Fidelity National Financial, Inc. (FNF) Earnings Call Transcript

Yes. Makes sense. Again, for newer investors, the term centralized refi is thrown out quite often, especially now with the backdrop that we've seen and currently see. But talk to us about what that business is, why it's different than -- why is it called centralized refi, not just refi? What is the other side of refi? How does that look? And how do the margins look in those businesses?

Well, maybe I'll start on just the structure and then you might talk to some of the margins. So there are certain originators that really want a more centralized ordering process. So they want to deal with a company that can handle their business across multiple geographies with kind of 1 ordering point and then the management of those orders through that process. And many times, they're looking for centralized kind of fee structures that apply across multiple geographies. So there's a lot of times specialized filings in the centralized channel. And if you think of the large national banks as some of the primary customers in that centralized world. So the usual suspects, the Bank of Americas, the Wells, the Chases, the U.S. banks, et cetera. And we have a business ServiceLink that's the largest kind of provider in that space. And so that's kind of the customers that they work with. And many times, you're dealing with a vendor manager inside an institution that's making decisions around allocations of orders. And those institutions typically have multiple vendors that they use in varying levels of allocation. And it's very, very competitive, and that's kind of how that works. And we do about, I think, 25% to 30% of our total volume, it fluctuates a little bit through the centralized channel versus distributed. So we've got a significant amount of our refinance volume out in that distributed footprint. And that's coming from mortgage brokers, smaller lenders and loan originators, even the national banks who also have in some cases, orders being placed by loan originators in community offices, so bank offices. And then they have other orders that are going through their centralized channel. So they kind of do both. And then you've also got the nonbanks who have really grown in origination volume. The companies you know, Rocket Mortgage, et cetera, and those nonbanks tend to have their own captive title agencies. So that's also centralized, but they're kind of doing it as an in-house model for their own refinance product.

And because they're an agent, they're going to write on an underwriter like us or like one of our competitors. So that's what a captive agent. They capture the agency share of it, but not the underwriting business. In terms of margin, just to give you some numbers, through 9 months of 2021, centralized refi at ServiceLink was 37% margin versus 34% for the 9 months ended September of 2020. So both very good, strong refi years. In full year 2019, ServiceLink's centralized refi was a 32% margin. If you put that up against local, I can't give you a local refi margin because it's blended in with purchase and local commercial. But our local offices are 1,300 offices around the country. 31% pretax margins for the first 9 months of this year versus 28% 9 months of last year versus 25% for the full year of 2019.

And then, John, we also -- I think as you know, we have a centralized default business as well through ServiceLink that also works with a lot of those same institutions I talked about that, again, want a centralized process to managing foreclosure activity and loss mitigation products and things like that.

Yes. And that's one side. I guess even with the Black Knight story, where there is probably the decline of refi, to some extent, offset by return of foreclosures and stuff like that. So it feels like that it should be somewhat of a buffer for you guys. But you mentioned 25% to 30% of your refi volumes coming -- going -- or stemming from the centralized channel. Any sense for what your share is naturally in the centralized channel?

I mean, we believe we're the largest, but I don't have a sense of share. I think it is difficult to know...

Probably not too dissimilar from international or maybe a little bit higher. I don't think Stewart's got probably a small piece of share there. You got Doma, I guess that's...

It's probably pretty small. First American would probably be maybe the next biggest competitor. Stewart -- maybe they've grown at some, but they were pretty small. Doma's pretty new. I think their share is pretty small. And then there's a lot of centralized independent title agents that compete in that space as well, names you wouldn't know. But we're competing not just up against First American and maybe the Stewarts of the world for that central -- and even Old Republic, but a lot of just independent agents that are getting share from some of those same institutions.

One more kind of centralized refi, I don't know if this was the cause of this or if this was what drove the benefit for you guys. But I mean, early on in the pandemic, there was a roller coaster, right? Volume just completely like slowed down and then just jumped, right? And refi senior dropping, refi started to explode. You guys were barely growing your headcount. I think your orders were growing 10x faster than your headcount. So there was a lot of efficiencies. Something was driving that in a big way, right, from a technology standpoint. Walk through kind of what that was? Was that centralized refi channel that was helping that? Or any sense for kind of what...

I think it was partly centralized refinance channel. I think it was the volume of refis. And I think it was a culmination of a lot of work we've done to improve our automation, our processes, particularly around title production. We're just a lot more efficient today than we were 10 years ago. And we did not have to -- we're now down to -- we've got essentially 20 production facilities tied with our India back office. We didn't have India really 10 years ago. Not to this level. And it's highly integrated with our title automation technology and these 20 operations that are probably doing 75% of our volume. And we just are more efficient, and we did not have to add staff to process it on the front end. As the closing volume built as we went through the year and particularly purchasing commercial volume, we had to start adding staff back in to kind of deal with those closings and take care of the customers. But I think that was a significant part of the -- part of the story.

I mean it's important to note also, we didn't know exactly how this would play out. And so when the pandemic hit, we took some immediate actions on staffing in the really the latter part of March and early April, I can't even remember the numbers now, but we took a lot of step out. Of course, we added them all back. But not knowing our order counts drop and we react and we did, and then we added those back over time, but we did take some immediate steps.

The other reason I point that out is similar to your message you had earlier on refi is I think a lot of investors just discredit as over-earning right now because of the backdrop. Clearly, the market's been good. Consensus EBITDA -- or consensus EPS is going down to reflect that, but it's maybe arguably too much. But I think a lot of people do fear that you guys are just over into the stent where there's a giant cliff coming. You guys were, at one point, 14%, 15% margins. You ran in that range for a couple of years. And I remember you guys talking to a goal of 20% margin. And a lot of people are like there's not a chance in hell they'd do that. So here we are, 21-ish above that range. Next year, I'm not going to ask you because I don't play that game. I'm not going to ask you what margins will be next year, but...

Good because we don't know.

Right, because who knows, right? So maybe just talk just broadly, just kind of let us inside your head a little bit about did you raise the floor of margin and raise the ceiling? Or like where that range -- how investors should be thinking about that broad range, fully understanding that you have no idea because the origination market could be -- could do anything, right?

Well, I'll start with a couple of things and then you can weigh in, Tony. I don't think we're prepared to change the range at this time that it doesn't mean we might not at some point. To your point, we had that 15% to 20% range for a long time but weren't getting to 15% for even a full year. It wasn't until 2019 that we actually got over 15% for a full year. And now we're in the upper bounds, obviously, 20%, maybe a little higher. We said all along and asked what would it take to get to that midpoint or higher point of that range that we needed a bigger purchase market and talked about -- and this was when the purchase originations were $1.1 trillion, $1.2 trillion. And we had said things like, wow, it's got to be -- we probably need a $1.5 trillion, $1.6 trillion market, right? And also a very good commercial market and an average refinance market. And now we're at maybe a $1.7 trillion purchase market in '21, and that's getting us up to this upper end of the range. And then we have a very good commercial market. And with refis coming out, I think that will be less of an event for us as long as those other 2 segments. We didn't touch on this. We talked about purchase forecast, but the Urban Land Institute doesn't forecast. I don't know if anybody ever looks at that. But I think it's pretty good, they do a commercial forecast, and they're projecting '22 and '23 to be better than '21 for commercial volume. So if you take that and stack it up with what MBA and Fannie, you may think about purchase points to a pretty optimistic outlook even with refis coming out at some level.

Okay. Nice.

Yes. I mean I think you covered it. I mean our -- it was our aspirational goal to get to 20% even when we were below 15%. And it's nice to be there. But again, it takes a good market and the efficiencies.

And maybe one thing I would add is that the way we think about margins going forward is that we can't predict the margins, and we're certainly still subject to transactional volumes without question. But we feel like we'll outperform future peaks and valleys, if you will, as we go forward. So the trough years will be better than the prior trough years and the peaks will be better than the prior peak years.

Great. So you're saying you're going to grow EPS next year. Is that...

I didn't say that.

Just kidding. All right. So Chris, you've been very patient down there. Sorry. We were running around in circles here. But let's get an update on -- or just a kind of high-level view on the F&G business. I think we've got some new investors may be here today, and I'm sure on the call here. So give us a little bit of a kind of brief overview of the F&G business, and let's talk about some of the strategy.

Sure. Happy to. So yes, ours is a spread-based model. So as a bit of a reminder, our core product are fixed annuities. So think of it as a bank -- an insurance company's version of a bank CD. So for a retail customer, a classic example, they've got $100,000, they go to roll the CD at the bank. They're quoted 1% taxable for tying it up for 5 years. Bankrupts, client doesn't like that, what's an alternative. How about a fixed annuity from F&G, 2.25% tax deferred. That's the simplest scenario. We then offer a product called a fixed index annuity instead of paying you 2.25% in cash, we take that 2.25% and we buy an option on your behalf. So we say to you, your guaranteed you can't lose money, but you can get a percentage of the S&P 500 or a blended index, et cetera. So nobody is getting rich. But in a good market, they got a shot at maybe making 5% or 6%. That's more attractive to them than locking in 1% or 2.25%. So it's how we source premiums. Now we've gone in a year post FNF acquisition from sourcing through 1 channel, independent insurance agents. We now sell through banks. We sell through broker-dealers and we sell through institutions in 2 channels, funding agreement backed notes, think of my retail example, but I'm now issuing it to a bunch of institutions that want to own a 5-year piece of paper with a 2.25% yield or the pension buyout space where we're going to a planned sponsor generally through a consultant and bidding on taking them out of their defined benefit pension obligations. So we've now got 6 channels of sourcing premiums. The competitive advantage for us, in addition to access to all of these channels, is our partnership with Blackstone. So we turn around, we take those premiums regardless of the channel. Blackstone is the largest originator of credit in the world. They've ramped up massively their credit origination capability, effectively disintermediating a lot of the investment banks. So a lot of the credit origination is in the private markets now. 90% of the portfolio is investment grade, but maybe we pick up 200 basis points on an A-rated piece of paper. You don't need a lot of that in your portfolio to walk around with a very meaningful crediting rate edge. So that has led to just tremendous market share growth for us. And frankly, in all of the channels are growing right now. So that's our business model. You net it all out, expenses, taxes, it's roughly 1% on average assets under management. So you project forward average AUM for F&G, multiply by 1%, you got a pretty going to be awfully close to an earnings projection.

That's a really good way to frame it up because I talk to investors often who were like, oh, I don't have the time to go through that business. And someone like, "All right, if you want to keep it simple, you can take your AUM growth or your AUM multiplied by your net investment spread, and that's kind of what you're doing," like you just said. So if we want to stay on that -- and I don't mean to oversimplify the business because there's a lot more that goes into it than that. But I think for a casual investor, that's a good way to frame it up, maybe. So what would you tell an investor to give them confidence to boost their confidence in the fact that you can continue to grow that AUM side and maintain that investment spread.

Yes, a couple of things. So we'll start with growing the AUM piece, right? So our core original channel, independent agents, that was $4 billion a year last year. That's growing quite solidly this year. So we're getting growth there. We've now entered the bank and broker-dealer channels. That's a larger channel of distribution than independent agents. So we've more than doubled the opportunity set, and we're off to an unbelievable start. A few things that we've already announced. We did $1 billion with Raymond James right off the bat. This is from Raymond James, the most successful product launch they've ever had in the history of Raymond James, we're #1 in market share. We're #1 in market share in 2 of the medium-sized banks that we rolled out after Raymond James. So we're going to see same-store sales, if I can use that analogy, because we haven't come anywhere close to penetrating the distributors we're in. We're also adding distributors. So we had 5 to start the year. We'll have 12 at the end of the year, probably add another 5 or 6 next year. So that channel, we would expect exponential growth because we're going to further penetrate the places we're in, and we're going to add new distribution partners. The institutional has just been a home run. This is a business that didn't exist a year ago. It was always in our plans. It was a huge beneficiary of the FNF acquisition. As you remember, we were upgraded within hours of the deal closing. I mean, it opened up this incredible channel for us. So we did 2 funding agreement-backed notes. Again, think of it as selling in the first deal we did, I try to remember now is maybe $400 million. The second one was like $1.1 billion, and it was 4x oversubscribed. Institutions wanting to own a fixed contract annuity from F&G. So that's been wildly successful. And then we entered the pension buyout space. We were a new player, but we hired an incredibly experienced team. We hired Prudential's pricing actuary, been pricing these products for 30 years. We hired one of the top intermediary consultants person for business development. We hired one of the top ops people in the space. So school ahead, less than a year, we've raised $1 billion. We've done 6 transactions and that is a pretty rapidly growing market. So I would say we had a market that was maybe $150 billion a year of opportunity. We were playing at 40% of it. Now we're playing in 100% of it. We've added a market in pension buyouts that's $40 billion a year and growing and funding agreement backed notes, which I want to say is $25 billion, $30 billion and growing. So the opportunity steps 2.5x what it was before. So I think that gives you some comfort that, that won't be our limiter. We have plenty of opportunity, plenty of places to go, further penetrate the market. In terms of the margin side of this, we're getting benefits of scale now. So I think you'll see that and hopefully some spread expansion. And then the last point is we're doing great in this environment. But if rates do start ticking up over time, that's an opportunity to grab additional spread. So that's kind of our plan. But I would say if you -- what's the plan in 2022? Finish out the technology build. That's probably the other thing that's worth mentioning, and it was another beneficiary of the FNF acquisition. But they greenlighted us to spend, what will be about $100 million in redoing pretty much every technology platform that we have. So I would say by the end of 2022, we will have as nimble, modern and scalable a tax stack as anybody in our space. So partnership with Blackstone. Now we had technology, 6 channels of distribution. We think there's a lot of upside from here.

Yes. I mean you guys have done exceptionally well since coming out of being under following on an umbrella of FNF for sure. So just for newer investors, again, just broadly, I mean, this is a sticky business that is cash generative. So what is the cash generation coming from F&G? And with you guys continuing to raise your dividend, I would imagine those things are connected. So if you can comment on that?

Well, yes, it's interesting. They're actually not connected. The cash generation that we're enjoying for the last few years, and we now have $1.5 billion at holdco is coming from the title business. F&G at this point is still a consumer of cash, although less and less over time. We announced in the last quarter that we did a $400 million intercompany loan with F&G to help fund their growth. And we also announced that we anticipate maybe $200 million to $300 million in 2022 to help them kind of get to the point where we believe that the growth can be self-funding. And at some point, not too long after that, they can actually contribute to the overall cash flow of the organization. So yes, it's interesting. They're growing great, but you have to fund that. So at this point, cash generation from title, the use is there, $500 million in dividend. We raised our dividend the last 2 quarters consecutively because we do have that strong cash flow generation. So $500 million annually in our dividend, $100 million in interest expense -- We do have a bond maturity that comes due in September of next year at $400 million. We could refinance that or just pay it off with cash on hand. And then buybacks. We get a lot of questions about buybacks, obviously. We -- and we think it's a great use of our cash as well. We spent $500 million over the trailing 12 months in share buybacks, and we got right back into the market. When our blackout lifted, we think it's a smart use of money, and we're going to continue to -- and I don't know what commitment level or what dollars we'll commit to it, but I think we're going to be fairly aggressive. And then on the M&A front, we don't have a number for it, but we're always active on the title agency front. Maybe at this point, no major deals on the horizon, but there's always title agents that we can acquire. And if I put a number to it, maybe $100 million to $300 million annually in acquisition spend at the title company.

Yes. John, the only thing I'd add to that is I would think of F&G as more future dividend support. I mean, because the nature of our business, you put up a lot of capital to put sales on. You then have this profitable block that over time, returns profits and frees up capital. We've been growing at such a clip relative to our relatively small balance sheet, but fairly soon, we do get to this tipping point where you've got enough in force throwing off profits and capital to fund a pretty high level of sales. So I think 2022 and certainly 2023 is really going to be about optimizing return on capital that were allocated from the parent as opposed to meeting fresh injections of capital. And then fairly quickly, you do get to a point where you're actually returning. You can still grow earnings and a fair amount of those earnings are cash dividendable up to the parent.

I don't want to put you guys on the mark exactly. But just broadly speaking, is there a trigger point we should maybe be thinking about from a -- I don't know from a policies in force or if it's contribution of earnings standpoint, where F&G flips to a tailwind for the dividend?

Yes, I'd maybe -- because it's really 2 factors. So the only hesitation is it's size of the in-force relative to size of your annual sales volume. But I would just say, at our current trajectory, we think we hit that point probably in 2023 where we're at a point we can be at a pretty high level of new sales, be relevant in all of our channels. have optionality of where we want to source premiums from and still not require a capital contribution.

Really good color. I think we've got time for maybe 1 or 2 questions in the audience, if you guys want to chime in with any questions. Happy to take them.

On the commercial side, do you over index to a certain asset class, and I assume most include the commercial? And maybe that will explain some of the hotness in that market since a lot of capital has come out of office and [indiscernible] industrial...

Yes. I don't know whether we over index, but I would agree that multifamily has been one of the strongest commercial segments, and we certainly have enjoyed that. Industrial has been another -- I mentioned logistics businesses. That's been a really great segment consistently over the past couple of years. But we just see a lot of activities in other segments. I mean I talked about energy and gaming. Those aren't there all the time but when they're there, they're big, and we do a lot of that. When you think about the larger commercial deals, because of our balance sheet, we're going to be pretty much in all of them. Certainly, other people in the industry are in a lot of those deals as well, but we're going to be in most all of them. So -- and then I think we have an advantage in the smaller local because we just got a bigger footprint. We've got 1,300 offices around the country with sales people that are out actively pursuing local commercial transactions. And it's a real advantage with the size of the market compared to the others that just don't have that same level of footprint. It's still a very much a relationship driven sales process.

Okay. I think that's a wrap. We appreciate the time, guys. And the audience, thanks for being with us as well. Thank you.

Thanks, John.