The Long and Short

Operating prospects remain compelling for FNF

| May 14, 2021

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.

Despite recent volatility, the prospect of “lower-for-longer” interest rates benefits Fidelity National Financial’s (FNF) core business of mortgage title insurance, as re-fi volume is poised to remain elevated for the foreseeable future. From an indexer’s perspective, FNF provides the opportunity to gain exposure to a credit classified as property and casualty (P&C) within the investment grade bond index, but with a unique risk profile relative to the rest of the P&C 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.

Exhibit 1. FNF 10-year notes vs P&C comps

Source: Amherst Pierpont, Bloomberg/TRACE G-spread Indications

Bond recommendation

FNF 2.45% 03/15/31 @ +100/10yr; G+102; 2.66%; $98.24
FNF 3.40% 06/15/30 @ 103/10yr; G+116; 2.68%; $105.60
Issuer: Fidelity National Financial (FNF)
CUSIP: 31620RAK1 & 31620RAJ4
Amount outstanding: $600 million, $650 million
Senior rating: Baa2/BBB/BBB
Global issues

As the national leader in mortgage 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 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. Meanwhile, FNF closed on its $2.2 billion acquisition of FGL Holdings in June 2020, helping further diversify the insurer’s revenue stream by adding a top-10 provider of fixed-index annuities; and perhaps more importantly, further diversifying FNF’s risk exposure to interest rates.

FNF reported 1Q21 results late last week. Adjusted EPS was $1.56, coming in well ahead of the $1.22 consensus estimate. Top-line revenue was up a massive 92% YoY to $3.1 billion, also well of analysts’ expectations of $2.76 billion. The gains were not just driven by the addition of FGL, as refinance volumes were up significantly over the prior year period. Revenue in the Title segment was up 33% YoY, as refi orders opened were up 15% daily and refinance orders closed were up 103% daily. Meanwhile, F&G – which is the provider of Fixed-Index Annuity products – saw record sales of $1.6 billion.

FNF last tapped the public debt markets with two 10-yr debt deals in 2020 (the 2030s and 2031s). Both debt launches were executed to help clean up the 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 no more term loan maturities and have the entirety of their $800 million credit facility available to them through 2025. FNF has manageable near-term maturities with just $400 million due in 2022, and the next maturity is not until 2025 ($550 million). As of quarter-end 1Q21 the cash balance was over $3 billion, up from $1.4 billion as of year-end 2019.

Dan Bruzzo, CFA
dan.bruzzo@santander.us
1 (646) 776-7749

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