Ladies and gentlemen, good morning, and welcome to the Fidelity National Financial, Inc. Third Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Lisa Foxworthy-Parker, SVP, Investor and External Relations. Please go ahead.

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. Chris Blunt, F&G's CEO; and Wendy Young, F&G's CFO, 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. 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 p.m. Eastern Time through November 15, 2023. And now, I'll turn the call over to our CEO, Mike Nolan.

Thank you, Lisa, and good morning. Overall, we've had a strong quarter despite the tough market. Starting with our title business, we delivered adjusted pretax earnings of $311 million in an industry-leading adjusted pretax title margin of 16.2%. This is an outstanding result, especially given that U.S. mortgage rates have advanced to multi-decade highs recently peaking at over 8% in October, which is the highest level since November of 2000. In turn, this is keeping a lid on residential purchase applications, which have decreased to their lowest level since 1995, almost three decades ago. As a result, we continue to be focused on managing expenses and have reduced staffing and operating expenses this year. As of September 30, our total field operations employee count has been reduced by about 13% over the past 12 months. This has generated about $70 million in run rate personnel cost savings in the third quarter as compared to the third quarter of 2022. We have also reduced our direct title office locations from approximately 1,400 to below 1,300, generating about $1 million per month in expense savings. Commercial volumes are trending in line with our expectations. We have generated commercial revenue of $263 million in the third quarter and $767 million in the first nine months, putting us on track for $1 billion for the full year and in line with levels seen in more normal years like 2015 to 2019. Looking at sequential volumes more closely, daily purchase orders opened were down 7% from the second quarter of 2023 and down 8% for the month of October versus September, in line with seasonal expectations and down 2% for the month of October versus the prior year and refinance orders opened per day were down 8% from the second quarter of 2023, up 2%…

Thank you, Mike. Starting with our consolidated results, we generated $2.8 billion in total revenue in the third quarter. Third quarter net earnings were $426 million, including net recognized losses of $356 million versus net earnings of $362 million including $230 million of net recognized losses in the third quarter of 2022. The Title segment contributed net earnings of $185 million, the F&G segment contributed $259 million, and the Corporate segment had a net loss of $18 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 will continue to be held in our investment portfolio. Excluding net recognized gains and losses, our total revenue was $3.1 billion as compared with $3.4 billion in the third quarter of 2022. Adjusted net earnings from continuing operations was $333 million or $1.23 per diluted share compared with $272 million or $0.99 per share for the third quarter of 2022. The Title segment contributed $245 million. The F&G segment contributed $102 million and the Corporate segment had an adjusted net loss of $14 million. Turning to Q3 financial highlights specific to the Title segment, our Title segment generated $1.9 billion in total revenue in the third quarter, excluding net recognized losses of $46 million, compared with $2.3 billion in the third quarter of 2022. Direct premiums decreased by 24% versus the third quarter of 2022. Agency premiums decreased by 25% and escrow title-related and other fees decreased by 7% versus the prior year. Personnel costs decreased by 10% and other operating expenses decreased by 16%. All in, the title business generated adjusted pretax title earnings of $311 million and a 16.2% adjusted pretax title margin for the quarter versus 17.1% in…

[Operator Instructions] Our first question is from Soham Bhonsle with BTIG. Please go ahead.

Hope you're doing well. So first one on title margin. The 16.2% this quarter and one of the toughest mortgage environment that's pretty impressive. And I know you've historically talked about 15% to 20% as normalized. But is there a reason that, that can't be higher? Should we be thinking about a range that's different now? And maybe could you just talk through some of the puts and takes there?

Yes. I think right now, we wouldn't talk about a different range. We're still in a very volatile environment with rates at 7.5% and low inventory volumes historically, but certainly very pleased with the margin performance in the third quarter and just the work of our employees in the field to continue to take care of customers, recruit and manage expenses. And I think if you look at the third quarter to the second quarter, it's really that expense discipline and then a little pickup in some of our nontitle businesses like subservicing that allowed us to pull a little bit stronger margin from the second quarter. But I think we need to get past this volatile market to really think about talking about an annualized margin greater than 15% to 20%.

Yes. I mean, keep in mind, the 15% to 20% is an annual number. And certainly, the last couple of quarters, we've been in that range. But you recall from last year, the fourth quarter gets more challenging when inventories come down and then the first quarter even more so. So when you talk about the whole year, you're still not there. We're still in a tough environment.

Yes. And I think to add on to that, in the short term, so we remain cautious on margins for the fourth quarter and first quarter. Our open inventory levels are similar to what we saw going into the fourth quarter last year. And you saw how margins were pressured as we as we got through the fourth and first quarters. But kind of to your point, we're very confident that as the market returns, we're well positioned to drive margins given this cost structure we have and more importantly, the industry-leading scale that we have. So, we think as rates moderate and this market returns, we'll be able to produce very strong margins. But we kind of got to get through these next couple of quarters.

Got it. Okay. That makes sense. And then on F&G performance obviously continues to be very strong. But one of the concerns we hear is sort of the lack of liquidity in the stock. And I know you -- there's that 80% ownership threshold that you may want to sort of adhere to. But maybe just talk through some of the considerations for potential equity raise there because it would seem that the business could use perhaps some capital to accelerate their strategy there and just capitalize on the opportunities. And this would also be an interesting way to sort of maybe reduce FNF's ownership over time that could help unlock the multiple. So, any thoughts there, please.

Yes. No, you make some good points. Clearly, liquidity is a challenge there, and you can see a little volatility in the share price because of that. F&G is growing great, as you probably have seen from their results. Their margins are stronger. They're generating roughly $800 million in cash flow from their in-force book and reinvesting that into new business and there's plenty of new business to be had. And so ultimately, yes, they will need more equity to continue to grow. And I guess, we'll see. I mean, Chris may have some thoughts, but we'll see how that comes about. We do want to -- FNF wants to preserve that 80-plus percent ownership so that we have the ability to spend of F&G tax-free in the future if that's what the Board decides to do. But there are ways to raise equity and preserve that. We're at 85% now. And so, there's a little bit of room there. I don't know, Chris, if you had any more to add there or...

No, other than it's now about roughly 18 months until the five-year mark. And so yes, just related to your potential tax-free spin comment.

Our next question is from Mark Hughes with Truist Securities. Please go ahead.

Thinking about the margin, just the sequential progression from 3Q to 4Q, if you look at '21 and '22 -- or I'm sorry, 2020 and 2021, the margins held up pretty well between Q3 and Q4. Last year, there was a more substantial drop. How do you think about the progression this year from 3Q to 4Q, given the orders that you're seeing in headcounts and all that.

Well, again, we're not going to guide to a specific number, Mark, on margin, but I would just look at what happened last year because the inventories are very, very similar. We're going to have less resale closings much like we did last year, maybe a little less refi commercial can be a bit of a wildcard in terms of the closing levels of the fourth quarter. But I just think it's going to be a tough quarter given the inventory levels we have. Some of the other puts and takes can be agency mix in the quarter. If you have more agency revenue that just has a natural push down on margins because the gross margins are lower. And then sometimes the -- on sort of the edges, if you will, the nontitle businesses that are in the title segment can push margins around a little bit one way or the other. But -- it's really just -- we're at very low inventory levels as an industry, and that's going to just have a natural downward pressure on margins, I think, in the short term.

Understood. And then I'm sorry if this came up on the F&G call earlier today, but the Department of Labor, proposing maybe some new rules around fixed indexed annuities. Chris, any impact on that?

Yes. Honestly, I don't think it's going to have any meaningful impact. It's kind of just a different -- slightly different version of the same rule that we've been contending with for years. A lot of similarities to the best interest rule from the NAIC. And so, if the margin could add a little bit of extra compliance and oversight expense in the independent channel probably, we're obviously still digesting it. But there's nothing in there that looks to us to be particularly threatening to our business, even within the independent agent channel, which is as we've grown and expanded, I want to say that's maybe 20% of our total sales. But even within that, I think the IMOs that we do the bulk of our business through are really well positioned. They're very sophisticated firms. Many of them now have RIAs and broker-dealers of their own right, and they're competing through a lot of value-added services. So, I'll skip editorializing on whether this is necessary, but just say that I don't think there's anything that we're particularly worried about.

I think you just did editorialize.

We're going to have us doing that.

That's great.

Our next question is from John Campbell with Stephens Inc. Please go ahead.

Nice work in the quarter. No problem. On the October order count that was a clear positive in RI is just kind of across the board. It seems like things are turning ever so slightly, and that's impressive given you've got obviously, the 8% backdrop with mortgage rates. Two-part question here. First, on the purchase side, I mean both you guys and First American are, I think, showing clearly better trends than what's kind of been implied out there in the market, I mean, both from the industry forecasters and we look at the MBA weekly apps. I mean the thing there is that's based on the number of mortgages, right? I saw this morning the stat that I think cash sales rose to like 34% of the mix. That was up versus 29% last year. So I guess the question is, are you guys seeing maybe a little bit of deviations from what others might be seeing out there in the market due to rising cash flows? And if that's the case, is there any meaningful impact to fee per file on the purchase side?

Yes. It's a really good question, John. It's Mike. I don't know that we track cash sales specifically. It might be more anecdotally, and I think I've heard that maybe the field has been seeing a little bit more of that. But to your point, I mean, our October purchase orders fell 7% sequentially. And as I said in the opener, that's very much a seasonal fall off. And -- but then when you go back and look at what happened with rates in the third quarter, they were they went up, I don't know, 60, 70, 80 basis points or something like that during that time frame. I fully expected more fall off, to be honest with you, given the rate movement. So, I think I agree with your premise that there's a little maybe outperformance going on and maybe cash sales are an element of it, but I'm not sure of that.

Maybe I'll just chime in on the fee per file. I think on the purchase side, we're up about 3% versus Q3 of last year, which surprised me a little bit. I felt like it was trending down as you got into Q4 and the first quarter -- fourth quarter of last year, the first quarter of this year, but then it started to tick right back up, probably surprised a lot of people that home prices have maintained their value. Maybe it came down a little bit sequentially from Q2 to Q3, but still holding up pretty well thus far.

Yes. It's a great point. I mean I feel like for the last 1.5 years, 2 years, we've all been surprised kind of on the negative on the downside. So it's good to see that these things are turning for sure. Refi to me, I mean, that's obviously not even a meaningful driver anymore. So, I hesitate to even spend time on it. But I mean, the 2% sequential gain, that's, again, against the backdrop of higher rates. I mean, are you guys feeling like -- I mean, are you comfortable saying that we're kind of at a true trough right now? And would you go as far as saying that any kind of slight reduction in rates could send us back to growth on refi?

I would tend to agree with that, John, if you look at our refi open orders. So we've averaged for the year. This is now through October on the open side, 1,012 a day. And we did 966 in October. I mean it's been generally a straight line, right, Tony, across the year. And rates have moved around, as you know, quite a bit. So it does feel like we're kind of at a floor. And to your comment about if rates come down, volumes go up, I think that's absolutely true. It might take a little bit of time in that rates got to come down a certain amount to generate that refi opportunity. But you go back -- I think I said this on the last call, the last time rates were 8% was 2,000. That was a very small refinance market, I think, $250 billion that year. And rates were 6% in '03, and it was a $2.5 trillion refinance market. Now I'm not saying that will happen now, but I do think it points to how that refinance market can build over time with the drop in rates.

And in terms of revenue, refi as a percentage of our direct revenue is like 5% right now, and that's been pretty consistent. It was 5% last quarter and 6% in Q1 and 6% in the fourth quarter. And 7% in the third quarter of last year and so, it's just flat-lining at very low levels.

[Operator Instructions] Our next question is from Bose George with KBW. Please go ahead.

Tony, I wanted to go back to your guidance on investment income. I mean, you noted that the 1031 balances are likely to moderate. I'm just wondering, is that volume-driven? Or are there other factors that caused that to moderate even if volumes are flat or it looks like maybe even starting to head back up.

Yes, it's really more of a forecast than anything else. But just to be conservative, especially when we're talking about trying to predict investment income for the next year. It's the expectation that as regular order counts come down. On the title side, we would expect the 1031 accounts to come down as well. Balances have really held up very consistently all year long in the $4.5 billion range. And so that hasn't changed yet. But we're just anticipating that, that comes down. We earn about 400 basis points on those balances. And so, as they come down or if they come down, then you can see that, that comes down. And so, I would expect maybe a decline in quarterly income of maybe $10 million in -- as we make our way into 2024.

Okay. That's helpful. Actually, can you remind me, what's the split of the 1031 balances between residential and commercial?

That's a good question. Mike, do you remember that? I -- my recollection, it was more residential than I thought. I think in terms of -- in terms of numbers, it was like 70% residential, but in terms of balances...

I don't remember. I think we have to get back to you on that one. But we have the number, both, but I don't have it handy.

Yes, I don't either. It's been a while probably been a year that you looked at it.

I would say this it's probably more residential than you think in terms of the order flow.

Okay. No, that's helpful. And then just one broader question. Just with the recent lawsuits against the realtors and potential change in the commission structure there, especially for the buy-side agents. Just curious what your thoughts are about what that could do with the landscape there changes.

Yes. Both -- it's Mike. I think it's really hard to predict at this point. Obviously, that was a big ruling against a couple of the companies that are all going to appeal. This will probably go on for a while. But it could impact buy-side agents, I suppose. And -- but probably less of an impact from our view on our business. We still think that real estate agents bring tremendous value to the transaction and will continue to play an important role. They're the trusted -- really the trusted intermediaries and local communities for people who buy and sell homes. And I think that will remain. And we still will expect that we will be working very closely with that real estate community.

Our next question is from John Campbell with Stephens Inc. Please go ahead.

One quick follow-up here. On -- I just want to revisit the title escrow and other line. Last couple of quarters, that's obviously held up a lot better than the direct premiums. The gap has widened here of late. But I know you've got subservicing in there, you've got warranty revenue in there. So, you've got some degree of subscription revenue in there, recurring revenues. And then I think you're also getting TitlePoint in there as well. So maybe if you could kind of unpack some of that and maybe give us some indication on also what the impact was from TitlePoint on margins.

Yes, John, this is Tony. Yes, footnote, Jay and revenue recognition footnote in the 10-Q helps to break this out a little bit. But you're right, you named the primary pieces. First of all, escrow fees are in there, and they tend to trend with direct title premiums, but they've held up better than direct title premiums. And I think that's a combination of maybe commercial coming off a little bit more and commercial has a lower percentage of escrow fees. That could be part of it. I think also sometimes you just have a flat escrow fee. And so, if you have a transaction size that's down, then the direct premium will come down accordingly, but there may be a base to that escrow fee because I think escrow fees were only down about 12%, whereas direct premiums were down about 24%. So that's part of it. And then loan care, which is loan subservicing was actually up in Q3, up against last year's third quarter, so that was a positive. Home warranty is in there as well. It was down a little bit, but maybe not the same percentage as what we saw on the title side. And then ServiceLink has some different businesses in there, some default businesses and other, and it was fairly stable versus what we saw on the title side. In terms of TitlePoint, yes, it is in there as well. I don't have off the top of my head what the margins there. I think our revenue increase in property insight, which includes TitlePoint, revenue was up about $5 million as compared with Q3 of last year, but I don't have that margin. My guess is somewhere in the 20% range if I had to guess, but that can be a follow-up.

As there are no further questions, I would now hand the conference over to Mike Nolan, CEO, for closing comments.

Thank you. We are proud of our very strong performance in the first nine months of the year. We remain well positioned to navigate the current tough market cycle and continue 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 drive asset growth, deliver margin expansion and generate accretive returns. 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. The conference of Fidelity National Financial, Inc. has now concluded. Thank you for your participation. You may disconnect your lines.