Greetings and welcome to the First American Financial Corporation Third Quarter Earnings Conference Call. At this time, all participants are in listen-only mode. A brief question-and-answer session will follow the formal presentation. [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 entering the conference ID 13646700. We will now turn the call over to Craig Barberio, Director of Investor Relations to make an introductory statement.

Good morning everyone and welcome to our third quarter 2016 earnings conference call. Joining us on today’s call will be our Chief Executive Officer, Dennis Gilmore; and Mark Seaton, Executive Vice President and 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 have 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 the today’s earnings release and the factors discussed in our form 10-K and subsequent SEC filings. Our presentation today contain certain non-GAAP financial measures that we believe provide additional insides in the operational efficiency and performance of the company relative to the earlier period and relative to our company’s competitors. For more details on these non-GAAP financial measures including presentation with and reconciliation to the most directly comparable to GAAP financial measures, please refer to today’s earnings release, which is available on our website at www.firstam.com. I will now turn the call over to Dennis Gilmore.

Thanks Craig. Good morning and thanks for joining our call. I'll begin with a review of our third quarter highlights and conclude with a few comments on our outlook for the fourth quarter. The company's strong performance continued in the third quarter with revenues of $1.5 billion, up 9%. Our EPS was $0.96, up from $0.69 last year. The strong performance was driven by our title segment, which delivered a pretax margin of 13.5%. Our ongoing focus on operating efficiencies combined with a strong refinance market contributed to our positive results. We also benefited from a lower loss provision rate and higher net realized investment gains. In our residential business, purchase revenue grew by 3%, driven by higher average revenue per order with closed purchase orders down 3% compared to last year. Refinance revenue was up 53% this quarter compared with last year. Beginning late in the second quarter, lower interest rates drove strong refinance activity, which led to higher closings in the third quarter. Close refinance orders were up 49% compared to last year. So far in October, refinance open orders remain strong averaging 2,300 per day. Although our commercial revenue was down 3% in the quarter, we continue to see broad based strength in our commercial business and expect this trend to continue into the fourth quarter. Revenues in our Special Insurance segment grew by 8% during the quarter. Fidelity claim losses in the home warranty led to a segment pretax margin of 1.6%, flat compared to last year. We continue to operate -- we continue to implement operating changes necessary to improve the performance of our home warranty business. Turning to recent acquisitions, in September, required resolution RedVision, the largest independent national provider of title information in real property research. RedVision's title production and technology platform expands…

Thank you, Dennis. Total revenue in the third quarter was $1.5 billion, up 9% compared with the third quarter of 2015. Net income was $107 million, or $0.96 per diluted share. The current quarter results include net realized investment gains of $9.5 million, or $0.05 per diluted share. In the title insurance and services segment, direct premium and escrow fees were up 7% compared with last year. This increase was driven by a 20% increase in the number of orders closed, partially offset by 10% decrease in the average revenue per orders. The average revenue per order decreased to $1,859, due to a shift in the mix to lower premium refinance transactions. The average revenue per order increased 6% for purchase transactions and 3% for refinance transactions, while commercial declined by 2%. Agent premiums were up 7% reflecting the normal reporting lag of agent revenues of approximately one quarter. The agent split was 78.1% of agent premiums. Information and other revenues totaled $188 million, up 9% compared with last year. Excluding the impact of the recent acquisitions, the increase was primarily due to higher demand for the company's title plant and information products. Personnel costs were $409 million, up 5% from the prior year. The increase was primarily attributable to recent acquisitions, higher salary expense, and incentive compensation expense. Other operating expenses were $198 million, up 4% from last year. The increase was primarily due higher production related cost due to higher order volumes. The ratio of personnel and other operating expenses to net operating revenue was 70.4% compared with 72.3% last year, reflecting strong operating leverage given our increased order volumes. The provision for title policy losses and other claims was $64 million, or 5.5% of title premiums and escrow fees, compared with a loss provision rate of 6.6%…

Thank you. [Operator Instructions] Our first question comes from the line of Mr. Jeremy Campbell from Barclays. Please proceed with your question.

Hey. Thanks. So, while your agent premium mix was basically flat on a year-over-year basis, the growth rate of agent premiums has still vastly outperformed direct premiums thus far this year, when you look at it on a one quarter lag basis. Just can you touch on this a little bit? Is this a concerted effort to gain share in the agent market, or is something else going on here that we are not super aware of?

I wouldn’t say it’s a concerted effort to emphasize agency away from direct. We're very focused on growing both channels. I would say that when you look at how the market share has been direct versus agency, our growth in agency market share has somewhat outperformed our growth in direct market share and so that's part of it. And the other part of it is just the lumpiness of when the premiums come in.

And I would only add it's also has to do with where the strength in the country is right now. So, we’ve got a lot of strength going on in our agency states.

Got it. So, when we look ahead to maybe like the end of this year and in to 2017, do you expect that lag factor to kind of revert back towards more normal levels?

That's our expectation, yes.

Okay, great. And then with the big rate rally happening late June and really the most of early July, it seemed like you may have had a disproportionately higher number of refis open earlier in the quarter than you would typically have. Given a typical closing cycle is maybe 45, 60 days for a refi, did you guys experience a higher open to close ratio for refis during 3Q as some of those early opens may have closed in September?

Yeah, we did. When you look at so for this year, I mean our open refis peaked in July. We were about 2,700 a day in July. August we were 2,500, September we were 2,500. So far in October, our expectation is about 2,300. So, our opens are still elevated. They have been following and as results, we had a lower closing ratio for the quarter. So, we still feel like we have a good refi pipeline heading into Q4. Although it was probably not as quite as robust as is was this quarter.

Okay. And then -- so as we kind of look ahead, was there any margin impacts from a higher close ratio in the quarter at all just from the mechanically -- that happening?

I don't think so. No, Jeremy.

Okay, great. That's all. Thanks guys.

Your next question comes from the line of Mr. Jason Deleeuw from Piper Jaffray. Please proceed with your question.

Thank you and nice work on the quarter. Question on the pretax margins going forward, you've done a lot of good work on the cost front, but -- so going forward should we kind of think about margin expansion being contingent on topline revenue growth? Is that going to be the key here? Or are there still some other levers you can pull on for the cost side to help margins even if revenues are flattish? I know you've got the pension cost benefit that's going to help. It looks like maybe nearly 50 bps at some point it will kick in next year. But can you just kind of help us think about the key drivers of margin expansion from here.

Sure. It’s a little as little -- it's actually probably a little of both. The business is running very well right now. We're running it close to the higher end of our range of 10 to 12. But when we let the range out, we size that for the market and it's about the size of market it is right now. So, if we get some lift in the market, we think we can get margin expansion. But irrespective of the market, we're going to continue to look to gain efficiencies in the business, which we continue to do. We're going to continue to look to gain profit in the market share and I think we'll also continue get some benefit from the lower loss provision rate. And probably the most important is we remain very optimistic on housing market. So, we continue believe we’ll get lift in the housing market going forward.

So even just from a mix standpoint, the purchase could help you a little bit on the mix? Is that in commercial? Is that what you are referring to?

Just the overall purchase business, so we continue to get growth in the purchase business in 2017, we'll continue to perform very well.

And then loan provision, you guys are at 5.5, are you anticipating that can go lower still from here?

Yes, we've been booking it 5.5 for the whole year. We brought it down, last year it was 6.6 and I think last quarter we said there is a greater likelihood of it going down and going up and I think we even feel stronger about that statement this quarter. So, yes, I think there is definitely room for the loss provision rate that's all over the next couple of quarters or so.

Great. And then on the two acquisitions, could you help us out on the revenue contributions, or at least give us a perspective on the growth profile of those businesses and the margin profiles? Is there help you can give us on that?

Yes, I would say just collectively the revenue for the acquisitions we’ve closed recently is about $90 million. And it will show up in the info in another line item because they're not -- these aren’t insurance based businesses. And I just that the margins are somewhat higher than the title segment once our integration is complete over the next 12 to 18 months. These are going to take a little bit longer to integrate than a normal title agency. But I would say once we're done, the margins will be somewhat higher than overall title segment.

Great. Thank you very much.

Thank you.

And our next question comes from the line of Mr. Kevin Kaczmarek from Zelman and Associates. Please proceed with your question.

Hey, guys. Thanks for taking my call. Can you elaborate a bit on what you're seeing in the commercial market? It sounded like you were optimistic, but could you put some more color on that? I noticed open orders were down year-over-year, and I know they can be lumpy. But how do you see the kind of year-over-year trend in terms of revenue heading into the fourth quarter?

Sure, this Dennis. Again, another good quarter for us. Yes, we were down a little bit in revenue, 3%, but we’ve got a lot of momentum going into the fourth quarter. I think we'll have another strong quarter for us in the fourth quarter. It's typically our seasonal strongest quarter. We have a very strong franchise here and we’re running at a very high level. Again, just looking forward though, as I said before, I do think we'll probably start to see some downward pressure on this market because it's been running at such a high level for the last few years. So, specifically to your question I think fourth quarter will be very strong for us as it typically is for the seasonal fourth and we look for another strong year in 2017.

Okay. And on the information and other businesses, is there -- were there any kind of outliers in terms of revenue contributions this quarter? I know there's been some talk about extra fees being paid to appraisers and what not. Is there may be more sensitivity to refi than in the past?

No, not particularly. I think when you look forward, obviously, the acquisition we’ve closed this roughly $90 million that I just mentioned, that's obviously going to have an impact. So, we expect info order to grow going forward because of those deals. But there was -- I wouldn’t say there was anything extraordinary happened this quarter.

Okay. Thanks. And then lastly, on the Specialty Insurance, within the home warranty, you guys mentioned a higher contract servicing costs in previous quarters. I guess how has that been trending? Is there any indication that it's letting up, and maybe the provisions could improve going forward, excluding kind of one-time weather related events like the wildfires?

Sure, yes. I am optimistic and we had a good the last month of the quarter here. We had a higher contract servicing cost now for the last few calls. We’ve been putting a lot of resources on it to not only add to our network, but also add to the management of the contractor network. That's number one. Number two, we have experienced higher equipment replacement cost going on in this business. And to counter those two issues, we’ve also been raising prices selectively over the last few months. And we'll see the benefit of that going forward over the next 12 months. So, overall, we gone through the toughest two quarters of this business and I'm optimistic looking forward, we'll continue to see some improvement here in home warranty.

Okay. Thanks. And that $90 million you mentioned for the acquisitions, that's annualized run rate?

Yes, annualized.

Okay. And it will maybe have some seasonality consistent with the rest of the business, in info and other?

Yes, I would think so. Yes.

Okay. All right. Thanks. That's all I had.

Thank you.

And our next question comes from the line of Mr. Eric Beardsley from Goldman Sachs. Please proceed with your question.

Hi. Thank you. If we were to look at the MBA forecast for next year and other industry: forecast first deep drop off in refi and some growth and purchase. I'm just wondering if you can comment on your ability to grow earnings if that type of environment actually materializes.

Well, difficult question, because it's going to be based on the forecast. So, when we look at the incurred MBA forecast right now, it would make rational sense to us. We do think that the purchase market will continue to show growth in 2017 and beyond. We think there's still room in the housing market for continued growth. Obviously, a wildcard is refinance. So, right now we’ve got some nice tailwind actually going in the fourth quarter. And rates stay where they are with different benefit going into the first quarter. So, we'll kind of see on that one. But we're optimistic on the purchase market. So, again, the forecast makes some sense to us. And then to the earnings side, we're going to continue like we say, we're going to drive efficiencies while we can in the business and continue look to gain some profitable share to help our leverage in the business.

Got it. But I guess if we were looking at volumes being down overall -- and the mix for it is, I'm just curious what those levers are. Is there ability to shrink expenses more than revenue or grow things like information and other more to offset that?

Again, it will depend on the severity of either the upturn or the downturn, but we'll run the business like we always do and this is will ultimately match our expenses against our revenue. So, that's just how we'll have to run this -- how we do run this business.

And just a quick follow-up on the acquisition. You said there is $10 million of impact from the acquisitions in this quarter. Is that $10 million out of the $90 million that you expect to have on an annual basis? Is that right way to think about it?

No, I don't think we said $10 million this quarter, I think the deal is basically one deal close the at the very end of the quarter, one close at the very beginning of Q4. So, there was really -- in your terms of these two acquisitions, there was no real impact in Q3, but I think starting in Q4, we'll start to see that $90 million run rate coming through.

Got it. Basically, you had some nice year-over-year growth there already, and so you're just going to grow a little bit on top of that run rate, is the right way to think about it?

Yes, I think that's the right way to think about it.

Okay. And then just lastly, the pension cost benefit, could you just help us out exactly which quarter we're going to start to see that hit? And is that purely on the corporate OpEx lines?

Yes, it's going to be incorporated. It's not getting hit the title segment at all. And right now we think the whole thing will be terminated conservatively estimated by the end of Q3. So, we'll get that full $22 million run rate I would say at the latest beginning in Q4 of next year, but I think there's a good chance it could come earlier than that.

Got it. Okay, great. Thank you.

Thank you.

Our next question comes from the line of Jordan Hymowitz from Philadelphia Financial. Please proceed with your question.

Hey, guys. Thanks for taking my question. Two things. When you dividend payout, do you have a specific target that you don't want it to go above or something like that? What's maximum payout you want to maintain at?

We don't target a dividend payout. Obviously, there is a dividend payout kind of just naturally falls out. So, that's not something that we target. I think when you look historically, we paid 20% dividend payout going back years and years. We've raised the dividend not just this year, but recently fairly significantly couple years and now we're in roughly 40% to 45% range. But that's not like we target that when we set the dividend. What we really look at is we look at our cash flow forecast, we figure out how much of that we need to run our business and grow our business. And a big chunk of the rest, we go to pay the dividend and whatever the payout ratio is.

Is there a maximum number that you won't let it get above?

No, I mean that's not something we think about. I mean obviously if earnings were to fall for some reason, it would go up, it wouldn’t scare us all to run at a higher dividend rate payout ratio than we are now for a period of time. But to answer the question, there's no maximum that we have.

Got it. And the second question is I like what you're doing with the dividend, and you've also maintained a better optimal capital structure. My question is does that preclude you from making further large scale acquisitions, though, at this point especially within the title industry?

I wouldn’t say preclude. No, I mean we still have a lot of financial flexibility. So, I wouldn’t say preclude thus from executing our strategic objectives.

Okay. Thank you.

Thank you.

And our next question comes from the line of Mr. Ryan Byrnes from Janney. Please proceed with your question.

Great. Thanks. Good morning, everybody. I just had a question. What -- so you used -- you drew down the revolver this quarter. Is the plan to keep it that drawn down or to term it out? What's the thought process there?

The plan right now is just to keep it on the line. I mean obviously that's not really a permanent sort of financing for us. But the rate is good. We feel it’s the optimal cost of capital -- source of capital right now. So, for the foreseeable future, we expected to be -- to remain on the line.

And with I guess the uptick in mortgage service acquisitions in the last couple months for you guys, is that obviously an active part of the strategy or it's just kind of one-off, these both came available at the same time? I'm just trying to figure out if your M&A appetite has increased a little bit.

We are looking at a lot of deals right now, but like always, we're going to be very disciplined on it. So, the two deals really fall -- or fit into two different parts of our strategy. The first one RedVision allows us to continue to add to our title information products so that we could self-count it our self of the industry and leverage our data base. So, that one is grilling on the title side. The TD Services to build our mortgage solutions product offerings and in that specific case, we had most of these products, but they were smaller, so give its bulk in the product offerings.

Got it. Thanks, guys.

Thank you.

Our next question comes from the line of Chris Gamaitoni from Autonomous Research. Please go ahead.

Thanks, guys. All my questions have been answered.

Thank you.

Up next is John Campbell from Stephens Inc. please go ahead sir.

Hey, guys. Good morning. Back to the leverage question. You guys -- it's 20% now. Could you guys maybe just give us an idea of what your kind of comfortable max leverage point is or maybe what the rating agencies are looking for?

Well, what I'd say is our target is 18% to 20%. We're obviously at the higher end of that target now. We're obviously very comfortable with that. We'd be very comfortable at 25%, but I think if we went that high for whatever reason, we would be in that pay down. We want to -- in a normalized market, we want to be 18% to 20%. And the rating agencies are very comfortable that and especially since we raised the dividend so dramatically, it helped them just a little bit of a more target leverage. So, we could go to 25% easy, but if we did would be in debt pay down.

Okay. That's helpful. And then Mark, I just want to make sure I get pension plan contributions right. Are you saying that you're expecting an incremental $45 million contribution from what was already announced with the 8-K? Are you saying that you are expecting $45 million of what was announced to be front end loaded?

Well, in the 8-K, we announced that we thought that we would be about $100 cash contribution. Obviously, that dependent on a lot of factors, but our best estimate was $100 million. This quarter we funded $56 million of that $100 million. And we expect to rest roughly $45 million to be early next year.

Okay. That's helpful. And then just for my notes, could you guys run back through the quarter-to-date purchase and refi open-order trends?

Q4 quarter end?

Yes.

So, on the purchase side, our open orders were down, 2% relative to the prior year. On the refinance side, our refinancer was up 32% versus prior and they down 9% September. I don't know we're roughly -- and this is on the open, we will think about 2,300 refinance orders.

Okay, great. Thanks, guys.

Thank you.

Our next question comes from the line of Mr. Mark Hughes from SunTrust. Please go ahead sir.

Thank you. Good morning. Sorry if you mentioned this, but what tax rate, given some of the mix changes we've talked about, what tax rate do you think we should use going forward?

We still fill like 34% is a good rate going forward.

Thank you.

You're welcome.

And our next question comes from one of Bose George from KBW.

Good morning. Just going back to the comments on the specialty insurance business, when do you think the margins there are going to normalize?

We'll I'm looking for material improvement going into 2017. So, will you again we got our toughest two quarters, the second and third. I we're going to spring back in fourth and first. And then again the key for the businesses is how it performs in the second and third of 2017. But again, we're putting a lot of resources and it fixed some of these issues number one. Number two, we continue to actively raise prices were appropriate and in the reality it will take about a full year for them to flow into the benefit of the revenue line for us.

Okay, great. That's helpful. Thank you.

Thank you.