First American Financial Corporation (FAF) Earnings

Management highlights

- Overall Financial Performance * Adjusted earnings per share hit $2.08, up 36% year-over-year; GAAP diluted EPS was $2.12. * First six months free cash flow was $285 million, up 32% year-over-year, driven by higher operating cash flow and 18% lower capital expenditures. * 330,000 shares were repurchased in Q2 for $20 million at an average price of $61.99. - First American Trust Banking Operations * Average deposits totaled $7.9 billion, up 30% year-over-year, with 36% of deposits coming from non-captive title sources. * Servicemac (mortgage subservicer) contributed $1.7 billion in deposits, up 76% year-over-year, as its loan portfolio grew 54%. * In-company 1031 exchange banking, launched less than a year prior, grew to an average of $827 million in deposits, representing roughly one-third of total 1031 balances. * Agent banking gained traction, with 310 title agents banking with First American Trust, up 37% year-over-year. * The bank acts as a counter-cyclical earnings driver with long-term growth potential. - AI and Technology Transformation (Core Strategic Priority) * AI is being deployed across the enterprise to reduce manual work, improve efficiency, and enhance customer service. Examples include: cutting form update time by 97% vs historical manual processes; AI-enabled ExamAssist QC has processed over 50,000 orders, with 92% requiring no additional human review; ServiceMac's AI virtual agent for loan transfer inquiries lifted self-service success from 0% in April to 42% in June, with plans to expand from 1 to 7 self-service use cases by end-2025. * 700 employees have completed hands-on AI boot camps to build internal agentic AI development capability, moving teams from awareness to active adoption. - Core Platform Milestones * Endpoint (next-generation title and settlement platform): First local office conversion completed successfully in Spokane, WA; expansion to additional Western Washington offices will occur in Q3, with full statewide rollout by end-2025 and national deployment through 2027; automation rates improved from 30% in Q1 to 34% in Q2 and 39% in early July, with further gains expected as the platform matures. * Sequoia (AI-powered title decisioning platform): Refinance capabilities expanded to centralized Southern California lender operations, and California coverage grew from 8 to 41 counties; automation rates improved from 35% to 40%; purchase capability launched in 2 additional California counties (Orange and San Diego), providing instant title decisioning for 16% of purchase transactions at opening; full deployment across California and Florida planned by end-2025, with national rollout in 2027; long-term targets are 70% automation for purchase transactions and 80% automation for refinance transactions in title plant markets. - Capital Allocation Strategy * First priority: Invest in technology, platforms, and products to maintain industry leadership; total company technology spend has been flat since 2022, with no material additional spending expected. * Second priority: Strategic acquisitions only, with a high bar for deals; no plans to pursue acquisitions purely for scale or diversification, only opportunities with strong synergies in title or adjacent segments. * Third priority: Return capital to shareholders via growing dividends and opportunistic share repurchases.

Guidance

- Management maintains its prior projection that the commercial business will deliver a record full-year, with a strong pipeline: 3 transactions over $1 million in premium closed in the first three weeks of July, and open commercial orders are up 9% year-over-year. ARPO is expected to continue growing in the second half of 2025, with management expecting the commercial growth cycle to be in early innings and extend into 2026. - Management remains more cautious than consensus on the residential purchase market: open purchase orders were flat year-over-year through the first three weeks of July, as existing home sales remain sluggish. - Net investment income (after interest expense) is expected to continue growing at ~8% year-over-year in the second half of 2025, matching first half growth. - Year-to-date title segment margin is 12.3%, and margin expansion is expected in the second half, with the magnitude of expansion tied to commercial business performance, which is difficult to forecast particularly for Q4. - Full deployment of both Endpoint and Sequoia platforms is still on track for the end of 2027.

Segment performance

1. Title Segment: Adjusted total revenue was $2 billion, up 14% year-over-year, accounting for 94.7% of total company adjusted revenue. Breakdown within the segment: - Commercial revenue: $314 million, up 34% year-over-year, 14.8% of total adjusted revenue; average revenue per order (ARPO) hit a record $19,980, up 31% year-over-year. 14 transactions over $1 million in premium were closed, up from 11 a year prior. - Purchase revenue: up 2% year-over-year; ARPO increased 6%, while closed orders declined 3% due to ongoing residential market weakness. - Refinance revenue: up 18% year-over-year, driven by a 12% increase in closed orders and 5% ARPO growth; refinance accounted for just 5% of direct revenue this quarter. - Agency business revenue: $820 million, up 14% year-over-year, 38.7% of total adjusted revenue. - Information and other revenues: $295 million, up 12% year-over-year, driven by ServiceMac growth, higher demand for non-insured information products, and Canadian refinance activity. - Pre-tax margin was 15.7% GAAP, 14.0% adjusted. 2. Home Warranty Segment: Adjusted total revenue was $112 million, up 1% year-over-year, accounting for 5.3% of total company adjusted revenue. Loss ratio improved to 40% from 41% year-over-year, driven by lower claim frequency partially offset by higher claim severity. Pre-tax margin was 21.3% GAAP, 20.2% adjusted. 3. Corporate/ Investment Line: Investment income was $164 million, up 11% year-over-year, driven by growth in First American Trust's deposit base expanding the investment portfolio.

Risks & headwinds

- Ongoing affordability challenges continue to weigh on existing home sales and residential purchase transaction volumes. - Mortgage rate volatility drove a temporary refinance activity spike in Q2, but volumes have already moderated as rates moved higher again; the refinance market remains severely depressed relative to historical levels, at just 5% of current direct revenue. - Forward-looking statements are subject to existing material risks and uncertainties that could cause actual results to differ materially from projections, as detailed in the company's 10-K and other SEC filings. - Uncertainty remains around potential regulatory changes to the title industry following public comments about upcoming FHFA/Fannie Mae actions, with the company in a wait-and-see posture with no incremental updates as of the call.

Analyst Q&A

• Q: Analyst asks how sustainable ServiceMac's above-average deposit growth is, and what the cadence of investment income will be in the second half of the year. /

  A: Management notes that after maximizing captive title deposits at First American Trust, the bank now pursues third-party deposits from agent banking, 1031 exchanges, and ServiceMac, with strong ongoing traction that is expected to be sustainable. Net investment income after interest expense grew 8% year-over-year in Q2, and management expects this 8% growth rate to continue through the second half of the year.

• Q: Analyst asks for the outlook for commercial ARPO growth in the second half and how sustainable these increases are. /

  A: Management confirms it is bullish on commercial, with growing order counts, a strong pipeline of large deals, and expects ARPO to continue growing in the second half. Management notes the commercial real estate cycle is still in early innings, and expects strength to continue well into 2026.

• Q: Analyst asks about the pace of share buybacks for the rest of the year, and if the current higher debt-to-capital ratio changes buyback plans. /

  A: Management conducts buybacks opportunistically, typically repurchasing shares when market dislocations driven by industry concerns create attractive entry points. While debt-to-cap is slightly above the 20% target, current levels are comfortable, especially at the market trough, and do not change the company's approach to opportunistic repurchases.

• Q: Analyst asks which commercial asset classes are seeing the strongest growth, specifically calling out data centers and office. /

  A: Management reports broad-based growth across 10 of 11 asset classes: development sites are up 33%, multifamily up 23%, retail up 59%, and data center revenue up 147% year-over-year. Office is growing year-over-year and only healthcare (the 11th asset class) is flat, so growth is not reliant solely on high-profile data center deals. Data center transactions have extremely high premiums (often over $1 million per deal, vs the $19,980 commercial average), driving a large portion of overall ARPO growth.