• Adjusted Pre-Tax Title Margin (Year): 10.3%
• Title Premiums and Escrow Revenues (Q4): Up double digits
• Commercial Revenue Growth (Q4): 47%
• Investment Income (Title Segment, Q4): $155 million
• Success Ratio (Q4): 51%
• Adjusted Pre-Tax Title Margin (Q4): 11.8%
• Home Warranty Revenue Growth (Q4): 4%
• Adjusted Pre-Tax Margin (Home Warranty, Q4): 18.2%
• GAAP Earnings (Q4): $0.69 per diluted share
• Adjusted Earnings (Q4): $1.35 per diluted share
• Title Segment Revenue (Q4): $1.6 billion, up 22%
• Purchase Revenue Growth (Q4): 18%
• Commercial Revenue (Q4): $252 million, up 47%
• Refinance Revenue Growth (Q4): 75%
• Agency Business Revenue (Q4): $698 million, up 23%
• Information and Other Revenues (Q4): $238 million, up 13%
• Provision for Policy Losses (Q4): $38 million, 3.0% of title premiums and escrow fees
• Home Warranty Total Revenue (Q4): $103 million, up 4%
• Effective Tax Rate (Q4): 27%
• Debt to Capital Ratio (Dec 31): 30.8%
• Debt to Capital Ratio (Excluding Secured Financings): 23.9%

• Warning! GuruFocus has detected 4 Warning Signs with FAF.

Release Date: February 13, 2025

For the complete transcript of the earnings call, please refer to the full earnings call transcript.

Positive Points

• First American Financial Corp (NYSE:FAF) reported a strong fourth quarter with a 47% growth in commercial revenue, driven by broad-based strength across all asset classes.
• The company achieved an adjusted pre-tax title margin of 11.8% for the fourth quarter, reflecting effective expense management and scale benefits.
• Investment income in the title segment exceeded expectations, reaching $155 million, partly due to a strategic portfolio rebalancing project.
• The home warranty segment posted a 4% revenue growth and an adjusted pre-tax margin of 18.2%, with significant contributions from the direct-to-consumer channel.
• First American Financial Corp (NYSE:FAF) anticipates continued growth in 2025, with early signs of improvement in residential purchase and refinance orders, and a strong start in the commercial business with a 24% revenue increase in January.

Negative Points

• The residential purchase and refinance markets remain challenging due to low inventory, high home prices, and mortgage rates around 7%, impacting overall market conditions.
• Refinance volumes are at trough levels, accounting for just 5% of direct revenue, highlighting ongoing distress in this market segment.
• The effective tax rate for the quarter was 27%, higher than the company's normalized rate of 24%, due to a valuation reserve against deferred tax assets.
• Despite strong commercial performance, there is uncertainty about sustaining growth in the second half of 2025, given the strong comparisons from the previous year.
• The office market, particularly suburban office, is only beginning to show signs of activity, indicating potential volatility in this segment of the commercial business.

Q & A Highlights

Q: Can you elaborate on the strength in the commercial business and its implications for future growth? A: Kenneth DeGiorgio, CEO, explained that the commercial business saw significant growth, with 14 large deals exceeding $1 million in premium compared to 8 in the previous quarter. Revenue was up 47% in Q4 and 24% in January, indicating strong market confidence. However, growth may decelerate in the second half of 2025 due to strong comparisons from 2024.

Q: What are the expectations for title revenue growth in 2025? A: Mark Seaton, CFO, stated that growth is expected to align with industry forecasts, around 8-9% for purchase volumes. Refinance growth is anticipated but from a low base, and commercial business is expected to continue its positive trend.

Q: How will the strategic portfolio rebalancing impact margins? A: The rebalancing project is expected to add $42 million in investment income for 2025, potentially improving margins by about 50 basis points. Additional cost controls and investment income improvements could further enhance margins.

Q: Can you discuss the impact of escrow deposits from commercial activity on investment income? A: Mark Seaton noted that investment income benefits from escrow deposits related to commercial deals, but there is no specific rule of thumb for the impact. The income is influenced by various factors, including Fed funds rates and deposit management.

Q: What is the outlook for the home warranty segment, particularly in a buyer-driven market? A: Kenneth DeGiorgio highlighted that as the market shifts towards buyers, home warranties may become more common as incentives in property sales. The real estate channel was a key driver of performance in Q4, and this trend is expected to continue.

For the complete transcript of the earnings call, please refer to the full earnings call transcript.