Fidelity National Financial, Inc. (NYSE:FNF) Q4 2023 Earnings Call Transcript
Fidelity National Financial, Inc. (NYSE:FNF) Q4 2023 Earnings Call Transcript February 22, 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: Good morning, and welcome to FNF Fourth Quarter and Full-Year 2023 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 Lisa Foxworthy-Parker, Senior Vice President, 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 CEO; and Wendy Young, F&G CFO, will join us for the Q&A portion of today's call. Today's earnings 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 PM Eastern Time through February 29, 2024. And now, I'll turn the call over to our CEO, Mike Nolan.
Mike Nolan: Thank you, Lisa, and good morning. I am proud of our results and would like to thank all our employees for their accomplishments in 2023 as we delivered another industry-leading performance in the Title Segment and record-setting performance in the F&G Segment. Before I cover the results, I'd like to address our recently reported cybersecurity incident. Given the strong execution of our recovery plan, we were able to resume normal operations quickly in the quarter. As far as the minor negative impact to our fourth quarter Title Segment results, we estimate the incident reduced adjusted pre-tax title earnings by $8 million to $10 million and lowered our adjusted pre-tax title margin by roughly 50 basis points and 12.3%, which would have been in line with the prior year quarter to 11.8% as reported.
The F&G Segment was not impacted. As challenging as this event was, it really showcased how our team pulled together. I'd especially like to thank our employees and advisers who worked tirelessly around the clock to resolving incidents and our employees in the field who work diligently with our customers to minimize the impact. FNF remains committed to protecting our client and customer information and cybersecurity remains a top priority. Now turning to the results for the Title Segment. Our Title business has continued to perform well in 2023. We delivered adjusted pre-tax earnings in our Title Segment of $964 million and achieved an industry-leading adjusted pre-tax Title margin of 13.7% for the full-year. This is an outstanding result, despite the persistent housing market downturn, as home affordability has been cited as the worst in a generation due to continued higher U.S. mortgage rates, which peaked at over 8% in October, combined with limited housing supply.
One of the key drivers to our ability to successfully navigate the tough market is our continued focus on managing expenses. For the full-year, we reduced total field operations employee count by approximately 8%. We have also consolidated some of our direct office Title locations, which has generated about $1 million per month and facilities cost savings. Commercial volumes continue to be in line with our expectations and consistent with the levels seen in years like 2015 through 2020. We generated commercial revenue of $294 million in the fourth quarter and $1.1 billion for the full-year. During 2023, we saw continued strength in multifamily, industrial and other segments like energy and affordable housing, similar to recent years. Looking at fourth quarter volumes more closely.
Daily purchase orders opened were up 1% over the fourth quarter of 2022, up 7% for the month of January versus the prior year, and up 23% for the month of January versus December. And refinance orders opened per day were down 11% from the fourth quarter of 2022, down 1% for the month of January versus the prior year, and up 15% for the month of January versus December. Our total commercial orders opened were 704 per day, down 3% from the fourth quarter of 2022, flat for the month of January versus the prior year, and up 3% for the month of January versus December. Overall, total orders opened averaged 4,100 per day in the fourth quarter, with October at 4,600, November at 3,800, and December at 4,000. For the month of January, total orders opened were 4,800 per day, up 20% versus December.
While we are pleased with our strong performance and profitability, we remain cautious as we have entered the first quarter of 2024 with historic low order volumes, which are expected to pressure industry margins much like last year. During 2023, we progressed from an adjusted pre-tax title margin of 10% in the first quarter to mid-teens in the middle of the year and tapering to 11.8% in the fourth quarter, which in aggregate produced a full-year level of 13.7%. As always, we will manage our business to the trend in opened orders to protect our profitability. We feel that we are well-positioned for the current market and poised to benefit from a potential turn in the housing market, should mortgage rates drop in 2024? Beyond the near-term pressures, we remain bullish on the mid to long-term fundamentals of the real estate market.
We will continue to develop and invest in technology, recruit top talent, and make strategic acquisitions, all while maintaining industry-leading margins. Over the past year, we've invested approximately $300 million in 10 acquisitions. Our inHere platform is another area where we continue to invest. This is our industry-leading end-to-end real estate experience platform, which is fully deployed across our residential business and integrated within our direct operations. Adoption of the platform has been strong, shown by the following highlights for 2023, over 1 million agents, transaction coordinators, and consumers used inHere to manage their transactions, up more than 50% over the prior year. Over 750,000 starting here opening packages were sent to consumers with 64% completing these packages entirely online.
Our Title Company has automatically published over 400,000 orders to win here, providing our customers with enhanced efficiency and transparency into their transactions. inHere's performance throughout 2023 demonstrates its growing relevance and utility in the real estate sector. Its diverse offerings and accessibility through both web and mobile platforms make it a vital resource that's significantly aged processing of residential transactions. We expect to add functionality and content to inHere to further enhance the transaction experience of agents, transaction coordinators, and consumers, which in turn will create market growth and efficiency opportunities for FNF over the near and long term. Turning to our F&G business. We are pleased to see investor recognition of F&G's success as its market capitalization has increased from $2.4 billion at the time of the partial spin-off in December of 2022 to approximately $5.8 billion at the end of 2023.
F&G is profitably growing its assets under management before flow and reinsurance to a record $56.3 billion at December and comprise nearly 30% of FNF's adjusted net earnings for the full-year 2023. We were also pleased to see the most recent rating agency recognition of F&G's success as AM Best upgraded the financial strength ratings of F&G's primary operating companies to A from A- in January 2024, recognizing the financial strength and stability of F&G's business as they successfully execute on their diversified growth strategy. Given the success that F&G has achieved, combined with the many opportunities to grow and expand the business, FNF Board made the decision to invest $250 million in F&G to take advantage of the current opportunity for growth.
As announced on January 16, 2024, the independent special committees of both companies agreed at a mandatory convertible preferred security, which will provide F&G additional capital to celebrate growth of its retained AUM. With that, let me now turn the call over to Tony to review FNF's fourth quarter and full-year financial performance and provide additional highlights.
Tony Park: Thank you, Mike. Starting with our consolidated results. We generated $3.4 billion in total revenue in the fourth quarter, and we reported a fourth quarter net loss of $69 million, including net recognized gains of $203 million versus a net loss of $5 million, including $118 million of net recognized losses in the fourth quarter of 2022. The Title Segment contributed net earnings of $228 million. The F&G Segment had a net loss of $251 million and the Corporate Segment had a net loss of $46 million. The net recognized gains and losses in each period are primarily due to mark-to-market accounting treatment of equity and preferred stock securities, whether the securities were disposed of in the quarter or continued to be held in our investment portfolio.
Excluding net recognized gains and losses, our total revenue was $3.2 billion, as compared with $2.7 billion in the fourth quarter of 2022. Adjusted net earnings were $204 million or $0.75 per diluted share compared with $274 million or $1.01 per share for the fourth quarter of 2022. The Title Segment contributed $174 million. The F&G Segment contributed $64 million and the Corporate Segment had an adjusted net loss of $34 million. For the full-year 2023, we saw a strong performance for the Title Segment, despite a difficult environment as well as record growth for the F&G Segment, which together generated solid profitability. Total revenue excluding gains and losses was $11.9 billion in the full-year 2023, and reflects a 9% decrease from the full-year 2022, primarily due to the decline in Title order volumes.
This generated $962 million in adjusted net earnings, a decrease of 35% from $1.5 billion in full-year 2022. The Title Segment contributed $760 million. The F&G Segment contributed $285 million, and the Corporate Segment had an adjusted net loss of $83 million. Turning to financial highlights, specific to the Title Segment. Our Title Segment generated $1.7 billion in total revenue in the fourth quarter, excluding net recognized gains of $65 million, compared with $1.8 billion in the fourth quarter of 2022. Direct premiums decreased by 10% versus the fourth quarter of 2022. Agency premiums decreased by 13%, and escrow title-related and other fees decreased by 4% versus the prior year. Personnel costs decreased by 4% and other operating expenses decreased by 10%.
All in, the title business generated adjusted pre-tax title earnings of $198 million compared with $227 million for the fourth quarter of 2022, and an 11.8% adjusted pre-tax title margin for the quarter versus 12.3% in the prior year quarter. As Mike highlighted, excluding the one-time 50 basis point impact of the cybersecurity incident, our fourth quarter adjusted pre-tax title margin was 12.3%, and in line with the prior year quarter. For the full-year, the title business generated adjusted pre-tax title earnings of $964 million, compared with $1.6 billion for the full-year 2022, and a 13.7% adjusted pre-tax title margin versus 16.7% in the full-year 2022. Our Title and Corporate investment portfolio totaled $5 billion at December 31. Interest and investment income in the Title and Corporate segments of $103 million increased $3 million, as compared with the prior year quarter, primarily due to higher income from cash and short-term investments, partially offset by lower income from our 1031 exchange business.
Looking to 2024, we expect to generate interest and investment income of $95 million to $100 million in each of the first two quarters before falling to $75 million to $85 million in the second half of the year with anticipated Fed funds cuts of 100 basis points to 150 basis points. Our Title claims paid of $64 million were $14 million higher than our provision of $50 million for the fourth quarter. The carried reserve for Title claim losses is approximately $70 million or 4.2% above the actuary central estimate. We continue to provide for Title claims at 4.5% of total Title premiums. Next, 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 and full-year performance.
F&G reported record gross sales of $4.1 billion in the fourth quarter, a 52% increase from the fourth quarter of 2022 and $13.2 billion for the full-year 2023. A 17% increase over the full-year 2022, driven by record retail sales and robust institutional market sales. F&G's net sales retained were $2.5 billion in the fourth quarter and $9.2 billion for the full-year 2023. Net sales reflect third-party flow reinsurance, which has increased from 50% to 90% of MYGA sales during 2023, as expected. F&G has successfully expanded from one to three high-quality and established flow reinsurance partners, which provides counterparty diversification benefit and more capacity. And the higher percentage of flow reinsurance, which provides a lower capital requirement on ceded new business, while allocating capital to the highest returning retained business enhances cash flow, provides fee-based earnings, and is accretive to F&G's returns.
F&G has profitably grown its retained assets under management to a record $49.5 billion at December 31. AUM before flow reinsurance was $56.3 billion, adjusting for the approximately $7 billion of cumulative new business ceded and well ahead of our expectations at the time of acquisition. Adjusted net earnings for the F&G Segment were $64 million in the fourth quarter. This includes alternative investment returns below our long-term expectations by $31 million or $0.11 per share and significant expense items of $16 million or $0.06 per share. For the full-year 2023, adjusted net earnings for the F&G Segment were $285 million. This includes alternative investment returns below our long-term expectations by $130 million or $0.48 per share and significant expense items of $43 million or $0.16 per share.
To bring it all together, F&G adjusted net earnings, excluding significant items in the F&G Segment, were $251 million or $0.92 per diluted share in the fourth quarter and $1.1 billion or $4.19 per diluted share for the full-year. I will wrap up with a few thoughts on capital and liquidity. We remain focused on ensuring a balanced capital allocation strategy, as we navigate the current environment. We held $886 million in cash in short-term liquid investments at the holding company level at December 31, which has remained relatively steady over the course of the year despite the effect of market headwinds and historical low volumes in the Title business. As a reminder, this year-end amount is prior to the $250 million investment, made in F&G in January 2024.
On February 16, 2024, FNF and F&G, each entered into amended and restated credit agreements. For FNF, this included an extension of the maturity of the facility from October 2025 to February 2029. For F&G, this included an increase to the size of the facility commitment to $750 million from $665 million and extended the maturity of the facility by two years to November 2027. Thereby enhancing our liquidity profile and financial flexibility. F&G's outstanding balance is $365 million, which reflects a $150 million paydown in the fourth quarter. FNF's consolidated debt was $3.9 billion on December 31, up approximately $200 million from the preceding quarter due to F&G's senior note issuance and a partial revolver paydown in December. As a result, FNF's consolidated debt-to-capitalization ratio, excluding AOCI, was 28.9% as of December 31.
This is in line with our long-term target range of 20% to 30%, and we expect that our balance sheet will naturally delever, as a result of growth in shareholders' equity, excluding AOCI. Going forward, our consolidated annual interest expense on debt outstanding is approximately $200 million, comprised of $80 million for FNF's holding company debt and $120 million for F&G Segment debt. Following our record level of share repurchases in 2021 and 2022, at a total combined cost of $1 billion, we prudently moderated our repurchase volume in 2023, to preserve financial flexibility through the multi-decade low volumes of this market cycle. Therefore, there were no share repurchases in the fourth quarter and only $4 million of share repurchases in 2023.
During the fourth quarter, we paid common dividends of $0.48 per share, for a total of $133 million. We continue to view our current annual common dividend of approximately $525 million as sustainable. This concludes our prepared remarks. And let me now turn the call back to our operator for questions.
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