First American Financial Corp Q3 FY2025 earnings call

• Mark Seaton noted commercial business delivered outstanding performance with 29% revenue growth and record average revenue per order. Residential market in transition with purchase revenue down 2% and refinance revenue up 28% but at low levels. Home warranty pretax income up 80% due to lower loss rate. Investment income grew 12%.
• Matthew Wajner mentioned GAAP earnings of $1.84 per diluted share, adjusted earnings per share of $1.70. Adjusted revenue in title segment was $1.8 billion, up 14%. Personnel costs and other operating expenses increased. Raised common stock dividend by 2% and repurchased shares in the third quarter.

Title Segment

• Adjusted consolidated revenue grew 14%, adjusted EPS increased 27%. Commercial revenue increased 29%, with average revenue per order at just over $16,000 per closing. Closed orders in commercial up 6%, average revenue per order up 22%. Purchase revenue declined 2% due to reduced demand for new homes, with closed orders down 5% but average revenue per order up 3%. Refinance revenue up 28% but accounted for just 6% of direct revenue. Agency revenue was $799 million, up 17%. Information and other revenues were $276 million, up 14%. Investment income was $153 million, up 12%. Personnel costs were $543 million, up 10%. Other operating expenses were $276 million, up 9%. Success ratio was 62%. Provision for policy losses was $42 million, 3.0% of title premiums and escrow fees. Pretax margin in the title segment was 12.9% on both GAAP and adjusted basis.

Home Warranty Segment

• Total revenue was $115 million, up 3% compared with last year. The loss ratio was 47%, down from 54% in the third quarter of 2024. Pretax margin in the Home Warranty segment was 14.1% or 13.5% on an adjusted basis.

• Matt Wajner stated Q4 investment income expected to be slightly down sequentially. Mark Seaton mentioned commercial ARPO is sustainable and expects Q4 to build on momentum. Matthew Wajner noted for 2026, investment income expected headwinds from rate cuts but offset by growth in transaction volumes and operational enhancements at the bank allowing 1031 exchange deposits at the bank.

• Market conditions risk affecting residential and commercial segments. Interest rate changes impact on investment income. Potential M&A execution risks. Regulatory changes affecting title rates, such as expected rate cut in Texas in March not final yet.

Q: On the commercial ARPO revenue per order, obviously, 3Q is very strong. Could you talk about that, the sustainability, perhaps what you're seeing so far in 4Q?

A: Thanks for the question, Mark. Yes, I would say it's sustainable. I mean typically, in commercial, there is some seasonality to ARPO, right? It usually builds throughout the year. And we think it will continue to build in Q4. We're just seeing a lot of momentum in commercial. There's a lot of big transactions. We track 11 asset classes. 10 of our asset classes were up in the third quarter year-over-year. The only one that wasn't up was energy, which has historically been a really good asset class for us, but Q4 is typically a big energy quarter. We've got some big deals in the pipeline. So just in terms of Q3, it exceeded our expectations. And we're really optimistic about what we see in Q4. So it's been a really good story for us.

Q: How about the outlook currently for investment income? I know you've talked about some historically some sensitivities, but kind of what should we anticipate in Q4?

A: This is Matt. Thanks for the question, Mark. So for Q4, we continue to see -- we think it will be down slightly sequentially just due to kind of some of the headwinds from rate cuts. But it should be modestly down sequentially. It's the expectation right now.

Q: I was hoping you could give an update on maybe just Sequoia and Endpoint in terms of the time line for the pilots. I think last quarter, you said Endpoint pilot was going to roll out December. Is that still on track? And then for Sequoia in the markets that you're piloting currently, any kind of early results?

A: Yes. Thanks, Terry. Well, first of all, in terms of Endpoint, yes, we're still on track with everything we talked about in the third quarter. We -- the product is ready for testing. In fact, we got people here on campus last week and this week testing the product and testing is going well, and we are still on track to roll it out in our first office in December. And we're -- right now, we're planning on sort of a broader rollout in the springtime to kind of start rolling it out throughout the country. It's going to take us roughly 2 years or so to get it national, but it's something we're really excited about. Our current system, which we call FAST, we rolled it out in 2002, and so we've been on the system for 23 years. It's been a good system for us for a long time. But obviously, technology has changed and AI is here and we're really excited about Endpoint. It's going to give us productivity improvements we haven't seen before. It's going to be a great user interface for our escrow officers and it's really going to amplify their talent. It's going to reduce the mundane task or part of the escrow transaction and free up more time for our escrow officers to spend more time with the client. We're really excited about it. And we're really on track with everything since last quarter, since we talked about last quarter. So that's we keep hitting our milestones. In terms of Sequoia, we're also very optimistic about Sequoia. We really started Sequoia with the vision of having instant title for purchase transactions. It's never been done in the industry. There's instant title for refinance transactions. We've got a solution for that. Our competitors have solutions for that. Nobody has it for purchase transaction. And we're continuing to make milestones with Sequoia too. We have rolled out our AI engine for Sequoia and we're running live refinance orders through Sequoia today, and that's a big milestone. The product is out there. It's in production. It's in 3 counties. We've sort of exceeded our expectations in terms of the hit rates that we can get. And as of right now, the plan is to have our first purchase transaction go live in the first quarter. And so we -- that's been our plan, and it continues to be our plan, and we see really good progress with Sequoia as well. So we're going to start testing the purchase product in the first quarter. And that's similarly, it's going to take us roughly 2 years or so to do a national rollout. But when we do, we'll be able to produce a commitment faster arguably with more accuracy and cheaper than anything that's out here in the market. So we're really excited about really both Endpoint and Sequoia.

Q: Just sticking to Sequoia and Endpoint, can you remind us just what the margin impact of those programs are of just running the 2 platforms and just the way to think about the time line for that kind of rolling off?

A: Yes. Thanks a lot, Bose. One thing I would say is we initially broke out our -- we call it our margin drag from Endpoint and Sequoia early on because we really wanted investors to be able to evaluate the performance of our core title business without these investments that we were making with Endpoint and Sequoia. And at the time, we didn't know if they were going to work or not. There were big technological hurdles. We weren't sure it was going to work. Well, now we're -- we know it's going to work. I think there's still -- there's always questions on the timing of things, but we know that they're both going to work. And so we are integrating them into our core operations now. It's just part of our title segment. So we're not going to disclose the drag with endpoint Sequoia anymore. A, because we don't feel like it's fair to back that out. We want investors to judge us on our core operating performance, including those. And b, is because they're being integrated in their core operations before they were really stand-alone entities. But now it's just being -- it's harder and harder for us to track it just because they're being more integrated into what we're doing. So we're not going to give that anymore.

Q: Mark, back on Sequoia, it doesn't seem like there's a demand for instantaneous title. So it really sounds like it's more about efficiency gains. But then obviously, you have political pressure picking up every so often according to the cost of title. So as you think about the longer-term profile of the business, is this just naturally where the business is evolving to and maybe you struggle to keep those gains? Or do you think that there's something more sustainable in those efficiency gains over time?

A: Well, I think it's -- well, there's a few things there, Jeff. And I want to make sure I answer your questions, if I don't call me back, call me out on it. But first of all, I think for Sequoia, I don't know, I would take issue that the demand isn't there for instant title. I mean I've heard that, but I'll tell you, I've talked to customers and our sales team that think that instant title for purchase transactions is a big deal. And so maybe it is, maybe it isn't, but we're going to test it. We're going to be the ones that test it. And even if it's not, even in the worst case that it's not helpful to have an instant purchase transaction, right? And you can have an instant purchase transaction when the transaction won't close in 55 days. Even if it's not, we're really turning a labor product into a data product. And it gives us a lot more flexibility and innovation to create new products out there. So I think that it will be at advantages. And I think particularly on the agency side, if you can have a lower cost to produce your products, you're going to have an advantage out there. In terms of like the title waivers and where the market is going and are these sustainable? I mean we're in the title insurance business. We're not in the title waiver business. I think we've got a responsibility to consumers to not only a, protect consumers and lenders, but also to do it at a reasonable price point, too. And so there's been a lot of talk about the title waiver pilot. I just think the title insurance is going to be here, it's necessary. And the title waivers, we all, as an industry, have an obligation to do what's best for the consumer, both in terms of protection, protecting their property rights, but also we've got an obligation to make it affordable, too. And so we'll see what happens -- we'll see what happens and how the market develops. But I think particularly with Sequoia it just gives us a lot of strategic optionality going forward once it's naturally rolled out.

Q: Looks like you only purchased about 20,000 shares after you reported 2Q results. Is there any color you can provide on why you pulled back and what you need to see to get more active?

A: Mark, thanks for the question. This is Matt. So yes, I mean we're continuing to focus on returning excess capital to shareholders. During the quarter, we raised our dividend. And like you mentioned, we repurchased some shares during the quarter. We purchased $122 million worth of shares this year. But at the time -- at this time, we paused our buyback program to just evaluate how things develop and consider whether there may be better uses for the capital. But we continually evaluate it, and we will be buying back shares opportunistically.

Q: It looks like you ended up delevering a little bit in the quarter. Could you just kind of discuss the range of debt-to-capital ratios you'll look to operate in and kind of where you'd expect to get more aggressive on using excess capital?

A: Yes. So over the long term of the cycle, we targeted debt-to-capital of 20%. Right now, we're a little bit over that at 22.5%. And which we feel very comfortable and because we're at the lower part of the market right now, lower part of the cycle. So it's okay for us to have a little bit of a higher debt-to-cap. And when you say we did levered, we didn't pay down any debt. We just -- as we generate earnings, we obviously generate additional capital. So it went from, I think, 23% to 22.5%. So we're comfortable where we're at. As the market continues to increase in the cycle turns, we look to get back towards the 20% over time.

Q: Are you guys seeing more of potential interest on the M&A front that could be a use of some of that excess?

A: Yes, we are. We are seeing it. When the market initially fell in the first half of 2022, I think we were really hopeful that there would be acquisitions and deals to do. And we just really didn't see much. And over the last couple of years, we've really kind of leaned into the buyback, and we were -- felt really good about that. But now there are more things that are coming across our desk. And so we'll see if those deals close or what happens, but they're both on the title side and the non-title side. And there's just more opportunities today than there have been in the last couple of years.

Q: Yes, it makes sense. I mean is it fair to say that some of the weakness in the residential side is creating more and more pressure from potential sellers at this point?

A: Yes, we're seeing that. We're definitely seeing that. So we're disciplined. I mean I would just say just on the M&A side, too, Mark, is we don't feel like we have to do anything. We're not just trying to grow for the sake of growing. The deal has to make sense and it has to be strategic, and we have to make sure we have a good expected outcome in terms of the financials. So if we don't do any deals, we're fine with that. But we do think what we know, there's just more and more opportunities that are rising because the sluggish market has lasted a long time. And I think more and more people are calling us now.

Q: Yes. Mark, you'd mentioned the title waiver, you're proposing a title solution. Anything new on the regulatory front, either on the demonstration project or maybe even on the rate front at the various states, anything new?

A: I would say there's nothing new since last quarter. I mean, the title waiver pilot is still going on, and we're just on the sidelines waiting to kind of -- and we're sort of monitoring results and seeing where that goes. There's been nothing new on that front. On the state front, I would say there's nothing new. I mean the most material thing that is the Texas rate issue. And again, that's not new from the last call, but there's -- the industry now is expecting a 6.2% rate cut in Texas in March. It's not final yet. There's still another hearing that needs to happen, but I think that's the -- that's what we're sort of expecting internally. That's probably the biggest news on the rate side. But again, that's not new since the last call we had.

Q: And then when we think about net investment income for 2026, any early thoughts there?

A: Yes, Mark, from an early thought perspective, when I look out into '26, right, the obvious headwinds for interest -- for an investment income are the expected rate cuts and then we've already gotten a rate cut this year. So as a reminder, each 25 basis rate cut -- basis point rate cut impacts us by $15 million on an annual basis. So each rate cut will reduce investment income by approximately $15 million based on kind of current balances. I would say the offsets that we have potentially for next year that could help that are, one is we are expecting growth in kind of all of our markets that matter to us, specifically commercial and moderately in purchase. And if we get growth in transaction levels and transaction volumes, we can -- we'll get growth in deposit balances. So we'll have a higher balance rate or a higher level of balances, which will be helpful. The other thing that we did recently towards the end of Q3 is we made some operational enhancements at our bank, which now allows us to put 1031 exchange deposits at our bank. So historically, we had to put those positive third-party banks, and now our bank can handle those deposits, which will just increase the economic value of those deposits. And that will be a tailwind going into next year. That will hopefully offset any impacts of rate cuts.