Fidelity National Financial, Inc. (NYSE:FNF) Q3 2023 Earnings Call Transcript

Fidelity National Financial, Inc. (NYSE:FNF) Q3 2023 Earnings Call Transcript November 8, 2023

Operator: Ladies and gentlemen, good morning, and welcome to the Fidelity National Financial, Inc. Third Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Lisa Foxworthy-Parker, SVP, Investor and External Relations. Please go ahead.

Lisa Foxworthy-Parker: Great. Thanks, operator, and welcome, everyone. Joining me today are Mike Nolan, Chief Executive Officer; and Tony Park, Chief Financial Officer. We look forward to addressing your questions following our prepared remarks. Chris Blunt, F&G’s CEO; and Wendy Young, F&G’s CFO, will join us for the Q&A portion of today’s call. Today’s earnings call may include forward-looking statements and projections under the Private Securities Litigation Reform Act which do not guarantee future events or performance. We do not undertake any duty to revise or update such statements to reflect new information, subsequent events or changes in strategy. Please refer to our most recent quarterly and annual reports and other SEC filings for a discussion of the factors that could cause actual results to differ materially from those expressed or implied.

This morning’s discussion also includes non-GAAP financial measures that we believe may be meaningful to investors. Non-GAAP measures have been reconciled to GAAP where required in accordance with SEC rules within our earnings materials available on the Company’s website. Yesterday, we issued a press release, which is also available on our website. Today’s call is being recorded and will be available for webcast replay at fnf.com. It will also be available through telephone replay beginning today at 3:00 p.m. Eastern Time through November 15, 2023. And now, I’ll turn the call over to our CEO, Mike Nolan.

Mike Nolan: Thank you, Lisa, and good morning. Overall, we’ve had a strong quarter despite the tough market. Starting with our title business, we delivered adjusted pretax earnings of $311 million in an industry-leading adjusted pretax title margin of 16.2%. This is an outstanding result, especially given that U.S. mortgage rates have advanced to multi-decade highs recently peaking at over 8% in October, which is the highest level since November of 2000. In turn, this is keeping a lid on residential purchase applications, which have decreased to their lowest level since 1995, almost three decades ago. As a result, we continue to be focused on managing expenses and have reduced staffing and operating expenses this year. As of September 30, our total field operations employee count has been reduced by about 13% over the past 12 months.

This has generated about $70 million in run rate personnel cost savings in the third quarter as compared to the third quarter of 2022. We have also reduced our direct title office locations from approximately 1,400 to below 1,300, generating about $1 million per month in expense savings. Commercial volumes are trending in line with our expectations. We have generated commercial revenue of $263 million in the third quarter and $767 million in the first nine months, putting us on track for $1 billion for the full year and in line with levels seen in more normal years like 2015 to 2019. Looking at sequential volumes more closely, daily purchase orders opened were down 7% from the second quarter of 2023 and down 8% for the month of October versus September, in line with seasonal expectations and down 2% for the month of October versus the prior year and refinance orders opened per day were down 8% from the second quarter of 2023, up 2% for the month of October versus September and down 13% for the month of October versus the prior year.

Our total commercial orders opened were $779 per day, flat for the third quarter versus the second quarter of 2023, down 7% for the month of October versus September and down 4% for the month of October versus the prior year. Overall, total orders opened averaged 5,000 per day in the third quarter with 5,300 in July and 4,900 in both August and September. For the month of October, total orders opened were 4,600 per day, down 6% versus September. While we are pleased with our continued strong performance in profitability, we remain cautious as we anticipate order volumes at or near historic lows as we close out the year and enter the first quarter, which in turn is expected to pressure industry margins much like last year. As always, we will manage our business to the trend in open orders to protect our profitability.

Beyond the near-term pressures, we remain bullish on the mid- to long-term fundamentals of the real estate market. A clear benefit of our financial strength, scale and profitability is our ability to continue to strategically build and expand our title business by investing in technology, recruiting talent and making acquisitions, which we have continued to do while maintaining industry-leading margins. Turning to our F&G business, we are pleased to see investor recognition of F&G’s success as its market capitalization has increased from $2.4 billion at the time of the partial spinoff last December to approximately $4 billion. F&G recently held an Investor Day on October 3, which provided a deep dive into the Company’s proven track record of growth and highlighted strategic levers that the team is employing to create value for stakeholders and which will benefit F&S as its majority shareholder.

To recap, F&G’s future potential upside from three areas; first, sustainable asset growth from its retail and pension risk transfer growth strategies; next, margin expansion from investment opportunities, effectively managing operating expenses for operational scale benefit and incremental fee-based earnings from flow reinsurance and owned distribution. And finally, we believe there is potential for F&G’s share price to more fully reflect its core business performance and the accretive nature of its flow reinsurance and owned distribution strategies as they scale over time. For the current quarter, F&G has profitably grown its assets under management for flow reinsurance to a record $53 billion at September 30 and now comprises 31% of FNF’s adjusted net earnings.

I’d like to wrap up by thanking all our employees for delivering another industry-leading performance this quarter despite the market headwinds. This is a seasoned team that knows how to prudently manage through tough cycles while continuing to invest in the business to take advantage of opportunities for longer-term growth. With that, let me now turn the call over to Tony Park to review FNF’s third quarter financial highlights.

Tony Park: Thank you, Mike. Starting with our consolidated results, we generated $2.8 billion in total revenue in the third quarter. Third quarter net earnings were $426 million, including net recognized losses of $356 million versus net earnings of $362 million including $230 million of net recognized losses in the third quarter of 2022. The Title segment contributed net earnings of $185 million, the F&G segment contributed $259 million, and the Corporate segment had a net loss of $18 million. The net recognized gains and losses in each period are primarily due to mark-to-market accounting treatment of equity and preferred stock securities, whether the securities were disposed of in the quarter will continue to be held in our investment portfolio.

Excluding net recognized gains and losses, our total revenue was $3.1 billion as compared with $3.4 billion in the third quarter of 2022. Adjusted net earnings from continuing operations was $333 million or $1.23 per diluted share compared with $272 million or $0.99 per share for the third quarter of 2022. The Title segment contributed $245 million. The F&G segment contributed $102 million and the Corporate segment had an adjusted net loss of $14 million. Turning to Q3 financial highlights specific to the Title segment, our Title segment generated $1.9 billion in total revenue in the third quarter, excluding net recognized losses of $46 million, compared with $2.3 billion in the third quarter of 2022. Direct premiums decreased by 24% versus the third quarter of 2022.

Agency premiums decreased by 25% and escrow title-related and other fees decreased by 7% versus the prior year. Personnel costs decreased by 10% and other operating expenses decreased by 16%. All in, the title business generated adjusted pretax title earnings of $311 million and a 16.2% adjusted pretax title margin for the quarter versus 17.1% in the prior year quarter. Our title and corporate investment portfolio totaled $5 billion at September 30. Interest and investment income in the title and corporate segments of $108 million increased $37 million as compared with the prior year quarter, primarily due to higher income from our 1031 exchange business and cash and short-term investments. Looking ahead to 2024, we expect interest and investment income to moderate in the $95 million to $100 million quarterly range with gradually declining 1031 exchange balances and spreads and assuming level cash and short-term investment balances.

Our title claims paid of $69 million were $12 million higher than our provision of $57 million for the third quarter. The carried reserve for title claim losses is approximately $81 million or 4.8% above the actuary central estimate. We continue to provide for title claims at 4.5% of total title premiums. Next, turning to Q3 financial highlights specific to the F&G segment. F&G hosted its earnings call earlier this morning and provided a thorough update, so I will focus on the key highlights of its quarterly performance. F&G reported gross sales of $2.8 billion in the third quarter, down 3% from the prior year quarter. This reflects lower retail channel sales, offset by higher institutional market sales. Coming off record sales in the first half of the year, retail sales were intentionally lower in the quarter as F&G finalized its reinsurance agreements and enhanced product features to position for a strong finish to 2023 and create momentum for 2024.

Within this market environment, F&G has seen a sharp increase in submitted annuity premium in September and October, which is expected to provide a strong growth trajectory for annuity sales in the fourth quarter. F&G’s net sales retained were $2.3 billion in the third quarter, in line with the prior year quarter. In addition, and as expected, F&G has increased flow reinsurance to 90% of MYGA sales in September of 2023. As a reminder, F&G utilizes flow reinsurance, which provides a lower capital requirement on ceded new business while allocating capital to the highest returning retained business. This enhances cash flow, provides fee-based earnings and is accretive to F&G’s returns. F&G has profitably grown its retained assets under management to a record $47 billion at September 30.

Assets under management before flow reinsurance was $53 billion adjusting for the approximately $6 billion of cumulative net business ceded. Adjusted net earnings for the F&G segment were $102 million in the third quarter. This includes alternative investment returns below our long-term expectations by $24 million or $0.09 per share. Let me wrap up with a few thoughts on capital and liquidity. We remain focused on ensuring a balanced capital allocation strategy as we navigate the current environment. We ended the quarter with $949 million in cash and short-term liquid investments at the holding company level, which has remained relatively steady since year-end despite the effect of market headwinds and historical low volumes in the title business.

FNF’s consolidated debt-to-capitalization ratio, excluding AOCI, was 27.7% as of September 30. This is in line with our long-term target range of 20% to 30%, and we expect that our balance sheet will naturally delever as a result of growth in shareholders’ equity, excluding AOCI. Going forward, our consolidated annual interest expense on debt outstanding is approximately $175 million, comprised of approximately $80 million for FNF’s holding company debt and $95 million for F&G segment debt. Following a record level of share repurchases in 2021 and 2022 at a total combined cost of $1 billion. We have prudently moderated our repurchase volume in the first nine months of this year to preserve financial flexibility through the multi-decade low volumes of this market cycle.

Therefore, there were no share repurchases in the third quarter and only $4 million of share repurchases in the first nine months of the year. During the third quarter, we paid common dividends of $0.45 per share for a total of $123 million. We continue to view our current annual common dividend of approximately $500 million as sustainable. This concludes our prepared remarks, and let me now turn the call back to our operator for questions.

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Q&A Session

Operator: [Operator Instructions] Our first question is from Soham Bhonsle with BTIG. Please go ahead.

Soham Bhonsle: Hope you’re doing well. So first one on title margin. The 16.2% this quarter and one of the toughest mortgage environment that’s pretty impressive. And I know you’ve historically talked about 15% to 20% as normalized. But is there a reason that, that can’t be higher? Should we be thinking about a range that’s different now? And maybe could you just talk through some of the puts and takes there?

Mike Nolan: Yes. I think right now, we wouldn’t talk about a different range. We’re still in a very volatile environment with rates at 7.5% and low inventory volumes historically, but certainly very pleased with the margin performance in the third quarter and just the work of our employees in the field to continue to take care of customers, recruit and manage expenses. And I think if you look at the third quarter to the second quarter, it’s really that expense discipline and then a little pickup in some of our nontitle businesses like subservicing that allowed us to pull a little bit stronger margin from the second quarter. But I think we need to get past this volatile market to really think about talking about an annualized margin greater than 15% to 20%.

Tony Park: Yes. I mean, keep in mind, the 15% to 20% is an annual number. And certainly, the last couple of quarters, we’ve been in that range. But you recall from last year, the fourth quarter gets more challenging when inventories come down and then the first quarter even more so. So when you talk about the whole year, you’re still not there. We’re still in a tough environment.

Mike Nolan: Yes. And I think to add on to that, in the short term, so we remain cautious on margins for the fourth quarter and first quarter. Our open inventory levels are similar to what we saw going into the fourth quarter last year. And you saw how margins were pressured as we as we got through the fourth and first quarters. But kind of to your point, we’re very confident that as the market returns, we’re well positioned to drive margins given this cost structure we have and more importantly, the industry-leading scale that we have. So, we think as rates moderate and this market returns, we’ll be able to produce very strong margins. But we kind of got to get through these next couple of quarters.

Soham Bhonsle: Got it. Okay. That makes sense. And then on F&G performance obviously continues to be very strong. But one of the concerns we hear is sort of the lack of liquidity in the stock. And I know you — there’s that 80% ownership threshold that you may want to sort of adhere to. But maybe just talk through some of the considerations for potential equity raise there because it would seem that the business could use perhaps some capital to accelerate their strategy there and just capitalize on the opportunities. And this would also be an interesting way to sort of maybe reduce FNF’s ownership over time that could help unlock the multiple. So, any thoughts there, please.

Tony Park: Yes. No, you make some good points. Clearly, liquidity is a challenge there, and you can see a little volatility in the share price because of that. F&G is growing great, as you probably have seen from their results. Their margins are stronger. They’re generating roughly $800 million in cash flow from their in-force book and reinvesting that into new business and there’s plenty of new business to be had. And so ultimately, yes, they will need more equity to continue to grow. And I guess, we’ll see. I mean, Chris may have some thoughts, but we’ll see how that comes about. We do want to — FNF wants to preserve that 80-plus percent ownership so that we have the ability to spend of F&G tax-free in the future if that’s what the Board decides to do. But there are ways to raise equity and preserve that. We’re at 85% now. And so, there’s a little bit of room there. I don’t know, Chris, if you had any more to add there or…

Chris Blunt: No, other than it’s now about roughly 18 months until the five-year mark. And so yes, just related to your potential tax-free spin comment.

Operator: Our next question is from Mark Hughes with Truist Securities. Please go ahead.

Mark Hughes: Thinking about the margin, just the sequential progression from 3Q to 4Q, if you look at ’21 and ’22 — or I’m sorry, 2020 and 2021, the margins held up pretty well between Q3 and Q4. Last year, there was a more substantial drop. How do you think about the progression this year from 3Q to 4Q, given the orders that you’re seeing in headcounts and all that.

Mike Nolan: Well, again, we’re not going to guide to a specific number, Mark, on margin, but I would just look at what happened last year because the inventories are very, very similar. We’re going to have less resale closings much like we did last year, maybe a little less refi commercial can be a bit of a wildcard in terms of the closing levels of the fourth quarter. But I just think it’s going to be a tough quarter given the inventory levels we have. Some of the other puts and takes can be agency mix in the quarter. If you have more agency revenue that just has a natural push down on margins because the gross margins are lower. And then sometimes the — on sort of the edges, if you will, the nontitle businesses that are in the title segment can push margins around a little bit one way or the other.

But — it’s really just — we’re at very low inventory levels as an industry, and that’s going to just have a natural downward pressure on margins, I think, in the short term.

Mark Hughes: Understood. And then I’m sorry if this came up on the F&G call earlier today, but the Department of Labor, proposing maybe some new rules around fixed indexed annuities. Chris, any impact on that?

Chris Blunt: Yes. Honestly, I don’t think it’s going to have any meaningful impact. It’s kind of just a different — slightly different version of the same rule that we’ve been contending with for years. A lot of similarities to the best interest rule from the NAIC. And so, if the margin could add a little bit of extra compliance and oversight expense in the independent channel probably, we’re obviously still digesting it. But there’s nothing in there that looks to us to be particularly threatening to our business, even within the independent agent channel, which is as we’ve grown and expanded, I want to say that’s maybe 20% of our total sales. But even within that, I think the IMOs that we do the bulk of our business through are really well positioned.

They’re very sophisticated firms. Many of them now have RIAs and broker-dealers of their own right, and they’re competing through a lot of value-added services. So, I’ll skip editorializing on whether this is necessary, but just say that I don’t think there’s anything that we’re particularly worried about.

Mark Hughes: I think you just did editorialize.

Tony Park: We’re going to have us doing that.

Mark Hughes: That’s great.

Operator: Our next question is from John Campbell with Stephens Inc. Please go ahead.

John Campbell: Nice work in the quarter. No problem. On the October order count that was a clear positive in RI is just kind of across the board. It seems like things are turning ever so slightly, and that’s impressive given you’ve got obviously, the 8% backdrop with mortgage rates. Two-part question here. First, on the purchase side, I mean both you guys and First American are, I think, showing clearly better trends than what’s kind of been implied out there in the market, I mean, both from the industry forecasters and we look at the MBA weekly apps. I mean the thing there is that’s based on the number of mortgages, right? I saw this morning the stat that I think cash sales rose to like 34% of the mix. That was up versus 29% last year.

So I guess the question is, are you guys seeing maybe a little bit of deviations from what others might be seeing out there in the market due to rising cash flows? And if that’s the case, is there any meaningful impact to fee per file on the purchase side?

Mike Nolan: Yes. It’s a really good question, John. It’s Mike. I don’t know that we track cash sales specifically. It might be more anecdotally, and I think I’ve heard that maybe the field has been seeing a little bit more of that. But to your point, I mean, our October purchase orders fell 7% sequentially. And as I said in the opener, that’s very much a seasonal fall off. And — but then when you go back and look at what happened with rates in the third quarter, they were they went up, I don’t know, 60, 70, 80 basis points or something like that during that time frame. I fully expected more fall off, to be honest with you, given the rate movement. So, I think I agree with your premise that there’s a little maybe outperformance going on and maybe cash sales are an element of it, but I’m not sure of that.

Tony Park: Maybe I’ll just chime in on the fee per file. I think on the purchase side, we’re up about 3% versus Q3 of last year, which surprised me a little bit. I felt like it was trending down as you got into Q4 and the first quarter — fourth quarter of last year, the first quarter of this year, but then it started to tick right back up, probably surprised a lot of people that home prices have maintained their value. Maybe it came down a little bit sequentially from Q2 to Q3, but still holding up pretty well thus far.

John Campbell: Yes. It’s a great point. I mean I feel like for the last 1.5 years, 2 years, we’ve all been surprised kind of on the negative on the downside. So it’s good to see that these things are turning for sure. Refi to me, I mean, that’s obviously not even a meaningful driver anymore. So, I hesitate to even spend time on it. But I mean, the 2% sequential gain, that’s, again, against the backdrop of higher rates. I mean, are you guys feeling like — I mean, are you comfortable saying that we’re kind of at a true trough right now? And would you go as far as saying that any kind of slight reduction in rates could send us back to growth on refi?

Mike Nolan: I would tend to agree with that, John, if you look at our refi open orders. So we’ve averaged for the year. This is now through October on the open side, 1,012 a day. And we did 966 in October. I mean it’s been generally a straight line, right, Tony, across the year. And rates have moved around, as you know, quite a bit. So it does feel like we’re kind of at a floor. And to your comment about if rates come down, volumes go up, I think that’s absolutely true. It might take a little bit of time in that rates got to come down a certain amount to generate that refi opportunity. But you go back — I think I said this on the last call, the last time rates were 8% was 2,000. That was a very small refinance market, I think, $250 billion that year. And rates were 6% in ’03, and it was a $2.5 trillion refinance market. Now I’m not saying that will happen now, but I do think it points to how that refinance market can build over time with the drop in rates.

Tony Park: And in terms of revenue, refi as a percentage of our direct revenue is like 5% right now, and that’s been pretty consistent. It was 5% last quarter and 6% in Q1 and 6% in the fourth quarter. And 7% in the third quarter of last year and so, it’s just flat-lining at very low levels.

Operator: [Operator Instructions] Our next question is from Bose George with KBW. Please go ahead.

Bose George: Tony, I wanted to go back to your guidance on investment income. I mean, you noted that the 1031 balances are likely to moderate. I’m just wondering, is that volume-driven? Or are there other factors that caused that to moderate even if volumes are flat or it looks like maybe even starting to head back up.

Tony Park: Yes, it’s really more of a forecast than anything else. But just to be conservative, especially when we’re talking about trying to predict investment income for the next year. It’s the expectation that as regular order counts come down. On the title side, we would expect the 1031 accounts to come down as well. Balances have really held up very consistently all year long in the $4.5 billion range. And so that hasn’t changed yet. But we’re just anticipating that, that comes down. We earn about 400 basis points on those balances. And so, as they come down or if they come down, then you can see that, that comes down. And so, I would expect maybe a decline in quarterly income of maybe $10 million in — as we make our way into 2024.

Bose George: Okay. That’s helpful. Actually, can you remind me, what’s the split of the 1031 balances between residential and commercial?

Tony Park: That’s a good question. Mike, do you remember that? I — my recollection, it was more residential than I thought. I think in terms of — in terms of numbers, it was like 70% residential, but in terms of balances…

Mike Nolan: I don’t remember. I think we have to get back to you on that one. But we have the number, both, but I don’t have it handy.

Tony Park: Yes, I don’t either. It’s been a while probably been a year that you looked at it.

Mike Nolan: I would say this it’s probably more residential than you think in terms of the order flow.

Bose George: Okay. No, that’s helpful. And then just one broader question. Just with the recent lawsuits against the realtors and potential change in the commission structure there, especially for the buy-side agents. Just curious what your thoughts are about what that could do with the landscape there changes.

Mike Nolan: Yes. Both — it’s Mike. I think it’s really hard to predict at this point. Obviously, that was a big ruling against a couple of the companies that are all going to appeal. This will probably go on for a while. But it could impact buy-side agents, I suppose. And — but probably less of an impact from our view on our business. We still think that real estate agents bring tremendous value to the transaction and will continue to play an important role. They’re the trusted — really the trusted intermediaries and local communities for people who buy and sell homes. And I think that will remain. And we still will expect that we will be working very closely with that real estate community.

Operator: Our next question is from John Campbell with Stephens Inc. Please go ahead.

John Campbell: One quick follow-up here. On — I just want to revisit the title escrow and other line. Last couple of quarters, that’s obviously held up a lot better than the direct premiums. The gap has widened here of late. But I know you’ve got subservicing in there, you’ve got warranty revenue in there. So, you’ve got some degree of subscription revenue in there, recurring revenues. And then I think you’re also getting TitlePoint in there as well. So maybe if you could kind of unpack some of that and maybe give us some indication on also what the impact was from TitlePoint on margins.

Tony Park: Yes, John, this is Tony. Yes, footnote, Jay and revenue recognition footnote in the 10-Q helps to break this out a little bit. But you’re right, you named the primary pieces. First of all, escrow fees are in there, and they tend to trend with direct title premiums, but they’ve held up better than direct title premiums. And I think that’s a combination of maybe commercial coming off a little bit more and commercial has a lower percentage of escrow fees. That could be part of it. I think also sometimes you just have a flat escrow fee. And so, if you have a transaction size that’s down, then the direct premium will come down accordingly, but there may be a base to that escrow fee because I think escrow fees were only down about 12%, whereas direct premiums were down about 24%.

So that’s part of it. And then loan care, which is loan subservicing was actually up in Q3, up against last year’s third quarter, so that was a positive. Home warranty is in there as well. It was down a little bit, but maybe not the same percentage as what we saw on the title side. And then ServiceLink has some different businesses in there, some default businesses and other, and it was fairly stable versus what we saw on the title side. In terms of TitlePoint, yes, it is in there as well. I don’t have off the top of my head what the margins there. I think our revenue increase in property insight, which includes TitlePoint, revenue was up about $5 million as compared with Q3 of last year, but I don’t have that margin. My guess is somewhere in the 20% range if I had to guess, but that can be a follow-up.

Operator: As there are no further questions, I would now hand the conference over to Mike Nolan, CEO, for closing comments.

Mike Nolan: Thank you. We are proud of our very strong performance in the first nine months of the year. We remain well positioned to navigate the current tough market cycle and continue to build and expand our title business for the long term. Likewise, F&G’s profitable growth demonstrates its strong momentum with many opportunities ahead to drive asset growth, deliver margin expansion and generate accretive returns. Thanks for your time this morning. We appreciate your interest in FNF and look forward to updating you on our fourth quarter earnings call.

Operator: Thank you. The conference of Fidelity National Financial, Inc. has now concluded. Thank you for your participation. You may disconnect your lines.