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

Okay. I think we're going to get started over here. So welcome, everyone. My name is Terry Ma. I cover U.S. Consumer Finance on the equity side. Very pleased to have FNF, Fidelity National Financial will join me on stage here. And we have Mike Nolan, CEO; and Tony Park, CFO. So welcome, gentlemen.

Thanks, Terry.

So with that brief intro, I think we'll just jump right into it. Can you maybe just give us a mark-to-market on the third quarter and provide an update on purchase and refi trends you've seen in August?

Yes. Sure, Terry. And we've actually seen good response, particularly on the refi side to this movement in rates downward. I think the current daily rates around 6.25% come off maybe 25, 30 basis points in August. And our refinance orders are up -- on the open side are up 43% over last August and up 27% sequentially. So you're seeing people responding pretty quickly to this movement in rates given the higher mortgage rates that people have gotten over the past 3 or 4 years. On the purchase side, it's a bit more muted. Our orders are up slightly over August, maybe 0.5%. So just in line with what we saw last year. And on the purchase side, you still have the normal seasonality where orders just essentially come down as we move through the back half of the year. So we'll see if these lower rates kind of meet that normal seasonality or not. But right now, I'd say that's -- it's similar to what we normally see on the purchase side.

Okay. Got it. And of course, there's many quite a good deal of optimism lately around rate cuts and the potential for those cuts that actually impact the mortgage rate. I guess, do you share that optimism? And what are you trying to see for the rest of the year?

Yes. I think definitely, rates have been -- mortgage rates have been coming down. We can see that. It was only a year ago when they were 8% last October. And now they're down to maybe 6.25% and what the prospect for maybe more Fed fund rate cuts, we could see lower mortgage rates. So I think the likelihood of lower rates is higher than that. When you think about what's happened in the last 3 years, I'd rather note recently that something like $2.5 trillion of mortgages in the past 3 years have been originated above 6.5%. And maybe half of that is above 7%. So when you think about just the refinance opportunity, if rates are at 6.25% now, the people with mortgage rates at 7% or above are already in the money, and I think you'll see -- and we're probably seeing in our order flow, mortgage brokers and originators are probably very aggressively working their clientele around taking advantage of the opportunity for lower rates. So I would anticipate seeing more refi volume as the year goes on, particularly if rates come down. On the purchase side, again, I think we've got the seasonality factor. We typically see our open orders fall about 7% in the third quarter from the second quarter on the open side. That's the average over the pretty much the last 9 years if you throw out the pandemic year and '22 when rates skyrocketed. And then they typically fallen 16% to 20% in the fourth quarter to the third quarter. I would say my base case right now is normal seasonality, so that flow. But maybe lower rates meet that. So the upside might be just not falling as much.

Okay. Got it. That's helpful. And then maybe just touch on the fee per file trends you're seeing quarter to date as well.

Yes. Maybe I'll handle that one. I would say that the fee per file had been trending higher as we moved through the second quarter. But in the last 2 months, July and August, it's come down a little bit. I'm talking about on the purchase side. So I think we're down about 1%. Fee per file on the purchase side in July versus June and down about 1% in August versus July. So that indicates maybe to me, and of course, this could be a mix issue in terms of size of transactions because this is just our average. But it also might mean that home prices have stabilized and maybe even coming down a little bit. We have seen reports that inventory is building. And so maybe there's -- maybe we'll stop seeing the kind of growth on the home prices that we've seen, which frankly would not be a bad thing because affordability, as we know, has been a challenge. If rates come down, if home prices stabilize, and inventory build that I think we'll see a lot more volume. On the refinance side, kind of hard to tell because that could be a mix of bigger loans and smaller loans. And I would say that's pretty stable right now.

Got it. And then just turning to commercial. How has that performed quarter-to-date? And maybe just touch on the different kind of areas of commercial, office, industrial, multifamily?

Yes. So just starting kind of at the broad sense, the thing that we focus on most -- think about most is just our open order flow in commercial, how many owners are we opening per day. And it has been remarkably consistent really through the back half of '22, all the way through '23 and the first half of '24, where we've been opening around 780 to 800 orders a day in commercial. And that translates typically at that order flow to about $1 billion to $1.1 billion in direct commercial revenue in calendar year. In July and August of this year, we're right at those numbers. So it's really been remarkable how consistent the commercial market has been even though it's probably been the segment that gets the most consternation or concern kind of from the media headlines, primarily because of the office segment. But there's a lot of subsegments in commercial and many of them are doing quite well, things like industrial deals, multifamily, affordable housing, energy transactions with battery factories and data centers and different things like that. Logistics. A lot of that have been sort of driving this commercial market. Office has been a small component in our view or in our book, if you will, in the back half of '22, '23 and '24. Yet, we've stated this really remarkably consistent level, as I talked about. I think there's an opportunity really for some upside at office. But if and when you start to see more transactions occurring in the office space as people maybe realize their buildings aren't worth what they thought and willing to transact or you have a refinancing opportunity, maybe lower rates will help that or workouts or other things like that in commercial, there could be a net positive really to the title industry and certainly us and having more transactional volumes potentially in the back half of the year, and into next. We've also seen -- we get commercial orders in 2 channels. One is called our national channel and the others are local channels. So national tends to be larger transactions in places like New York and other places, and they tend to be bigger deals and higher fee per files. We've actually seen more strength in national this year than local. So I talked about that 780 to 800 open orders a day. Our national orders year-to-date, so through August are up about 8% on the open side and our local order are flat. And so that bodes well potentially for maybe a little bit higher fee per file as we move through the back end of the year.

Got it. So it sounds like you're pretty positive on fee per file because of that national versus local mix. Maybe just talk about what the differences that are kind of driving the national versus the local kind of year-over-year comps?

I think certainly, the fact that we're seeing more transactions in things like industrial, which could include logistics as well as properties that are being developed for data centers and battery factories and things like that. They just tend to be larger deals and national deals. The national deals also get driven by multisite or multistate transactions. And we've seen a little bit more of that picking up. So I would probably point to those 2 as maybe 2 of the strongest, but multifamily has also been strong throughout this whole period as well.

Okay. Helpful. So just to take a quick step back and look at the larger mortgage market, industry forecasts have originations in 2024 to be about $1.7 trillion and about $2.1 trillion from 2025. What's FNF's view on this? And is that in line with your expectations?

Well, I think our first view is one thing we know about forecast is they're always wrong. So we'll start there. We don't think a lot about forecast. We certainly look at MBA and Fannie Mae and Freddie Mac forecast to kind of help us think about broad ranges of budgeting and things like that. But it's not how we manage the business in any way, shape or form. We really think about our order flows and what that implies for the next 30, 60, 90 days. And we have a constant discipline around that, determining what staffing requirements we're going to have and trying to protect our margins as best as we can. So I don't necessarily disagree or agree with those forecasts. They seem reasonable. I do think there's maybe more upside in refi than the forecast might show right now, personal opinion. I think the case for a better existing home sale market next year is stronger than the case for not. But I still think we're a ways off from getting back to maybe a more normalized level of 5 million or more existing home sales a year. Maybe not too far off from there, but that's not in their forecast for '25 and that seem reasonable at this point as well.

Okay. So I'm just going to pause here and maybe go to the first polling question, see what the audience thinks. So the question is relative to Fannie and MBA forecast for total mortgage originations of $1.7 trillion in '24 and $2.1 trillion in '25. What do you expect 2025 total mortgage originations to be at? [Voting]

No, surprising. 35% I think it's going to be between $1.6 billion to $1.8 trillion. And 29% kind of in the $2 trillion to $2.2 trillion mark that kind of all over the place.

Okay. So maybe just to turn to margins. It's been a strong first half of 2024. Pretax type margin came at 13.7%. First half '23, was just over 13%. Can you maybe just remind us, I guess, first, what the typical seasonality looks like in the third and fourth quarter? And then how would you say the third quarter margin is hitting upward?

Sure. So maybe from a historical standpoint, the second and third quarter is typically the 2 best margin quarters in any given year. With sometimes it's the second and sometimes it's the third, they're usually pretty close together in terms of what that margin is. Margins can get moved around particularly in lower transaction environments pretty easily because you're starting with low revenue numbers. So things like mix of agency versus direct can move margins around, how much commercial revenue you have in a quarter versus a different quarter, that can move margins around. So again, second and third are typically the 2 biggest. And then fourth, typically falls off somewhat from the third. And if you look at the last 2 years, you really saw that I think last year -- it was in the [ 16% to ]...

To [ 11% ] in Q4.

So and then if you look at the year before, it was a similar kind of a falloff, I don't remember the numbers exactly. As we think about this year, I would expect we don't give guidance on margins, but I would expect margins to be very solid in the third quarter, whether they're better than the second quarter, I can't tell you, but they'll be good. Then we'd anticipate probably the fourth falling off. Typically, you have a lot less residential purchase revenue in the fourth quarter because you just have less closings. I already talked about those open orders falling 7% sequentially in the third quarter and then another whatever, 16% to 20% in the fourth, you're just going to close less deals. Some of the wildcard, I think this year could be how much more refi revenue do we have. if we see an appreciable increase in that, we saw the nice increase in August. If that continues, that could be some new net revenue. And then just how strong the commercial fourth quarter is. And it's hard to predict that. But if you look at more historical numbers, you'd expect to fall off in the fourth quarter.

Got it. That's helpful. Maybe turning to expenses. You've demonstrated an ability to manage down cycles through strong expense management, particularly on office space and field staff. So how are you thinking about expense management in this environment?

Yes. I think we're -- first of all, I think we're in a very good spot right now relative to our volumes. We've done a lot of work over the last couple of years to kind of get our footprint down. I think we've taken out 1.3 million of square footage.

100 leases.

Yes, 100 leases, something like that. Even with increase in volumes, I wouldn't think we would need to go to add to a lot more footprint. There might be some places. We open offices back up in communities, probably small offices for closings. But I think we've done a lot of work on the leasing side that's sort of embedded. I think our staffing right now is in a very good place where as we came into this year, we wanted to be smaller than we were the year before and we got that done. We came into this year lighter than we were last year. We're lighter right now than we were at this time last year. And that's also continuing to add recruits and we've done some acquisitions. So we're adding revenue for today and the future from recruiting and acquisitions and still keeping our expenses kind of below from a head count standpoint, at least number of headcount to where we were last year. As refi volumes pick up, I think we'd be slow to add staff. I think we can handle a lot of that with all the automation we've done over the years, particularly on the front end. So we can hopefully gain a lot of incremental margin out of that. And then if that purchase environment is actually really come back appreciably, we'll definitely have to add more staff, but we'll do it in a very cautious way like we always do. And I think we can drive higher margins, obviously, with more volume.

Got it. So there's been a view from some mortgage companies, and we've heard some originators at this conference. I'm trying to say they should be ready to respond in case of sudden increases in volume. So can you just talk about how you're strategically positioned in case of such an environment? It sounds like you're pretty comfortable where you are right now?

Yes, I think it's a number of things. I mean, first of all, from a production standpoint, on the front end, the title process is highly centralized in our company and integrated with the offshore build in India as well as our data, our proprietary title plants, our automation technologies. So we've done a lot of work over the years. I think that positions us very well to manage volumes even if they spike. And I think we showed that if you look back at '19, '20 and '21, we really demonstrated that. We just didn't have to add the staff for those refi orders that maybe would normally in prior periods had to do. We also are very capable of hiring more people we need to. When you think about the way we run the company, it's a very distributed model. We have 1,300 locations across the company. And many of them are very small. Our typical offices -- we have 8, 10 people in office, 80% of our leases are under 5,000 square feet, to give you an idea of what it looks like. And so if we need to staff up, we're doing it across 1,300 locations. It's not as hard to do when you think about it that way. If you need to add a couple of people in place, you can get that done versus a large facility or maybe you had to add hundreds of people to deal with the production issue.

Got it. So how should investors think about the incremental margin, if there is kind of a material pickup in either refi or purchase?

Yes. I think on the direct side, it's -- we've always talked about 40%, and that could probably move around a little bit. Maybe the immediate incremental margin might even be stronger than that as you determine if you have to add more cost to the structure to handle the volume. On the agency side, because so much is kept by the independent agent, it's probably 12% or something like that on the gross number but maybe a similar number if it's on the net number. We have a large fixed cost base, which is good and bad. We have a great footprint. And so we really participate in all geographies. But the challenge there is we have a lot of expense. But when you get incremental revenue on that, you're not adding a lot of incremental fixed costs. And so yes, 40% or 40-plus percent is reasonable on the direct side.

And what about commercial?

I would include commercial in that bucket of direct when I say direct, we talk about really residential and commercial. I don't think that it's any different really than what we would what we would see from the direct offices. There are 2 kinds of commercial. As Mike mentioned, we have local, and that's mixed in with our residential operations, and we have national, which are the larger deals. Maybe incremental margins are a little stronger on national, but in that range.

Okay. That's helpful. And then you mentioned that you can generate a 15% to 20% title margin in a more normalized environment. You guys are tracking about 14% through the first half of this year. Just maybe talk about what kind of origination market, you do need to see that you maybe get closer to the high end.

Yes. It's not a perfect science, but I would answer it this way. If we have a purchase environment with 5 million existing home sales are more, talk about origination volume there, just think about the transactional volume, a refinance market that's probably above $1 trillion, we're running right now about $400 billion. And a commercial market that's at least as good as we have right now. I think you'd see our margins in the higher end of that range. So maybe mid- to high end of that range. And then you saw years like 21%, where we went over -- we did 21-plus percent in a much stronger refinance market, obviously. So there's room to grow with even a better market. But probably that higher end point of that 15% to 20% range.

Got it. Just to switch gears, maybe just touch on the regulatory front. Texas should begin its discussion on title insurance premiums in September. Do you have any thoughts just entering that discussion, how it may impact title or FNF?

Yes. So Texas, I think it's every 5 years, they go through a rate selling cycle. Texas is a promulgated rate state where they set the rates for title insurance. And there's been years when it's gone up in years when it's gone down over time. I think the last time there was a decrease was it was 5% or 3% or something like that.

Yes. I mean I remember one, it was like an increase of 3% and another one where it was 1.9% or something.

So I'm not exactly sure what will happen this cycle, but I don't think it will be significant to FNF one way or the other. It might go down a little, maybe it stays flat. But they've tended not to be sort of seismic shift specific to Texas.

Got it. And maybe just remind us what the other states of promulgated pricing are and how big in aggregate those markets are.

Yes. I think it's Florida, promulgates rates, and I don't think they've changed in I don't remember the last time Florida changed rates. I don't think the rates have changed. That's a big agency market, as you might know, and it's big for us on the agency side. We're also there direct, but it's bigger for us on the agency side. So probably no change there. New Mexico, I believe, is promulgated. That's a pretty slow market. And I think that's it. I don't think there's another state that promulgates rates that I recall. Not that I know of.

Okay. Got it. Can maybe you just talk about, you've mentioned in the past and talked about enhanced fraud prevention. There's been some headlines on the growing amount of sell impersonation fraud. Can you maybe just expand or go into detail on kind of the progress and investments FNF has made just on this front and maybe just how else or the steps you've been taking to customer's safety?

Yes. And well, it's a number of things. And it really starts with, I think, awareness. And we've been working on that quite a bit over the last number of years to just raise consumers' awareness around this problem, particularly with wire fraud, which is a terrible problem in the U.S. Where fraudsters impersonate title companies and try to get buyers and sellers to send money to the wrong people. And that goes on all the time. And we started a program, we call it StartSafe some number of years ago, really, again, from that awareness standpoint of letting buyers know from the outset that we will never ever, ever change our wire instructions. And we have them sign forms and we talk about it and live tutorials on it. And we really feel like it's made an impact in helping get people more attuned to the fact that this is actually out there. So when they get an e-mail from someone who's been following their transaction because they've gotten inside a consumer's e-mail and they're monitoring the transaction. And then at the right moment, they say to that person, oh, we'd like you to send the wire here that we sensitize them that we never do that. It still happens, even though we do that. And then you're right, this sort of seller impersonation or brought around vacant land. We've done a lot of internal work around that to identify things that help minimize that. We have some products that we've implemented and just really tried to look at all the areas where fraud is an issue, but it is a terrible problem in the U.S. and really in the world.

Okay. Got it. Maybe just rounding out the discussion on regulatory, anything else you attention to on the regulatory front? And then obviously, we have the elections coming up in November. Anything, I guess, depending on who gets in the White House, is there going to be any impact that you're kind of looking out for?

There's probably 3 things, and these have been pretty well documented, so you're probably aware of them. There's probably 3 areas right now that are getting attention. The first is the GSEs are talking about a pilot, they're calling it a waiver pilot will come out and say, hey, we don't -- we propose a rule that, that not be the case that lenders cannot charge the borrower. Or they promulgate a rule. And I think you'll see a lot of pushback if either of those things happen, particularly from maybe people in the lending community. But that's something to be monitored relative to the broader industry. And then probably the third is just -- there's a product called attorney opinion letters that's been around forever. I've been doing this for over 40 years, and they've existed for longer than that. And it's never really been a product that's used much. We really view it as a much inferior product to a title product, not necessarily even a lower -- their products to see even lower cost. And it's never got a lot of traction. But Fannie Mae recently did add it to their guidance that they would take an [ AOL ] instead of a title policy. So it's gotten a little bit more attention in the marketplace. So those are probably the 3 broadest. Right now, I'd say they've had almost no impact on the industry.

Got it. And any thoughts on the outcome of the election?

I really don't. I think it's interesting the waiver pilot seem to be a Biden idea. He was talking about it. I haven't really heard Harris talk about it. So maybe it's not something she's going to focus on as much. But to predict what anybody is going to do once they get in the White House, I'm not -- I don't have much view for that.

Fair enough. We have about 10 minutes left. I'll just open it up for Q&A from the audience if there are any questions.

Yes. Just wondering how F&G is doing outlook for annuities in the rate environment that you foresee?

Yes. Maybe I'll start, you can weigh in, but F&G is doing great. And we've reported that and F&G separately since their separate public company has reported that as well. But the sales are growing. When we bought the company in 2020, the sales were $3 billion or thereabouts. And assets under management were about $26 billion. Now sales were $13-plus billion last year and trending toward even higher this year and assets under management are over $50 billion, earning 110-plus basis points on those assets under management. And so the performance has been exceptional, probably even better than our Board had imagined when we made that acquisition. We did spin off 15% of F&G back in December of '22, I believe, that was track of days. But that was just really to highlight the value of F&G and get them more public and have them doing things like this where they're talking to investors. And I think it's helped because we've recognized value both in their share price since we've done that and also in our own share price that reflects more of the value that we have there. F&G has contributed 40% of FNF's overall after-tax earnings through the first half of this year. So from a hedge standpoint or a balance standpoint, in a high-rate environment, they've done exceptionally well. When it's been more difficult on the title side. And so yes, things are going well there, and we're very pleased.

I would add to that, too. If some of the theory is at higher rate -- lower rates mean less annuity sales, and that may or may not be accurate. One of the big differences from when we bought the business to where we're at today is we had 1 sales channel when we bought it in 2020. And we now have 5 or 6 distinct sales channels. So just the market share, the greenfield opportunity is still there, even if total annuity sales are coming down.

Any more questions from the audience?

Just on F&G, you guys have talked to that as being a bit of like an offsetter to a weaker title given lower rates. I guess in an environment where rates come down, are any things maybe being done from F&G to kind of prevent maybe a headwind from that segment in a lower rate environment? Because my understanding has been like a beneficiary of higher rates.

Yes. I mean I would say, and Chris Blunt has spoken to this even in our prior earnings calls because it's a fair question. I would say that because F&G is a spread lender, they feel like they're going to earn that spread in a rising rate environment in a stable environment and a falling rate environment. And I anticipate that to be the case. And so I don't like to call it a hedge because the hedge would indicate that it's kind of an offset. I think it's more of a balance where title will clearly benefit from a lower rate environment. But at the same time, I think F&G will continue to grow. There's a lot of opportunity on the sales side for F&G to continue to grow. They now have a registered product that they didn't have before. And there's a lot of cash like trillions of dollars on the sidelines that is still going to be invested, probably especially as rates come down and people are earning less money on that cash. And so I think the opportunities are still there.

Any more questions?

Just back to the some of the legal and government issues that you noted, obviously, if the CFPB requested let's say, banks started paying or title insurance. Obviously, there would still be needed for title insurance. So that's probably of the 3 that you noted the least threatening. But I'm curious to know of those 3 items that you mentioned, which one gives the most pause for concern. And second of those, do you see them really as being election dependent if the Republican stick the White House again? Do you see any of these potential things going away?

Yes. Two really good questions. I would say to the first one, you probably have to look at the GSE pilot is the one that would concern you the most. Again, it's described as a very small pilot. And I think certainly in the short term, it's not much of a risk. But when you say you're going to waive something that we sell, that's going to make you concerned, right? So I think that one is concerning. And it's also concerning because they might really mess things up with it. It's like it might be really bad policy. So I think there's a concern that it's just bad policy for a lot of reasons that we don't have time to go into. So that would be one. I do think there's an element to politics to this. The GSEs purported to be doing this waiver 2 years ago, and they made a decision not to go forward. And that decision was made after a lot of meetings with people like us and our trade association. And I think they reevaluated why they were doing it. And yet then it just popped up after the state of the union. So it does feel like there's a political element to this. And does it go away after election? Maybe. I mean there's some thought that Republicans are in, it's not their issue, and they'll move on. But that may even happen with the Democrats. I do think growing recognition in the states. State attorney generals, state legislators and you've got state insurance commissioners that this appears to be the federal government getting involved in the regulation of insurance, which is regulated at the state level. And I think they're rightly recognizing that as something they ought to be concerned about. So I think all these ideas are going to get significant pushback for a variety of reasons.

Let me just take this moment to prompt the last audience response question. Over the next year, would you expect your position in FNF to one, increase; two, decrease; or three, stay the same.

So 40% increase, 50% the same pretty bullish.

So just a couple of minutes left. Maybe let's just round up the discussion and just talk about capital returns. You guys made some comments last earnings call about the potential for buybacks. So let's just maybe talk about that?

Yes. I guess our position on buybacks is we have a certain level of capital and we generate the last couple of years, which was -- has been a more challenging environment in title generating maybe $800 million or $900 million in annual cash flow. We do have commitments to that. Our dividend is about $525 million annually. We have about $80 million in interest expense. So that gets us to $600 million and then we typically spend $200 million to $300 million on title agency and other acquisitions as we go throughout the year. And so call that $800 million or $900 million. And so what I said in the last call to the extent we're generating more than that, I would expect us to be back in market. But we did take a pause on the buybacks when the market turned down back in and I guess, 2022 is one of the pause the buyback.

I think we're pretty much out of time. So thank you.

Thank you, Terry.

Thank you.