our national commercial business, ARPO was actually up year over year and up sequentially. So what that means is there were some large deals that happened last year, or sorry, last quarter in Q2 outside of centralized commercial, which really strengthened that ARPO. That ARPO is a record ARPO, so it's still a really healthy ARPO it just didn't have the support of maybe some of large deals coming through the uh the non-centralized channel okay got it thank you thank you our next question is from oscar nieves with stevens incorporated please proceed with your question uh good morning uh you you made some comments earlier about the rollout of endpoint in sequoia my question is uh following up on that as endpoint goes national next year what are the biggest execution risks and do you expect this transition to weigh on costs before benefits show up uh potentially in 2028 thanks so much for the question oscar um i think the biggest risk with endpoint yeah when we initially started endpoint the biggest risks was just the i'd say technology execution there were there was we're trying to do something that you know had never been done before and there were real technological hurdles for us to execute, now that risk is kind of gone now. We feel really good about our ability to build products, and we've got a great product design engineering team at Endpoint. The flywheel is really turning with technology, so we feel really good about where our product is, which was the risk. I think the risk now is more on the change management side. I mean, our team has been using FAST, which is our system, for 25 years, and it's an inefficient system today by today's standards, but they're used to it, right? They're used to going on and they're efficient on an inefficient system. And now we're rolling out a new system and there's a lot of change management that has to go into that. And so you're teaching someone who's been on a system again for 25 years to use an AI native platform. And that is the big risk right now is just change management. And so it's one of the things that we're testing in these Washington pilots is not just improving the product, but also, OK, how do we train our people? Are we giving them enough training? Are we doing the right things? And so that, I think, is going to be the biggest risk going into next year. In terms of just the costs, I don't think there's going to materially more costs. It's kind of already baked into our run rate. Maybe there'll be some, but it's worth investing to get it right next year. But I don'T think it'll be a materially increasing cost next year relative to that initiative that's uh very helpful uh my next one is on on the bank on the growth of the bank you've mentioned for a few quarters now how first american trust continues to grow uh can you comment on how big you think that part of the business can become relative to the company and how you think about its sensitivity to rates and the deposit mix well i'll i'll start with that and then and And then Matt can talk about the sensitivity to rates and the deposit mix. But, you know, I'll just say that our bank is a big strategic advantage for us for two reasons. One is it makes our operations a lot more efficient. And so one of the things as a settlement company is we deal with escrow funds all day long. And the fact that we have a bank that's tightly integrated to our operations, we can open accounts, close accounts, move money faster than anybody. Um, so that's a, there's an operational benefit, but then of course, the second piece is there's a big financial benefit too, in the sense that we can push certain deposits to our own bank and earn a spread on those. And it has been growing, um, you know, pretty much every single year. I think we've, we've pretty much maxed out, not quite, but, you know, I would say 95% of our own internal deposits that we can push the first American trust we do. And so really the growth prospects from here on out are what I'll call these non-title deposits. And so we are going to – there's 20,000 different title agents out there that use their own banks, and we're going to them and saying, hey, why don't you bank with First American Trust? And we're having some success with that. We also, when we acquired ServiceMac, they have deposits too that we can push to First American Trust. And we talked about this last quarter, but we never had our 1031 exchange balances at First American Trust, but we built a product and now we've got about a billion deposits at First American Trust. So we are growing these non-title deposits, I think, very successfully. How big can it get? I don't really have an answer to that, but what I do know is every single month we're signing up new agents and we're growing our deposit base. So I'll hand it over to Matt to talk about the sensitivity. Yeah. And then regarding the sensitivity of the bank. So most of the bank's assets are invested in the bond portfolio. So the portfolio, you can think about it as having a five-year duration. And roughly $50 million to $60 million is thrown off in cash every month that we reinvest. So that's a way to think about it if you look at the forward curve and then think about that amount getting reinvested at those rates. And then just one thing on the growth. You know, year over year, when we look at average deposits in Q3 26 versus Q3 25, deposits grew almost 38%. And almost all of that came, like Mark said, from our subservicing business ServiceMac and our 1031 exchange business. So I wouldn't expect that pace of growth to continue. But there's opportunities to continue to expand. I just think it would continue to expand at that rate okay that helps and my last one is uh turning now to the resource uh you mentioned that title losses typically run uh in the four to five percent range over the cycle and that you've been below that for uh several years following coving if those releases uh as you have you know because you have released some of the reserves if those releases low or stop how should we think about the provision going forward and how much of today's uh rate is the release and where does the current year uh rate settle so when we're so currently we're reserving at three percent so the way we think about that is 3.75 is the for the current what we call the current policy year so for new policies that we're issuing we reserve at 3.7 and then as we release reserves that are unneeded from prior years that's the 75 basis points reduction that gets us to three percent so we would think of it in the current environment as for new policies as 3.75 is kind of the the right loss reserve right now okay super helpful thank you so much thanks oscar thank you that is all the time we have for questions today That concludes this morning's call. We'd like to remind listeners that today's call will be available for replay on the company's website or by dialing 877-660-6853 or 201-612-7415 and enter the conference ID 1376-3251. The company would like to thank you for your participation. This concludes today's conference call. You may now disconnect.