Fidelity National Financial Q1 2024 Earnings Call Transcript

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May 9, 2024

There are 7 speakers on the call.

Operator

Ladies and gentlemen, good morning, and welcome to FNF First Quarter Earnings Call. During today's presentation, all parties will be in a listen only mode. Following the presentation, the conference will be open 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.

Operator

Please go ahead.

Speaker 1

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 and G's CFO, will join us for the Q and A portion of today's call.

Speaker 1

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.

Speaker 1

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 atfnf.com. It will also be available through telephone replay beginning today at 3 p. M. Eastern Time through May 16, 2024.

Speaker 1

And now, I'll turn the call over to our CEO, Mike Nolan.

Speaker 2

Thank you, Lisa, and good morning. We are very pleased with our Q1 results for both the Title segment and F and G, which provides a strong start to the year. Both businesses are well positioned for the current market and for longer term growth. Our title business continues to perform well in a volatile and challenging environment. We delivered adjusted pre tax earnings in our title segment of $171,000,000 and achieved an industry leading adjusted pre tax title margin of 10.7% for the 1st quarter, an increase of 70 basis points over the 10% margin in the prior year quarter.

Speaker 2

This performance is in line with our expectation that entering 2024 with historic low order volumes would pressure 1st quarter margins much like last year. In the Q1, we saw normal seasonality in purchase opened orders with sequential improvement coming off the 4th quarter. In April, purchase open orders per day were up 4% over last year, but higher mortgage rates may temper purchase volumes going forward. Refis are holding steady at roughly $1,000 per day at the current floor. Commercial volumes continue to be resilient and consistent.

Speaker 2

We generated revenue in commercial of $238,000,000 in the first quarter, trending in line with the approximately $1,000,000,000 in annual revenue levels seen in 2023. We saw continued strength in multifamily, industrial and other segments like energy and affordable housing similar to recent years. Looking at Q1 volumes more closely, daily purchase orders opened were up 5% over the Q1 of 2023, up 25% over the Q4 of 2023, up 4% for the month of April versus the prior year and up 4% for the month of April versus March. Our refinance orders opened per day were down 2% from the Q1 of 2023, up 16% over the Q4 of 2023, down 2% for the month of April versus the prior year and down 2% for the month of April versus March. Our total commercial orders opened were 7.85 per day, in line with the Q1 of 2023, up 12% over the Q4 of 2023, up 4% for the month of April versus the prior year and up 1% for the month of April versus March.

Speaker 2

Overall, total orders opened averaged 5,100 per day in the first quarter, with January at 4,800, February at 5,100 and March at 5,300. For the month of April, total orders opened were 5,400 per day, up 2% versus March. At this time, we remain cautious and continue to view our performance in 2023 as a proxy for 2024 with some upside if rates come down later this year. However, market challenges from higher mortgage rates currently running in the low to mid 7% range, housing affordability and low inventory are expected to persist in the near term. Given mortgage rate volatility, we could see adjusted pre tax title margin move into the low to mid teens range over the next couple of quarters.

Speaker 2

The timing for a potential rebound in the housing market is uncertain and largely dependent on lower mortgage rates. In the scenario where more inventory comes into the market and rates come down, we are well positioned to capture upside to last year's performance. Overall, higher volumes above current trough levels would help to drive stronger incremental margins and showcase the scale and efficiencies that our diversified national footprint provides, much like what we saw in 2019 through 2021. In the current environment, we remain focused on managing our business to the trend in opened orders and we'll continue to monitor our headcount and footprint carefully. Over the long term, we remain bullish on the real estate market and we'll continue to develop and invest in technology, recruit top talent and make strategic acquisitions, all while maintaining industry leading margins.

Speaker 2

I also wanted to comment on some recent headlines emanating from Washington on homeownership in America and the costs associated with buying a home. While we strongly support the broader effort to make homeownership more affordable, we believe the recent comments from the FHFA and the CFPB relative to title insurance are misguided and display a misunderstanding of the vital role and value that title insurance provides consumers and the broader economy and the critical role it plays in helping to make the American dream of homeownership a reality. The title industry not only protects consumers property ownership rights, but also the critical integrity of land records. In addition, we are our first line of defense in helping protect buyers and sellers from real estate and wire fraud. Title insurance also provides insureds a duty to defend them in the event of a covered claim and title insurers have state mandated reserves standing behind their policies, unlike attorney opinion letters or a GSE waiver.

Speaker 2

We welcome the opportunity to continue conversations with the FHFA and CFPB and we'll continue to actively engage with all stakeholders in discussing the fundamental value that title insurance and settlement services delivered to America's homebuyers and sellers, lenders and other participants and what for many is their most important real estate transaction. Turning to our F and G business. F and G has profitably grown its assets under management before flow reinsurance to a record $58,000,000,000 at March 31. As demonstrated, F and G's business performs well in a low rate environment and even better in higher rate environments, which provides a nice counterbalance for the title business. Their growth prospects are compelling and led to our Board's decision to invest $250,000,000 in F and G during the Q1 in exchange for a mandatory convertible preferred security.

Speaker 2

This will enable F and G to take advantage of the current opportunity to accelerate growth of its retained AUM. Overall, we are pleased with F and G's performance, which continues to exceed our expectations and even more pleased that this performance is being recognized by the market as seen in F and G's strong share price performance since its listing in December of 2022. We believe that the growing value of F and G is beginning to be recognized in F and S shares as well. I would like to thank our employees for their outstanding efforts in delivering a solid start to the year, including another industry leading performance despite the tough market. With that, let me now turn the call over to Tony to review FNF's Q1 financial performance and provide additional highlights.

Speaker 3

Thank you, Mike. Starting with our consolidated results, we generated $3,300,000,000 in total revenue in the Q1. Excluding net recognized gains and losses, our total revenue was $3,000,000,000 as compared with $2,500,000,000 in the Q1 of 2020 3. 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.

Speaker 3

We reported 1st quarter net earnings of $248,000,000 including net recognized gains of $275,000,000 versus a net loss of $59,000,000 including $5,000,000 of net recognized gains in the Q1 of 2023. Adjusted net earnings were $206,000,000 or $0.76 per diluted share compared with $151,000,000 or $0.56 per share for the Q1 of 2023. The Title segment contributed $130,000,000 the F and G segment contributed $95,000,000 and the corporate segment contributed $8,000,000 before eliminating $27,000,000 of dividend income from F and G in our consolidated financial statements. Turning to Q1 financial highlights specific to the Title segment. Our Title segment generated $1,600,000,000 in total revenue in the Q1, excluding net recognized gains of $63,000,000 compared with $1,500,000,000 in the Q1 of 2023.

Speaker 3

Direct premiums increased 3% versus the prior year, agency premiums increased 8% and escrow title related and other fees increased 3%. Personnel costs increased 3% and other operating expenses decreased 4%. All in the title business generated adjusted pre tax title earnings of $171,000,000 compared with $153,000,000 for the Q1 of 2023 and a 10.7% adjusted pretax title margin for the quarter versus 10% in the prior year quarter. Our title and corporate investment portfolio totaled 4 point $6,000,000,000 at March 31. Interest and investment income in the title and corporate segments was $94,000,000 an increase of $2,000,000 over the prior year quarter, primarily due to higher income from cash, short term and fixed income investments, partially offset by lower income from our 10/31 exchange business resulting from declining balances.

Speaker 3

For the remainder of 2024, we expect quarterly interest and investment income to be stable at $95,000,000 to 100,000,000 with anticipated Fed funds cuts of 50 basis points over the next 12 months. In addition, we expect approximately $27,000,000 per quarter in dividend income from F and G to our corporate segment. Our title claims paid of $70,000,000 were $24,000,000 higher than our provision of $46,000,000 for the Q1. The carried reserve for title claim losses is approximately $67,000,000 or 4% above the actuary central estimate. We continue to provide for title claims at 4.5% of total title premiums.

Speaker 3

Turning to financial highlights specific to the F and G segment. F and 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 and G reported gross sales of $3,500,000,000 in the first quarter, a 6% increase from the Q1 of 2023, driven by continued strong retail sales and robust institutional market sales. F and G's net sales retained were $2,300,000,000 in the first quarter, in line with the prior year quarter.

Speaker 3

F and G has profitably grown its retained assets under management to a record $49,800,000,000 at March 31. AUM before flow reinsurance was 58,000,000,000 dollars Adjusted net earnings for the F and G segment were $95,000,000 in the Q1. This includes alternative investment returns below our long term expectations by $44,000,000 or $0.16 per share and significant income items of $5,000,000 or $0.02 per share. To bring it all together, FNF's consolidated adjusted net earnings excluding significant items in the F and G segment were $245,000,000 or $0.90 per diluted share in the Q1. From a capital and liquidity perspective, we are maintaining a strong balance sheet at the trough of the cycle and remain focused on ensuring a balanced capital allocation strategy as we navigate the current environment.

Speaker 3

We held $618,000,000 in cash and short term liquid investments at the holding company level at March 31. As a reminder, this amount reflects the $250,000,000 investment made in F and G in January 2024 given the many opportunities to grow their business. Our annual interest expense on $3,900,000,000 of consolidated debt outstanding is approximately $200,000,000 comprised of $80,000,000 for F and G segment debt. Our consolidated debt to capitalization ratio excluding AOCI remains in line with our long term target range of 20% to 30%. We view our current annual common dividend of approximately 5 $25,000,000 as sustainable.

Speaker 3

During the Q1, we paid common dividends of $0.48 per share for a total of $130,000,000 We continue to invest in the business for long term growth and typically see opportunistic spend on strategic title acquisitions average $200,000,000 to $300,000,000 per year. In terms of share repurchases, we paused our activity during 2023 due to the uncertainty in one of the weakest years in industry history. As we are still in a tough market, there were no share repurchases in the Q1. This concludes our prepared remarks. And let me now turn the call back to our operator for questions.

Operator

Thank you. Ladies and gentlemen, we will now be conducting a question and answer session. Our first question is from the line of Soham Bhonsle with BTIG Pactual. Please go ahead.

Speaker 4

Hey guys, good morning. Hope you're doing well. Good morning. First one maybe just on the comment Mike on the low to mid teens margin over the next few quarters. Can you maybe just elaborate a little bit more there?

Speaker 4

Should we think of that as more similar to last year or something better? Because you just put up a higher margin on orders that were down, it looks like 1% year over year and your orders are trending up so far in April. So just wondering if this is just some conservatism or are there costs that are coming down the pipe that maybe we're not seeing?

Speaker 2

Yes, sure. And I mean, as you know, we don't give guidance, but we'd expect margins to be good relative to the environment. And I think part of the commentary reflects the fact that at these lower levels, these lower revenue and volume levels, it doesn't take a lot to move margins around in a particular quarter. And when you think about the various segments, refi is relatively flat, so you don't see much volatility there one way or the other. And so margins will be kind of dependent on how commercial finishes out in a particular quarter.

Speaker 2

And given the lumpiness of that business that can kind of move your margins around. And then secondarily, if there's continued rate volatility on just mortgage rates overall in either direction, so it could be up or down, It could affect the purchase revenue. So I think that's where the comments are grounded in. And I would just add that if we have more revenue and we see improvements there, we're well positioned to drive stronger margins.

Speaker 4

Got it. Okay. And then, it looks like F. G. Contribution this quarter to EPS exceeded at least what title generated on a core basis.

Speaker 4

I mean this is the first time. And this kind of plays your whole thesis, right, of being able to offset title earnings in a tough environment. So I guess does this sort of performance maybe embolden you as a management team to just stay the course on F and G or are there other factors that we should think about when it comes to sort of owning the asset longer term?

Speaker 3

Yes, fair question. I think we've been saying for a while that staying the course is exactly what the Board intends to do at least for now. We can't predict the future and what might happen and if there's a better opportunity. We've been opportunistic over our history with various businesses and so you predict what might happen there. But I will tell you the board is very pleased with F and G's performance and you're right, that was probably closer to I think last quarter F and G was like 30% of A and E and now it's closer to half.

Speaker 3

And it kind of validates the Board's initial premise when rates go up, FG outperforms and the title business can have its challenges. And we feel like there's value creation here and we feel like there's been some recognition of that value creation. So again, I'm not going to comment on what the Board might do ultimately with the investment, but I will tell you that they've been pleased thus far.

Speaker 4

Got it. And then Tony, if I could just squeeze one more in. The corporate segment looks like it produced a profit this quarter. I'm guessing it's the $27,000,000 related to the dividend, but should we I guess you said expect that going forward. So does that segment turn into a profit going forward?

Speaker 4

How should we think about that? Thank you.

Speaker 3

Yes. Thanks for that observation. We did add a new column, if you will, in our earnings release. And really the point here was to highlight that F and G is paying now $27,000,000 per quarter in investment income to our corporate segment. And so we didn't want that to get lost by netting those 2 together.

Speaker 3

In reality, our consolidated financials have to net those together. But when you want to isolate our segments, I think it's important to see that corporate is receiving that $27,000,000 So that's why yes, you see a profit and adjusted profit of adjusted net earnings of $8,000,000 in the corporate segment, but then you do have that elimination of $27,000,000 So I think that's the way we'd like to show that in the future just to highlight that point.

Speaker 4

Great. Thank you.

Operator

Thank you. Our next question comes from the line of Bose George with KBW. Please go ahead.

Speaker 5

Hey, guys. Good morning. Actually wanted to go back to the margin discussion. So you noted that your volumes are up in April. But when you compare it to the cadence that you guys saw last year, is it more muted than what you saw last year?

Speaker 5

And so when you think about the margin in 2Q versus 1Q, could we see a similar improvement or could it be a little more muted than last year?

Speaker 2

Yes. Good question, Bose. It's Mike. The sequential improvement in the Q1 over the 4th quarter this year was actually a little bit better than prior years. It was 25% up against probably an average of 20% over the last handful of years.

Speaker 2

So that was actually very encouraging. And then April was up 4% over March of this year. It was a little less than last year. I think we were about 6%, so not really much difference. And we were pleased with that given that rates were moving back up in April.

Speaker 2

We just don't know, Bose, the impact on May June if rates stay elevated. It may put more pressure as we see opens move through the last couple of months of the quarter. So that's part of the wildcard. And it's just hard to predict the rates. I mean they move back down I think around 6% to 8% in the Q4 somewhere in there and they jump up in April hit as high as 7.5%.

Speaker 2

I think they're back down to 7.2% if you're tracking the daily rates and it's just more volatile than we've typically had in prior periods. So that's the that's part of what's the color of the comment, I think.

Speaker 5

Okay. That makes sense. Thanks. And then actually just to follow-up on the F and G sorry, on the corporate question as well. So the corporate segment goes up.

Speaker 5

Actually, where is the offset? Is that coming out of the F and G segment?

Speaker 3

Yes. So F and G is paying a dividend both on their common shares and their preferred. So it's like $22,000,000 common dividend, another $5,000,000 on the preferred. Dividends actually come out of the equity section in F and G. So it's not an expense to F and G, but it's real cash to F and F corporate.

Speaker 3

And so we book it in the income and then we eliminate it since you can't earn you can't show earnings from a subsidiary in your financials. And so that's why that's an offset. And it was like that, absent the preferred dividend. I don't know that we had that last quarter. But in terms of just the common dividend, we had it in the prior quarter.

Speaker 3

It's just it was netted together.

Speaker 5

Okay. And is the elimination in the income statement or is that sort of below the line somewhere?

Speaker 3

Yes. The elimination is in the income statement. There's actually a column that you can now see in our earnings release that shows a negative $27,000,000 that offsets the corporate segment.

Speaker 5

Okay, great. Thanks.

Operator

Thank Our next question is from the line of John Campbell with Stephens Inc. Please go ahead.

Speaker 6

Hey guys, good morning.

Speaker 3

Hey, John. Good morning, John.

Speaker 6

Hey, it looks like you ended up with more title field staff in the quarter. I think that was the 1st sequential increase since maybe 3Q 2021. And obviously, it's a seasonally weaker period. Just curious about how you're thinking about the staffing levels as you move throughout the year? And maybe if you could talk to how much incremental capacity maybe you felt like built in the last year or so.

Speaker 6

I mean going back to the margin commentary, it seems like you're not at least you're not signaling a big lift off of last year, but with the order growth and what I think would be maybe a little bit of incremental capacity, it seems like you should do better there, but just maybe some commentary on that.

Speaker 2

Yes. Well, first, it is staffing. I think the the staff, which isn't unusual as we head into the into a new year coming off the weakness in 4th. We're very focused on headcount still John. And but at the same time also recruiting and have had some adds in the acquisition space as well.

Speaker 2

So I think we're well positioned with staffing to the current environment. And back to the margin question, if we get if we see more revenue, more pickup in purchase in particular, we'll drive better margins. We're very well positioned for that. It just gets back to the volatility on mortgage rates and how quickly that could have an impact in one direction or the other. And as we go through the balance of the year, I think we'll just continue to manage the staffing accordingly like we always have.

Speaker 2

I mean, I think the outperformance on margin in the Q1 certainly is partly due to the fact that we came into the year in a better position from an expense standpoint and took advantage of that in the Q1.

Speaker 6

Okay. Makes a lot of sense. And then on the capital allocation framework, obviously, you guys have flat lined the buybacks after record years in 2021, 2022. I don't know if I'm reading too much in the commentary from you, Tony, but it sounds like maybe we should just be thinking about the return potentially the buyback activity just kind of aligning with U. S.

Speaker 6

Housing recovery. Is that a fair assumption?

Speaker 3

Yes, I think it probably is. We took we paused in 2023 in Q1. I think from my standpoint, I'm looking to see some positive cash flow. I mean, we have positive cash flow, but a lot of it goes toward a $525,000,000 dividend commitment and a couple $200,000,000 to $300,000,000 in acquisition activity. And so I guess, I'm looking for something more than $800,000,000 to fund that realizing that we do have a cushion in a $600,000,000 sitting on the balance sheet.

Speaker 3

We generated positive operating cash flow in Q1 of about $80,000,000 in the title and corporate segments, which isn't unusual. The Q1 is always the most challenging. But if we see upside to cash flow this year relative to last, I could see us revisiting that. But to your point, I think a lot of it depends on just where we feel like the trends are headed. And I think we all believe that things are going to get better.

Speaker 3

It's just calling that timing is probably most challenging.

Speaker 6

Okay. That makes sense. And if I could squeeze in maybe one more here. Mike, I agree with you. I mean, the market feels like it is wanting to bounce back.

Speaker 6

Obviously, a lot of it hinges on rates. And so just kind of related to that, you guys gave the April numbers. So maybe if you could talk to maybe the progression week to week throughout the quarter, if you saw much of an influence from rate movements? And then I don't know if you've got the orders for the trends for the 1st week of May, but maybe talk to how the market kind of trended into May?

Speaker 2

Yes. I don't have anything I could report on May, but back to your comment. If you look at the pickup in refinance business in the Q1, I think we were up 16% over the 4th. Rates did come down in the Q1. And I think to your point, refis reacted to that still at low levels, but they I think they reacted to that.

Speaker 2

And then as we got into April, that's when rates went back up and then refi was down a little bit to the prior period. On the purchase side, I actually was pleased that even though rates were moving up in April, like I said, they got to 7.5% at one point, it was not showing up and impacting our purchase open orders. In fact, they were up 4% sequentially. What we don't know is kind of how it's as I said before, how it's going to play out into May June if rates stay elevated or move higher. And if they go lower, then you could have a more positive outcome obviously.

Operator

Our next question is from the line of Maxwell Fritchard with Truist Securities. Please go ahead.

Speaker 6

Hi, good morning. I'm calling in from Mark Hughes. Kind of in relation to that last question, I was just wondering if any internal models are showing what would be the best equilibrium between and this is in regards to rates, the best equilibrium for the title business, the net investment income in F and G, where rates would be headed for the optimal earnings?

Speaker 3

Wow. Yes, I don't know if we have a model for that. We all we've always said and just speaking specific to title before I even try to touch on, I'll let Chris and Wendy handle the FG side. But on title, we've always said more volume trumps investment income. And so if we can get to a rate environment where we get over 5,000,000 existing home sales or whatever the number is and get into that normalized market.

Speaker 3

I think we'll take that any day over maybe even a couple of $100,000,000 of additional investment income. Having said that, certainly it's a bit of a hedge and we're enjoying $100,000,000 a quarter in interest and investment income from the portfolio. But lower rates and more volume is certainly better. And did you want to Yes,

Speaker 2

I just it's Mike Maxwell. I would add just look back at years like 2019 2020 2021, we didn't have a lot of investment income because rates were low, but the title business just exploded. And you can look at the margins and the profitability we drove in those years, hitting an all time high of I think it was 21% in almost 22% in 2021 and that was without very little investment income. So I think that probably answers your question and Chris can certainly confirm this. But FG's business performs well regardless of the interest rate cycle.

Speaker 2

The interest rates on their floating assets are there, but it's a small part of the story. So I'll let Chris confirm that, but I think we take lower rates for sure. Yes, Mike, that's right. I mean, one of the charts we're most proud of is you see the pretty consistent spreads from when the 10 year treasury was at 39 basis points up to where it sits now. Because again, once we get premiums in, we're getting those invested in the ground ASAP and we're locking in that net spread.

Speaker 2

So spread matters to us, credit environment matters to us, but we're largely indifferent. Now in a rising rate environment, it's easier to eke out more spread. There's a little more demand for the product. But yes, I think folks are going to be surprised that as rates fall, our earnings should hold up quite well.

Speaker 6

Yes, there's a lot there. You all answered it perfectly. So I appreciate that. That's all I have. Thanks.

Speaker 6

Thanks.

Operator

Thank you. Ladies and gentlemen, this will conclude our question and answer session. I will now turn the conference back over to CEO, Mike Nolan, for his closing remarks. Mike?

Speaker 2

Thank you. We are pleased with our solid start to the year. We remain well positioned to navigate the market cycle and are continuing to build and expand our title business for the long term. Likewise, F and G's opportunities are compelling with many prospects ahead to drive asset growth, deliver margin expansion and generate accretive returns. Thanks for your time this morning.

Speaker 2

We appreciate your interest in FNF and look forward to updating you on our Q2 earnings call.

Operator

Thank you. The conference of FNF has now concluded.

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