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FIDELITY NATIONAL FINANCIAL, INC. – 10-K – Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with the Consolidated Financial Statements and the Notes thereto and Selected Financial Data included elsewhere in this Annual Report.
Overview
For a description of our business, including descriptions of segments, see the discussion under Business in Item 1 of Part I of this Annual Report, which is incorporated by reference into this Item 7 of Part II of this Annual Report.
Business Trends and Conditions
Title
Our Title segment revenue is closely related to the level of real estate
activity that includes sales, mortgage financing and mortgage refinancing.
Declines in the level of real estate activity or the average price of real
estate sales will adversely affect our title insurance revenues.
We have found that residential real estate activity is generally dependent on
the following factors:
•mortgage interest rates; •mortgage funding supply; •housing inventory and home prices; •supply and demand for commercial real estate; and •the strength ofthe United States economy, including employment levels. The most recent forecast of the MBA, as ofFebruary 21, 2023 , estimated (actual for fiscal year 2021) the size of theU.S. residential mortgage originations market as shown in the following table for 2021 - 2025 in its "Mortgage Finance Forecast" (in trillions): 2025 2024 2023 2022 2021 Purchase transactions$ 1.8 $ 1.7 $ 1.4 $ 1.6 $ 1.8 Refinance transactions$ 0.7 $ 0.6 $ 0.5 $ 0.6 $ 2.6
Total U.S. mortgage originations forecast$ 2.5 $
2.3
As ofFebruary 21, 2023 , the MBA expects residential purchase transactions to decrease in 2022 and 2023 followed by increases in 2024 and 2025. Additionally, the MBA expects residential refinance transactions to dramatically decrease in 2022, followed by a slight decrease in 2023 before slightly increasing in 2024 and 2025. The MBA expects overall mortgage originations to decrease in 2022 and 2023 before increasing in 2024 and 2025. In recent years, total originations have been reflective of a strong residential real estate market driven by increasing home prices and low mortgage interest rates. Interest rate cuts in the second half of 2019 resulted in a significant increase in refinance transactions and a slight increase in purchase transactions. In the beginning of 2020, refinance and purchase transactions remained strong until the outbreak of COVID-19. OnMarch 15, 2020 , theFederal Reserve took emergency action and reduced its benchmark interest rate by a full percentage point to nearly zero. Following this emergency action, average interest rates for a 30-year fixed rate mortgages fell throughout the remainder of 2020. The outbreak of COVID-19 resulted in significant uncertainty in the economic outlook in the second quarter of 2020, and as a result real estate activity decreased significantly as consumers moved to the sidelines to assess the ongoing impact of COVID-19. However, real estate activity began to rebound inJune 2020 , with increases in purchase activity and a surge in refinance transactions as a result of historically low interest rates.
Residential purchase and refinance activity remained strong in 2021. However,
with the surge in residential refinance transactions in 2020, residential
refinance transactions began to slow in 2021 as the population of eligible
refinance candidates declined.
TheFederal Reserve raised the benchmark interest rate from near zero as ofMarch 2022 to a range between 4.25% and 4.50% as ofDecember 2022 in an effort to combat inflation. Interest rates on a 30-year, fixed rate mortgage averaged 5.2% in 2022, up from 3.2% in 2021. OnFebruary 2, 2023 , theFederal Reserve raised the benchmark interest rate an additional 25 basis points. A shortage in the supply of homes for sale, increasing home prices, rising mortgage interest rates, inflation and disrupted labor markets created some volatility in the residential real estate market in 2021 and 2022, which has continued into 2023. Additionally, geopolitical uncertainties associated with the war inUkraine have created additional volatility in the global economy beginning in 2022. Existing-home sales decreased 34% inDecember 2022 as compared to the corresponding month in 44
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2021 while median existing-home sales prices rose to
a 2% increase over the corresponding month in 2021.
Other economic indicators used to measure the health of theU.S. economy, including the unemployment rate, indicated thatthe United States was on strong footing prior to the outbreak of COVID-19. According to theU.S. Department of Labor's Bureau of Labor , the unemployment rate was at a historically low 3.5% inFebruary 2020 but subsequently fluctuated dramatically before reaching 6.7% inDecember 2020 . In 2021, the unemployment rate fell dramatically and remained near record lows throughout 2022. The unemployment rate was 3.5% and 3.9% in December of 2022 and 2021, respectively. Because commercial real estate transactions tend to be generally driven by supply and demand for commercial space and occupancy rates in a particular area rather than by interest rate fluctuations, we believe that our commercial real estate title insurance business is less dependent on the industry cycles discussed above than our residential real estate title business. Commercial real estate transaction volume is also often linked to the availability of financing. Factors includingU.S. tax reform and a shift inU.S. monetary policy have had, or are expected to have, varying effects on availability of financing in theU.S. Lower corporate and individual tax rates and corporate tax-deductibility of capital expenditures have provided increased capacity and incentive for investments in commercial real estate. In recent years prior to the COVID-19 pandemic, we experienced strong demand in commercial real estate markets. In 2020, we experienced decreases in commercial volumes and commercial fee-per-file as a result of the outbreak of COVID-19. Commercial volumes and commercial fee-per-file recovered in the second half of 2020 and remained stable throughout 2021 and the first three quarters of 2022. Commercial volumes and commercial fee-per-file declined in the fourth quarter of 2022. We continually monitor mortgage origination trends and believe that, based on our ability to produce industry leading operating margins through all economic cycles, we are well positioned to adjust our operations for adverse changes in real estate activity and to take advantage of increased volume when demand increases.
See Item 1A of Part I of this Annual Report for further discussion of risk
factors related to COVID-19.
Seasonality. Historically, real estate transactions have produced seasonal revenue fluctuations in the real estate industry. The first calendar quarter is typically the weakest quarter in terms of revenue due to the generally low volume of home sales during January and February. The second and third calendar quarters are typically the strongest quarters in terms of revenue, primarily due to a higher volume of residential transactions in the spring and summer months. The fourth quarter is typically strong due to the desire of commercial entities to complete transactions by year-end. Seasonality in 2020, 2021 and 2022 deviated from historical patterns due to COVID-19 and the subsequent rapid increase in interest rates. We have noted short-term fluctuations through recent years in resale and refinance transactions as a result of changes in interest rates. Geographic Operations. Our direct title operations are divided into approximately 180 profit centers. Each profit center processes title insurance transactions within its geographical area, which is usually identified by a county, a group of counties forming a region, or a state, depending on the management structure in that part of the country. We also transact title insurance business through a network of approximately 5,300 agents, primarily in those areas in which agents are the more prevalent title insurance provider. Substantially all of our revenues are generated inthe United States .
The following table sets forth the approximate dollar and percentage volumes of
our title insurance premium revenue by state:
Year Ended December 31,
2022 2021 2020
Amount % Amount % Amount %
(Dollars in millions)
Texas $ 1,027 15.0 % $ 1,112 13.0 % $ 778 12.3 %
California 819 12.0 1,251 14.6 958 15.2
Florida 722 10.6 799 9.3 540 8.6
Pennsylvania 356 5.2 439 5.1 303 4.8
Illinois 360 5.3 436 5.1 312 5.0
All others 3,550 51.9 4,516 52.9 3,407 54.1
Totals $ 6,834 100.0 % $ 8,553 100.0 % $ 6,298 100.0 %
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-------------------------------------------------------------------------------- Table of Contents F&G The following factors represent some of the key trends and uncertainties that have influenced the development of our F&G segment and its historical financial performance, and we believe these key trends and uncertainties will continue to influence the business and financial performance of our F&G segment in the future.
COVID-19 Pandemic
The health, economic and business conditions precipitated by the worldwide
COVID-19 pandemic that emerged in 2020 increased our mortality experience in
2021 and 2020 in both our single premium immediate annuity ("SPIA") and IUL
business which largely offset each other. As of December 31, 2022 , we have not
seen a sustained elevated level of adverse policyholder experience from the
impact of COVID-19 on the overall business.
Market Conditions
Market volatility has affected, and may continue to affect, our business and financial performance in varying ways. Volatility can pressure sales and reduce demand as consumers hesitate to make financial decisions. To enhance the attractiveness and profitability of our products and services, we continually monitor the behavior of our customers, as evidenced by annuitization rates and lapse rates, which vary in response to changes in market conditions. See Item 1A of Part I of this Annual Report for further discussion of risk factors that could affect market conditions.
Interest Rate Environment
Some of our F&G products include guaranteed minimum crediting rates, most notably our fixed rate annuities. As ofDecember 31, 2022 , our reserves, net of reinsurance, and average crediting rate on our fixed rate annuities were$6.0 billion and 3%, respectively. We are required to pay the guaranteed minimum crediting rates even if earnings on our investment portfolio decline, which would negatively impact earnings. In addition, we expect more policyholders to hold policies with comparatively high guaranteed rates for a longer period in a low interest rate environment. Conversely, a rise in average yield on our investment portfolio would increase earnings if the average interest rate we pay on our products does not rise correspondingly. Similarly, we expect that policyholders would be less likely to hold policies with existing guarantees as interest rates rise and the relative value of other new business offerings are increased, which would negatively impact our earnings and cash flows.
See "Item 7A. Quantitative and Qualitative Disclosure about Market Risk" for a
more detailed discussion of interest rate risk.
Aging of the
We believe that the aging of theU.S. population will increase the demand for our FIA and IUL products. As the "baby boomer" generation prepares for retirement, we believe that demand for retirement savings, growth, and income products will grow. Over 10,000 people will turn 65 each day inthe United States over the next 15 years, and according to theU.S. Census Bureau , the proportion of theU.S. population over the age of 65 is expected to grow from 18% in 2022 to 21% in 2035. The impact of this growth may be offset to some extent by asset outflows as an increasing percentage of the population begins withdrawing assets to convert their savings into income.
Industry Factors and Trends Affecting Our Results of Operations
We operate in the sector of the insurance industry that focuses on the needs of middle-income Americans. The underserved middle-income market represents a major growth opportunity for us. As a tool for addressing the unmet need for retirement planning, we believe that many middle-income Americans have grown to appreciate the financial certainty that we believe annuities such as our FIA products afford. Accordingly, the FIA market grew from nearly$12 billion of sales in 2002 to$66 billion of sales in 2021. Additionally, this market demand has positively impacted the IUL market as it has expanded from$100 million of annual premiums in 2002 to$2 billion of annual premiums in 2021. 46
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Critical Accounting Policies and Estimates
The accounting estimates described below are those we consider critical in preparing our Consolidated Financial Statements. Management is required to make estimates and assumptions that can affect the reported amounts of assets and liabilities and disclosures with respect to contingent assets and liabilities at the date of the Consolidated Financial Statements and the reported amounts of revenues and expenses during the reporting period. Actual amounts could differ from those estimates. See Note A Business and Summary of Significant Accounting Policies to our Consolidated Financial Statements included in Item 8 of Part II of this Annual Report for additional description of the significant accounting policies that have been followed in preparing our Consolidated Financial Statements.
Reserve for Title Claim Losses
Title companies issue two types of policies, owner's and lender's policies,
since both the new owner and the lender in real estate transactions want to know
that their interest in the property is insured against certain title defects
outlined in the policy. An owner's policy insures the buyer against such defects
for as long as he or she owns the property (as well as against warranty claims
arising out of the sale of the property by such owner). A lender's policy
insures the priority of the lender's security interest over the claims that
other parties may have in the property. The maximum amount of liability under a
title insurance policy is generally the face amount of the policy plus the cost
of defending the insured's title against an adverse claim; however, occasionally
we do incur losses in excess of policy limits. While most non-title forms of
insurance, including property and casualty, provide for the assumption of risk
of loss arising out of unforeseen future events, title insurance serves to
protect the policyholder from risk of loss for events that predate the issuance
of the policy.
Unlike many other forms of insurance, title insurance requires only a one-time
premium for continuous coverage until another policy is warranted due to changes
in property circumstances arising from refinance, resale, additional liens, or
other events. Unless we issue the subsequent policy, we receive no notice that
our exposure under our policy has ended and, as a result, we are unable to track
the actual terminations of our exposures.
Our reserve for title claim losses includes reserves for known claims as well as
for losses that have been incurred but not yet reported to us ("IBNR"), net of
recoupments. We reserve for each known claim based on our review of the
estimated amount of the claim and the costs required to settle the claim.
Reserves for IBNR claims are estimates that are established at the time the
premium revenue is recognized and are based upon historical experience and other
factors, including industry trends, claim loss history, legal environment,
geographic considerations, and the types of policies written. We also reserve
for losses arising from closing and disbursement functions due to fraud or
operational error.
The table below summarizes our reserves for known claims and incurred but not
reported claims related to title insurance:
December 31, % December 31, %
2022 2021
(Dollars in millions)
Known claims $ 195 10.8 % $ 337 17.9 %
IBNR 1,615 89.2 1,546 82.1
Total Reserve for Title Claim Losses $ 1,810 100.0 % $ 1,883 100.0 %
Although claims against title insurance policies can be reported relatively soon
after the policy has been issued, claims may be reported many years later.
Historically, approximately 60% of claims are paid within approximately five
years of the policy being written. By their nature, claims are often complex,
vary greatly in dollar amounts and are affected by economic and market
conditions, as well as the legal environment existing at the time of settlement
of the claims. Estimating future title loss payments is difficult because of the
complex nature of title claims, the long periods of time over which claims are
paid, significantly varying dollar amounts of individual claims and other
factors.
Our process for recording our reserves for title claim losses begins with
analysis of our loss provision rate. We forecast ultimate losses for each policy
year based upon historical policy year loss emergence and development patterns
and adjust these to reflect policy year and policy type differences that affect
the timing, frequency and severity of claims. We also use a technique that
relies on historical loss emergence and on a premium-based exposure measurement.
The latter technique is particularly applicable to the most recent policy years,
which have few reported claims relative to an expected ultimate claim volume.
After considering historical claim losses, reporting patterns and current market
information, and analyzing quantitative and qualitative data provided by our
legal, claims and underwriting departments, we determine a loss provision rate,
which is recorded as a percentage of current title premiums. This loss provision
rate is set to provide for losses on current year policies, but due to
development of prior years and our long claim duration, it periodically includes
amounts of estimated adverse or positive development on prior years' policies.
Any significant adjustments to strengthen or release loss reserves resulting
from the comparison with our actuarial analysis are made in addition to this
loss provision rate. At each quarter end, our recorded reserve for claim losses
is initially the result of taking the prior recorded reserve for claim losses,
adding the current provision
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and subtracting actual paid claims, resulting in an amount that management then
compares to the range of reasonable estimates provided by the actuarial
calculation.
We recorded our loss provision rate at 4.5% for the years ended December 31,
2022 , 2021 and 2020 related to policies written in those years. The provision
rate in 2022, 2021, and 2020 is supported by stability in payments for prior
policy years, and qualitative factors that would indicate consistency, including
consistency in lender underwriting standards, extension of credit to quality
borrowers, a high proportion of refinance activity, claims expense management,
mechanic's lien underwriting practices, and fraud awareness by lenders, title
insurers and settlement agents.
Due to the uncertainty inherent in the process and due to the judgment used by
both management and our actuary, our ultimate liability may be greater or less
than our carried reserves. If the recorded amount is within the actuarial range
but not at the central estimate, we assess the position within the actuarial
range by analysis of other factors in order to determine that the recorded
amount is our best estimate. These factors, which are both qualitative and
quantitative, can change from period to period, and include items such as
current trends in the real estate industry (which we can assess, but for which
there is a time lag in the development of the data), any adjustments from the
actuarial estimates needed for the effects of unusually large or small claims,
improvements in our claims management processes, and other cost saving measures.
If the recorded amount is not within a reasonable range of our actuary's central
estimate, we may have to record a charge or credit and reassess the loss
provision rate on a go forward basis. We will continue to reassess the provision
to be recorded in future periods consistent with this methodology.
The table below presents our title insurance loss development experience for the
past three years:
2022 2021 2020
(In millions)
Beginning balance $ 1,883 $ 1,623 $ 1,509
Change in reinsurance recoverable (128) 94 34
Claims loss provision related to:
Current year 308 385 283
Prior years - - -
Total title claim loss provision 308 385 283
Claims paid, net of recoupments related to:
Current year (21) (14) (11)
Prior years (232) (205) (192)
Total title claims paid, net of recoupments (253) (219) (203)
Ending balance of claim loss reserve for title insurance $ 1,810 $ 1,883 $ 1,623
Title premiums $ 6,834 $ 8,553 $ 6,298
2022 2021 2020
Provision for title insurance claim losses as a percentage of
title insurance premiums:
Current year 4.5 % 4.5 % 4.5 %
Prior years - - -
Total provision 4.5 % 4.5 % 4.5 %
Actual claims payments consist of loss payments and claims management expenses
offset by recoupments and were as follows (in millions):
Claims Management Net Loss
Loss Payments Expenses Recoupments Payments
Year ended December 31, 2022 $ 294 $ 134 $ (175) $ 253
Year ended December 31, 2021 171 124 (76) 219
Year ended December 31, 2020 120 122 (39) 203
As of December 31, 2022 and 2021, our recorded reserves were $1,810 million and
$1,883 million , respectively, which we determined were reasonable and
represented our best estimate and these recorded amounts were within a
reasonable range of the central estimates provided by our actuaries. Our
recorded reserves were $90 million above the mid-point of the provided range of
$1.5 billion to $2.0 billion of our actuarial estimates as of December 31, 2022 .
Our recorded reserves were $59 million above the mid-point of the provided range
of our actuarial estimates of $1.5 billion to $2.0 billion as of December 31,
2021 .
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During 2022, 2021, and 2020, payment patterns were consistent with our
actuaries' and management's expectations. Also, compared to prior years we have
seen a leveling off of the ultimate loss ratios in more mature policy years,
particularly 2006-2009. While we still see claims opened on these policy years,
the proportion of our claims inventory represented by these policy years has
continued to decrease. Additionally, we continued to see positive development
relating to the 2011 through 2022 policy years, which we believe is indicative
of more stringent underwriting standards by us and the lending industry. Also,
any residential lender's policy claim paid relating to a property that is in
foreclosure negates any potential loss under an owner's policy previously issued
on the property as the owner has no equity in the property. Our ending open
claim inventory decreased from approximately 9,600 claims at December 31, 2021
to approximately 9,100 claims at December 31, 2022 . If actual claims loss
development varies from what is currently expected and is not offset by other
factors, it is possible that our recorded reserves may fall outside a reasonable
range of our actuaries' central estimate, which may require additional reserve
adjustments in future periods.
An approximate $68 million increase (decrease) in our annualized provision for
title claim losses would occur if our loss provision rate were 1% higher
(lower), based on 2022 title premiums of $6,834 million . A 10% increase
(decrease) in our reserve for title claim losses, as of December 31, 2022 , would
result in an increase (decrease) in our provision for title claim losses of
approximately $181 million .
Reserves for Future Policy Benefits and Product Guarantees
The determination of future policy benefit reserves is dependent on actuarial assumptions. The principal assumptions used to establish liabilities for future policy benefits are based on our experience. These assumptions are established at issue of the contract and include mortality, morbidity, contract full and partial surrenders, investment returns, annuitization rates and expenses. The assumptions used require considerable judgment. We review overall policyholder experience at least annually and update these assumptions when deemed necessary based on additional information that becomes available. For traditional life and immediate annuity products, assumptions used in the reserve calculation can only be changed if the reserve is deemed to be insufficient. For all other insurance products, changes in assumptions will be used to calculate reserves. These changes in assumptions will also incorporate changes in risk free rates and option market values. Changes in, or deviations from, the assumptions previously used can significantly affect our reserve levels and related results of operations. Mortality is the incidence of death amongst policyholders triggering the payment of underlying insurance coverage by the insurer. In addition, mortality also refers to the ceasing of payments on life-contingent annuities due to the death of the annuitant. We utilize a combination of actual and industry experience when setting our mortality assumptions. A surrender rate is the percentage of account value surrendered by the policyholder. A lapse rate is the percentage of account value canceled by us due to nonpayment of premiums. We make estimates of expected full and partial surrenders of our fixed annuity products. Our surrender rate experience in the years endedDecember 31, 2022 and 2021, and the seven month period endedDecember 31, 2020 on the fixed annuity products averaged 7%, 7% and 4%, respectively, which is within our assumed ranges. Management's best estimate of surrender behavior incorporates actual experience over the entire period, as we believe that, over the duration of the policies, we will experience the full range of policyholder behavior and market conditions. If actual surrender rates are significantly different from those assumed, such differences could have a significant effect on our reserve levels and related results of operations. The assumptions used to establish the liabilities for our product guarantees require considerable judgment and are established as management's best estimate of future outcomes. We periodically review these assumptions and, if necessary, update them based on additional information that becomes available. Changes in or deviations from the assumptions used can significantly affect our reserve levels and related results of operations. At issue, and at each subsequent valuation, we determine the present value of the cost of the Guaranteed Minimum Withdrawal Benefit ("GMWB") rider benefits and certain Guaranteed Minimum Death Benefit ("GMDB") riders in excess of benefits that are funded by the account value. We also calculate the present value of total expected policy assessments, including investment margins, if applicable. We accumulate a reserve equal to the portion of these assessments that would be required to fund the future benefits less benefits paid to date. In making these projections, a number of assumptions are made and we update these assumptions as experience emerges, and determined necessary. We began issuing our GMWB products in 2008, and future experience could lead to significant changes in our assumptions. If emerging experience deviates from our assumptions on GMWB utilizations, such deviations could have a significant effect on our reserve levels and related results of operations. 49
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Our aggregate reserves for contractholder funds, future policy benefits and
product guarantees on a direct and net basis as of
Reinsurance
(Dollars in millions) Direct Recoverable Net
Fixed indexed annuities $ 24,812 $ - $ 24,812
Fixed rate annuities 9,359 (3,719) 5,640
Immediate annuities 4,007 (135) 3,872
Universal life 2,127 (947) 1180
Traditional life 1,777 (786) 991
Funding agreement backed notes ("FABN") 2,613 - 2,613
Pension risk transfer ("PRT") 2,461 - 2,461
Total $ 47,156 $ (5,587) $ 41,569
As of December 31, 2021
(Dollars in millions) Direct Reinsurance Recoverable Net
Fixed indexed annuities $ 23,370 $ - $ 23,370
Fixed rate annuities 6,369 (1,689) 4,680
Immediate annuities 3,657 (133) 3,524
Universal life 1,981 (983) 998
Traditional life 1,823 (805) 1,018
Funding agreement backed notes 1,904 - 1,904
Pension risk transfer 1,153 - 1,153
Total $ 40,257 $ (3,610) $ 36,647
Fixed indexed annuities ("FIA") and indexed universal life ("IUL") products
contain an embedded derivative; a feature that permits the holder to elect an
interest rate return or an equity-index linked component, where interest
credited to the contract is linked to the performance of various equity indices.
The FIA/ IUL embedded derivatives are valued at fair value and included in the
liability for contractholder funds in our Consolidated Balance Sheets with
changes in fair value included as a component of Benefits and other changes in
policy reserves in our Consolidated Statements of Earnings.
Valuation of Fixed Maturity,
and Reinsurance Recoverable
Our fixed maturity securities have been designated as available-for-sale and are
carried at fair value, net of allowance for expected credit losses, with
unrealized gains and losses included in accumulated other comprehensive income
(loss) ("AOCI"), net of associated adjustments for deferred acquisition costs
("DAC"), value of business acquired ("VOBA"), deferred sales inducements
("DSI"), unearned revenue ("UREV"), SOP 03-1 reserves, and deferred income
taxes. Our equity securities are carried at fair value with unrealized gains and
losses included in net income (loss). Realized gains and losses on the sale of
investments are determined on the basis of the cost of the specific investments
sold and are credited or charged to income on a trade date basis.
Management's assessment of all available data when determining fair value of the
AFS securities is necessary to appropriately apply fair value accounting.
Management utilizes information from independent pricing services, who take into
account perceived market movements and sector news, as well as a security's
terms and conditions, including any features specific to that issue that may
influence risk and marketability. Depending on the security, the priority of the
use of observable market inputs may change as some observable market inputs may
not be relevant or additional inputs may be necessary. We generally obtain one
value from our primary external pricing service. In situations where a price is
not available from the independent pricing service, we may obtain broker quotes
or prices from additional parties recognized to be market participants. We
believe the broker quotes are prices at which trades could be executed based on
historical trades executed at broker-quoted or slightly higher prices. When
quoted prices in active markets are not available, the determination of
estimated fair value is based on market standard valuation methodologies,
including discounted cash flows, matrix pricing, or other similar techniques.
We validate external valuations at least quarterly through a combination of
procedures that include the evaluation of methodologies used by the pricing
services, comparisons to valuations from other independent pricing services,
analytical reviews and performance analysis of the prices against trends, and
maintenance of a securities watch list. See Note D Fair Value of Financial
Instruments and Note E Investments to our Consolidated Financial Statements
included in Item 8 of Part II of this Annual Report.
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The fair value of derivative assets and liabilities is based upon valuation
pricing models and represents what we would expect to receive or pay at the
balance sheet date if we canceled the options, entered into offsetting
positions, or exercised the options. Fair values for these instruments are
determined internally using a conventional model and market observable inputs,
including interest rates, yield curve volatilities and other factors. Credit
risk related to the counterparty is considered when estimating the fair values
of these derivatives. However, we are largely protected by collateral
arrangements with counterparties when individual counterparty exposures exceed
certain thresholds. The fair value of futures contracts at the balance sheet
date represents the cumulative unsettled variation margin (open trade equity net
of cash settlements). The fair values of the embedded derivatives in our FIA and
IUL contracts are derived using market value of options, use of current and
budgeted option cost, swap rates, mortality rates, surrender rates, partial
withdrawals, and non-performance spread and are classified as Level 3. The
discount rate used to determine the fair value of our FIA/ IUL embedded
derivative liabilities includes an adjustment to reflect the risk that these
obligations will not be fulfilled ("non-performance risk"). For the years ended
December 31, 2022 and December 31, 2021 , our non-performance risk adjustment was
based on the expected loss due to default in debt obligations for similarly
rated financial companies. See Note D Fair Value of Financial Instruments and
Note F Derivative Financial Instruments to our Consolidated Financial Statements
included in Item 8 of Part II of this Annual Report.
As discussed in Note O F&G Reinsurance of our Consolidated Financial Statements
included in Item 8 of Part II of this Report, F&G entered into a reinsurance
agreement with Kubera Insurance (SAC) Ltd. ("Kubera") effective December 31,
2018 , to cede certain multi-year guaranteed annuities ("MYGA") and deferred
annuity GAAP and statutory reserves on a coinsurance funds withheld basis, net
of applicable existing reinsurance. Effective October 31, 2021 , this agreement
was novated from Kubera to Somerset . Additionally, F&G entered into a
reinsurance agreement with Aspida Re effective January 1, 2021 , to cede a quota
share of certain deferred annuity business on a funds withheld basis. Fair value
movements in the funds withheld balances associated with these arrangements
create an obligation for F&G to pay Somerset and Aspida Re at a later date,
which results in embedded derivatives. These embedded derivatives are considered
total return swaps with contractual returns that are attributable to the assets
and liabilities associated with the reinsurance arrangements. The fair value of
the total return swaps are based on the change in fair value of the underlying
assets held in the funds withheld portfolio. Investment results for the assets
that support the coinsurance with funds withheld reinsurance arrangement,
including gains and losses from sales, are passed directly to the reinsurer
pursuant to contractual terms of the reinsurance arrangement. The reinsurance
related embedded derivatives are reported in Accounts payable and accrued
liabilities on the Consolidated Balance Sheets and the related gains or losses
are reported in Recognized gains and losses, net on the Consolidated Statements
of Earnings.
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We categorize our fixed maturity securities, preferred securities, equity
securities and derivatives into a three-level hierarchy based on the priority of
the inputs to the valuation technique. The fair value hierarchy gives the
highest priority to quoted prices in active markets for identical assets (Level
1) and the lowest priority to unobservable inputs (Level 3). If the inputs used
to measure fair value fall within different levels of the hierarchy, the
category level is based on the lowest priority level input that is significant
to the fair value measurement of the instrument. The following table presents
the fair value of fixed maturity securities and equity securities by pricing
source, hierarchy level and net asset value ("NAV") as of December 31, 2022 and
December 31, 2021 .
As of December 31, 2022
Quoted Prices in Significant
Active Markets for Significant Unobservable
(Dollars in millions) Identical Assets Observable Inputs Inputs
(Level 1) (Level 2) (Level 3) NAV Total
Fixed maturity securities
available-for-sale and equity
securities:
Prices via third-party pricing
services $ 1,333 $
25,197
Priced via independent broker
quotations
- - 6,846 - 6,846 Priced via other methods - - 18 47 65 Total $ 1,333 $ 25,197$ 8,098 $ 47 $ 34,675 % of Total 4 % 73 % 23 % - % 100 % As of December 31, 2021 Quoted Prices in Significant Active Markets for Significant Unobservable (Dollars in millions) Identical Assets Observable Inputs Inputs (Level 1) (Level 2) (Level 3) NAV Total Fixed maturity securities available-for-sale and equity securities: Prices via third-party pricing services $ 1,892 $
26,389
Priced via independent broker
quotations
$ - $ -$ 4,538 $ - 4,538 Priced via other methods $ - $ -$ 66 $ 48 114 Total $ 1,892 $ 26,389$ 5,524 $ 48 $ 33,853 % of Total 6 % 78 % 16 % - % 100 % Goodwill We have made acquisitions that have resulted in a significant amount of goodwill. As ofDecember 31, 2022 and 2021, goodwill was$4,642 million and$4,539 million , respectively. The majority of our goodwill as ofDecember 31, 2022 relates to goodwill recorded in connection with the Chicago Title merger in 2000, our initial acquisition of an ownership interest inServiceLink in 2014 and our acquisition of F&G in 2020. Refer to Note N Goodwill to our Consolidated Financial Statements included in Item 8 of Part II of this Annual Report for a summary of recent changes in ourGoodwill balance. In evaluating the recoverability of goodwill, we perform a qualitative analysis at the reporting unit level to determine whether it is more likely than not that the fair value of our recorded goodwill exceeds its carrying value. Based on the results of this analysis, an annual goodwill impairment test may be completed based on an analysis of the discounted future cash flows generated by the underlying assets. The process of determining whether or not goodwill is impaired or recoverable relies on projections of future cash flows, operating results and market conditions. Future cash flow estimates are based partly on projections of market conditions such as the volume and mix of refinance and purchase transactions and interest rates, which are beyond our control and are likely to fluctuate. While we believe that our estimates of future cash flows are reasonable, these estimates are not guarantees of future performance and are subject to risks and uncertainties that may cause actual results to differ from what is assumed in our impairment tests. Such analyses are particularly sensitive to changes in estimates of future cash flows and discount rates. Changes to these estimates might result in material changes in fair value and determination of the recoverability of goodwill, which may result in charges against earnings and a reduction in the carrying value of our goodwill in the future. We completed annual goodwill impairment analyses in the fourth quarter of each period presented using aSeptember 30 measurement date. For the years endedDecember 31, 2022 , 2021 and 2020, we determined there were no events or circumstances that indicated that the carrying value exceeded the fair value. 52
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VOBA, DAC and DSI
Our intangible assets include an intangible asset reflecting the value of
insurance and reinsurance contracts acquired (hereafter referred to as VOBA, DAC
and DSI).
VOBA is an intangible asset that reflects the amount recorded as insurance
contract liabilities less the estimated fair value of in-force contracts ("VIF")
in a life insurance company acquisition. It represents the portion of the
purchase price that is allocated to the value of the rights to receive future
cash flows from the business in force at the acquisition date. VOBA is a
function of the VIF, current GAAP reserves, GAAP assets, and deferred tax
liability. The VIF is determined by the present value of statutory distributable
earnings less opening required capital, and is sensitive to assumptions
including the discount rate, surrender rates, partial withdrawals, utilization
rates, projected investment spreads, mortality, and expenses.
DAC consists principally of commissions. Additionally, acquisition costs that
are incremental, direct costs of successful contract acquisition are capitalized
as DAC. Indirect or unsuccessful acquisition costs, maintenance, product
development and overhead expenses are charged to expense as incurred. DSI
consists of contract enhancements such as premium and interest bonuses credited
to policyholder account balances.
DAC, DSI, and VOBA are subject to loss recognition testing on a quarterly basis
or when an event occurs that may warrant loss recognition.
For annuity and IUL products, DAC, DSI and VOBA are generally being amortized in
proportion to estimated gross profits from net investment spread margins,
surrender charges and other product fees, policy benefits, maintenance expenses,
mortality, and recognized gains and losses on investments. Current and future
period gross profits for FIA contracts also include the impact of amounts
recorded for the change in fair value of derivatives and the change in fair
value of embedded derivatives. At each valuation date, the most recent quarter's
estimated gross profits are updated with actual gross profits and the
assumptions underlying future estimated gross profits are evaluated for
continued reasonableness. If the update of assumptions causes estimated gross
profits to increase, DAC, DSI and VOBA amortization will decrease, resulting in
lower amortization expense in the period. The opposite result occurs when the
assumption update causes estimated gross profits to decrease. Current period
amortization is adjusted retrospectively through an unlocking process when
estimates of current or future gross profits (including the impact of recognized
investment gains and losses) to be realized from a group of products are
revised. Our estimates of future gross profits are based on actuarial
assumptions related to the underlying policies' terms, lives of the policies,
duration of contract, yield on investments supporting the liabilities, cost to
fund policy obligations, and level of expenses necessary to maintain the polices
over their entire lives.
Changes in assumptions can have a significant impact on DAC, DSI and VOBA,
amortization rates and results of operations. Assumptions are management's best
estimate of future outcomes, and require considerable judgment. We periodically
review assumptions against actual experience, and update our assumptions based
on historical results and our best estimates of future experience when
additional information becomes available.
Estimated future gross profits are sensitive to changes in interest rates,
which are the most significant component of gross profits. Assumptions related
to interest rate spreads and credit losses also impact estimated gross profits
for products with credited rates. These assumptions are based on the current
investment portfolio yields and credit quality, estimated future crediting
rates, capital markets, and estimates of future interest rates and defaults.
Significant assumptions also include policyholder behavior assumptions, such as
surrender, lapse, and annuitization rates. We use a combination of actual and
industry experience when setting and updating our policyholder behavior
assumptions.
We perform sensitivity analyses to assess the impact that certain assumptions
have on DAC, DSI, VOBA. The following table presents the estimated instantaneous
net impact to income before income taxes of various assumption changes on our
DAC, DSI, and VOBA. The effects, increase or (decrease), presented are not
representative of the aggregate impacts that could result if a combination of
such changes to interest rates and other assumptions occurred.
As of December 31, As of December 31,
(Dollars in millions) 2022 2021
A change to the long-term interest rate assumption of
-50 basis points
$ (113) $ (91)
A change to the long-term interest rate assumption of
+50 basis points
93 75 An assumed 10% increase in surrender rate (6) (4)
Assumptions regarding shifts in market factors may be overly simplistic and not
indicative of actual market behavior in stress scenarios.
Lower assumed interest rates or higher assumed annuity surrender rates tend to
decrease the balances of DAC, DSI and VOBA, thus decreasing income before income
taxes. Higher assumed interest rates or lower assumed annuity surrender rates
tend to increase the balances of DAC, DSI and VOBA, thus increasing income
before income taxes.
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Accounting for Income Taxes
As part of the process of preparing the consolidated financial statements, we
are required to determine income taxes in each of the jurisdictions in which we
operate. This process involves estimating actual current tax expense together
with assessing temporary differences resulting from differing recognition of
items for income tax and accounting purposes. These differences result in
deferred income tax assets and liabilities, which are included within the
Consolidated Balance Sheets. We must then assess the likelihood that deferred
income tax assets will be realized and, to the extent we believe that
realizability is not likely, establish a valuation allowance. Determination of
income tax expense requires estimates and can involve complex issues that may
require an extended period to resolve. Further, the estimated level of annual
pre-tax income can cause the overall effective income tax rate to vary from
period to period. We believe that our tax positions comply with applicable tax
law and that we adequately provide for any known tax contingencies. We believe
the estimates and assumptions used to support our evaluation of tax benefit
realization are reasonable. Final determination of prior-year tax liabilities,
either by settlement with tax authorities or expiration of statutes of
limitations, could be materially different than estimates reflected in assets
and liabilities and historical income tax provisions. The outcome of these final
determinations could have a material effect on our income tax provision, net
income or cash flows in the period that determination is made.
For the year ended December 31, 2022 , changes in market conditions, including
rising interest rates, resulted in deferred tax assets related to the net
unrealized capital losses in the Company's investment portfolio. U.S. GAAP
requires the evaluation of the recoverability of deferred tax assets and the
establishment of a valuation allowance, if necessary, to reduce the deferred tax
asset to an amount that is more likely than not to be realized. When assessing
the need for valuation allowance on the unrealized capital loss deferred tax
assets, we assert a tax planning strategy to hold the vast majority of
underlying securities to recovery or maturity. Our ability to assert such a tax
planning strategy is dependent upon factors such as the Company's
asset/liability matching process, overall investment strategy, projected future
annuity product sales, and expected liquidity needs. In the event these
estimates differ from our prior estimates due to the receipt of new information,
we may be required to significantly change the income tax expense recorded in
the Consolidated Financial Statements. This includes a further significant
decline in value of assets incorporated into our tax planning strategies which
could lead to an increase of our valuation allowance on deferred tax assets
having an adverse effect on current and future results.
Refer to Note T Income Taxes to our Consolidated Financial Statements in Item 8
of Part II of this Annual Report for details.
54 -------------------------------------------------------------------------------- Table of Contents Results of Operations
Consolidated Results of Operations
Net Earnings. The following table presents certain financial data for the years
indicated:
Year Ended December 31,
2022 2021 2020
(In millions)
Revenues:
Direct title insurance premiums $ 2,858 $ 3,571 $ 2,699
Agency title insurance premiums 3,976 4,982 3,599
Escrow, title-related and other fees 4,324 4,795 3,092
Interest and investment income 1,891 1,961 900
Recognized gains and losses, net (1,493) 334 488
Total revenues 11,556 15,643 10,778
Expenses:
Personnel costs 3,192 3,528 2,951
Agent commissions 3,064 3,821 2,749
Other operating expenses 1,721 1,929 1,759
Benefits and other changes in policy reserves 1,125 2,138 866
Depreciation and amortization 496 645 296
Provision for title claim losses 308 385 283
Interest expense 115 114 90
Total expenses 10,021 12,560 8,994
Earnings before income taxes and equity in earnings of
unconsolidated affiliates
1,535 3,083 1,784 Income tax expense 398 713 322 Equity in earnings of unconsolidated affiliates 15 64 15 Net earnings from continuing operations$ 1,152 $ 2,434 $ 1,477 Revenues. Total revenues decreased by$4,087 million in 2022 compared to 2021, primarily attributable to decreases in both direct and agency premiums, decreases in escrow title-related and other fees, decreases in interest and investment income and net recognized losses on our investment holdings in 2022 as compared to net recognized gains on our investment holdings in 2021. Total revenues increased by$4,865 million in 2021 compared to 2020, primarily attributable to increases in both direct and agency premiums, increases in escrow title-related and other fees and increases in interest and investment income, partially offset by a decrease in recognized gains on our investment holdings. See Note L Revenue Recognition to our Consolidated Financial Statements included in Item 8 of Part II of this Annual Report for a breakout of our consolidated revenues.
Total net earnings from continuing operations decreased by
2022 compared to 2021, and increased by
The change in revenue and net earnings from our reportable segments is discussed
in further detail at the segment level below.
Interest and investment income levels are primarily a function of securities markets, interest rates and the amount of cash available for investment. Interest and investment income was$1,891 million ,$1,961 million , and$900 million for the years endedDecember 31, 2022 , 2021, and 2020, respectively. The increase in 2021 as compared to 2020 is primarily attributable to a full year of activity in our F&G segment. Recognized gains and losses, net totaled$(1,493) million ,$334 million , and$488 million for the years endedDecember 31, 2022 , 2021, and 2020, respectively. Recognized gains and losses, net for the year endedDecember 31, 2022 are primarily 55
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attributable to realized losses on derivatives of$515 million , losses on sales of fixed maturity securities of$282 million , losses on sales of mortgages and other assets of$80 million , losses on sales of equity and preferred securities of$31 million and non-cash valuation losses on equity and preferred security holdings of$584 million . Recognized gains and losses, net for the year endedDecember 31, 2021 are primarily attributable to realized gains on derivatives of$655 million , gains on sales of fixed maturity securities of$114 million and gains on sales of mortgages and other assets of$13 million , partially offset by losses on sales of equity and preferred securities of$19 million and non-cash net valuation losses on equity and preferred securities of$429 million . Recognized gains and losses, net for the year endedDecember 31, 2020 are primarily attributable to non-cash valuation gains on equity and preferred security holdings of$208 million , realized gains on derivatives of$192 million , gains on sales of fixed maturity, preferred and equity securities of$148 million , losses on other assets of$25 million and losses on mortgage loans of$32 million . See Note E Investments to our Consolidated Financial Statements included in Item 8 of Part II of this Annual Report for a breakout of our consolidated interest and investment income and realized gains and losses.
Expenses.
Our operating expenses consist primarily of Personnel costs; Other operating expenses, which in our Title segment are incurred as orders are received and processed; Agent commissions, which are incurred as title agency revenue is recognized; and Benefits and other changes in policy reserves, which in our F&G segment are charged to earnings in the period they are earned by the policyholder based on their selected strategy. For traditional life and immediate annuities, policy benefit claims are charged to expense in the period that the claims are incurred, net of reinsurance recoveries. Title insurance premiums, escrow and title-related fees are generally recognized as income at the time the underlying transaction closes or other service is provided. Direct title operations revenue often lags approximately 45-60 days behind expenses, therefore; gross margins may fluctuate. The changes in the market environment, mix of business between direct and agency operations and the contributions from our various business units have historically impacted margins and net earnings. We have implemented programs and have taken necessary actions to maintain expense levels consistent with revenue streams. However, a short-term lag exists in reducing controllable fixed costs and certain fixed costs are incurred regardless of revenue levels.
Personnel costs include base salaries, commissions, benefits, stock-based
compensation and bonuses paid to employees, and are one of our most significant
operating expenses.
Agent commissions represent the portion of premiums retained by our third-party
agents pursuant to the terms of their respective agency contracts.
Benefit expenses for deferred annuity, FIA and IUL policies include index credits and interest credited to contractholder account balances and benefit claims in excess of contract account balances, net of reinsurance recoveries. Other changes in policy reserves include the change in the fair value of the FIA embedded derivative and the change in the reserve for secondary guarantee benefit payments. Other changes in policy reserves also include the change in reserves for life insurance products. Other operating expenses consist primarily of facilities expenses, title plant maintenance, premium taxes (which insurance underwriters are required to pay on title premiums in lieu of franchise and other state taxes), appraisal fees and other cost of sales onServiceLink product offerings and other title-related products, postage and courier services, computer services, professional services, travel expenses, general insurance and bad debt expense on our trade and notes receivable.
The Provision for title claim losses includes an estimate of anticipated title
and title-related claims, and escrow losses.
The change in expenses attributable to our reportable segments is discussed in
further detail at the segment level below.
Income tax expense was$398 million ,$713 million , and$322 million for the years endedDecember 31, 2022 , 2021, and 2020 respectively. Income tax expense as a percentage of earnings before income taxes was 25.9%, 23.1%, and 18.0% in the years endedDecember 31, 2022 , 2021, and 2020 respectively. The increase in income tax expense as a percentage of earnings before taxes in 2022 as compared to 2021 is primarily attributable to the recording of a valuation allowance in 2022 for tax benefits associated with deferred tax assets related to unrealized losses on equity securities for which it is not more likely than not that we will not be able to realize the benefit for tax purposes, partially offset by the tax benefit of realized capital losses carried back to 2017. The increase in income tax expense as a percentage of earnings before taxes in 2021 when compared to 2020 is primarily attributable to valuation allowance releases and the tax status change recorded by F&G in 2020. For the year endedDecember 31, 2022 , changes in market conditions, including rising interest rates, resulted in deferred tax assets related to the net unrealized capital losses in the Company's investment portfolio.U.S. GAAP requires the evaluation of the recoverability of deferred tax assets and the establishment of a valuation allowance, if necessary, to reduce the deferred tax asset to an amount that is more likely than not to be realized. 56 -------------------------------------------------------------------------------- Table of Contents When assessing the need for valuation allowance for the F&G segment on the unrealized capital loss deferred tax assets, F&G asserts a tax planning strategy to hold the vast majority of underlying securities to recovery or maturity. F&G's ability to assert such a tax planning strategy is dependent upon factors such as F&G's asset/liability matching process, overall investment strategy, projected future annuity product sales, and expected liquidity needs. In the event these estimates differ from our prior estimates due to the receipt of new information, the Company may be required to significantly change the income tax expense recorded in the Consolidated Financial Statements. This includes a further significant decline in value of assets incorporated into our tax planning strategies which could lead to an increase of our valuation allowance on deferred tax assets having an adverse effect on current and future results. Title The following table presents the results of operations of our Title segment for the years indicated: Year Ended December 31, 2022 2021 2020 (In millions) Revenues: Direct title insurance premiums$ 2,858 $ 3,571 $ 2,699 Agency title insurance premiums 3,976 4,982 3,599 Escrow, title-related and other fees 2,502 3,228 2,782 Interest and investment income 213 109 151 Recognized gains and losses, net (443) (393) 143 Total revenues 9,106 11,497 9,374 Expenses: Personnel costs 2,987 3,292 2,778 Agent commissions 3,064 3,821 2,749 Other operating expenses 1,515 1,725 1,536 Depreciation and amortization 142 138 149 Provision for title claim losses 308 385 283 Interest expense - - 1 Total expenses 8,016 9,361 7,496
Earnings from continuing operations, before income taxes and
equity in earnings of unconsolidated affiliates
$ 1,090 $ 2,136 $ 1,878 Orders opened by direct title operations (in thousands) 1,594 2,689 2,950 Orders closed by direct title operations (in thousands) 1,222 2,169 2,052 Fee per file by direct title operations (in dollars) $
3,381
Total revenues for the Title segment decreased by$2,391 million , or 21%, in the year endedDecember 31, 2022 when compared to 2021. Total revenues for the Title segment increased by$2,123 million , or 23%, in the year endedDecember 31, 2021 when compared to 2020. The decrease in the year endedDecember 31, 2022 as compared to 2021 is primarily attributable to decreases in both our direct and agency premiums, decreases in escrow, title-related and other fees and an increase in non-cash valuation losses on our equity and preferred investment holdings, partially offset by an increase in interest and investment income. The increase in the year endedDecember 31, 2021 as compared to 2020 is primarily attributable to increases in both our direct and agency premiums, and increases in escrow, title-related and other fees, partially offset by a decrease in interest and investment income, and an increase in non-cash valuation losses on our equity and preferred investment holdings. 57
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The following table presents the percentages of title insurance premiums
generated by our direct and agency operations:
Year Ended December 31,
2022 2021 2020
Amount % Amount % Amount %
(Dollars in millions)
Title premiums from direct operations $ 2,858 41.8 % $ 3,571 41.8 % $ 2,699 42.9 %
Title premiums from agency operations 3,976 58.2 4,982 58.2 3,599 57.1
Total title premiums $ 6,834 100.0 % $ 8,553 100.0 % $ 6,298 100.0 %
Title premiums decreased by 20% in the year ended December 31, 2022 as compared
to 2021. The decrease is primarily attributable to a decrease in Title premiums
from direct operations of $713 million , or 20%, and a decrease in Title premiums
from agency operations of $1,006 million , or 20%. Title premiums increased by
36% in the year ended December 31, 2021 as compared to 2020. The increase is
primarily attributable to an increase in Title premiums from direct operations
of $872 million , or 32%, and an increase in Title premiums from agency
operations of $1,383 million , or 38%.
The following table presents the percentages of opened and closed title
insurance orders generated by purchase and refinance transactions by our direct
operations:
Year Ended
2022 2021 2020
Opened title insurance orders from purchase transactions
(1)
71.1 % 48.9 % 39.0 %
Opened title insurance orders from refinance
transactions (1) 28.9 51.1 61.0
100.0 % 100.0 % 100.0 %
Closed title insurance orders from purchase transactions
(1)
67.9 % 44.9 % 39.8 %
Closed title insurance orders from refinance
transactions (1) 32.1 55.1 60.2
100.0 % 100.0 % 100.0 %
_______________________________________
(1) Percentages exclude consideration of an immaterial number of non-purchase
and non-refinance orders.
Title premiums from direct operations decreased in the year endedDecember 31, 2022 as compared to 2021. The decrease is primarily attributable to a decrease in total closed order volume, partially offset by an increase in fee per file. Title premiums from direct operations increased in 2021 as compared to 2020, primarily due to an increase in total closed order volume, driven by an increase in purchase order volume and an increase in fee per file, partially offset by a decline in refinance volume. The residential refinance market has considerably lower fees per closed order than commercial or residential purchase transactions. We experienced a decrease in closed title insurance order volumes from both purchase and refinance transactions in the year endedDecember 31, 2022 as compared to 2021. Total closed order volumes were 1,222,000 in the year endedDecember 31, 2022 compared to 2,169,000 in the year endedDecember 31, 2021 , an overall decrease of 43.7%. Total closed order volumes from refinance transactions, which have a lower fee per file than purchase transactions, were 369,000 in the year endedDecember 31, 2022 compared to 1,172,000 in the year endedDecember 31, 2021 , an overall decrease of 69%. The decrease in 2022 is primarily attributable to higher average mortgage interest rates in 2022 as compared to 2021. Total closed order volumes were 2,169,000 in the year endedDecember 31, 2021 compared to 2,052,000 in the year endedDecember 31, 2020 , an overall increase of 5.7%.The decrease in refinance transactions in 2021 is primarily attributable to the surge in residential refinance transactions in 2020 and the first half of 2021, resulting in a decline in the population of eligible refinance candidates in the second half of 2021. Total opened title insurance order volumes decreased in the year endedDecember 31, 2022 , as compared to 2021. The decrease in 2022 was attributable to decreases in both opened title orders from purchase transactions and refinance transactions. Total opened title insurance order volumes decreased in the year endedDecember 31, 2021 , as compared to 2020. The decrease in 2021 was attributable to decreased opened title orders from refinance transactions, partially offset by an increase in purchase transactions. The average fee per file in our direct operations was$3,381 in the year endedDecember 31, 2022 , compared to$2,467 in the year endedDecember 31, 2021 . The increase in average fee per file in 2022 as compared to 2021 reflects an increased proportion of purchase transactions relative to total closed orders and a stable commercial market. The average fee per file in our direct operations was$2,467 in the year endedDecember 31, 2021 , compared to$2,067 in the year endedDecember 31, 2020 . The increase in average fee per file in 2021 as compared to 2020 reflects an increased proportion of purchase transactions 58
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relative to total closed orders and a stronger commercial market compared to 2020. The fee per file tends to change as the mix of refinance and purchase transactions changes, because purchase transactions involve the issuance of both a lender's policy and an owner's policy, resulting in higher fees, whereas refinance transactions only require a lender's policy, resulting in lower fees. Title premiums from agency operations decreased$1,006 million , or 20%, in the year endedDecember 31, 2022 as compared to 2021, and increased$1,383 million , or 38%, in the year endedDecember 31, 2021 as compared to 2020. The current trends in the agency business reflect a softening residential purchase environment in many markets throughout the country and a dramatic decline in residential refinance transactions, consistent with trends in the direct business. In addition in 2021 and 2020, lower mortgage rates during those years resulted in a surge in refinance business with agents, which was further impacted by changes in underlying real estate activity in the geographic regions in which the independent agents operate. Escrow, title-related and other fees decreased by$726 million , or 22%, in the year endedDecember 31, 2022 as compared to 2021, and increased by$446 million , or 16%, in the year endedDecember 31, 2021 as compared to 2020. Escrow fees, which are more closely related to our direct operations, decreased by$414 million , or 30%, in the year endedDecember 31, 2022 , as compared to 2021, and increased$225 million , or 19%, in the year endedDecember 31, 2021 as compared to 2020. The decrease in the year endedDecember 31, 2022 as compared to 2021 is primarily due to the decrease in closed order volume including the decline in residential refinance volume, which have relatively higher escrow fees than residential purchase and commercial transactions. The increase in the year endedDecember 31, 2021 as compared to 2020 is primarily due to the increase in closed order volume. Other fees in the Title segment, excluding escrow fees, decreased by$311 million , or 17%, in the year endedDecember 31, 2022 as compared to 2021, and increased$221 million , or 14%, in the year endedDecember 31, 2021 as compared to 2020. The decrease in Other fees in the year endedDecember 31, 2022 as compared to 2021 was primarily driven by a decrease in revenues related to ourServiceLink business in addition to decreases in various individually immaterial items. The increase in Other fees in the year endedDecember 31, 2021 as compared to 2020 was primarily driven by an increase in revenues related to ourServiceLink business in addition to increases in various individually immaterial items. The change in both escrow fees and other fees is directionally consistent with the change in title premiums from direct operations in 2022 and 2021. Interest and investment income levels are primarily a function of securities markets, interest rates and the amount of cash available for investment. Interest and investment income increased$104 million , or 95%, in the year endedDecember 31, 2022 , as compared to 2021, and decreased$42 million , or 28%, in the year endedDecember 31, 2021 as compared to 2020. The increase in the year endedDecember 31, 2022 as compared to 2021 was primarily attributable to increased income from our tax-deferred property exchange business and higher yields on our short-term investments when compared to 2021. The decrease in the year endedDecember 31, 2021 as compared to 2020 was primarily attributable to decreased average fixed maturity portfolio balances, decreased dividends on preferred and common stocks and a decline in interest on cash and short-term investments. Recognized net losses were$443 million and$393 million in the years endedDecember 31, 2022 and 2021, respectively. Recognized net gains were$143 million in the year endedDecember 31, 2020 . The variability in recognized gains and losses, net is primarily attributable to fluctuations in non-cash valuation changes on our equity and preferred security holdings in addition to various other individually immaterial items. Personnel costs include base salaries, commissions, benefits, stock-based compensation and bonuses paid to employees, and are one of our most significant operating expenses. Personnel costs decreased$305 million , or 9%, in the year endedDecember 31, 2022 , as compared to 2021, and increased$514 million , or 19% in the year endedDecember 31, 2021 as compared to 2020. The decrease in the year endedDecember 31, 2022 as compared to 2021 is primarily attributable to lower average head count in 2022 in response to the significant decline in refinance orders and the recent declines in purchase and commercial orders, partially offset by an increase in the 401(k) match in 2022. The increase in the year endedDecember 31, 2021 as compared to 2020 is primarily attributable to increased commissions driven by the increases in year-over-year closed title order volumes. Personnel costs as a percentage of total revenues from direct title premiums and escrow, title-related and other fees were 56%, 48% and 51% for the years endedDecember 31, 2022 , 2021 and 2020, respectively. Average employee count in the Title segment was 25,157, 27,297, and 24,638 in the years endedDecember 31, 2022 , 2021 and 2020, respectively. Other operating expenses decreased by$210 million , or 12%, in the year endedDecember 31, 2022 as compared to 2021, and increased$189 million , or 12%, in the year endedDecember 31, 2021 compared to 2020. Other operating expenses as a percentage of total revenue excluding agency premiums, interest and investment income, and recognized gains and losses were 28%, 25% and 28% in the years endedDecember 31, 2022 , 2021 and 2020, respectively. Agent commissions represent the portion of premiums retained by agents pursuant to the terms of their respective agency contracts. Agent commissions and the resulting percentage of agent premiums that we retain vary according to regional differences in real estate closing practices and state regulations. 59
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The following table illustrates the relationship of agent premiums and agent
commissions:
Year Ended December 31,
2022 2021 2020
Amount % Amount % Amount %
(Dollars in millions)
Agent premiums $ 3,976 100.0 % $ 4,982 100.0 % $ 3,599 100.0 %
Agent commissions 3,064 77.1 3,821 76.7 2,749 76.4
Net retained agent premiums $ 912 22.9 % $ 1,161 23.3 % $ 850 23.6 %
The claim loss provision for title insurance was $308 million , $385 million , and
$283 million for the years ended December 31, 2022 , 2021, and 2020 respectively.
The provision reflects a provision rate of 4.5% of title premiums in all
periods. We continually monitor and evaluate our loss provision level, actual
claims paid, and the loss reserve position each quarter. This loss provision
rate is set to provide for losses on current year policies, but due to
development of prior years and our long claim duration, it periodically includes
amounts of estimated adverse or positive development on prior years' policies.
F&G
Segment Overview
Through our majority owned F&G subsidiary, which we acquired on June 1, 2020 , we
provide our principal annuity and life insurance products through the insurance
subsidiaries composing our F&G segment, FGL Insurance and FGL NY Insurance . Our
customers range across a variety of age groups and are concentrated in the
middle-income market. Our Fixed Indexed Annuity ("FIA") products provide for
pre-retirement wealth accumulation and post-retirement income management. Our
Indexed Universal Life Insurance ("IUL") products provide wealth protection and
transfer opportunities. Life and annuity products are primarily distributed
through Independent Marketing Organizations ("IMOs") and independent insurance
agents, and beginning in 2020, independent broker dealers and banks.
Additionally, we provide funding agreements and pension risk transfer ("PRT")
solutions to various institutions through consultants and brokers.
In setting the features and pricing of our flagship FIA products relative to our
targeted net margin, we take into account our expectations regarding (1) the
difference between the net investment income we earn and the sum of the interest
credited to policyholders and the cost of hedging our risk on the policies; (2)
fees, including surrender charges and rider fees, partly offset by vesting
bonuses that we pay our policyholders; and (3) a number of related expenses,
including benefits and changes in reserves, acquisition costs, and general and
administrative expenses.
Key Components of Our Historical Results of Operations
Through our insurance subsidiaries, we issue a broad portfolio of deferred annuities (fixed indexed and fixed rate annuities), indexed universal life insurance, immediate annuities, funding agreements and pension risk transfer solutions. A deferred annuity is a type of contract that accumulates value on a tax deferred basis and typically begins making specified periodic or lump sum payments a certain number of years after the contract has been issued. Indexed universal life insurance is a complementary type of contract that accumulates value in a cash value account and provides a payment to designated beneficiaries upon the policyholder's death. An immediate annuity is a type of contract that begins making specified payments within one annuity period (e.g., one month or one year) and typically makes payments of principal and interest earnings over a period of time. UnderU.S. GAAP, premium collections for fixed indexed annuities, fixed rate annuities, immediate annuities and PRT without life contingency, and deposits received for funding agreements are reported in the financial statements as deposit liabilities (i.e., contractholder funds) instead of as sales or revenues. Similarly, cash payments to customers are reported as decreases in the liability for contractholder funds and not as expenses. Sources of revenues for products accounted for as deposit liabilities are net investment income, surrender, cost of insurance and other charges deducted from contractholder funds, and net realized gains (losses) on investments. Components of expenses for products accounted for as deposit liabilities are interest-sensitive and index product benefits (primarily interest credited to account balances or the hedging cost of providing index credits to the policyholder), amortization of VOBA, DAC, and DSI, other operating costs and expenses, and income taxes. We hedge certain portions of our exposure to product related equity market risk by entering into derivative transactions. We purchase derivatives consisting predominantly of call options and, to a lesser degree, futures contracts (specifically for FIA contracts) on the equity indices underlying the applicable policy. These derivatives are used to offset the reserve impact of the index credits due to policyholders under the FIA and IUL contracts. The majority of all such call options are one-year options 60
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purchased to match the funding requirements underlying the FIA/IUL contracts. We attempt to manage the cost of these purchases through the terms of our FIA/IUL contracts, which permit us to change caps, spread, or participation rates on each policy's annual anniversary, subject to certain guaranteed minimums that must be maintained. The call options and futures contracts are marked to fair value with the change in fair value included as a component of net investment gains (losses). The change in fair value of the call options and futures contracts includes the gains and losses recognized at the expiration of the instruments' terms or upon early termination and the changes in fair value of open positions. Earnings from products accounted for as deposit liabilities are primarily generated from the excess of net investment income earned over the sum of interest credited to policyholders and the cost of hedging our risk on FIA/IUL policies. With respect to FIAs/IULs, the cost of hedging our risk includes the expenses incurred to fund the index credits. Proceeds received upon expiration or early termination of call options purchased to fund annual index credits are recorded as part of the change in fair value of derivatives, and are largely offset by an expense for index credits earned on annuity contractholder fund balances. InJune 2021 , we established a funding agreement-backed notes program (the "FABN Program"), pursuant to whichFGL Insurance may issue funding agreements to a special purpose statutory trust (the "Trust") for spread lending purposes. The maximum aggregate principal amount permitted to be outstanding at any one time under the FABN Program is currently$5.0 billion . We also issue funding agreements through theFederal Home Loan Bank of Atlanta ("FHLB"). InJuly 2021 , we entered the PRT market, pursuant to whichFGL Insurance andFGL NY Insurance may issue group annuity contracts to discharge pension plan liabilities from a pension plan sponsor. Life contingent pension risk transfer premiums are included in life insurance premiums and other fees below. 61
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F&G Results of Operations
The results of operations of our F&G segment for the years endedDecember 31, 2022 andDecember 31, 2021 and seven months endedDecember 31, 2020 , were as follows: Seven months Year ended ended December 31, December 31, December 31, 2022 2021 2020 (In millions) Revenues: Life insurance premiums and other fees$ 1,695 $ 1,395 $ 138 Interest and investment income 1,655 1,852 743 Recognized gains and losses, net (1,010) 715 352 Total revenues 2,340 3,962 1,233 Benefits and expenses: Benefits and other changes in policy reserves 1,125 2,138 866 Personnel costs 157 129 65 Other operating expenses 102 105 75 Depreciation and amortization 329 484 123 Interest expense 29 29 18 Total benefits and expenses 1,742 2,885 1,147 Pre-tax earnings (loss) 598 1,077 86 Income tax expense (benefit) 117 220 75
Net earnings (loss) from continuing operations
Earnings from discontinued operations, net of tax
- 8 (25) Net earnings (loss)$ 481 $ 865 $ 136 Revenues
Life insurance premiums and other fees
Life insurance premiums and other fees primarily reflect premiums on
life-contingent pension risk transfers and traditional life insurance products,
which are recognized as revenue when due from the policyholder, as well as
policy rider fees primarily on FIA policies, the cost of insurance on IUL
policies and surrender charges assessed against policy withdrawals in excess of
the policyholder's allowable penalty-free amounts (up to 10% of the prior year's
value, subject to certain limitations). The following table summarizes the Life
insurance premiums and other fees, on the Consolidated Statements of Earnings
for the respective periods:
Seven months
Year ended ended
December 31, December 31, December 31,
2022 2021 2020
(In millions)
Life-contingent pension risk transfer premiums $ 1,362 $ 1,147 $ -
Traditional life insurance premiums 15 18 13
Life-contingent immediate annuity premiums 17 13 10
Surrender charges 58 33 13
Policyholder fees and other income 243 184 102
Life insurance premiums and other fees $ 1,695
•Life contingent pension risk transfer premiums for the year endedDecember 31, 2022 increased compared to the year endedDecember 31, 2021 , due to increased PRT premiums, reflecting our first full year in the PRT market. As noted above, PRT premiums are subject to fluctuation period to period. •Surrender charges increased for the years endedDecember 31, 2022 andDecember 31, 2021 , primarily reflecting an increase in market value adjustments ("MVA") assessed on certain surrendered FIA policies. A market value adjustment ("MVA") will apply in most states to any withdrawal that incurs a surrender charge, subject to certain exceptions. The MVA is based on a formula that takes into account changes in interest rates since contract issuance. 62 -------------------------------------------------------------------------------- Table of Contents Generally, if interest rates have risen, the MVA will decrease surrender value, whereas if rates have fallen, it will increase surrender value. In addition, surrender charges increases as a result of increased amounts assessed against policy withdrawals in excess of the policyholder's allowable penalty-free amounts primarily on our FIA policies. •Policyholder fees and other income increased for the years endedDecember 31, 2022 andDecember 31, 2021 , primarily due to increased GMWB rider fees, cost of insurance charges on IUL policies and IUL premium loads. GMWB rider fees are based on the policyholder's benefit base and are collected at the end of the policy year.
Interest and investment income
Below is a summary of interest and investment income:
Seven months
Year ended ended
December 31, December 31, December 31,
2022 2021 2020
(In millions)
Fixed maturity securities, available-for-sale $ 1,431 $ 1,213 $ 643
Equity securities 17 11 7
Preferred securities 49 47 35
Mortgage loans 186 131 50
Invested cash and short-term investments 33 7 -
Limited partnerships 110 589 75
Other investments 20 17 8
Gross investment income 1,846 2,015 818
Investment expense (191) (163) (75)
Net investment income $ 1,655 $ 1,852 $ 743
Interest and investment income is shown net of amounts attributable to certain
funds withheld reinsurance agreements which is passed along to the reinsurer in
accordance with the terms of these agreements. Interest and investment income
attributable to these agreements, and thus excluded from the totals in the table
above, was $109 million , $53 million and $21 million , for the years ended
December 31, 2022 and December 31, 2021 , and the seven months ended December 31,
2020 , respectively.
Recognized gains and losses, net
Below is a summary of the major components included in recognized gains and
losses, net:
Seven months
Year ended ended
December 31, December 31, December 31,
2022 2021 2020
(In millions)
Net realized and unrealized (losses) gains on fixed
maturity available-for-sale securities, equity securities
and other invested assets
$ (461) $ 57 $ 179 Change in allowance for expected credit losses (34) 4 (19)
Net realized and unrealized (losses) gains on certain
derivatives instruments
(857) 615 237
Change in fair value of reinsurance related embedded
derivatives
352 34 (53)
Change in fair value of other derivatives and embedded
derivatives
(10) 5 8 Recognized gains and losses, net$ (1,010)
Recognized gains and (losses) are shown net of amounts attributable to certain funds withheld reinsurance agreements which is passed along to the reinsurer in accordance with the terms of these agreements. Recognized gains and (losses) attributable to these agreements, and thus excluded from the totals in the table above, was$381 million ,$15 million and$(58) million for the year endedDecember 31, 2022 , the year endedDecember 31, 2021 , the seven months endedDecember 31, 2020 , respectively. •For the year endedDecember 31, 2022 , recognized gains and (losses), net include$241 million of realized losses on fixed maturity available-for-sale securities and$207 million of unrealized losses on equity securities (as a result of mark-to-market losses). For the year endedDecember 31, 2021 , recognized gains and (losses), net include$102 million of realized gains on fixed maturity available-for-sale securities and$51 million unrealized losses on equity securities (as a result of mark-to-market losses). 63 -------------------------------------------------------------------------------- Table of Contents •For the period fromJune 1, 2020 toDecember 31, 2020 , recognized gains and (losses), net include$95 million of realized gains on fixed maturity available-for-sale securities and$84 million of unrealized losses on equity securities (as a result of mark-to-market losses).
•For all periods, the change in allowance for expected credit losses primarily
relates to available for sale securities.
•For all periods, net realized and unrealized gains (losses) on certain
derivative instruments primarily relate to the net realized and unrealized gains
(losses) on options and futures used to hedge FIA and IUL products, including
gains on option and futures expiration. See the table below for primary drivers
of gains (losses) on certain derivatives.
•The fair value of reinsurance related embedded derivative is based on the
change in fair value of the underlying assets held in the funds withheld ("FWH")
portfolio.
We utilize a combination of static (call options) and dynamic (long futures
contracts) instruments in our hedging strategy. A substantial portion of the
call options and futures contracts are based upon the S&P 500 Index with the
remainder based upon other equity, bond and gold market indices.
The components of the realized and unrealized gains (losses) on certain
derivative instruments hedging our indexed annuity and universal life products
are summarized in the table below:
Year ended Seven months ended
December 31,
2022 December 31, 2021 December 31, 2020
(Dollars in millions)
Call options:
Realized (losses) gains $ (170) $ 437 $ 62
Change in unrealized (losses) gains (692) 160 167
Futures contracts:
(Losses) gains on futures contracts expiration (6) 9 21
Change in unrealized gains (losses) (1) (1) (6)
Foreign currency forward:
Gains on foreign currency forward 11 10 (7)
Total net change in fair value $ (858) $ 615 $ 237
Year-to-Date Point-to-Point Change in S&P 500 Index
during the periods
(19) % 27 % 23 %
•Realized gains and losses on certain derivative instruments are directly
correlated to the performance of the indices upon which the call options and
futures contracts are based and the value of the derivatives at the time of
expiration compared to the value at the time of purchase. Gains (losses) on
option expiration reflect the movement during each period on options settled
during the respective period.
•The change in unrealized gains (losses) due to fair value of call options is
primarily driven by the underlying performance of the S&P 500 Index during each
respective period relative to the S&P 500 Index on the policyholder buy dates.
•The net change in fair value of the call options and futures contracts was
primarily driven by movements in the S&P 500 Index relative to the policyholder
buy dates.
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The average index credits to policyholders are as follows:
Seven months
Year ended ended
December 31,
2022 December 31, 2021 December 31, 2020
Average Crediting Rate 1 % 5 % 3 %
S&P 500 Index:
Point-to-point strategy 1 % 4 % 5 %
Monthly average strategy 2 % 3 % 2 %
Monthly point-to-point strategy - % 7 % - %
3 year high water mark 13 % 16 % 19 %
•Actual amounts credited to contractholder fund balances may differ from the
index appreciation due to contractual features in the FIA contracts and certain
IUL contracts (caps, spreads and participation rates), which allow us to manage
the cost of the options purchased to fund the annual index credits.
•The credits for the periods presented were based on comparing the S&P 500 Index
on each issue date in the period to the same issue date in the respective prior
year periods.
Benefits and expenses
Benefits and other changes in policy reserves
Below is a summary of the major components included in Benefits and other
changes in policy reserves:
Seven months
Year ended ended
December 31, December 31, December 31,
2022 2021 2020
(In millions)
PRT agreements $ 1,365 $ 1,149 $ -
FIA/IUL market related liability movements (1,010) (378) 317
Index credits, interest credited & bonuses 610 1,024 319
Annuity payments and other 160 343 230
Total benefits and other changes in policy reserves
•PRT agreements for the years ended
reflect our entrance into the PRT market in the second half of 2021. PRT
agreements are subject to fluctuation period to period.
•The FIA/IUL market related liability movements for all periods are mainly driven by changes in the equity markets, non-performance spreads, and risk-free rates during the respective periods. Additionally, 2021 includes the system implementation and assumption review process impacts discussed below. The change in risk free rates and non-performance spreads (decreased)/ increased the FIA market related liability by$(656) million ,$(74) million ,$268 million and$141 million during the years endedDecember 31, 2022 andDecember 31, 2021 , the period fromJune 1, 2020 toDecember 31, 2020 and the Predecessor period fromJanuary 1, 2020 toMay 31, 2020 , respectively. The remaining change in market value of the market related liability movements was driven by equity market impacts. See "Recognized gains and (losses)" above for summary and discussion of net unrealized gains (losses) on certain derivative instruments. •Annually, typically in the third quarter, we review assumptions associated with reserves for policy benefits and product guarantees. During the fourth quarter of 2022, based on increases in interest rates and pricing changes during 2022, we updated certain FIA assumptions used to calculate the fair value of the embedded derivative component within contractholder funds and certain assumptions used to calculate SOP 03-1 liabilities and intangible balances. These changes, taken together, resulted in an increase in contractholder funds and future policy benefits of$97 million . During the third quarter of 2021, we implemented a new actuarial valuation system, and as a result, our third quarter 2021 assumption updates include model refinements and assumption updates resulting from the implementation. The system implementation and assumption review process included refinements in the calculation of the fair value of the embedded derivative component of our fixed indexed annuities. These changes, taken together, resulted in a decrease in contractholder funds and future policy reserves of$397 million . 65
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•Index credits, interest credited & bonuses for the year endedDecember 31, 2022 were lower compared to the year endedDecember 31, 2021 and primarily reflected lower index credits on FIA policies as a result of market movement during the respective periods. Index credits, interest credited & bonuses for the year endedDecember 31, 2021 were higher compared with the combined periods fromJune 1, 2020 toDecember 31, 2020 and the Predecessor period fromJanuary 1, 2020 toMay 31, 2020 , and primarily reflected higher index credits on FIA policies as a result of market movement during the respective periods. Refer to average policyholder index discussion above for details on drivers.
Amortization of intangibles
Below is a summary of the major components included in depreciation and
amortization:
Seven months
Year ended ended
December 31, December 31, December 31,
2022 2021 2020
(In millions)
Amortization of DAC, VOBA and DSI $ 353 $ 517 $ 131
Interest (57) (44) (22)
Unlocking 4 (12) (2)
Amortization of other intangible assets and other
depreciation 29 23 16
Total depreciation and amortization $ 329
•Amortization of VOBA, DAC and DSI is based on current and future expected gross margins (pre-tax operating income before amortization) and includes the impacts of the assumption changes and system implementation discussed below. The amortization for the each period presented is the result of AGPs in the respective periods. •Annually, typically in the third quarter, we review assumptions associated with the amortization of intangibles. During the fourth quarter of 2022, based on increases in interest rates and pricing changes during 2022, we updated certain FIA assumptions used to calculate the fair value of the embedded derivative component within contractholder funds and certain assumptions used to calculate SOP 03-1 liabilities and intangible balances. These changes, taken together, resulted in an increase to intangible assets of$47 million .
During the third quarter of 2021, we implemented a new actuarial valuation
system and as a result, our third quarter 2021 assumption updates include model
refinements and assumption updates resulting from the implementation. The
changes, taken together, increased amortization of intangibles by
Other items affecting net earnings
Income tax expense (benefit)
Below is a summary of the major components included in income tax expense
(benefit):
Year ended Seven months ended
December 31, 2022 December 31, 2021 December 31, 2020
(Dollars in millions)
Earnings from continuing operations before taxes $ 598 $ 1,077 $ 86
Income tax expense (benefit) before valuation
allowance 90 234 (21)
Change in valuation allowance 27 (14) (54)
Federal income tax expense (benefit) $ 117 $ 220 $ (75)
Effective rate 20 % 20 % (87) %
•The income tax expense for the year ended December 31, 2022 was $117 million
compared to the income tax expense of $220 million for the year ended
December 31, 2021 . The effective tax rate was 20% for both years, which differs
from the statutory rate of 21% primarily due to favorable permanent tax
adjustments.
•Income tax benefit for the seven months ended December 31, 2020 was $75
million . The income tax benefit was primarily driven by the change in tax status
benefit recorded at December 31, 2020 and valuation allowance releases on the
current period activity in Front Street Re Cayman Ltd. ("FSRC") included in
continuing operations and the US non-life companies.
•See Note T Income Taxes to the Consolidated Financial Statements for further
information.
66 -------------------------------------------------------------------------------- Table of Contents Investment Portfolio The types of assets in which we may invest are influenced by various state laws, which prescribe qualified investment assets applicable to insurance companies. Within the parameters of these laws, we invest in assets giving consideration to four primary investment objectives: (i) maintain robust absolute returns; (ii) provide reliable yield and investment income; (iii) preserve capital and (iv) provide liquidity to meet policyholder and other corporate obligations. Our investment portfolio is designed to contribute stable earnings, excluding the effects of short-term mark-to-market effects, and balance risk across diverse asset classes and is primarily invested in high quality fixed income securities. As ofDecember 31, 2022 andDecember 31, 2021 , the fair value of our investment portfolio was approximately$41 billion and$39 billion , respectively, and was divided among the following asset classes and sectors: December 31, 2022 December 31, 2021 Fair Value Percent Fair Value Percent (Dollars in millions) Fixed maturity securities, available for sale: United States Government full faith and credit$ 32 - %$ 50 - % United States Government sponsored entities 42 - % 74 - %United States municipalities, states and territories 1,410 3 % 1,441 4 % Foreign Governments 148 - % 205 1 % Corporate securities: Finance, insurance and real estate 5,085 12 % 5,109 13 % Manufacturing, construction and mining 737 2 % 932 2 % Utilities, energy and related sectors 2,275 6 % 2,987 8 % Wholesale/retail trade 2,008 5 % 2,627 7 % Services, media and other 2,794 7 % 3,349 8 % Hybrid securities 705 2 % 881 2 % Non-agency residential mortgage-backed securities 1,479 4 % 648 2 % Commercial mortgage-backed securities 3,036 7 % 2,964 7 % Asset-backed securities 7,245 18 % 4,550 12 % Collateral loan obligations ("CLO") 4,222 10 % 4,145 11 % Total fixed maturity available for sale securities$ 31,218 76 %$ 29,962 77 % Equity securities (a) 823 2 % 1,171 3 % Limited partnerships: Private equity 1,129 3 % 1,181 3 % Real assets 431 1 % 340 1 % Credit 867 2 % 829 2 % Limited partnerships$ 2,427 6 %$ 2,350 6 % Commercial mortgage loans 2,083 5 % 2,265 6 % Residential mortgage loans 1,892 5 % 1,549 4 % Other (primarily derivatives and company owned life insurance) 809 2 % 1,305 3 % Short term investments 1,556 4 % 373 1 % Total investments$ 40,808 100 %$ 38,975 100 %
(a) Includes investment grade non-redeemable preferred stocks (
Insurance statutes regulate the type of investments that our life insurance subsidiaries are permitted to make and limit the amount of funds that may be used for any one type of investment. In light of these statutes and regulations, and our business and investment strategy, we generally seek to invest in (i) corporate securities rated investment grade by established nationally recognized statistical rating organizations (each, an "NRSRO"), (ii)U.S. Government and government-sponsored agency securities, or (iii) securities of comparable investment quality, if not rated. 67 -------------------------------------------------------------------------------- Table of Contents As ofDecember 31, 2022 andDecember 31, 2021 , our fixed maturity available-for-sale ("AFS") securities portfolio was approximately$31 billion and$30 billion , respectively. The following table summarizes the credit quality, by NRSRO rating, of our fixed income portfolio: December 31, 2022 December 31, 2021 Fair Value Percent Fair Value Percent Rating (Dollars in millions) AAA $ 1,358 4 % $ 660 2 % AA 2,297 7 % 2,181 7 % A 8,076 26 % 7,667 26 % BBB 8,158 26 % 10,462 35 % Not rated (a) 9,529 31 % 6,642 22 % Total investment grade 29,418 94 % 27,612 92 % BB 986 3 % 1,372 5 % B and below (b) 236 1 % 432 1 % Not rated (a) 578 2 % 546 2 % Total below investment grade 1,800 6 % 2,350 8 % Total $ 31,218 100 % $ 29,962 100 %
(a) Securities denoted as not-rated by an NRSRO were classified as investment or
non-investment grade according to the securities' respective NAIC designation
(b) Includes$46 million and$68 million atDecember 31, 2022 andDecember 31, 2021 , respectively, of non-agency RMBS (as defined below) that carry a NAIC 1 designation. The NAIC's Securities Valuation Office ("SVO") is responsible for the day-to-day credit quality assessment and valuation of securities owned by state regulated insurance companies. Insurance companies report ownership of securities to the SVO when such securities are eligible for regulatory filings. The SVO conducts credit analysis on these securities for the purpose of assigning an NAIC designation or unit price. Typically, if a security has been rated by an NRSRO, the SVO utilizes that rating and assigns an NAIC designation based upon the following system: NAIC Designation NRSRO Equivalent Rating 1AAA /AA/A 2 BBB 3 BB 4 B 5 CCC and lower 6 In or near default The NAIC uses designation methodologies for non-agency RMBS, including RMBS backed by subprime mortgage loans and for CMBS. The NAIC's objective with the designation methodologies for these structured securities is to increase accuracy in assessing expected losses and to use the improved assessment to determine a more appropriate capital requirement for such structured securities. The NAIC assigns a NAIC designation based on the loss expectation for each security. Several of our RMBS securities carry a NAIC 1 designation while the NRSRO rating indicates below investment grade. The revised methodologies reduce regulatory reliance on rating agencies and allow for greater regulatory input into the assumptions used to estimate expected losses from such structured securities. In the tables below, we present the rating of structured securities based on ratings from the NAIC rating methodologies described above (which in some cases do not correspond to rating agency designations). All NAIC designations (e.g., NAIC 1-6) are based on the NAIC methodologies. 68
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The tables below present our fixed maturity securities by NAIC designation as of
(Dollars in millions) December 31, 2022
NAIC Designation Amortized Cost Fair Value Percent of Total Fair Value
1 $ 21,917 $ 19,234 62 %
2 11,889 10,250 33 %
3 1,571 1,419 4 %
4 240 220 1 %
5 54 39 - %
6 52 56 - %
Total $ 35,723 $ 31,218 100 %
(Dollars in millions) December 31, 2021
NAIC Designation Amortized Cost Fair Value Percent of Total Fair Value
1 $ 15,636 $ 15,848 54 %
2 10,779 11,441 38 %
3 1,603 1,850 6 %
4 567 669 2 %
5 80 93 - %
6 59 61 - %
Total $ 28,724 $ 29,962 100 %
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Investment Industry Concentration
The tables below present the top ten industry categories of our fixed maturity and equity securities and FHLB common stock, including the fair value and percent of total fixed maturity and equity securities and FHLB common stock fair value as ofDecember 31, 2022 andDecember 31, 2021 (dollars in millions):
Percent of Total
Top 10 Industry Concentration Fair Value Fair Value
ABS Other $ 7,245 23 %
CLO securities 4,222 13 %
Whole loan collateralized mortgage obligation ("CMO") 3,655 12 %
Banking 2,855 9 %
Municipal 1,410 4 %
Electric 1,379 4 %
Life insurance 1,376 4 %
Technology 855 3 %
Healthcare 659 2 %
Commercial MBS 571 2 %
Total $ 24,227 76 %
December 31, 2021
Percent of Total
Top 10 Industry Concentration Fair Value Fair Value
ABS Other $ 4,550 15 %
CLO securities 4,145 13 %
Banking 2,919 9 %
Whole loan collateralized mortgage obligation ("CMO") 2,622 8 %
Life insurance 1,795 6 %
Electric 1,701 6 %
Municipal 1,441 5 %
Healthcare 947 3 %
Technology 932 3 %
Other Financial Institutions 760 2 %
Total $ 21,812 70 %
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The amortized cost and fair value of fixed maturity AFS securities by contractual maturities as ofDecember 31, 2022 andDecember 31, 2021 , are shown below. Actual maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations. December 31, 2022 December 31, 2021 Amortized Cost Fair Value Amortized Cost Fair Value (In millions) Corporate, Non-structured Hybrids, Municipal andU.S. Government securities: Due in one year or less $ 124$ 123 $ 105$ 106 Due after one year through five years 2,193 2,059 1,724 1,754 Due after five years through ten years 1,840 1,633 2,141 2,201 Due after ten years 14,417 11,379 12,842 13,515 Subtotal$ 18,574 $ 15,194 $ 16,812 $ 17,576 Other securities, which provide for periodic payments Asset-backed securities$ 12,209
Commercial mortgage-backed securities
3,309 3,036 2,669 2,964 Structured hybrids - - 5 5 Residential mortgage-backed securities 1,631 1,521 722 722 Subtotal$ 17,149 $ 16,024 $ 11,912 $ 12,386 Total fixed maturity available-for-sale securities$ 35,723 $ 31,218 $ 28,724 $ 29,962 Non-Agency RMBS Exposure Our investment in non-agency RMBS securities is predicated on the conservative and adequate cushion between purchase price and NAIC 1 rating, general lack of sensitivity to interest rates, positive convexity to prepayment rates and correlation between the price of the securities and the unfolding recovery of the housing market. The fair value of our investments in subprime and Alt-A RMBS securities was$40 million and$54 million as ofDecember 31, 2022 , respectively, and$52 million and$75 million as ofDecember 31, 2021 , respectively. As ofDecember 31, 2022 andDecember 31, 2021 , approximately 91% and 94%, respectively, of the subprime and Alt-A RMBS exposures were rated NAIC 2 or higher.
ABS and CLO Exposures
Our ABS exposures are largely diversified by underlying collateral and issuer
type. Our CLO exposures are generally senior tranches of CLOs which have
leveraged loans as their underlying collateral.
As ofDecember 31, 2022 , the CLO and ABS positions were trading at a net unrealized loss position of$236 million and$499 million , respectively. As ofDecember 31, 2021 , the CLO and ABS positions were trading at a net unrealized gain position of$145 million and$37 million , respectively.
Municipal Bond Exposure
Our municipal bond exposure is a combination of general obligation bonds (fair value of$188 million and$258 million and an amortized cost of$231 million and$247 million as ofDecember 31, 2022 andDecember 31, 2021 , respectively) and special revenue bonds (fair value of$1,017 million and$1,183 and an amortized cost of$1,248 million and$1,138 as ofDecember 31, 2022 andDecember 31, 2021 , respectively). Across all municipal bonds, the largest issuer represented 6% and 7% of the category as ofDecember 31, 2022 andDecember 31, 2021 , respectively, less than 1% of the entire portfolio and is rated NAIC 1. Our focus within municipal bonds is on NAIC 1 rated instruments, and 96% of our municipal bond exposure is rated NAIC 1 as ofDecember 31, 2022 .
Mortgage Loans
Commercial Mortgage Loans
We diversify our commercial mortgage loans ("CMLs") portfolio by geographic
region and property type to attempt to reduce concentration risk. We
continuously evaluate CMLs based on relevant current information to ensure
properties are performing at a level to secure the related debt. LTV and DSC
ratios are utilized to assess the risk and quality of CMLs. As of December 31,
2022 and December 31, 2021 , our mortgage loans on real estate portfolio had a
weighted average DSC ratio of 2.3 times and 2.4 times, respectively, and a
weighted average LTV ratio of 57% and 56%, respectively.
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We consider a CML delinquent when a loan payment is greater than 30 days past due. For mortgage loans that are determined to require foreclosure, the carrying value is reduced to the fair value of the underlying collateral, net of estimated costs to obtain and sell at the point of foreclosure. AtDecember 31, 2022 we had one CML that was delinquent in principal or interest payments and none in the process of foreclosure. AtDecember 31, 2021 we had no CMLs that were delinquent in principal or interest payments or in process of foreclosure. See Note E Investments to the Consolidated Financial Statements included in this report for additional information on our CMLs, including our distribution by property type, geographic region and LTV and DSC ratios.
Residential Mortgage Loans
Our residential mortgage loans are closed end, amortizing loans and 100% of the properties are inthe United States . We diversify our RML portfolio by state to attempt to reduce concentration risk. RMLs have a primary credit quality indicator of either a performing or nonperforming loan. We define nonperforming RMLs as those that are 90 or more days past due and/or in nonaccrual status. Loans are placed on nonaccrual status when they are over 90 days delinquent. If a loan becomes over 90 days delinquent, it is our general policy to initiate foreclosure proceedings unless a workout arrangement to bring the loan current can be put in place. See Note E Investments to the Consolidated Financial Statements included in this Annual Report for additional information on our RMLs. 72
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Unrealized Losses
The amortized cost and fair value of the fixed maturity securities and the
equity securities that were in an unrealized loss position as of
2022
December 31, 2022
Allowance for
Amortized Expected Unrealized
Number of Securities Cost Credit Losses Losses Fair Value
Fixed maturity securities, available for sale:
United States Government full faith and credit 6
United States Government sponsored agencies
58 39 - (4) 35United States municipalities, states and territories 167 1,590 - (289) 1,301 Foreign Governments 44 169 - (37) 132 Corporate securities: Finance, insurance and real estate 526 5,586 (15) (876) 4,695 Manufacturing, construction and mining 120 850 - (160) 690 Utilities, energy and related sectors 333 2,825 - (644) 2,181 Wholesale/retail trade 316 2,418 - (532) 1,886 Services, media and other 360 3,354 - (783) 2,571 Hybrid securities 43 706 - (84) 622 Non-agency residential mortgage-backed securities 241 1,353 (5) (105) 1,243 Commercial mortgage-backed securities 365 2,850 - (284) 2,566 Asset-backed securities 1,147 11,511 (1) (770) 10,740 Total fixed maturity available for sale securities 3,726 33,285 (21) (4,570) 28,694 Equity securities 59 879 - (174) 705 Total investments 3,785$ 34,164 $ (21) $ (4,744) $ 29,399 December 31, 2021 Allowance for Amortized Expected Unrealized Number of Securities Cost Credit Losses Losses Fair Value Fixed maturity securities, available for sale: United States Government full faith and credit 9
United States Government sponsored agencies
41 42 - (1) 41United States municipalities, states and territories 50 503 - (11) 492 Foreign Governments 28 27 - - 27 Corporate securities: Finance, insurance and real estate 366 1,365 - (31) 1,334 Manufacturing, construction and mining 97 281 - (3) 278 Utilities, energy and related sectors 280 1,243 - (46) 1,197 Wholesale/retail trade 313 1,188 - (33) 1,155 Services, media and other 339 1,486 - (39) 1,447 Hybrid securities 3 3 - - 3 Non-agency residential mortgage-backed securities 46 316 (2) (3) 311 Commercial mortgage-backed securities 89 616 (1) (11) 604 Asset-backed securities 375 4,603 (2) (38) 4,563 Total fixed maturity available for sale securities 2,036 11,709 (5) (216) 11,488 Equity securities 20 259 - (33) 226 Total investments 2,056$ 11,968 $ (5) $ (249) $ 11,714 73
-------------------------------------------------------------------------------- Table of Contents The gross unrealized loss position on the fixed maturity available-for-sale fixed and equity portfolio was$4,744 million and$249 million as ofDecember 31, 2022 andDecember 31, 2021 , respectively. Most components of the portfolio exhibited price depreciation caused by higher treasury rates and wider spreads. The total amortized cost of all securities in an unrealized loss position was$34,164 million and$11,968 million as ofDecember 31, 2022 andDecember 31, 2021 , respectively. The average market value/book value of the investment category with the largest unrealized loss position was 84% for finance, insurance and real estate as ofDecember 31, 2022 . In the aggregate, finance, insurance and real estate represented 18% of the total unrealized loss position as ofDecember 31, 2022 . The average market value/book value of the investment category with the largest unrealized loss position was 96% for utilities, energy and related sectors as ofDecember 31, 2021 . In the aggregate, utilities, energy and related sectors represented 18% of the total unrealized loss position as ofDecember 31, 2021 .
The amortized cost and fair value of fixed maturity available for sale
securities under watch list analysis and the number of months in a loss position
with investment grade securities (NRSRO rating of BBB/Baa or higher) as of
December 31, 2022
Allowance for Gross Unrealized
Number of Securities Amortized Cost Fair Value Credit Loss Losses
Investment grade:
Less than six months 6 $ 5 $ 3 $ - $ (2)
Six months or more and less than
twelve months 49 299 200 - (99)
Twelve months or greater 76 969 634 - (335)
Total investment grade 131 1,273 837 - (436)
Below investment grade:
Less than six months 1 32 13 15 (4)
Six months or more and less than
twelve months 12 124 94 - (30)
Twelve months or greater 2 6 4 - (2)
Total below investment grade 15 162 111 15 (36)
Total 146 $ 1,435 $ 948 $ 15 $ (472)
December 31, 2021
Allowance for Gross Unrealized
Number of Securities Amortized Cost Fair Value Credit Loss Losses
Investment grade:
Less than six months 4 $ 82 $ 79 $ - $ (3)
Six months or more and less than
twelve months 2 34 32 - (2)
Twelve months or greater - - - - -
Total investment grade 6 116 111 - (5)
Below investment grade:
Less than six months - - - - -
Six months or more and less than
twelve months - - - - -
Twelve months or greater 2 16 14 - (2)
Total below investment grade 2 16 14 - (2)
Total 8 $ 132 $ 125 $ - $ (7)
74
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Expected Credit Losses and
F&G prepares a watch list to identify securities to evaluate for expected credit losses. Factors used in preparing the watch list include fair values relative to amortized cost, ratings and negative ratings actions and other factors. Detailed analysis is performed for each security on the watch list to further assess the presence of credit impairment loss indicators and, where present, calculate an allowance for expected credit loss or direct write-down of a security's amortized cost. AtDecember 31, 2022 , our watch list included 146 securities in an unrealized loss position with an amortized cost of$1,435 million , allowance for expected credit losses of$15 million , unrealized losses of$472 million and a fair value of$948 million . AtDecember 31, 2021 , our watch list included seven securities in an unrealized loss position with an amortized cost of$132 million , allowance for expected credit losses of$0 million , unrealized losses of$7 million and a fair value of$125 million .
The watch list excludes structured securities because we have separate processes
to evaluate the credit quality on the structured securities.
There were 64 and 36 structured securities with a fair value of$162 million and$45 million , respectively, to which we had potential credit exposure as ofDecember 31, 2022 andDecember 31, 2021 , respectively. Our analysis of these structured securities, which included cash flow testing, resulted in allowances for expected credit losses of$16 million and$8 million as ofDecember 31, 2022 andDecember 31, 2021 , respectively.
Exposure to Sovereign Debt and Certain Other Exposures
Our investment portfolio had an immaterial amount of direct exposure to European sovereign debt as ofDecember 31, 2022 andDecember 31, 2021 , respectively. We have no exposure to investments inRussia orUkraine and de minimis investments in peripheral countries in the region.
Interest and Investment Income
For discussion regarding our net investment income and net investment gains
(losses) refer to Note E Investments to the Consolidated Financial Statements
included in Item 8 of Part II of this Annual Report.
For additional information regarding our AFS securities, including the amortized cost, gross unrealized gains (losses), and fair value as well as the amortized cost and fair value of fixed maturity AFS securities by contractual maturities, as ofDecember 31, 2022 andDecember 31, 2021 , refer to Note E Investments to the Consolidated Financial Statements included in Item 8 of Part II of this Annual Report.
Concentrations of Financial Instruments
For detail regarding our concentration of financial instruments refer to Item
7A. of Part II of this Annual Report.
Derivatives
We are exposed to credit loss in the event of nonperformance by our
counterparties on call options. We attempt to reduce this credit risk by
purchasing such options from large, well-established financial institutions.
We also hold cash and cash equivalents received from counterparties for call option collateral, as well asU.S. Government securities pledged as call option collateral, if our counterparty's net exposures exceed pre-determined thresholds. We are required to pay counterparties the effective federal funds rate each day for cash collateral posted to F&G for daily mark to market margin changes. We reduce the negative interest cost associated with cash collateral posted from counterparties under various ISDA agreements by reinvesting derivative cash collateral. This program permits collateral cash received to be invested in short termTreasury securities, bank deposits and commercial paper rated A1/P1, which are included in Cash and cash equivalents in the accompanying Consolidated Balance Sheets. See Note F Derivative Financial Instruments to the Consolidated Financial Statements included in Item 8 of Part II of this Annual Report for additional information regarding our derivatives and our exposure to credit loss on call options. 75
-------------------------------------------------------------------------------- Table of Contents Corporate and Other The Corporate and Other segment consists of the operations of the parent holding company, our various real estate brokerage businesses and our real estate technology subsidiaries. This segment also includes certain other unallocated corporate overhead expenses and eliminations of revenues and expenses between it and our Title segment.
The following table presents the results of operations of our Corporate and
Other segment for the years indicated:
Year Ended
2022 2021 2020
(In millions)
Revenues:
Escrow, title-related and other fees $ 127 $ 172 $ 172
Interest and investment income 23 - 6
Recognized gains and losses, net (40) 12 (7)
Total revenues 110 184 171
Expenses:
Personnel costs 48 107 108
Other operating expenses 104 99 148
Depreciation and amortization 25 23 24
Interest expense 86 85 71
Total expenses 263 314 351
Loss from continuing operations, before income taxes and equity
in earnings of unconsolidated affiliates
$ (153) $ (130) $ (180) The revenue in the Corporate and Other segment for all years represents revenue generated by our non-title real estate technology and brokerage subsidiaries as well as mark-to-market valuation changes on certain corporate deferred compensation plans. Total revenues in the Corporate and Other segment decreased$74 million , or 40% in the year endedDecember 31, 2022 as compared to 2021, and increased$13 million , or 8%, in the year endedDecember 31, 2021 as compared to 2020. The decrease in the year endedDecember 31, 2022 as compared to 2021 is primarily attributable to a$59 million decrease in valuations associated with our deferred compensation plan assets, which decreased both revenue and personnel costs and a$41 million impairment of cost method investments in 2022, partially offset by other immaterial items. The increase in the year endedDecember 31, 2021 as compared to 2020 is primarily attributable to increased Recognized gains and losses, net, of approximately$19 million , partially offset by decreased interest and investment income of$6 million associated with a year-over-year reduction in fixed-income investment holdings. Personnel costs in the Corporate and Other segment decreased$59 million , or 55% in the year endedDecember 31, 2022 as compared to 2021, and decreased$1 million , or 1%, in the year endedDecember 31, 2021 as compared to 2020. The decrease in the year endedDecember 31, 2022 as compared to 2021 is primarily attributable to the aforementioned decrease in the valuation of deferred compensation plan assets in 2022. Other operating expenses in the Corporate and Other segment increased$5 million , or 5%, in the year endedDecember 31, 2022 as compared to 2021, and decreased$49 million , or 33% in the year endedDecember 31, 2021 as compared to 2020. The decrease in 2021 as compared to 2020 is primarily attributable to F&G transaction costs of approximately$38 million in 2020 that were not incurred in 2021 and reduced real estate brokerage expenses of$24 million in 2021 related to previous divestitures, partially offset by growth in our real estate technology businesses. Interest expense increased$1 million , or 1%, in the year endedDecember 31, 2022 as compared to 2021, and increased$14 million , or 20%, in the year endedDecember 31, 2021 as compared to 2020. The increase in the year endedDecember 31, 2021 as compared to 2020 is primarily attributable to increased average debt outstanding in 2021 associated with issuance of our 3.20% Notes inSeptember 2021 as well as having a full year outstanding of our 3.40% Notes and our 2.45% Notes issued in 2020. 76
-------------------------------------------------------------------------------- Table of Contents Liquidity and Capital Resources Cash Requirements. Our current cash requirements include personnel costs, operating expenses, claim payments, taxes, payments of interest and principal on our debt, capital expenditures, business acquisitions, stock repurchases and dividends on our common stock. We paid dividends of$1.77 per share in 2022, or approximately$489 million to our common shareholders. OnFebruary 16, 2023 , our Board of Directors declared cash dividends of$0.45 per share, payable onMarch 31, 2023 , to FNF common shareholders of record as ofMarch 17, 2023 . There are no restrictions on our retained earnings regarding our ability to pay dividends to our shareholders, although there are limits on the ability of certain subsidiaries to pay dividends to us, as described below. The declaration of any future dividends is at the discretion of our Board of Directors. As ofDecember 31, 2022 , we had cash and cash equivalents of$2,286 million , short term investments of$2,590 million and available capacity under our Revolving Credit Facility of$800 million . Subsequent toDecember 31, 2022 , F&G completed the issuance and sale onJanuary 13, 2023 of$500 million aggregate principal amount of 7.40% Senior Notes due 2028 (the "7.40% F&G Notes") pursuant to Rule 144A and Regulation S under the Securities Act of 1933, as amended. F&G intends to use the net proceeds from the offering of the 7.40% F&G Notes for general corporate purposes, including to support the growth of assets under management and for our future liquidity requirements. OnNovember 22, 2022 , F&G entered into a Credit Agreement (the "F&G Credit Agreement") with certain lenders (the "Lenders") andBank of America, N.A . as administrative agent (the "Administrative Agent"), swing line lender and an issuing bank, pursuant to which F&G has an available unsecured revolving credit facility (the "F&G Credit Facility") in an aggregate principal amount of$550 million to be used for working capital and general corporate purposes. A net partial paydown of$35 million was made onJanuary 6, 2023 and, onFebruary 21, 2023 , F&G entered into an amendment (the "First Amendment") to the F&G Credit Agreement (the "Amended F&G Credit Agreement"). The First Amendment increased the aggregate principal amount of commitments under the F&G Credit Facility by$115 million to$665 million . For further information related to the 7.40% F&G Notes and F&G Credit Facility, refer to Note G Notes Payable to the Consolidated Financial Statements included in Item 8 of Part II of this Annual Report. We continually assess our capital allocation strategy, including decisions relating to the amount of our dividend, reducing debt, repurchasing our stock, investing in growth of our subsidiaries, making acquisitions and/or conserving cash. We believe that all anticipated cash requirements for current operations will be met from internally generated funds, through cash dividends from subsidiaries, cash generated by investment securities, potential sales of non-strategic assets, potential issuances of additional debt or equity securities, and borrowings on our Revolving Credit Facility and the F&G Credit Facility. Our short-term and long-term liquidity requirements are monitored regularly to ensure that we can meet our cash requirements. We forecast the needs of all of our subsidiaries and periodically review their short-term and long-term projected sources and uses of funds, as well as the asset, liability, investment and cash flow assumptions underlying such forecasts. Our title insurance subsidiaries generate cash from premiums earned and their respective investment portfolios, and these funds are adequate to satisfy the payments of claims and other liabilities. Due to the magnitude of our title segment investment portfolio in relation to our title claim loss reserves, we do not specifically match durations of our investments to the cash outflows required to pay claims, but do manage outflows on a shorter time frame. Our two significant sources of internally generated funds are dividends and other payments from our subsidiaries. As a holding company, we receive cash from our subsidiaries in the form of dividends and as reimbursement for operating and other administrative expenses we incur. The reimbursements are paid within the guidelines of management agreements among us and our subsidiaries. Our insurance subsidiaries are restricted by state regulation in their ability to pay dividends and make distributions. Each applicable state of domicile regulates the extent to which our title underwriters can pay dividends or make other distributions. As ofDecember 31, 2022 ,$1,442 million of our net assets were restricted from dividend payments without prior approval from the relevant departments of insurance. We anticipate that our title insurance subsidiaries will pay or make dividends to us in 2023 of approximately$606 million . Our underwritten title companies and non-insurance subsidiaries are not regulated to the same extent as our insurance subsidiaries. The maximum dividend permitted by law is not necessarily indicative of an insurer's actual ability to pay dividends, which may be constrained by business and regulatory considerations, such as the impact of dividends on surplus, which could affect an insurer's ratings or competitive position, the amount of premiums that can be written and the ability to pay future dividends. Further, depending on business and regulatory conditions, we may in the future need to retain cash in our underwriters or even contribute cash to one or more of them in order to maintain their ratings or their statutory capital position. Such a requirement could be the result of investment losses, reserve charges, adverse operating conditions in the current economic environment or changes in statutory accounting requirements by regulators.
Cash flow from our operations will be used for general corporate purposes
including to reinvest in operations, repay debt, pay dividends, repurchase
stock, pursue other strategic initiatives and/or conserve cash.
Operating Cash Flow. Our cash flows provided by operations for the years endedDecember 31, 2022 , 2021, 2020 were$4,355 million ,$4,090 million , and$1,578 million respectively. The increase in cash provided by operating activities of$265 77
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million in 2022 as compared to 2021 is primarily attributable to increased cash inflows associated with the change in funds withheld from reinsurers of$1,206 million , increased cash inflows associated with the change in future policy benefits of$557 million , increased cash inflows from the net decrease in trade receivables of$298 million , increased cash inflows associated with the change in reinsurance recoverable of$145 million and the increase in cash inflows associated with the change in income taxes of$43 million , partially offset by the decrease in pre-tax earnings in 2022 of$1,290 million , increased cash outflows associated with the decrease in the reserve for title claims losses of$333 million and the timing of receipts and payments of prepaid assets, payables, receivables and income taxes. The increase in cash provided by operating activities of$2,512 million in 2021 as compared to 2020 is primarily attributable to the increase in pre-tax earnings in 2021, non-cash valuation changes in equity, preferred and derivative securities of$821 million , increased cash inflows associated with the change in future policy benefits of$726 million , increased cash inflows associated with the change in funds withheld from reinsurers of$865 million , partially offset by gains on sales of investments and other assets of$668 million , increased cash outflows associated with increased deferred policy acquisition costs and deferred sales inducements of$409 million and the timing of receipts and payments of prepaid assets, payables, receivables and income taxes. The primary driver of the increased cash flows associated with the change in future policy benefits in 2021 as compared to 2020 was cash received for PRT transactions associated with our F&G segment. Investing Cash Flows. Our cash used in investing activities for the years endedDecember 31, 2022 , 2021, and 2020 were$10,524 million ,$7,449 million , and$2,331 million , respectively. The increase in cash used in investing activities in 2022 as compared to 2021 of$3,075 million is primarily associated with decreased cash inflows from proceeds from sales, calls and maturities of investment securities of$3,456 million , net purchases of short-term investment securities of$2,571 million in 2022 as compared to proceeds from sales and maturities of short-term investment securities of$266 million in 2021, partially offset by decreased cash outflows for additional investments in unconsolidated affiliates of$669 million and decreased cash outflows for purchases of investment securities of$2,866 million . The increase in cash used in investing activities of$5,118 million in 2021 as compared to 2020 is primarily associated with increased purchases of investment securities of$11,055 million , increased investment in unconsolidated affiliates of$1,419 million , partially offset by increased proceeds from sales, calls and maturities of investment securities of$6,204 million , increased distributions from unconsolidated affiliates of$250 million and reduced cash outflows associated with acquisitions of$818 million . Capital Expenditures. Total capital expenditures for property and equipment and capitalized software were$138 million ,$131 million , and$110 million for the year endedDecember 31, 2022 , 2021, and 2020 respectively. Financing Cash Flows. Our cash flows provided by financing activities for the year endedDecember 31, 2022 , 2021, and 2020 were$4,095 million ,$5,000 million , and$2,096 million respectively. The decrease in cash provided by financing activities of$905 million in 2022 as compared to 2021 is primarily associated with increased cash outflows for debt service payments, including the repayment of$400 million for our 5.50% Notes that were due inSeptember 2022 , increased cash outflows from contractholder withdrawals of$519 million , and net cash outflows associated with the change in secured trust deposits of$72 million in 2022 as compared to net cash inflows of$224 million in 2021, partially offset by increased cash inflows from contractholder deposits of$365 million . The increase in cash provided by financing activities of$2,904 million in 2021 as compared to 2020 is primarily associated with increased cash inflows associated with the change in contractholder accounts of$3,595 million , increased cash inflows associated with the change in secured trust deposits of$304 million and reduced debt service payments of$1,000 million , partially offset by reduced debt offerings and borrowings of$1,797 million and increased purchases of treasury stock of$227 million . Financing Arrangements. For a description of our financing arrangements see Note G Notes Payable included in Item 8 of Part II of this Annual Report, which is incorporated by reference into this Item 7 of Part II. 78
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Obligations - Contractual and Other. As ofDecember 31, 2022 , our required annual payments relating to contractual and other obligations were as follows: 2023 2024 2025 2026 2027 Thereafter Total (In millions)
Notes payable principal repayment
Operating lease payments
147 116 74 51 26 35 449 Pension and other benefit payments 13 12 11 10 10 61 117 Annuity and universal life products 4,044 3,775 4,908 3,653 3,988 29,341 49,709 Pension risk transfer annuity payments 397 383 370 357 343 4,308
6,158
Funding agreements (FABN/FHLB) 790 938 776 816 661 878 4,859 Title claim loss estimated payments 236 220 212 174 117 851 1,810 Interest on fixed rate notes payable 147 147 147 147 147 605 1,340 Acquisitions 225 - - - - - 225 Total$ 6,549 $ 5,591 $ 7,048 $ 5,208 $ 5,292 $ 38,229 $ 67,917 As ofDecember 31, 2022 , we had title insurance reserves of$1,810 million . The amounts and timing of these obligations are estimated and are not set contractually. While we believe that historical loss payments are a reasonable source for projecting future claim payments, there is significant inherent uncertainty in this payment pattern estimate because of the potential impact of changes in: •future mortgage interest rates, which will affect the number of real estate and refinancing transactions and; therefore, the rate at which title insurance claims will emerge; •the legal environment whereby court decisions and reinterpretations of title insurance policy language to broaden coverage could increase total obligations and influence claim payout patterns; •events such as fraud, escrow theft, multiple property title defects, foreclosure rates and individual large loss events that can substantially and unexpectedly cause increases in both the amount and timing of estimated title insurance loss payments; and •loss cost trends whereby increases or decreases in inflationary factors (including the value of real estate) will influence the ultimate amount of title insurance loss payments. Based on historical title insurance claim experience, we anticipate the above payment patterns. The uncertainty and variation in the timing and amount of claim payments could have a material impact on our cash flows from operations in a particular period. We sponsor certain frozen pension and other post-retirement benefit plans. See Note U Employee Benefit Plans to our Consolidated Financial Statements included in Item 8 of Part II of this Annual Report for further information. Capital Stock Transactions. OnAugust 3, 2021 , our Board of Directors approved the 2021 Repurchase Program under which we may purchase up to 25 million shares of our FNF common stock throughJuly 31, 2024 . We may make repurchases from time to time in the open market, in block purchases or in privately negotiated transactions, depending on market conditions and other factors. We repurchased 13,369,565 shares of FNF common stock during the year endedDecember 31, 2022 for approximately$549 million , or an average of$41.05 per share. Subsequent toDecember 31, 2022 and through market close onFebruary 23, 2023 , we repurchased a total of 100,000 shares for approximately$4 million in the aggregate, or an average of$38.45 per share under the 2021 Repurchase Program. Since the original commencement of the 2021 Repurchase Program, we have repurchased a total of 16,449,565 FNF common shares for an aggregate amount of$701 million , or an average of$42.60 per share. Equity and Preferred Security Investments. Our equity and preferred security investments may be subject to significant volatility. Currently prevailing accounting standards require us to record the change in fair value of equity and preferred security investments held as of any given period end within earnings. Our results of operations in future periods is anticipated to be subject to such volatility. Off-Balance Sheet Arrangements. In conducting our operations, we routinely hold customers' assets in escrow, pending completion of real estate transactions, and are responsible for the proper disposition of these balances for our customers. Certain of these amounts are maintained in segregated bank accounts and have not been included in the accompanying Consolidated Balance Sheets, consistent with Generally Accepted Accounting Principles and industry practice. These balances amounted to$18.9 billion and$30.5 billion atDecember 31, 2022 and 2021, respectively. As a result of holding these customers' assets in 79
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escrow, we have ongoing programs for realizing economic benefits during the year
through favorable borrowing and vendor arrangements with various banks.
We have unfunded investment commitments as ofDecember 31, 2022 based upon the timing of when investments are executed compared to when the actual investments are funded, as some investments require that funding occur over a period of months or years. Please refer to Note E Investments and Note H Commitments and Contingencies to the Consolidated Financial Statements included in Item 8 of Part II of this Annual Report for additional details on unfunded investment commitments. FHLB Collateral. We are currently a member of the FHLB and are required to maintain a collateral deposit that backs any funding agreements issued. We use these funding agreements as part of a spread enhancement strategy. We have the ability to obtain funding from the FHLB based on a percentage of the value of our assets, subject to the availability of eligible collateral. Collateral is pledged based on the outstanding balances of FHLB funding agreements. The amount of funding varies based on the type, rating and maturity of the collateral posted to the FHLB. Generally,U.S. government agency notes and mortgage-backed securities are pledged to the FHLB as collateral. Market value fluctuations resulting from changes in interest rates, spreads and other risk factors for each type of asset are monitored and additional collateral is either pledged or released as needed. Our borrowing capacity under these credit facilities does not have an expiration date as long as we maintain a satisfactory level of creditworthiness based on the FHLB's credit assessment. As ofDecember 31, 2022 and 2021, we had$1,983 million and$1,543 million , respectively, in FHLB non-putable funding agreements included under contractholder funds on our consolidated balance sheet. As ofDecember 31, 2022 and 2021, we had assets with a fair value of approximately$3,387 million and$2,420 million , respectively, which collateralized the FHLB funding agreements. Assets pledged to the FHLB are included in fixed maturities, AFS, on our consolidated balance sheets. Collateral-Derivative Contracts. Under the terms of our ISDA agreements, we may receive from, or deliver to, counterparties collateral to assure that all terms of the ISDA agreements will be met with regard to the Credit Support Annex ("CSA"). The terms of the CSA call for us to pay interest on any cash received equal to the federal funds rate. As ofDecember 31, 2022 and 2021, respectively,$219 million and$790 million of collateral was posted by our counterparties as they did not meet the net exposure thresholds. Collateral requirements are monitored on a daily basis and incorporate changes in market values of both the derivatives contract as well as the collateral pledged. Market value fluctuations are due to changes in interest rates, spreads and other risk factors.
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