Fidelity National Financial, Inc. (NYSE:FNF) Q1 2024 Earnings Call Transcript May 9, 2024
Fidelity National Financial, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Ladies and gentlemen, good morning and welcome to FNF First Quarter Earnings Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the call over to Lisa Foxworthy-Parker, SVP, Investor and External Relations. Please go ahead.
Lisa Foxworthy-Parker: 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&G’s CEO and Wendy Young, F&G’s 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 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 at fnf.com. It will also be available through telephone replay beginning today at 3:00 p.m. Eastern Time through May 16, 2024. And now, I’ll turn the call over to our CEO, Mike Nolan.
Mike Nolan: Thank you, Lisa and good morning. We are very pleased with our first quarter results for both the Title segment and F&G, which provides a strong start to the year. Both businesses are well positioned for the current market and for longer term growth. Our title business continues to perform well in a volatile and challenging environment. We delivered adjusted pre-tax earnings in our Title segment of $171 million and achieved an industry-leading adjusted pre-tax title margin of 10.7% for the first quarter, an increase of 70 basis points over the 10% margin in the prior year quarter. This performance is in line with our expectation that entering 2024 with historic low order volumes would pressure first quarter margins much like last year.
In the first quarter, we saw normal seasonality in purchase opened orders with sequential improvement coming off the fourth quarter. In April, purchase open orders per day were up 4% over last year, but higher mortgage rates may temper purchase volumes going forward. Refis are holding steady at roughly 1,000 per day at the current floor. Commercial volumes continue to be resilient and consistent. We generated revenue in commercial of $238 million in the first quarter, trending in line with the approximately $1 billion in annual revenue levels seen in 2023. We saw continued strength in multifamily, industrial and other segments like energy and affordable housing similar to recent years. Looking at first quarter volumes more closely, daily purchase orders opened were up 5% over the first quarter of 2023, up 25% over the fourth quarter of 2023, up 4% for the month of April versus the prior year and up 4% for the month of April versus March.
Our refinance orders opened per day were down 2% from the first quarter of 2023, up 16% over the fourth quarter of 2023, down 2% for the month of April versus the prior year and down 2% for the month of April versus March. Our total commercial orders opened were 785 per day, in line with the first quarter of 2023, up 12% over the fourth quarter of 2023, up 4% for the month of April versus the prior year and up 1% for the month of April versus March. Overall, total orders opened averaged 5,100 per day in the first quarter, with January at 4,800, February at 5,100 and March at 5,300. For the month of April, total orders opened were 5,400 per day, up 2% versus March. At this time, we remain cautious and continue to view our performance in 2023 as a proxy for 2024 with some upside if rates come down later this year.
However, market challenges from higher mortgage rates currently running in the low to mid-7% range, housing affordability and low inventory are expected to persist in the near term. Given mortgage rate volatility we could see adjusted pre-tax title margin move into the low to mid-teens range over the next couple of quarters. The timing for a potential rebound in the housing market is uncertain, and largely dependent on lower mortgage rates. In the scenario where more inventory comes into the market and rates come down, we are well positioned to capture upside to last year’s performance. Overall, higher volumes above current trough levels would help to drive stronger incremental margins and showcase the scale and efficiencies that our diversified national footprint provides much like what we saw in 2019 through 2021.
In the current environment, we remain focused on managing our business to the trend in opened orders and we’ll continue to monitor our headcount and footprint carefully. Over the long term, we remain bullish on the real estate market, and we’ll continue to develop and invest in technology, recruit top talent and make strategic acquisitions all while maintaining industry-leading margins. I also wanted to comment on some recent headlines emanating from Washington on homeownership in America and the costs associated with buying a home. While we strongly support the broader effort to make homeownership more affordable, we believe the recent comments from the FHFA and the CFPB relative to title insurance are misguided and display a misunderstanding of the vital role in value that title insurance provides consumers and the broader economy and the critical role it plays in helping to make the American dream of homeownership a reality.
The title industry not only protects consumers’ property ownership rights, but also the critical integrity of land records. In addition, we are our first line of defense in helping protect buyers and sellers from real estate and wire fraud. Title insurance also provides insures a duty to defend them in the event of a covered claim, and title insurers have state mandated reserves standing behind their policies, unlike attorney opinion letters or a GSE waiver. We welcome the opportunity to continue conversations with the FHFA and CFPB and we’ll continue to actively engage with all stakeholders in discussing the fundamental value that title insurance and settlement services deliver to America’s homebuyers and sellers, lenders and other participants in what for many is their most important real estate transaction.
Turning to our F&G business. F&G has profitably grown its assets under management before flow reinsurance to a record $58 billion at March 31. As demonstrated, F&G’s business performs well in a low rate environment and even better and higher rate environments, which provides a nice counterbalance for the title business. Their growth prospects are compelling and led to our board’s decision to invest $250 million in F&G during the first quarter, in exchange for a mandatory convertible preferred security. This will enable F&G to take advantage of the current opportunity to accelerate growth of its retained AUM. Overall, we are pleased with F&G’s performance, which continues to exceed our expectations and even more pleased that this performance is being recognized by the market as seen in F&G’s strong share price performance since its listing in December of 2022.
We believe that the growing value of F&G is beginning to be recognized in FNF’s shares as well. I would like to thank our employees for their outstanding efforts in delivering a solid start to the year, including another industry-leading performance despite the tough market. With that, let me now turn the call over to Tony to review FNF’s first quarter financial performance and provide additional highlights.
Tony Park: Thank you, Mike. Starting with our consolidated results, we generated $3.3 billion in total revenue in the first quarter. Excluding net recognized gains and losses, our total revenue was $3 billion, as compared with $2.5 billion in the first quarter of 2023. 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 off in the quarter or continue to be held in our investment portfolio. We reported first quarter net earnings of $248 million, including net recognized gains of $275 million versus a net loss of $59 million, including $5 million of net recognized gains in the first quarter of 2023.
Adjusted net earnings were $206 million or $0.76 per diluted share compared with $151 million or $0.56 per share for the first quarter of 2023. The Title segment contributed $130 million. The F&G segment contributed $95 million and the Corporate segment contributed $8 million before eliminating $27 million of dividend income from F&G in our consolidated financial statements. Turning to Q1 financial highlights specific to the Title segment. Our Title segment generated $1.6 billion in total revenue in the first quarter, excluding net recognized gains of $63 million compared with $1.5 billion in the first quarter of 2023. Direct premiums increased 3% versus the prior year. Agency premiums increased 8%, and escrow title related and other fees increased 3%.
Personnel costs increased 3% and other operating expenses decreased 4%. All in, the title business generated adjusted pre-tax title earnings of $171 million compared with $153 million for the first quarter of 2023 and a 10.7% adjusted pre-tax title margin for the quarter versus 10% in the prior year quarter. Our title and corporate investment portfolio totaled $4.6 billion at March 31. Interest and investment income in the title and corporate segments was $94 million, an increase of $2 million over the prior year quarter, primarily due to higher income from cash, short-term and fixed income investments, partially offset by lower income from our 1031 Exchange business resulting from declining balances. For the remainder of 2024, we expect quarterly interest and investment income to be stable at $95 million to $100 million, with anticipated Fed funds cuts of 50 basis points over the next 12 months.
In addition, we expect approximately $27 million per quarter in dividend income from F&G to our corporate segment. Our title claims paid of $70 million were $24 million higher than our provision of $46 million for the first quarter. The carried reserve for title claim losses is approximately $67 million or 4% above the actuary central estimate. We continue to provide for title claims at 4.5% of total title premiums. Turning to financial highlights specific to the F&G segment. F&G hosted its earnings call earlier this morning and provided a thorough update, so I will focus on the key highlights of its quarterly performance. F&G reported gross sales of $3.5 billion in the first quarter, a 6% increase from the first quarter of 2023, driven by continued strong retail sales and robust institutional market sales.
F&G’s net sales retained were $2.3 billion in the first quarter, in-line with the prior year quarter. F&G has profitably grown its retained assets under management to a record $49.8 billion at March 31. AUM before flow reinsurance was $58 billion. Adjusted net earnings for the F&G segment were $95 million in the first quarter. This includes alternative investment returns below our long-term expectations by $44 million or $0.16 per share and significant income items of $5 million or $0.02 per share. To bring it all together, FNF’s consolidated adjusted net earnings, excluding significant items in the F&G segment, were $245 million or $0.90 per diluted share in the first quarter. From a capital and liquidity perspective, we are maintaining a strong balance sheet at the trough of the cycle and remain focused on ensuring a balanced capital allocation strategy as we navigate the current environment.
We held $618 million in cash and short-term liquid investments at the holding company level at March 31st. As a reminder, this amount reflects the $250 million investment made in F&G in January 2024, given the many opportunities to grow their business. Our annual interest expense on $3.9 billion of consolidated debt outstanding is approximately $200 million, comprised of $80 million for FNF’s holding company debt and $120 million for F&G segment debt. Our consolidated debt-to-capitalization ratio, excluding AOCI, remains in-line with our long-term target range of 20% to 30%. We view our current annual common dividend of approximately $525 million as sustainable. During the first quarter, we paid common dividends of $0.48 per share for a total of $130 million.
We continue to invest in the business for long-term growth and typically see opportunistic spend on strategic title acquisitions averaged $200 million to $300 million per year. In terms of share repurchases, we paused our activity during 2023 due to the uncertainty in one of the weakest years in industry history. As we are still in a tough market, there were no share repurchases in the first quarter. This concludes our prepared remarks, and let me now turn the call back to our operator for questions.
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