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

Good morning, everyone. Thank you for joining us for this fireside chat with Fidelity National President, Mike Nolan; and CFO, Tony Park; and F&G President and CEO, Chris Blunt. We have a number of prepared questions we'll be going through. [Operator Instructions] We'll do our best to address it in the time we have today. We have also prepared a number of audience polling questions that we would encourage you to answer during the presentation. And we'll be publishing the results in our report summarizing the takeaways from the conference. With that out of the way, let's get to the discussion. Guys, thank you all for joining us. Really appreciate the time.

First, I wanted to lead off some contents on how daily purchase and refinance orders have trended so far in the quarter. And can you discuss the sustainability of current refinance order accounts if rates remain at or below kind of this 3% level?

Sure, Mark, and great to be here. Thanks for having us. I would say the trends are healthy. As we reported at the earnings call, our July purchase orders were up 4% over the prior July. August is running flat to the prior August. I'd point out that August of last year was the peak purchase open order month for the year, which is really unusual in a typical year. Usually, we see the peak in the second quarter. But with the pandemic, it kind of pushed out. So I'd say they're holding very, very well. Certainly going to see the seasonality in the purchase market. We're kind of already seeing it a little bit. It will drift down kind of each month. But still, I think a very good environment. On the refi side, the comp obviously is very tough to last year. We're still running about 30% behind the activity of last year. July and August of last year were 2 of the 3 best months we had on the open side. But I was looking at the orders in April, May and June, we were averaging right around 5,000 refi opens a day. And in July and August, we're averaging around 5,400. So we've seen a little bit of an increase in July and August. Rates seem to be holding kind of around that 3% number. And to your second question of what will happen if we kind of hang in around 3%, I would think we'd probably be 5,000 or so. We could be maybe seeing just a little bit of a falloff just because of all the activity that's occurred that maybe we start to lose a little momentum on that. But I would anticipate refis to hold up reasonably well if they stay at 3%. If rates fall, who knows. If they fall down to 2.75%, we'll see a nice uptick. Black Knight is still reporting that, I think, as of the last report I saw in July that at 3%, there's 15 million eligible refinanced candidates, which is kind of amazing when you think about all the activity that's already occurred.

Yes. Yes, indeed. Margins remain well above your previous guidance of normalized levels. Is that level of normalized margin changed as a result of all the investments in technology and automation? And is there a room for further improvement as these tech and automation investments continue to take hold?

I wouldn't say that we're prepared to have a different range. I think that 15% to 20% number is still pretty good. I mean we've obviously had a couple of quarters above 20%, but it's still just a couple of quarters. I would say that from our investments in technology and automation, we're certainly driving better margins. And I think that is showing up in the current cycle. And I would add that in future periods, we should outperform up cycles to previous years and kind of outperform down cycles, but not ready to call a different range. And then is there room? I think there's always room to improve margins. We've done a lot on the title automation side, on the title production side. I think we can still improve there. But a lot of the work has occurred, but there's still things that can be done on the closing side. I mean that's a big part of the business. Maybe it gets underappreciated a little bit in terms of how much of the business is tied to that settlement side. And with our digital platform that we're building and have built and as that gets more and more adoption, I think we'll have some opportunities to be more efficient in the future there.

Okay. Great. What impacts will your investments in technology and automation have on future claims rate? Is it also affecting the quality of the searches that you do and reducing that claims risk at all?

I guess it's hard to measure, but I would say that it absolutely has some impact. I think with improved technology, you're just going to have fewer human errors, which is, frankly, a big part of our claims experience. So hard to measure. We've seen a decade now of 4%-or-better claims ratios, loss ratios. And so I could see that even in a spike in a year where -- or a couple of years where maybe claims are higher because the economic environment turns against us and you have foreclosures and maybe more fraud, I still think the next peak in loss ratios is going to be well below the last.

Got it. You discussed your expectation for margin through the back half of the year. What impact will this kind of shift we've had back towards a more purchase-heavy mix of volumes have on title margins?

Well, I would expect margins to be very good in the back half of the year. We're not going to project a number. And we're coming off a record margin in the second quarter, which we match in the fourth quarter. I think -- as I think about kind of the puts and takes of the back half versus maybe that second quarter, we would expect to have a little bit less purchase revenue because purchase closings will come off a bit as the seasonality occurs. And commercial is going to be very, very good, but we just had a record commercial quarter in the second quarter, the best obviously in the history of the company. So that could be up in the back half, but we don't know yet. And then maybe the wildcards refi a little bit. If rates do fall, we could get some extra refi revenues. So you get a little bit of a situation where maybe purchase revenue comes off and the other things kind of hold a little bit. Expenses should be reasonably fat -- flat. I think we could see maybe some increase in personnel because we did add employees in the second quarter. But real strong margins, but don't know where they'll end up.

Can you remind investors how your margins vary across your different channels, whether it's your centralized refi or distributed purchase transactions and then also commercial?

Yes. Maybe with centralized refi, just to give you some numbers, and obviously, we're in almost a super cycle with respect to refis, ServiceLink, our centralized refi channel, had 40% margins in the second quarter. That's just on the title and close business. 38% margins for the first half of 2021 and 34% margins for the full year of 2020, so very strong margins in a -- what I'll call a very strong refi period. Compare that with the directs that are also very, very good margins but not as good. And the directs, I'll remind you, do purchase, they do local refi and also local commercial. Our direct operations, the entire footprint, 1,300 offices, at 32% margins in the second quarter, 30% margins in the first half and 29% margins for all of 2020, those are kind of the 2 pieces. Then obviously, we have national commercial. And our national commercial offices really specialize in the large deals, multisite, multistate, large local transactions. And those margins are very good, too. And those typically run somewhere in the mid-30s, I would say.

Okay. When you think about where the benefits of some of the investments in technology and automation are falling, does it benefit disproportionately the direct and ultimately make it almost more like a centralized, where you -- it becomes a more efficient process? Or are you kind of -- are those benefits being spread across your entire business?

I think the benefits are spread across all of our direct channels, maybe less so in commercial just because the automation sort of benefits the residential process more. But having said that, even in our commercial business, when we went through the pandemic, when I think about our national commercial offices, our 21 national offices that we talk about, when we went through the pandemic, we reduced our staffing about 20% in those operations, which we really hadn't done at that level before. It's obviously an unprecedented time. And even with the orders coming back and they're very strong, and I'm sure we'll end up talking about that, but we found that we haven't had to add back as much of that staff as maybe we would have thought. So we're starting to see some really nice margin growth on the commercial side as well.

Great. So home price appreciation, obviously, it's been a nice tailwind, continues to kind of mid-teens pace as inventory continues to lag demand, which has driven nice kind of fee-per-file improvement. Can you just discuss the contribution to that of HPA versus mix shifts to more expensive MSAs and how that's kind of -- what the main forces are that are driving your average fee per file higher?

Yes, I guess it's hard for us to measure because we don't measure a relativity between HPA versus the size of the transactions have just gotten larger. I will tell you that we've seen about an 18% increase year-over-year in the purchase fee per file. And I think that's roughly the number of the home price depreciation year-over-year that you -- that is measured nationally. So typically, we only get about a 60% pull-through, so we may have a combination there of home price appreciation, combined with just transaction sizes that are generally larger. But again, it's kind of hard to know because we don't measure at that level.

Yes. Well, do you see that reflected and you just think about where your orders are coming from? Is it coming from some of the markets that just tend to have higher home prices in general, like California or New York or other areas where home prices are higher? Or are you seeing that kind of also a shift in where transactions are coming from that's benefiting you?

I think we're seeing transactions across the board. Each of our divisions is doing very well and probably, percentage-wise, fairly measured or fairly equal relative to the others.

Yes, I think that's right.

Okay. Got it. So it sounds like there's also a benefit of some trading up going on, where just transactions across all markets are generally getting higher, right? So I think that's -- because I think HPA is more like in the mid-teens. So that will always imply what you're seeing is just the average transaction also that's occurring is larger than what we saw a year ago.

It seems like that is the case, and I don't know if certain economic groups are better over the last 18 months than others, but maybe that's a possibility.

Yes, that makes sense. Okay. Could you give us an update on commercial trends you've seen so far in 3Q and how the pipeline is shaping up in that business?

Yes. I mean the trends are just fantastic. Through August now, we have our seventh month in a row of open orders per day above 1,000. And just to give some context to that, prior to '21, we only had 1 year in our history where we went over 1,000 orders per day in a month, and that was February of 2020, so right before the pandemic. And in 2019, when we had our record year for open and close in revenue, we averaged right around 870 orders per day in 2019. That was a fantastic year. And now we've had 7 months in a row over 1,000 orders, so just incredible volume. And it's across the board, local, national geographies very well represented. And I would say the pipeline is really strong, both really in our national environment and our local environment. It should be a good -- really good back end of the year. We've had a strong July and August, and the trends are just excellent.

Great. Mike, can you remind us how long it is between an opening or when you see something in your commercial pipeline and with the closing? I assume it's longer than a residential transaction.

Yes, certainly. So maybe first, on the residential side, it's about 45 days. So purchase -- and that's been there -- that's probably been the number for a while. Refi, we saw some fluctuation particularly during the pandemic, that it lengthened a little, but 45 to 50 days. Commercial is really difficult to measure because you can have a transaction that closes in 10 days, and you can have another transaction that closes in a year or more. So we don't tend to really focus and measure closing ratio a whole heck of a lot on commercial, although we've had some more questions from investors. Just even the other week, I think we had one about kind of commercial closing rates. So I did go back and look. And if you look at it just on an annualized basis, so total open orders in a year and total closed in commercial, I went back to '15. '15 through '19, the number was in the mid-60s. So on average, every year, we would close about 65% or so of the commercial orders we opened. In 2020, it went down to 59%. So that was the outlier year. We probably all know why. And I would fully expect this year to be right back in that mid-60 number. The fourth quarter is always the strongest closing ratio if you look back at prior years. And so I think it's very consistent with where we've been absent the pandemic year of 2020.

Okay. Any sense how like the average time is between open and close on the commercial?

I don't have that number. We just don't really think about it that way. I mean I'm sure we could probably come up with it somehow, but we never have.

I don't know. I mean I guess we'd just be speculating if we threw something out there, but it's got to be longer than the 45.

I had no question on that.

It is -- and you look at your pipeline, the breadth of it, is it all across the board? Do you have some large like multisite transactions in there as well as...

We do. We've definitely seen an increase of multisites open in the second and into the third quarter. National orders, I mean, if we look at our orders for the year, and I think we talked about this on the earnings call, the national opens are actually exceeding the local opens, but both are doing very, very well. And another interesting thing that really is just starting to show up in the third quarter is that our local fee per file kind of the last couple of months has really been running significantly ahead of last year. So not exactly sure why. Obviously, we're doing bigger transactions in the local markets than we were before. But I would anticipate fee per file to be pretty good in the third and fourth quarters.

What I think is interesting also is the fee per file on commercial is almost the same whether it's a purchase or a refi. Whereas, as we know, it's a huge difference on the residential side of things. But sometimes, we'll have periods where our average fee per file on a commercial refi is higher than -- now that could just be the size of the transaction that's getting done, but it's interesting, you don't have the same separation.

Okay. Got it. And if you look at the commercial market, is it being driven more by purchase than refi right now or the other way around?

No, certainly purchase. I mean I'm looking at the numbers, and it's been pretty consistent even through -- I've got the 2020 numbers here, too. Full year 2020, we opened 66% purchase, 34% refi. And right now through August, we're at 69% purchase and 31% refi. So skewed a little bit more to purchase but not that different.

Yes. Yes. Okay. I assume that mix of purchase and refi moves around a lot less in commercial than it does in residential.

Yes.

Yes, yes, for sure.

Yes.

Okay. Great. Let's see. Okay. And then just going through these questions. Looks like we've covered a lot of this. So one question I have for you is margins have been kind of above obviously the long-term average. And the question is, is there any concern that these really elevated margins could ultimately lead to some elevated regulatory scrutiny particularly when you compare your margins to some of the other competitors in the industry?

Yes, I guess I would say we certainly haven't heard anything yet, so we would be speculating. I think it's hard to regulate a company. You have to really regulate the entire industry. And to your point about the separation, I think the separation really reflects better execution as opposed to some regulatory advantage, so I don't know how -- I mean, I don't know exactly how it works, but I don't know how they could come in and regulate us and not others. I think another point I would make is states actually seldom set rates in our industry. Only a couple -- 3 states, I think, actually set rates, Texas and Florida, maybe New Mexico. All the others are done differently. They're market-driven. They're file and use in about half of them, and so I think it's -- I mean regulators can always weigh in. But in terms of disrupting the industry and coming in and actually changing what is charged because we all charge roughly the same thing. I just -- I'd be surprised if something like that happen.

Yes. And to that point, Tony, about -- it's hard to regulate just one company. Does the continued scale advantage and technology advantage you're creating there, creating these excess margins all those years? Combined with the desire for regulators to have competition, right, not have you bidding like players ultimately constrain them in their ability to try and regulate rates, right? Because if they push your rates down to a point where you've got like a low-teens margin, you may drive others out of the market because they can't even make money. Is that a fair way to kind of think about that regulatory dynamic?

I think it's certainly one way to think about it. And I don't know what all the thinking goes into regulating the title insurance industry. I know that they typically have a lot of other companies within their jurisdiction that aren't title companies. There aren't very many of us. And so I think their focus is probably on the P&C and other insurance entities. But you make a fair point. They certainly don't want to regulate us to a point -- or our industry to a point where they actually drive competition away. Now having said that, Mike will tell you that we have 20,000 competitors. It isn't just the big 4 title underwriters who we compete against every day. We compete locally against agents and directs, and so there's actually a ton of competition in our industry.

And I would add new entrants all the time. There's been many new entrants and new or revamped underwriters. And you even see some growth in some of the regional players. So those would all point to a healthy, competitive environment in the industry.

Okay. Sticking with the theme of competitors, there have been some newer competitors making some big claims about disruptive technology and faster decisioning processes. Can you just talk about how you perceive that threat in the marketplace?

Well, I think when you think about speed, we certainly believe we have that ourselves particularly in our ServiceLink business. We've had a decision engine for a long time producing very quick results. We lead that segment of the business. So we're pretty confident in our position there. I think when I think about disruption, we really think about ourselves and what we're doing on the digital side, building out the inHere platform at a scale that is an advantage that nobody else has. I mean it's built. It works. We can offer it up from the start of the transaction to the end. We're not just focusing on the last 45 minutes of the transaction like some companies are with just the signing process. And the mobile app, we're rolling out to realtors and others. I think we're really in a position to be the disruptor. And so there's always competitors. There's always new entrants with new thought processes and new market pitches, if you will. But I'm very confident in the work we're doing and the position we're in.

Okay. That's helpful. Why don't we bring in Chris here before we finish up with some capital allocation questions. Chris, can you just remind us how you view the earnings contribution from F&G over the long term and kind of the growth prospects you see from the business?

Sure. Yes. So when we closed on the acquisition, we had said at the time that we thought we could double assets and earnings over the next 5 years. And I would say 1 year into that, we're running ahead of schedule.

Okay. Great. And how do you think about the impact of the impending tapering of the Fed and what it could do to the rates markets impacting kind of the investment returns in your business?

Yes. So on the presumption that tapering leads to higher interest rates, I think it benefits those 3 different categories. The most immediate would be about 15% of our portfolio is floating rate security, so any uptick in LIBOR, for example, just flows directly to the bottom line for us. The second is this impact on demand. Right now, we're offering 2% tax deferred on a 5-year fixed deferred annuity. If suddenly that goes to 2.50% or 3%, obviously, you'll see a pickup in demand. And then the third is, generally, it's easier to grab just a little extra spread at the margin in a rising rate environment even if it's just from the lag effect that between pricing and actually investing, you're picking up a couple of basis points here or there. So yes, the tapering gradual rise in interest rates is our Goldilocks scenario.

Okay. Got it. Now that you've made substantial progress in entering some of the new channels, identified the early stages of being acquired, how should we think about growth rates for F&G over the next 2 to 5 years?

Yes, I'd say it's already happening. So if you think about it, when Fidelity National bought us, we were effectively selling through one retail channel, and that was independent agents. We've now tripled that on the retail side. We've added banks and broker-dealers. And I'd say the progress there is phenomenal. I mean just the way the team has executed is incredible. And then we entered the institutional market in the last year as well. So we did our first funding agreement note issuance, and that was extremely well received. So we're excited about that market. We've now entered the pension risk, transferred the pension buyout space and have already won a few cases. So we feel really good about the trajectory there. So we've gone from effectively 1 retail channel to now 3 retail, 2 institutional. And honestly, each one of them has multibillion dollar per year premium opportunity for us over the next few years.

Okay. And how are you thinking about just the growth in AUM kind of over the next several years?

Yes, again, I'd stick with what we've been saying for a while now, which is now we're a year into it. So I would say, if you go back to the starting point of where we were, I think we can double that number at least from an AUM perspective. I think the biggest growth in earnings for us will be AUM growth. But we've targeted typically a 1% return on assets net of everything. I think there'll be some margin expansion as well because we made substantial technology investments in our part, too. So we think at the end of this year, we're going to have a really scalable, pretty modern and modular operating platform. So in addition to the AUM growth, if you see margins go from 100 to 105 or 110, that can have a pretty meaningful impact on incremental earnings.

Okay. In the banks and broker-dealer channel, have you brought any new institutions? Or are you right now just leveraging the relationships with the ones that you brought on already?

Yes, both. So I would say the ones that we've brought on, the first 3 were actually enjoying #1 market share, which is pretty awesome. We've added a number of additional distribution partners. So I would guess by the end of the year, we'll probably have a dozen different distributors. So yes, on a go-forward basis, it's further penetrating the distribution partners we have plus the upside leverage of adding additional partners.

Okay. Great. And as you think about just positioning the investment portfolio, have there been any notable changes in recent months or quarters?

No, more just, I would say, a gradual increase in diversification, probably a little derisking at the margin as spreads have come in. CLOs are a good example. You're seeing a lot of refis now. And rather than reinvest that, given how those spreads have tightened, we've been allocating those dollars more to high-quality commercial mortgages and even residential mortgages, where we see some good return on capital opportunities. So I would say it's just been a gradual progression over the last year of just increasing the amount of diversification in the portfolio.

Okay. Great. Just turning back now to capital allocation, how should investors expect you to deploy free cash flow over the coming quarters? Is paying down a portion of the debt still top priority, Tony?

Yes. I would say we're in a very strong position from a capital standpoint. We have $1.2 billion of parent company cash on hand as of June 30, and that number is actually growing as we continue to perform very well. I would say we're in a good shape from a debt standpoint, although we do have some bonds coming due in September of 2022, $400 million. We did -- you may have seen, we had a press release, I guess, last night, where we issued 30-year bonds at 3.2%, $450 million. And that really serves to prefund that debt that comes due in September of 2022. It also allows us -- we had the cash on hand, but we could certainly use that as well to fund an intercompany facility that we'll put into place with F&G that we've talked about in prior quarters. But I would say the capital allocation strategy is the same as it's been. I mean dividends clearly are our #1 priority. And we spend about $400 million annually on our common dividend. We just raised that last quarter by 11% to $0.40 a quarter. Buybacks, clearly in there. And we completed the commitment of the $500 million that we made a year ago. But we're still in the market buying back shares, and we'll continue to do so. Beyond that, I think it's M&A to the extent something shows up, although I would say that's probably a smaller piece of the pie at this point just because, from a title standpoint, there aren't significant transactions that can be done there, at least not any individually significant. And then on the F&G front, I think there's so much organic opportunity there that I think M&A is in the cards right now. So it's a nice position on capital, but dividends and buybacks are 1 and 2.

Okay. Does -- Tony, does that imply that the opportunities are so strong that you might see taking some of the excess capital at the holding company and pushing it down to fund some of that growth? Or is there enough earnings power within F&G to kind of organically fund what they're doing?

I think with the growth you're seeing at F&G, it requires more than what they can internally generate. So then the question is how do we fund that. We've talked about putting that credit facility in place, which allows a more efficient capital structure at F&G, which is good. And FNF has the money, so why not lend that internally. Ultimately, they'll probably need more capital, and then we'll have to decide -- that will be next year and beyond, but we'll have to decide is that equity capital that FNF wants to fund or do we look at third-party sources of equity capital in the form of reinsurance or sidecar or something like that. But at this point, I guess we don't have to make that call.

Okay. And you alluded to larger M&A kind of not being an option right now. Is that due to capital limitations because of what you want to kind of at least keep on hand to fund all the opportunities at F&G? Or are there other drivers there?

Well, I guess the point I was making is we couldn't buy Stewart Title, and so there's no really big title company out there that we can buy. That doesn't mean we can't buy something sizable that's related to real estate but maybe not in our industry. And it doesn't mean that we can't buy a number of agents if we choose to go that path. So that's really what I was referring to. On the F&G side, there may or may not be plenty of opportunities. But I guess with the returns we're getting growing organically, it hasn't been the top of our list.

Okay. You guys have always been active kind of doing deals, adding up and down kind of the value chain within the mortgage ecosystem. Is there anything there, Mike, in particular, any kind of services or that you're looking to kind of add to help complement what you already have in place?

Yes, I don't think there's any one thing we feel we need right now. We look at a lot of things. We get a lot of things sent to us to look at, both title agents and sort of related kind of businesses in real estate. And so we're -- we always have an eye out for something we think that could add value. But I don't know that we feel that there's one thing we really need to do today. We've been active in buying agencies. We've bought a number over the past handful of years. We typically don't announce them. We continue to buy them. We bought them in the last 6 months, and we've got a pretty good list of candidates there that we continue to work on. So there's a lot of things we can do but probably nothing we feel we have to do.

Okay. And is the reason you're not announcing those because the agencies are getting relatively small in size? I mean you historically have announced at least the bigger ones, right?

Yes, I think we've announced a handful. I can think of TG.

Yes.

But absent that one, I'm not sure we've announced any others. I think it's just they're not that big, so we typically don't announce them. I know a lot of other companies announce every acquisition they make, but it's just, I guess, the way we've done it.

Okay. Great. Well, I think that does it for us. Really appreciate the time and comments. Thank you all very much for joining us.

Thanks, Mark.

Great to be here. Thank you.

Thanks, Mark.

Okay. Thank you.