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A property and casualty play with less underwriting risk

| October 9, 2020

This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors.

From an indexer’s perspective, the recent debt launch of Fidelity National Financial (FNF) provides the opportunity to gain exposure to a credit classified as property and casualty within the investment grade corporate index, but with a very unique risk profile relative to the rest of the peer group – one with lower tail risk and less possibility for unexpected catastrophe losses, which are inherent to many of the more traditional insurance underwriters.

Issue details

  • FNF 3.40% 06/15/30 at 173 bp over 10-year Treasury; G+178; 2.52% yield; $107.35
  • Issuer: Fidelity National Financial (FNF)
  • CUSIP: 31620RAJ4
  • Amount outstanding: $650 million
  • Senior rating: Baa2/BBB/BBB, Global Issue

Exhibit 1: Comparison of property and casualty insurance sector spreads

Source: Bloomberg/TRACE g-spread indications, Amherst Pierpont Securities

Multiple debt issues improve liquidity profile

The FNF 3.40% of ’30 was launched in June and has since lost a bit of focus in the secondary market, as the issuer brought a second long 10-year note in mid-September of $600 million. Those FNF 2.45% ’32 came at a launch level of +180 bp and are now indicated closer to +175-to-180 bp, or a g-spread of 173 bp.

Both debt launches were executed in order to help clean up outstanding bridge financing, and improve the company’s liquidity profile. The term loan debt was related to FNF’s recently closed acquisition of FGL Holdings for $2.2 billion. They have $258 million in term loans due next year, and still have over $1.5 billion available to them on their credit facility. FNF has manageable near-term maturities with just $400 million due in 2022, and the next maturity is not until 2025. As of quarter-end at 6/30/20, following the first of the two debt launches, the cash balance was $2.3 billion, up from $1.4 billion as of year-end 2019.

Recent results beat expectations

As one of the national leaders in title insurance and related closing services, FNF’s business model and cash flows are more directly influenced by home closings and refinancing activity. The low rate environment and the Fed’s recent commitment to keep rates low for the foreseeable future present a favorable operating environment for the intermediate term. Furthermore, the ongoing trend of possible “urban flight” related to the pandemic in key metropolitan areas can also be viewed as favorable from an operating standpoint.

FNF reported adjusted EPS of $1.09, beating the $0.62 consensus estimate. Top-line revenue was up 13% year-over-year to $2.4 billion, well ahead of analysts’ expectations. Refinance volumes were up significantly over the prior year period. Meanwhile, F&G – which is a provider of fixed annuity products – saw record sales of $866 million in the second quarter despite a difficult operating environment.

FNF has $28 billion in total assets, with just under $26 billion in total cash and investments. Policy reserves sit at just under $18 billion as of the second quarter of 2020. The company reported total capital and surplus of $1.4 billion in 2Q20, and carried a risk-based capital ratio of over 900% as of year-end 2019.

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