Fidelity National Financial, Inc. Q4 FY2020 Earnings Call

Good morning, ladies and gentlemen, and welcome to the FNF 2020 Fourth 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 call is being recorded. I would now like to turn the call over to Jamie Lillis, Investor Relations for FNF. Please go ahead, sir.

Thank you, operator. And good morning, everyone. Thank you for joining our fourth quarter 2020 earnings conference call. Joining me today is our CEO, Randy Quirk; President, Mike Nolan; CFO, Tony Park; and F&G's CEO, Chris Blunt.

Thank you, Jamie. I would like to begin by thanking our entire team for their incredible efforts as we navigated through a challenging environment this past year, while delivering record results for both the fourth quarter and the full year 2020 in our title business. Our primary focus has been and continues to be the health and well-being of our employees, while maintaining our business continuity and ensuring the needs of our customers are consistently met. For the fourth quarter, we generated record adjusted pretax title earnings of $624 million compared with $355 million in the year-ago quarter and a record 22.7% adjusted pretax title margin compared with 16.3% in the fourth quarter of 2019.

Thank you, Randy. As Randy mentioned, the fourth quarter was a record for adjusted pretax title earnings and adjusted pretax title margin, as we continue to benefit from low interest rates driving sustained momentum in refinance volumes, strong purchase demand and the continued rebound in commercial real estate activity. For the fourth quarter, we generated adjusted pretax title earnings of $624 million, a 76% increase over the fourth quarter of 2019. Our adjusted pretax title margin was 22.7%, a 640 basis point increase over the prior year quarter. We had a 40% increase in direct orders closed, driven by an 86% increase in daily refinance orders closed, an 18% increase in daily purchase orders closed and a 1% increase in total commercial orders closed.

Great. Thanks, Mike. The fourth quarter capped off another record year of growth at F&G. Building on the momentum we saw in the third quarter, we achieved record sales of fixed indexed annuities, or FIAs, in the fourth quarter, while maintaining our pricing discipline. Total retail annuity sales of $1.3 billion in the fourth quarter were up 42% from the prior year, and core FIA sales were $947 million, up 19% from the prior year. We continue to see significant growth ahead of us as we take further market share in our primary independent agent channel and gain traction in new channels. As we previously shared, following the FNF acquisition, we successfully launched into the financial institutions channel in July. Since then, we've generated over $500 million in new annuity sales in the channel to date, including $322 million in the fourth quarter alone. These phenomenal sales results have surpassed our original expectations, and we continue to receive very positive feedback from our new partners on our quality of service as well. With these solid sales results, we grew average assets under management, or AAUM, to $28 billion, driven by approximately $900 million of net new business flows in the fourth quarter. Now despite the decline in interest rates this year, our spread results have remained in line with historical trends, demonstrating our continued pricing discipline and active management. Total product net investment spread was 255 basis points in the fourth quarter, and FIA net investment spread was 302 basis points. Adjusted net earnings for the fourth quarter were $128 million. Strong earnings were driven by steady spread results and a favorable tax benefit recognized following the FNF acquisition. Net favorable items in the period were $68 million, primarily due to this tax benefit. Adjusted net earnings, excluding notable items, were $60 million, down from $64 million in the third quarter due to $4 million of higher strategic spending due to our faster-than-expected launch into new channels.

Thank you, Chris. We generated approximately $3.8 billion in total revenue in the fourth quarter, with the title segment producing approximately $3 billion, F&G producing $667 million, and the corporate segment generating $60 million. Fourth quarter net earnings were $801 million, which includes net recognized gains of $573 million versus net recognized gains of $131 million in the fourth quarter of 2019. The net recognized gains 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 continued to be held in our investment portfolio. Excluding net recognized gains, our total revenue was $3.2 billion as compared with $2.2 billion in the fourth quarter of 2019.

Thank you. Our first question comes from the line of Jack Micenko with SIG. Please proceed with your question.

Good morning, everybody or good afternoon, actually, my apologies. The question of the day, looking at the market, looking at the 10-year yield, the refinance numbers seem to be much more resilient than people are thinking, looking at the January and February data you provided us. I mean, January was sort of a tough comparison a year ago because rates kind of moved higher, but the February number is up 40%. Can you just touch on how you feel about the resilience of refinancing? Are the lenders finally getting to the backlog? Because it seems like there's just a lot more there than the move-in rates would suggest, just from your observations on the open order side?

Sure, Jack, it's Mike. You're right, the year is starting out at very elevated levels. We're opening in January over 8,000 refinances a day, which are higher than pretty much any month we had last year. Having said that, as rates move up, refinances will be impacted, but it really depends on how much they move up. If you look at data, for example, that comes out of Black Knight, they measure this pretty carefully. In their December report, they had estimated the size of the refinance market, the potential size at interest rates just below 2.9%, was close to 17 million eligible people. With a 50 basis point movement up, I’m not saying that will happen, but if it did, they say that drops down to just under 10 million. So there's a pretty good fall-off, but still a lot of people that can refinance. I think our view is that refinances will still be strong in 2021, maybe not as strong as in 2020, but certainly stronger than we've probably had in quite a number of years. So hopefully, that addresses your question.

Yeah, no, it does and it's hard to ultimately say, but just - it seems to hang in there much stronger than anybody had thought even a year ago. The closed order side, you definitely seem to be taking some market share. I'm curious if you can - what do you think some of the drivers there are? If you can parse it out between centralized refinancing versus purchase? Where do you think you're gaining more share and why?

I think it's a little tough to nail that down because we don't get market share numbers specific to segments. The real market share numbers tend to be more at the national level on premium dollars. So I think it’s a little tough to answer. However, ServiceLink has certainly seen a lot of growth in their centralized refinance channel. We've seen a lot of it in our finance business on the agency side that works with title agents on refinancing. But I can't really say how it relates to the overall market.

Yeah. And Mike, this is Randy. I might just add also we have a very large, very distributed network. We also have the benefit in some of the major metropolitan areas, particularly in the West, of our multiple brands. With our sales teams, we have one, two, three, four, and in some cases, five bites at the apple in given markets. We are pretty aggressive in that regard. So I think that somewhat plays into market share gain, along with our strategy when we see an opportunity for acquisitions, particularly agent acquisitions. Year in and year out, we have agency operations and acquire agency operations into our direct side, which accounts for gradual but continual market share growth.

Yes, got it. Okay. And then if I could sneak one more and not to let Chris off the hook with an answerable question also. How do we think about revenue contribution in 2021? I mean, obviously, the bank channel is new and growing. But you also mentioned some share gains in independent. And you hadn't really considered that a real growth driver going forward. Any sense you can give us in terms of modeling around how big the F&G contribution could be in 2021?

Yeah. To be really clear, the independent agent channel remains our largest channel, and I think it will for quite some time, and we're quite optimistic there as well. We've seen some competitors pull back for different reasons, so we continue to add market share. We had growth in that channel last year, which I think put us in a very small peer group. And then layered on top of that, we've experienced pretty explosive growth in banks and broker-dealers. The next channel of opportunity for us is the pension risk transfer business. We’re now in a position where we can bid on pension buyout cases as well. I definitely don't want to give the impression that the independent agent channel isn't an absolute core channel. Our relationships are as good as they've ever been, and we believe we can continue to take share.

Our next question comes from the line of John Campbell with Stephens. Please proceed with your question.

Hey. Guys, good morning. Congrats on a great quarter.

Thanks.

So I think it's going to be difficult, obviously, for you guys to carry a 20% title pretax margin. I don't think anybody is really forecasting that at this point, but you guys have a lot of moving parts in the business. You don't have a crystal ball, obviously, on the macro side. But any sense for how margins might fare in 2021? I guess at the macro outlook in your head at least kind of plays out. I mean, is it more like a mid-teens type margin like 2018 and 2019? Or do you think you've got enough sustainable things in place to keep it closer to high teens?

John, it's Mike. Maybe I'll take that in two chunks. First, as we think about the first quarter, we are very positive on how margins will play out. We did a 14.4 last year in the first quarter. I think we've got a good shot to outperform that just given what we're seeing currently with resale and refinance activity. We've talked about some of the numbers. If there's any wildcard—and that's probably too strong a word—you never know how commercial is going to play out quarter-to-quarter. The open orders are extremely good, but you don't always know when the transaction will close. So there's a good chance to outperform the first quarter of last year. For the full year, it's a pretty tough comparison to 19.6. I think that will come down to a couple of things. We think purchase will outperform for the full year, which seems to be a pretty consensus view at this point. Commercial has a good opportunity, I think, to do better than in 2020. The wildcard there, John, is what happens with refinancing, particularly in the back half of the year. If rates move up, there will be some impact on refinances, and that could be the thing that pushes back on margins just a little bit.

And John, maybe just - this is Tony, just chiming in for a moment. As a reminder, and I think you know this and probably all the listeners do, but we're talking about the resiliency of refinancing, but it's important to keep in mind that the fee per file on refinancing is probably a third or so of what we get on a purchase transaction. So, clearly, a fall-off in refinancing that's offset by even 1/3 offset by an increase in purchase is equal revenue dollars. I think that's important to consider as well.

Yeah, I think that makes sense. And on the F&G business, I guess, I'll just say this first: I think that those guys have done a phenomenal job since you guys picked it up and congratulated Chris and the team. For whatever reason, investors just seem to be refusing to give any credit for it. If that remains the case for you guys, how do you insert yourself to create more value? I know you guys kind of mentioned something last call, but are there things that you're exploring or something that you might look to do to kind of insert yourself there?

Yeah, this is Tony. I mentioned on the last call, and all I said, and it was a hypothetical, and some people read more into those than others. But what I said was our board has a long history of taking action when we aren't fully appreciated. At the same time, they are patient and are very pleased, or at least they're very pleased with the progress that we have at F&G, the sales growth, the momentum, and the opportunities that are there. As long as those continue to play out, we'll just see how things go. We've owned it since June 1, and so it's only been seven months to this point. They're willing to be patient and to see how this goes. Ultimately, it will either benefit us and all of our shareholders, or it won't. I think it's pretty early to tell. In the meantime, we'll continue to allocate capital, whether it's in buybacks if the stock is under pressure, or increasing our dividend, or whatever else we might do, as the title company is generating a lot of cash.

Yeah, makes sense. If I could squeeze in one more for Chris. The $60 million you called out as a favorable tax impact post-transaction, were you calling that out as a one-time event? Or is that a go-forward benefit for you guys?

Yes, maybe I'll take that. Chris, do you want it?

No. Go ahead, Tony.

Yes, John, it's basically a one-time, but it wasn't carved out of adjusted operating income as a one-timer, even though it sort of is because it's tax planning and valuation allowance adjustments. Those have typically, or historically in the life space, not been carved out of adjusted operating income. We didn't want to be inconsistent with that. The reality is there was a $37 million tax benefit related to the sale of F&G Re, which had a tax loss, even though it wasn't a GAAP loss and another roughly $40 million of benefits from an F&G restructuring, so about $77 million in total that benefited our adjusted operating earnings, and that's really a one-time deal. I would expect the tax rate in 2021 to go back to historical numbers of somewhere around 24% on a consolidated basis.

The only thing I would add to that is we did try to call out. We had some core expenses, but extraordinary as we've had an opportunity to expand our distribution faster than we thought, and that obviously has some set-up costs both in the bank, broker-dealer, as well as the setup of our PRT business, so we would consider more onetime as we go forward. If you're kind of foot to shore, it's probably that $64 million, and then we expect it to grow throughout the year as the asset base is higher as some of the pricing actions we took last year feed into the portfolio.

Okay. Makes sense. Thanks, guys.

Thanks, John.

Our next question comes from the line of Mark DeVries with Barclays. Please proceed with your question.

Yeah, thanks. Tony, the implied payout from the combination of the dividend and the repurchase authorization is not that far off from what earnings power had been a few years ago, but you guys earned almost that much this quarter and even on a more continuing operating basis, covered almost two-thirds of that. Should we think that if you are able to sustain this kind of level of robust earnings power, that there could either be upside later in the year to the repurchase authorization? Are you thinking about just accumulating dry powder? Or are you actually seeing some opportunities to deploy that, whether it's at F&G or through M&A?

Yeah, it's a good question, Mark. To your point, we generated a lot of cash in 2020. In fact, 2019 was a strong cash flow generation as well through our title company. In the fourth quarter, we upstreamed about $400 million in cash to the parent holding company. We spent about $350 million of that on the combination of our stockholder dividend of about $110 million, about $10 million in interest expense, $140 million in share buybacks, and roughly $100 million, mostly in taxes because it was a significant tax quarter. We ended the quarter pretty close to where we started at $1 billion. As we look ahead, I wouldn't be at all surprised if we generated another $1 billion or so that we could upstream to the parent. Some of that is clearly spoken for. The dividend will cost us a little over $400 million, and there's still $360 million left on the $500 million buyback we announced in the fourth quarter of last year, we bought back $140 million, so we have $360 million remaining. I fully intend to execute that and additionally $80 million in interest expense. We’ll probably gain a little bit on our cash position, but mostly spend what we make. So your question is a good one, what might we do with roughly $1 billion or $1.2 billion in dry powder, so to speak. The Board does like to look at the dividend annually and likes to increase that, I'll call it, modestly over time. From there, I wouldn't be surprised, especially if our shares are under pressure, to see us increase the buyback. We still have an authorization available to buy more shares, or the Board could always revisit that and increase that. Randy mentioned title agent acquisitions. I think those are always on the table and we'll continue to buy those. We don't announce every single deal we do. But we like to spend $100 million, $200 million, $300 million on agency acquisitions over the course of the year. The real question is what kind of growth does F&G experience organically in 2021 and beyond. How much capital is FNF and the Board willing to put in that? F&G does have some ability to borrow locally under their current rating situation. Their debt-to-cap is now 16%, but they can go to 25%. There’s certainly capacity to borrow either externally or even from FNF. FNF could certainly contribute capital to F&G if the growth prospects continue as they look, or F&G could look to third-party equity or maybe even reinsurance arrangements. I know it was a long answer, but hopefully, it addressed your question.

Yeah, it did, Tony. And then a question for Chris. Clearly, there's a view that low rates are bad for your business, although it's hard to see that, as you alluded to, your spreads have held up near historic levels. Could you just talk us through at a high level what impact you believe low rates have had on your business and what impacts you might see if rates continue their steady march higher here?

Sure. We have to differentiate between short-term and long-term rates. About 15% of our portfolio is sitting in floating rate securities. It's a little over $4 billion of assets. When LIBOR dropped, we felt that instantly. Similarly, we would feel it instantly on the upside in terms of earnings. I don't think anyone is projecting short-term rates to move up higher in the near term here, but that's clearly a tailwind for us as rates rise. I would say unless LIBOR goes negative, we've probably felt that pain, and it's much more upside than downside from here. With longer-term rates, it just takes time to move into the portfolio. Yes, to your point, it's frustrating, and I think it comes from good historical reasons. You've seen companies that are life insurers put up reserves, and have a tough time with a low-rate environment, but that's not who we are. We've shown that with a 10-year at 40 basis points, we were making our spread targets. We just need a steep yield curve; we need a yield advantage over CDs, which is generally not hard to do in most environments. We can continue to grow sales and earn a healthy spread. What you're seeing is currently, while treasuries have gone up, spreads have come in, but net-net we’re up on corporate reinvestment over time. I hope that helps.

Very good. Thank you.

You're welcome.

Our next question comes from the line of Bose George with KBW. Please proceed with your question.

Hey. Guys, good afternoon. The first one is just on F&G. Can you remind us what the good way to think about sort of the operating run rate for earnings? Is the $72 million pretax this quarter a good run rate to add the growth to that? Any changes to the tax? Or should we just use a normalized tax rate for that also going forward?

Yeah, Bose, this is Tony. Maybe I'll start. Chris can certainly chime in. We had $60 million in what I would call core earnings in the fourth quarter, which was impacted by some unusual spending on really growing or building out the broker-dealer channel and the growth prospects on the sales side. That was impacted by $4 million or $5 million. So I would expect as we look to 2021, we're starting in the mid-60s, and then we would expect that that grows each quarter as assets under management grow. As I think we've told you in the past, a general rule of thumb is somewhere around 100 basis points of after-tax earnings on total assets under management. So that gives you an indication of what we would expect to see going forward. Hopefully, that helps. On the tax rate, I think the overall tax rate guidance is probably somewhere in the 23.5% to 24% on a consolidated basis, maybe a little higher in title and lower in the F&G business.

Okay. Perfect, thanks. And then actually just switching to the commercial. The revenues there were pretty much back to 4Q '19. You noted 1Q looks good. I mean, do you think there is a little bit of catch-up in there? Or do you feel like commercial is getting fairly normalized?

Yeah, Bose, it's Mike. I don't think it's catch-up. When you look at the performance, particularly on the open side in the third and fourth quarters, it had been sustained at such a high level. We averaged over 900 orders per day on the open side in both quarters, which are really high levels. Prior to 2020, we only had one quarter that was over 900. That tells me it's not catch-up. We're seeing it sustain into 2020. I mentioned in the opener that February was running a little bit ahead of last February on the commercial open side. Last February was our best opening month ever. It feels just very sustained, and we're seeing it across multiple geographic areas.

Okay, great. Thanks very much.

Thanks.

Our next question is a follow-up from the line of John Campbell with Stephens. Please proceed with your question.

Hey. Guys, thanks for squeezing one more in here. I wanted to ask on BFT and WPF on the two stocks. We're big fans of Cannae and see a lot of value in those. I'm curious about some of the moving parts there. There's Class A, Class B shares, there are warrants and whatnot. If you could run us through exactly how many shares you're getting with those investments for each?

Yes, John, this is Tony. I don't know how many shares, although it would be easy to do the math. Our investment, I don't want to get these wrong, in Paysafe is our $500 million investment and the other one—that's public, right? Yes, I’m pretty sure it's public—but I'm not going to say the name. The other one is a $150 million commitment, and we're in at $10 per share. It’s pretty easy to do the math. I think it may even come with some warrants. In our earnings, not in our adjusted earnings because we carve it out but in our GAAP earnings in our recognized gains and losses, we have about a $175 million gain related to the first one, the Paysafe investment. Even though we don't own it yet, it's a forward purchase contract, but we had to mark that to market, and those shares are trading well ahead of our $10 buy-in. We're pleased with the expectations of that and the other one as well. Hopefully, that helps.

Yeah, absolutely. I think the WPF is the other one, the light investment. The follow-up to that is how should we be thinking about the liquidity there? I guess, the potential time horizon you guys have there. I mean, are you long-term holders? Is that something that's more of a short-term type of investment?

Yeah. I think probably to realize the true value, we're probably in it—or at least the expectation going in is that we're in it as long as the other investors are, and of course that can change. The good news is it's liquid. For us, it's swapping one investment for another. It's hard to make yield on corporate fixed income securities right now. These investments historically have been very, very good. It's just taking a $500 million investment in our insurance subsidiaries and exchanging it for an investment like this that could double or triple over time versus yield $10 million annually or something like that. The short answer is we'll wait and see, but my expectation is we would probably hold it for a while.

Okay. Makes sense. Thanks, guys.

There are no further questions in the queue. I'd like to hand the call back to management for closing remarks.

Thank you. We are extremely pleased with our record fourth quarter and full year title results, fueled by our team's ongoing efforts. Through such unprecedented times, we were able to execute our strategy and deliver superior, industry-leading performance. F&G continues to deliver strong results while maintaining a solid investment portfolio, and we are excited about the prospect of entering additional distribution channels with new products in the coming year. Lastly, we will continue to deploy a thoughtful capital allocation plan that is focused on delivering value to our shareholders. We look forward to updating you on our progress during our first-quarter call. Thank you.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time and have a wonderful day.