First American Financial Corporation 2026 Q3 Earnings Call

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 Wajner, 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 uncertainties, 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-GAAP financial measures, including presentation with and reconciliation to the most directly comparable GAAP financials, 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 2 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% in the first quarter to 34% in the second quarter and reached 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 Sequoia for purchase transactions in 3 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 California refinance transactions processed through the platform. Another important metric we track 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 purchase transactions fell from 83 minutes in the first quarter to 74 minutes in the second quarter and 56 minutes in the 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 American'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 American'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 Sequoia 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 Sequoia 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 ServiceMac 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 will 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 will turn the call over to Matt, who will discuss our financial results in greater detail.

Thank you, Mark. This quarter, we generated GAAP 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 order, partially offset by a 3% increase in closed orders.

Refinance 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 during the quarter, up 6% compared with last year, primarily driven by a 31% increase in fee revenue at ServiceMac 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 in the third quarter, up 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 continued 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 in the 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 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.