First American Financial Corp Q1 FY2026 Earnings Call

Greetings, and welcome to the First American Financial Corporation First Quarter 2026 Earnings Conference Call. Operator Instructions: 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 by entering the conference ID 37-5-9993. We will now turn the call over to Craig Barberio, Vice President, Investor Relations, to make an introductory statement.

Good morning, everyone, and again, welcome to First American's earnings conference call for the first quarter of 2026. Joining us today on the call will be our Chief Executive Officer, Mark Seaton, and Matt Wajner, 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 yesterday'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 yesterday's earnings release which is available on our website at www.firstam.com. I'll now turn the call over to Mark Seaton.

Thank you, Craig. We are pleased to report continued momentum in the first quarter, generating adjusted earnings per share of $1.33, a 58% increase from the prior year. In commercial, revenue grew 48%, achieving a record for a first quarter. Notably, we closed 20 orders, generating more than $1 million in premium, double the amount from last year. In our National Commercial Services division, we are seeing broad-based strength with 9 of our 11 asset classes up year-over-year. Data centers remain a meaningful tailwind with revenue tied to this sector increasing 76% relative to last year. We are also seeing strong activity in our Energy Group, which grew 250% and was a top 5 asset class during the quarter. Residential purchase revenue continues to lag. We have been more bearish on the purchase market this year than most public forecasts, and that view is proving accurate as purchase revenue declined 4% year-over-year. On the refinance side, we saw a modest benefit during the quarter when mortgage rates dipped into the low 6% range. While this provided some lift in the first quarter, volumes have since softened as rates moved higher again. Another key earnings driver is the bank, First American Trust, which continues to provide a steady stream of investment income. During Q1, average deposits totaled $6.8 billion, up 19% from last year. Growth has been driven by both commercial deposits and deposits outside of our captive title business. During the quarter, 29% of deposits came from sources beyond our captive title business, including $1.4 billion from Servicemac and an additional $300 million from 1031 exchange deposits. Our agent banking strategy is also gaining traction with 284 agents currently banking with First American Trust, up 26% from last year. These balances are expected to grow as the market recovers. The bank continues to serve as a countercyclical earnings driver with meaningful long-term growth potential as we expand servicing 1031 exchange and agent banking deposits. Our primary strategic focus is to leverage AI across our business to amplify the talents of our team, better serve our customers and strengthen our operational capabilities. Over the past year, we launched an enterprise AI platform that helps product teams develop, govern and deploy secure, compliant AI systems. This platform is an internal system that will allow us to deploy products faster and at scale. While we regularly discuss our two major enterprise initiatives, Endpoint and SEQUOIA, we are also seeing incremental gains across the company. One example is in our Agency division, where we are deploying AI-driven tools that expand our quality control capacity by more than sixfold. We have also introduced AI-assisted examination capabilities that reduced order processing time by roughly 30 minutes per file. Importantly, these examination capabilities are not confined to our internal operations. This quarter, we are extending these same AI-driven tools into AgentNet, our title agent-facing platform, leveraging our proprietary data, domain expertise and proven production performance to deliver value to our customers. AI-driven efficiency improvements like these not only enhance our operating leverage, allowing us to scale efficiently as volumes recover, but also provide revenue opportunities by enabling us to deliver new solutions to our clients. We are also redefining how we build software. Today, 25% of our engineers are trained in agentic AI development and are moving from concept to production in weeks rather than months. Productivity will continue to improve as the rest of our product engineering teams complete training this quarter. The impact goes beyond speed. Our teams are spending more time solving customer challenges, ensuring every investment drives real value. We are embracing this transformation and believe we are on the leading edge of our industry in adopting these capabilities. Turning to Endpoint. We have outlined a plan to scale the platform across First American Title's local branch network by the end of 2027, and we remain on track. Endpoint is live in Seattle, where we have opened around 310 orders and closed 150 orders on the new system. With each transaction, we continue to learn and improve. In this pilot, we have automated approximately 30% of the tasks required to close the transaction, allowing our people to focus more on customer-facing activities and complex issues. These automation rates will only increase over time. We are expanding the Endpoint pilot this quarter to First American Title's escrow officers across the state of Washington, an important milestone. We expect approximately 80% to 85% of our local branch network to be on Endpoint by the end of next year. This represents a significant transformation, not just a technology rollout but a standardization of workflows that shift the nature of work from executing tasks to verifying them. The real value of AI lies not only in the tools themselves, but in how workflows evolve to fully leverage them. While substantial work remains, we are confident and energized by the opportunities ahead. With SEQUOIA, we also continue to make strong progress. As a reminder, SEQUOIA is our AI-powered title decisioning platform. We are currently live with refinance transactions in eight counties across California and Arizona in our direct division, where we have fully automated title decisioning 35% of the time. The more complex challenge has been purchase transactions. Last month, we reached a key milestone by launching SEQUOIA for purchase transactions. Today, in three counties, we are automating title decisioning for 13% of purchase transactions, instantly determining insurability at order open. Over time, our automation rates will improve, and ultimately, we believe we can deliver instant title decisioning for 70% of purchase and 80% of refinance orders in markets where we have title plants. This is made possible by our industry-leading title plant data, underwriting expertise and innovative technology. By the end of this year, we plan to expand SEQUOIA across California and Florida with a national rollout planned for 2027. Looking ahead, we are optimistic about our earnings trajectory. Our commercial business remains strong. For the first three weeks in April, our opened commercial orders are down 4% relative to last year. But as we experienced this quarter, the fee profile matters more in commercial than the number of orders. And given our strong pipeline of sizable commercial transactions, we still believe 2026 will be a record year in our commercial business. On the purchase market, we remain more cautious than the consensus view. So far in April, open purchase orders are down 3% as the sluggish home sale trend continues. While the residential market remains at trough levels, we are focused on rolling out our new AI-powered title and escrow platforms, which will provide greater operating leverage when the market recovers. From a capital management perspective, we continue to deploy earnings into opportunities with the most attractive risk-adjusted returns. We are taking a disciplined approach to acquisitions, focusing on the right partners rather than growth for its own sake. As our stock has pulled back while our earnings and outlook have strengthened, we have taken the opportunity to repurchase shares. Matt will discuss our financial results and capital management in more detail. And with that, I'll turn the call over to him.

Thank you, Mark. This quarter, we generated GAAP earnings of $1.21 per diluted share. Our adjusted earnings, which exclude the impact of net investment losses and purchase-related intangible amortization, were $1.33 per diluted share. Focusing on the Title segment, adjusted revenue was $1.7 billion, up 17% compared with the same quarter of 2025. Looking at the components of title revenue, we saw strong growth in commercial and refinance, partially offset by weakness in purchase. Commercial revenue was $271 million, a 48% increase over last year, reflecting both increased transaction volumes and significantly higher average revenue per order. Our closed orders increased 9% from the prior year and our average revenue per order was up 36%. Purchase revenue was down 4% during the quarter, driven by a 6% decline in closed orders, partially offset by a 3% improvement in the average revenue per order. This reflects continued weakness in home sale activity. Refinance revenue was up 76% compared with last year, driven by a 57% increase in closed orders and a 13% increase in the average revenue per order. This growth was supported by a temporary decline in mortgage rates during the quarter, though activity has since softened as rates have moved higher. Refinance accounted for just 8% of our direct revenue this quarter and highlights how challenged this market continues to be compared to historic levels. In the Agency business, revenue was $759 million, up 16% from last year. Given the reporting lag in agent revenues of approximately one quarter, these results primarily reflect remittances related to fourth quarter economic activity. Information and other revenues were $269 million during the quarter, up 14% compared with last year. The increase was driven by revenue growth at the company's subservicing business, higher demand for noninsured information products and services, and refinance activity in the company's Canadian operations. Investment income was $154 million in the first quarter, up 12% compared with the same quarter last year despite the Fed cutting rates three times. The increase in investment income was primarily due to higher average balances driven by commercial, 1031 exchange, subservicing and warehouse lending activity. Investment income benefitted from our bank subsidiary shifting its asset mix to fixed income securities, which earn a higher yield and are less sensitive to changes in short-term interest rates. Personnel costs were $546 million in the first quarter, up 13% compared with the same quarter of 2025. The increase was mainly due to incentive compensation expense resulting from improved financial performance and higher salary expense. Other operating expenses were $277 million in the quarter, up 13% compared with last year, primarily attributable to higher production expense driven by higher volumes and increased software expense. Our success ratio for the quarter was 58%, which is in line with our target of 60%. The provision for policy losses and other claims was $40 million in the first quarter, or 3.0% of title premiums and escrow fees, unchanged from the prior year. The first quarter rate reflects an ultimate loss rate of 3.75% for the current policy year and a net decrease of $10 million in the loss reserve estimate for prior policy years. Interest expense was $27 million in the current quarter, up 34% compared with last year due to higher interest expense in the warehouse lending business and on deposit balances at the company's bank subsidiary. Pretax margin in the title segment was 9.6% and 10.4% on an adjusted basis. Moving to the Home Warranty segment. Total revenue was $110 million this quarter, up 2% compared with last year. The loss ratio was 36%, down from 37% in the first quarter of 2025. The improvement in the loss ratio was due to small reductions in the number and severity of claims. Pretax margin in the Home Warranty segment was 23.5% or 23.8% on an adjusted basis. The effective tax rate in the quarter was 22.9%, which is slightly below the company's normalized tax rate of 24%. Our debt-to-capital ratio was 32.2%; excluding secured financings payable, our debt-to-capital ratio was 21.9%. As Mark mentioned, our stock has pulled back while our earnings and outlook have strengthened, so we took the opportunity during the quarter to repurchase 556,000 shares for a total of $33 million. So far in April, we repurchased 296,000 shares for a total of $18 million at an average price of $61.61. We will continue to take an opportunistic approach to buybacks based on valuation, available capital and our outlook. Now I would like to turn the call over to the operator to take your questions.

Operator Instructions: Our first questions come from the line of Mark DeVries with Deutsche Bank.

Thanks. As I know you're aware, there has been a lot of talk about new entrants leveraging AI to potentially disrupt the title insurance industry. Mark, could you just talk about the ways in which you're evolving, whether it's Endpoint, SEQUOIA, other things to try to fend off the competition. And also, any kind of inherent advantages you have, moats that really should help you hold up well against this competitive threat?

Thanks, Mark. In terms of AI in general, these are new tools available to us that weren't available a year ago, and we've seen what they can do. We do think they're going to change our industry for the better, not just on the operating efficiency side, but they will allow us to reach new customers and serve our customers better. We're really leaning into it. We're all in on AI, and we feel like we need to win in our industry with it. We talked a lot about SEQUOIA and Endpoint on this call and prior calls, and we feel really great about those capabilities. In terms of the competition, there's a lot of talk about what AI can do, but we really have significant advantages. First, distribution is hard to get. We've got thousands of local relationships all over the country, with roughly 800 offices in large and small counties. It's hard to replicate that and to change how real estate is transacted in the U.S. Second, our title plants are a big advantage. We could not automate title like we are without our title plants. Not only are we automating, but we're putting our balance sheet behind it; we're ensuring it. When we automate things, we're not changing our underwriting standards and we're not creating alternative products that shift risk onto consumers. We're putting our balance sheet behind it. Our balance sheet is an advantage, our data is an advantage, and I believe our technology is an advantage now. Historically, our industry has not competed on technology; it's a people and service business. But over time, data and technology become more important, and by those measures, I think we've got a big advantage.

I know in the recent past you've been able to significantly expand your title plant footprint by leveraging technology to make that process more efficient. Are you still generating efficiency gains there that could potentially get you to full coverage over the next several years? Or are there markets where that's just never going to make sense?

There are realistically submarkets where it probably doesn't make sense. We're in about 1,850 counties now, which represents roughly 82% of all real estate transactions nationwide. We are always looking to build new plants, but it's more one or two here or there. There are very rural markets where there simply is not enough business to scale. We have a national footprint now. Looking back five years, there were markets where we wished we had title plants; now we have them. The ability to post our plants has gotten better over time, and we're clearly the industry leader here. We sell this data to competitors and the industry on a one-off basis, but we use it to power our tools, and that's a big advantage. For the most part, we're in the markets we want to be, and I don't see another big wave of geographic expansion right now.

Our next question comes from the line of Maxwell Fritscher with Truist.

I'm calling in for Mark Hughes. Commercial ARPO has obviously been on a huge run. What are your expectations there for the balance of 2026? Do you see that being sustained? And looking at your current pipeline?

We have a lot of momentum in commercial right now. I think the whole industry is benefiting from this. Our commercial revenue was up significantly. We're very confident that Q2 is going to be another similarly strong quarter in commercial, and 2026 is going to be a good year; we believe it will be a record year for us. We expect the commercial market to have legs for a couple more years. There are a number of tailwinds: price stability has given investors confidence to invest, sales growth has been persistent which helps with comps, commercial lending has been on the rise, and there's a lot of equity capital on the sidelines. We're also seeing a new material asset class in data centers. We're working on data center projects in 25 states right now, and energy projects are starting to pick up too. There's a lot of momentum, and we see it continuing into 2026 and beyond.

Got it. And then you had mentioned refinance activity in Canada. Can you elaborate on the dynamics there? Is that activity expected to be sustained as well? And also, what's the difference in the market there versus in the U.S.?

This is Matt. I'll take that one. In Canada, they don't have the concept of a 30-year fixed-rate mortgage. Mortgages tend to be three- to five-year in duration and then need to be refinanced. We're entering a refi wave or refi wall. We saw it last year and we believe it will persist through this year and into next year. We expect the refi tailwind to continue throughout this year and into next year for Canada.

And then if I may sneak one last one in here. Are there any updates you can share on the regulatory environment?

On the regulatory environment, there are different components. At the state level, it's fairly benign at the moment—there are always items here or there, but nothing systemic. At the national level, there's been a lot of talk about the title waiver pilot over time. We've talked about this on prior calls; it's immaterial. They've extended it until November of 2027. That's not new news. There's always things going on, but nothing specific I would point to right now.

Our next questions come from the line of Terry Ma with Barclays.

So I think you called out 20 deals this quarter within Commercial with over $1 million in premium. Any color on what sectors those deals were focused on? And as you look forward, is the breakup of your deal pipeline similar? Do you expect a similar number of deals with higher premium?

When we look at the big deals, the biggest asset class was energy deals; we closed a number of large energy deals. The second biggest asset class was industrial and data centers—we split data centers between industrial and development sites. Industrial was our second-biggest megadeal asset class. We did a couple of multifamily and retail deals, but most of it was energy, industrial and data centers. That mix will continue. We're working on more data center and energy deals, and the pipeline this year looks very good.

Last quarter, you said a bigger driver of the commercial growth would be from volume rather than pricing. Is that still the view? Or do you think there's a bit more benefit from ARPU growth this year?

We've been surprised. Heading into the year, we thought it would be a record year in commercial, but it's even better than we thought. It's really being driven by the fee per file more than order counts. Order counts have been below our expectations, but the fee per file has more than exceeded expectations. That's the trend we're seeing this year so far.

A follow-up on your comment about title plants being a competitive advantage. How hard would it be for an entrant with AI or otherwise to replicate that? What are the barriers to reconstructing that advantage?

To build a title plant, you have to go out and acquire the source documents—you have to buy the deeds and other documents from counties. You have to go to roughly 1,850 counties and purchase the source documents needed to build a title plant; that's very expensive. Once you have the documents, you need title skill to understand which documents are relevant and how to post the plant. Every county is different: the syntax is different on what's a deed versus a warranty deed, there are nuances county by county. It is cheaper to build a plant today than it was two years ago because AI is helping, and we've seen the benefit. Today about 85% of our posting is digital; maybe 15% still requires human review for handwritten or unclear documents. But you still have to buy the source documents and navigate differing search requirements—some states require going back to patent; others, like Texas, require a 15-year search. It's difficult. There's been noise about title plants' value, but people are still buying our title plants at a higher clip than before. Many participants who questioned their utility are coming to us to buy data. We believe our plans are a big strategic advantage.

Our next questions come from the line of Bose George with KBW.

On the home warranty business, can you remind us what the good run-rate margin for that is and also the seasonality?

Bose, thanks for the question. Typically, we look to have margins in the mid-teens for home warranty throughout the year. The seasonality is that Q1 and Q4 are typically stronger quarters, and then Q2 and Q3 typically have higher rates of claims, driven by weather and HVAC claims.

Yes. This quarter was definitely a good quarter. Last year we had higher margins than typical and we didn't expect that to persist. Q1 was largely in line with expectations. Our expectation right now is that in Q2 and Q3 we'll see a more typical weather pattern, so you'll see claims pressures in Q2 and Q3 compared to last year.

Switching to investment income: in terms of escrow deposits and the ability to utilize them more at the bank, is there more room to do that at the bank?

Yes. We can put more deposits at our bank; we can grow deposits at the bank and we have room and capital available to do so. As a strategy, we keep some escrow deposits at our bank and some at third-party banks. Our strategic initiative has been to grow deposits at the bank from sources outside our captive title business—for example, subservicing, 1031 exchanges and agent banking. That has driven growth at the bank. One additional point: historically, when the Fed cuts 25 basis points, we lose roughly $15 million of investment income as a general rule of thumb. Over the past year the Fed cut three times, and yet our investment income is up 12% year-over-year. We've been able to grow investment income despite Fed cuts for the reasons mentioned.

Our next questions come from the line of Oscar Nieves with Stephens.

I have one on tech. Mark, you mentioned that as you continue deploying Endpoint and SEQUOIA, you also continue to learn and improve the products. Could you share some color on those learnings?

The way the technology is built, it's moving at a rapid pace. In Endpoint, every time we do something manually, we can quickly change the software so the next time it doesn't have to be manual. We use a human-in-the-loop approach: we assume the AI can do the work but there are times when it cannot because the models haven't learned. Every time a human intervenes and makes an adjustment, we update the software so you don't have to make that adjustment next time. It's the same for SEQUOIA. The human-loop process allows us to iterate very quickly. For a young product, being at a 30% automation rate is strong, and it will get better over time as the machines learn. There's a big advantage to getting to market first, and we feel like we're doing that.

You highlighted that title segment margins were very strong, driven by commercial and expense management. Can you break down the relative contributions between mix, pricing and expense management? How much more margin improvement do you think is possible as legacy technology platforms roll off?

When we look at margin growth this quarter relative to last year, we grew margins about 250 basis points in the title segment. The driver was revenue growth outpacing expenses. Our success ratio this quarter was 58% against a target of about 60%, and we did a good job of managing expenses while revenue rose. Looking forward, we expect incremental gains from technology over time. It won't happen in one quarter; it's not a one-time jump to dramatically higher margins. But these incremental gains will compound over time as we roll out platforms nationally next year and as other improvements are deployed. We hear stories every day about how AI is helping our employees, and those things will add up. Whatever our normalized margins have been over the last decade, we expect margins to rise in the coming years as these tools make the business more efficient.

One last question on capital allocation. You talked about an opportunistic approach to buybacks. How much remains under the current repurchase program, and what are the company's current capital allocation priorities for the remainder of the year, including M&A and buybacks?

Under the current repurchase program, after what we've already purchased through today in April, we have $248 million remaining on the program. Our capital allocation priorities remain unchanged: first, reinvest in the business; second, pursue acquisitions that make strategic and financial sense; and third, return excess capital to shareholders through dividends and share buybacks. We are opportunistic with buybacks based on valuation, available capital and our outlook. In Q1 we saw the stock under pressure while our earnings and outlook strengthened, so we took the opportunity to repurchase shares. We'll continue to be opportunistic going forward.

There are no additional questions at this time. That does conclude 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 by entering the conference ID 137-59-993. The company would like to thank you for your participation. This concludes today's conference call. You may now disconnect.