Q1 2024 Earnings Summary
- F&G's strong performance is offsetting challenges in the title business, contributing close to half of adjusted net earnings, validating the board's thesis that F&G can provide earnings stability in a tough environment. This diversification supports overall earnings growth.
- Purchase open orders increased by 25% from the fourth quarter to the first quarter, compared to an average of 20% in prior years, indicating encouraging sequential improvement. Despite higher mortgage rates, April purchase orders were up 4% over March, demonstrating the company's resilience. ,
- Management is well-positioned to drive stronger margins with increased revenue, especially from improvements in purchase volumes, and is prepared to manage staffing and expenses accordingly to capitalize on growth opportunities. The company's outperformance on margin in the first quarter is partly due to a better expense position.
- Higher mortgage rates may temper purchase volumes moving forward, as acknowledged by the CEO. This could lead to pressure on both purchase and refinance volumes, potentially lowering revenues in upcoming months. ,
- Margins may be pressured due to lower revenue and volume levels. The company notes that at these lower levels, margins are volatile and dependent on commercial activity and rate volatility, which adds uncertainty to future earnings.
- Paused share repurchases indicate management's cautious outlook. The company paused its share buyback program due to uncertainty and challenging market conditions, suggesting concern about near-term prospects and cash flow.
-
Margin Outlook
Q: Can you elaborate on your low to mid-teens margin guidance?
A: While we don't provide specific guidance, we expect margins to be good relative to the environment. At lower revenue and volume levels, margins can fluctuate significantly each quarter. Factors like commercial performance and mortgage rate volatility can impact margins. If revenues improve, we're well positioned to drive stronger margins. -
F&G Performance
Q: Does strong F&G earnings encourage you to retain it longer?
A: The board is pleased with F&G's performance. Last quarter, F&G was about 30% of adjusted net earnings; now it's closer to half, validating our premise that when rates rise, F&G outperforms while the title business faces challenges. We're staying the course with F&G for now, recognizing the value creation. -
Capital Allocation
Q: Will buybacks resume with housing recovery?
A: We paused buybacks in Q1 2023. We're looking for positive cash flow beyond funding our $525 million dividend commitment and $200–$300 million in acquisition activity. If cash flow improves this year, we'll revisit buybacks. It depends on trends, and while we believe things will get better, timing is challenging. -
Volume Trends
Q: How do current volumes and margins compare to last year?
A: Sequential improvement in Q1 over Q4 was better than prior years, up 25% versus an average of 20%. April volumes were up 4% over March, slightly less than last year's 6%. We're pleased given rising rates, but if rates stay elevated, volumes may be pressured in May and June. Rate volatility makes predictions hard. -
Staffing Levels
Q: How are you managing staffing with order growth?
A: Staffing increases were modest, mainly additional hours by existing staff. We're focused on headcount while recruiting selectively. We're well-positioned to drive better margins if revenues pick up, but rate volatility could impact this. We'll manage staffing as needed throughout the year. -
Corporate Segment Profit
Q: Will corporate segment stay profitable going forward?
A: F&G is paying $27 million per quarter in investment income to our corporate segment, resulting in adjusted net earnings of $8 million. While consolidated financials net this out, isolating it shows corporate receiving the $27 million. We'll highlight this arrangement in future reporting. -
Optimal Rates
Q: What's the optimal rate environment for earnings?
A: For title, more volume from lower rates is preferable to higher investment income from higher rates. In years like 2019–2021, low rates led to explosive title growth and margins up to 22% without much investment income. F&G performs well regardless of rates; as rates fall, earnings should hold up well. -
Corporate Offset
Q: Where is the offset to corporate's profit?
A: F&G's dividends to corporate are booked as income but eliminated in consolidation since you can't show earnings from a subsidiary. The dividends are real cash to FNF corporate but are offset in the income statement. Our earnings release now shows a negative $27 million offsetting the corporate segment. -
Rate Impact on Orders
Q: How have rate changes influenced recent orders?
A: In Q1, lower rates led to a 16% increase in refinance over Q4. Rates rose in April, and refi volumes dipped slightly. Despite higher rates, purchase open orders in April were up 4% sequentially. The impact of rates on May and June volumes remains uncertain.