Q2 2024 Earnings Summary
- Strong performance in the Title segment with industry-leading margins: Despite a challenging market with elevated mortgage rates and low transactional volumes, FNF's Title segment delivered an adjusted pretax title margin of 16.2% in Q2 2024, up from 15.8% in the prior year quarter. Management expects margins to potentially outperform in the second half of the year if volumes pick up due to lower interest rates, indicating resilience and efficiency in their operations.
- Significant growth and earnings contribution from the F&G segment: F&G reported record gross sales of $4.4 billion in Q2 2024, up 47% over the prior year quarter. The segment contributed 40% of FNF's adjusted net earnings in the first half of 2024, up from 28% in the first half of 2023. Management is optimistic about F&G's growth prospects and its ability to provide durable and growing earnings.
- Potential rebound in commercial real estate transactions: Open orders in the national commercial segment were up 11% over Q2 2023, indicating strength in commercial volumes. Management noted early signs of increased activity in the office sector and believes commercial volumes could outperform in the second half, which would positively impact revenues.
- Margins are under pressure due to lower revenue levels, and achieving mid-teens margin guidance depends on improved volumes which rely on lower mortgage rates. Management mentioned it's tough to predict margins at current lower revenue levels and that achieving mid-teens margins depends on better volumes, which are dependent on lower mortgage rates.
- Share repurchases have paused due to market uncertainty, indicating limited capital return to shareholders in the near term. The company needs to cover its $525 million annual dividend, $80 million interest expense, and $200-300 million acquisition spend before resuming buybacks, which are on hold due to uncertainty in one of the weakest years in industry history.
- Increased claims expenses due to fraud claims in 2023 may impact future profitability. The company experienced fraud claims in 2023, leading to a higher claims provision for that year, and while they feel the 4.5% loss provision rate is comfortable, it's higher than the long-term run rate of 4%, potentially affecting future earnings.
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F&G Spin-off Considerations
Q: Any updated thoughts on spinning off F&G?
A: Management is very pleased with F&G's performance, noting it contributed 40% of adjusted net earnings in the first half. F&G has outperformed expectations, growing sales from around $3 billion annually at acquisition to four to five times that amount now. While there's optionality, the Board is currently satisfied with retaining F&G. -
Capital Allocation and Buybacks
Q: How active do you plan on being with buybacks near term?
A: After covering the $525 million dividend and approximately $80 million in interest expense, and allocating $200–$300 million for acquisitions, management plans to consider buybacks once generating $800–$900 million in cash flow. They renewed a 25 million share buyback authorization, which was a timing matter as the prior authorization expired. -
Margin Outlook
Q: Do you feel comfortable about the mid-teens margin guide?
A: Management is confident about potentially outperforming last year's back-half margins if volumes improve. With better volumes and increased commercial activity, there's an opportunity to achieve full-year margins at the lower end of the 15%–20% range. -
Impact of Interest Rates on F&G Sales
Q: How will the move in rates impact F&G's sales?
A: Management noted they've hedged about two-thirds of their floating rate exposure, with approximately 6.5% of the portfolio in floaters. The near-term impact of rates coming down is expected to increase demand for their products. They can reprice products monthly or as needed, with a few days' notice to distribution partners. -
Commercial Real Estate Outlook
Q: What's the outlook for commercial in the back half?
A: Through July, open orders are up 4% year-over-year, with national orders up 8%. Management anticipates potentially matching or exceeding the $1.1 billion in commercial direct revenue from 2023, aided by lower rates and increased office transactions. -
Staffing Levels and Capacity
Q: How are you thinking about staffing levels with potential volume increases?
A: Management feels well-positioned, having reduced staff by 3% year-over-year while adding 250 people through recruiting and acquisitions. They can utilize overtime first but are prepared to add staff as needed based on market demand. -
Operating Cost Reductions
Q: How should we think about operating costs in Q3?
A: Management highlighted facility savings of almost 7% over the second quarter of last year, reducing 1.3 million square feet and about 100 leases over a few years. They expect these savings to continue into the third quarter without needing to add new leases. -
Loss Provision Rate Stability
Q: Are you considering revising the 4.5% loss provision rate?
A: Management believes the 4.5% rate feels comfortable and possibly a bit conservative, given a ten-year run rate for developed claims closer to 4%. While higher claims in 2023 skewed estimates, they expect levels to align with historical norms.