Q3 2024 Fidelity National Financial Inc Earnings Call
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Speaker Change: Good morning and welcome to FNF's third quarter earnings call. During today's presentation all parties will be in a listen-only mode. Following the presentation the conference will be open for questions with instructions to follow at that time.
Speaker Change: I would now like to turn the call over to Lisa Foxworthy Parker, SVP, Investor and External Relations. Please go ahead.
Speaker Change: 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.
Speaker Change: Chris Blunt, F&G CEO, and Wendy Young, F&G CFO, will join us for the Q&A portion of today's call.
Speaker Change: 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.
Speaker Change: Please refer to our most recent quarterly and annual reports and other SEC filings for details on important factors that could cause actual results to differ materially from those expressed or implied.
Speaker Change: This morning's discussion also includes non-GAAP financial measures that we believe may be meaningful to investors. Non-GAAP measures have been reconciled to GAAP where required in accordance with SEC rules within our earnings materials available on our website at FNF.com.
Speaker Change: Today's call is being recorded and a webcast replay will be available on our website. And now, I'll turn the call over to our CEO, Mike Nolan.
Mike Nolan: Thank you, Lisa, and good morning. We are pleased to report another strong set of results for the third quarter.
Speaker Change: I'd like to start by thanking our employees as we work together through this challenging real estate cycle while continuing to deliver industry-leading performance.
Speaker Change: I would also like to acknowledge the incredible response to the two major hurricanes that made landfall in recent weeks, impacting several southeastern states.
Speaker Change: I am grateful for the unwavering dedication and resilience demonstrated by our people and first responders throughout these storms and want to extend our heartfelt thoughts to all those who have been affected by these natural disasters.
Now, turning to our third quarter results.
Speaker Change: Our title business continues to successfully navigate the low transactional environment, having delivered adjusted pre-tax earnings of $323 million and an industry-leading adjusted pre-tax title margin of 15.9%.
as compared to 16.2% in the third quarter of 2023.
These are outstanding results given the environment.
Speaker Change: For the third quarter, we continue to see normal seasonality, with daily purchased opened orders showing an 8% sequential decline from the second quarter.
Speaker Change: Within the quarter's results, however, we saw daily purchase orders opened in September higher than August.
Speaker Change: This is atypical and due to decline in rates, and we believe is indicative of the pent-up demand for housing.
Speaker Change: and the first time I've seen this video, I've seen it.
Speaker Change: Refinance volumes have been responsive as 30-year mortgage rates decreased by over 75 basis points during the third quarter.
Speaker Change: This generated an average increase in refinance orders opened to $1,400 per day in the third quarter, with July at $1,100, August at $1,400, and September at $1,800.
Speaker Change: With the increase in mortgage rates in October, we saw refinance orders opened dip back down to $1,500 per day, reflecting how refinance volumes can change with moves in rates.
Speaker Change: Commercial volumes continue to be steady and resilient. We generated direct commercial revenue of 801 million dollars in the first nine months.
trending in line with the 1 billion.
Speaker Change: annual revenue level that we delivered in 2015 through 2020 and in 2023.
Asset classes have remained very consistent as well.
Speaker Change: Looking ahead to 2025, we see the potential for higher commercial volumes as the office sector begins to transact and expect continued strength in the industrial, multifamily, and energy sectors, among others.
Speaker Change: Looking at third quarter volumes more closely, daily purchase orders opened were up 1% over the third quarter of 2023, down 8% from the second quarter of 2024, and up 5% for the month of October versus the prior year.
Speaker Change: Our refinance orders open per day were up 46% over the third quarter of 2023, up 35% over the second quarter of 2024, and up 51% for the month of October versus the prior year.
Speaker Change: Our total commercial orders opened were 794 per day, up 2% over the third quarter of 2023, down 1% from the second quarter of 2024, and up 8% for the month of October versus the prior year.
Speaker Change: Overall, total orders opened averaged 5,500 per day in the third quarter with July at 5,200, August at 5,300, and September at 6,000.
Speaker Change: For the month of October, total orders opened were 5,200 per day, down 13% versus September.
Speaker Change: Notably, our adjusted pretext title margin of 14.5% for the first nine months of 2024 is in line with the 14.3% margin for the first nine months of 2023.
Speaker Change: As a reminder, for the full year 2023, our pre-tax title margin was 13.7%, which was an outstanding result in light of the persistent housing market downturn.
Speaker Change: We would expect the normal seasonal purchase fall off for the remainder of 2024 if mortgage rates remain at current levels.
Speaker Change: If mortgage rates move lower next year, we are poised to capture the upside from higher transactional volumes given the scale and efficiencies of our diversified national footprint.
Speaker Change: <unk> Pro now powers all of our direct residential operations and is integrated into our proprietary in here experienced platform.
Speaker Change: In here continues to be a vital expanding resource for our customers.
Speaker Change: We had over 1 million real estate professionals and consumers use in here in 2023, and we are well ahead of that level. So far this year.
Speaker Change: On the AI front, our high quality curated data and single platform have allowed us to standardize automate and use machine learning AI tools and many aspects of our business over the last 15 years.
Speaker Change: In turn this has reduced the cost and timelines of the title search and exam process, while preserving the coverage and value of our insurance product.
Speaker Change: Looking ahead, we are investing in further innovation with generative AI tools exploring their potential to enhance various aspects of our business, including the title and settlement processes.
Speaker Change: Turning now to our F&B business F and G as profitably grown assets under management before flow reinsurance to a record $62 $9 billion at the end of the third quarter.
Speaker Change: <unk> is well positioned for continued growth through its diversified new business platform and benefits from expanding profitability as its enforce book continues to scale.
Speaker Change: <unk> is also executing on its accretive flow reinsurance and owned distribution strategies, which are contributing to margin expansion and improved returns Tony will provide additional details in a few moments.
Speaker Change: <unk> benefits from its majority ownership of LNG through its share of <unk> durable and growing earnings cash dividend streams and recognition of the value of <unk> market capitalization.
Speaker Change: Which has increased from $2 $9 billion at the time of the partial spin off in December of 2022 to $5 $6 billion at September 30th on a standalone basis.
Speaker Change: With that let me now turn the call over to Tony to review <unk> third quarter financial performance and provide additional highlights.
Tony Park: Thank you Mike Star.
Tony Park: Starting with our consolidated results, we generated $3 $6 billion in total revenue in the third quarter, excluding net recognized gains and losses. Our total revenue was $3 3 billion.
Tony Park: As compared with $3 1 billion in the third quarter of 2023.
Tony Park: We reported third quarter net earnings of $266 million, including net recognized gains of $269 million.
Speaker Change: Versus $426 million, including $356 million of net recognized losses in the third quarter of 2023.
Speaker Change: 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 or continue to be held in our investment portfolio.
Speaker Change: Adjusted net earnings were $356 million or $1 30 per diluted share compared with $333 million or $1 23 per share for the third quarter of 2023.
Speaker Change: The title segment contributed $244 million.
Speaker Change: The F&B segment contributed $135 million in the corporate segment contributed $3 million before eliminating $26 million of dividend income from <unk> and the consolidated financial statements.
Speaker Change: Turning to the third quarter financial highlights specific to the title segment.
Speaker Change: Our title segment generated $2 billion in total revenue in the third quarter, excluding net recognized gains of $63 million.
Speaker Change: Compared with $1 9 billion in the third quarter of 2023.
Speaker Change: Direct premiums increased 9% versus the prior year agency premiums increased 8% and.
Speaker Change: And escrow title related and other fees increased 1%.
Speaker Change: Personnel cost increased 5% and other operating expenses increased 5%.
Speaker Change: All in the title business generated adjusted pretax title earnings of $323 million.
Speaker Change: Compared with $311 million for the third quarter of 2023.
Speaker Change: And a 15, 9% adjusted pretax title margin for the quarter versus 16, 2% in the prior year quarter.
Speaker Change: Our title in corporate investment portfolio totaled $5 billion at September 30 <unk>.
Speaker Change: Trust and investment income in the title and corporate segments was $103 million a modest decline from the prior year quarter and excluding income from <unk> dividends to the holding company.
Speaker Change: Looking ahead, we expect quarterly interest and investment income to trend down from the $103 million in Q3.
Speaker Change: To around $95 million in Q4 and to $85 million in Q3 of 2025, assuming anticipated fed funds rate cuts of 100 basis points over the next nine months.
Speaker Change: As a rule of thumb and all else being equal every 25 basis point decrease in fed funds is expected to result in an approximate $15 million annualized decline in interest and investment income.
Speaker Change: In addition, we expect over $100 million of annual dividend income from LNG to the corporate segment. This cash return reflects approximately 85% of <unk> common dividend given our majority ownership stake and 100% of F&B as preferred dividend on.
Speaker Change: The mandatory convertible preferred stock issued to FNF in January 2024.
Speaker Change: Our title claims paid of $64 million were $3 million higher than our provision of $61 million for the third quarter.
Speaker Change: The carried reserve for title claim losses is approximately $29 million or 2% above the actuary central estimate.
Speaker Change: We continue to provide for title claims at four 5% of total title premiums.
Speaker Change: Next turning to financial highlights specific to the F&B segment.
Speaker Change: Since apogee hosted its earnings call earlier, this morning, and provided a thorough update I'll recap a few key highlights for the quarter.
Speaker Change: F&B delivered strong gross sales of $3 9 billion in the third quarter up 39% over the prior year quarter.
Speaker Change: Retail sales were a record $3 5 billion nearly double the prior year quarter.
Speaker Change: <unk> retail sales continued to surge driven by favorable market conditions and strong demand for retirement savings products benefiting from a significant demographic trend with a long tail as consumers want to secure the relatively higher rates guaranteed tax deferred growth and principal.
Speaker Change: Protection that annuities provide.
Speaker Change: Pension risk transfer sales were over $300 million in the third quarter.
Speaker Change: <unk> net sales were $2 4 billion in the third quarter up 4% over the prior year quarter.
Speaker Change: F&B has profitably grown its AUM before flow reinsurance to a record $62 9 billion.
Speaker Change: Including retained assets under management of $52 5 billion.
Speaker Change: At the end of the third quarter.
Speaker Change: Adjusted net earnings for the F&B segment were $135 million in the third quarter.
Speaker Change: This includes alternative investment returns below our long term expectations by $35 million or <unk> 13 per share and significant income items of $16 million or <unk> <unk> per share.
Speaker Change: To bring it altogether fnf's consolidated adjusted net earnings excluding significant items in the F&B segment.
Speaker Change: Our $375 million or $1 37 per diluted share in the third quarter.
Speaker Change: The combined businesses are performing as expected.
Speaker Change: <unk> give stability to our earnings regardless of whether rates are rising or falling providing an important complement to our cyclical title business. The.
Speaker Change: The F&B segment contributed 39% of Fnf's adjusted net earnings for the first nine months of 2024.
Speaker Change: Up from 29% for the first nine months of 2023.
Speaker Change: Okay.
Speaker Change: From a capital and liquidity perspective, we are maintaining a strong balance sheet and ensuring our balanced capital allocation strategy as we navigate the current environment.
Speaker Change: We held $822 million in cash and short term liquid investments at the holding company level at September 30th this is up $126 million compared to the sequential quarter. Despite the low volumes in the title business.
Speaker Change: Our consolidated debt outstanding was $4 2 billion at September 30th.
Speaker Change: In early October F&B issued $500 million of senior notes and net proceeds have been used to fully pay down its $365 million revolver balance with the remainder to be used for general corporate purposes.
Speaker Change: Our consolidated debt to capitalization ratio, excluding OCI remains in line with our long term target range of 20% to 30% and we expect that our balance sheet will naturally delever as shareholders' equity excluding OCI growth.
Speaker Change: Our primary capital allocation priorities support our now $550 million annual dividend commitment.
Speaker Change: Modest $80 million annual interest expense at the holding company level and $200 million to $300 million average annual strategic title acquisition spend in support of the long term growth of the business.
Speaker Change: Given the continued uncertainty in the market there were no share repurchases in the third quarter.
Speaker Change: We will continue to monitor and expect to resume buybacks once both the title market picks up and we see our cash generation building above the level of our annual dividend interest expense and acquisition spend.
Speaker Change: As a reminder, buybacks are subject to board approval.
Speaker Change: This concludes our prepared remarks, and let me now turn the call back to our operator for questions.
Speaker Change: Thank you.
Speaker Change: Ladies and gentlemen, we will now be conducting a question and answer session.
Speaker Change: If you'd like to ask a question. Please press star and one on the telephone keypad.
Speaker Change: A confirmation tone will indicate your line is in the question queue.
Speaker Change: You may push down and two if you would like to move your question from the queue.
Speaker Change: For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.
Speaker Change: Ladies and gentlemen, if you would wait for the moment, while we poll for questions.
Speaker Change: The first question is from John Campbell with Stephens. Please go ahead.
Speaker Change: Hey, guys good morning.
Speaker Change: Good morning, good morning on the title pretax pre tax margin for the quarter. It looks like direct and agency kind of grew at the same rate you got investment income that was kind of flat year over year. So it doesn't seem like there was really any mix shift changes to call out there.
Speaker Change: Looks like the underlying incremental margin was about I think about 10 or 11% you guys have closely run it probably 30 to 40 in the past is there anything you'd call out as far as limiting factors.
Mike Nolan: So Jonathan it's Mike <unk>.
Speaker Change: In terms of comparing the third quarter of last year, we actually had a bit outperformance in both direct and agency.
Speaker Change: To the third quarter.
Speaker Change: We had a 30 point difference in <unk>.
Speaker Change: Margin to actual third quarter last year, that's that's about 6 million.
Speaker Change: Dollars different so.
Speaker Change: When you think about $2 billion in revenue thats not much of a difference but.
Speaker Change: We did see in some of our non title business is in the title segment slightly below <unk>.
Speaker Change: Performance in the third quarter not that the performance was was not good it was just a little bit better last year or so.
Speaker Change: <unk>.
Speaker Change: Really my takeaway is we had outperformance Bolton and national commercial.
Speaker Change: Agency.
Speaker Change: The agency comes with a lower margin so that can also.
Speaker Change: You can get more agency revenue and that's a good thing, but you could have lower margins because of the other things being equal yes. That's a that's a very good point. It's it's if you look at.
Speaker Change: The incremental margin, we talk about that 40% or whatever it is that that's that's on direct revenue in our direct operations. So actually if we if we do better on the agency side as you know because so much goes back to the agent that incremental margins on an agency business is probably somewhere in the 10%.
Speaker Change: Range.
Speaker Change: Okay got it and then it was encouraging to hear your kind of upbeat outlook for commercial.
Speaker Change: I guess.
Speaker Change: Based on the pipeline you see now and it doesn't seem like that you know the fee per file helped you a little bit in this quarter, but based on what you see now maybe some commentary on what you expect as far as Super file in commercial and <unk> and then as you think about next year.
Speaker Change: Going back to your bullish take do you think that's the commercial growth was more likely to be driven by orders or our overall fee per file.
Mike Nolan: Yeah, It's a great question, Jonathan It's Mike again.
Speaker Change: We are encouraged by commercial for a number of reasons why don't we just continued to see strength in various asset classes and are generating.
Speaker Change: Somewhere around 1 billion to $1 billion, one annual commercial direct revenues really without much of an office market.
Speaker Change: So as that market begins to transact and we think it will.
Speaker Change: A matter of when we see that as a net positive when we look at our orders through September are our open orders are up about 4%, but our national orders are up 10%.
Speaker Change: Through September and in October our National orders were up 16% over last October So we're seeing this real strength in the.
Speaker Change: And the bigger the bigger deals right and when you look at national fee per file was in excess of.
Speaker Change: It was 14 five in the third quarter.
Speaker Change: And local was around nine so.
Speaker Change: I think that bodes well for not only the fourth quarter, but really into next year that we've got a nice inventory of these bigger transactions and still have local kind of kind of flattish to last year.
Speaker Change: Makes sense thanks, guys.
Speaker Change: Thanks.
Speaker Change: Thank you.
Speaker Change: The next question is from Mark Hughes with <unk> Securities. Please go ahead.
Speaker Change: Yeah. Thank you good morning.
Speaker Change: October commercial number you gave.
Speaker Change:
Speaker Change: About 8% year over year, when you were describing the.
Speaker Change: Progression on a monthly basis. It seemed like it was a little down from September kind of steady with earlier in the quarter.
Speaker Change: October kind of an easy comp.
Speaker Change: Year over year or is that.
Speaker Change: <unk>.
Speaker Change: To start out for acute you think that'll be sustained.
Speaker Change: Current trends hold.
Speaker Change: Yes last October.
Speaker Change: We opened.
Speaker Change: 731, a day and that was down from September at 786.
Speaker Change: And so.
Speaker Change: I don't know if you call it an easy comp for that but we typically see mark as I think you know I will fall off in open orders in the fourth quarter in commercial and then we see more closings you know the closing rate gets a little bit higher.
Speaker Change: This October.
Speaker Change: Didn't fall off as much as last year.
Speaker Change: So I think Thats, a net positive I think it shows strength and the open order activity in commercial and again pointing out that the.
Speaker Change: The national commercial orders were up more significantly in October and I think that helps helped.
Speaker Change: <unk> job.
Speaker Change: Create that that 8% overall increase as well.
Speaker Change: Yes.
Speaker Change: When we think about the I think you gave a number.
Speaker Change: $1 37.
Speaker Change: Overall earnings ex the other items I think you called out maybe six perhaps.
Speaker Change: Did I hear that properly and then.
Speaker Change: I think you said in F&B, they were 13% below expectation on some of the old portfolio again.
Speaker Change: If that had been in line would you add the 13th.
Speaker Change: But 37 is that the right progression there.
Speaker Change: Yes, youre right about the $1 37 that that adjust basically for.
Speaker Change: The all that.
Speaker Change: At <unk> that were a little sure.
Speaker Change: The long term expectation and then the other significant items in.
Speaker Change: Hi.
Speaker Change: The various things that go into that bucket, although it wasn't a very big number those go the other direction. So when you when you add back the Alt underperformance slight underperformance and then reverse out the other that's where you get to the $1 37, if that makes sense.
Speaker Change: Okay.
Speaker Change: I do see that.
Speaker Change: And then on the F&B, just sort of curious I missed the earlier call.
Speaker Change: Outlook for sales and spreads just kind of a quick thoughts in the in that business would be helpful.
Speaker Change: Sure. This is Chris Yeah, new sales continue to be quite robust.
Speaker Change: Some of that is this great refinancing that we've talked about before if people exchanging policies written when rates were 2% to two new policies today, and we've been getting more than our fair share of that which has been good. Some of it is just the long term demographics that.
Speaker Change: That are taking place and so yes, we're still quite optimistic in terms of sales growth. So we don't see anything slowing us down there and spreads have held up nicely and we've got expansion coming from flow reinsurance owned distribution activity is kicking in so.
Speaker Change: The trend lines are quite good.
Speaker Change: Thank you for that.
Speaker Change: Thank you.
Speaker Change: The next question comes from Mark Devries with Deutsche Bank. Please go ahead.
Speaker Change: Yeah. Thanks, just to follow up on on the commercial.
Speaker Change: Mike I think you alluded to at least some optimism that that office and starting to transact or you're actually seeing that in the pipeline or is it just.
Speaker Change: Either in terms of transactions already or activity picking up or is that built more on just kind of an expectation that things are loosening up and should accelerate in 2025.
Mark Devries: It's based on a couple of things Mark.
Mark Devries: We're seeing some transactions, but I would say not a trend more on the margins. So we've seen evidence.
Mark Devries: That we're starting to see some transactions.
Mark Devries: And then based on what we're hearing from our our commercial leadership team, who are talking to customers and clients that there is an expectation.
Mark Devries: That that there could be more activity.
Mark Devries: As we go into 'twenty five.
Speaker Change: Okay got it and then a question for Chris.
Speaker Change: In the press release, you alluded to some strengths in the PRT pipeline and kind of some early ones in Q4.
Mark Devries: Maybe it's actually a question for Tony but could you just discuss the current capital load up she said enough to support the opportunities you're seeing or could there be.
Mark Devries: Need opportunity for another capital infusion from Fms.
Speaker Change: Yes no.
Speaker Change: We're pretty comfortable managing the sales growth that we have without requiring an equity infusion from FNF is the short answer.
Speaker Change: We did do about $800 million of PRT transactions in October so through 10 months of this year, we're over $2 billion.
Mark Devries: Now PRT sales, but we.
Mark Devries: We run the business with the intention of being capital self sufficient.
Speaker Change: Okay got it.
Speaker Change: And just one more quick one any impact on Q4 closings from the Hurricanes.
Speaker Change: Uh huh.
Mike Mark: There'd be some mark it's Mike Mark I would say well, we'll have some some impact, particularly in our Florida direct market.
Speaker Change: I don't think it'll be significant.
Speaker Change: It could be a magnitude of.
Mark Devries: Maybe a $1 million in revenue a month for a couple of for a couple of months, but I don't I don't think it's anything of significance.
Mark Devries: As we think about the quarter.
Speaker Change: Got it thank you.
Speaker Change: Thank you.
Speaker Change: Before we take the next question a reminder to all participants you May press Star one to ask a question ladies and gentlemen, you May press star one to ask a question.
Speaker Change: The next question is from the line of Bose George with <unk>. Please go ahead.
Speaker Change: Hey, guys. Good morning can you talk about it first.
Mark Devries: Right acquisition, how meaningful is that in terms of what it could do for you guys in the office market.
Speaker Change: Yeah. Good question Bose I would say it's.
Mark Devries: Another acquisition in the agency space like we've done all along and these are not these are not major acquisitions youre talking agent.
Mark Devries: Agencies that we're buying that may have.
Mark Devries: Generally $10 million to $20 million in revenue.
Mark Devries: Very well established player in the New York market very well known there and we're excited to have them.
Mark Devries: I'm joined the team and really just gave us another brand to kind of build upon and I think as.
Mark Devries: As the New York market comes back and it will it's just a matter of when.
Mark Devries: That acquisition will really pay off for us just to have another another group there that you're accessing our market share in the New York market.
Speaker Change: Okay, great. Thanks, and then actually one question just on the post election landscape.
Speaker Change: With the changes that are likely to happen.
Mark Devries: We like things like the GSE pilot.
Mark Devries: Thanks have a pilot in the CFPB efforts do you think things are likely to get put on hold.
Mark Devries: He sort of updated thoughts post selection.
Mark Devries: Yeah.
Mark Devries: It's hard to know for sure Bose, but.
Mark Devries: I think most people think with with a Republican administration.
Mark Devries: It'll be maybe a less.
Mark Devries: Less onerous regulatory environment overall, and I think that will be helpful too.
Mark Devries: Businesses.
Mark Devries: So there may be less.
Mark Devries: Impetus to push behind things like this waiver pilot, which got awfully quiet.
Mark Devries: As we went through the year anyway, probably in anticipation of the election.
Mark Devries: But we're not taking any sort of it for granted we continue to work very hard to with all stakeholders on the value of title insurance and why we think things like waiver pilots are bad ideas, but.
Mark Devries: It's probably a little bit better environment overall.
Mark Devries: On that kind of upfront.
Mark Devries: This new administration.
Mark Devries: Okay, great. Thanks.
Mark Devries: Thank you.
Mark Devries: Yeah.
Mark Devries: Ladies and gentlemen.
Mark Devries: That was the sorry.
Speaker Change: And this will conclude our question and answer session I will now turn the conference back over to CEO, Mike Nolan for closing remarks.
Mark Devries: Thank you we are very pleased with our overall performance. The title segment is outperforming in the current market poised for a rebound in transactional levels and we are continuing to build and expand the business for the long term.
Mark Devries: Likewise F&B has many opportunities ahead to drive asset growth deliver margin expansion and generate accretive returns.
Mark Devries: As you can see both businesses are executing well in the current market and position for longer term growth.
Speaker Change: Thank you for the time. This morning, we appreciate your interest in <unk> and look forward to updating you on our fourth quarter earnings call.
Speaker Change: Thank you for attending today's presentation and conference call has concluded you may now disconnect.
Mark Devries: Hugh.