Fidelity National Financial, Inc. (NYSE:FNF) Q4 2022 Earnings Call Transcript

Fidelity National Financial, Inc. (NYSE:FNF) Q4 2022 Earnings Call Transcript February 23, 2023

Operator: Ladies and gentlemen, greetings, and welcome to the Fidelity National Financial, Inc. Fourth Quarter 2022 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. As a reminder, this conference is being recorded. It is now my pleasure to introduce you to your host, Lisa Foxworthy-Parker, Investor 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. And Chris Blunt, F&G’s Chief Executive Officer; and Wendy Young, F&G’s Chief Financial Officer, 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 PM Eastern Time through March 2, 2023. And now, I’ll turn the call over to our CEO, Mike Nolan.

Mike Nolan: Thank you, Lisa, and good morning. Overall, we have delivered strong performance for the quarter and full year, while navigating a challenging landscape. During the quarter, we completed a dividend distribution of 15% ownership of F&G to FNF shareholders, and F&G held its first quarterly earnings call as a publicly traded company earlier this morning. F&G continues to deliver on its diversified growth strategy and reported record sales for the year and record assets under management of nearly $44 billion at year-end. Looking forward, F&G has reached an inflection point where its strong capitalization supports both organic growth and the distribution of a portion of their earnings to shareholders in the form of common dividends, which FNF will benefit from as F&G’s largest shareholder.

Tony will provide more details on F&G’s performance and its impact on FNF’s consolidated results. Our title business has continued to perform well despite the falloff in mortgage originations due to increasing mortgage rates and housing market headwinds. Volumes in 2022 were considerably less than the record setting 2021 levels, mainly due to the precipitous increase in mortgage rates in recent months. We responded with disciplined cost actions as opened orders began to decrease, and delivered adjusted pre-tax earnings in our title segment of $1.6 billion and an industry-leading adjusted pre-tax title margin of 16.7% for the full year. We are proud of this result as this is our third best pre-tax title margin since 2003, despite the steep decline in mortgage volumes.

Looking at fourth quarter volumes more closely. Our total commercial orders opened were $724 per day, down 29% from the fourth quarter of 2021, and for January were 736 per day, lower by 30% versus the prior year. Next, daily purchase orders opened were down 31% from the fourth quarter of 2021 and down 29% and for the month of January versus the prior year. And refinance orders opened per day were down 76% from the fourth quarter of 2021 and down 72% for the month of January versus the prior year. Overall, total orders opened averaged 4,300 per day in the fourth quarter, with October at 4,800, November at 4,300, and December at 3,700. For the month of January, total orders opened were 4,700 per day, up 27% over December. Notably, purchase orders opened per day in January increased by 33% over December and refinance orders opened per day increased 17%.

Total revenue, excluding recognized gains and losses, was $1.8 billion, a 42% decrease compared with the fourth quarter of 2021. Commercial revenue proved resilient at $344 million, our second best fourth quarter, only trailing our record-setting fourth quarter of 2021. For the year, commercial revenue was $1.54 billion, an all-time high. Adjusted pre-tax title earnings were $227 million and adjusted pretax title margin was 12.3% in the fourth quarter. While the volatile market environment challenged all industry participants, our management team is experienced in operating through varying economic cycles, and has a proven track record of reacting quickly to adjust to order volumes. For the full year 2022, net of acquisitions, we have reduced title headcount by approximately 26% and we’ll continue to manage the business based on market conditions.

At the same time, we continue to look for opportunities to strengthen our business through acquisitions and recruiting industry talent. Our industry-leading position and strong balance sheet puts us in an advantageous position to not only withstand periods of dislocation, but take advantage of opportunities to strategically build and expand our title business for the long-term. Over the past year, we have invested over $200 million in 11 acquisitions. And we completed the previously announced acquisition of TitlePoint in January 2023 for $225 million as we expand our footprint into attractive markets and enhanced our title capabilities. We have also continued to invest in our inHere experience platform that enhances the transaction experience of agents, transaction coordinators, and consumers.

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Adoption of the inHere platform has been strong this year with real estate agents and transaction coordinators registered for the platform growing to approximately 135,000 in the fourth quarter, an increase of 220% over the fourth quarter of 2021. We believe this growth demonstrates the value customers are receiving from the inHere platform and creates both market growth and efficiency opportunities over the near and long term. Finally, we have confidence in F&G following its partial spin-off and public listing. F&G’s spread-based income delivers a steady and growing source of earnings, which is countercyclical to our title business, as F&G benefits from the rising rate environment. Since the merger of over two years ago, F&G has far exceeded our original expectation for growth and contributed approximately $1.1 billion of adjusted net earnings over the last 10 quarters on a cumulative basis.

By retaining our majority interest in F&G following the dividend distribution, we will continue to benefit from F&G’s growth while also receiving approximately 85% of F&G’s cash dividends. F&G’s Board of Directors has approved initiation of a dividend program at an initial aggregate amount of approximately $100 million per year, commencing in 2023, and FNF will receive approximately 85% of F&G’s quarterly cash dividend in proportion to our majority ownership. This provides a competitive advantage for our company, and we remain committed to F&G’s long-term success. Wrapping up, I would also like to thank our employees for their hard work and commitment over the last year. We could not have delivered our industry-leading performance without their incredible effort.

Let me now turn the call over to Tony Park to review FNF’s fourth quarter financial highlights.

Tony Park: Thank you, Mike. Before I turn to our consolidated results, as Mike mentioned, on December 1, FNF completed the distribution on a pro rata basis of approximately 15% of the common stock of F&G to FNF shareholders. The purpose of the distribution is to highlight the substantial equity value of F&G that has been and will continue to be created, and allow investors to invest directly in F&G. For reporting purposes, since FNF retains control of F&G through its approximate 85% equity ownership stake, we continue to consolidate the assets, liabilities and results of operations of F&G in FNF’s consolidated financial statement. The portion of equity interest of F&G that FNF does not own, for the period of December 1 to December 31, is reflected as non-controlling interest in FNF’s consolidated financial statements.

Now, turning to our consolidated results. We generated $2.6 billion in total revenue in the fourth quarter. Fourth quarter net earnings were $68 million, including net recognized losses of $118 million, versus net earnings of $533 million, including $213 million of net recognized gains in the fourth quarter of 2021. 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 or continue to be held in our investment portfolio. Excluding net recognized gains and losses, our total revenue was $2.7 billion as compared with $4.6 billion in the fourth quarter of 2021. Adjusted net earnings from continuing operations was $287 million or $1.06 per share compared with $668 million or $2.34 per share for the fourth quarter of 2021.

The Title segment contributed $180 million. The F&G segment contributed $131 million. And the Corporate segment had an adjusted net loss of $24 million. For the full year 2022, we saw strong performance for the Title segment despite a difficult environment as well as strong growth for the F&G segment, which together generated solid profitability. Total revenue, excluding gains and losses, was $13 billion in full year 2022 despite the decline in title order volumes and reflects a 15% decrease from the record set in full year 2021. This generated $1.5 billion in adjusted net earnings, a decrease of 40% from $2.5 billion in full year 2021. The Title segment contributed $1.2 billion. The F&G segment contributed $338 million, and the Corporate segment had an adjusted net loss of $83 million.

Turning to Q4 financial highlights specific to the Title segment. Our Title segment generated $1.8 billion in total revenue in the fourth quarter, excluding net recognized gains of $29 million, compared with $3.2 billion in the fourth quarter of 2021. Direct premiums decreased by 47% versus the fourth quarter of 2021, agency premiums decreased by 48%, and escrow title-related and other fees decreased by 36% versus the prior year. Personnel costs decreased by 24% and other operating expenses decreased by 24%. All in, the title business generated a 12.3% adjusted pre-tax title margin for the quarter versus the record 22.4% in the prior year quarter. Adjusted pre-tax title margin decreased to 16.7% for the full year compared with 21.7% in full year 2021.

Our title and corporate investment portfolio totaled $5.3 billion at December 31. Interest and investment income in the Title and Corporate segments of $100 million increased $74 million as compared with the prior year quarter, primarily due to increases in income from our 1031 exchange business and short-term investments. Given the rising rate environment, we would anticipate potential for higher investment income through reinvestment of our short three-year duration portfolio maturities. Looking to 2023, we expect quarterly interest and investment income to moderate in the $75 million to $80 million range with declining 1031 exchange balances and spreads and potentially declining cash and short-term investment balances. Our title claims paid of $79 million were $22 million higher than our provision of $57 million for the fourth quarter.

The carried reserve for title claim losses is approximately $90 million or 5.2% above the actuary central estimate. We continue to provide for title claims at 4.5% of total title premiums. Next, turning to Q4 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. Total gross sales were $2.7 billion in the fourth quarter, an increase of 23% over the fourth quarter 2021. This reflects record retail sales, partially offset by lower institutional sales, which are expected to be lumpier and more opportunistic than in the retail channels. Net retained sales were $1.9 billion for the fourth quarter, a decrease of 7% from the fourth quarter of 2021, reflecting the increase in flow reinsurance to a effective September 1.

Ending assets under management were $43.6 billion as of December 31, 2022. Adjusted net earnings for the F&G segment were $131 million for the fourth quarter compared with $142 million for the fourth quarter of 2021. F&G’s adjusted net earnings reflect volatility from the alternatives investment portfolio, short-term mark-to-market movement that differ from long-term expectation. As Mike mentioned, F&G continues to generate consistent economics over time and FNF will continue to benefit from the F&G segment’s growth and countercyclical performance to the title business as well as receiving cash dividends as the largest shareholder of F&G, which we anticipate will grow with earnings. 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. This encompasses making investments in title technology and other strategic initiatives to support innovation and organic growth in the business, continuing to evaluate sensible strategic M&A opportunities in real estate-related businesses, title agencies and technology acquisitions, paying a generous quarterly dividend to our shareholders, and repurchasing shares. We ended the quarter with $939 million in cash and short-term liquid investments at the holding company level. Importantly, this balance does not reflect FNF’s acquisition of the TitlePoint line of business from Black Knight for $225 million, which funded on January 1, 2023, from a combination of $150 million of operating cash and $75 million of holding company cash.

FNF’s consolidated debt was $3.2 billion on December 31, up approximately $550 million from the preceding quarter due to F&G’s draw on its new third-party senior unsecured revolving credit facility that closed in November. As a result, our debt-to-capitalization ratio, excluding AOCI, was 26.8% as of December 31. As planned, F&G also successfully completed their first debt issuance as a public company on January 13, 2023, issuing $500 million of senior unsecured notes due in 2028. F&G intends to use the net proceeds from the revolver draw and senior notes to support growth of the business and for future liquidity needs. On a pro forma basis, including F&G’s new notes and a $35 million partial paydown on its revolver in January 2023, FNF’s debt-to-capitalization ratio, excluding AOCI, is estimated at approximately 29.5%.

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 Holdco debt and $95 million for F&G debt outstanding at this time. During the fourth quarter, we paid common dividends of $0.45 per share for a total of $124 million. We view our current annual common dividend of approximately $500 million as sustainable. The dividend is reviewed quarterly and expected to increase over time, subject to cash flows, alternative uses of capital and market conditions. FNF continues to return excess cash to shareholders over time through share repurchases and, subject to blackout periods has remained active throughout the fourth quarter and into the first quarter.

During the fourth quarter, we repurchased one million shares for a total of $38 million at an average price of $37.87 per share. We also closed on two title acquisitions in the fourth quarter and TitlePoint in early January. And we’ll continue to evaluate M&A opportunities as we navigate the current business environment. For the fourth quarter, we have returned approximately $162 million of capital to our shareholders through common dividends and share repurchases. For the full year, we have returned over $1 billion through common dividends and share repurchases. 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: Thank you. Ladies and gentlemen, at this time we will be conducting a question-and-answer session. Our first question comes from the line of Bose George from KBW. Please go ahead.

Bose George: Hi, guys, good morning. Actually, could I get an update on just margins by segment? And just curious if the trend in the margin was reflected across all segments, or just how that trended?

Tony Park: Sure, Bose. This is Tony. Yeah, I’ll highlight some of the margins by segment as we’ve done in the past. Just looking at the fourth quarter of 2022 up against the fourth quarter of 2021. Keep in mind that, the fourth quarter of 2021 was our best quarter ever. Our direct operations generated a 21% pre-tax margin, up against over 30% in the prior year quarter. Agency was 6% up against 10% in the prior year quarter. Some of that agency margin in the prior year quarter was driven by a centralized business we have that generates tremendous margins on refinance business. And, obviously, we’ve all seen what’s happened to refinance orders over the course of 2022. So that’s why agency is down as much as it is. National commercial operations held up at 31%, but last year, with that record fourth quarter, they were at almost 43%.

And then ServiceLink, which has, like, the combination of centralized refinance, but also some default businesses and loan sub-servicing and others, was roughly 10% in the quarter versus about 25% in the fourth quarter of 2021.

Bose George: Okay. Great. Thanks a lot for that detail. And then, actually on — in terms of the non-controlling interest, can you just remind us, apart from the F&G piece, what else flows through that line item?

Tony Park: Yes. Not a lot, to be honest. We own 100% of most of our investments. But in the Title segment, you’ll find some joint venture type businesses that we have in certain markets, but they don’t really move the needle a whole lot. And then the F&G piece will show up. We only have a month’s worth in there, and I don’t even think — I think it’s probably going to show up in the corporate segment. And you’ll see, I don’t think there’s much or anything there. And so, you really won’t see it until we make our way into 2023. But that’s going to be 15% of the net earnings of F&G going forward.

Bose George: Okay. Perfect. Thank you.

Operator: Thank you. Our next question comes from the line of Mark DeVries from Barclays. Please, go ahead.

Mark DeVries: Thank you. I was hoping to get some color on what we should expect on buybacks in 2023. You had a pretty big step down in the pace in 4Q. Was that kind of subject to maybe extended blackouts around the FG distribution? And should we expect the cadence to go back to closer to the $150 million a quarter that you had in 2022, prior to the fourth quarter?

Tony Park: Yes, Mark, this is Tony. You’re right about the step back in Q4, we were blacked out for most of the quarter, with the dependency of the F&G spin. So we weren’t very active during the quarter until after the December 1 spin. In terms of going forward, it’s hard for me to speak for the Board. We typically don’t pre-announce where we’re headed in terms of buyback activity. I can say, and I think we — management and the Board would agree, we think our shares are undervalued. And certainly F&G with the mark that we’ve set in terms of that spin-off, we don’t think — first of all, we think that’s light and there might be reasons for that, including limited float. But we also don’t believe FNF share price got any benefit from that to this point.