Title

Presentation

Operator: Good morning, and welcome to FNF’s First Quarter Earnings Call. During today’s presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open 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, 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. Also Chris Blunt, F&G’s Chief Executive Officer; and Wendy Young, F&G’s Chief Financial Officer, 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. And 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 May 11, 2023. And now I’ll turn the call over to our CEO, Mike Nolan.

Mike Nolan: Thank you, Lisa, and good morning. We are pleased with our solid performance in the quarter as we continue to navigate a volatile and challenging environment. Starting with our title business, the focus remains on providing our customers’ exceptional service, protecting our policyholders and building our business for the long-term, as well as maximizing our margins in a given market. In light of the steep decline in mortgage volumes as compared to the prior year and given the low inventory coming out of the fourth quarter, we continue to monitor expenses closely and reduced our field staff by an additional 2% in the first quarter. This is after a 26% reduction of field staff, net of acquisitions in 2022, one of the largest reductions in our history.

As a result of these actions, we delivered adjusted pre-tax earnings in our title segment of $153 million, and an industry-leading adjusted pre-tax title margin of 10%. We are pleased with this result given that volumes remain at historically low levels. Moving into 2023, we have been closely monitoring for sequential trends in residential purchase volumes. In a typical year, we expect purchase open orders to build in the first and second quarters off of the seasonal low of the fourth quarter. At this time, we are seeing encouraging indications of improving order volumes, albeit coming off lower levels than the last few years. Residential purchase orders opened per day in both March and April showed sequential improvement and April was our best month since August of last year.

Looking at sequential volumes more closely, daily purchase orders opened were up 20% over the fourth quarter of 2022, and up 6% for the month of April versus March, although building off a lower base. And refinance orders opened per day were up 6% over the fourth quarter of 2022 and flat for the month of April versus March. Our total commercial orders opened were 781 per day, up 8% over the fourth quarter of 2022 and down 3% for the month of April versus March. Overall, total orders opened averaged 5,000 per day in the first quarter with January 4,700; February, 5,100; and March at 5,100. For the month of April, total orders opened were 5,300 per day, up 4% over March. From here, we expect a volatile market environment will continue to provide both headwinds and tailwinds for market participants.

On the residential side, although there is not yet firm footing for rates and home affordability, there are solid fundamentals such as pent-up demand and a growing working age in first-time buyer population that are expected to support a rebound once rates move downward and sellers and buyers more fully return to the market. From a commercial perspective, our mix continues to weigh towards industrial, multifamily and sectors like affordable housing, energy and hospitality. In the first quarter, we generated commercial revenue of $241 million, which is consistent with our first quarters between 2015 and 2020. Reflecting on what these factors mean for FNF’s Title business, we expect near-term margin improvement to be modest given the relatively low volumes that we have seen in our first quarter open orders, which is indicative of the level of closed orders we will have in the second quarter.

Beyond these near-term pressures, we remain confident in the fundamentals of the business and continue to strategically build and expand our Title business for the long-term through acquisitions, recruiting talent and enhancing our title capabilities. Finally, F&G is off to a strong start as a public company and continues to deliver on its diversified growth strategy. F&G reported record assets under management of $45 billion at March 31 driven by record top line growth and stable in-force retention. We are nearly at the three-year mark since the 2020 merger and F&G is well ahead of our original expectation to double its assets under management over five years. Tony will provide more detail on the F&G segment results in a minute. Wrapping up, I’d like to thank our employees for their commitment and dedication to keeping us on track to deliver a solid start to the year despite the market challenges.

Let me now turn the call over to Tony Park to review FNF’s first quarter financial highlights.

Tony Park: Thank you, Mike. Before I turn to our consolidated results, effective January 1, 2023, we have adopted the new accounting standard known as LDTI, which is related to long duration contracts and only impacted our F&G segment. LDTI is a U.S. GAAP accounting standard only with no impact to statutory results, insurance company cash flows or regulatory capital. Now turning to our consolidated results. We generated $2.5 billion in total revenue in the first quarter. First quarter net loss was $59 million, including net recognized gains of $5 million versus net earnings of $400 million, including $469 million of net recognized losses in the first quarter of 2022. The Title segment contributed net earnings of $128 million.

The F&G segment had a net loss of $164 million largely due to unfavorable mark-to-market movement and the Corporate segment had a net loss of $23 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 continue to be held in our investment portfolio. Excluding net recognized gains and losses, our total revenue was $2.5 billion as compared with $3.6 billion in the first quarter of 2022. Adjusted net earnings from continuing operations was $141 million or $0.52 per diluted share compared with $386 million or $1.36 per share for the first quarter of 2022. The Title segment contributed $115 million, the F&G segment contributed $42 million and the Corporate segment had an adjusted net loss of $16 million.

Turning to Q1 financial highlights specific to the Title segment. Our Title segment generated $1.5 billion in total revenue in the first quarter, excluding net recognized gains of $22 million compared with $2.6 billion in the first quarter of 2022. Direct premiums decreased by 44% versus the first quarter of 2022. Agency premiums decreased by 50% and escrow title-related and other fees decreased by 29% versus the prior year. Personnel costs decreased by 23% and other operating expenses decreased by 25%. All-in the Title business generated adjusted pre-tax title earnings of $153 million and a 10% adjusted pre-tax title margin for the quarter versus 17.1% in the prior year quarter. Our Title and Corporate investment portfolio totaled $4.9 billion at March 31.

Invested assets included $2.1 billion of fixed maturity and preferred securities having an average duration of three years and an average rating of A2, as well as $600 million of equity securities, $1 billion of short-term and other investments and $1.2 billion of cash. Interest and investment income in the Title and Corporate segments of $92 million increased $65 million as compared with the prior year quarter, primarily due to increases in income from our 1031 Exchange business and cash and short-term investments. Given the rising rate environment, we would anticipate higher investment income through reinvestment of our three-year-duration fixed income portfolio maturities. For the remainder of 2023, we expect quarterly interest and investment income to moderate in the $75 million to $80 million range with declining 1031 Exchange balances and spreads and potentially declining cash and short-term investment balances.

Our title claims paid of $62 million were $18 million higher than our provision of $44 million for the first quarter. The carried reserve for title claim losses is approximately $72 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 Q1 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 record total gross sales of $3.3 billion in the first quarter a 27% increase over the prior year quarter, and a 22% increase over the fourth quarter. This reflects higher demand for retail products in the first quarter, given higher interest rates and market volatility, which often spur fixed annuity sales as financial advisers and consumers seek out guaranteed savings vehicles.

F&G net sales retained was $2.2 billion in the first quarter, which reflects 67% of gross sales, as compared to 70% for the sequential quarter, and 92% for the prior year quarter. This trend reflects third-party flow reinsurance, which increased from 50% to 75% of MYGA sales in September of 2022. 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. Record ending assets under management were $45.4 billion as of March 31. Adjusted net earnings for the F&G segment were $42 million for the first quarter compared with $80 million for the first quarter of 2022.

This includes volatility from alternative investment portfolio short-term mark-to-market movement that differs from long-term return expectation, as well as a tax valuation allowance expense in the current period. Let me wrap-up with a few thoughts on capital and liquidity. We remain focused on ensuring a balanced capital allocation strategy. In addition to making strategic investments in the business to support innovation and organic growth, we are continuing to evaluate sensible and strategic M&A opportunities in real estate-related businesses and returning capital to our shareholders through our generous quarterly dividend, and share repurchases. We ended the quarter with $834 million in cash and short-term liquid investments at the holding company level.

This balance reflects FNF’s acquisition of TitlePoint in January 2023 from a combination of $150 million of operating cash and $75 million of holding company cash. FNF’s consolidated debt was $3.7 billion on March 31, up approximately $460 million from the preceding quarter primarily due to F&G’s new $500 million senior notes issuance in early January. F&G intends to use the net proceeds from the senior notes to support growth of the business and for future liquidity needs. Our debt-to-capitalization ratio excluding, AOCI, was 28.5% as of March 31st. 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 interest — 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’s debt.

During the first quarter we have returned approximately $126 million of capital to our shareholders, through $122 million or $0.45 per share of common dividends and $3.8 million of share repurchases. Following our record level of share repurchases in 2022 at a total cost of $549 million, we prudently moderated our repurchase volume in the first quarter to preserve financial flexibility, as we navigate the challenging market and extended blackout period due to the year-end close cycle. We continue to view our current annual common dividend of approximately $500 million as sustainable. The dividend is reviewed quarterly and expected to increase overtime, subject to cash flows, alternative uses of capital and market conditions. This concludes our prepared remarks.

And let me now turn the call back to our operator, for questions.

Operator: Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Thank you. And our first question comes from John Campbell with Stephens Inc. Please proceed with your question.

Operator: Thank you. Our next question comes from Mark DeVries with Barclays. Please proceed with your question.

Operator: Thank you. [Operator Instructions] Our next question comes from Bose George with KBW. Please proceed with…

Operator: Thank you. Our next question comes from Mark Hughes with Truist. Please proceed with your question.

Operator: Thank you. And this will conclude our question-and-answer session. I will now turn the conference back over to CEO, Mike Nolan for closing remarks.

Mike Nolan: Thank you. We are pleased with our solid start to the year despite the uncertainty and volatility in the current macro environment. FNF is well-positioned to navigate the current market cycle and continues to build and expand our Title business for the long-term. Likewise F&G’s profitable growth demonstrates its strong momentum with many opportunities ahead to further expand the business drive margin expansion and improve 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: Thank you for attending today’s presentation. The conference call has concluded. You may now disconnect at this time. Good bye.