Fidelity National Financial, Inc. (NYSE:FNF) Q3 2023 Earnings Call Transcript
Fidelity National Financial, Inc. (NYSE:FNF) Q3 2023 Earnings Call Transcript November 8, 2023
Operator: Ladies and gentlemen, good morning, and welcome to the Fidelity National Financial, Inc. Third Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, 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 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 November 15, 2023. And now, I'll turn the call over to our CEO, Mike Nolan.
Mike Nolan: Thank you, Lisa, and good morning. Overall, we've had a strong quarter despite the tough market. Starting with our title business, we delivered adjusted pretax earnings of $311 million in an industry-leading adjusted pretax title margin of 16.2%. This is an outstanding result, especially given that U.S. mortgage rates have advanced to multi-decade highs recently peaking at over 8% in October, which is the highest level since November of 2000. In turn, this is keeping a lid on residential purchase applications, which have decreased to their lowest level since 1995, almost three decades ago. As a result, we continue to be focused on managing expenses and have reduced staffing and operating expenses this year. As of September 30, our total field operations employee count has been reduced by about 13% over the past 12 months.
This has generated about $70 million in run rate personnel cost savings in the third quarter as compared to the third quarter of 2022. We have also reduced our direct title office locations from approximately 1,400 to below 1,300, generating about $1 million per month in expense savings. Commercial volumes are trending in line with our expectations. We have generated commercial revenue of $263 million in the third quarter and $767 million in the first nine months, putting us on track for $1 billion for the full year and in line with levels seen in more normal years like 2015 to 2019. Looking at sequential volumes more closely, daily purchase orders opened were down 7% from the second quarter of 2023 and down 8% for the month of October versus September, in line with seasonal expectations and down 2% for the month of October versus the prior year and refinance orders opened per day were down 8% from the second quarter of 2023, up 2% for the month of October versus September and down 13% for the month of October versus the prior year.
Our total commercial orders opened were $779 per day, flat for the third quarter versus the second quarter of 2023, down 7% for the month of October versus September and down 4% for the month of October versus the prior year. Overall, total orders opened averaged 5,000 per day in the third quarter with 5,300 in July and 4,900 in both August and September. For the month of October, total orders opened were 4,600 per day, down 6% versus September. While we are pleased with our continued strong performance in profitability, we remain cautious as we anticipate order volumes at or near historic lows as we close out the year and enter the first quarter, which in turn is expected to pressure industry margins much like last year. As always, we will manage our business to the trend in open orders to protect our profitability.
Beyond the near-term pressures, we remain bullish on the mid- to long-term fundamentals of the real estate market. A clear benefit of our financial strength, scale and profitability is our ability to continue to strategically build and expand our title business by investing in technology, recruiting talent and making acquisitions, which we have continued to do while maintaining industry-leading margins. 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 spinoff last December to approximately $4 billion. F&G recently held an Investor Day on October 3, which provided a deep dive into the Company's proven track record of growth and highlighted strategic levers that the team is employing to create value for stakeholders and which will benefit F&S as its majority shareholder.
To recap, F&G's future potential upside from three areas; first, sustainable asset growth from its retail and pension risk transfer growth strategies; next, margin expansion from investment opportunities, effectively managing operating expenses for operational scale benefit and incremental fee-based earnings from flow reinsurance and owned distribution. And finally, we believe there is potential for F&G's share price to more fully reflect its core business performance and the accretive nature of its flow reinsurance and owned distribution strategies as they scale over time. For the current quarter, F&G has profitably grown its assets under management for flow reinsurance to a record $53 billion at September 30 and now comprises 31% of FNF's adjusted net earnings.
I'd like to wrap up by thanking all our employees for delivering another industry-leading performance this quarter despite the market headwinds. This is a seasoned team that knows how to prudently manage through tough cycles while continuing to invest in the business to take advantage of opportunities for longer-term growth. With that, let me now turn the call over to Tony Park to review FNF's third quarter financial highlights.
Tony Park: Thank you, Mike. Starting with our consolidated results, we generated $2.8 billion in total revenue in the third quarter. Third quarter net earnings were $426 million, including net recognized losses of $356 million versus net earnings of $362 million including $230 million of net recognized losses in the third quarter of 2022. The Title segment contributed net earnings of $185 million, the F&G segment contributed $259 million, and the Corporate segment had a net loss of $18 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 will continue to be held in our investment portfolio.
Excluding net recognized gains and losses, our total revenue was $3.1 billion as compared with $3.4 billion in the third quarter of 2022. Adjusted net earnings from continuing operations was $333 million or $1.23 per diluted share compared with $272 million or $0.99 per share for the third quarter of 2022. The Title segment contributed $245 million. The F&G segment contributed $102 million and the Corporate segment had an adjusted net loss of $14 million. Turning to Q3 financial highlights specific to the Title segment, our Title segment generated $1.9 billion in total revenue in the third quarter, excluding net recognized losses of $46 million, compared with $2.3 billion in the third quarter of 2022. Direct premiums decreased by 24% versus the third quarter of 2022.
Agency premiums decreased by 25% and escrow title-related and other fees decreased by 7% versus the prior year. Personnel costs decreased by 10% and other operating expenses decreased by 16%. All in, the title business generated adjusted pretax title earnings of $311 million and a 16.2% adjusted pretax title margin for the quarter versus 17.1% in the prior year quarter. Our title and corporate investment portfolio totaled $5 billion at September 30. Interest and investment income in the title and corporate segments of $108 million increased $37 million as compared with the prior year quarter, primarily due to higher income from our 1031 exchange business and cash and short-term investments. Looking ahead to 2024, we expect interest and investment income to moderate in the $95 million to $100 million quarterly range with gradually declining 1031 exchange balances and spreads and assuming level cash and short-term investment balances.
Our title claims paid of $69 million were $12 million higher than our provision of $57 million for the third quarter. The carried reserve for title claim losses is approximately $81 million or 4.8% above the actuary central estimate. We continue to provide for title claims at 4.5% of total title premiums. Next, turning to Q3 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 $2.8 billion in the third quarter, down 3% from the prior year quarter. This reflects lower retail channel sales, offset by higher institutional market sales. Coming off record sales in the first half of the year, retail sales were intentionally lower in the quarter as F&G finalized its reinsurance agreements and enhanced product features to position for a strong finish to 2023 and create momentum for 2024.
Within this market environment, F&G has seen a sharp increase in submitted annuity premium in September and October, which is expected to provide a strong growth trajectory for annuity sales in the fourth quarter. F&G's net sales retained were $2.3 billion in the third quarter, in line with the prior year quarter. In addition, and as expected, F&G has increased flow reinsurance to 90% of MYGA sales in September of 2023. As a reminder, F&G utilizes flow reinsurance, which provides a lower capital requirement on ceded new business while allocating capital to the highest returning retained business. This 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 $47 billion at September 30.
Assets under management before flow reinsurance was $53 billion adjusting for the approximately $6 billion of cumulative net business ceded. Adjusted net earnings for the F&G segment were $102 million in the third quarter. This includes alternative investment returns below our long-term expectations by $24 million or $0.09 per share. Let me 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 ended the quarter with $949 million in cash and short-term liquid investments at the holding company level, which has remained relatively steady since year-end despite the effect of market headwinds and historical low volumes in the title business.
FNF's consolidated debt-to-capitalization ratio, excluding AOCI, was 27.7% as of September 30. 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 $175 million, comprised of approximately $80 million for FNF's holding company debt and $95 million for F&G segment debt. Following a record level of share repurchases in 2021 and 2022 at a total combined cost of $1 billion. We have prudently moderated our repurchase volume in the first nine months of this year to preserve financial flexibility through the multi-decade low volumes of this market cycle.
Therefore, there were no share repurchases in the third quarter and only $4 million of share repurchases in the first nine months of the year. During the third quarter, we paid common dividends of $0.45 per share for a total of $123 million. We continue to view our current annual common dividend of approximately $500 million as sustainable. This concludes our prepared remarks, and let me now turn the call back to our operator for questions.
See also 12 Best Day Trading Stocks To Buy and Top 11 Extreme Value Stocks To Buy.
To continue reading the Q&A session, please click here.
