Fidelity National Financial, Inc. (FNF) Earnings Call Transcript & Summary

I just lost my script. But anyway, I'm Brock Vandervliet, the mortgage finance and banks analyst here at UBS, and I'm joined by my associate, Manu Srivareerat. And we're very happy to be joined by Mike Nolan and Tony Park from the management of Fidelity National Financial with us this afternoon. Mike is the President and has been with the company since 1983 and Tony is CFO and joined in 1991. So gentlemen, welcome, and thank you for supporting our conference.

Thank you.

Thanks for having us.

So I would say, many investors know FNF for its commanding 33% market share in the title business, but the company also has many other facets, some of which we'll touch on today in our questions. And as we planned the conference, we wanted it to be more than just a straight up mortgage conference, particularly as some of the technology changes that we're watching don't always touch mortgage origination directly, but certainly will make the process more efficient over time. And we wanted to get FNF's view on this as title is such a dominant adjacency to mortgage origination. So the format is the same as the others, analysts-led Q&A by Manu and myself. But please do e-mail me, and we can add your questions. So with that, why don't we -- why don't we start off?

So Mike, you've been with the company since 1983, that is a tremendous run. Maybe you could just start off by kind of setting the table on some of the changes you've seen over the years and how technology fits in the picture.

Sure, Brock. Thanks again for having us. Yes, there's certainly been an evolution in technology. And I think the industry -- and the broader real estate industry has always had some level of technology, but it is becoming, I think, a more important topic over time. I think it certainly got accelerated in some levels by the pandemic and the idea of more E-Closings and things like that. But when you think about the real estate marketplace, it has a very diverse set of participants, from consumers to real estate agents, lenders, title companies, appraisers, notaries, inspectors, and they're all kind of operating inside a transaction, your typical purchase transaction, and they have different needs and different things they're getting out of that transaction. I think that's always been a bit of a gating item, if you will, to kind of broader scalable technology solutions. And then you also layer in the local regulatory environment, it's state regulated, federally regulated, county, city. So there's all these different parts of it that I think have slowed, if you will, maybe some of the technology adoption. So I think what we've seen is a lot of it was more internally focused with title companies and probably others where the technology was focused on cost efficiencies and improving productivity. And I think in the early stages of my career and maybe the middle stages, it's been a lot about that. As we've kind of done a lot of that work, and as I said now, technology is becoming such a hotter topic, I think that external view is becoming much more important. And there are certain things that we're doing today that are really driving it at that external view, how do you get more of a digital approach to the title and closing process? How do you give consumers better visibility, better security inside the transaction? How do you make the transaction more efficient for all the participants? So I guess that's my sort of broad view of it, kind of over time went from internal to kind of now where we're at this more external focus. So I'll pause here and let you follow-up.

Got it. Okay. And that's helpful. And it appears the -- your strategy regarding tech investment in general, not to put words in your mouth, but has generally been to broaden the product suite beyond title, which you already dominate and focus on products that can improve productivity, add revenue. Could you talk about that effort and that the build-out you've had?

Yes, sure. Sure, Brock. And maybe I'll start again with maybe where we began on the title production side, and then I'll layer in what you just asked about. When you think about what we do, there's 2 broad aspects to it. There's the title production side where we get an order for a purchaser, refinance or commercial order, and we're researching public records and ultimately producing a title commitment. And then you've got the settlement side. And those are the 2 big pieces of the business. A lot of the technology effort to date has really been around that title production side. And so our investments have included things like SoftPro, which is what we use to process our orders daily. It's our title and closing technology. We also sell that to the independent agent community. It's the largest independent agent technology used in the industry as well as used by our internal companies. And then we made other investments in companies like NextDays, which is a patented title automation technology that we've had for years. And then another company called ValueCheck, which is also in the title automation space, inside ServiceLink, which maybe we'll talk about later. We've developed EXOS Technologies that kind of fit that centralized world. But a lot of these investments that we've made over the past 10, 12 years really have been focused on improving that title automation and shortening the time it takes us to issue title commitments lowering the cost and integrating those technologies with our workforce, where we can really centralize the number of places that we have to do title production. So if you went back 10 or 15 years, we might have had 150, 175 separate locations doing localized title production to get our work out. We really have that down to about 20 today tied in with our India back office, really producing 75% or more of all of our title product. Then additionally, we've made investments in a company called SkySlope, which provides automation to real estate brokers, helps them automate their kind of back office, their compliance functions inside the brokerage business. I think we're in 60 of the top 100 or something like that brokers nationally. And we're also using them to develop a lot of our work on our inHere platform that we can talk about later, that's the digital platform I referenced earlier. And we've also bought companies in the real estate technology space, and maybe that's one of the things you're referring to. We have 2 -- really 3 acquisitions we've made in kind of the lead generation space where they sell lead generation capabilities to real estate agents. And we kind of see that as a nice adjacency for us, and that it's our core customer group, we're kind of touching them with the different business that we have before there's even an opportunity for a title order. And it's a revenue business with profit. So those are some of the acquisitions we've made. Did I miss anything, Tony or?

Oh, thanks. Did you mention Next -- you mentioned NextDays.

NextDays, yes.

No, I think you got it.

Guys, I think Brock may have dropped off here. Let me continue most of the work. So if you could talk about some of your technology and product suite, some of the major parts here. How do they all fit in? And why move to diversified beyond dominant share and title?

Yes. It's a good question. So I would say on the title production side that I talked about, so that front end, you really think about SoftPro, NextDays, ValueCheck, those 3 companies I talked about as really being part of the same puzzle where you're trying to use these technologies and integrate them with your workflow to really reduce the amount of time you have to spend doing your search and examination work to get the title commitment out. And that's really about reducing cost and, as I said, gaining efficiencies and also providing a product faster to the customer, the end users. Similarly with our EXOS Technologies inside ServiceLink, which is our centralized environment, we have a decision engine that provides the statusing of title in essentially seconds and issues title commitments very, very quickly. And so a lot of that's been on that side. When we think about real estate technology, as I said, it's really just another way to touch a core customer group with value-added products that they want to consume and pay for and get them from the Fidelity family, if you will. And we think that, one, those are businesses that have revenue and profitability. And so we manage them to that level. But they also -- we think they help us deepen our relationship, if you will, with that core customer group.

I think we have a bit of feedback there. Sorry for that, guys. Please go on.

No, I'll pause there.

Okay. Well, one question I have is on your e-commerce systems. I understand that you have a system called RealEC through a joint venture with Stewart Title. What is RealEC? Can you tell us about how this partnership came together and...

Yes, that was a partnership some time ago. It's not today. Really see -- really -- I think that might still be owned by Black Knight.

I know that -- we used to own Black Knight. And at one point when we separated from them, they retained RealEC. I don't know if they still own RealEC or not.

But what RealEC was or is, is really like an exchange where -- we're getting some feedback, but -- an exchange where lenders, in particular, could send orders to title companies and then title companies could fulfill certain pieces of information and send that back, and it was kind of like a data exchange. So when you think about technology adoption or broader technology adoption, it's kind of an effort at creating a utility that would allow kind of this information to go back and forth and make the transaction more efficient, essentially, but we don't own that.

No. And I don't know if Stewart Title's still involved with RealEC.

I don't think so.

Got you. I was struck by the partnership arrangement between the 2 companies and that led me to question whether -- is there a potential for more of these types of partnerships to occur as we see consolidation within the industry or as like people get together to combine share?

Yes. That's interesting. I think what we've seen in the title industry is maybe not so much partnerships, but there are times when companies share -- or sell actually title data information. So you could have an underwriter that owns title information of a particular jurisdiction like a private title plan, but they're willing to sell that to competitors who are competing with them for the next transaction in the marketplace. And so that might be a form of a partnership. It's certainly a business that they're running. But there is some of that in the industry. But I would say, for the most part, it's a highly competitive industry. And while at a high level it might appear to be quite consolidated with 4 national underwriters maybe having about 80% of the underwriting business, it's not consolidated at the local level. There are well over 20,000 independent agents that are competing in those local markets for the next title order from a realtor, a lender, a builder, a lawyer. And so that competitiveness probably works against a lot of -- the kind of question you're asking about is the potential for other partnerships.

And it's hard to know whether you'll see any more consolidation with the big 4. As you probably know, we went through a process where we tried to buy Stewart Title and ultimately, the regulators kind of nixed that deal, and we weren't able to go through with that. I suppose that doesn't necessarily mean 2 of the other big 4 couldn't get together at some point, but I think it's less likely. And then you have -- so you have those 4 that write about 85% of the premium in the industry. And then you have probably 30 regional underwriters that write the balance. And I suppose you could see some consolidation among those companies. But I think it's been pretty status quo for some period of time now in terms of what that makeup has looked like.

Yes. I mean, if you look at the premium dollars that are written, the gross premium dollars as reported the American Land Title Association, so that's the National Trade Association, about 60% of gross premiums historically are written by the independent agents. In other words, when I say written, they're processing that transaction. They're the ones that obtained it in the local market. They ultimately have to issue it on the policy of an underwriter, but they're really controlling 60-plus percent of the volume of the industry.

Okay. That's interesting. I wonder what some of the issues are in implementing this technology to achieve your goals. Is the problem with title that it's very localized and document intensive? Is it that you need to set up a shop in your local jurisdiction or that could be...

I think there's 2 aspects to that. I think from the title production side, sort of that front end, as I talked about earlier, we've really centralized a lot of that where at one point, it was very localized. It was just done that way in local markets. You had your closing team in that market and your production team and your sales team. And now we've really kind of consolidated that title production and leveraged a lot of technology. And really, it's a big part of the story in terms of our ability to expand our margins, at least we have this last year, with these rising volumes, we just didn't have to add as much staff because we're taking advantage of the technology. The closing side is still more localized because you still have a business where you're winning business in a local market from people in that community and you're closing transactions from people in that community, and a lot of that's still done in person. Where at the end of the transaction, a purchase transaction, on average, from the time you open the order, the purchase agreement gets signed to when it gets closed and recorded is roughly 45 to 50 days. That's a pretty typical average. But that typically today still culminates with the signing of documents in an office across from a person who's a notary, signing paper documents. So that certainly has a local aspect to it, of course.

I see. If I'm not mistaken, you have operations in Canada as well. Am I misremembering that?

No, no, we do. So the business in Canada is a little bit different than the U.S., but similar in a lot of respects. But it's a much smaller country, of course. But we do appraisal management there and title processing and -- but it's a much smaller business.

Yes. Is it what, $120 million?

Yes, maybe $120 million.

In total revenue, and that stacks up against our consolidated revenue of almost $11 billion. So you kind of get a sense of -- it's not a huge part of what we do.

But maybe I could touch on something we're working on now that I think is related to the question you asked a minute ago around this closing side. Really, our focus right now is on what we're calling our inHere platform, and that's to take that closing process or that beginning from the purchase agreement signed to the end to a digital process. And we've made a lot of progress on that. We call it inHere, as I said, and it really begins with an opening package that instead of being in the traditional e-mail format, where you have back and forth e-mail, back and forth e-mail and phone calls, we invite people to a portal where they're authenticated, think of buyers and sellers, and then they provide us information on that portal, directly feeds into our title production system, SoftPro, because we've built APIs between that front-end portal and the title technology. And then they can start to begin the transaction with us on that portal, ultimately, to conclude with a fully digitalized signing and digital notary, et cetera. And we've kicked it off with this opening package. We've done it since we started, it's been a little over a year...

Yes, 1.5 years if you will.

I think we've sent out 1.5 million opening packages. So we're doing this at scale. And we really have an advantage in the industry, I think, that we have scale that other people don't have, and we've built this in a way where we can kind of offer it everywhere. It's not a bait in 1 market. We can really do it across the footprint. And we've gotten about a 63% adoption rate on it, which we think is fantastic. I think it shows that people are ready for kind of a digital experience. It doesn't mean that everyone who starts that way finishes that way because you still have people that might want to start digitally, but sign paper documents. And -- but we think over time, that will continue to build. And then we're adding additional capabilities to it like a mobile notary deposit, earnest money deposit rather, pardon me, and additional signing ability for additional documents, ultimately, to finish with the closing of the documents and then the companion mobile app for real estate agents and others who can then see on their app when they want kind of on demand, the status of the transactions that they're involved with. And we think this has a lot of power and could be a real differentiator for us and bring a lot of value to the clients at the same time.

That makes sense. I'm actually going through the process of refinancing my mortgage right now. And compared to the process, which took place about, say, 10 years ago, there's been a lot of noticeable changes in how things are done. And so I think the progress that you guys have made is kind of reflective of that outcome. So that's interesting. But it sounds like there's still more to do.

Well, and I think there's -- as I referenced at the beginning, it's a diverse industry with a lot of diverse participants and there's a lot of regulatory elements to it. And when you talk about there's still a lot to do, remote online notary is a big part of sort of this digital idea of doing everything digitally. And I think that's still -- I think it's approved in maybe 25, 26 states. I mean, it changes all the time, and it's going in the right direction. But you still have many states that don't have statutes that support that. Meaning in those states, you would not be able to use a remote online notary, you would need a notary in person. I mean, really, notary means physically appeared before me. That's the concept. And so you need a statute that in essence, I mean, it does a lot of things, but sort of redefines that concept of physically appears before me to include an authenticated remote protocol. So that's 1 example. Others are just the broader adoptions of things like e-notes that I think still have some way to go before it could become kind of the regular part of the process.

And did you think -- did you see much pushback from the consumer? Is that an element that we're missing here? Or is it more...

I don't know if it's pushback. I would say that I think for a lot of consumers, they're fine with the process. I don't -- for a lot of people, they do it once in their lifetime. If you're talking about buying a home, maybe twice, and I'm not saying that's the experience for all people. There's plenty of people that want a broader digital experience. So the way we think about it is we want to offer up all the solutions. So for those that want an end digital process, we're ready to do that. You need the other participants also kind of on board with that to accomplish. And for people that want a more traditional process, we're doing that. And the people that want something in between sort of that start on the front end digitally, sign paper on the back end, we'll do that as well. I think that will be the environment we're in for some time. And well, I guess, I'll pause there.

Yes. I mean, not everyone wants a 5-day closing, either. I mean, we talk about 45 to 50 days from start to finish on a purchase transaction. That isn't because we couldn't do it faster. It's because a lot of parties are involved in that process. We're one of them and certainly an important one, but we can do our job, and I don't know, it depends. But maybe all in, it's 4, 5 days throughout the process. So the 50 days has a lot of constituents, including the consumer who may not want to rush things along. And so I guess, to Mike's point, we're going to be ready when we need to, to expedite that process. But it's not quite here yet.

Yes. And I think when you think about the idea of shortening the time, which gets a lot of discussion and I get it, you've got to remember that there's a lot of due diligence that occurs. Specific -- more importantly, obviously, in a purchase transaction where you have appraisers and inspectors and the loan review and the title review and maybe people timing their moves around life events and they're buying another home and they're selling. I mean, I just sold a home, and it was a 60-day close. And I felt like I needed every single day of that 60 days. So not everybody is looking for this sort of instant idea that people like to talk about. But I do think over time, the process will be faster, but it requires all the participants to kind of be moving in that direction, while still protecting the due diligence aspect because I don't think we want a repeat of the great recession and the housing crisis that at some level was driven by maybe due diligence not being what it should have been.

I think I understand that there's a lot of [indiscernible] with their hands in making this [ deal. ] So I can understand that title was a small, but important part of the process. And so it requires all these different players to be involved in getting that closing time down to 5 days if that's what consumer wants.

Hey, guys, I'm back on.

Hey, Brock. Good to see you.

Amazing, speaking of technology and the challenges with it. I was listening to that last response and just entered to jump in. Where are the choke points right now in terms of a more faster, more efficient process? I will say one of the earlier presentations mentioned title was a big choke point with structural issues that maybe it can be made more efficient, but it's never going to be a today kind of a process.

Well, I would say, from our perspective on title, we generally -- again, you think about the issuance of the commitment and then the closing side, we generally get a refinance commitment out in a day and a purchase commitment in a couple of days on average. That doesn't mean there's not outliers and some transactions take longer that are more complicated from a title perspective, but the -- that sort of commitment front end is very fast. Now you have maybe different areas of the country where that's not true. You have not the same level of automation in all markets. So I'm sure there's experience around, no that's not the case that I had. And then on the closing side, and then maybe 1 more step, then after that commitment goes out, there's a curative process where you have to deal with the exceptions to title that we're on that commitment, and I'm not trying to get too technical here, but that process kind of to get to the clear to close, as we call it, that can add another week or longer depending on what needs to be done, but it's not so much automation that's in the way of that, but there's issues, legal issues many times that have to be addressed. There could be clearance documents that you have to get people to sign. And so there's a lot of parts to it that kind of relate to the way our property records are organized, the system that we have in this country around that. And then as far as the closing process goes, as Tony said, while the deal might be 45 days front end to front end, including all the work that all the other people do, the actual time we spend prepping or closing and signing the documents is actually quite fast. So I'd probably take a little issue with the view that title's a gating item, I suppose it could be, but I don't think that's the issue. I think it really relates to -- there's a lot of people involved. You have to schedule people to come do an appraisal and write-up the appraisal, and that's got to be reviewed. And sometimes that's very quick, and sometimes it's not. You can have, obviously, inspection items where a seller needs to address before you can close. I don't know if anybody's tried to get a contractor recently, but that can take a little bit of time. And there's loan review, and there's just a lot of different things that are involved. So I think -- I don't think it's any one thing. Volume also plays a role in it. When you have high-volume that it's difficult to step into for the various participants, that can slow at times. So it's not any one thing or any one part of the process.

Interesting. I wonder, is there a danger to shorter closing times? Or to imagine that for the -- the majority of the transactions there's probably very little risk, but for those transactions where there is a risk, can those risk be easily flagged? Or is it much more nuanced than that?

Well, maybe there's 2 elements. As I think about that question. One would be just, as I said earlier, there's some kind of cost benefit between the amount of due diligence we think is necessary to protect all the participants, not just from the title side, but all the participants in a transaction. But there are -- when you think about purely from a title claims standpoint, some transactions require more review than others. And so there's certainly risk if you went away from the proper amount of work to handle those files that require it. So if you're suggesting -- you're not suggesting, but if someone was saying, well, what if you just made it like casualty insurance and you didn't surge anything, yes, you're going to have a lot more claims. So where that dividing line is part of the trick of what we think about a lot in terms of leveraging our automation more fully and what transactions require more manual review. And that's a lot of what we put together between the acquisitions we've made on technology and the way we've integrated that. We know very quickly after we get that order through the use of our automation, what we need to elevate to a higher level review in order to make sure we're not taking on too much risk.

Yes. And the great thing about title insurance is we're ensuring against past events, not future events, like you would see in most insurance. So yes, I mean, technically, if the records are good and the process is good, we ought to underwrite close to 0 claims. Now we don't have 0 claims because things happen and you miss things or maybe they're not available in the record, but it would be a whole different situation if you weren't doing that work and taking the risk that -- well, claims are low in this industry. So I'm going to just bet on claims being low because there's, in fact, a lot of work done during the underwriting process to keep those claims low by really curing issues before they can ever become an issue.

That makes sense.

Maybe in the remaining time we've got, we could just pivot to kind of the efficiency of the core business, core title business, in particular, in terms of -- I think you mentioned this in some of your opening remarks, in terms of cost savings and greater efficiency now versus in the past. Do you think that will allow you to preserve your operating margins here as we do go through this decline in volumes over the next 2 years?

Well, maybe I'll start on that. Tony might weigh in. I guess the way I think about that, Brock, is that there's a lot of levers involved in margin because it's not just your expense side, but what's the size of the commercial market, the purchase market, the refinance market and depending on how those are all performing, it has a lot to do with your margins. But I would say that because of the efficiencies we've gained over time and the ones we believe will gain as we go forward, that we should outperform the next down cycle vis-à-vis the last one, if you will. And we should also outperform growth markets. And I think that's what we've shown really in 2020 and the first quarter of '21, we've achieved really fantastic margins, 19.9% in the first quarter. That's -- we did 14.4 last first quarter, and I think that was our best first quarter margin in the history of the company. We outperformed that by 550 basis points. But I'm not saying we'll do that necessarily, that kind of growth, but I think it shows the potential the business has in kind of these higher cycle markets, and I think we'll have more downside protection in the next decline.

It wasn't that long ago that we were talking about a target of 15% to 20% margin over either during a quarter or over the course of the year and everyone kept wondering when we were going to get there. And now through a little more volume and more efficiencies, not only did we get there, I mean, last year, we did a 19.6% margin, the year before, 16.3%. So we're well into that range because of a really good market and, of course, focus on cost management.

Got it. Got it. Okay. And just to maybe close this out here on -- I did notice you've got a 1031 exchange business that's been kind of a Steady Eddie business for a long time except when it comes in the crosshairs of changes in tax code. Any thoughts around how that issue may play out here in the next few months with the Biden tax proposals?

Well, I'd say it's a very good business for us, but just to size it, I mean it's important to understand that we had $11 billion in revenue last year. I think our 1031 exchange business probably add $50 million or $60 million in revenue and probably made about $30 million last year in pretax. So it's a good business, and it's a good margin business. But we've already seen the challenges in that business from lower interest rates because it's really short-term rates or what impacts a lot of the upside in that business. And with short-term rates dropping to pretty much 0 back in January of 2020 or maybe first quarter of 2020, we really felt the brunt of those declines for all of 2020. This year, with the full effect of lower rates, it's probably closer to a $25 million profit business for us. And so that probably helps size it a little bit. In terms of how this plays out, it's hard to know. I mean, the proposal, I believe, on the table is that any gains over $500,000 would not be allowed to be deferred under the 1031 exchange rules. But over half of our business are proceeds that are under $500,000. That's not a gain under $500,000. So it certainly doesn't get rid of the 1031 exchange business, even under the current proposal, but it certainly would put a dent in it. But we'll see. I mean, it's early, we don't know how that's ultimately going to play out.

Got it. Well, I know this has been a little bit more disjointed than it otherwise would have been because of my technical issue. Is there anything that you'd like to cover that we didn't in our Q&A?

I don't think so. I think it was good.

Yes, I do too.

Great.

Okay. All right. Well, next time, I promise I won't lose connectivity.

All right. Brock, Manu, it was good talking to you guys. Have a good afternoon.

Thanks, Tony.

Thank you very much for attending the conference with us. And thank you very much for your time. This was great. Appreciate it.

Bye. Take care.

Talk to you soon. Bye-bye.