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

Well, great. Thank you very much for everyone taking the time today. I'm Jamie Lillis from Solebury Trout. I'm filling in for John Campbell from Stephens, who unfortunately had a last-minute issue, which I'm sure most know. But nonetheless, really excited to have Fidelity National Financial here today. We have Mike Nolan, President; Tony Park, Chief Financial Officer; Chris Blunt, CEO of F&G. I'm going to start with a short run through the business and what we think is really getting at the value creation that's occurred at FNF really for a very long period of time, and then we're going to jump into some questions.

Thanks, Jamie, and thanks, everyone, for being here, as Bill said this morning. We really appreciate you taking the time to hear from us and spend some time with us today. Yes, we're going to have a short presentation, really highlighting the industry-leading performance that we have on the title and settlement services space as well as our new entry into the annuity business and also talk about some of the factors and reasons that drive our industry-leading performance and, really, we think, create a compelling story around a sustainable competitive advantage in these businesses. So we're going to start with just an overview of -- well, we have a legal disclosure. I'm not going to read that.

Read that.

I forgot Jamie made us put that in there. We really think about the business that we have today in kind of 4 buckets. First is the traditional title business, our core title insurance and closing business. As I said, we're the industry leader. We've been the industry leader for more than 2 decades. And we're #1 in virtually anything you can measure in the title business from revenue to profitability, to margin, to market share in the channels independent agent, direct, to segments commercial, purchase, refi -- centralized refi and centralized default. We're #1 and we've been #1 for over 20 years. We also have some ancillary businesses in the sort of real estate-related space, things like a subservicing company called LoanCare. We're the second largest subservicer in the United States. We're servicing somewhere around 1.7 million, 1.8 million loans. We have an appraisal management business in both the United States and Canada. And then we have a few other businesses like home warranty that are sort of complementary to the title offerings. In addition, we have a number of real estate technology assets. These include things like -- this includes things like our smart title automation products that kind of power efficiencies in the business itself, but also includes investments we've made in things like lead generation businesses and customer relation management businesses that sell products and services to real estate agents as well as our SoftPro business that not only powers our title and closing activities inside our company but is the #1 independent agent software in the industry. And then the fourth bucket is the annuity business that Chris will be talking about in a few minutes. Really, we think about why are we the leader. Well, it's -- we have a go-to-market strategy that we think really differentiates ourselves from our competitors, and I'll talk about a little bit more about that in a minute. We have technology investments that really drive innovation and cost savings. We probably invest more in technology than any other company in the industry, and we've had a long history of innovation. Tony is going to touch on the industry-leading performance and our long-term focus on shareholder value creation. So when we think about how do we go to market, we're the only title insurance company that has a multi-brand approach. So what does that mean? We have 5 separate underwriting brands, and no one else takes this approach in the market. And really, what that does is it gives us more bites of the apple if you will. It gives us more opportunity to gain market share, to drive profit, to drive more margin. And we also expand that out into our local communities. This is really a community-based business. You win or lose in the title business by building trusted relationships and communities across the United States with real estate agents, loan originators, et cetera. And we have multiple local brands, which you can see on the slide. You probably can't read it because it's pretty small, but it's really just meant to give you the flavor that we make a lot of acquisitions of independent agents. And many times, we keep the name for continuity purposes, for business retention purposes, and we just continue to operate in that way. We also have the complementary real estate assets that I've talked about, including the businesses like subservicing, but also our foray into lead gen and CRM tools. And then we just have a scale and volume that just creates more efficiencies for us, more opportunities to lead the industry. And this really is one of the most sustainable, competitive advantages we have. I already mentioned this is a community-based business. We're in more communities than any other player in the industry by quite a factor, and it's very difficult for competitors to achieve that, very difficult and expensive to build organically. And you can't really buy it because no one else has it, except us, and we're not selling it. And then we've got F&G, which is the company we bought a year ago, in June of 2020, a little bit over a year ago, and we're really excited about this business. Chris is going to talk about it more in a minute. But it's an opportunity in a business that generates strong earnings and growing earnings over time and future cash flows that are not as sensitive to interest rate impacts that we have in the title space. I'm going to wrap up on the technology before I turn it over to Chris. So we've been making investments in technology for a long time. We're really a pioneer in technology, and I've broken this down into 4 buckets. First, smart title automation. We were the first company to have a patent for automated title through our acquisition of NextDays. We've made additional investments with companies like ValueCheck and the development work we've done with EXOS, which is our proprietary technology and our ServiceLink business, and we processed over 10 million orders across that technology. Secondly, SoftPro, I already talked about that. We use that to power our business internally. We have over 10,000 internal users that use that every day to do title work and closing work and we have thousands and thousands of independent agent customers. And those 2 things combined keep us really laser-focused on making sure where we have leading edge technology, the very best technology. We continue to invest in the development of SoftPro and just enhancing its feature set. I already talked about the lead gen businesses, [ Sync ] and Real Geeks, Again, they provide lead generation tools and services to real estate agents and SkySlope as a business it sells transaction management automation to real estate brokers. And those 3 businesses touch hundreds of thousands of real estate agents and millions of consumers. And then lastly, it's probably something we're most excited about. It's our newest development. We have built what we think is the industry's first truly end-to-end digital transaction platform. It's built. It works. We're running it in our operations today, and we've built that at scale, and we think that's going to be a powerful differentiator for us as we move forward. With that, I'll turn it over to Chris.

Great. Thanks, Mike. So a quick overview of F&G. We operate in the fixed annuity space. It's about a $250 billion a year market and growing. We have $35 billion of assets under management, and our business model is spread lending. We issue premiums in the marketplace. These are very sticky liabilities. So clients buy an annuity, knowing that it would be expensive for them to ask for their dollars back. We handed off to our investment partner, which is Blackstone, who's the largest originator of private credit in the world. That allows us to earn an additional spread or an additional number of basis points over what our traditional insurance competitors can earn. We target a 1% return on assets, net of everything. So as we scale our AUM, we earn that spread. As Mike said, these are very, very consistent earnings being generated. We obviously do better in a rising rate environment. You see a little bit of that in our third quarter results, where we've been tracking ahead of 100 basis points. We go back to the acquisition, which, as Mike said, was not quite 18 months ago, we were operating in one distribution channel. As you see here, we did a little less than $5 billion in sales. Right now, we're operating in 5 distinct distribution channels. We're on track to double our sales run rate. And in addition, taking a page out of the Bill Foley playbook, we've invested about $100 million in our technology platform. So at the end of 2022, we think we're going to be quite scaled from a new business perspective and have an incredibly scalable technology stack.

So my unbiased opinion is that this is a very compelling stock to buy. But if you're not there yet, just a little bit on our leading financial performance, $13.9 billion market cap. That's as of November 30. Revenue over the last 12 months of $14.6 billion, up 56% from that same period of the prior year. Net earnings up 178% to $2.7 billion. Cash generated from operations in our cash flow statement, $3.2 billion during that same period. Earnings per share, $9.30. So with a share price as of November 30 of just under $49, that's a 5.3x PE multiple. Turning to our balance sheet, just under $59 billion in total assets, $45 billion of which are cash and investments. A lot of that, obviously, would be in the life and annuity space at F&G. Holding company cash of $1.5 billion, and we'll probably get to a capital allocation a little bit later. A lot of people ask, what you're going to do with that? And of course, we are continuing to generate very strong cash flow in the title business and, frankly, in the F&G business as well. The F&G business is being -- F&G cash flow is being reinvested into growth in F&G. So most of the title company cash goes to Holdco. F&G's average assets under management just under $33 billion. And at quarter end average -- or rather assets under management were about $35 billion. Total debt of $3.1 billion for a debt to cap of about 25%. And over the last 3-plus years, cash flow dividended from our title company to the parent company is $4.7 billion. And finally, just a little bit about cash generation and what we've been doing with it. Just on the cash side, we've paid over the last 10 years $2.6 billion in common dividends, cash dividends to our shareholders, another $1.6 billion in share repurchases for a total cash return to our shareholders of $4.2 billion. And with that, I'll hand it back to Jamie.

That was great. Thank you. Mike, maybe we could start just with kind of your view of the U.S. housing market and how you're thinking about housing going into the year ahead.

I would say we're optimistic. We're coming through what's probably the largest purchase origination market in the history of the country in '21. And most forecasts, to the extent you buy into the forecast, are suggesting that '22 is going to be better. What we see is still very strong demand, housing. There's obviously very low interest rates. And even as we go into the back end of the year, our purchase open orders are kind of outstripping where we were in the back end of the year last year. So we're encouraged by that. Having said all of that, we don't manage the business by forecast. We manage it in real time. If we get a better housing market next year, we'll certainly take advantage of that and enjoy that. And if we don't, we'll do what we need to do to manage our expenses and keep focused on our margins. In addition to housing, Jamie, we also think we'll have a very strong commercial market, which is a really big part of our story. And the commercial market in '21 has just been on fire. We continue to have incredible amounts of open orders coming in, and we think we're building a really nice inventory for '22.

Right. Yes, maybe that's a good segue into the title insurance revenue model and given some of the distinctions there and maybe for some who are new to title, why it's important to really understand the difference between purchase and refinance, given some of the questions around where rates are going to go and how refi volumes have been trending.

Do you want to...

Yes, I'll start there. So it's important to understand that we get about 3 to 3.5x revenue on a purchase transaction relative to a residential refinance transaction. So when people come to us and say, "Wow, refis are going to be off 60% next year. What are you going to do about it?" It's again, very important to know that the purchase business is really the driver economically of our business. And of course, commercial is very good. Refi is great, and it's been strong for the last couple of years, but we can manage to a fall off in refi given that it's a much smaller percentage of our revenue. Just to give you some numbers, the third quarter just reported refi revenue as a percent of total direct revenue was 19%. That's down from, I think, 21% in the second quarter, 33% in the first quarter of this year and then it was 27% for the third quarter of last year. So we printed an outstanding margin in the third quarter, and refi again was less than 20% of our direct revenue. So we feel like we're very well positioned if refis are off 50% or whatever they might be. But commercial is stable, maybe growing and purchases up a little bit. The revenue is almost neutral, the revenue impact. We think we'll have a very good year.

That's great. And then from a competitive positioning point, you touched on it a little bit in the presentation, but maybe you could walk through what differentiates FNF from a competitive positioning perspective relative to your peers.

Yes. I go back to the scale. We just have more of it than anybody else, and scale is critical to win the ground game of that local community business. I can't emphasize that enough. And the multi-brand approach really gives us an opportunity just to get more market share in individual markets. We have markets and communities in California and in Texas and others where we might have 5 direct brands in Los Angeles, for example, or 5 direct brands in Houston or Dallas. And that just allows us to get more market share, more revenue. We've got more sales teams. We've got more closures. We've got more underwriters pursuing business in those markets. And it really started in many ways through the acquisitions that Bill drove in the early days of the company, all the way through the Chicago title acquisition in 2000. And we've got this hone down, and we know how to make it work. We still have the shared service environment that supports those brands. But from a customer-facing standpoint, it's, I think, the real differentiator.

And then with your scale, you've also been able to invest in technology given some of the trends in the market, maybe it would make some sense or make sense to really touch on your investments in technology, the inHere Platform and really how you're revolutionizing, how you do business through the platform.

Yes. I'll really talk about the inHere Platform. With the pandemic, there was a lot more talk about digital signing. And when you think about a purchase transaction, we've all done them. It takes about 45 days from the time you sign the contract to when you get the keys for the house. The last 45 minutes of that 45 days is the signing of the documents. And so there's been all this focus on that last 45 minutes and a lot of talk about, well, how do you not have to do that in person. And the reality is even through the pandemic, it was largely still in person. That's just the way it played out. Our thinking about it is, how do you start at the beginning and make it digital from the moment you sign that purchase contract and take it all the way through the signing? And we really believe we'll have customers that will start that way and finish that way. And we may have customers that start with that way and then go to a more traditional process. But really, that's how we're thinking about it. And we developed what we call Start inHere, and that's kind of a digital opening package where a consumer is invited to a portal, not an e-mail that can be hacked, a portal where they can give us information that feeds directly into our production system. We've got this built through APIs right into SoftPro and start to open up the transaction with us. Since we've rolled this out, it's been a little over 2 years, we've invited over 2 million consumers to this opening package process, and we've had about a 65% adoption rate. So we're really believing that consumers are very interested in this. We think it improves the transparency, the efficiency of the transaction and really the security of the transaction. If we can get consumers out of e-mail, we go a long way towards preventing them being victims of fraud through e-mail hacking. That's a real problem in the industry. And then we've also built out a Track inHere module that's now in about 1/3 of our operations nationally. The first part is in about 70% to 75% of our operations. So that's what I mean by its scale. And the Track inHere really gives real estate agents and consumers the ability at a 24/7 on-demand basis to see everything inside their transaction via a mobile app or, I said, a portal and also to receive milestones about the transaction. So think about it from a real estate agent's view. You now have the ability to know where all your transactions are in the process of that 45 days and not having to call the title company or have the e-mails going back and forth. And our thinking is whether it's a 45-day process or a 30-day process, it is what it is. But if we can make it more efficient for all the participants inside those 30 days or those 45 days, we think that sets us apart and really gives us an opportunity to gain more market share and build cost efficiencies going forward.

Okay. How far away do you think you are going to be -- being able to be fully digital? And are there any barriers to stopping you from doing that?

We're fully digital now. I mean the capability is there. It's built. We have a partnership with Black Knight on the notarized end and the signing end. That's been there for a while. It really is a customer adoption issue. And customer in the broadest sense, consumers, realtors, loan originators, lenders, attorneys have to want to transact that way. And that will build over time. But we're kind of in the mindset that the -- that will take time, and it's not what everybody necessarily wants. We have real estate agents and lawyers that tell us they want to preserve that in-person signing because that's kind of a customer event for them. That's an opportunity for them to maybe build a customer relationship beyond that closing.

Yes. Okay. Great. So the business is doing great. And clearly, a lot of the FNF polls ask the question, if you put FNF some multiple in the title earnings, you're getting F&G for free. why do you think that is? And what do you do from here to try to close that or try to get recognition for F&G's value?

Yes, Jamie, I'll take that.

That's why we brought Chris.

Yes, and I'll try to take it personally that being valued for free. Yes. I think there's 2 things. One, it will naturally occur, meaning we're getting very close to that inflection point where the size of our in-force book will throw off enough capital to be self-sustaining at a very high level of sales. And that's simply because, again, we're going to double our sales this year. We've been on really capturing the benefits of scale as we've grown. So we will get to a point fairly short order where any capital on top of that is optional. And we could either use reinsurance to hold sales, net sales at a certain level, and that will then naturally start returning cash to the parent company. You could accelerate that through reinsurance, a larger reinsurance transaction. So I'm not overly worried about that. I know the Board is aware of that. We've briefed them on what the cash flow picture looks like.

Yes. I mean, we believe that we're building an asset and whether it's recognized today, tomorrow or 6 months from now. We're building the asset with the tremendous growth that Chris has seen. And the value is there. And a lot of people we talk with know the values there and they ask us, why isn't being recognized? Well, we don't know, but we're patient. We know that it's not eroding by us waiting a little bit longer. We mentioned in our last call we expect to commit about $200 million to $300 million of capital toward F&G. And at that point, we get to that inflection point where F&G can self-sustain neutral cash and then ultimately pay dividends and even significant dividends over time. So we're not worried.

And Jamie, maybe just one more because like we couldn't ask for more relevant data points. So last week, one of our direct competitors, Allianz, announced a reinsurance transaction of $35 billion, ironically, fixed index annuities and they freed up $4 billion. So $4 billion, 0. I can't explain it. I spent 17 years in the investment management business, I can't explain it to you. I just know that one way or another, it's going to take care of itself because we've got a block of assets that are incredibly profitable. They throw off a lot of cash. And again, as we hit that inflection point, you're going to see more and more of that cash available to come back to the parent company.

And maybe that's -- maybe if you could touch on what is the earnings and cash that the assets throw off? What does that model look like as you continue to grow this value within the asset?

Yes. I think what's unique about our business is you put up a fair amount of capital in year 1 when you onboard business, but then you very quickly -- that capital starts getting returned to you. So because we've been on a hockey stick of growth, I think when I joined 3 years ago, we were doing less then $3 billion in sales. And this year, we'll probably come close to $10 billion. You're putting up quite a bit more capital. But as that starts to level off, that very quickly that capital starts returning to you. And so going back to just the 1% number, again, we've been doing better than that. But 1% on assets under management, you project that for to give you a sense of earnings. And then over time, you'll see more and more of those earnings. Actually, the cash earnings were dividendable to the parent.

Okay. Great. And then the growth has been phenomenal. Maybe it would be helpful to walk folks through since being acquired, the new channels that you're opening up and the addressable markets that you're really entering into, which I think are significant.

Yes. Look, this has been the magic of the acquisition by FNF, right? We were upgraded within hours of the acquisition. We were selling, as I said, a little under $5 billion a year through one channel, which was independent agents. We rolled out in Raymond James. We went to #1 in market share. We've done over $1 billion of sales with them. The next 2 banks that we rolled out and we've gone to #1 in market share. So we're onboarding new distribution partners. So that is a whole new channel. That's -- frankly, banks and broker-dealers are larger than independent agents. We then entered the pension buyout space. That's about a $40 billion a year market and growing. We've done $1 billion of sales in our first year. So that's probably light years beyond where we thought we would be. So now we entered funding agreement-backed notes. We raised about $2.4 billion in our first year of operations there. So yes, for us, it's new distribution, further penetrating the places that we're in, increasing same-store sales, if you will. So the path is quite big against $250 billion a year market with massive tailwind. I mean our clients are folks that look like Mike and I, like that's the age demographic, right? So baby boomers, where everybody is getting closer to our retirement age, and there's just an insatiable appetite for fixed annuities.

And you had spoken about doubling assets in about 5 years at the time of acquisition. Is that -- you're still on pace for that?

Yes, we're probably at least a year ahead of that. I mean we're sitting right now where I thought, frankly, we'd be in 2023.

Okay. And then, Tony, maybe turning to capital. What are the capital requirements of the title insurance business? And how much does that play when you think about expanding the business?

Yes. Title is very different than Chris' business. In title, you pretty much get what you make and you get it almost immediately, whether it's in your insurance companies or -- our structure is such that we've created a bunch of wholly-owned agents where the cash literally flows month-to-month as opposed to look back at the prior year earnings. But regardless, it's 100% of your earnings you can dividend out of your insurance companies the following year. So we don't have the same strain on capital, and so then we have to figure out what to do with it. And obviously, we get that question a lot. We've grown through acquisition over a long period of time and some big, a lot of small. Now we're probably locked out of the major acquisitions because of the FTC and regulatory world and the fact that we own a 33% national market share. But that doesn't mean there aren't 20,000 agents available to us out there that -- plenty that would be super attractive acquisition opportunities, and so that's one area where we'll devote some capital.

Okay. Great. And then maybe while on capital, you spoke to all the capital that you've returned to shareholders over the years. What are the priorities for capital now as you think about the dividend, which you've been raising share buyback?

Yes, absolutely. Dividend is always right there at the top. We raised our dividend in the second quarter, about 10% or 11%. Raised it again in the third quarter by a similar amount. We're now paying about $500 million annually in common dividend. That's partly not only the cash generation we've seen, but the outlook for the future. We feel very bullish about the business -- the title business and then, of course, the deferred cash flow that we expect to come from F&G. So dividend is strong. Buybacks are strong. We've spent $500 million over the last 12 months in share buybacks. We think it's a very attractive acquisition, if you will, at this point, and we're back in the market. As soon as the blackout lifted, we went back into the market, and we're buying shares, and we hope you are, too.

And maybe just to wrap up with just 2 minutes left. Can you talk about how the F&G cash flow works, right? As you grow the assets, as you have to put the money into F&G, how do we think about the dividends coming back?

Yes. Well, as Chris mentioned, it's being built up. There's a lot that gets put aside initially. But once you reach that inflection point, when you're not growing as quickly as they are, certainly when you're stable, the money you set aside early on in the process, and it's about a 7-year life starts to come back to you, and so we expect -- and I don't know what the numbers are exactly, but we can model those that you go from maybe committing capital to F&G of $200 million or $300 million or $400 million or $500 million to the point where you're going to generate $150 million or $200 million or $250 million annually, and then it becomes coincidentally an annuity, right?

Well said.

You've been waiting to say that.

No, no, it just came to me, I'd promise.

And Jamie, that's without -- that's not shrinking the business either. I mean you're still growing earnings at a double-digit clip and returning a growing dividend stream. So I think that's probably the most misunderstood. It's not a permanent. Again, it's just -- it's unusual for a company of our size to have the kind of exponential growth that we're having and -- but that levels off at some point.

And you're making a decision to retain that value versus reinsurance, which would diminish the value that you're creating.

Correct. And that's simply because we're at this inflection point, where we're getting incredible scale benefits. We're building real strategic value by having a position in all of these markets. And I look at pension risk transfer, that was an idea in a cocktail napkin a year ago, and now we got a full team. We onboarded $1 billion of sales in our first year. That is long-term value to us.

Well, great. Well, this has been terrific. Really appreciate your time. We're going to take a short break now, and we'll be back in about 20 minutes.