Title insurance provider First American Financial (NYSE: FAF) announced better-than-expected revenue in Q3 CY2025, 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.

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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.

Revenue Growth

Insurers earn revenue three ways. The core insurance business itself, often called underwriting and represented in the income statement as premiums earned, is one way. Investment income from investing the “float” (premiums collected upfront not yet paid out as claims) in assets such as fixed-income assets and equities is the second way. Fees from various sources such as policy administration, annuities, or other value-added services is the third. Unfortunately, First American Financial’s 1.2% annualized revenue growth over the last five years was weak. This was below our standards and is a rough starting point 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.

Our experience and research show the market cares primarily about an insurer’s net premiums earned growth as investment and fee income are considered more susceptible to market volatility and economic cycles.

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Net Premiums Earned

When insurers sell policies, they protect themselves from extremely large losses or an outsized accumulation of losses with reinsurance (insurance for insurance companies). Net premiums earned are:

• Gross premiums - what’s ceded to reinsurers as a risk mitigation and transfer strategy

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. These extra revenue streams are important to the bottom line, yet their performance can be inconsistent. Some firms have been more successful and consistent in managing their float, but sharp fluctuations in the fixed income and equity markets can dramatically affect short-term results.

Key Takeaways from First American Financial’s Q3 Results

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 quarter featured some important positives. The stock traded up 4.3% to $64 immediately after reporting.

First American Financial had an encouraging quarter, but one earnings result doesn’t necessarily make the stock a buy. Let’s see if this is a good investment. The latest quarter does matter, but not nearly as much as longer-term fundamentals and valuation, when deciding if the stock is a buy. We cover that in our actionable full research report which you can read here, it’s free for active Edge members.