First American Financial (FAF) Q3 2026 earnings call transcript

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 Seton, and Matt Wagner, Chief Financial Officer.

Some of the statements made today may contain four-looking statements that do not relate strictly to historical or current fact. These four-looking statements speak only as of the date they are made, and the company does not undertake to update four-looking statements to reflect the circumstances of events that occur after the date the four-looking statements are made.

Risks and uncertainties exist that may cause results to differ materially from those set forth in these four-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 10K and subsequent SEC filings. Our presentation today contains certain non-GAP 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 financial measures, including presentation with and reconciliation to the most directly comparable GAP 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 for 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 to year, and our average revenue per order reaching a record for the fifth consecutive quarter. We closed 22 transactions generating more than one 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. Purchased revenue decreased 3% as affordability constraints continued to weigh on existing home sales. Refinance revenue decreased 1%. Over the last six months, the 30 or six mortgage rate has increased approximately 100 basis points to 7.5%, the highest since the second quarter of 2024.

Higher mortgage rates reinforce their expectations 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 through 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 the 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 three additional counties in Southern California. We are now successfully completing 17% of California purchase transactions processed through Endpoint, up from 11% in 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 Americans most important competitive advantages is our title plan 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 Americans 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 end point, 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 plans.

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 capital 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%. Refant 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 will be 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, they're 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 million, 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 with 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 to press refinance activity remains relative to historical levels. In the agency business, revenue was $868 million, up 9% from last year. Given the reporting lag and 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 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 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 Service MAC. The investments at Service MAC 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 escropies 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 and 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 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. Pre-tax 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 financials payable, our debt-to-capital ratio was 22.2%.

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 were purchased 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.

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 know, 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 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 tail win 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.

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 4% 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 will either slow the release or cease the release, but any changes will obviously be related to how claims come in.

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.

It really depends on the platform we're talking about, whether it's end point or Sequoia. I mean, in the case of Sequoia, we'll get benefit as we roll out Sequoia. I mean, next year is going to be a big year for us strategically as we roll out these platforms. And we'll start to get incremental benefit. You know, for example, Sequoia, as we roll out, as our fulfillment rates improved, as we run more orders through Sequoia, we save on every order 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 end point. So next year is a big year strategically.

And we'll start to really kind of start to see the benefits, you know, in 2028 if we can successfully execute next year.

Thanks, Rose.

Yeah, I would say I think we could be stable too. I think about stable is what I would expect right now. You know, there may be a little bit of pressure. So, you know, it could contract a little bit, but I don't, right now where we sit today, I don't see considerable deviation.

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. 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 here today, 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.

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 deals like data centers and big energy deals that we're doing just aren't sensitive to rates. 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 mean, a lot of these commercial loans are, they're shorter in duration now too. I mean, 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 why should we take out a 10-year loan?

We can do a three-year loan. And so that just creates more transaction activity, more refinanced activity in our pipeline over the next couple of years. And so it's just, you know, commercial is just more of a stable business when it comes to refinancing and the residential side, which is obviously good for us.

Here we go.

Thanks, Mark.

Well, I'll just talk about, I'll start with that, Terry. I just think, you know, when we look at it next year, we're already at just a tough, tough market. I mean, the refinance market has been like a 1 out of 10 here for the last couple of years. And now, as 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. Has been kind of at rock bottom for four years now. Our orders are open orders in October down 8 percent.

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 the down market. We want to invest in our business and roll out these new platforms next year. That's going to 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 want to just keep that momentum going. So we always have, we always have levers is 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 thumb process right now.

Well, the first part of that, you know, we're very bullish on on on commercial here in Q4. Very bullish. We've already closed three deals over a million of premium.

We've 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 how your quarter went 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 base. 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 ARPO decelerated from Q2. So just to be clear, ARPO expanded year over year. It did decelerate from Q2. You know, that's largely when we 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, sorry, last quarter in Q2 outside of centralized commercial, which really strengthened that ARPO. That ARPO was 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 non centralized channel.

Thank you. Thank you.

Thanks so much for the question, Oscar. I think the biggest risk with N. Poyne, when we initially started N. Poyne, the biggest risk was just the, I'd say, technology execution. They were trying to do something that 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 N. Poyne. 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 at 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, okay, 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 be 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.

Well, I'll start with that and then Matt can talk about the sensitivity to rates and the deposit mix. But 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.

So 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 pretty much every single year. I think we've pretty much maxed out, not quite, but I would say 95% of our own internal deposits that we can push to 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 require a service, they have deposits too that we can push to First American Trust. And 31 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 that 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 in its bond, invested in the bond portfolio. So the portfolio you can think about it as having a five-year duration.

And roughly 50 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 Q326 versus Q325. The deposits grew almost 38%. And almost all of that came, like Mark said, from our sub-servicing business service, Mac, 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 don't think it would continue to expand at that rate.

So when we're, so currently we're reserving it 3%. 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 it 3.75. And then as we release reserves that are unneeded from prior years, that's the 75 basis points reduction that gets us to 3%. And so we would think of it in the current environment as for new policies as 3.75 is kind of the right loss reserve right now.

So, Barbara, thank you so much.

Thanks, Oscar.