Earnings Call Transcript - FNF Q1 2024

Operator, Operator

Ladies and gentlemen, good morning, and welcome to FNF First Quarter Earnings Call. As a reminder, this conference call is being recorded.

Lisa Foxworthy-Parker, SVP, Investor and External Relations

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 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 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, CEO

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 pretax earnings in our Title segment of $171 million and achieved an industry-leading adjusted pretax 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 pretax 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 is 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 insurance and 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 in 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.

Anthony Park, CFO

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 of 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 pretax title earnings of $171 million compared with $153 million for the first quarter of 2023 and a 10.7% adjusted pretax 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 31. 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.

Operator, Operator

Our first question is from the line of Soham Bhonsle with BTIG Pactual.

Soham Bhonsle, Analyst

First one, maybe just on the comment, Mike, on the low to mid-teens margin over the next few quarters. Can you maybe just elaborate a little bit more there? Should we think of that as more similar to last year or something better? Because you just put a higher margin on orders that were down, looks like 1% year-over-year, and your orders are trending up so far in April. So just wondering if this is just some conservatism? Or are there costs that are coming down the pipe that maybe we're not seeing?

Mike Nolan, CEO

Yes, sure. I mean, as you know, we don't give guidance, but we'd expect margins to be good relative to the environment. And I think part of the commentary reflects the fact that at these lower levels, these lower revenue and volume levels, it doesn't take a lot to move margins around in a particular quarter. And when you think about the various segments, refi is relatively flat. So you don't see much volatility there one way or the other. And so margins will be kind of dependent on how commercial finishes out in a particular quarter. Given the lumpiness of that business, that can kind of move your margins around. And then secondarily, if there's continued rate volatility on just mortgage rates overall in either direction. So it could be up or down, it could affect the purchase revenues. So I think that's where the comments are grounded in. I would just add that if we have more revenue and we see improvements there, we're well positioned to drive stronger margins.

Soham Bhonsle, Analyst

Got it. Okay. And then it looks like F&G's contribution this quarter to EPS exceeded at least what title generated on a core basis. I mean this is the first time, and this kind of places your whole thesis, right, of being able to offset title earnings in a tough environment. So I guess, does this sort of performance maybe embolden you and the management team to just stay the course on F&G? Or are there other factors that we should think about when it comes to sort of owning the asset longer term?

Anthony Park, CFO

Yes, that's a valid question. We've been indicating for some time that the board intends to maintain its current strategy for now. While we cannot foresee the future or predict potential opportunities, we have taken advantage of various business situations in the past. However, I can say that the board is very satisfied with F&G's performance. You are correct that last quarter, F&G accounted for about 30% of A&E, and now it's nearing half, which supports the board's original view. When interest rates rise, F&G tends to excel, although the title business faces its challenges. We believe there is value being created here, and it has been acknowledged. I won't speculate on the board's final decisions regarding the investment, but I can confirm they are pleased with the results so far.

Soham Bhonsle, Analyst

Got it. And Tony, if I could just squeeze one more in. The corporate segment looks like it produced a profit this quarter. I'm guessing it's the $27 million related to the dividend. But should we expect that going forward? Does that segment turn into a profit going forward? How should we think about that?

Anthony Park, CFO

Yes. Thanks for that observation. We did add a new column, if you will, in our earnings release, and really, the point here was to highlight that F&G is paying now $27 million per quarter in investment income to our corporate segment. And so we didn't want that to get lost by netting those two together. In reality, our consolidated financials have to net those together. But when you want to isolate our segments, I think it's important to see that corporate is receiving that $27 million. So that's why, yes, you see a profit and adjusted profit of adjusted net earnings of $8 million in the corporate segment, but then you do have that elimination of $27 million. So I think that's the way we'd like to show that in the future, just to highlight that point.

Operator, Operator

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

Bose George, Analyst

Actually I wanted to go back to the margin discussion. So you noted that your volumes are up in April. But when you compare it to the cadence that you guys saw last year, is it more muted than what you saw last year? And so when you think about the margin in 2Q versus 1Q, could we see a similar improvement, or could it be a little more muted than last year?

Mike Nolan, CEO

Yes. Good question, Bose. It's Mike. The sequential improvement in the first quarter over the fourth quarter this year was actually a little bit better than prior years. It was 25% up against probably an average of about 20% over the last handful of years. So that was actually very encouraging. And then April is up 4% over March of this year, it was a little less than last year. I think we were about 6%. So not really much difference. And we were pleased with that given that rates were moving back up in April. We just don't know, Bose, the impact on May and June. If rates stay elevated, it may put more pressure as we see, opens move through the last couple of months of the quarter. So that's part of the wild card. And it's just hard to predict the rates. I mean, they move back down, I think, around 6.8% in the fourth quarter or somewhere in there, and they jump up in April, hitting as high as 7.5%. I think they're back down to 7.2% if you're tracking the daily rates. And it's just more volatile than we've typically had in prior periods. So that's part of what's the color of the comment, I think.

Bose George, Analyst

Okay, that makes sense. Just to follow up on the corporate question, the corporate segment is increasing, but where is the offset? Is it coming from the F&G segment?

Anthony Park, CFO

Yes. F&G is distributing dividends on both its common shares and preferred shares. This amounts to a $22 million dividend for common shares and an additional $5 million for preferred shares. These dividends are drawn from the equity section of F&G, meaning they do not count as an expense for the company. However, they do represent actual cash for FNF corporate, allowing us to record them as income. We then eliminate this amount since we cannot reflect earnings from a subsidiary in our financials. This process explains the offset. Last quarter, excluding the preferred dividend, we did not have any, but we did record the common dividend in the previous quarter, which was combined.

Operator, Operator

Our next question comes from the line of John Campbell with Stephens Inc.

John Campbell, Analyst

It appears that you have increased your staff with more titles during the quarter, marking the first sequential rise since possibly the third quarter of 2021. Recognizing that this is typically a seasonally lower period, I'm interested in your thoughts on staffing levels as you progress through the year. Additionally, could you address how much additional capacity you believe you have developed over the past year? Referring back to your margin comments, it seems you are not indicating a significant increase from last year, but given the growth in orders and potentially some added capacity, it seems there is room for improvement. I'd appreciate any insights you could share on this.

Mike Nolan, CEO

Yes. First, regarding staffing, the increase was quite modest and primarily due to additional hours from existing staff, which is typical as we enter a new year following a weak fourth quarter. We are still focused on headcount and are also recruiting, with some additions in the acquisition area. Therefore, I believe we are well positioned with our staffing for the current environment. As for the margin question, if we experience an increase in revenue, especially with purchases, we will achieve better margins. We are well prepared for that, but it ultimately depends on the volatility of mortgage rates and how quickly it can affect us in either direction. Throughout the remainder of the year, we will continue to manage staffing as we always have. The strong margin performance in the first quarter is partly due to starting the year in a favorable expense position and capitalizing on that during the first quarter.

John Campbell, Analyst

Okay. That makes a lot of sense. Regarding the capital allocation framework, it seems like you've paused the buybacks following record years in 2021 and 2022. Tony, I might be interpreting your comments too much, but it appears we should consider that the buyback activity may align with the recovery of the U.S. housing market. Is that a reasonable assumption?

Anthony Park, CFO

Yes, I think it probably is. We paused in the first quarter of 2023. From my perspective, I'm looking for some positive cash flow. We have positive cash flow, but a significant portion goes toward a $525 million dividend commitment and several acquisitions ranging from $200 million to $300 million. So, I’m looking for something beyond $800 million to support that, keeping in mind we have a cushion of $600 million on the balance sheet. We generated positive operating cash flow in Q1 of about $80 million in the title and corporate segments, which is not unusual as the first quarter tends to be the most challenging. However, if we see an increase in cash flow this year compared to last, I could see us reconsidering that. Still, it largely depends on how we perceive the trends, and I believe we all expect things to improve. The timing, however, remains the tricky part.

John Campbell, Analyst

Okay. That makes sense. And if I could squeeze in maybe one more here. Mike, I agree with you. I mean the market feels like it is wanting to bounce back. Obviously, a lot that hinges on rates. And so just kind of related to that, you guys gave the April numbers. So maybe if you could talk to maybe the progression week-to-week throughout the quarter if you saw much of an influence from rate movements. And then I don't know if you've got the orders for the trends for the first week of May, but maybe talk to how the market kind of turned into May?

Mike Nolan, CEO

I don't have any updates for May, but regarding your comment about the refinance business in the first quarter, we saw an increase of 16% compared to the fourth quarter as rates decreased. Refis responded to those lower rates, although they remained at low levels. In April, rates increased again, which led to a slight decrease in refinancing compared to the previous period. However, I was pleased to see that despite rates rising in April, reaching 7.5% at one point, our purchase open orders were still up 4% sequentially. What’s uncertain is how this will evolve in May and June depending on whether rates remain high or decrease. A drop in rates could lead to a more favorable outcome.

Operator, Operator

Our next question is from the line of Maxwell Fritscher with Truist Securities.

Maxwell Fritscher, Analyst

Calling in for Mark Hughes. In relation to the last question, I wanted to know if any internal models are indicating the best equilibrium for the title business, net investment income, and F&G concerning rates, which would lead to optimal earnings.

Anthony Park, CFO

Wow, yes, I don't know that we have a model for that. We've always said, and just speaking specific to title before I even try to touch on. I'll let Chris and Wendy handle the FG side. But on title, we've always said more volume trumps investment income. And so if we can get to a rate environment where we get over a million existing home sales or whatever the number is and get into that normalized market, I think we'll take that any day over maybe even a couple of hundred million dollars of additional investment income. Having said that, certainly, it's a bit of a hedge, and we're enjoying $100 million a quarter in interest and investment income from the portfolio, but lower rates and more volume are certainly better.

Mike Nolan, CEO

Yes. I would point out that if we reflect on the years 2019, 2020, and 2021, we didn't see much investment income because interest rates were low, but the title business thrived. We achieved impressive margins and profitability during those years, reaching an all-time high of nearly 22% in 2021 with very little investment income. I believe this addresses your question, and Chris can verify this as well. F&G's business performs strongly regardless of the interest rate environment. While the interest rates on their floating assets are present, they play a minor role in the overall picture. Ultimately, we prefer lower rates.

Christopher Blunt, CEO of F&G

Yes, Mike, that's right. I mean one of the charts we're most proud of is you see the pretty consistent spreads from when the 10-year treasury was up 39 basis points up to where it sits now because again, once we get premiums in, we're getting those invested in the ground ASAP, and we're locking in that net spread. So spread matters to us, credit environment matters to us, but we're largely indifferent. Now in a rising rate environment, it's easier to eke out more spread. There's a little more demand for the product. But yes, I think folks are going to be surprised that as rates fall, our earnings should hold up quite well.

Operator, Operator

Ladies and gentlemen, this will conclude our question-and-answer session. I will now turn the conference back over to CEO, Mike Nolan for his closing remarks. Mike?

Mike Nolan, CEO

Thank you. We are pleased with our solid start to the year. We remain well positioned to navigate the market cycle and are continuing to build and expand our title business for the long term. Likewise, F&G's opportunities are compelling with many prospects ahead to drive asset growth, deliver margin expansion and generate accretive returns. Thanks for your time this morning. We appreciate your interest in FNF and look forward to updating you on our second quarter earnings call.

Operator, Operator

Thank you. The conference of FNF has now concluded. Thank you for your participation. You may now disconnect your lines.