Greetings, and welcome to the First American Financial Corporation Third Quarter 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 the First American's website at www.firstam.com/investor. Please note that the call is being recorded and will be available for replay by entering from the company's investor website and for a short time by dialing (877) 660-6853 or (201) 612-7415 and entering the conference ID 13733443. I'll now turn the conference 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 third 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 speak strictly to historical or current facts. 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 would now like to turn the call over to Ken DeGiorgio.

Thank you, Craig. The slowing economy and rapid increase in mortgage rates continued to pressure our residential title business. Despite the challenging market conditions, we achieved revenue of $1.8 billion and earnings per diluted share of $0.02 or $1.62 per share, excluding net investment losses. In our title segment, we delivered a pre-tax margin of 9.9% or 13%, excluding net investment losses. Two key factors, along with our continued focus on expense management, favorably impacted our third quarter financial results. First, our commercial business continued its strong performance, and we remain on track to deliver another record year; second, we continue to capture the benefit of higher interest rates at our bank, on other escrow and tax-deferred exchange balances and in our investment portfolio. This quarter, investment income in our title segment increased to $105 million, up 114% compared to last year. Based on the current forward curve for Fed funds and assuming escrow balances remain at current levels, we believe investment income in our title segment could be $600 million in 2023. Mark will go into greater detail concerning these assumptions. Refinance has been declining since early last year, so it's now near trough levels and no longer a significant contributor to our financial results. Our open purchase orders were down 23% this quarter, with orders declining each month throughout the quarter. And so far in October, this trend has continued with open orders down approximately 35% compared to last year. As we discussed on our last call, we remain committed to investing in strategic initiatives that support our company's long-term growth and operational efficiency despite their near-term impact on profitability. Our initiative to deliver instant title decisioning for purchase transactions and Endpoint, our digital title and settlement company, continue to make progress. ServiceMac, our mortgage sub-servicing business, is rapidly achieving scale, and we now expect ServiceMac will be profitable in the final quarter of the year, a significant improvement from the $11 million pre-tax losses booked in the second quarter. Despite the challenging environment ahead of us, we believe the company is well positioned to emerge from this cycle even stronger. The market has shifted away from refinance towards purchase and commercial transactions, which is where we are stronger. And consequently, we are growing our market share. We are also the only title company that has a bank, which enables us to better capitalize on higher interest rates. Our strong balance sheet will allow us to continue to invest in key strategic initiatives, pursue acquisitions as well as return capital to shareholders. I note that since the beginning of this year, we have repurchased approximately 7% of our shares outstanding as of the end of last year. In closing, I want to thank our employees for all their hard work and accomplishments as we navigate our way through a difficult market. Relationships are key to our business, and it's our talented and dedicated people who provide the connection to our customers that ultimately drives our company's success. Given the importance we place on our workplace culture, I'm proud that First American was recently named one of the Best Workplaces for Women by Great Places to Work and Fortune Magazine for a seventh consecutive year. Now, I'd like to turn the call over to Mark for a more detailed discussion of our financial results.

Thank you, Ken. I'll begin with commentary on this quarter's results, followed by a discussion of a few key topics, including our venture portfolio, our outlook for investment income and the financial impact of a few of our strategic initiatives. This quarter, we earned $0.02 per diluted share. Included in this quarter's results were $1.60 of net investment losses. Excluding these losses, we earned $1.62 per diluted share. Three items contributed to our net investment losses this quarter: first, we incurred $126 million of unrealized losses related to our venture portfolio; second, we recognized $50 million of losses related to mark-to-market adjustments in our public equity portfolio. Finally, we realized $50 million of losses on our fixed income portfolio in connection with our tax planning strategies. In terms of our Venture portfolio, we booked $126 million of net unrealized losses this quarter. This compares to $276 million of net unrealized gains in the third quarter of last year. As of September 30, including our investment in Offerpad, which is now publicly traded, we have invested $398 million in our venture strategy, which has a carrying value of $448 million. Revenue in our Title segment was $1.9 billion, down 12% compared with the same quarter of 2021. Commercial revenue was $260 million, a 1% decline over last year. Our escrow balances totaled $12 billion at the end of the quarter, up from $11 billion at year-end, which indicates a healthy pipeline for commercial activity as we approach the seasonally strong fourth quarter. Purchase revenue was down 15% during the quarter, driven by a 23% decrease in the number of orders closed, partially offset by an 11% increase in the average revenue per order. Our average revenue per order for purchase transactions continued to benefit from the 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 1%. Refinance revenue declined 68% relative to last year due to the increase in mortgage rates. In the agency business, revenue was $910 million, down 9% from last year. Given the reporting lag in agent revenues of approximately one quarter, these results reflect remittances related to Q2 economic activity. Our information and other revenues were $279 million, down 9% relative to last year. The decline was a result of lower transaction levels across several business units, driven by the decline in residential mortgage originations, including the company's data, property information and post-close services. Investment income within the Title Insurance and Services segment was $105 million, a 114% increase relative to the prior year. I want to take a minute to discuss how to think about our investment income for 2023. 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. In the third quarter, we generated $105 million of investment income. That result didn't reflect the full quarter of the Fed's 75 basis point increase in July, or the 75 basis point increase in September. In addition, according to the forward curve, the market is projecting another seven rate hikes in the middle of next year. We believe our investment income in the title segment could be $600 million in 2023, assuming our escrow deposits remain at current levels. This excludes any growth in third-party banking deposits as well as the benefit from reinvesting paydowns and principal maturities into higher yielding securities. If our book yield on our investment portfolio was reset to the market yield, it would increase our investment income by an additional $185 million annually. Investors often ask what the Street is missing about our company, and our answer is that the market doesn't appreciate the benefit we receive from investment income as a result of higher interest rates. And because we own a bank, we are better positioned to capitalize on a higher rate environment. On the expense side, we are reducing expenses in areas of the company that are being impacted by the slowdown in residential activity. Excluding acquisitions, our success ratio was 39%, meaning that our net operating revenue declined 22% relative to last year, and our personnel and other operating expenses declined 13%. Pre-tax margin in the title segment was 9.9% or 13.0%, 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 in the long-term, but at this point in our life cycle, adversely impact our financial results. Last quarter, we discussed three initiatives; ServiceMac, Endpoint and instant decisioning for purchase transactions, which together generated a pre-tax loss of $16 million this quarter, impacting our pre-tax title margin by 100 basis points. However, the drag on margin improved by 50 basis points since the second quarter, primarily related to improvements at ServiceMac. Turning to the Specialty Insurance segment, total revenue in our home warranty business totaled $105 million, down 3% compared with last year. Pre-tax income in home warranty was $4 million, down from $9 million in the prior year. Excluding net investment gains and losses, pre-tax income was $6 million, down from $9 million last year. The loss ratio in home warranty was 59%, up from 57% in 2021, driven by a higher severity of claims. In our property and casualty business, we had no revenue in the third quarter and only six policies remain. We incurred $10 million of losses mostly related to adverse claims development. The effective tax rate for the quarter was 174%. Excluding the impact of our net investment losses, our tax rate would have been 23.1%, slightly less than our normalized tax rate of 24%. In the third quarter, we repurchased 1.3 million shares for a total of $72 million at an average price of $53.31. So far in Q4, we repurchased an additional 339,000 shares for a total of $16 million at an average price of $46.46. Our debt-to-capital ratio as of September 30 was 30.5%. This ratio is impacted by both our accumulated other comprehensive loss and our secured financings payable. Excluding these two items, which is more in line with how our banks view the ratio, our debt-to-capital ratio was 22.8%. As of September 30, we recorded an accumulated other comprehensive loss of $1 billion. This quarter, we elected to sell fixed income securities, which produced a $59 million capital loss in connection with our tax planning strategy, which will offset capital gains we recognized in 2019, 2020, and 2021. When combined with further actions we will take in the fourth quarter, we expect to generate $24 million of cash to the holding company as a result of the strategy. Our remaining unrealized losses in our investment portfolio are split between our bank and our insurance companies. We don't need to liquidate the portfolio for liquidity purposes, and the average credit rating of the portfolio is AA-. So we expect to recapture the amount of accumulated other comprehensive loss into equity barring any additional tax planning strategies we may exercise. Now, I would like to turn the call back over to the operator to take your questions.

Thank you. We’ll now be conducting a question-and-answer session. Our first question comes from the line of John Campbell with Stephens Inc. Please proceed with your question.

Hey guys, good morning.

Good morning John.

Mark, I think you said it twice, I want to make sure, you said $600 million in title investment income for next year?

That's right. That's assuming that the forward curve plays out like it's expected to and our escrow balances remain at current levels. As that happens, we should be around $600 million. That's right.

Yes. Even with the current consensus, it seems likely that fewer hikes and lower deposit levels could still keep you well above that. Good job on that front. Regarding severance expenses, could you share the annualized savings from it? Additionally, as we consider the market, if it takes a downturn, what actions might you be planning to take?

I would just say we've reduced our headcount in places that are being affected by the residential markets. We had $6 million of severance this quarter. I think we had $5 million last quarter. So, that's just stuff that we continue to have our eyes on.

Yes. John, I'll add. I mean, this obviously isn't the first downturn we've seen in 130-plus years, and we're highly focused on expense management that we started on expense management when we saw the downturn coming very early this year. And we will continue to calibrate our expenses to the market.

Okay, that makes sense. Thinking about the industry, I noticed the recent rule changes from Fannie and Freddie regarding attorney acceptance. We've seen some smaller proptech companies launching new offerings, and recently, United Wholesale mentioned increasing its own offerings and originating mortgages without lenders' title insurance. I'm curious how you view this situation. Is it just noise, or is it something you plan to address?

Yes, it's a good question. These attorney opinion letters have generated a lot of press, but we haven't seen much of an impact so far. We are monitoring the situation closely. Once lenders and the GSEs understand the limitations of AOLs, we may see some issues arise. For example, proving negligence against lawyers can be challenging, and there might be a statute of limitations. It's uncertain whether the coverage lasts for the life of a loan. The biggest concern is that many of these policies do not cover defense costs, which is interesting since they were initially intended to assist low and moderate-income borrowers, who are typically the least able to afford the costs of defending title. We are keeping an eye on it, but it hasn't been impactful so far.

Okay, that’s helpful. Thank you guys.

Thanks John.

Thank you. Our next question comes from the line of Mark DeVries with Barclays. Please proceed with your question.

Yes, thanks. I was hoping you could discuss what you're seeing in the commercial pipeline here, kind of relative areas of strength and weakness, how that's kind of been evolving in recent months? And also how that may differ from what we can see looking at the more visible kind of institutional larger side of the commercial real estate market.

I'll start, and then Mark can join in if needed. We had a strong Q3, with revenue down just 1% compared to a robust Q3 in 2021. This suggests a positive outlook for the fourth quarter. Our escrow balances have increased, indicating a solid pipeline. We've seen strength in various regions and asset classes, particularly in multifamily, industrial, and development sites. Looking ahead to 2023, we anticipate commercial may settle to more normalized levels after the record-setting years of 2021 and what we expect to be a record-setting 2022. While some capital is still pursuing deals, the market is softening somewhat. However, we believe commercial will remain strong next year.

Okay. Got it. And then just turning back to the investment portfolio. Mark, are you looking to extend duration at all where you can to try and take advantage of the higher rates there?

It's not part of our strategy. Our duration has extended. I mean, typically, when you look at it on a consolidated basis, our duration has been the low 4s, and today, it's in the high 4s just because mortgages have extended. But I wouldn't say that's part of our strategy to go longer. The average duration of our liabilities is around five years, and so we feel pretty comfortable with where we are right now.

Okay. I understand. You mentioned that the investment income guidance regarding escrow deposits is expected to remain stable. Considering the various market dynamics, do you believe these deposits are more likely to increase, decrease, or stay at their current level?

Well, there's a few different things at play, Mark. Roughly a rough number is about 70% of our escrow deposits are commercial related. So if commercial is down next year, everything else being equal, our escrow deposits would be down. But the one thing that we have that offsets that is that we're growing our deposits from third-party banks. We talked about ServiceMac. We've got $1 billion of subservicing deposits at our bank today, and a year ago, it was zero. And we think that number will continue to grow, and that's going to help offset some of the potential softness that we might see. So those are two kind of competing things, we'll have to kind of see how that plays out over the next couple of years.

Okay. That’s helpful. Thank you.

Our next question comes from Mark Hughes with Truist Securities. Please proceed with your question.

Yes, thank you. I appreciate it. Mark, you mentioned that there’s potential to capture another $185 million in investment income if you fully benefit from the higher rates. Assuming your duration is in the high 4s and the portfolio is turning over, you typically capture around 20% to 25% of that over the next 12 months. Is my understanding correct?

I think that's the right way to think about it, yes. So the $600 million that we talked about, that's just variable. I mean that's just assuming that the Fed raise isn't all like our cash balances and our variable rate securities will reset pretty immediately. But we also have this fixed income portfolio; it just takes longer. And so that's what that $185 million is. And given the duration of high 4s, roughly 20% to 25% of that will turn over every year. And that is so that would be a benefit that's in addition to the $600 million.

And then did you give order trends so far for October? You've given some good general thoughts about the outlook, but did you give any specific numbers for October?

In October, our purchase orders, our open purchase orders are down 35% relative to last year. Our refinance orders are about $400 a day and that's down 73% from last year.

And then anything on the commercial side?

Commercial side, our open orders are down about 30% relative to last year.

I believe you still have a $10 million loss from the reserve strengthening in the P&C business. What is the current amount of the reserves that remain? Do you think this addresses everything, or is there still a possibility for more?

Right now, we've got about $20 million in reserves for our P&C business and it's at the final stages of winding down. So we're looking into next year; the losses will be negligible.

Yes. Okay. All right. Thank you very much.

Thanks, Mark.

Thank you. Our next question comes from the line of Bose George with KBW. Please proceed with your question.

Hey, guys. Good morning.

Good morning.

From a share buyback perspective, does the increase in your leverage because of your negative AOCI marks create any constraints, or do you look through those marks? And in your comments, you noted that the banks look through those as well.

I wouldn't say it creates any constraints. I mean, obviously, every company has some constraints, but looking at our debt to cap at 22% now, that's a really comfortable place to be. It gives us a lot of flexibility to execute any buyback or any strategies we might have.

Okay. So that makes sense. But basically, the question was will you focus more on the leverage AOCI marks when you're making those positions?

That's right.

Okay, great. You mentioned that the drag on margins from Endpoint and ServiceMac was about 100 basis points this quarter. How do you anticipate that will trend in the upcoming quarters?

When you look at them all together, we think it's going to just keep getting better. I mean we're really pleased with how ServiceMac is progressing. They're going to breakeven here in the fourth quarter, and we feel like they're well on their way to profitability next year, and that doesn't include any benefit that we get at the bank for their deposits, too. So it's hard to say where that 100 basis points is going to go. But we feel pretty confident that the losses will narrow in the fourth quarter and continue to narrow into next year.

Okay. Great. Thank you.

Thanks, Bose.

Thank you. Ladies and gentlemen, there are no additional questions at this time. That concludes this morning's call. We'd 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 entering the conference ID number 13733443. The company would like to thank you for your participation. This concludes today's conference call. You may now disconnect your lines.