Q2 2020 Fidelity National Financial Inc Earnings Call
Good morning, ladies and gentlemen, and welcome to the FNF Twentytwenty second quarter earnings call.
During today's presentation, all parties will be in listen only mode.
Following the presentation the conference will be open for questions with instructions to follow at that time.
As a reminder, this conference is being recorded.
I would now like to turn the conference over the Jamie Louis Investor Relations FNF. Please go ahead Sir.
Thank you operator and good morning. Thank you for joining our second quarter 2020 earnings Conference call. Joining me today as our CEO, Randy Quirk President like no one CFO Tony Park, SNG CEO, Chris what.
Well begin with the re strategic overview for Randy Mike will review the title business, Chris will review SNG, Tony All finished with a review of the financial highlights well then open the call for your questions and finish with some concluding remarks Randy.
We began I would like to remind you that this conference call may contain forward looking statements that involve a number of risks and uncertainties in particular, the kobin 19 pandemic.
There are significant uncertainty about the duration and extend the impact of this pandemic.
They miss that are not historical facts, including statements about our expectations hopes intentions or strategies regarding the future are forward looking statements.
Forward looking statements are based on management's beliefs as well as assumptions made by an information currently available to management at the time at this call because such statements are based on expectations as to future financial and operating results and are not statements affect actual results may differ materially from those projected.
Undertake no obligation to update any forward looking statements, whether as a result of new information future events or otherwise.
The risks and uncertainties, which forward looking statements are subject to include but are not limited to the risks and other factors detailed in our press release stated yesterday and then the statement regarding forward looking information risk factors and other sections of the company's form 10-K, and other filings with the FCC.
The conference call will be available for replay via webcast at our website <unk> Dot com.
We'll also be available through phone replay beginning at three PM Eastern time today through August 12 replay number is 84451 to two nine to one and the access code is 137 06371, let me now turn the call over to our CEO Randy.
Thank you Jeremy I would like to strike if I take it our employees for their hard work.
Have continued to keep our operations running smoothly, even as approximately 70% have continued to work remotely as result of the cold in 19 pandemic.
Our first priority remains to safety and health of our people. During these challenging times I'm very proud of their efforts.
Well that might go into more detail on the times business momentarily.
Touching on the highlights of our titled business in the second quarter, we generated adjusted pre tax earnings of $378 million compared with 363 million in a comparable year ago, Porter and an 18.4% adjusted pretax title margin compared with 17.7%.
In a second quarter of 2019.
We're also pleased to announce that last week, we purchased the remaining 21% interest in service like for $90 million, which gives us full ownership in a leading provider of centralized residential refinanced tried one closing and default management services as well that's the second largest loan sub servicer India.
Industry.
Turning to our acquisition of SGL holdings after three years and am I not as a minority holder in F and G. We closed our acquisition on June 1st 2020 in a cash in equity deal valued at approximately $2.7 billion at closing.
We are excited to welcome the F and G employees policyholders into the FNF family F and G had strong sales for the quarter as a result of the acquisition. That's when she was recently upgraded by multiple rating agencies and achieved a major major distribution milestone by successfully expanding.
Into the financial institutions channel.
We continue to expect transaction to be more than 10% accretive on a pro forma basis to FNF 2020 earnings per share and 20% accretive on a pro forma basis, just after an ABS 2021 earnings per share.
Looking forward, our commitment to creating meaningful long term value for our shareholders to our capital allocation strategy is unwavering.
We announced in late July our quarterly cash dividend of 33 cents per share, which reflects the fourth quarter dividend increase of 6.5%.
Our share buyback was previously suspended due to due to the LNG acquisition and the uncertain Cobot 19 outlooks, we continue to watch the economy and Nicole Good 19 pandemic closely as we evaluate share buybacks.
Let me now turn the call over to Mike Dolan to discuss the title insurance business in more detail.
Thank you Randy we generated strong adjusted pretax title earnings of 378 million, a 4% increase over the second quarter of 2019.
Our adjusted pretax title margin was 18.4% 70 basis point increase over the prior year.
Wait a 36% increase in direct orders closed driven by a 158% increase in daily refinance orders closed offset by a 24% decrease in daily purchase or a close and a 24% decrease in total commercial orders closed.
Total commercial revenue was 184 million compared with a year ago quarter of 286 million due to the 24 per cent decrease in closed orders and a 14% decline in total commercial fee per file.
For the second quarter total orders opened average 10800 per day with April at 9500.
May a 10900 and shoot at 12000.
For July total orders opened were over 13200 per day.
We continue to see a strong recovery and purchase activity and continued strength in the refinance market.
Daily purchase orders opened in April were down by 43% versus the prior year period, well may was down 16% in June was down less than 1% versus the prior period.
For July daily purchase orders opened were up 10% versus the prior year.
Refinance orders open decreased by one of 10% to 11% on a daily basis versus the second quarter of 2019.
For July daily refinance orders opened were up 116% versus the prior year.
Lastly, total commercial orders opened decreased by 25% over the second quarter of 29 team.
On a positive note we experienced steady improvement in commercial opened orders per day during the quarter from April's low.
Total commercial opened orders per day up 10% from April to May end up 12% from May to June.
For July total commercial opened orders per day were up 16% over Joan and up 10% over July of 2019.
Well, we're very encouraged by our second quarter volumes it remains difficult to forecast a rise of carbon 19 cases.
And the resulting impact on the residential and commercial real estate markets.
Fortunately our team has significant experience operating through challenging times into our investments in technology, we have been able to tactically keep our business operating as usual for our clients and partners, while maintaining a tight grasp on our expense structure.
To that end, we made the difficult decision to reduce staffing by approximately 3100 employees at the end of the first quarter and the early part of April.
We continue to monitor the market.
If since added approximately 1100 employees in June and July it's order volumes increased.
We will continue to aggressively manage our expenses for the second half a 2020, given the uncertain market backdrop.
And we'll remain focused on order volumes looking forward as we maintain our culture of exports expense discipline.
Let me now turn the call over to Chris Blonde to review F and G second quarter highlights.
Great. Thanks, Mike.
And she had a record level of fixed index annuity sales of 866 million in the second quarter in a period when industry annuity sales declined materially and several of our direct competitors chose to reduce volumes.
Our solid capital position and investment management capabilities through our partnership with Blackstone allowed us to outpace the industry sales trends and continue to take market share, while maintaining our pricing discipline.
We successfully expanded into the financial institutions channel in late June by partnering with one of the largest independent broker dealers in the country. We're off to a strong start and are excited about the prospects for this new channel.
For the quarter total product net investment spread was 350 basis points up 124 basis points over the prior year and net investment spread for fixed indexed annuities are at by Hey was up 347 basis points up 63 basis points over the prior year.
Each was boosted by merger impact on adjusted investment yield.
<unk> adjusted investment yield of 5.42% reflects merger and purchase accounting effects.
Primarily from changes to average assets under management, or Hey, you well.
Adjusted yield excluding these effects was 4.55% roughly in line with F and G is full year 2019 historical yield of approximately 4.5 Boe per sub.
Do you out was reduced by 2.3 billion for discontinued operations and the recognition of a 500 million dollar unrealized loss on the investment portfolio that was mark to market at the time of the merger as of June Thirtyth. The portfolio wasn't the net unrealized gain position of 600.
<unk> million dollars.
Finally, as it relates to capital LNG finished the second quarter with an estimated risk based capital or RBC ratio of about 400% for our primary operating subsidiary compared to 425%. The ended the first quarter up 2020.
The RBC decline of the current quarter reflects a planned return of capital to the holding company for normal course liquidity needs.
As well as investment related mark to market and credit drift.
Let me now turn the call over to Tony part to review FNF second quarter financial highlights.
Thank you, Chris we generated $2.4 billion and total revenue in the second quarter with the title segment, producing $2.2 billion F and G producing $124 million and the corporate segment generating $72 million second quarter net earnings were $309 million.
Which include net realized gains of $162 million versus net realized gains a $41 million in the second quarter 2019, primarily due to mark to market accounting treatment.
Equity in preferred stock securities, whether those securities were disposed of in the quarter or continue to be held in our investment portfolio.
Excluding net realized gains our total revenue was $2.3 billion as compared with $2.1 billion in the second quarter 2019.
Adjusted net earnings from continuing operations were $305 million or one dollar a nine cents per diluted share. The title segment contributed $276 million F and G contributed $37 million and the corporate and other segment had an adjusted net loss of $8 million.
Excluding net realized gains of $169 million, our title segment generated $2.1 billion in total revenue for the second quarter, a slight increase from the second quarter 2019.
Direct premiums decreased by 8% versus the second quarter 2019 agency revenue grew by 4% an escrow title related and other fees increased by 7% versus the prior year [noise].
Personnel costs decreased by 4% and other operating expenses were relatively flat all in the title business generated an 18.4% adjusted pretax title margin, a 70 basis point increase versus the very strong second quarter 2019.
Interest income in the title in corporate segments, a $41 million declined $18 billion as compared with the prior year quarter due to the reduction of short term interest rates and the use of cash to fund the F and G acquisition.
In late April we signed a credit agreement for a 1 billion dollar 364 day delayed draw term loan.
This term loan allowed us to secure financing to close the acquisition of LNG in a challenging capital markets environment brought on by Tobin 19.
In June when the capital markets improved we closed on an issuance of $650 million a 3.4% senior notes due June 15th 2030.
The net proceeds of the issuance of the notes have been used to repay approximately $640 million a principal amount borrowed under the term loan credit agreement.
Total FNF debt outstanding was $2.4 billion on June 30.
Debt to capital ratio of 27%.
Our title claims paid a $51 million were $10 million lower than our provision of $61 million for the second quarter.
Carried title reserve for claim losses is currently $52 million or 3.5% above the actuaries central estimate.
We continue to provide for title claims at 4.5% of total title premiums.
Finally, our title investment portfolio totaled $4.4 billion at June Thirtyth.
Included in the $4.4 billion are fixed maturity and preferred securities of $2.4 billion with an average duration of 3.5 years and an average rating of eight to.
Equity securities of $700 million short term and other investments of $300 million and cash of $1 billion. We ended the quarter with over $500 million in cash and short term liquid investments at the holding company level.
Let me now turn the call back to our operator to allow for any questions.
Thank you at this time will be conducting a question and answer session.
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Our first question today is from Mark Devries of Barclays. Please proceed with your question.
Yes, Thank you Mike.
Could you repeat what the commercial trends were year over year in July and also just talk about what you're seeing in terms of you know closing rate on open orders in commercial.
And the mix I'm, whether it's kind of local or national and larger transactions versus smaller.
Yeah sure Mark Great question. So the July number was 10% up over July of 2019.
And you know also on the in the opening remarks, just really reference the sequential improvement that we've seen you know off of April lows with July being up 16% from June and really just that sequential growth has gotten better you know may over April June over May July over over June.
In terms of the mix.
Kinda one it fell and we talked about this before the follow up with stronger a national.
Fell in local but last and then as a sequential improvement was coming back in.
In May and June.
It was kind of stronger and local and ER and a little bit last and national but that really turned around in July and what are the most encouraging things I think that we can report is the July opens were up 27% on the national side over Joan and.
And local was up 11. So we just saw really big come back if you will add our national opens in July.
And out for both National orders and our overall orders in July we're now back to pre pandemic levels.
And Oh, that's very positive because you know remember that pre pandemic levels, where we're really record levels and this now six year of you know enhance commercial performance.
You also asked about mix or the other thing we've seen.
I want to when the pandemic kit, we saw a pretty big shift on the open side from.
Resales at about 68%, 69% of the opens fallen down to about 59%.
And as we've gotten into June and July it it's really reverted back to where we were opening.
You know 67, 68% on the resale side versus versus refi.
Okay, that's really helpful and then.
Second question I think you guys indicated you still expect.
10% accretion from F and G and 2020 and 20% in 20.
21, maybe Tony could you give us a little more context around that so you know in light of you know probably the stronger outlook.
For FNF than you had when you first provided that maybe improving I look at F and G. And also just up the financing of that term loan at a lower cost and I think you initially assumed.
Yeah. Thanks, Mark Yes, the number still hold I think the 10%.
Probably got.
Probably went from somewhere in the teens and dropping a little bit because of FNF performance as you mentioned, it's just been.
Much stronger than we are than maybe we thought 90 days certainly some we saw 90 days ago and looking out for the balance of the year with strength in all markets. We feel very good about EPS performance and so obviously, that's a good thing, but it puts a little pressure on the accretion number for 2020, having said that I still feel.
Phil good about the 10% accretion or as you know Apogees results are are very consistent and continue to be so and we expect that through the balance or through the balance of the year in terms of financing 3.4%.
10 year Bond. We were we were very pleased to be able to secure that and now that is a little lower than the 4%. We had anticipated when we did the the calculations back in February in terms of the outlook for 2021, obviously, we don't have a crystal ball, but just assuming that that.
At FNF outperforms in 2020 and comes back down a little bit in 2021, I don't think anyone would be too surprised by that I would anticipate a 20% target for.
For a accretion in 2021 to be higher I I would I can see that definitely drifting up into the mid twentys or or beyond assuming consistent performance it up and GE with growth in there I asked that.
Balance and ER and may be up enough coming off a little bit.
Great. That's very helpful. Thank you.
Next question jump comes from Jack when things go of Fiveg. Please proceed with your question.
Hi, Thanks for taking the questions I guess to start off you know.
The FNF business is having a monster year commercial seems to be coming back sounds like LNG is outperforming a bit I guess in that context, what's going to get you guys more constructed on share repurchase going forward. What are you looking for two or just sort of change your mind.
Get back into the share repurchase I think.
Yeah. Jack this is Tony maybe I'll jump on that I.
I don't know that we need our minds changed about share repurchase I think we're up.
No we do feel like we're undervalued at the current levels, but we also are a bit capital constrained I mean, if you. If you look at the parent company cash levels and I'll update you through where we are today versus a quarter and we we started the quarter with 1 billion one started Q.
2 billion won and cash and we upstream to about $300 million from our subsidiaries. We spent about $100 million in our common dividend. These were all.
Fully expected.
We borrowed a net billion dollars are fully expected and we funded the F G acquisition.
$1.8 billion and change in cash so we ended the quarter by $500 million, but we do have other uses of cash.
And we mentioned in the in the call a few moments ago, we bought the 21% minority interest in Servicelink for $90 million, we're very pleased with that.
With Oh willing buyer willing transaction there, we've always felt like that the long.
In our portfolio at 100%, but.
I Didnt have a deal and then we were able to close on a deal just last week. So we spent close to $100 million on that transaction. We also have a dissenting shareholder very large one out there that we haven't paid yet and our expectation as you know assuming we.
We pay them what everyone else Scott we.
Oh them, roughly $100 million and cash in a million shares of stock that's all been accounted for except for the cafes we.
Obviously haven't paid that so that's a $100 million that we have to set aside so call that a couple hundred million dollar spoken for of the 500 million we have at the holding holding company at quarter end and then we have $360 million in debt outstanding we left some of that pre payable because we really like to win.
It'll that debt down we didn't want to keep a billion dollars a long term debt.
That's why we floated the $650 million bond and so we have like I said $360 million of pre payable debt and we'd really like to whittle away at that over the course of the year or it through next April when that that one year term loan expires.
So those are some of the.
Needs. If you will that we have on the cash fraud as well as buybacks and it's going to depend on cash flow generation as we as we make our way through the second half of the here I think it'll be very strong and I think we'll probably have an opportunity to get back into the market buyback shares and I think we'd like to do that.
Those are hopefully that helps with understanding kind of the cash needs we have.
No. Yeah that was that was helpful. Other sources and uses I guess, one for Chris you did a 13% trailing if I growth number year to year, but you are up for Q to Q1, I think you spoke about some share take.
So I'm wondering if you could talk about trajectory for growth.
Particularly in light of this new.
And you talked about a pre deal through the marketing of the deal everything else that this broker dealer relationship coming on board in that context of a 13.
No trailing 16% growth rate.
Realized how do we size that opportunity.
With the recent agreement that you just signed last month or I guess in June though.
Yeah, Great Great question, So I would say first to explain the 13% because market again was down dramatically. We did have a couple of our most immediate competitors really cut back pretty dramatically or pullback I should say and so we were.
Immediate beneficiary of that we also had a really really strong outperformance.
Heading into the cobot environment, so sales have slowed.
But they've slowed to kind of paces that we saw.
In 2019, so not nearly as dramatically as we thought there.
So they got to normal last call that we're probably going to come in against our total sales number of probably flat to maybe down.
8% or so adding things are.
More optimistic right now so I would say, we're probably coming in to the higher end of that.
A range of outcome.
Off to a great start in the broker dealer sales. So I think we always knew we could compete but it's nice.
To see it happened so I would say that has well exceeded our expectations as to how quickly we've been able to get business.
Through the door. So I would say at this point, you know probably a little more upside to the sales outlook for the year.
And then to the overtime how do you.
Scale it.
Probably the quick way of thinking about it is we have been.
Doing 4 billion of sales, playing and probably 40% of the total market and we just opened up the other 60%.
Okay, and then I'm just.
Recall that last one is there seasonality or meaningful seasonality and the business around the sales sales cycle or is it is it just market volatility higher or lower that that may drive.
A quarter or is this quarter performance and growth.
Yeah, there's a little bit of seasonality, but not not nothing material you know like you, sometimes see a little slow down in July and August as clients are vacation and advisers, maybe take some time off but barring that no. We don't we don't feel lot of variability there.
Okay. Thanks, Thanks, taking my questions.
The next question comes from Bose George of KBW. Please proceed with your question.
Hi, guys good afternoon.
Chris just wanted to ask about the margin outlook for the third quarter, but looks like you know purchase is stronger commercial is stronger and then rehire is is at least a strong so given what you guys did north of 80%.
The margin in the third quarter or could it be just as good or potentially even better just any color there would be great.
Yeah Bose its Mike I mean, I I think you're right that given you know when you look at the puts and takes we should have.
Yeah pretty consistent refinance closings in the third quarter compared to the second.
Michelle closing should be better and commercial you know maybe moderately better.
In terms of revenues. So those are all the pluses we will have additional.
Personnel expense, but you know put it all together, we'd expect a very very strong margin.
You know kinda on power, maybe maybe the opportunity to be plus to the second quarter.
Okay, great. Thanks, and then lets you just can you remind us what the margin is at Servicelink decentralized aside.
Yeah, we ran for the second quarter or right around 36%, which is just a tremendous margin a in a in a refinance business really higher than our commercial margins and.
I think it's just probably below that year to date, maybe 35%.
Okay. Thanks, and then actually a quick one on EPS is they want to be simplistic about it but just the operating income but it was generated in this one month you said a good run rate, yes sort of perspective, you, leaving aside growth.
Nelson credit, but it's all things equal is that kind of a good run rate.
Oh this is Tony I'll I'll touch on that Chris you're certainly welcome to join in but I do want to caution people a little bit we're looking at one month and and it happens to be a month that ends a quarter. So you get a little bit stronger preferred dividends in a in the third month of every quarter I am I also want to back you down from the.
$37 million of Oh, adjusted after tax earnings for $8 million of notable items that I think we've called out and there was a supplement available I'm a very extensive supplement available that you guys can can see kind of how this looks but up.
The $8 million I think that's SPIA mortality and and a bond prepay. So those are always backed out of what I. What we would call core earnings. So that gets you to $29 million and you may be tempted to multiply that by three to get to $87 million and that's probably a little.
Hi, too as I mentioned with the preferred dividends I think maybe a better way to look at it is I.
I think three or four quarters in a row F and G is at about $65 million in core after tax earnings on a quarterly basis. If you add back $8 million of preferred dividends that they've been paying that no longer apply since we retired that that gets you to $73 million.
And then Uh huh.
Roughly.
Call it $10 million of net positive purchase accounting activity. So you basically have purchase accounting bond accretion, we mentioned a half a billion dollar unrealized loss at closing that's going to accrete over the life for that portfolio into earnings and that's going to be.
Offset by by amortization of Voba value of business acquired as well as income taxes, and so let's call. It a net 10. There gets you to roughly 80 80, low eightys, probably a better run rate on a quarterly basis going forward hopefully that.
But hopefully that helps yeah. That's that's great very helpful. Thanks very much.
As a reminder, if you would like to ask a question. Please press star one on your telephone.
The next question comes from John Campbell of Stephens. Please proceed with your question.
Hey, guys. Good morning, congrats on great quarter.
Thanks, John.
Hi, Tony back second SNG that was really good run down you just provided as far as kind of a run rate income coming out of the F and G. But I don't know if you want to get the details but.
Do you think about next year, we've been talking about a percent kind of growth out of.
Out of accretion is there way too just simplify that provide a dollar amount I because it just seems like obviously lot of that percent, there's going to depend a lot of the accretion potentially going to pursue.
And on what you're forecasting for 2021 for the core.
Chris I May lets you talk about what typically the portfolio would grow.
From one year to the next you know maybe you can help me out without one.
Yeah, I think for US you what we've typically seen is like you know net asset growth in the six seven per cent per year range, and then spread fairly consistent we usually able to outperform our pricing targets a bit.
On our spread assumptions, so we've had pretty consistent double digit.
Earnings growth rate in terms of you know growth that accretion or how that translates into dollar based accretion I'd have to leave that to Tony.
Okay. We can we can follow back up offline, but.
Just one other question just a little bit Addlestone for you guys, but any any sense for the index inclusions. After after closing left Angie I think you guys at one point, where S&P 500, there since we'll get back.
Got it back to that.
Yeah, I think I mean, it's one of those things where you don't you don't know until you know and then it happens on a Tuesday or something like that certainly you know where we've seen a write off that shows that we're very close if not at the top of the lifts the S&P 500.
And you know I think it just Oh, you know when you're acquisitive like we are you know they probably like to wait until things settle down a little bit, but you know given where we are now and going forward I can definitely see a them taken a strong.
Look obviously I think somebody needs to depart before they can replace.
Some of it could depend on that but I definitely think we're on the short list.
Okay book, a squeeze in one more here actually servicelink nice job picking up the rest of the interest there can you guys maybe run its back through just at a high level the servicing capabilities around different closure kind of what that revenue it looks like today.
Seems like what the more tour in that were being rents like some of that's probably being Paul's I think we've seen that on the black Knight side, but just curious what you guys are seeing today in kind of how that revenue might trend kind of getting out of forbearance interposer.
Yeah, Matt maybe I'll start it's Mike John and then Tony can wait I don't have the.
The dollar numbers right in front of me, but.
With the more off forbearance or what would they actually a foreclosure moratorium, it's certainly impacted a couple of our businesses, including our auction business and.
Our pre foreclosure title business, but we have other default businesses that are still you know are running running strong and were by far the leader in default title services. So you know as those.
Moratoriums get lifted eventually we should see.
Improvement in those business lines, but Tony I don't have the.
The revenue numbers right in front of me I don't know if you do.
Hi, My recollection is that I mean, we're pretty much in trop default markets. Currently just because of you know the strengthening economy and obviously the forbearances. So you know the number that we have now it might be.
It might be 150 in revenue 150 million annualized revenue or something along those lines you know the attorney let me jump in because actually just found it and you're kind of right on the number.
Through June our default revenue was 87 million so annualized that's what Tony just sat and.
You know a last year at this point, where at 104 million.
Okay.
It's in the margin I mean, obviously is not could be as high as centralize rifai, but it seems to be pretty accretive title is that right.
Yeah, it's different by business, but overall, we have about five or six different default businesses that we lump together margins you're running at about 14%. This year on the 87 million.
Last year at this time, we were at 18% or the 104.
Very good thank you guys.
Thanks.
There are no additional questions at this time I would like to turn the call back to Mr. core closing comments.
Well the quarter was off to a challenging start we're very pleased with our second quarter results in the execution of our team.
Due to the ongoing pandemic, which hasn't impacted us all.
We'll continue to diligently watch our expense structure as we manage through the second half of the year.
Then optimistic on the recovery of the housing market as well as effigies ratings upgrades, which will allow them to further penetrate the bank and broker channels.
This is a significant opportunity which greatly expands their total addressable market.
Additionally, we are confident in the capital and liquidity liquidity position of effigy, who remains well positioned to execute on its growth strategy. We look forward to updating you on the third quarter call.
Everyone is able to stay healthy and safe.
This concludes todays conference you may disconnect your lines at this time. Thank you for your participation.
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