FIDELITY NATIONAL FINANCIAL, INC. – 10-Q – Management's Discussion and Analysis of Financial Condition and Results of Operations

The statements contained in this Quarterly Report on Form 10-Q that are not
purely historical are forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, including statements regarding our
expectations, hopes, intentions or strategies regarding the future. All
forward-looking statements included in this document are based on information
available to us on the date hereof, and we assume no obligation to update any
such forward-looking statements. It is important to note that our actual results
could vary materially from those forward-looking statements contained herein due
to many factors, including, but not limited to: the ability of FNF to
successfully integrate F&G's operations and employees; the potential impact of
the F&G acquisition on relationships, including with employees, suppliers,
customers and competitors; changes in general economic, business and political
and COVID-19 conditions, including changes in the financial markets; weakness or
adverse changes in the level of real estate activity, which may be caused by,
among other things, high or increasing interest rates, a limited supply of
mortgage funding, a weak U.S. economy; our potential inability to find suitable
acquisition candidates, acquisitions in lines of business that will not
necessarily be limited to our traditional areas of focus, or difficulties in
consummating and integrating acquisitions; our dependence on distributions from
our title insurance underwriters as our main source of cash flow; significant
competition that our operating subsidiaries face; compliance with extensive
government regulation of our operating subsidiaries; and other risks detailed in
the "Statement Regarding Forward-Looking Information," "Risk Factors" and other
sections of our Annual Report on Form 10-K (our "Annual Report") for the year
ended December 31, 2020 and other filings with the SEC.
The following discussion should be read in conjunction with our Annual Report.
Overview
For a description of our business, including descriptions of segments and recent
business developments, see the discussion in Note A Basis of Financial
Statements in the accompanying unaudited Condensed Consolidated Financial
Statements included in Item 1 of Part I of this Report, which is incorporated by
reference into this Part I, Item 2.
Business Trends and Conditions
Title
Our Title segment revenue is closely related to the level of real estate
activity which 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 of the United States economy, including employment levels.
While we cannot predict the severity and duration of the negative impacts
related to the outbreak of COVID-19, the most recent forecast of the Mortgage
Bankers Association ("MBA"), as of October 17, 2021, estimates (actual for
fiscal year 2020) the size of the U.S. residential mortgage originations market
as shown in the following table for 2020 - 2023 in its "Mortgage Finance
Forecast" (in trillions):
                                                                2023       2022       2021       2020
        Purchase transactions                                  $ 1.8      $ 1.7      $ 1.6      $ 1.5
        Refinance transactions                                 $ 0.7      $ 0.9      $ 2.2      $ 2.6
        Total U.S. mortgage originations forecast              $ 2.5      $ 2.6      $ 3.8      $ 4.1



As of October 17, 2021, the MBA expects residential purchase transactions to
steadily increase in 2021 and beyond from 2020 levels. Additionally the MBA
expects residential refinance transactions to decrease in 2021 and beyond as
interest rates are expected to rise while the supply of refinance candidates
decreases. The MBA expects overall mortgage originations to decrease in 2021 and
beyond as a result of record refinance originations in 2020.
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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. Mortgage rates rose consistently between 2016 and the beginning of 2019.
Concerns over a slowing global economy and the impact of a prolonged trade war
resulted in interest rate cuts in the second half of the 2019, which
significantly increased refinance transactions and slightly increased purchase
transactions when compared to 2018. In the beginning of 2020, refinance and
purchase transactions remained strong until the outbreak of COVID-19.
On March 11, 2020, the World Health Organization declared that the novel
coronavirus or COVID-19 "can be characterized as a pandemic," which is defined
as a worldwide spread of a new disease for which most people do not have
immunity. On March 15, 2020, the Federal 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 the year, bottoming out at 2.65% on
January 7, 2021. 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
in June 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 has remained strong in the first
three quarters of 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. Mortgage interest
rates averaged 2.9% in the third quarter of 2021. Despite the recent increase in
interest rates and fluctuation in existing-home sales, the market is still
outperforming pre-pandemic levels.
Other economic indicators used to measure the health of the U.S. economy,
including the unemployment rate and consumer confidence, indicated that the
United States was on strong footing prior to the outbreak of COVID-19. However,
the impact of COVID-19 reduced the outlook related to these economic indicators
in March 2020. According to the U.S. Department of Labor's Bureau of Labor, the
unemployment rate was at a historically low 3.5% in February 2020 but
subsequently rose to a record 14.8% in April 2020 before declining to a
still-elevated level of 6.7% in December 2020. In 2021, the unemployment rate
has continued to fall to 4.8% in September 2021. Additionally, the Conference
Board's monthly Consumer Confidence Index remained at high levels through
February 2020 before falling as a result of the COVID-19 outbreak. Consumer
confidence has since rebounded, reaching its peak in June of 2021 before
decreasing in the third quarter of 2021 due to concerns over inflation and the
spread of the Delta variant.
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 including U.S. tax reform and a shift in U.S. monetary policy have had,
or are expected to have, varying effects on availability of financing in the
U.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, we have experienced
strong demand in commercial real estate markets and from 2015 through 2019, we
experienced historically high volumes and fee-per-file in our commercial
business. In 2020, we experienced decreases in commercial volumes and commercial
fee-per-file as a result of the outbreak of COVID-19. In the second half of 2020
and the first three quarters of 2021, commercial volumes have continued to
recover.
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.
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. We have noted short-term fluctuations
through recent years in resale and refinance transactions as a result of changes
in interest rates. Due to COVID-19 and the Federal Reserve's action to reduce
the benchmark rate to near zero in response to the pandemic, seasonality
deviated from historical patterns in 2020 and we continue to see deviations in
2021.
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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
While continuously evolving, the COVID-19 pandemic has caused significant
economic and financial turmoil in the U.S. and around the world. These
conditions may continue in the near term. At this time, it is not possible to
estimate the longer term-effects the COVID-19 pandemic could have on our F&G
segment or our consolidated financial statements. Increased economic uncertainty
and increased unemployment resulting from the economic impacts of the spread of
COVID-19 may result in F&G policyholders seeking sources of liquidity and
withdrawing at rates greater than was previously expected. If policyholder lapse
and surrender rates significantly exceed expectations, it could have an adverse
effect on our F&G segment's financial condition, results of operations,
liquidity and cash flows. Such events or conditions could also have an adverse
effect on its sales of new policies. F&G is monitoring the impact of COVID-19 on
its investment portfolio and the potential for ratings changes caused by the
sudden slowdown of economic activity. The extent to which the COVID-19 pandemic
impacts our F&G segment's results of operations, financial condition, liquidity
or prospects will depend on future developments which cannot be predicted.
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 our Annual Report on Form 10-K for the year ended December 31, 2020
for further discussion of risk factors that could affect market conditions.
Interest Rate Environment
Some of our products include guaranteed minimum crediting rates, most notably
our fixed rate annuities. As of September 30, 2021, the Company's reserves, net
of reinsurance, and average crediting rate on our fixed rate annuities were $5.0
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 of Part II of our Annual Report on Form 10-K for the year ended
December 31, 2020 for a more detailed discussion of interest rate risk.
Aging of the U.S. Population
We believe that the aging of the U.S. population will increase the demand for
our products. As the "baby boomer" generation prepares for retirement, we
believe that demand for retirement savings, growth, and income products will
grow. 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
Demographics and macroeconomic factors are increasing the demand for our FIA and
IUL products. Over 10,000 people will turn 65 each day in the United States over
the next 15 years, and according to the U.S. Census Bureau, the proportion of
the U.S. population over the age of 65 is expected to grow from 17% in 2020 to
21% in 2035.
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 the Company. As a tool for addressing the unmet need for
retirement planning, we believe that many middle-income Americans have grown
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to appreciate the "sleep at night protection" that annuities such as our FIA
products afford. See Item 7 of Part II of our Annual Report on Form 10-K for the
year ended December 31, 2020 for a more detailed discussion of industry factors
and trends affecting our Results of Operations.