Fidelity National Financial, Inc. (NYSE:FNF) Q2 2023 Earnings Call Transcript

Fidelity National Financial, Inc. (NYSE:FNF) Q2 2023 Earnings Call Transcript August 9, 2023

Operator: Good morning, and welcome to FNF Second Quarter Earnings Call. During today’s presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be opened for questions with instructions to follow at that time. As a reminder, this conference call is being recorded. I would now like to turn the call over to 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 and we will have Chris Blunt, F&G’s Chief Executive Officer; and Wendy Young, F&G’s Chief Financial Officer, 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 August 16, 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 had another strong set of results at this midyear mark as we continue to navigate a volatile and challenging environment. Starting with our title business, we delivered adjusted pre-tax earnings in our title segment of $302 million and an industry-leading adjusted pre-tax title margin of 15.8%. We are very pleased with this result, which reflects strong sequential margin improvement across our title-related businesses. This strong performance really demonstrates our approach to running the business, highlighting our ability to manage through economic cycles and react quickly to changing order volumes. It also demonstrates the expertise and discipline of our field managers and employees, who are critical to our success and our ability to deliver these results.

I’d like to thank all of our employees who have worked so diligently to build the field-driven business we have today and who consistently deliver an industry-leading performance quarter after quarter. Our performance this year is a direct result of the actions we took in the back half of 2022. When in light of the steep decline in mortgage volumes, we reduced our field staff by 26% net of acquisitions. This positioned us well given the low inventories coming into 2023. In the first half of this year, we have continued to monitor expenses closely. So far, we’ve seen solid sequential growth with residential purchase open orders per day up in both Q1 and Q2, a typical seasonal pattern and even holding strong in the month of July, which is not typical since orders usually crest heading into the back half of the year.

We feel that the resiliency of residential purchase volumes, which have held up in a weak market and despite mortgage rates spiking to 7% at times is a testament to the underlying demand for housing that exists in the country. Commercial volumes are still holding up well, which is positive and in line with our expectations. We have generated commercial revenue of $500 million in the first half consistent with the first halves we saw from 2015 to 2020. Looking at sequential volumes more closely. Daily purchase orders opened were up 12% over the first quarter of 2023, and up 2% for the month of July versus June. And refinance orders opened per day were up 4% over the first quarter of 2023 and down 2% for the month of July versus June. Our total commercial orders opened were 784 per day, flat for the second quarter versus the first quarter of 2023, and up 3% for the month of July versus June.

Overall, total orders opened averaged 5,400 per day in the second quarter, with April at 5,300, May at 5,700 and June at 5,300. For the month of July, total orders opened were 5,300 per day in line with June. So far, 2023 has been encouraging as we have found our footing in a more typical seasonal pattern albeit in a weak market and with a cost structure that is aligned with this environment. From here, we remain cautious in the second half of the year, given continued higher rates and volatility. As always, we will manage to order volumes in a given environment. Beyond the near-term pressures, we remain bullish on the mid- to long-term fundamentals of the business. A clear benefit of our financial strength, scale and profitability is our ability to invest in our business through cycles as we strive to further expand our competitive positioning in the industry.

We continue to strategically build and expand our title business through acquisitions, recruiting talent and enhancing our Title capabilities. Our inHere platform is an area that we have been investing in recent years. This industry-leading, end-to-end, real estate experience platform is fully deployed across our residential business and integrated within our direct operations and is quickly gaining traction. In fact, over the past two years, we have had over 1.4 million users on the inHere platform comprised of – 1.2 million consumer users and 200,000 real estate professionals and consumer engagement continues to be between 65% to 70%, a strong success rate. In the first six months of 2023 alone, our real estate agent and transaction coordinator users have logged over one million sessions and nearly 90% were active in the last 30 days.

We believe this strong adoption demonstrates the value customers are receiving from the inHere platform, and we expect to continue to add functionality and content targeted at further enhancing the transaction experience of agents, transaction coordinators and consumers, partnering to help real estate professionals grow their businesses and creating both market growth and efficiency opportunities for FNF over the near and long term. Turning to our F&G business, it has been over three years now since the 2020 merger, and we are pleased with F&G’s performance, which has exceeded our expectations. F&G has successfully transformed its business from essentially being a mono line at the time of acquisition to now having a robust new business platform that is well diversified by product and channel and a profitable in-force book of business that is scaled considerably.

F&G has profitably grown its assets under management from $25 billion at the 2020 merger to a record $46 billion at June 30. And the business is well positioned to both expand its spread-based earnings and diversify through fee-based earnings from its flow reinsurance and owned distribution strategies, which will ultimately drive margin expansion and improved returns. With that, let me now turn the call over to Tony Park to review FNF’s second quarter financial highlights.

Tony Park: Thank you, Mike. Starting with our consolidated results, we generated $3.1 billion in total revenue in the second quarter. Net earnings were $219 million, including net recognized losses of $16 million versus net earnings of $537 million including $676 million of net recognized losses in the second quarter of 2022. The Title segment contributed net earnings of $165 million. The F&G segment contributed $110 million and the Corporate segment had a net loss of $56 million. With 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 $3.1 billion as compared with $3.3 billion in the second quarter of 2022. Adjusted net earnings from continuing operations was $274 million or $1.01 per diluted share compared with $557 million or $2 per share for the second quarter of 2022. The Title segment contributed $226 million, the F&G segment contributed $67 million and the Corporate segment had an adjusted net loss of $19 million. Turning to Q2 financial highlights specific to the Title segment. Our Title segment generated $1.9 billion in total revenue in the second quarter, excluding net recognized losses of $50 million compared with $2.8 billion in the second quarter of 2022. Direct premiums decreased by 37% versus the second quarter of 2022, Agency premiums decreased by 41% and escrow title-related and other fees decreased by 18% versus the prior year.

Personnel costs decreased by 20% and other operating expenses decreased by 19%. All-in, the Title business generated adjusted pretax title earnings of $302 million and a 15.8% adjusted pretax title margin for the quarter versus 18.9% in the prior year quarter. Our Title and Corporate investment portfolio totaled $5 billion at June 30. Invested assets included $2 billion of fixed maturity and preferred securities having an average duration of three years and an average rating of A2, as well as $600 million of equity securities, $1 billion of short-term and other investments and $1.4 billion of cash. Interest and investment income in the Title and Corporate segments of $93 million increased $55 million as compared with the prior year quarter, primarily due to higher income from our 1031 exchange business and cash and short-term investments.

Given the higher rate environment, we would anticipate increased investment income through reinvestment of our three-year duration fixed income portfolio maturities. For the remainder of 2023, we expect quarterly interest and investment income to moderate in the $90 million range with stabilizing 1031 exchange balances and spreads and level cash and short-term investment balances. Our Title claims paid of $67 million were $11 million higher than our provision of $56 million for the second quarter. The carried reserve for Title claim losses is approximately $77 million or 4.5% above the actuary central estimate. We continue to provide for Title claims at 4.5% of total title premiums. Next, turning to Q2 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 $3 billion in the second quarter, a 3% decrease over the prior year quarter. This reflects higher retail channel sales offset by slightly lower sales to institutional markets, which are expected to be lumpier and more opportunistic in nature. F&G’s net sales retained were $2.2 billion in the second quarter, a decrease of 12% from the prior year quarter, reflecting flow reinsurance, which is – which increased from 50% to 75% of MYGA sales in September of 2022. As a reminder, F&G utilizes flow reinsurance, which provides a lower capital requirement on seated 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’s record asset under management were $46.3 billion as of June 30. Adjusted net earnings for the F&G segment were $67 million in the second quarter. This includes bond prepay income that contributed $4 million or $0.02 per share and was offset by alternative investment returns below our long-term expectations by $47 million or $0.17 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 $885 million in cash and short-term liquid investments at the holding company level. FNF’s consolidated debt to capitalization ratio excluding AOCI was 28.3% as of June 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 and 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 our 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 half of this year to preserve financial flexibility as we navigate the challenging market. Therefore, there were no share repurchases in the second quarter. We continue to view our current annual common dividend of approximately $500 million as sustainable.

During the second quarter, we paid common dividends of $0.45 per share for a total of $121 million. The dividend is reviewed quarterly and expected to increase over time subject to Board of Director approval. 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, we will now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Bose George with KBW. Please go ahead.

Bose George: Hey guys. Good morning. Hey, Mike, I know you gave the July order trends. I’m curious if you have any color on just what’s happening in August just with the move in rates. Were there any early read on that?

Mike Nolan: Yes. I think it’s too early to look at August. We really just have the first week, which was a shortened week, and I just don’t think looking at that small data set would provide the right direction. But I think the fact that orders have held up as well in July. I think it’s again a testament to the strength of the market. And if you look through – as we went through the quarter, even when rate spiked at different points, the order counts held up very well.

Bose George: Okay. That’s helpful. Thanks. And then actually just switching over to F&G, I think in the past, you’ve talked about sort of reinsuring blocks over there. Is that still a possibility and also the FG management agreement at Blackstone, I think now has been extended through 2029. Just a comment about sort of the benefits of that, whether that has any impact on a – if there’s a block transaction, does the Blackstone agreement impact that in any way?

Chris Blunt: Sure, this is Chris. So yes, that is always an option that remains for us to reinsure out a block as a means of freeing up capital. So nothing’s changed there. The Blackstone agreement, yes, that’s a big net positive. So it’s order of magnitude of almost a 25% reduction in fees going forward on assets over $40 billion. And that fee agreement on the $40 billion runs off over time. So it’s quite impactful for us. It does influence block deals, but we know there are Blackstone affiliated reinsurers and that would probably be excited to have Blackstone manage the money. So it’s probably a bit of a constraint on doing a really big block transaction, but it’s – it doesn’t rule it out.

Bose George: Okay. Great. Thank you.

Mike Nolan: Thanks.

Operator: Thank you. Our next question comes from the line of Soham Bhonsle with BTIG. Please go ahead.

Soham Bhonsle: Hey, good morning guys. Thanks for taking the questions.

Mike Nolan: Good morning.

Soham Bhonsle: Good morning. So the first one is just on F&G and this is sort of a two-parter. First one just being, wanted to get your updated thoughts on whether you think FG continues to strategically fit within the FNF fold or maybe as a standalone company. And then second, considering that there was the AEL transaction, have there been any discussions with the board around potential options that you’re considering beyond just the tax-free spin that you’ve talked about before?

Tony Park: Yes, thanks. Thanks for the question. This is Tony. Maybe I’ll start and I know Mike and Chris might want to weigh in. But I would say from the Board’s perspective, they couldn’t be more pleased about the performance of F&G and really how it validates if you will, our investment thesis that we had when we made the acquisition, which is if – when interest rates go up F&G will add earnings that are consistent and stable as you’ve seen and grow over time as rates are going up and maybe the title insurance market comes down a little bit and that’s exactly what we’ve seen. It’s is fair to say that our share price has not performed as we would’ve hoped kind of during the ownership of this, although, some of that may have been maybe changing really over the course of at least the last 90 days.