Q4 2023 Earnings Summary
- FNF is well-positioned to benefit from a lower interest rate environment, as a decrease in rates would positively impact their Title business, leading to increased volumes and potential margin expansion, while F&G's earnings are expected to remain consistent due to their ability to adapt to interest rate changes ,.
- F&G is generating approximately 30% of FNF's adjusted net earnings, and the company's additional $250 million investment in F&G demonstrates confidence in its growth potential, with an expected return of around 7% over 3 years.
- FNF's inHere platform shows significant growth potential, with over 1 million users, up more than 50% from the prior year, and management anticipates significant upside in user adoption and impact on expenses and revenue as market conditions improve.
- The Corporate segment experienced higher-than-usual losses in the fourth quarter due to unexpected expenses, including a $10 million charge related to a cybersecurity incident and an $8 million charge to terminate an old frozen pension plan, which may continue to impact profitability.
- Margins are under pressure due to historically low order volumes and are heavily dependent on interest rates declining; management expressed caution regarding margins, particularly in the first quarter of 2024, indicating that if rates do not decrease as anticipated, margins may not improve.
- Recent increases in commercial fee per file were influenced by a few large transactions in the fourth quarter, and management expects these numbers to normalize, potentially leading to lower revenue in future quarters.
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Margin Outlook
Q: Will margins improve in 2024 compared to 2023?
A: Management expects margins in Q1 2024 to be similar to last year due to lower inventory volumes but is more optimistic as the year progresses. Resale open orders in January are up 7% over last year, indicating a modestly better purchase environment. The key factor will be interest rates; if rates decrease, especially in the second half, there's potential for modestly better margins. Refinance activity was up 15% sequentially in January due to a modest rate decrease. -
Capital Allocation and $250 Million Investment in F&G
Q: Why did the Board invest $250 million in F&G, and what's the capital prioritization strategy?
A: The Board invested $250 million in F&G to capitalize on its strong performance since the June 2020 acquisition. With nearly $1 billion in holding company cash, the investment offers a 7% return over three years and demonstrates confidence in F&G, which generates about 30% of adjusted net earnings. Capital priorities include a $525 million annual dividend, $200–$300 million for M&A, and potential share buybacks, though buybacks were paused in 2023 to monitor the title business environment. -
Impact of Lower Interest Rates on F&G and Title Business
Q: How would a lower rate environment affect F&G's performance?
A: Management believes F&G can maintain consistent earnings even if rates decline. While higher rates provide outsized earnings through extra spread, F&G has grown earnings consistently across varying rate environments by growing assets under management and adjusting pricing annually. A lower rate environment would positively impact the title business without significantly affecting F&G's performance. -
M&A Activity and Outlook
Q: Can you elaborate on recent M&A activity and its impact on order counts?
A: In 2023, the company completed 10 acquisitions totaling $300 million, heavily influenced by the $200 million TitlePoint deal completed on January 1. The acquisitions were mostly smaller and had a modest impact on order counts. Management expects more M&A activity in 2024 as market pricing stabilizes. -
Cybersecurity Incident Impact
Q: Has the cybersecurity incident led to any customer fallout or market impact?
A: Management reports negligible impact from the cybersecurity incident, with no indications of concerns from large customers. November open orders were down about 10%, but December saw a 15% increase, likely recapturing delayed business. Overall, the impact was minimal. -
Fee per File Increase
Q: What's driving the increase in residential and commercial fee per file?
A: Residential purchase fee per file increased by 6%, from approximately $3,180 to $3,350, aligning with market trends. The rise in commercial fee per file is due to a mix shift from a few large transactions in Q4 and is expected to normalize in 2024. -
Closing Ratios
Q: Do you expect closing ratios to improve after earlier disruptions?
A: Closing ratios were lower in 2023 due to the rate environment but are expected to improve as the market normalizes in late 2024 and beyond, benefiting both residential and commercial segments. -
$8 Million Frozen Pension Adjustment
Q: Was the $8 million pension charge adjusted out of earnings?
A: Yes, the $8 million charge to terminate a frozen pension plan was adjusted out of normal earnings. -
Growth Potential of inHere Platform
Q: What is the growth potential and impact of the inHere platform?
A: The inHere platform has reached 1 million contacts, up 50%, including consumers and agents. Management sees significant potential for growth, especially as market activity increases with lower rates, enhancing customer engagement and potentially impacting expenses and revenue positively. -
Investment in Light Position
Q: Can you comment on the investment in light position?
A: Management indicated that any growth in the light position has been negligible and not significant enough to have noted.