Earnings Call Transcript - FAF Q2 2025

Operator, Operator

Greetings and welcome to the First American Financial Corporation Second Quarter Earnings Conference Call. 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 by dialing (877) 660-6853 or (201) 612-7415 with the conference ID 13754701. We will now turn the call over to Craig Barberio, Vice President of Investor Relations, for an introductory statement.

Craig Barberio, VP, Investor Relations

Good morning, everyone, and welcome to First American's earnings conference call for the second quarter of 2025. 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 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 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 will now turn the call over to Mark Seaton.

Mark Edward Seaton, CEO

Thank you, Craig. And thank you to everyone joining our call. Today, I will provide a brief review of our earnings, discuss our market outlook and conclude with some thoughts on capital management. Today, we announced our second quarter adjusted earnings per share of $1.53. This result includes the impact of $0.12 per share related to executive separation costs. Our earnings were strong despite continued challenges in the U.S. housing market. Our performance this quarter was highlighted by continued strength in our commercial business. Commercial revenue was up 33%, and we set an all-time record in our National Commercial Services division for fee per file in a quarter. We are seeing broad-based strength in Commercial again this quarter, led by industrial, which includes data center transactions and multifamily. We're also seeing a continued shift toward refinance in commercial. Historically, our revenue was roughly 30% refinanced but this quarter, it was 46%. The sales, underwriting, closing and operations teams that drive our commercial business are the best in the industry. They deal with complex multisite, multistate, and sometimes, cross-border transactions, while skillfully underwriting risk and providing amazing service and transparency to our clients. Our commercial business also drives much of our escrow deposits, which helped drive investment income. Investment income grew 17% this quarter. Investment income at our bank, in particular, continues to be a countercyclical earnings driver, while the residential market is at the trough. The residential side of our business continues to navigate through difficult market conditions. Our purchase revenue declined 3%, driven by lower demand for new homes. It's been a tough purchase market for the last 3 years, due primarily to home affordability issues and elevated mortgage rates. But as purchase volumes return to the trend line, we are very well positioned given our operating leverage and strength with local real estate professionals who drive purchase volumes. Refinance revenue was up 54% this quarter, but it's growing off a low base and represents just 5% of our direct revenue. The opened orders we are seeing in July tell a similar story to what we have experienced so far this year with strong commercial activity outpacing a sluggish residential market. For the first 3 weeks in July, our open purchase orders are down 8%, while our refinance orders are up 29%. Commercial orders are up 13% so far this month, setting us up well for a strong back half of the year. Our Home Warranty business posted very strong results. Our pretax income was up 35%, driven by a lower loss rate, and we continue to drive revenue growth through our direct-to-consumer channel. This quarter, we ramped up our share repurchases. And in July, our Board of Directors approved a new $300 million share repurchase authorization. We are at the very beginning of the next cycle. And are poised to outperform given our unique assets and the productivity improvements we expect to achieve related to our investments in data, technology and AI. Now I would like to turn the call over to Matt for a more detailed review of our financial results.

Matthew Feivish Wajner, CFO

Thank you, Mark. This quarter, we generated GAAP earnings of $1.41 per diluted share. Our adjusted earnings, which exclude the impact of net investment losses and purchase-related intangible amortization was $1.53 per diluted share. Both our GAAP and adjusted earnings include a $13 million or $0.12 per diluted share one-time expense related to executive separation costs, which was recorded in the corporate segment. Revenue in our Title segment was $1.7 billion, up 13% compared with the same quarter of 2024. Commercial revenue was $234 million, a 33% increase over last year. Our closed orders increased 2% from the prior year, and our average revenue per order was up 30% due to continued broad-based strength across both asset class and transaction size. Purchase revenue was down 3% during the quarter, driven by a 6% decline in closed orders, partially offset by a 2% improvement in the average revenue per order. Refinance revenue was up 54% compared with last year due to a 44% improvement in closed orders and a 7% increase in the average revenue per order. Refinance accounted for just 5% of our direct revenue this quarter and highlights how challenged this market continues to be with mortgage rates hovering between 6.5% and 7%. In the Agency business, revenue was $717 million, up 16% from last year. Given the reporting lag in agent revenues of approximately 1 quarter these results primarily reflect remittances related to first quarter economic activity. Information and other revenues were $264 million during the quarter up 10% compared with last year, primarily due to our Canadian operations, continuing to see higher refinance activity. Investment income was $147 million in the second quarter, up $21 million compared with the same quarter of last year, primarily due to higher interest income from the company's investment portfolio and an increase in average interest-bearing deposit balances, partially offset by the Fed cutting rates by 100 basis points in the second half of 2024. The provision for policy losses and other claims was $39 million in the second quarter or 3.0% of title premiums and escrow fees, unchanged from the prior year. The second 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. Pretax margin in the title segment was 12.6% or 13.2% on an adjusted basis. Turning to the Home Warranty segment. Total revenue was $110 million this quarter, up 3% compared with last year. The loss ratio was 41%, down from 46% in the second quarter of 2024. The improvement in the loss ratio was driven by lower claim frequency, which was partially offset by higher claims severity. Pretax margin in the Home Warranty segment was 20.2% or 20.7% on an adjusted basis. The effective tax rate in the quarter was 24.6%, which is slightly above the company's normalized tax rate of 24%. Our debt-to-capital ratio was 32.1%, excluding secured financings payable, our debt-to-capital ratio was 23.1%. In the second quarter, we repurchased 1 million shares for a total of $61 million at an average price of $57.95. So far in July, we repurchased 577,000 shares for $32 million at an average price of $56.19. Now I would like to turn the call back over to the operator to take your questions.

Operator, Operator

Our first question comes from Mark DeVries with Deutsche Bank.

Mark Christian DeVries, Analyst

Could you describe the source of strength in the commercial ARPO that you're seeing and how the transactions that drove you to that outcome compared to what's in your pipeline today?

Mark Edward Seaton, CEO

Yes. Sure thing, Mark. Thanks for the question. The interesting thing is commercial, we definitely look at the order counts and order counts are up, and it's setting us up for a good back half of the year. But what matters a lot more is the fee per file. And when you look at our commercial revenue growth this quarter, our revenue is up 33%. We're closing the same amount of orders we did last year. Our orders are only up 2%. But the fee per file for commercial is up 30%. So to your point, I mean, we're getting a lot more high-quality and just higher liability transactions. And it's coming from a broad array of asset classes. Our biggest asset class this quarter was industrial. Our second biggest was multifamily. We're seeing a lot of data center deals. We closed 11 transactions with a premium over $1 million. So we're getting a lot of big deals, but Commercial is also driven by just the smaller commercial deals, and we're seeing a lot of those come through, too. So I would just say it's hard to pinpoint one thing. It's just real broad-based strength that we're seeing and we're getting a lot of high-quality deals, and we feel really good about our pipeline heading into the second half of the year. And one thing that's going to help us, too, is this one big beautiful bill, I mean, there were certain tax incentives that are going to go away for certain renewable energy credits next year. And so we think there's going to be kind of acceleration of deals that closed in Q4 to take advantage of those credits. So I think we're pretty positive about the outlook. Now the one thing, too, is the comps are going to get tougher here because we had a really strong back half last year, really strong Q4. But we feel really good about the outlook for commercial for the rest of this year.

Mark Christian DeVries, Analyst

Okay. Great. And you also referred to kind of an increase in the percentage of commercial that's coming from refi. What's causing that? Is this somewhat of a secular change? Or is there just some kind of cyclical component to this?

Mark Edward Seaton, CEO

It's a cyclical aspect. There was a significant amount of refinancing activity in 2020 and 2021, with many deals being executed. Discussions centered around a refi wall in commercial, predicting a period of 18 to 24 months where numerous refinance deals were expected to occur. We're currently right in the midst of that. When assessing the long-term trend in commercial, it's important to note that we don't deal with 30-year mortgages, but rather 5, 7, and sometimes 10-year mortgages. This leads to a more variable situation, and we're currently overexposed to refinancing. However, we expect that this will eventually realign with the normalized trend of 30%.

Mark Christian DeVries, Analyst

Okay. And that's helpful. Just you mentioned you think we're kind of in the middle of that wall. How much longer do you think it kind of extends before it becomes a bit of a headwind?

Mark Edward Seaton, CEO

It’s likely to last another year. While it’s difficult to predict, we have seen a gradual increase over the past year, and we anticipate that we may need about another year before it changes. This trend won’t continue indefinitely, but we are certainly experiencing it right now.

Operator, Operator

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

Maxwell Fritscher, Analyst

On for Mark Hughes. You had pointed to the higher refinance activity in Canada. What is your judgment on the durability there? And maybe could you size the contribution from that quarter?

Matthew Feivish Wajner, CFO

Yes, thank you for the question. This is Matt. We anticipate that the refinancing business in Canada will remain strong for the rest of the year. The growth we have experienced in information and other areas is primarily driven by Canada and the refinancing activity there. The growth we observed this quarter serves as a reliable indicator of the growth we expect for the entire year.

Maxwell Fritscher, Analyst

And then moving to Home Warranty. How do you see the competitive environment there? And then what are your observations around the loss environment? You had called out lower frequency. Was that driven by weather or any other underlying factors you're seeing?

Mark Edward Seaton, CEO

There are many competitors in the Home Warranty sector, but our team is performing well, and we're still expanding our business despite challenges in the real estate markets. This quarter, Home Warranty delivered strong results. Several factors contributed to this success. The frequency of claims decreased for a couple of reasons. First, we experienced favorable weather conditions, which helped reduce claims. Second, we currently have fewer contracts active compared to last year. We operate through two channels: the real estate channel and the direct-to-consumer channel. The real estate channel has seen a decline, similar to the overall market, while the direct-to-consumer channel is growing, yet we still have fewer contracts in total. Fewer contracts mean fewer claims, leading to a decrease in frequency. With fewer claims, we can allocate our claims to higher-quality contractors, which helps us maintain a consistent severity level and keep the claims ratio low. Additionally, among all our businesses, Home Warranty had us slightly concerned about inflationary pressures because we're purchasing HVAC equipment and related items that could be impacted by inflation. Last year, we raised our prices to account for anticipated cost increases, but we have not yet witnessed significant inflation on the claims side. Still, we believe it may emerge in the latter half of the year. These factors combined contributed to our strong loss ratios this quarter.

Operator, Operator

Our next question comes from the line of Terry Ma with Barclays.

Terry Ma, Analyst

I wanted to start off on the margin. It obviously came in pretty strong this quarter. I think it was up about 140 basis points year-over-year. I guess, as we kind of look forward to the second half of the year, how sustainable is that, particularly if commercial kind of remains strong?

Matthew Feivish Wajner, CFO

Terry, this is Matt. Thank you for the question. Yes, as you pointed out, we achieved a strong margin this year. For the first half of this year, compared to the first half of last year, our margin is up about 220 basis points year-to-date. As Mark mentioned earlier, the comparisons for the second half are going to be more challenging. We believe we will finish the year with improved margins compared to last year, but I think the gap you referenced will begin to narrow in the second half.

Terry Ma, Analyst

Got it. That's helpful. Do you have any updates on the technology investments, Sequoia and Endpoint in the sense of kind of like rollouts and success rates?

Mark Edward Seaton, CEO

Thank you, Terry. We are making significant progress on both the Endpoint and Sequoia initiatives. Our teams are doing an excellent job in product development. For Endpoint, we are currently in the early stages of implementing the technology across our entire branch network. We plan to begin piloting this new technology in an office in December, and we anticipate integrating it into our direct operations in the first quarter. The technology is functional, and we believe it will enhance many aspects of our operations. We’ll share more details when we have actual data to present, but the national rollout is scheduled for the first quarter, and we will proceed from there. On the Sequoia front, we are also making solid progress. We have implemented it in three markets, and while achieving instant decision-making for purchases is challenging, we have consistently overcome obstacles. We are confident in our ability to eventually reach our goals. We are currently enhancing our capabilities for instant decision-making on purchase transactions and laying the foundation for a statewide rollout in California. Additionally, if we can automate the purchase transactions, we can do the same for refinance transactions. We began rolling out our refinance automation in September, showing our commitment to progress on both fronts. These initiatives are long-term endeavors, and while we do not expect our margins to see dramatic increases in the immediate future, we believe that in two to three years, these will offer distinct solutions compared to our competitors. We look forward to discussing more once we have tangible results to showcase beyond initial pilots.

Operator, Operator

Our next question comes from Bose George with KBW. Our margin is not going to jump dramatically next quarter or the quarter after that. However, looking out 2 to 3 years, we believe these will be differentiated solutions compared to the industry, and we are very excited about it. We'll share more details once we have made tangible progress and can demonstrate our achievements beyond lab or pilot settings, but at a broader company level.

Bose Thomas George, Analyst

Sorry, guys, I'm on mute. Sorry. Just following up on the question on margins. It makes sense that the gap will narrow in the back half of the year. But just looking at your 13.2% margin you did this quarter. Is any reason the margin in the third quarter should be lower than that? I mean it just looks like the trends are similar. So could we expect a similar number in the third quarter?

Mark Edward Seaton, CEO

A significant factor will be the performance of the commercial business. We set records in Q2, and there’s a possibility that Q3 could exceed that. However, we are not currently anticipating that. Based on typical seasonal trends, Q3 may be comparable to Q2. Since Q2 was very strong in commercial, if we achieve similar or better results in Q3, there is a chance we could reach those levels, but again, that’s not our current expectation. Ultimately, the commercial sector will be the primary influence, and while we anticipate it to be strong, the exact strength remains uncertain.

Bose Thomas George, Analyst

Yes. Okay. No, great. That's helpful. And then just switching to the regulatory front. Can you just give us any update on the FHFA title pilot? Have you interacted with Bill Pulte, just any color there?

Mark Edward Seaton, CEO

Yes, thank you, Bose. The pilot with Fannie is currently underway, but it's quite limited in both scope and duration. It's focused solely on refinance transactions, specifically a small portion of them. We are dealing with low loan-to-value ratios in certain states, and the properties must be free of any previous liens or encumbrances. Essentially, we're looking at the least risky refinance transactions. We are closely monitoring the pilot to evaluate its progress. We have been in contact with Director Pulte and his office, and we are also communicating with Fannie and Freddie. In response to the RFP, we submitted a title insurance solution instead of a title waiver solution, which was not the direction they preferred at that time. We will continue to observe how the situation evolves.

Bose Thomas George, Analyst

Okay, great. Regarding the pilot, it's expected to conclude later next year. It seems that FHA will wait for the pilot's completion before deciding in late 2026 how to move forward.

Mark Edward Seaton, CEO

Yes. So it goes the rest of this year and through 2026 and it's a pilot, and so they'll evaluate the results and whether it was successful or not and then make a determination at some point after that.

Matthew Feivish Wajner, CFO

I want to emphasize that we are not participating in the pilot currently. However, if this is the direction the market chooses, we possess very unique assets, including our data and title plans, which provide us with greater coverage than others. Additionally, our distribution network is a significant advantage. Even though this is a title waiver pilot, closing the transaction still requires expertise. Considering our distribution capabilities and underwriting skills, I believe we have real strengths if this direction is pursued by the market.

Operator, Operator

Thank you. And 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.