Greetings, and welcome to the First American Financial Corporation's Second Quarter 2022 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. A copy of today's press release is available on First American's website at www.firstam.com/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 13731471. We will now turn the call over to Craig Barberio, Vice President, Investor Relations, to make an introductory statement.

Good morning, everyone, and welcome to First American's earnings conference call for the second quarter of 2022. Joining us today on the call will be our Chief Executive Officer, Ken DeGiorgio; and Mark Seaton, Executive Vice President and 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 this morning'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 this morning's earnings release, which is available on our website at www.firstam.com. I'd now like to turn the call over to Ken DeGiorgio.

Thank you, Craig. The company delivered strong results in the second quarter with revenue of $2.1 billion and earnings of $1.1 per share, or $1.97 per share excluding net investment losses. Our Title segment margin was 11.7% or 13.9%, excluding net investment losses. While we operate in a cyclical business, we have a strong presence in all market segments including resale, refinance, commercial, new home and default, which can provide a level of diversification. So while rising interest rates have slowed our residential business, our commercial business, for example, has grown an impressive 30% this quarter and is on track to achieve another record year. We are also beginning to realize the benefit of higher interest rates at our bank and on other escrow and tax deferred exchange balances. Investment income increased by $23 million in our Title segment this quarter and we now expect to add $200 million to annualized investment income by year-end up from the $150 million that we discussed with you on our last call. As I suggested earlier, our residential purchase business declined this quarter. Open orders were down 12%, with June down 18% compared with last year. So far in July, this trend is continuing with open purchase orders down approximately 20% compared with last year. Given the decline in residential real estate activity and the uncertain economic outlook, we continue our focus on expense management. As you would expect, we are acting most aggressively in the business units with the greatest exposure to the declining residential market. We will see much of the benefit from these reductions beginning in the third quarter. Additional expense reductions are underway in July, and we are closely monitoring order levels to further balance expense levels as needed going forward. While we continue to manage our cost structure, we also remain steadfastly committed to investing in strategic initiatives that support our company's long-term growth and operational efficiency, despite their impact on near-term profitability. Significant among these is Endpoint, our digital title and settlement company that we built from the ground up. Endpoint has attracted leading talent that has developed technology to streamline the closing process and power prop tech companies and investors looking to scale their operations. After demonstrating strong customer acceptance in early test markets, Endpoint is rapidly building a national footprint and is currently operating in 27 states and by year-end expects to be licensed in 43 states. Another of these initiatives is ServiceMac, the mortgage sub-servicing business we acquired last year. Since its founding in 2018, ServiceMac rapidly achieved the sixth largest market share position. While ServiceMac has high potential as a standalone business, significant synergies exist with our other operations, in particular our bank which can hold deposits administered by ServiceMac. Lastly, while we have successfully automated the title production process for certain refinance transactions, we are now focused on solving instant title decisioning for purchase transactions, which is more complex. Our industry-leading property record and title plant assets put us in a unique position to solve this problem, which when solved promises to improve the customer experience and increase our efficiency. We expect to test this instant decisioning initiative with customers in two large markets by year-end. This quarter, we continue to prioritize share repurchases, acquiring 3.9 million shares and through July 27, an additional 963,000 shares. Since the beginning of this year, we have repurchased approximately 6% of our shares outstanding as of the end of last year. Reflecting its confidence in the long-term prospects of our company, our board recently approved a new $400 million share repurchase authorization, which enhances our capital deployment flexibility going forward. Now, I'd like to turn the call over to Mark for a more detailed discussion of our financial results.

Thank you, Ken. This quarter we earned $1.01 per diluted share. Included in this quarter's results were $0.96 of net investment losses, primarily related to the change in fair value of marketable equity securities. Excluding these losses we earned $1.97 per diluted share. Revenue in our Title segment was $2.1 billion, flat compared with the same quarter of 2021. Commercial revenue was $289 million, a 30% increase over last year. We continue to see strength in the commercial market as closed orders, average revenue per order and a number of large liability transactions all showed growth over the prior-year. Our escrow balances totaled $14 billion at the end of the quarter, up from $11 billion at year-end which indicates a healthy pipeline for commercial activity as we enter the second half of the year. Purchase revenue was up 2% during the quarter driven by a 15% increase in the average revenue per order, partially offset by an 11% decline in the number of orders closed. Our revenue per order for purchase transactions benefited from recent acquisitions of escrow companies in Southern California. We include escrow revenue from these transactions in the numerator without a corresponding title order in the denominator. Excluding acquisitions, average revenue per order would have been up 6%, which is more in line with what we would expect given home price appreciation. Refinance revenue declined 58% relative to last year, due to the increase in mortgage rates. In the agency business, revenue was $937 million, up 4% from last year. Given the reporting lag in agent revenues of approximately one quarter, we are experiencing growth in remittances related to Q1 economic activity. Our information and other revenues were $305 million, up 2% relative to the last year. Revenue growth was primarily due to the recently completed acquisitions of ServiceMac and Mother Lode. Investment income within the title insurance and services segment was $70 million, a 49% increase relative to the prior-year. As we've stated previously, we expect to generate $15 million to $20 million of annualized investment income in the Title segment for each 25 basis point increase in the federal funds rate. We believe this estimate is still appropriate and expect to see the benefit of the Fed's July rate hike beginning in August. Based on the current forward curve for the federal funds rate, we expect our investment income to grow by approximately $200 million on an annualized basis in 2022. On the expense side, we are reducing expenses in areas of the company that are being impacted by the slowdown in residential activity. Year-to-date through July, we had over 600 staff reductions. However, our overall employee count increased, primarily related to our acquisition of Mother Lode. In the second quarter, we incurred $11 million of severance expense. Pre-tax margin in the Title segment was 11.7% or 13.9%, excluding net investment losses. As Ken highlighted, we continue to invest in businesses and innovation initiatives that we believe will positively contribute to our profitability over time. But at this point of lifecycle detract from our financial results. The three initiatives Ken discussed — Endpoint, ServiceMac and instant decisioning for purchase transactions — together generated a pre-tax loss of $20 million this quarter, impacting our pre-tax margin by 150 basis points. We expect ServiceMac to turn profitable by the end of this year. And we expect Endpoint losses to bottom out in 2022, with earnings improvement in 2023 and beyond. Turning to the Specialty Insurance segment, total revenue in our Home Warranty business totaled $102 million down 5% compared with last year. Excluding net investment gains and losses, total revenue increased 2% to $106 million. Pre-tax income in Home Warranty was $9 million down from $13 million in the prior-year. Excluding the investment gains and losses, pre-tax income was $13 million up from $10 million last year. The loss ratio in Home Warranty was 52.4% down from 55.5% in 2021 driven by a lower frequency of claims. The wind down of the property and casualty business remains on track for completion in the third quarter. The business had a pre-tax loss of $5 million this quarter. As of June 30, the company had no active homeowner policies and a small number of renter policies remained in force. The effective tax rate for the quarter of 22.1% is less than our normalized tax rate of 24.5% as a result of fluctuations in forecasted earnings between our insurance and non-insurance businesses, since our insurance businesses generally pay state premium tax in lieu of income tax. In the second quarter, we repurchased 3.9 million shares for a total of $227 million at an average price of $57.93. So far in Q3, we repurchased an additional 963,000 shares for a total of $52 million at an average price of $54.20. Our debt-to-capital ratio as of June 30 was 29.6% or 25.0% excluding secured financings payable. At the end of the quarter, we had $750 million of accumulated other comprehensive loss primarily due to unrealized losses in our fixed income portfolio related to the rise in interest rates. This loss contributed 250 basis points to our debt-to-capital ratio. Over time we expect our unrealized loss position to narrow as their duration is 4.5 years, the average credit quality is AA+ and we don't have a need to liquidate the portfolio to generate cash. Now I would like to turn the call back over to the operator to take your questions.

At this time, we will be conducting a question-and-answer session. Our first question comes from the line of Mark DeVries with Barclays. You may proceed with your question.

Yes, thanks. Just wanted to start on the commercial business. It sounds like your pipeline is quite strong, which is a bit surprising, just based on at least what we're hearing anecdotally from the larger, more institutional end of the market where we're just hearing things are not transacting. So could you just give us a little bit better sense of what the sources of strength are? Were there any causes for concern that that activity is about to decline and any kind of differences across different types of property types and end markets?

Yes, this is Ken; I'll take the first crack at that. As we mentioned, we had a great quarter, and we're still seeing a lot of demand in the commercial space. There's a lot of capital chasing deals. In the quarter this was across asset classes; it was obviously led by multifamily and industrial, but the demand was across asset classes and across geographies, though some of the urban core markets like New York, San Francisco and Los Angeles were weakest. But again, across geographies and across deal sizes as well, though in the quarter large transactions were probably up significantly. We saw it across deal sizes, and frankly, we looked good going into the second half. As Mark mentioned, escrow balances are up over year-end, so we see a strong pipeline. We were anticipating, as we mentioned, to have another record-setting year, so maybe we're defying some of what we're reading or seeing in the marketplace, but we're still seeing strong demand.

Okay, that's helpful. And then just turning to Endpoint, I just want to better understand what the end game is there. It sounds like it's going to be a drag on earnings for the near term. When do you see that becoming profitable or is the real contribution going to come from lift you get in the core title business?

Well, I don't know exactly when it'll turn profitable. As we mentioned, we think the losses are going to bottom out this year, and then earnings will start growing into 2023 and beyond. The endgame there is twofold. One is to improve efficiency in our business. Secondarily, it's to meet the demands of a changing customer base—customers that want a digital-first experience—and Endpoint is rapidly expanding to provide it, both on the retail side and with prop tech companies. So the endgame with Endpoint is first and foremost to meet customer demand. We also expect it to generate efficiencies for the core business.

Our next question comes from the line of Bose George with KBW. You may proceed with your question.

Hey, good morning. Actually just sticking to Endpoint, the $28 million in losses you mentioned, how is that broken out between Endpoint and ServiceMac and the other piece?

Thanks for the question, Bose. In the second quarter, we had about a $10 million pre-tax loss in ServiceMac, which we think will flip to breakeven later this year; Endpoint had about a $12 million pre-tax loss this quarter; and our purchased automation initiative was about $6 million.

Okay, great. Thanks, and then actually wanted to switch and ask about leverage. Can you remind us where you think you want that to be in the range and whether that 25% now affects how you think about further buybacks and/or acquisitions?

Twenty-five percent is the highest we've been in some time. We've always talked about our target debt-to-capital being around 20%, but we're comfortable operating at 25%. Our covenant says we can't go above 35%, so we have plenty of room. One of the reasons our debt-to-cap has increased is the unrealized losses in our fixed income portfolio, which were roughly about $900 million at the end of June. We don't need to liquidate the portfolio; we feel those losses will eventually come back over time. So we're comfortable with where we are at 25% right now.

Okay. And actually, did you mention the duration of the portfolio, so the timeline in which that $900 million should come back?

We think about our portfolio as our bank portfolio and our insurance company's portfolio. On a consolidated basis, the duration is four-and-a-half years, a little bit less than the bank and a little bit higher than the insurance company.

Okay. And so that should be the rough timeline for it to come back that loss?

Yes, roughly. It depends on what happens with interest rates, but yes, we feel that by about four-and-a-half years, we'll have recognized it.

Our next question comes from the line of Mark Hughes with Truist. You may proceed with your question.

Yes, thanks. Good morning. Did you give the order trend in July for commercial?

We didn't provide a specific commercial July number. But so far in July, our open orders are down 10% from prior-year in July.

Does that—when we think about your increase in escrow balances—is that consistent with a down-10% trend, or do your escrow funds imply a little better than that?

We track our commercial orders, but unlike on the residential side where we have a very consistent average fee profile, in commercial the size of the deals matters so much more. So while orders are down 10%, it doesn't give us too much heartburn. What we look at is our balances in terms of what the deal sizes are about to close and we have conversations with our customers. As Ken mentioned, we feel really good about the second half of this year.

Very good. And then the impact of the instant decisioning, assuming you have success and that works out as you anticipate, what does that mean in terms of the cost structure?

The instant decisioning initiative is primarily designed to improve the customer experience. We've seen that with our instant decisioning for refinance transactions. If we can get that for purchase transactions, which is very complex, we think we're in a unique position given our data assets. There should be cost savings over time, because if you can provide decisions instantly through data it reduces manual processing and results in savings. We'll have to see how the bills play out.

It's very early days with this particular title automation effort. We're not even doing—well, we are going to do an MVP in two large markets at the end of the year, but we're in very early days. We'll probably know better in the coming months, if not years, what the exact cost savings will be.

Understood, and then your point on the Endpoint profitability—was that that the loss associated with that would bottom this year and then be progressively less negative, or would that also hit breakeven in 2023?

It would be less negative. So we'll have a pre-tax loss of roughly $50 million this year, and that will narrow next year and beyond. We won't flip to profitability next year, but the losses will narrow.

Our next question comes from the line of Ryan Gilbert with BTIG. You may proceed with your questions.

Hi, thanks. Good morning, everyone. First questions on ARPO in the purchase business—I think you said up 6% excluding the escrow acquisitions. Can you just talk about how that trended through the quarter and how you expect that to trend over the rest of the year? I think with overall home price appreciation probably more resilient than I expected but some headwinds from higher interest rates potentially in the second half of the year.

When we look at the purchase ARPO and how it trended through the quarter, it fell through the quarter. In April, our purchase ARPO was up 17%; in May, it was up 16%; in June it was up 12%. So for the quarter, when you weight that all together, it was up 15%. Looking at Q3, based on the trend and cooling home price appreciation, we think it's going to come down from the 15%; the run rate as of June is about 12%, and we are seeing it come down.

Okay, got it. And I apologize if I missed this but I think last quarter we talked about revenue flat for the year—is that still in the cards or have trends in residential deteriorated more than we were expecting after Q1?

I think things are deteriorating a bit based on where purchase orders are. Overall, I think revenue will be down—call it low-single-digits. We're not seeing anywhere near the declines that you're probably seeing in the headlines in terms of mortgage originations, so it will be down a little bit, low-single-digits.

Our next question comes from the line of John Campbell with Stephens. You may proceed with your question.

Mark, you briefly touched on the effect of the acquired revenue on the revenue per order. I'm trying to understand the Mother Lode impact on your order count. It sounds like, if I understand correctly, that Mother Lode revenue came on but you're not reflecting that in order count. So that drove the fee profile higher. Could you provide a little more color on that and specifically, how Mother Lode is going to impact the order count moving forward?

Excluding Mother Lode, when you look at our purchase orders in July, we were about 23% down year-over-year. When you add Mother Lode in, we're down about 20%. So it added about three percentage points difference in our purchase order change year-over-year.

Okay, that's helpful. I'm trying to better understand how you're receiving revenue without the orders.

There are different ways to cut that. In the second quarter, we had about $37 million of revenue from Mother Lode; half of that was booked in direct revenue where we're getting orders and we take 100% of premium booked in direct revenue. The other half of that revenue is booked in information and other where we're getting about 88% of the premium on average and the other 12% goes to a different underwriter because we haven't fully captured those underwriting synergies yet. So it's really split about 50:50, and over time that will migrate more towards direct revenue.

Okay, that makes sense. From a geographic standpoint, it looks like the West Coast is falling much sharper than the rest of the regions. What is your weighting toward the West Coast in the direct business you report, and any anecdotal comments on what you're seeing in that market?

Our direct orders come from our direct operations; we're direct in 27 states, which is mostly the West Coast. We are in Florida, but mostly it's the West Coast. That is one reason agency business is outperforming and growing faster—just because the East Coast is doing a little bit better.

Okay, that's very helpful. Last question for me—this may be a silly question—but in the past you called out $150 million investment in Endpoint. Was that a one-time investment or is that essentially running through your P&L; will it accumulate $150 million over time?

That was a commitment—we were committed to make that investment. I wouldn't consider it running through the P&L in the way some operating expenses run through. I would focus on the numbers that Mark noted with respect to what's running through the P&L, but we wanted to make it clear that we were committed to invest at least that amount.

Our next question comes from the line of Geoffrey Dunn with Dowling & Partners. You may proceed with your question.

Thanks, good morning. Mark, can you review the company's liquid resources for capital management? What was the HoldCo balance at year-end, what's your remaining regulated dividend capacity this year, non-regulated sources, and are you still targeting a minimum $250 million balance at HoldCo?

We are targeting roughly a $250 million minimum. As of the end of June we had $349 million of cash at the holding company. When we look at the amount that we can dividend from our insurance companies for the second half of the year, it's $474 million. We plan out the dividends we expect to get and we expect to max out the dividends that our insurance companies can pay. So we expect at this point that we'll dividend roughly about $500 million of cash from both our regulated and non-regulated subsidiaries in the second half of this year. In terms of liquidity, we have a $700 million line; none of it's drawn. So we're in a good spot in terms of liquidity.

I assume though, specifically for share repurchase, I would be surprised if you draw down more debt when you're already at 25%. Is that fair?

Yes, I think that's fair. In theory we don't have an issue with borrowing to buy back stock, but given our debt-to-capital is at 25% at this point in the cycle, it's not something we would do.

There are no further questions at this time. That concludes this morning's call. We would 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 13731471. The company would like to thank you for your participation. This concludes today's conference. You may now disconnect your lines. We thank you for your participation. Enjoy the rest of your day.