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 potential impact of our completed F&G acquisition on relationships, including 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 weakU.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 endedDecember 31, 2021 and other filings with theSEC .
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 ofthe United States economy, including employment levels. The most recent forecast of theMortgage Bankers Association ("MBA"), as ofApril 13, 2022 , estimates (actual for fiscal year 2021) the size of theU.S. residential mortgage originations market as shown in the following table for 2021 - 2024 in its "Mortgage Finance Forecast" (in trillions): 2024
2023 2022 2021
Purchase transactions$ 1.8 $
1.8
Refinance transactions$ 0.7 $
0.7
Total U.S. mortgage originations forecast$ 2.5 $
2.5
As ofApril 13, 2022 , the MBA expects residential purchase transactions to slightly increase in 2022 and beyond. Additionally the MBA expects residential refinance transactions to decrease in 2022 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 2022 and then remain relatively flat through 2024.
Following the
interest rate to near zero in response to COVID-19, there was an increase in
purchase activity and a surge in refinance activity beginning in the second
quarter of 2020 and continuing through 2021. In the second half of 2021,
refinance activity began to
47 -------------------------------------------------------------------------------- Table of Contents slow as the population of eligible refinance candidates declined and interest rates slightly increased. While refinance activity declined in the second half of 2021, it still exceeded pre-pandemic activity levels. Purchase activity remained strong throughout 2021 with variations in activity being consistent with historical seasonality. 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 the beginning of 2022. Additionally, geopolitical uncertainties associated with the war in theUkraine have created additional volatility in the global economy in the first half of 2022. Existing-home sales decreased 3% in the three months endedMarch 31, 2022 as compared to the corresponding period in 2021 while median existing-home sales prices rose to$361,533 in the three months endedMarch 31, 2022 , a 15 % increase over of the corresponding period in 2021. Total housing inventory as ofMarch 31, 2022 totaled 950,00 units, down 9.5% from the corresponding period in 2021. During the first quarter of 2022 theFederal Reserve raised the benchmark interest rate by 25 basis points in an effort to combat inflation, the first increase since 2018. Average interest rates for a 30-year fixed rate mortgage rose to 3.8% for the three months endedMarch 31, 2022 as compared to 2.9% for the corresponding period of 2021. Mortgage interest rates have continued to increase in the second quarter of 2022, surpassing 5% in April, their highest levels since 2010. In May, theFederal Reserve further raised the benchmark interest rate by an additional 50 basis points. Other economic indicators used to measure the health of theU.S. economy, including the unemployment rate and consumer confidence, have continued to improve. The unemployment rate was 3.6% inMarch 2022 , which was near the record low of 3.5% inFebruary 2020 , as compared to 6.0% inMarch 2021 . Consumer confidence, which has remained volatile since the outbreak of COVID-19, was relatively high as ofMarch 2022 , supported by strong employment growth despite geopolitical uncertainties and concerns over inflation. 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 2022 and 2021, we experienced strong demand in commercial real estate markets and therefore experienced relatively high volumes and fee-per-file in our commercial business when compared to historical results. In the first quarter of 2022 our average fee per file was$13,248 , a first quarter all-time high, as compared to$11,290 in the corresponding period in 2021. 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 theFederal Reserve's action to reduce the benchmark rate to near zero in response to the pandemic, seasonality deviated from historical patterns in 2021.
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 still evolving, the COVID-19 pandemic has caused significant economic and financial turmoil in theU.S. and around the world. At this time, it is still 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 48 -------------------------------------------------------------------------------- Table of Contents economic uncertainty and increased unemployment that could potentially result from the spread of COVID-19 and its variants may result in F&G policyholders seeking sources of liquidity and withdrawing at rates greater than was previously expected. Additionally, adverse events or conditions resulting from COVID-19 could also have a negative effect on its sales of new policies and could result in more volatility from the impact of mortality experience. As ofMarch 31, 2022 , F&G has not seen a sustained elevated level of adverse policyholder experience from the impact of COVID-19 on the overall business. The full extent to which the COVID-19 pandemic impacts our F&G segment's financial condition, results of operations, liquidity or prospects will depend on future developments which cannot be predicted at this time.
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 endedDecember 31, 2021 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 ofMarch 31, 2022 , our 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
Aging of the
We believe that the aging of theU.S. population will increase the demand for our fixed indexed annuities ("FIA") and indexed universal life ("IUL") products. As the "baby boomer" generation prepares for retirement, we believe that demand for retirement savings, growth, and income products will grow. It is projected that 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 17% in 2021 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.
See Item 7 of Part II of our Annual Report on Form 10-K for the year ended
affecting our Results of Operations.
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