First American Financial (FAF)

Title insurance provider First American Financial (NYSE:FAF) reported Q3 CY2025 results topping the market’s revenue expectations, with sales up 40.7% year on year to $1.98 billion. Its non-GAAP profit of $1.70 per share was 17.1% above analysts’ consensus estimates.

Company Overview

Tracing its roots back to 1889 when California was experiencing its first major real estate boom, First American Financial (NYSE:FAF) provides title insurance, settlement services, and risk solutions for residential and commercial real estate transactions across the United States and internationally.

Property & Casualty (P&C) insurers protect individuals and businesses against financial loss from damage to property or from legal liability. This is a cyclical industry, and the sector benefits when there is 'hard market', characterized by strong premium rate increases that outpace loss and cost inflation, resulting in robust underwriting margins. The opposite is true in a 'soft market'. Interest rates also matter, as they determine the yields earned on fixed-income portfolios. On the other hand, P&C insurers face a major secular headwind from the increasing frequency and severity of catastrophe losses due to climate change. Furthermore, the liability side of the business is pressured by 'social inflation'—the trend of rising litigation costs and larger jury awards.

First American Financial's primary competitors in the title insurance industry include Fidelity National Financial (NYSE:FNF), Old Republic International (NYSE:ORI), and Stewart Information Services (NYSE:STC). In the home warranty segment, it competes with American Home Shield (NYSE:AHS) and Frontdoor (NASDAQ:FTDR).

In general, insurance companies earn revenue from three primary sources. The first is the core insurance business itself, often called underwriting and represented in the income statement as premiums earned. The second source is investment income from investing the “float” (premiums collected upfront not yet paid out as claims) in assets such as fixed-income assets and equities. The third is fees from various sources such as policy administration, annuities, or other value-added services. Regrettably, First American Financial’s revenue grew at a weak 1.2% compounded annual growth rate over the last five years. This fell short of our benchmarks and is a poor baseline for our analysis.

We at StockStory place the most emphasis on long-term growth, but within financials, a half-decade historical view may miss recent interest rate changes, market returns, and industry trends. First American Financial’s annualized revenue growth of 6.4% over the last two years is above its five-year trend, but we were still disappointed by the results. Note: Quarters not shown were determined to be outliers, impacted by outsized investment gains/losses that are not indicative of the recurring fundamentals of the business.

This quarter, First American Financial reported magnificent year-on-year revenue growth of 40.7%, and its $1.98 billion of revenue beat Wall Street’s estimates by 6.2%.

Net premiums earned made up 81.3% of the company’s total revenue during the last five years, meaning First American Financial barely relies on non-insurance activities to drive its overall growth.

Markets consistently prioritize net premiums earned growth over investment and fee income, recognizing its superior quality as a core indicator of the company’s underwriting success and market penetration.

Net premiums earned are net of what’s paid to reinsurers (insurance for insurance companies), which are used by insurers to protect themselves from large losses.

First American Financial’s net premiums earned has grown at a 1.3% annualized rate over the last five years, much worse than the broader insurance industry and in line with its total revenue.

When analyzing First American Financial’s net premiums earned over the last two years, we can see that growth accelerated to 3.5% annually. Since two-year net premiums earned grew slower than total revenue over this period, it’s implied that other line items such as investment income grew at a faster rate. While these supplementary streams affect the bottom line, their contribution can fluctuate. Some firms have been more successful and consistent in investing their float over the long term, but sharp movements in the fixed income and equity markets can play a substantial role in short-term performance.

Revenue growth is one major determinant of business quality, and the efficiency of operations is another. For insurance companies, we look at pre-tax profit rather than the operating margin that defines sectors such as consumer, tech, and industrials.

Insurance companies are balance sheet businesses, where assets and liabilities define the economics. Interest income and expense should therefore be factored into the definition of profit but taxes - which are largely out of a company’s control - should not. This is pre-tax profit by definition.

Over the last four years, First American Financial’s pre-tax profit margin has risen by 9.8 percentage points, going from 18.8% to 9%. Luckily, it seems the company has recently taken steps to address its expense base as its pre-tax profit margin expanded by 4.3 percentage points on a two-year basis.

First American Financial’s pre-tax profit margin came in at 12.5% this quarter. This result was 22.8 percentage points better than the same quarter last year.

We track the long-term change in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company’s growth is profitable.

First American Financial’s flat EPS over the last five years was below its 1.2% annualized revenue growth. This tells us the company became less profitable on a per-share basis as it expanded due to factors such as interest expenses and taxes.

Like with revenue, we analyze EPS over a more recent period because it can provide insight into an emerging theme or development for the business.

Although it wasn’t great, First American Financial’s two-year annual EPS growth of 10.9% topped its 6.4% two-year revenue growth.

Diving into the nuances of First American Financial’s earnings can give us a better understanding of its performance. First American Financial’s pre-tax profit margin has expanded over the last two yearswhile its share count has shrunk 1.1%. Improving profitability and share buybacks are positive signs for shareholders as they juice EPS growth relative to revenue growth.

In Q3, First American Financial reported adjusted EPS of $1.70, up from $1.34 in the same quarter last year. This print easily cleared analysts’ estimates, and shareholders should be content with the results. Over the next 12 months, Wall Street expects First American Financial’s full-year EPS of $5.42 to grow 9.4%.

Insurance companies are balance sheet businesses, collecting premiums upfront and paying out claims over time. The float – premiums collected but not yet paid out – are invested, creating an asset base supported by a liability structure. Book value captures this dynamic by measuring:

• Assets (investment portfolio, cash, reinsurance recoverables) - liabilities (claim reserves, debt, future policy benefits)

BVPS is essentially the residual value for shareholders.

We therefore consider BVPS very important to track for insurers and a metric that sheds light on business quality because it reflects long-term capital growth and is harder to manipulate than more commonly-used metrics like EPS.

First American Financial’s BVPS grew at a sluggish 3.4% annual clip over the last five years. However, BVPS growth has accelerated recently, growing by 6.9% annually over the last two years from $43.83 to $50.11 per share.

The debt-to-equity ratio is a widely used measure to assess a company's balance sheet health. A higher ratio means that a business aggressively financed its growth with debt. This can result in higher earnings (if the borrowed funds are invested profitably) but also increases risk.

If debt levels are too high, there could be difficulties in meeting obligations, especially during economic downturns or periods of rising interest rates if the debt has variable-rate payments.

First American Financial currently has $1.55 billion of debt and $5.30 billion of shareholder's equity on its balance sheet, and over the past four quarters, has averaged a debt-to-equity ratio of 0.4×. We think this is safe and raises no red flags. In general, we’re comfortable with any ratio below 1.0× for an insurance business. Anything below 0.5× is a bonus.

Return on Equity, or ROE, ties everything together and is a vital metric. It tells us how much profit the insurer generates for each dollar of shareholder equity entrusted to management. Over a long period, insurers with higher ROEs tend to compound shareholder wealth faster through retained earnings, buybacks, and dividends.

Over the last five years, First American Financial has averaged an ROE of 9.7%, uninspiring for a company operating in a sector where the average shakes out around 12.5%.

We were impressed by how significantly First American Financial blew past analysts’ revenue expectations this quarter. We were also glad its EPS outperformed Wall Street’s estimates. Zooming out, we think this was a good print with some key areas of upside. The stock traded up 4.3% to $64 immediately following the results.

Updated: December 4, 2025 at 11:09 PM EST

When considering an investment in First American Financial, investors should account for its valuation and business qualities as well as what’s happened in the latest quarter.

First American Financial doesn’t pass our quality test. For starters, its revenue growth was weak over the last five years. On top of that, First American Financial’s net premiums earned growth was weak over the last five years, and its weak EPS growth over the last five years shows it’s failed to produce meaningful profits for shareholders.

First American Financial’s P/B ratio based on the next 12 months is 1.2x. This valuation tells us it’s a bit of a market darling with a lot of good news priced in - we think there are better stocks to buy right now.

Wall Street analysts have a consensus one-year price target of $76.80 on the company (compared to the current share price of $64.79).

Although the price target is bullish, readers should exercise caution because analysts tend to be overly optimistic. The firms they work for, often big banks, have relationships with companies that extend into fundraising, M&A advisory, and other rewarding business lines. As a result, they typically hesitate to say bad things for fear they will lose out. We at StockStory do not suffer from such conflicts of interest, so we’ll always tell it like it is.