Q3 2023 Fidelity National Financial Inc Earnings Call
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Ladies and gentlemen, good morning, and welcome to the Fidelity National Financial Inc. Third quarter 2023 earnings Conference call.
At this time all participants are in a listen only mode.
A brief question and answer session will follow the formal presentation.
If anyone should require operator assistance during the conference. Please press star and fetal on your telephone keypad.
As a reminder, this conference is being recorded.
It is now my pleasure to introduce your host Lisa Foxworthy, Parker SVP Investor and external relations. Please go ahead.
Great. Thanks, operator, and welcome everyone. Joining me today are Mike Nolan, Chief Executive Officer, and Tony Park, Chief Financial Officer, We look forward to addressing your questions. Following our prepared remarks, Chris Blunt F. N G C E O and Wendy Yang F. N G. CFO will join us for the Q&A portion of today's call.
Today's earnings call May include forward looking statements and projections under the private Securities Litigation Reform Act, which do not guarantee future events or performance, we do not undertake any duty to revise or update such statements to reflect new information subsequent events or changes in strategy.
Please refer to our most recent quarterly and annual reports and other SEC filings for a discussion of the factors that could cause actual results to differ materially from those expressed or implied.
This morning's discussion also includes non-GAAP financial measures that we believe maybe meaningful to investors.
non-GAAP measures have been reconciled to GAAP, where required in accordance with SEC rules within our earnings materials are available on the company's website.
Yesterday, we issued a press release, which is also available on our website today's call is being recorded and will be available for webcast replay F. N S. Dot com. It will also be available through telephone replay beginning today at three P. M. Eastern time through November 15th 2023.
And now I'll turn the call over to our CEO, Mike Nolan.
Thank you Lisa and good morning.
Overall, we've had a strong quarter despite the tough market.
Starting with our title business, we delivered adjusted pre tax earnings of $311 million.
In an industry, leading adjusted pretax title margin of 16, 2%.
This is an outstanding result, especially given the U S mortgage rates have advanced to multi decade highs recently, peaking at over 8% in October which is the highest level since November of 2000.
In turn this is keeping a lid on residential purchase applications, which have decreased to their lowest level since 1995, almost three decades ago.
As a result, we continue to be focused on managing expenses and have reduced staffing and operating expenses. This year.
As of September 30, our total field operations employee count has been reduced by about 13% over the past 12 months.
This has generated about $70 million and run rate personal cross savings in the third quarter as compared to the third quarter of 2022.
We have also reduced our direct title office locations from approximately 1400 to below 1300, generating about 1 million per month and expense savings.
Commercial volumes are trending in line with our expectations we.
We have generated commercial revenue of $263 million in the third quarter and $767 million in the first nine months, putting us on track for 1 billion for the full year and in line with levels seen in more normal years like 2015 to 2019.
Looking at sequential volumes more closely.
Daily purchase orders opened were down 7% from the second quarter of 2023.
Down 8% for the month of October versus September in line with seasonal expectations and.
Down 2% for the month of October versus the prior year ever.
And refinance orders opened per day were down 8% from the second quarter of 2023.
2% for the month of October versus September and down 13% for the month of October versus the prior year.
Our total commercial orders opened were 779 per day.
Flat for the third quarter versus the second quarter of 2023 down 7% for the month of October versus September and down 4% for the month of October versus the prior year.
Overall total orders opened averaged 5000 per day in the third quarter with 5300 in July and 4900 in both August and September.
For the month of October total orders opened were 4600 per day down 6% versus September.
While we are pleased with our continued strong performance and profitability.
We remain cautious as we anticipated order volumes at or near historic lows as we close out the year and under the first quarter.
Which in turn is expected to pressure industry margins much like last year.
As always we will manage our business to the trend in open orders to protect our profitability.
Beyond the near term pressures, we remain bullish on the mid to long term fundamentals of the real estate market.
A clear benefit of our financial strength scale and profitability is our ability to continue to strategically build and expand our title business.
By investing in technology recruiting talent and making acquisitions.
Which we have continued to do while maintaining industry leading margins.
Turning to our F and G business, we are pleased to see investor recognition of <unk> success.
Cause its market capitalization has increased from $2 $4 billion at the time of the partial spin off last December to approximately $4 billion.
We recently held an Investor day on October 3rd which provided a deep dive into the company's proven track record of growth and highlight the strategic levers that the team is employing to create value value for stakeholders.
Which will benefit <unk> as it is.
The majority shareholders.
To recap <unk> future potential upside from three areas.
First sustainable asset growth from its retail and pension risk transfer growth strategies.
Next margin expansion from investment opportunities effectively managing operating expenses for operational scale benefit.
An incremental fee based earnings from flow reinsurance and owned distribution.
And finally, we believe there is potential for F&B shared price to more fully reflect its core business performance and the accretive nature of its flow reinsurance and owned distribution strategies as they scale over time.
For the current quarter F N G as profitably grown its assets under management of four flow reinsurance to a record $53 billion at September 30th and now comprises 31% of adjusted net earnings.
I'd like to wrap up by thanking all our employees for delivering another industry, leading performance this quarter, despite the market headwinds.
This is a seasoned team that knows how to prudently manage through tough cycles, while continuing to invest in the business to take advantage of opportunities for longer term growth.
With that let me now turn the call over to Tony Park to review <unk> third quarter financial highlights.
Thank you, Mike starting with our consolidated results, we generated $2 $8 billion in total revenue in the third quarter.
Third quarter net earnings were $426 million, including net recognized losses of $356 million versus net earnings of $362 million, including $230 million of net recognized losses in the third quarter of 2022.
The title segment contributed net earnings of $185 million E F and G segment contributed $259 million and the corporate segment had a net loss of $18 million.
The net recognized gains and losses in 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 were continued to be held in our investment portfolio.
Excluding net recognized gains and losses, our total revenue was $3 1 billion as compared with $3 4 billion in the third quarter 2022.
Adjusted net earnings from continuing operations was $333 million or $1.23 per diluted share compared with $272 million or <unk> 99 per share for the third quarter of 2022.
The title segment contributed $245 million <unk>.
<unk> segment contributed $102 million in the corporate segment had an adjusted net loss of $14 million.
Turning to Q3 financial highlights specific to the title segment.
Our title segment generated $1 $9 billion in total revenue in the third quarter, excluding net recognized losses of $46 million compared with $2 $3 billion in the third quarter of 2022.
Direct premiums decreased by 24% versus the third quarter of 2022 agency premiums decreased by 25%.
And escrow title related and other fees decreased by 7% versus the prior year.
Personnel costs decreased by 10% and other operating expenses decreased by 16%.
All in the title business generated adjusted pretax title earnings of $311 million and a 16, 2% adjusted pretax title margin for the quarter.
Versus 17, 1% in the prior year quarter.
Our title in corporate investment portfolio totaled $5 billion at September 30.
Interest and investment income in the title and corporate segments of $108 million increased $37 million as compared with the prior year quarter Pri.
Primarily due to higher income from our 10, 31 exchange business and cash and short term investments.
Looking ahead to 2024, we expect interest and investment income to moderate in the 95 million to $100 million quarterly range with gradually declining 10, 31 exchange balances and spreads.
And assuming level cash and short term investment balances.
Our title claims paid of $69 million or $12 million higher than our provision of $57 million for the third quarter.
The carried reserve for title claim losses is approximately $81 million or four 8% above the actuary central estimate.
We continue to provide for title claims at four 5% of total title premiums.
Next turning to Q3 financial highlights specific to the F&B segment.
<unk> hosted its earnings call earlier, this morning, and provided a thorough update so I will focus on the key highlights of its quarterly performance.
SSG reported gross sales of $2 $8 billion in the third quarter down 3% from the prior year quarter. This reflects lower retail channel sales.
Offset by higher institutional market sales coming off record sales in the first half of the year retail sales were intentionally lower in the quarter as F. N G finalized its reinsurance agreements and enhanced product features to position for a strong finish to 2023 and create more.
Mentum for 2024.
Within this market environment LNG has seen a sharp increase in submitted annuity premium in September and October.
Which is expected to provide a strong growth trajectory for nucor annuity sales in the fourth quarter.
<unk> net sales retained were $2 $3 billion in the third quarter in line with the prior year quarter. In addition, and as expected F. N. G has increased flow reinsurance to 90% of my guess sales in September of 2023.
As a reminder, LNG utilizes flow reinsurance, which provides a lower capital requirement on ceded new business.
Allocating capital to the highest returning routine business.
This enhances cash flow provides fee based earnings and is accretive to <unk> returns.
F N G has profitably grown its retained assets under management to a record 47 billion at September 30.
Assets under management of four flow reinsurance was $53 billion adjusted.
Adjusting for the approximately $6 billion of cumulative net business ceded.
Adjusted net earnings for the <unk> segment were $102 million in the third quarter.
This includes alternative investment returns.
Though our long term expectations by $24 million or <unk> <unk> per share.
Let me wrap up with a few thoughts on capital and liquidity.
We remain focused on ensuring a balanced capital allocation strategy as we navigate the current environment we.
We ended the quarter with $949 million in cash and short term liquid investments at the holding company level, which has remained relatively steady since year end. Despite the effect of market headwinds and historical low volumes in the title business.
Fnf's consolidated debt to capitalization ratio, excluding a OCI was 27, 7% as of September 30. This was in line with our long term target range of 20% to 30% and we expect that our balance sheet will naturally delever as a result of growth in.
Shareholders' equity excluding OCI.
Going forward, our consolidated annual interest expense on debt outstanding is approximately $175 million.
Comprised of approximately $80 million for FNF holding company debt.
And $95 million for F&B segment yet.
Following a record level of share repurchases in 2021 and 2022.
At a total combined cost of $1 billion, we have prudently moderated our repurchase volume in the first nine months of this year to preserve financial flexibility through the multi decade low volumes of this market cycle.
Therefore, there were no share repurchases in the third quarter and only $4 million of share repurchases in the first nine months of the year.
During the third quarter, we paid common dividends of 45 per share for a total of $123 million.
We continue to view, our current annual common dividend of approximately $500 million and sustain.
Sustainable.
This concludes our prepared remarks.
Let me now turn the call back to our operator for questions.
Thank you.
Ladies and gentlemen, Viva and I'll be conducting a question and answer session.
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Ladies and gentlemen, we will wait for a moment, while we poll for questions.
Our first question if I'm, so supposedly with BP I G. Please go ahead.
Hey, guys. Good morning, hope you're doing well.
Good morning Arun.
Hey, So first of all on title margin of 16, two in this quarter and one of the toughest mortgage environment, that's pretty impressive and I know I know, you've historically talked about 15% to 20% is normalized but.
Is there a reason why that can't be higher should we think be thinking about a range. That's no different now and maybe could you just talk through some of the puts and takes there.
Yes, I think.
I think right now we wouldnt we wouldnt.
You know talk about about a different range, we are still in a very volatile environment with rates at.
At seven 5% and a low low inventory volumes historically, but certainly very pleased with the margin performance in the third quarter and just the the work of our employees in the field.
We continue to take care of customers recruit and manage manage expenses and I think if you look at the third quarter to the second it's really that expense discipline.
And then a little pick up in some of our non title businesses like sub servicing that allowed us to pull a little bit stronger margin from the second quarter.
But I think we need to get.
There's this volatile market to really think about.
You know talking about an annualized margin.
Greater than 15% to 20%, Yeah, I mean keep in mind, the 15% to 20% as an annual number.
And certainly the last couple of quarters, we've been in that range, but you recall from last year, the fourth quarter. It gets more challenging when inventories come down and then the first quarter even more so so when you when you talk about the whole year Youre still youre.
Still not there we're still in a tough environment and I think you know to add onto that in the short term.
So we remain cautious on margins for the fourth and first quarters.
Our open inventory levels are similar to what we saw going into the fourth quarter of last year.
And you saw how margins were pressured.
As we have.
As we got through the fourth and first quarters, but kind of to your point.
Very confident that as the market returns were well positioned to drive margins. Given this cost structure, we have and more importantly, the industry leading scale that we have so you know what we think is as rates moderate in this market returns, we'll we'll be able to produce very strong margins, but we kind of got it.
Through these next couple of quarters.
Got it okay that makes sense.
And then I had a F. G performance, obviously continues to be very strong.
But one of the concerns we hear sort of a lack of liquidity in the stock and I know you. You know is that 80% ownership threshold that you may want to sort of inherent too, but you know maybe just talk through some of the considerations for you know a potential equity raise there because it would seem that you know the business could use perhaps some capital to accelerate their strategy there and just capitalize.
The opportunities and it should also be an interesting way to sort of maybe reduce fnf's ownership over time that could help unlock the multiple so any thoughts Jeff. Please thanks.
Yeah, I know you you make some good points clearly liquidity.
The challenge there and you can see a little volatility in the share price because of that.
F&B is growing.
Great as you probably have seen from from their resolve their margins are stronger they are generating roughly $800 million in cash flow from their in force book and reinvesting that into new business and Theres plenty of new business to be had and so ultimately yes, they will need.
More equity to continue to grow.
And and I guess, we'll see I mean, Chris may have some thoughts, but we'll see.
That comes about we do want to FNF wants to preserve that 80 plus percent ownership.
So that we have the ability to spin off F. G tax free in the future if thats what we if that's what the board decides decides to do but there are ways to <unk>.
To raise equity and.
And preserve that we're at 85% now and so there's a little bit of room there.
Chris.
Add any more to add there.
No other than now.
About roughly 18 months until the five year, Mark So just related to your potential tax free spin comment right.
Great. Thanks, guys.
Thank you thanks.
Thank you.
Next question is from Mark Hughes with <unk> Securities. Please go ahead.
Yes. Thank you a good a good morning.
Thinking about the margin.
Good morning, Yeah, just the sequential progression from <unk> to <unk>, if you looked at.
'twenty, one and 'twenty two.
I'm, sorry, 'twenty, 2020 'twenty, one the margins held up pretty well between Q3 and Q4.
Last year, there was a more substantial drop how do you think about the progression this year from <unk> to <unk> given the.
Orders that youre seeing in head count and all of that.
Well again.
We're not going to.
Guide to a specific number mark on margin, but I would just look at what happened last year.
Because the inventories are very very similar you know we're going to have.
Less resale.
Closings.
Much like we did last year, maybe a little less refi commercial can be a bit of a wildcard.
In terms of the closing levels in the fourth quarter, but I, just think it's going to be a tough a tough quarter given given the inventory levels we have.
Some of the other puts and takes can be agency mix in the quarter. If you have more agency revenue that just has a natural push down on margins because the gross margins are lower.
And then sometimes the.
I'm sorry to the edges. If you will the non title businesses that are in the title segment.
Can push margins around a little bit one way or the other but it's really just we're at very low inventory levels as an industry.
And that's going to just have a natural downward pressure on margins I think in the short term.
Understood and then I'm sorry, if this came up on the F and G call earlier today, but the department of Labor.
Proposing maybe some new rules around fixed indexed annuities.
Chris any.
Impact on that.
Yeah honestly I don't think it's going to have any meaningful impact.
It's kind of just a different slightly different version of the same rule that we've been contending with for years.
A lot of similarities to the best interest rule.
From the FDIC and so you know at the margin could add a little bit of extra compliance and oversight expense in the independent channel probably.
We're obviously still digesting it but theres nothing in there that looks to us to be particularly.
Threatening to our business, even within the independent agent channel, which as you know.
As we've grown and expanded I wonder if that's maybe 20% of our total sales, but even within that I think the <unk> that we do the bulk of our business that we're really well positioned they're very sophisticated firms many of them now have <unk> and broker dealers with their own right.
They're competing through a lot of value added services. So.
You know I'll skip editorializing on whether this is necessary, but just say that I don't think there's anything that we're particularly worried about.
I think you just did the editorialize.
Thanks, Brad.
That's great.
[laughter].
Yeah.
Thank you.
Our next question is from John Campbell with <unk>.
Stephens Inc. Please go ahead.
Hey, guys. Good morning, nice work in the quarter.
Hey, Thanks, John and good morning, John.
No problem on the October order count that was a clear positive and our is just kind of across the board. It seems like things are turning ever since slightly and that's that's impressive given you've got the you know obviously, the 8% backdrop with mortgage rates.
You know two part question here first on the purchase side I mean, both of you guys and first American are I think showing clearly better trends than what's kind of been implied out there in the market I mean, both from industry forecasters and you know we look at the M. B a weekly ops I mean, the thing there is that based on the number of mortgages right.
I saw this morning, the stat that I think cash sales rose to like 34% of the mix that was up versus 29% last year.
No.
I know I guess the question is are you guys seeing maybe a little bit of deviations from what others might be seeing out there in the market due to rising cash levels and if that's the case is there any meaningful impact the fee per file on the purchase side.
Yes, it's a really good question John it's Mike.
I don't know that we track cash sales specifically it might be more anecdotally and I think I've heard that maybe.
The field has been seeing a little bit more of that but to your point I mean, our our October purchase orders.
<unk> fell 7% sequentially and as I said in the opener.
That's very much a seasonal falloff and but then when you go back and look at what happened with rates in the third quarter.
They were they went up I don't know 60, 70, 80 basis points or something like that during that timeframe I fully expected more of a fall to be honest with you given the rate movement. So I think I agree with your premise that.
Theres, a little maybe outperformance going on and maybe cash sales are an element of it but I'm not I'm not sure of that.
Okay. That's helpful.
Yeah, maybe I'll just chime in on the fee per file.
I think on the purchase side were up about 3%.
Versus Q3 of last year, which surprises me a little bit I felt like it was trending down as you got into Q4 in the first quarter.
The fourth quarter of last year, the first quarter of this year, but then it started to tick right back up probably surprised a lot of people that home prices have maintained their value maybe it came down a little bit sequentially from from Q.
Two to Q3, but still holding up pretty well thus far.
Yeah, that's a great point, I mean, I feel like from last year and a half two years, we've all been surprised.
On the negative on the downside.
So it's it's good to see that these things are turning for sure.
<unk> to me I mean, that's obviously not not even a meaningful driver anymore.
To even spend time on it but I mean, the 2% sequential gain.
Again against the backdrop of higher rates I mean are you guys feeling like I mean are you comfortable saying that we're kind of a true trough right now and when she goes far as saying that you know any kind of you know.
Slight reduction in rates could could send us back to growth on refi.
I I would tend to agree with that John if you look at our <unk>.
<unk> open orders so we've averaged for the year. This is now through October on the open side 1012 a day.
And we did 966 in October.
It's been generally a straight line.
Right right Tony across the year and rates have moved around you know as you know are quite a bit. So it does feel like we're kind of at a floor.
And to your comment about.
If rates come down volumes go up I think that's absolutely true.
You know it might it might take a little bit of time and that you know rates got to come down a certain amount to generate that refi opportunity, but you go back to I think I said this on the last call.
You know the last time rates were 8% was 2000.
That was a very small refinance market I think 250 billion that year end.
And rates were 6% no three and it was a $2 five trillion refinance market now I'm, not saying that will happen now but.
But I do think it points to how.
That refinance market can build over time with the drop in rates and in terms of revenue refi.
As a percentage of our direct revenue is like 5% right now and that's been pretty consistent with 5% last quarter and 6% in Q1 and 6% in the fourth quarter and 7% in the third quarter of last year and so it's just flatlining at very low levels.
Yeah, that's a great point, thanks for the color guys.
Thanks, Sean.
Okay.
Thank you.
Ladies and gentlemen reminder, if you wish to ask a question. Please press star and one.
Our next question is from Bose, George with Gabe VW. Please go ahead.
Hey, guys. Good afternoon, Tony I wanted to go back to your guidance on investment income.
You noted that the 10 31 balances are likely to moderate I'm. Just wondering is that volume driven or are there other factors that cause that to moderate even if volumes.
Our flat or it looks like you know, maybe even starting to head back up.
Yes, it's really more of a forecast than anything else, but just.
Just to be conservative, especially when we're talking about trying to predict.
Investment income for the next year.
It's the expectation that as regular order counts come down on the title side, we would expect.
The 10 31 accounts to come down as well balances have really held up.
Very consistently all year long in the $4 $5 billion range, and so that hasn't changed yet but.
We're just anticipating that that that comes down.
And about 400 basis points on those balances and so as as they come down or if they come down and then you can see that the that that comes down and so I would I would expect you know maybe.
Decline in quarterly income of maybe $10 million.
As we make our way into 2024.
Okay. That's helpful. Thanks, It actually can you remind me what's the split of the 10 31 balances between residential and commercial.
Oh, that's a good question, Mike do you remember that.
My recollection, it was more residential than I thought.
I think in terms of.
In terms of numbers it was like 70% residential on the orders, but in terms of balances.
I don't remember I think we'd have to get back to you on that one but we have the number of boats, but I don't I don't have it handy, yes, I don't either it's been awhile, probably been looked at I would say this is probably more residential than you think in terms of the order flow.
Okay. Now that's helpful. Thanks, and then just one broader question.
With the recent lawsuits against the Realtors and potential.
Change in the commission structure, there, especially for the buy side agents just.
Just curious what your thoughts are about.
That could do at the landscape there changes.
Yeah Bose, it's Mike I think it's really hard to predict at this point.
Obviously that was a big ruling.
Against a couple of the companies are all going to appeal. This will probably go on for a while.
But but you know.
It could impact our buy side agents I suppose.
And.
But probably less of an impact from our view on our business, we still think that our real estate agents bring tremendous value to the transaction and we will continue to play an important role.
The trusted.
Really the trusted.
Intermediaries in local communities for people to buy and sell homes.
And I think that will remain and.
We still will.
Expect that we will be working very closely with that real estate community.
Okay, great. Thanks, a lot.
Thanks.
Thank you.
Our next question is from John Campbell.
Stephens Inc. Please go ahead.
Hey, Thanks, guys. One quick follow up here on I, just want to revisit the title escrow and other line.
Last couple of quarters, that's obviously held up a lot better than the direct premiums.
You know the the gap as you know.
Widen here of late.
But I know you've got sub servicing in there you've got warranty revenue and there and so you've got some degree of subscription revenue in their recurring revenues and then I think you're also getting title point in there as well. So maybe if you could kind of unpack some of that and maybe give us some indication on also what the impact was from final point on margins.
Yeah.
Yes, John this is Tony.
Footnote J revenue recognition footnote in the 10-Q it helps to break this out a little bit but you are right you named the the primary piece.
Pieces first of all escrow fees are in there and they tend to trend with direct title premiums, but they have held up better than direct title premiums and I think thats a combination of maybe.
<unk> coming off a little bit more in commercial has a lower percentage of escrow fees that could be part of it I think also sometimes you just have a flat escrow fee and so if you have a transaction size that down then the direct premium will.
It will come down.
The but there may be a base to that escrow fees, because I think escrow fees were only down about 12%, whereas direct premiums were down about 24%. So that's part of it and then loan care, which is loan sub servicing.
It was actually up.
And in Q3 up against last year.
The third quarter, so that was a positive home warranties in there as well it was down a little bit maybe not.
The same percentage as what we saw on the on the title side and then service link has some different businesses in there some default businesses and other than that it was fairly stable versus what we saw on the title side in terms of.
In terms of title point, yes, it is in there as well.
I don't have off the top of my head what the margins there I think I think our revenue increase in property insight.
Which includes title point revs.
Revenue was up about $5 million as compared with Q3 of last year.
But I don't have that margin my guess is somewhere in the 20% range. If I had to guess, but that could be a follow up.
Okay, that's great color I appreciate that Tony.
Yep.
Okay.
Thank you.
I have no further questions I would now hand, the conference over to Mike Nolan CEO for closing comments.
Thank you we are proud of our very strong performance in the first nine months of the year.
We remained well positioned to navigate the current tough market cycle and continue to build and expand our title business for the long term.
Likewise, <unk> profitable growth demonstrates its strong momentum with many opportunities ahead to drive asset growth deliver margin expansion and generate accretive returns.
Thanks for your time. This morning, we appreciate your interest in <unk> and look forward to updating you on our fourth quarter earnings call.
Thank you the conference all Fidelity National Financial Inc. Has now concluded. Thank you for your participation you may now by your lines.
Oh.
Okay.
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Okay.
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