Q2 2021 Fidelity National Financial Inc Earnings Call
Good morning, ladies and gentlemen, and welcome to the FNF 2021 second quarter earnings call. During today's presentation. All parties will be in a listen only mode. Following the presentation. The conference will be opened for questions with instructions to follow at that time. As a reminder, this conference is being recorded I would now like to turn the call over to Jamie Lillis Investor Relations.
And for F. N F. Please go ahead Sir.
Thank you operator, and good morning, everyone. Thank you for joining our second quarter 2021 earnings Conference call. Joining me today is our CEO, Randy Quirk, President, Mike Nolan CFO, Tony Park, and F and G CEO, Chris Blunt.
We'll begin with a brief strategic overview from Randy Mike will review the title business and this will review F and G and Tony will finish with a review other financial highlights.
And then open the call for your questions and finish with concluding remarks, Randy but before we begin 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 COVID-19 pandemic. There is significant uncertainty about the duration and extent of the impact of this pandemic.
Statements 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 and information currently available to management at the time of this call because such statements are based on expectations.
As for future financial and operating results and are not statements of fact.
<unk> may differ materially from those projected.
We undertake no obligation to update any forward looking statements, whether 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 dated yesterday.
And the statement regarding forward looking information risk factors and other sections of the company's form 10-K, and other filings with the U S E C.
This conference call will be available for replay via webcast at our website at FNF Dot com and it will also be available through phone replay beginning at 3 P. M. Eastern time today and through Wednesday August 11th the replay number is 8 for 451 to 2.9 to 1 and the access code is 137.
2050 for let me now turn the call over to our CEO Randy.
Thank you Jamie.
We are excited about our second quarter performance as our title business continues to produce record results and F and G set records for us real retail annuity sales, while expanding into new institutional channels and further validating our decision to acquire the company just over 1 year ago.
We are building a company designed to deliver more stable earnings and cash flow as market conditions change and interest rates eventually rise and pressure our title business and we can already see the early signs of our success.
I would like to thank our employees for their hard work and and sacrifices that they have made since the start of the pandemic with and working from the office and working from home and dedication has allowed us to continue to lead the title industry and revenue earnings and margins and market share and produce the best performance and the history.
And the only the company, but the entire industry.
And the second quarter, we generated record adjusted pre tax title instead of $688 million compared to $378 million and a year ago quarter.
And a 22.7 adjusted pretax title margin.
Paired with $18.4 per cent and the second quarter of 2000 and Swan.
Our margin for the quarter matches, our record setting and margin achieved and the fourth quarter of 2020 and benefited from our investments and technology operations and automation over the years as we have worked to improve our efficiency and our title business and maximize our profitability over and.
Market share.
Turning to F and G. When we closed on our acquisition in June of 'twenty, and 'twenty, we expected essentially to provide and counter balance to our earnings which are highly sensitive and mortgage interest rates.
We also believe that our acquisition would accelerate <unk> ratings upgrades and open new channels of distribution and to enhance their sales growth.
F and G has far exceeded our expectations and we have gained significant momentum and the bank and broker dealer channel and the first year of launch as well as strong sales growth and existing channels.
While delivering record retail sales, we have maintained attractive spreads despite the low interest rate environment and we continue to experience.
F and G has also entered the institutional market and with the $750 million funding agreement backed note issuance and it was just awarded its first pension risk transfer deal over the past weighted.
F and G ended the second quarter was nearly $323.32 billion and ending assets under management, which is a 20% increase since the acquisition and it's well on its way towards achieving our goal of doubling assets sales momentum accelerates.
Looking forward, we will continue to evaluate our capital allocation strategy as we remain committed to long term value creation for our shareholders. While also focusing on supporting the future growth of our business.
Given our strong earnings and cash flows through the first half for the year yesterday, we announced a quarterly cash dividend of <unk> 40 per share and increase of 11% from our previous quarterly dividend and our board authorized a 3 year share repurchase program of up to 25 million shares.
At the end of 'twenty, and 'twenty, we announced a share buyback plan of $500 million and during the second quarter and repurchased 4 million shares for $183 million and an average price of $45.70 for SaaS for share.
Since announcing the buyback from here, we have purchased 11 million shares for $452 million and average price of 41.19 per share.
Let me now turn the call over to Mike Nolan to discuss the title insurance business and more detail.
Thank you Randy Randy touched upon our record second quarter results as we continued to benefit from low interest rates driving strong origination demand the continued rebound and commercial real estate activity and the efforts and focus of our employees and taking care of our customers.
For the second quarter, we generated adjusted pre tax title earnings of $688 million and 82% increase over the second quarter of 2020.
Our adjusted pretax title margin was 22, 7%, a 430 basis point increase over the prior year quarter.
We had a 17% increase and direct orders closed driven by a 57% increase and daily purchase orders closed and a 65% increase in total commercial orders closed partially offset by a 5% decrease and daily refinance orders closed.
Total commercial revenue was a record $347 million compared with the year ago quarter of $184 million due to the 65% increase and closed orders and a 14% increase and total commercial fee per file compared with the year ago quarter.
Yes.
For the second quarter total orders opened average 10900 per day with April at 10007 hundred May and 11200 and June at 10007 hundred for July total orders opened were 11000 per day as we continue to see strong demand and purchase activity.
While the refinance market continues to moderate as compared with last year's robust levels.
Daily purchase orders opened were up 41% and the quarter versus the prior year.
And for July Daily purchase orders opened were up 4% versus the prior year.
Refinance orders opened decreased by 25% on a daily basis versus the second quarter of 2020.
And for July Daily refinance orders opened were down 32% versus the prior year loss.
Lastly, total commercial orders opened per day increased by 58% over the second quarter of 2020 <unk>.
Commercial orders opened per day were at all time record levels through the second quarter for.
And for July total commercial orders opened per day were up 15% over July of 2020.
We remain optimistic that the order volumes, we have seen over the last several quarters will drive continued strong commercial performance and the second half of 2021.
As Randy mentioned, our strong results are a clear validation of the investments we have made into technology and how we integrate automation throughout our operations to approve improve efficiencies and enhanced client satisfaction.
We have spoken often about our focus on expense management and real time, and it's open orders rise and fall but.
But we also believe that our longer term focus on integrating automation has significantly improved our performance and profitability through market cycles and additionally.
Additionally, we continue to enhance our entire experience platform, which transforms the real estate transaction experience by improving the safety and simplicity needed to start track notarized and close a real estate transaction.
During the quarter, we reached an important milestone as more than 1 million consumers completed our digital start here opening package confirming our belief that customers are ready and eager for digital solutions for real estate transactions.
Last week, we announced Notarize and here, which ensures that the same level of service security and integrity, our customers demand during in person material acts as available when completing their most significant financial transaction online.
We are focused on improving our customers' experience and believe the inherent platform will not only improve client satisfaction, but will also help us to improve our efficiency by reducing the hours spent on transaction, while also positioning FNF to take market share.
Let me now turn the call over to Chris Blunt and to review <unk> second quarter highlights.
Thanks, Mike as Randy mentioned, 1 year into our acquisition by FNF F and G is executing on diversifying our sources of premium transforming a previously mono line business into a leading provider of solutions in both retail and institutional markets and the life and annuity space.
As we grow we're focused on generating scale benefits by increasing assets under management, while leveraging blackstone's unique investment management capabilities to deliver consistent spread.
Additionally, we've made significant investments and our operating platform to become a best of breed service provider and allowing us to leverage efficiencies as we scale in the second quarter, we had record annuity sales and our retail channel of $1.6 billion up 80% from the second quarter of 2020 and 9 per.
<unk> from the sequential quarter, and we continue to see success with core agent distribution and also with our 2 newer distribution channels independent broker dealers and banks, which generated over $900 million of new premium and the first half of 2021 and are on track to comfortably exceed 1.5.
For the full year.
Institutional channel, where we market to institutional clients. We have successfully entered the funding agreement backed note market and secured our first pension risk transfer transaction over the last week let.
And let me provide a few brief details in June and F&B and issued a $750 million funding agreement backed note.
B and Ed and attractive coupon of 175% market reception to our initial fabienne issuance was extremely strong with an order book and excess of $2 billion and going forward, we intend to opportunistically execute additional fabienne issuances.
Also we have successfully entered the pension risk transfer market securing our first deal and late July we will assume approximately $65 million and pension liabilities and provide annuity benefits over 1200 retirees in a transaction expected to close this month.
In addition, we have a very robust pipeline of deals where we will be bidding on in the third quarter.
Both channels contributed to top line sales results that surpassed our expectations driven by very strong growth and the retail channels and the launch into 2 additional institutional channels.
Total sales were $2.7 billion and the second quarter compared to $1.7 billion and the sequential quarter and $1.1 billion and the second quarter of 2020.
For the first half of the year, we achieved record sales of $4.3 billion nearly double the $2.2 billion of total sales and the first half of 2020.
With these strong top line results average assets under management or AA U M has surpassed the $30 billion milestone driven by approximately $1.7 billion of net new business flows in the second quarter.
Next turning to spread our results continue to be strong total product net investment spread was 295 basis points from the second quarter and FIA net investment spread was 335 basis points.
Investment yield and important driver of product margin was above expectation driven by onetime items and the quarter, primarily favorable investment income and <unk>.
Yellow redemptions held at a discount to par <unk>.
Adjusting for those notable items, though total product spread was 255 basis points in line with our historical trend and consistent with our disciplined approach to pricing.
Adjusted net earnings for the second quarter were $92 million strong earnings were driven by record.
AUM and strong and consistent spread results as we have maintained disciplined pricing actions on both new business as well as our in force book.
Net favorable items in the period were $22 million adjusted net earnings excluding those notable items were $70 million up from $66 million and the first quarter.
In summary, it's been a defining first half of the year for F and G. Our profitable growth strategy is firing on all cylinders and we have successfully diversified our sources of premiums a key strategic focus.
We remain excited about the opportunity to further contribute to the overall fnf's strategy and the years ahead with that I'll now turn the call over to Tony Park to review <unk> second quarter financial highlights.
Thank you, Chris we generated $3.9 billion and total revenue and the second quarter with the title segment, producing $3 billion F and G producing $802 million and the corporate segment generating $56 million.
Second quarter net earnings were $552 million, which includes net recognized gains of $232 million versus net recognized gains of $162 million and the second quarter of 2020.
The net recognized gains and losses and each period are primarily due to mark to market accounting treatment of equity and preferred stock securities whether the securities were disposed of in the quarter or continued to be held and our investment portfolio.
Excluding net recognized gains and losses, our total revenue, which was $3.6 billion as compared with $2.3 billion and the second quarter of 2020.
Adjusted net earnings from continuing operations were $592 million or $2.06 per diluted share. The title segment contributed $526 million F and G contributed $92 million and the corporate and other segment had an adjusted net loss of $26 million.
Yeah.
Excluding net recognized losses of $30 million, our title segment generated $3 billion and total revenue for the second quarter compared with $2.1 billion and the second quarter of 2020.
Direct premiums increased by 57% versus the second quarter of 2020 agency premiums grew by 60% and escrow title related and other fees increased by 28% versus the prior year.
Personnel costs increased by 32% and other operating expenses increased by 14% all and the title business generated a 22, 7% adjusted pretax title margin, representing a 430 basis point increase versus the second quarter of 2020.
Interest and investment income and the title and corporate segments of $27 million declined $14 million as compared with the prior year quarter due to decreases and dividends received on common and for preferred stock decreases and bond interest and a slight decrease in income from our 10 and 31 <unk>.
Range business.
FNF debt outstanding was $2.7 billion on June 30 for a debt to total capital ratio of 23, 2%.
Our title claims paid of $56 million were $41 million lower than our provision of $97 million for the second quarter. The carried reserve for title claim losses is currently $91 million or 5.8% above the actuary central estimate.
We continue to provide for title claims at 4.5% of total title premiums.
Finally, our title and corporate investment portfolio totaled $6.3 billion at June 30 include.
Included in the $6.3 billion, our fixed maturity and preferred securities of $2.2 billion with an average duration of 2.9 years and and average rating of <unk> to <unk>.
Equity Securities of $1.2 billion short term and other investments of $400 million and cash of $2.5 billion. We ended the quarter with over $1.2 billion and 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, we will be conducting a question and answer session. If you would like to ask a question. Please press star 1 on your telephone keypad. The confirmation tone will indicate that your line is and the question queue. You May Press Star 2 and you would like to remove your question from the queue for participants using speaker equipment and may be necessary to pick up your handset before pressing the <unk>.
Dr. Keith.
Our first question comes from the line of John Campbell with Stephens. Please proceed with your question.
Hey, good afternoon, and congratulations on the quarter. This is James holiday stepping in for John Campbell.
Thank you. Thank you.
First 1 just kind of a quick 1 here so on the refi mix and commercial can you break out what the mix was on the local and national levels.
Sure, It's Mike and let me, let me get to that.
So for the <unk>.
And the second quarter, the National open orders were up 80% and the local orders were up 46% and the total was 58 as we mentioned on the close side the national orders were up 69% to the previous second quarter and the local was up 62%. So we're sure.
<unk> seen and.
Courage and signs with.
The national and the larger orders kind of coming back into the mix.
Okay. Yeah. Thank you that's helpful. And then if I can squeeze 1 more and here.
And I'm not sure for your data is granular enough for this but can you give any insights into daily price and anything thats going on there and your thoughts on price appreciation going forward.
You mean in terms of the impact on fee per file I think is where you're going and so.
I guess, just a point of reference if I compare June of 2021 up against June of 2020.
We see roughly a little over 3400 dollar fee per file on a purchase transaction, which is up about 16% relative to June of the previous year refi is a lot closer to $1000 and order and Thats up about 4% June over June.
Alright. Thank you guys appreciate it.
Thank you.
Thank you. Our next question comes from Mark Devries with Barclays. Please proceed with your question.
And yes question for Chris.
And how meaningful can this <unk>.
And risk transfer business be.
Revenues and earnings, particularly if you.
I have a high hit rate on some of this big deal pipeline you said you've identified for the next quarter.
Yes, no, it's big and I think as you know.
You know tens of billions market I think last I saw a price 25 billion or so market.
And we believe growing.
So we think it could be quite significant certainly and the billions over time per year of sales, we're going to start modestly to make sure. We've got all the infrastructure in place, but I'd say, we're off to a really good start and feeling.
Confident that we can compete there.
Okay.
And a separate question.
If we apply a title multiple to the title earnings and market is still not really ascribe much value to F and G. Despite.
And our performance is really exceeding everyones expectations. So what was interesting and getting your latest thoughts about what if anything you can do here to kind of monetize the value of that business for shareholders.
Yeah.
Yes look I'll start this is Chris I think this comes down to it's a timing issue. So the value is there the value and a business like ours is always sitting in the in force, where we've got effectively locked in spread and today its $32 billion of assets under management. So this is a question of <unk>.
What's your timeframe and your and your timeline, but at the moment the ability for us to gather assets get benefits of scale and expand margins are just tremendous and we're and regardless of.
How the market values that multiple of earnings the value doesn't go away, whether you monetize that.
Via reinsurance or a block deal or something of that nature, but.
I'd say right now we're at an inflection curve.
My personal belief is that it would be really premature to try to to try to unlock that because versus looking at something like that down the road.
Okay got it thank you.
Thanks.
Thank you. Our next question comes from Andrew <unk> with Credit Suisse. Please proceed with your question.
Hey, good morning. So I also saw that you had.
<unk> announced and new share repurchase authorization of 25 million shares through July of 2024.
And $1 billion and a quarter of cash at the Holdco, so very well capitalized.
Quiddity.
Do you think you might want to take advantage of the share price here and do more buybacks I mean should we see this as kind of a steady.
25 million shares kind of very very smoothed over 3 years, where might you accelerate it and with that.
And what kind of other opportunities are you seeing for the cash right now.
Yeah, Andrew Good question this is Tony.
Maybe I'll just run through our cash a little bit. So we started the quarter at $1.1 billion, we upstream from our subsidiaries a little over $400 million and then we had a shareholder dividend of a little over $100 million interest expense of about $10 million and then buybacks of a roughly $185 million for the quarter. So we ended the.
Quarter at $1 billion $2.50, roughly.
Our buyback authorization did expire on July 31, So what you saw yesterday and that release was a reauthorization of 25 million shares almost a formality, if you will versus and announcement.
We committed last year to buy back $500 million and shares over the course of.
Of the following 12 months and we've almost exhausted that to this point were about $50 million short of that $500 million commitment, we have not announced another commitment, but I would say we're going to continue to be in the marketplace. We have the authorization and and I think we're going to continue to buy back.
Shares over time, I don't know, if we'll announce a commitment or if we'll try to accelerate that given our share price.
But but but I fully expect that we will be in the marketplace. We also increased our announced an increase and our dividend from 36 cents a quarter to <unk> 40, a quarter and a 11% increase and.
And we think that's a very bullish sign relative to the cash flow generation that we're seeing so.
Long answer to your question, but we certainly have a lot of optionality with the cash that we're generating.
And anything on the M&A front that.
Anything big out there.
And those lines.
This is Mike Andrew there's.
And Theres, a number and we've talked about this before but a number of Asian opportunities. We continue to look at those we do those we don't always announce them, but we have done those deals consistently and we have a number we're looking at now.
And then I would say you know there could be things that show up and.
Technology related areas as long as it kind of relates to our core our core business I'm, not saying, we have something specifically, but.
And we're always looking at how to augment our technology maybe.
Maybe some things inside the service linked business or other businesses that we have but that would be.
Yet we don't really have as you know the big opportunity and title.
Given the.
Issues that we had with the Stewart acquisition.
And if I could just jump in with 1 more.
So really like those and those numbers you talked about on the orders with purchase up 4% in July.
And commercial up 15%.
And I know, we could look at all the different services, but how are you thinking about maybe the next 3 months or so I mean are these.
Numbers likely to stay on that same trajectory and with that can we assume that.
Your adjusted pre tax margin will remain over year previously guided 15% to 20%.
Well I think on the orders it's Mike again, you look at commercial we've now had 6 months in a row February through July where we've opened over 1000 commercial orders per day, and we're averaging over 1000 per day for the year and.
And I look back to 2019, which was our previous record year for opens so we will take kind of a pandemic you're out of it and 2019, we averaged about 870 orders per day, so we're running and a market that's much stronger than the best market. We had in 2019 so I.
And we're optimistic that we'll have a very strong.
Commercial second half and on the purchase side, we're into that area, where we're getting the seasonality and the business like we typically do and a normal year purchase opens usually peak around may or June and then kind of start falling off 3% to 5% or sell every month and we're starting to see that.
Sequentially and.
In July, but we will have a very good purchase.
Closing activity in the third quarter, what will come out a little bit it'll be we will have less refi closings and the third quarter, Although we did see a sequential increase and refi.
And July on the open side it was up about 11% to June but to your margin question. We would anticipate very strong margins and the third quarter cant put a number to it but you have seen the power of the business. When we have active purchase markets and active commercial markets and.
So we would expect a very good quarter.
Awesome. Thanks.
Thank you.
Thank you. Our next question comes from Mark Hughes with Truest. Please proceed with your question.
Yes, Thank you Mike well the refi orders per day, you gave the year over year, but were they in absolute terms for July.
And let me get that we opened.
A little over 5300 orders per day refinance and July of 'twenty, 1 and.
And that was up against a little over 7900 last July we other than we had a big increase.
Last year from June about a 15% jump.
So the comp got a little bit tougher, but as I said, we did have a sequential improvement in July and our rates came down sub 3 and we had and 11% increase and opens per day in July versus June of this year.
And then the.
Independent channel great following that and.
Evolving these days, you're doing very well and the broker dealer and bank channel how about the independent channel.
Yes, that's some that's doing really well so we hit a milestone we moved up to number 2 and fees sales.
In the independent channel. So it was a big deal for Us and that's that's.
Cook and along at 20% growth for US right now and I would say our relationship with our top Imo's, which drive.
And 80% of our business and that channel is as strong as it's ever been.
And then.
If you could talk about just the update on the capital strategy with respect to LNG.
If you do have success here and make sure.
Are you going to finance that.
From a capital reinsurance capital how are you approaching Inc.
Yes. This is Tony maybe I'll start Chris can weigh in I think at this point, the only capital that F and G needs in 2021 is some debt capital because they have room and their debt to cap ratio.
For maybe $400 million of intercompany lending so with us sitting on $1 billion $2.50, and growing parent company cash I think we will loan that internally at least and the short run.
And allow F and G to continue to grow like they have been growing and then we will look as we get further into this year and into next year about where we stand on the equity front.
And and whether F and G wants to take out.
FNF piece with with third party debt as well and so we will kind of weigh that as as we go but we certainly like the growth trajectory that F and G is on and at this point don't don't feel like.
And we're in a position where we need to utilize a third party strategy.
Thank you.
Thanks.
Thank you and as a reminder, if you would like to ask a question and at this time. Please press star 1 on your telephone keypad. Our next question comes from Bose George with <unk>. Please proceed with your question.
Hey, guys good morning.
Good morning, and she first just on your agent premiums split it seem to you usually average around like 23, 5% or a little higher and it was 22.8 this quarter was there anything unusual there or is it just noise.
Bose, It's Mike I think it's really just geographic.
And performance that can change over time, we had stronger revenue growth and some of the markets, where you have higher average splits.
Versus some of the other markets. So I think it is simply that I don't think its any significant price pressure okay.
Okay, Okay, great. Thanks, and then.
In terms of margins can you just talk about margins for the different segments.
Yeah, I think I've got that somewhere Bose.
And.
Where do I want to start a direct operations very strong performance at roughly 32% margins up against 28%.
Those I would say are the are the big pieces that helped drive a record $22 and 7% margin.
Okay, great. Thanks, Thanks for the breakout and and keep 1 question for Chris.
And with this the new the funding agreement and the.
That business is acid yield and the investment assets that there's going to be invested and it's the same as everything else is the or is there any sort of restrictions. So I'll just spreads gonna be essentially the same and this business as it was and the existing business.
Yeah, I'd say, it's comparable the first deal and we did was.
100 and for basis points.
Return on assets, so spread should be comparable and if you think about it and it's like selling too and institution of 5 year fix deferred annuity zero optionality. So that money is tied up for the term and the case of this issuance for 5 years. So.
Yes. This is a and exciting new channel for us that should have comparable spreads. It also happens to have a lower capital strain. So the return from a return on equity return on capital it's actually higher.
And the other businesses.
Okay, great. Thanks.
Thanks.
Thank you, ladies and gentlemen, and we have reached the end of our question and answer session. So I'd like to pass the flow over to Mister Quirk for any closing comments.
Thank you.
We are very pleased with our second quarter results as our title and SMG businesses continue to set records. We are proud of our team success and we are optimistic about the future as we continue to implement our technology initiatives and our title business, which will lead to improved efficiencies and market share over time, while <unk> for.
To deliver strong asset growth over the medium term.
Taken together, we are building a company that has and financial model designed to deliver strong earnings cash flow as market conditions change.
Lastly, our capital allocation priorities remained focused on deploying capital and a way that best maximize shareholder value to our quarterly dividend share repurchases and continued investments and our businesses. We look forward to speaking with you and update and you on our third quarter earnings call.
Ladies and gentlemen, does does conclude today's teleconference and webcast. We thank you for your participation and you may disconnect. Your lines at this time.