Fidelity National Financial, Inc. (FNF) Q3 2022 Earnings Report, Transcript and Summary

Good morning and welcome to FNF's Third Quarter 2022 Earnings Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the call over to Lisa Foxworthy-Parker, Senior Vice President, Investor and External Relations. Please go ahead.

Great. Thanks, operator and welcome, everyone, to FNF's third quarter 2022 earnings call. Joining me today are Mike Nolan, Chief Executive Officer; and Tony Park, Chief Financial Officer; as well as Chris Blunt, F&G's Chief Executive Officer and Wendy Young, F&G's Chief Financial Officer. We look forward to addressing your questions following our prepared remarks. 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 2:00 p.m. Eastern Time through November 16, 2022. And with that, I'll now turn the call over to our CEO, Mike Nolan.

Thank you, Lisa and good morning. Overall, we have had another strong quarter despite housing market headwinds from ongoing concerns about inflation, surging interest rates and a growing risk of recession. Our title business has continued to perform well despite declining mortgage originations, while F&G continued to deliver on its diversified growth strategy with assets under management climbing to $42 billion at September 30. Looking forward, we are on track to complete the dividend distribution of 15% ownership of F&G to FNF shareholders in the coming weeks and Chris will provide more details in a minute. Starting with our title business, commercial revenue was $381 million, a third quarter record compared with the year ago quarter of $366 million. This was driven by a 19% increase in total commercial fee per file, partially offset by a 12% decrease in closed orders. On the residential side, the focus on rising mortgage rates continues to make headlines as we have experienced one of the fastest moves in mortgage rates ever seen. The average 30-year mortgage rate has jumped from 3.1% for 2021 to 4.5% for the first half of 2022. And in just a matter of weeks, is now over 7%, a level not seen since 2002. As expected, this dynamic environment and resulting market decline are impacting our order volumes as the rapid rise in mortgage rates and resulting decline in housing affordability are adding pressure to the normal second half seasonal falloff and purchase transactions. Looking at third quarter volumes more closely, daily residential purchase orders closed were down 23% in July, 24% in August and 27% in September for an overall 25% decrease in the third quarter compared to the prior year. Daily purchase orders opened were down 22% from the third quarter of 2021 and down 29% for the month of October versus the prior year. Next turning to refinance volumes which are inherently more rate sensitive, we saw refinance orders begin to decline in the second quarter of 2021 and move quickly to rightsize our operations. We believe that current refinance volumes are at or near trough levels and would not expect volumes to return in 2023 without a meaningful reduction in mortgage rates. For the third quarter, our refinance orders opened per day were down 75% from the third quarter of 2021 and down 74% for the month of October versus the prior year. Over the last year, as refinance volumes have fallen, we have benefited from diversification across our market segments as residential purchase and commercial revenue have helped to buffer lower refinance volumes. Refinance revenue was only 7% of Title total direct revenue in the third quarter compared to 19% in the third quarter of 2021. As to commercial volumes, we have seen open order volumes fall from their historically high levels, though still running above the average seen over the last 7 years. For the third quarter, our total commercial orders opened per day were down 18% from the third quarter of 2021 and lower by 30% for the month of October versus the prior year. For October, total commercial orders opened were 760 per day. For the quarter, we delivered solid Title results despite a challenging market backdrop. Total orders opened averaged 5,700 per day in the third quarter, with July at 6,000, August at 5,700 and September at 5,300. For the month of October, total orders opened were 4,800 per day. Total revenue, excluding recognized gains and losses, was $2.3 billion, a 24% decrease compared with the third quarter of 2021. Adjusted pretax Title earnings were $400 million and adjusted pretax title margin was 17.1%. In this declining market environment, we remain confident in our ability to navigate the challenges of operating in a cyclical business. Our management team is experienced in operating through varying economic cycles and has a proven track record of reacting quickly to adjust to order volumes. Year-to-date, net of acquisitions, we have reduced Title headcount by approximately 20% and we'll continue to manage the business based on market conditions. Our industry-leading position and strong balance sheet allow us to not only withstand periods of dislocation but take advantage of opportunities to build our title business for the long term. We will continue to make investments in technology, data, automation and people that enhance our security, productivity and the overall customer experience. We will continue to recruit revenue attached talent and look to acquire title agencies with strong management and people. Additionally, the growing utilization of our inHere digital transaction platform and mobile app which allow real estate agents to track orders and better manage their businesses creates both market growth and efficiency opportunities over the near and long term. We have approximately 120,000 real estate agents registered for the platform reflecting an increase of $23,000 or 25% from the second quarter. Finally, the countercyclical nature of F&G's business which benefits from rising interest rate environments, provides an important source of additional earnings as market dynamics put pressure on mortgage origination volumes. Since the merger over 2 years ago, F&G has far exceeded our original expectation for growth and contributed approximately $900 million of adjusted net earnings over the last 9 quarters on a cumulative basis. By retaining an approximate 85% majority interest in F&G following the dividend distribution, we will continue to benefit from F&G's growth. Wrapping up, I would like to thank all of our employees for their hard work and contribution to our performance and ongoing commitment to providing our customers with exceptional service. Let me now turn the call over to Chris Blunt and Wendy Young to review F&G's third quarter highlights.

Thanks, Mike. First, starting with sales. During the third quarter, F&G generated total gross sales of $2.9 billion. Our products are attractive in a rising rate environment as seen in our record $2.3 billion of retail total gross sales in the third quarter, up 45% from the prior year quarter and in our application submissions which are up nearly 60% from the prior year, providing a strong pipeline through year-end. In addition to increased demand from rising rates, our retail sales volume reflects expanding relationships with new and existing distribution partners in the agent, bank and broker dealer channels as well as traction from a comprehensive product portfolio that meets a broad range of consumer needs. Third quarter activity also included $621 million of pension risk transfer transactions including our first repeat client transaction compared with $371 million in the prior year, our first quarter in the PRT business. There were no funding agreement issuances in the current quarter which we expect to be lumpy and opportunistic. Total net sales were $2.2 billion in the third quarter, net of our flow reinsurance arrangement which increased from 50% to 75% of MYGA sales effective September 1. Assets under management for the quarter totaled $42 billion, reflecting an increase of $7 billion or 21% over the prior year, driven by net new business flows. Our high-quality investment portfolio is performing very well and our strategic investment management partnership with Blackstone remains a differentiated competitive advantage for F&G. As reported, the average earned yield of the total portfolio was 3.31% for the quarter compared to 5.89% in the year ago quarter. This 258 basis point decline primarily reflects short-term changes in market value on the alternative investment portfolio. Since the merger with FNF, F&G's alternative investment portfolio has returned 12% on average and returns have been less volatile than the S&P 500 index. Fixed income yield, excluding alternative investment volatility, CLO redemption gains and bond prepay income has expanded over the last 5 quarters. This reflects higher yield on new investments, upside from the 15% of our portfolio held in floating rate assets as well as lower fees from the Blackstone [indiscernible] fee which decreased to 14 basis points for assets over $34 billion from approximately 24 basis points which will further improve our competitiveness and allow us to drive even more profitable growth over time. Looking ahead, given the macro environment uncertainty, we have updated our investment portfolio stress test to look at moderate and severe recession scenarios that are conservative and consistent with or more severe than what has happened historically. We have applied cumulative default rates and an instantaneous shock at the asset class level. Under both stress scenarios, the largest impact is the mark-to-market on equity and preferred securities which is unrealized and would be expected to recover over time. Our F&G investment portfolio is well diversified and tightly matched between assets and liabilities which provides immunization against point-in-time mark-to-market volatility viewed as noneconomic. The impact of default losses and credit drift viewed as economic losses is significantly less than the mark-to-market impact under both stress scenarios, reflecting our differentiated asset allocation and targeted portfolio mix. F&G has a strong balance sheet, ample sources of liquidity and adequate levers for management action to successfully navigate the stress scenarios. In the moderate recession scenario, no management action is required. In the severe recession stress scenario, management levers such as revolver utilization, increased reinsurance activity or moderated new business volumes would be more than adequate to provide the needed short-term benefit. Further, our management team is seasoned and has experience throughout various economic cycles. We've included the detailed stress test analysis in our Analyst Day presentation posted to both the FNF and F&G Investors websites. Additionally, we plan to post a refreshed Analyst Day presentation for third quarter results including our updated non-GAAP measure for adjusted net earnings which is in our Form 10 registration statement. Let me now turn the call over to Wendy Young to provide a brief update on F&G's third quarter financial highlights.

Thanks, Chris. With regard to earnings for the third quarter, pursuant to our Form 10 registration process, effective this quarter, we have updated our non-GAAP measure definition for adjusted net earnings, or ANE, to remove the alternative investment yield adjustment. This adjustment had normalized for the current period yield impact of market volatility as compared to management's expectation of long-term returns. Going forward, this reporting change will result in more volatility for adjusted net earnings. Importantly, the underlying economics of our business has not changed. On a pro forma basis, over the past 9 quarters since the FNF merger, ANE under the new definition, would have had a quarterly range of volatility of $93 million lower to $60 million higher than ANE, as previously reported under the former definition due to the short-term alternative investment mark-to-market movements. Despite the quarterly mark-to-market volatility, cumulative earnings over the past 9 quarters were $878 million under the former definition versus $963 million under the new definition, an $85 million increase. We have provided a reconciliation for F&G segment, ANE under both the former and new definitions over the past 9 quarters in the earnings release. We have also added a new disclosure of significant income and loss items included in ANE, including the effect of alternative fair value movement. This disclosure is included in FNF's earnings release and 10-Q as well as F&G's quarterly financial supplement. For the third quarter, F&G's adjusted net earnings were $12 million compared to $112 million reported in the second quarter of 2022, with both periods reflecting the new definition for comparability. Adjusted net earnings for the third quarter of '22 includes a $10 million unrealized loss from alternative investments. Alternative investments net investment income based on management's long-term expected return was $83 million, representing a $93 million difference between the new and previous ANE definitions. As Chris mentioned, these amounts reflect actual short-term changes in fair value, whereas since the merger with FNF, F&G's alternative investments have returned 12% on average. Adjusted net earnings for the second quarter of 2022 included $30 million income from actuarial assumption updates and $6 million of CLO redemption gains and other income as well as a $38 million unrealized gain from alternative investments. Alternative investments net investment income based on management's long-term expected return of approximately 10% was $54 million. Next, turning to the new accounting standard for long-duration targeted improvements or LDTI which becomes effective in 2023 and is geared to fair value certain long-dated liabilities. Overall, we view the adoption of LDTI as an insignificant to our total book value, given our mix of business, prudent liability assumptions and recent purchase accounting associated with FNF acquisition which marked our assets and liabilities to market value as of June 1, 2020, merger date. Also, as a reminder, fixed indexed annuity based reserves are already at fair value and not impacted by LDTI. We estimate that the January 1, 2021, transition impact will increase total shareholders' equity by up to $200 million, reflecting the net after-tax effect of the new LDTI measurement drivers offset by the removal of shadow accounting for actuarial intangible balances. We look forward to providing further details as we get closer to the full implementation in the first quarter of 2023 which will include 2021 and 2022 recasted results on the new LDTI basis. There will likely be timing differences when sources of actual earnings emerge. Although from an economic perspective, the underlying product profitability is unchanged. As a reminder, this is a U.S. GAAP accounting standard only with no impact to statutory results or regulatory capital. With that, I will now hand it back to Chris to provide some final comments on F&G.

Thanks, Wendy. It was another strong quarter and our financial results demonstrate the underlying earnings power of the F&G business model, particularly in a rising rate environment. We are well positioned for future growth and on track for FNF to take F&G public through the pro rata distribution of 15% of the common stock of F&G to FNF shareholders, whereby FNF will retain control of F&G through an approximate 85% ownership stake. FNF expects the distribution to occur in the fourth quarter of 2022. At which time, F&G will be publicly listed on the New York Stock Exchange under the ticker symbol FG. Completion of the distribution of F&G shares to FNF shareholders is subject to the satisfaction of certain conditions, including that a registration statement on Form 10 filed by F&G with the U.S. Securities and Exchange Commission is declared effective. Also, F&G's Board of Directors has approved the initiation of a dividend program under which the company intends to pay quarterly cash dividends on our common stock at an initial aggregate amount of $100 million per year commencing in early 2023. With that, I'd like to thank our team once again for their extraordinary efforts and I will now turn the call over to Tony Park to review FNF's third quarter financial highlights.

Thank you, Chris. Starting with our consolidated results. We generated $3.2 billion in total revenue in the third quarter. Third quarter net earnings were $289 million, including net recognized losses of $230 million versus net earnings of $732 million, including $154 million of net recognized losses in the third quarter of 2021. 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 $3.4 billion as compared with $4 billion in the third quarter of 2021. Adjusted net earnings from continuing operations was $295 million or $1.07 per diluted share compared with $663 million or $2.33 per share for the third quarter of 2021. The Title segment contributed $298 million, F&G contributed $12 million and the Corporate segment had an adjusted net loss of $15 million. Turning to the Title segment financial highlights. Our Title segment generated $2.3 billion in total revenue in the third quarter, excluding net recognized losses of $48 million, compared with $3.1 billion in the third quarter of 2021. Direct premiums decreased by 23% versus the third quarter of 2021. Agency premiums decreased by 27% and escrow title-related and other fees decreased by 27% versus the prior year. Personnel costs decreased by 13% and other operating expenses decreased by 18%. All in, the Title segment generated a 17.1% adjusted pretax title margin for the quarter, a decrease of 460 basis points versus the record 21.7% in the prior year quarter. Our Title and Corporate investment portfolio totaled $5.6 billion at September 30. Interest and investment income in the Title and Corporate segments of $71 million increased $44 million as compared with the prior year quarter, primarily due to increases in income from our 1031 Exchange business and short-term investments. Given the rising rate environment, we would anticipate the potential for higher investment income through reinvestment of our 3-year duration fixed income maturities. Based on the current interest rate environment and expected near-term Fed actions, we expect an additional $15 million to $20 million increase in interest and investment income in the fourth quarter on our 1031 Exchange balances and our short-term investments. Looking to 2023, we expect quarterly interest and investment income to moderate in the $85 million range with declining 1031 Exchange balances and spreads and potentially declining cash and short-term investment balances. Our title claims paid of $65 million were $9 million lower than our provision of $74 million for the third quarter. The carried reserve for title claim losses is approximately $88 million or 5.1% above the actuary central estimate. We continue to provide for title claims at 4.5% of total title premiums. Let me wrap up with a few thoughts on capital and liquidity. We remain focused on ensuring a balanced capital allocation strategy as we navigate the current environment. This encompasses making investments in title technology and other strategic initiatives to support innovation and organic growth in the business, continuing to evaluate sensible strategic M&A opportunities in real estate-related businesses, title agencies and technology acquisitions, paying a generous quarterly dividend to our shareholders and repurchasing shares. We ended the quarter with $1.1 billion in cash and short-term liquid investments at the holding company level. F&'s consolidated debt was $2.7 billion on September 30, down $400 million from the preceding quarter due to the payment of our 5.5% senior notes which matured in September. As a result, our debt to capitalization ratio, excluding AOCI, was 23% as of September 30. Going forward, our annual interest expense on debt outstanding is approximately $100 million. During the third quarter, we paid common dividends of $0.44 per share for a total of $120 million. Following last week's announcement of the quarterly cash dividend increase to $0.45 per share, we view our current annual common dividend of approximately $500 million as sustainable. The dividend is reviewed quarterly and expected to increase over time, subject to cash flows, alternative uses of capital and market conditions. FNF continues to return excess cash to shareholders over time through share repurchases and has remained active throughout the third quarter and into the fourth quarter. During the third quarter, we repurchased 5.3 million shares for a total of $205 million at an average price of $38.74 per share. This compares to the second quarter of 2022, where we repurchased 4.3 million shares for a total of $172 million. For the third quarter, we have returned approximately $325 million of capital to our shareholders through common dividends and share repurchases. Year-to-date, we have returned $876 million through common dividends and share repurchases. This concludes our prepared remarks and let me now turn the call back to our operator for questions.

[Operator Instructions] Our first question comes from the line of Mark DeVries with Barclays.

Yes, thanks. Mike, I heard your comment that headcount is down about 20% from the peak but I think order counts are down considerably more at this point. Can you just discuss how much more in the way of expense reduction we should expect?

Sure, Mark. Yes, by 20% year-to-date and about 5% of that occurred in October and the first week of November. And we just continue to keep evaluating all of our expenses but certainly headcount in relation to the order volume decline. You're not going to get a complete kind of one-to-one with the percentage drops in volumes and personnel. But we're pretty pleased with our overall expense reduction, quarter-over-quarter was about 20%, including personnel and OpEx, of course, on maybe a little bit more than a 20% decline in revenue. I think it was about 24%. So we're going to continue to stay on it and we'll just evaluate it as we go through the back end of the year and into next year.

Okay. And then just given the current environment and what you think you can do around expenses, what's a realistic pretax title margin for us to expect in this type of environment?

Yes, it's a little tricky given the volatility, Mark. I would say that we still think the 15% to 20% annual margins is the right range in a normalized market. We've shown our ability to do that or be close to it over the last 6 years in a variety of different market conditions, even beating it, of course, in '21. But with the rapid rise we've seen in rates and the resulting pressure on volumes, it's a little tougher to predict how 2023 is going to play out. I would just say that we expect to have another strong commercial year. Refinance is likely to remain low as we mentioned in our opening comments. And I think purchase becomes a bit of the wildcard depending on where rates are and the stability of home prices. And you can look at just the difference in the MBA and Fannie Mae forecast to see the different outcomes that they're thinking about depending on where rates are. But certainly in the short term, rates are a bit of a headwind relative to industry revenue and margin as potential homebuyers reconsider the cost of purchasing a home. We're just going to continue to, as I said earlier, to move as quickly as we can to adjust our cost to our order volumes, maximize margins and lead the industry regardless of the environment. And I think our work on the headcount is a great example of that. In addition to the 20% that we mentioned on title headcount, we've also taken about 12% out in our nontitle headcount. So we're approaching it from all aspects of the business.

Our next question comes from the line of Mark Hughes with Truist Securities.

Thanks. Good morning. Chris, you've in the past used this formulation that the net income should equal say, 100 basis points of assets. Is that still a good approach with the new accounting methodology you're using or reporting methodology?

Yes, Mark, great question. I would say, it is. We're just going to see more volatility now quarter-to-quarter. The way we look at alternatives, it's our longest duration asset. We expect to hold this portfolio for a very long period of time. So economically, we don't get too excited by a big markup or a big markdown quarter-to-quarter. But if you look through the cycle, right? And our long-term assumption is 10% for alternatives. We've actually done 12% since the merger with FNF. Yes, I still think that, that 100 basis point target is a good one. We've actually average probably closer to 109 or 110. And this is a good environment, rates continue to go up. And so we're -- for us, at least, this is actually a good environment.

And then will you continue to provide any disclosures and give us some sense of the variation from your expectations, I guess, similar to what you did here in the third quarter?

Yes. That's our intent, particularly it's hard to compare quarter-to-quarter going forward without doing that. But we will certainly disclose our average balance in alternatives. And again, if there's any change to what we consider to be a long-term assumption, we would note that as well.

And then you had suggested the strong submission growth number, I think, something like 60% [ph]. Could you clarify what was that precisely? And then does that imply corresponding growth in the fourth quarter?

Yes. So that was all application activity across our retail business, so MYGA business as well as FIA included in that. And I think that was really just our way of saying, yes, it was a good quarter of sales. It was a record for retail and the momentum, if anything, is accelerating into year-end.

Our next question comes from the line of Bose George with KBW.

Actually, on your guidance on investment income, I guess it implies that commercial volumes will be down next year just on the lower escrow. I mean, is that right? I mean, I guess, Mike noted that you still expect a strong commercial year but just curious what you're thinking in terms of declines when you -- it's embedded in that investment income number.

Thanks, Bose. I can address -- this is Tony. I can address the investment income. And I don't know if it really relates directly to our commercial market or not. But really, it's more -- our investment income is driven partly by our fixed income portfolio but also, as you know, we have a lot of short-term cash and short-term investments in our 1031 Exchange business. So the guidance that we provided, we expect to see another $15 million to $20 million of net investment income in Q4. This is just Title and Corporate. And that's really due to the increases in rates that we've seen and that's primarily on the 1031 Exchange balances and our short-term investments. And then looking to 2023, I would expect that to moderate, so not continue to grow as we've seen in 2022. And somewhere in the $85 million quarterly range or maybe $340 million to $350 million for the full year 2023. And that's based on an expectation that the 1031 balance has come down a little bit. We've seen peak balances in that business and that drives really a big part of the investment income and I would expect those to come down. I think we've seen peaks of like $10 billion and maybe the bottom end at somewhere around $4 billion. And so maybe somewhere in the middle of that range or maybe a little less than that. But again, it's hard to predict where that lands. But based on that and spreads would tighten a little bit as we would expect to share more of that with customers. And so that's kind of where my guidance is based right now.

Okay, great. And then, actually -- and Mike and maybe just on the commercial, you noted you expect a strong year next year. Just curious just the cadence how much sort of a difference from what you're expecting now in '22?

Yes. Great question, Bose. And certainly still seeing commercial strength. I think you look at the third quarter, a record third quarter, a beat to a really strong comp from last year's third quarter. So that's evidence of a still healthy market. And the pipeline is still good. If you look at the opened orders for the third quarter, they were just under 860 a day which is down from the highs of '21 and the early part of '22. But for context, that lines up kind of really well with the volumes we saw in 2019 which was the best year we ever had before 2021. So I feel like there's good activity. We did see a bit more of a decline in October. We'll have to see if that becomes a new trend or is the kind of the lumpiness. But I would just say, we're still seeing strength across geographies, asset classes and look to a pretty solid fourth quarter and maybe some momentum going into the first quarter of next year. So it's hard to say that it would be comparable to a '21 or -- '22 could be our best year for revenue. We don't know that yet but we may have our best year ever for revenue which should be, I think, just an incredible achievement. But it might look more like the years we saw heading into 2019 -- and a 2019 year [ph].

Our next question comes from the line of Andrew Kligerman with Credit Suisse.

And maybe just kind of tailing on to that question just now on commercial, Mike. So commercial opened orders were down about 18% year-over-year. And then you said October was off a bit as well or maybe a little more. So I'm kind of reading your comments to mean that you kind of think commercial orders will kind of stabilize in this zone. Is that the right read as to what you were saying? I just want to get a sense of -- a little better sense of where you think it's going relative to [indiscernible].

Yes. It's a little -- Andrew, it's Mike. But it's a little tough to know stabilize or not. Remember the comp is really tough. You're talking about an environment where we opened over 1,000 commercial orders a day all through '21 and I don't know, the first 4 or 5 months, I think, of '22. And so kind of looking back to maybe markets prior to that, to me, is a little bit more helpful for context. And opening in the mid-800s in the third quarter kind of takes you back to 2019 which was a great year. So -- but no question, orders have come off a bit, particularly with rates moving up. So my feeling is we'll have a good '23, I just -- I can't tell you exactly how it's going to look.

Got it. Okay. And maybe for Chris, it looks like in 3Q, surrenders didn't really pick up. They were around $600 million and rates keep picking up, that's for sure. So how are you thinking about surrenders going forward? Are there any indications that they're picking up into the fourth quarter and beyond?

Yes. No, we haven't seen that. I think this has been one of our points. The stability of our liability base has been pretty consistent for a really long time right now. And so no, we're not seeing that. And honestly, even if we were, that would probably be a sign that there was a lot of 1035 Exchange activity and you just want to make sure that you're winning as much as you're losing on the back end in terms of new business. But even during the pandemic when people had a good excuse to be noneconomic in their surrenders, we saw elevated surrenders but it lasted for a nanosecond. And it was within a band of normal. It wasn't spike types of surrenders. So yes, as of yet, we're not seeing anything that looks alarming.

Is that -- Chris, is that a function of strong surrender charges in place? Is it that you've got an older population of annuity holders? Intuitively, I would think it would start to spike up. So I'm kind of curious what's the construct of your portfolio that's allowing for this stability?

Yes. I think part of it is how young our book is. So we've been selling really large volumes relative to the asset base. So 90% of our book is surrender charge protected and the average surrender charge is 7%. So you can do the math. You would need much higher rates for that to be an economic trade for someone to move out. The other thing is, keep in mind, these are retail policyholders. They're not generally sitting around looking for interest rate arbitrage. This is not what they're worried about in their portfolio. They kind of wish they had more fixed annuities and less ETFs, frankly. So I think they tend to think about it when it rolls as opposed to you. I wonder if I can cash out an arbitrage and make a bit more.

Got it. That makes sense. And if I could sneak one last one in quickly. Just Mike, on the acquisition pipeline for these title agencies, are you seeing a lot there? How is that looking?

Yes. I would say the pipeline is still very strong. We're certainly evaluating deals in light of kind of this changing market conditions. So I think there's good opportunities but we've just got to make sure that we're timing it right and getting the right talent and the right company because the market could be a little choppy for particularly the early part of the year.

[Operator Instructions] Our next question comes from the line of John Campbell with Stephens.

On F&G, it sounds like you guys have that kind of ready to go on the spin here shortly. Obviously, we're going to have to wait and see where the price shakes out but the $100 million dividend announcement, just running the math, it looks like again, depending where the price comes out, it looks like that dividend yield could range from a good bit better to maybe miles better than what AEL has out there today. I don't know if you can discuss this at this stage but just maybe talk to us about the dividend strategy, whether you guys think there's maybe upside to that, I don't know, 20% or so payout ratio and kind of what the other capital priority items are for F&G.

Yes, this is Chris. I'll start and others can jump in here but this is the point we've been trying to make which is the size of our in-force book now is large enough that it throws off quite a bit of capital to allow us to still grow -- continue to sell at a good clip but also have some cash. And so yes, we were trying to send a signal. The Board was trying to send a signal with the dividend that we have cash capacity. It's something we would hope to grow over time. And again, given the volume that we're selling, just simply reinsuring a bit more of our gross sales. If we choose to do that, we can earn a spread on the reinsurance but it also frees up a meaningful amount of cash that would be with the Board's discretion of how they want to allocate that.

Okay. That's helpful, Chris. And then maybe this is for Tony but a couple of years ago, you guys had the accounting change where you have to mark your book to market and kind of create some volatility around the revenue. And so with this F&G change, it sounds like you're going to have a lot more volatility around the earnings. I mean if you look at it just this quarter, [indiscernible] you guys really put up a great quarter. I think you would have beat consensus by a pretty healthy amount, if not for that change with F&G. With all that said, is there any desire to maybe report out directly on title, just a way to kind of get beyond that volatility?

Yes, John, thanks. You're right. We did. A few years ago, we changed our reporting to reflect that these marks really aren't operating per se and should be pulled out. And of course, we've done that with F&G for the most part. But given the process that we're undertaking with the spin, specific to the alts [ph], we have to treat those differently. So I guess we will see some volatility but the economics shouldn't change at all. So I don't know if I got your question specifically but you're right, we had a very good quarter masked a little bit by the headline, unfortunately but it isn't too hard. And hopefully, we've helped you and others be able to interpret what the real earnings were. And yes, we feel like we had a really strong quarter.

Yes, that's helpful. And the reason I point that out is like with the change of the revenue accounting, you guys are able to back that out in your adjusted EPS number. So you guys, with this F&G change, you print [indiscernible]. I thought, again, that would have been above consensus. Is there a way from a headline number on adjusted EPS that you guys can account for this recent change with F&G reporting?

Meaning, could we show the adjusted in the headline? Is that what you're asking?

Perhaps.

No. We cannot do that. They're -- that's why we put it in there elsewhere so that you can reconcile to it but we can't prominently display what most people are most interested in, unfortunately.

Understood. I think you guys have given us enough or you can certainly get to it. So that's certainly helpful. One more quick one if I can squeeze it in. On the commercial order mix, I don't know how much level of detail you guys can provide there. But what does that look like all in purchase versus refi? And then if you could get it down to like kind of local versus national?

Yes. So on the -- maybe I'll start, John, it's Mike with the mix on commercial open. So in the third quarter, 74% of the opens were resale transactions and that compares to 69% in the third quarter last year. And we've seen it really in '22 kind of in that 70% to 74% range. So probably a little bit of an uptick if you went back to prior years, that resale number was probably more in the mid-60s to 68%. So that's on the mix side. In terms of opens year-to-date, we're down 7% total and again, off just a record '21 with national down 3% and local down 9%. So just a little bit more of a falloff on the local side and that may be -- a market that maybe gets impacted a little bit more by the rate increases than the national.

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

We are pleased with our overall results despite the uncertainty and volatility in the current macro environment. FNF is well positioned to execute through this higher mortgage rate environment due to our disciplined operating strategy and long history of navigating market cycles. Likewise, F&G is poised to benefit from the rising rate environment and is on track to list as a publicly traded company by year-end. Thanks for your time this morning. We appreciate your interest in FNF and look forward to updating you on our fourth quarter earnings call.

Thank you for attending today's presentation and the conference call has concluded. You may now disconnect.