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

All right. Good afternoon. We're going to go ahead and get started. I'm very pleased to be joined by the team from Fidelity National up here. We've got CEO, Mike Nolan; CFO, Tony Park; and then Chris Blunt, the CEO of F&G. So this is going to be a fireside chat. I've got a number of prepared questions for them. We'll take a break in the middle for some audience response questions and then I'll open it up to those of you out in the audience for any questions you have for the team.

But leading off with title, can you provide an update if you've got one for of kind of August open order trends for purchase refi, commercial, have those continue to decelerate into August?

Yes. So I would say that the trends have been pretty similar to July. Our refinance opens August over August were down 76% and they were down 75% July over July, so pretty consistent, and they had a 4% sequential falloff to August and July. On the resale side, opens were down 21% August over August, and they were down 20% July or July, so pretty consistent with that and also up 4% to last July. And that seasonal falloff is pretty typical. That's really not that unusual to see August come off 4% from July. Last year, it was 3%. We're kind of dealing with the seasonal at this point. I think we probably had more of a rate impact earlier in the year, and now we're just kind of dealing with seasonality as we go through the balance of the year on the resale side. Commercial opens are coming off kind of the record levels that we saw really through the first -- well, all of 2021 and then a good chunk of '22. But opens on the commercial side, we're up 18% August over August, and that followed an 11% decline in July over July.

Got it. That's helpful. Can you comment on the overall health of the mortgage market here? There's clearly a lot of variables affecting buyers and sellers in a lot of different ways. So I'd like to hear your thoughts about how the rest of 2022 and 2023 could play out?

Well, I mean, I think as that we're all aware, there's a lot of challenges right now with the mortgage market and the rate movements that we've had. We're really at trough levels on residential refinance. It seems to me we're probably off peak to trough, peak being the beginning of '21 to where we're at now 80% to 85% on the open side. And July and August were relatively flat to each other. So maybe we're starting to see a little floor, I don't know for sure. And looking at the MBA forecast for '23, they're projecting about a $540 billion mortgage market. That's coming off of this year. They're projecting about $700 billion. And in '21, it was whatever it was $2.6 trillion or something like that. That feels kind of right to me because I think we're maybe at a floor and whatever is going on in the second half of '22 and refi maybe continues in '23. So certainly, one of the smaller refinance markets we're going to have in the last 20 years. And then on the purchase side, obviously, transactions are coming off, but we're still getting some benefit from fee per file. So that's helping us on that side. I would expect -- I think the MBA has got transactional volume of about 15% for '22. That feels about right for our numbers. We were kind of flattish in the first half and probably going to be off 15% to 20% in the back half of the year. And then they've got transactional volumes pretty flat going into '23 and origination is pretty flat. That's probably as good a view as any right now. That's really just going to be, I think, rate driven. I think there's still a lot of demand the purchase side, still some supply issues. And if we get some of the price moderation that people are talking about on the housing side, maybe we'll get some help on the transition.

Sticking with that last theme, I think we are starting to see some signs of prices softening here. But what are the implications there for [ fee per file with that ]?

Yes, Mark, I'll touch on that for a moment. So I think we're already seeing or at least reading about home prices starting to fall sequentially still ahead maybe year-over-year, but sequentially falling. We did see a 3% decline in our fee per file on the purchase side from July to August. So maybe that's an indication of where things are going. It's hard to predict for sure. But there's a forecast out there or maybe it's MBA, I'm not sure that has. Home price is down about 8% in the second half of '22 and then down 13% 2023 versus 2022. I don't know exactly the impact that we'll see a lot of averages and a lot of geography that come into play. And of course, we're real strong in the West and I don't know what the expectation is there. But you could expect that if overall home prices declined by 13% from '22 to '23, we'll feel some of that, maybe a 10% fall off in our purchase fee per file.

Okay. Helpful. In commercial, have you seen any signs, I think you saw some lines and you open thoughts about, but in increased closed loans fall out as a result of rate and macro insertion?

We really haven't seen anything that I would point to as a real trend. Anecdotally, you hear about maybe a deal that falls off, but probably maybe a little bit more of delays in the transaction for the reasons you identified. Even though orders are coming off, just to give perspective, we're coming off just incredible levels of orders. We were averaging over 1,000 commercial orders a day, really all through '21, and I think first 4 or 5 months of '22. And our best year previous to that was '19 where we averaged in the mid-1800s -- I think it was mid-800s -- I think it was around 870. We're kind of back to that '19 level right now. So still really good activity, but obviously, orders coming off. And we're seeing more orders come off in our local environment versus our national environment. And that kind of makes sense to me that those would be a little bit rate sensitive on the open side. But overall, still a really good market and anticipate an early strong finish.

And is that -- I mean -- following up on your comments, Mike. I think one of the things that was a bit surprising with the 2 -- all your orders falling off in commercial, but the revenues were really strong. So you had like a big lift in the fee per file -- product of that. That -- I mean, is that accurate? And then secondarily, I think you commented that it's not necessarily surprising you that greater rate sensitivity in the local versus international. Can you talk a little bit more about why that is?

Well, maybe start with the fee per file. I think a couple of things that we saw in '22 and some of it existed in '21 is a real increase in local fee per file on the commercial side, which probably mimics what was going on with purchase transactions, that sort of inflationary effect or asset appreciate and that was up even more than the national fee for file. But we also had a return of larger deals really seen in more recent environment. So you're right, we're definitely benefiting from a really strong commercial fee for file. I think that will stay strong for the back half of the year. We've got a really good pipeline. So I don't really expect a lot of fall off there. As we get into '23, maybe that local market, if it again, follows kind of the residential purchase environment that Tony was talking about, maybe we see some softening in while in local. I think the reason they're more rate sensitive to your question on local is they're just -- they're smaller deals, maybe typically individual investors, and maybe more about rate than other reasons that drive some of the national deals like acquisition.

You talk a little bit more about what we're seeing commercial trends on across geographies?

I would say it's consistent. One of the things that's really stood out in this heightened conversion commercial environment for the past few years is just the real breadth of commercial activity across the country. And we're not really seeing -- as orders come down, we're not necessarily seeing one geographic area falling off more than others. It's kind of coming down in our local environment across the footprint. Our national offices, we have 20 national offices they really generate 60% to 65% of all of our commercial revenue. Every one of them is up over last year in both revenue and profit. And I think that trend will continue because of the pipeline back into the year. So I would say the geographic trends are consistent. And then in terms of asset classes, it's still -- the leading classes has still been multifamily, industrial, probably health care and then transactions that are really impactful but not always showing up or things like energy, those types of deals. But not a big change in [indiscernible].

Okay. Great. Turning to margins. What impact will your prior investments title automation have on your margin profile as the mix shift towards...

Well, I mean, there's so many levers, I think, that impact margin. It's hard to isolate anything. I would just say about margins, we still feel that the 15% to 20% range we've given in the past is still kind of holds up as we think about the short and midterm -- that doesn't necessarily mean every quarter, but kind of as an overall margin, we certainly feel we've benefited over time from technology investments. I think that really showed up in our '20 and '21 margins dealing with all that refinance volume. And I think we were able to really take advantage of the things we've done on the automation side and the title production side of the business. But -- but overall, as I said, there's just so many other things that impact margins. It's hard to just pick one thing in terms of purchase mix.

Yes, I can touch on the margin specifically, if you'd like to think about maybe a range of margins. Mike mentioned our refi channel and when that was strong, which was really in 2020 and 2021. Our ServiceLink centralized refinance business did almost 40% pretax margin. That's really a peak margin. Right now, we're closer to a trough margin probably there at somewhere in the high teens. So they've done a lot of cost cutting to get there, but still half the margin that we enjoyed in the peak years. National commercial, a very good business and has been for a number of years now. That runs mid- to high 30% margin range. So it's very good. Again, those are the 21 large commercial offices throughout the country that do the larger deals. Probably trough margin for national commercial offices is somewhere in the 20% range. Haven't seen that in a while. Our local distributed operations, and these are 1,300 offices we have around the country that do local commercial, and then they do all of our purchase transaction -- all our residential purchase and probably about 75% of our residential refinance. And those operations run anywhere from 20% to 25% margin. We don't cost account the expense side of things to tell you what the difference is between local commercial versus residential purchase, for example. But overall, those are the trends. And then I guess the final operational piece of the puzzle is agency. We measure agency margin, which factors into our total margin on gross dollars. So on gross dollars, agency runs anywhere from probably 8.5% in trough to about 10% on peak margin. That's because so much of the agent premium is paid back to the agent in terms of commission. We have -- we enjoy the best splits in the industry, but that's still $0.77 of $1 goes back to the agent.

Got it. And then going back to the 15% to 20% range that Mike gave, we think about the different moving parts here with different margin trends across different businesses. But then we think about it, and I'm assuming, Tony, what you're talking about are just kind of the incremental margins. So we think about kind of a blended title margin now you're also dealing with and a contracting market, just a little bit of negative operating. Where should we think potentially margin falls out on a blended basis in the near term, just given all the different pressures across the business kind of...

Yes. I mean certainly, we enjoy operating leverage in both directions and maybe it's 40% incremental margins as we move up for direct revenue, not agency revenue. And then as we move down, obviously, you're battling that a bit. What we've been known to do for 40 years now as a just the cost structure as quickly as we can. Having said that, you're going to have a little bit of lag time. And so if we have a 40% decremental margin in month 1, we're trying to cut that in month 2 and month 3 in Q2 following that so that we can quickly get down to where we're not experiencing that. Whereas when revenue is increasing, we're probably slower to add cost, whereas we're very aggressive to cut costs on the way down. So it's hard to pinpoint exactly what the incremental or the decremental margin is. But rest assured, we're going to work very hard to maximize our profit margin because it's the single #1 goal that...

And any color you can provide on kind of the year-to-date staff reductions...

Sure. So through August, we're down maybe just a little under 12% in our direct title staffing. So I think we -- we came into the year around 13,600 and we're about 12,000. And we've been really working on that kind of on a month-to-month basis. I think in August, we took out 300 rough number that probably followed a similar number in July. And we're just going to continue to follow the market wherever it goes. And if we need to do some more staff as those volumes come out, that's what we're going to work on. We've done this before to Tony's point, and it's really how we need to manage the business.

Turning to capital allocation. Can you discuss the highlights of your recent accounts transaction to buy all first title and kind of what impact do you expect it to have?

Yes. I guess I'll comment first, and Mike can talk about the operation, but we haven't disclosed what we paid there for competitive reasons. I don't know that it makes a lot of sense. So it was meaningful, but not meaningful in terms of the total capital allocation picture, but a very good acquisition. We're excited about it. Do you want to talk?

Yes. I think what I would add is, I mean, this is just an example of the title agency acquisitions we do. This one happens to be a little bit larger than maybe the ones we've done recently, there are certainly financial transactions. We want to make sure we're buying good businesses with good profitable operations. But we also think a lot about bringing new talent into the organization particularly in good geographies that we like, and we like a lot of things about this company. One, they're in Texas and Oklahoma primarily, which we view as pretty good markets with a little bit in New Mexico and also in Arkansas. But we really like the leadership and the senior people in the organization and they want to come and be part of our company and be here a long time and operate under the brand that they have. So it's another example of our multi-brand strategy that we use very, very effectively. We're really the only company in the industry that does it. And we just see this as an additive talent to the organization that we'll have for a long time. And we're going to continue to look for more of these title agency acquisitions.

Or I mean, are you seeing the opportunity set for that grow as pressure?

I would say it's been very strong for some time. There's a lot of potential companies. I think the competition might lessen for buying these assets. And for us, that might mean more opportunities to buy companies at the right prices. It's been interesting. There's been a lot of private equity money that's coming to the industry in the last, I don't know, we'll call it 5 years. And it will be interesting to see if that still is around or less.

And where else outside of title are you finding interesting...

Well, I would say it needs to be in the real estate-related basis. So -- we have a number of nontitle businesses that are real estate related, like appraisal, home warranty, loan subservicing, real estate technology, and it could show up in any of those places but for the right. And we've got obviously the cash on hand to pretty much do those things that...

Okay. And are you seeing -- in some of these things you're looking at private market valuations...

Yes. I mean they're probably adjusting. I don't know that it's a super-efficient market where you see maybe like the public markets where things adjust literally like minute by minute, especially today. But yes, I think that just like buying and selling a home, I think you'll settle on -- you'll recognize that the market is transitioning and you'll settle on a price. And we want to make sure that we don't overpay, but at the same time, sometimes you have to pay up a little bit to get a high-quality asset, and we have the balance sheet from which...

And staying with capital allocation, could you discuss your priorities for capital with respect to the dividend, buyback and further M&A?

Sure. Yes. We ended the second quarter with about $1.6 billion in cash at holdco. We have -- we basically pay $500 million of annual common dividends to our shareholders. The Board looks at that at least once a year and typically raises that modestly over time. So that's kind of a commitment that doesn't go away. So that's priority #1, I would say. A close second has been buybacks. Our shares are under pressure. We feel they've been cheap for a while now. We've spent over $800 million in cash to buy back shares over the last 18 months, and we're still active in the marketplace. We think it's a great opportunity, and I think that will pay off over time. We had a $400 million debt maturity come due in early September. We talked about that. We prefunded that a year ago with a debt offering. And so we used holdco cash to fund that $400 million and retire that debt. And as Mike mentioned, M&A is opportunistic. You never know when it's going to show up and sometimes the best deals we ever did. We're in challenging times when our competitors probably weren't in same position financially as we were.

Let's pause here in the audience response section. For those of you out there [indiscernible] question. One, what do you view catalyst for FNF [indiscernible] one, better-than-expected residential order count, two, better-than-expected commercial order counts, three, increasing capital returns for spin-off of F&G by other. Way in afterwards if you'd like to.

No.

So after we're looking for spinoff F&G. Next question, please. What is the biggest risk to shares? One, weaker-than-expected residential order count, two, weak commercial or account, three, weaker-than-expected fee per file, four, weaker-than-expected performance at F&G or five others? No. Well. Got it. 42% for weaker...

They must mean the price of that performance, not the actual operating.

Next question, please. What's the best use of excess cash flow? One, buy back shares, two, increase the dividend; three, delever the balance sheet; four, M&A; five, other? Buy back shares. We got one more. Next year, would you expect your position in FNF to one increased? Okay. 4% to 5%. Thank you all for participating. At this point, I'd like to open it up to the audience for questions, if you have any.

Buybacks and does the potential excise tax do anything for you in your calculus?

Yes. I think it's minimal, frankly. I think it was 1% of value. And so I think it's $5 million on $500 million or something like. To me, I saw it, it's a little annoying it wouldn't change our strategy.

All right. Well, is a good time to turn to the biggest risk of the business opportunity. So Chris, or maybe this is for -- this is on the F&G spend. How does the partial spin of F&G change, FNF's capital plans with F&G -- and can you update us on timing for the...

Yes. I mean I can hit that. I think the impact is capital self-sufficiency on the F&G side. So we've talked about this before, we've got significant debt capacity, significant reinsurance capacity so no longer need equity capital from the parent company. And then the hope is that we're in a position now or in-force large enough, there's off enough capital, we can sustain a pretty good level of sales and earnings growth. We have more of that earnings attributable back potential distributions back to the parent. Update on timing, still on track. We said early fourth quarter, and I would say clearly it's October.

So is there any impact from the spin-off at all for the internal capital allocation within F&G?

Yes. I don't know if it's driven by the spin-off, but again, this inflection point for us. We've got now 5 channels to source premiums from. There's a robust market for reinsurance. And so there's a demand for profitable print. So I think that's really our challenge as a management team going forward is how do you make those capital allocation. But I think we've got a lot of flexibility and a lot of options again to generate cash for shareholders while still growing the...

It sounds like, Chris, you've got a number of different levers for growth areas expanded product distribution. What is the outlook for growth, particularly when you layer on the impact of rising interest rates here?

Yes, it's a few. So the obvious example of fixed deferred annuity that today for 5 years, we would pay you a little over 4% tax deferred compared to, I think, the highest might be [indiscernible] taxable. So those numbers would have started with [indiscernible] a year ago. So overall demand goes up, that's one. Same thing with the pension buyout space. That market is just floating right now. The average pension plan has gone from 80 percentage type -- in the 80s funding levels to now on average over 100. So there's a lot of opportunity there. So that's another benefit of rising rates. And then a real obvious one for us, 16% of our portfolio is in floating rates. That's not quite a dollar-for-dollar impact, but it benefits both top line and bottom line.

But where do you expect to see the growth in your business?

Yes, I think we're already seeing it. So I think in our retail business, we've now expanded again from independent agents banks and broker-dealers. All 3 of those channels are growing really well right now. So there's just core strength in our fixed index annuity [indiscernible] sales through those channels will be entering [indiscernible] space in 2023. That opens up another large market for us to go after. So I think that kind of covers retail. We talked about PRT. We've already done the same amount of business year-to-date that we did last year in the PRT space, a little over $1.1 billion. And I think that's just warm up, and I don't think that's slowing down any time soon. Those are probably the big engine of growth. So we'll be an opportunistic issuer of FABN notes, but that's sooner going to depend on the market conditions and what types of...

Can you talk a little bit about how kind of the rate volatility you've been experiencing, what if any impact did that have on your spread?

Yes, really hasn't. It's probably what we're most proud of. There's a slide in our financials that juxtaposes the 10-year treasury rate against our net spread. And I think the 10-year treasury was as low 39 basis points over the last 5 years, the highest probably an hour ago. And yet our average spread has been about [indiscernible] move. So yes, we're largely indifferent to -- and the reason for that is you give us premiums, we turn around and we invest ASAP. We run a really tight ALM. So subsequent moves in interest rates really don't affect our book.

And any material adjustments you've made to kind of the -- your portfolio allocation positioning with some of the moves we've seen credit spreads?

Yes. So these are always good opportunities. We've taken some risk off the table. Any time you see a rally in spreads is an opportunity to go through and tighten up the portfolio even more. They weren't substantial move [indiscernible] that portfolio to start with. I'd say it's the most diversified portfolio we've had, at least in my tenure number of asset classes. So yes, we feel really good [indiscernible] right now.

This may be a good opportunity for you to talk more high level about kind of your partnership. Blackstone and also some of the fee arrangements we negotiated...

Yes. Look, this has just been a fantastic relationship, I think, for us and for them as well. So they've one, just done an exceptional job on the portfolio. Yields are up -- and a lot of that is coming from private original capturing in a premium that used to go to the investment bank. So the proprietary issues were picking up 100 to 200 investment grade. So that's really been the big source of alpha for us. We've done a great job on the credit side. I think we've averaged 5 or 7 basis points of credit losses is well below what we price for in any given year. We had some pretty dicey markets in this period of time. And then from a fee perspective, yes, we executed on a pretty substantial break point. So on assets above $34 billion, that fee will drop -- the marginal fee will drop from [ $24 billion to $14 billion ] that's obviously quite significant. We think we've got fantastic investment partner with a ton of capacity and the market rate that we're paying.

Can you talk about your appetite for M&A within F&B rather increase portfolio strengthen your position in various channels or...

Yes. I don't think it's going to be a big focus for us, certainly not large dollar M&A. We have taken some stakes in some middle market, cultural market, life players. That's a space we really like. We've got an index universal life business exponential pain, the hard market to crack into, got a really good foothold there. So we might do some things there. I could see small bolt-ons to bolster further capabilities probably on the life side. But the primary focus is organic, getting really good returns there. We've got a ton of opportunity.

How, if at all, just kind of shifting expectations around rates here? I mean, we've obviously had dipped a lot in the last few hours. How does that impact how you're positioning your investment portfolio?

Yes. I would say back to credit to Blackstone, they were way ahead of this and much earlier than other organizations. So we've had a pretty hefty inflation bias portfolio. Certainly, in our alternatives portfolio, but as I said, 16 portfolios and floating rates. A lot of the private bespoke deals that we've been together not only are linked to LIBOR, but have a LIBOR floor. Some ways it's the best of all worlds, you get the upside purchase [indiscernible] on the downside. So yes, we feel really, really good. It's really so good you can feel if inflation is going to hang out here at 8% for a long time. But I would say in a relative position, we're about as well positioned.

And sticking with that topic, maybe for Tony, how is affecting how you're positioning the FNF investment?

Yes. We have -- well, ours is short from a fixed income standpoint, it's probably around 3 years and probably $2.5 billion. Keep in mind, we have a lot of cash and we have commons and preferred. So fixed income wise, because it's so short, it allows for rapid reinvestment at better yields. I think we have over $500 million of maturities that are less than 1 year. So we'll certainly earn more on that. There's really no change in terms of asset allocation. We're comfortable with what we have, and we haven't had.

Yes. Great. Turning back to the spin of F&G. If this partial spend doesn't translate into kind of public market reception, you're looking -- what else do you think you need to do to better some of the parts value with FNF?

Yes. I don't know who's -- who takes that, but -- it's a good question. And frankly, it's a Board decision and something that we hope not to have to deal with, but we never know. Ideally, I mean the idea behind the spin was, hey, let's put as little out there as possible, with still having some float in a public company, but we don't want to give up the economics because company is doing great. The earnings are great. The growth is great. The cash flow, and Chris talked about that as an flection point. Now the cash flow reverses and could very well come back to us. And so we feel very good about the business. So we didn't want to give much up, but at the same time, we're probably getting 0 credit in the FNF share price for it. So really, the 15% IPO or dividend to our shareholders accomplishes something where we get a true valuation for the stub and that valuation is reflected in the 8% shift that FNF still have. That doesn't happen, I guess, we'll figure out what's next. I mean we have preserved the ability to spin it out tax-free to spend the entire company out tax free to our shareholders after 5 years. We have to maintain do that. That's not what we're thinking about right now. Hopefully, that's not something we have to think about at all. But we have preserved that ability. Beyond that, we could always sell the company cash, bring a partner, tax implications, obviously, you could reinsure a block the $40 billion book of [indiscernible] you can read some of that for some be it cash generation. So I think there's a lot of options, but like I said earlier, ideally, we accomplished what we're looking at.

Yes. The thing I'd add to that, Mark, to the last point of even flow reinsurance decision by us is just the last business earnest spread by putting it on someone else's balance sheet. [indiscernible] fair amount of capital. We, in our Analyst Day in the past [indiscernible] that capital relief. I think the real key is we control our own desk don't, at some point, cash talks.

Helpful. And one last question for the group. Are there any regulatory concerns on the horizon for either FNF or...

Maybe I'll start with FNF and then, Chris, if you want to weigh in on F&G. But really nothing that I would point to. We're a state regulated business primarily. We really haven't had a lot of regulatory issues over time and really don't see anything on the horizon that would really impact.

I give the same answer. There's a lot of stuff that we follow. There's a lot of activity around structured products and capital charges, things of that nature. The Department of Labor Fiduciary Rule, there's like [indiscernible]. And -- but I would say there's nothing that we look at this is, wow, that would be a real hit to the business.

Great. And on that note, please join me in thanking them all for their thoughts.

Thank you.

Thank you.