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

I mean, just -- maybe just remind us what the barriers to entry the title industry.

I don't know if it's about barriers to entry, but maybe barriers to success. And what I would say there is that particularly for AI, you need data and scale. And we have the data and we have the scale and new entrants don't have the data. I'm talking about proprietary data. They don't have any of that, and they don't have any scale. And by scale, that also means we have trusted distribution relationships. And those things together are really powerful moats. And then you could add things like the regulatory environment and capital requirements that less scaled players might find more challenging. So maybe not barriers to entry, but barriers to success.

We have 1,300 offices throughout the country that are earning the next title order from our customer base, and it's just such a huge advantage relative to what you might have as a new entrant where even if you're going to enter the business, you're going to enter in one market and start from there. And we have a huge advantage over that.

Got it. Maybe just a follow-up on that proprietary data point. Like the use of technology or AI maybe makes it easier to replicate that at some level, maybe not today, but just given the rapid pace of how the technology is evolving. AI is best when you can give it your data and your own internal process work and trained it on that. Then you can get really great outcomes. Right now, when you think about AI, it's trained on the Internet. And so it knows a lot of the Internet, and we can all go to it and ask it questions and it gives us answers. It doesn't know really anything about title insurance. It doesn't really know anything about our own workflows and our own processes. It doesn't have our prior title work, where we've actually researched and cultivated and curated the property records that are available. So it lacks a lot of things that new entrants can't duplicate because they don't have it and we do.

Got it. Okay. That makes a lot of sense. Maybe just switching gears again. You spent several years building out the in-here platform, recently launched property monitoring. How should investors think about the strategic value of the platform beyond improving customer service? And does the opportunities for operational efficiency and share gain over time?

Well, in here is the only fully deployed digital transaction platform in the industry, and no one is even really close. We had 2.8 million unique users on it last year. And not only are we getting efficiency benefits out of that way of connecting with customers, meaning not phone calls and not e-mails, but the participants to the transaction all get benefits. So we do believe we're building efficiencies, and we also believe it adds stickiness to us, what could lead to share gains or share retention, if not gains. And we think we really have a first-mover advantage with it. And that's another platform now we can deploy AI tooling into. And we're not stopping there. We've rolled out what we call live in here. which is an initiative to engage homebuyers post close. And we've added property monitoring, which, again, we think brings more value to our customers after the transaction in a way that will just deepen our relationship and deepen our really retention of customer relationships.

Got it. Investors often think of FNF primarily as a title insurance company and really a beneficiary of housing activity. How do you think about FNF's role in the real estate ecosystem today, and what aspects of the business do you think are underappreciated by investors?

Well, the way we think about our role in the real estate ecosystem is that we are the rails that everything runs on. That's what title companies do. That's what the title industry does, that it manages all the disparate parts of a transaction and all the different participants in a way that's organized, efficient and leads to good outcomes for lenders and buyers and sellers and agents, et cetera. And maybe what's underappreciated is the importance of that. But I think what's also underappreciated is the dual benefit we will get as the industry leader, as I said before, as volumes recover and we get more benefits out of leveraging technology like AI.

Got it. That makes sense. So turning to FG, share performance has struggled due to lower expected returns on all the investments and also potentially concerns around private credit. How does FNF's Board currently view the strategic value of the business alongside the core title franchise?

Yes. Thanks for the question. I would say, I mean, I'm not privy to everything that's discussed by the Board, either in a Board meeting or outside of a Board meeting. I will say that the Board has been overall very pleased with the performance of F&G in the 6 years that we've owned them. We've grown the asset base from $26 billion to 3x that. We've grown the sales fivefold, branched into a number of distribution channels that F&G wasn't in before we bought them. And so that's been positive. To your point, the alternative investment noise, if you will, has not been what we've expected when we made those investments, but those sometimes or oftentimes take time to mature and later in the cycle of ownership of those halts, you generally see the value come through. So we're not concerned with that, but it has put a little bit of a damper on F&G's reported earnings. In terms of valuation, I think our Board and we share the same frustration that our shareholders share, which is we're not getting -- we're not realizing the true value that we know we have in that asset. I mean F&G is a $6 billion GAAP book value asset, and we're not seeing anything near there in F&G's share price or in F&F share price. And so that's been a frustration. We tried to maybe unlock some of that with the first spin-off a few years ago where we spun 15% of our ownership to our shareholders, and I think that helped. It certainly put a mark -- a public mark on the valuation. But then we heard more recently, that shareholders that wanted to own F&G meaningfully couldn't because there weren't enough shares out there. There wasn't enough float. And so we added to that float in December of last year and distributed another, call it, 18% to where 30% was in the public domain. And then frankly, there's been some macro noise really unrelated to F&G, but some macro noise that has impacted not just the life and annuity space, but really a lot of investments out there. And so we really haven't seen maybe the true benefit that we might get from distributing those additional shares. But at the same time, yes, it's a frustration that we can't seem to realize that benefit that we see in our F&G ownership.

Got it. Do you think you could benefit from additional distributions? Like I guess, how are you thinking about the F&G piece because entering this year like last year, most people were potentially expecting a tax-free spin as an option. Obviously, you moved below the 80% threshold, and that's obviously, off the table, how should investors kind of think about that?

Yes. It's a good question. I'm not sure I have a good answer. It's going to be the Board's decision on where we go from here. I mean, I think, ideally in their mind, that we would unlock the value and see both shares rise and maybe then stay where we are. I don't know that we plan to continue to distribute F&G shares, but our Board has a 40-plus year track record of creating shareholder value. And they're patient to a point, but then they oftentimes, at least with past investments, realize there's a better way to create shareholder value. I'm not suggesting where they might go with this particular investment, but I will say it's a -- the feel is that it's a frustration, and we haven't solved it yet.

Got it. So F&G's management announced it's exploring strategic alternatives for peak altitude that includes bringing a majority partner in. Can you maybe just describe the business the rationale for adding a partner? And also, when should investors expect an update on this process?

Yes. In terms of an update, I guess, we'll have to wait and see how that plays out. In terms of Peak, Peak is an investment. We have majority and minority owned distribution IMOs, if you will. I think we have 4 of them. We've invested about $700 million and it generates about $80 million to $85 million in EBITDA. So it's a good, healthy business, not capital intensive. And I think the idea there again is maybe we have an underappreciated, undervalued asset that maybe we can take some money off the table, find a strategic partner, maybe it's a 50-50, 51-49 partnership where we can grow that asset and still return money to F&G and maybe then return that to FNF or whatever F&G might do with that, I'm not sure we know at this point, but we know we have an asset there that has value. And with a strategic partner, we believe we can really grow that asset.

Got it. So clearly, it seems like the market's undervaluing F&G within SNF. When we think about kind of the earnings power, I believe a few years ago, you guys mentioned that you viewed F&G as a good hedge against title business in a higher rate environment. Do you still view that as a case?

Yes, I certainly do view it as the case. I think F&G -- certainly, if you normalize the returns on all, F&G is a steady performer. The revenue and earnings are steady and they grow in a higher rate environment. FNF typically has more challenges in a higher rate environment, certainly on the volume side. Now we have had some real strong tailwinds on the commercial side. But on the residential side, as Mike spoke to, it's been a more difficult environment. So I do think there's a balance. I don't know if it's a pure hedge per se, but I think there's a nice balance or complement in terms of the overall return to our shareholders with having that steady earnings stream. But again, if we don't seem to be rewarded for that at this point.

Got it. Maybe you could just touch on the regulatory front. The FHFA extended its title pilot to May 2027. Are you hearing anything else on the regulatory development side that could either benefit or be a risk title insurance? Maybe just expand on the pilot.

I think first, it's worth noting that the pilot is intentionally small and it applies to a small subset of -- a small environment of residential refinance transactions. It did get extended and we don't really know how many loans have flowed through. I don't think that's been reported. But our sense is it's a fairly small number. As we go through the pilot program, it got extended, I think the view is that it's a difficult thing to scale if you're FHFA because you got to think about, are we going to pay for anything at scale because it's basically being paid for by FHFA. But in terms of other regulatory challenges, there's really not a lot out there that we're seeing. Other than on the state level, there's always a variety of bills being proposed that aren't necessarily directed at the title industry, but could have elements in the bill that impacts us one way or another, things like redaction statutes, which are basically proposed statutes that would redact from public records certain people's information, and it's done under the guise of concerned about security and things like that. And we're very active in tracking all the bills across the country. And we work very effectively with state regulatory agencies, state legislators to really get the industry's voice and our voice into how to make the bill work in a way that doesn't negatively impact our record system and the broader real estate system.

Got it. Maybe just a follow-up on the pilot. You did mention it's a very small subset of kind of low-risk refi transactions. So I guess is it your view that it would be hard to implement on a wider scale for all refi and also purchase obviously.

Well, someone's got to pay for it. And so the question is, who's going to do that? And it's my understanding right now that Fannie, I guess, is paying for whatever goes through that program. It's not free really, someone's getting paid that that's difficult to see the reason for scaling that beyond a limited pilot.

Got it. And maybe just, can you remind us what your priorities are in terms of capital deployment and how you approach share buybacks?

Yes. I mean, first and foremost, we pay a dividend, very strong yielding dividend at this point. Our Board looks at that dividend annually. And we raised it not every year, but almost every year. We raised the dividend. So it's a nice payout there. And that's a commitment of about $550 million annually. After that, we have some modest interest expense of about $75 million annually. And then we look to more opportunistic capital allocation options, which would include M&A and share buybacks. And we do both, and we're active in both, depending on the market backdrop. M&A has been a little slower over the last few years, mostly because valuations have been hard to nail down as we've transitioned from a really strong market in '20 and '21 and the first part of '22 to more of a trough market in the past few years. I would say there's a lot of activity on the M&A front in terms of discussions and even negotiations. But we haven't done as many deals in the last 2 years as we historically have, but I would expect that we make more acquisitions on the title agent side is really mostly what I'm speaking to over the next few years. On the buyback front, again, opportunistic. We are typically active on buybacks, especially at these share price levels. But we're also blacked out a lot during the year. We have standard blackouts for earnings and things like that. But we also have unexpected blackouts. And so we have to find our pockets for when we can buy back, but we're always looking to be in the market when we can be.

Got it. I'll open it up to the audience for any questions. Okay. It looks like we have no questions. Maybe just to close, what do you want the main message to investors to be today? Obviously, share price valuation is depressed a little bit? Like what do you think the market is underappreciating about the business? And what are you most excited about going forward?

I think about our long-term sustainable competitive advantages. And that we have trusted distribution relationships at scale. We've got technology at scale that others don't have. And we have the best opportunity to deploy AI at scale than any other player in the business. So as we look forward, I think the opportunities are really great for us again, particularly as you marry volumes back to that. I mean, we still are a very low transactional lands with existing home sales and refinancing commercial strong that we will get an outsized benefit from both volume and technology vis-a-vis the industry.

And maybe I'll just throw in, I believe, and I just said it earlier, but I believe we have a very undervalued asset in F&G, and at some point, I believe we'll realize that value.

Okay. On that note, we'll just end it there. Thank you so much.

Thank you.