Item 2. 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 the F&G Distribution on relationships, including employees, suppliers, customers and competitors; changes in general economic, business and political conditions, including changes in the financial markets; continued 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, or 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 adverse changes in applicable laws or regulations or in their application by regulators; our ability to successfully execute the proposed plan to redeem all FNFV tracking stock;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, 20162022 and other filings with the SEC.
The following discussion should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2016.2022.
Overview
For a description of our business, including descriptions of segments and recent business developments, see the discussion under in Note A Basis of Financial Statements in Note A to 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.
On September 29, 2017, we completed our previously announced tax-free distribution, to FNF Group shareholders, of all 83.3 million shares of New BKH Corp. ("New BKH") common stock that we previously owned (the “BK Distribution”). Immediately following the BK Distribution, New BKH and Black Knight Financial Services, Inc. ("Black Knight") engaged in a series of transactions resulting in the formation of a new publicly-traded holding company, Black Knight, Inc. ("New Black Knight"). Holders of FNF Group common stock received approximately 0.30663 shares of New Black Knight common stock for every one share of FNF Group common stock held at the close of business on September 20, 2017, the record date for the BK Distribution. New Black Knight's common stock is now listed under the symbol “BKI” on the New York Stock Exchange. The BK Distribution
is expected to generally be tax-free to FNF Group shareholders for U.S. federal income tax purposes, except to the extent of any cash received in lieu of New Black Knight's fractional shares. As a result of the BK Distribution, we have reclassified the assets and liabilities divested as assets and liabilities of discontinued operations in our Condensed Consolidated Balance Sheet as of December 31, 2016. Further, the financial results of Black Knight have been reclassified to discontinued operations for all periods presented in our Condensed Consolidated Statements of Operations.
Business Trends and Conditions
Title
Our Title segment revenue is closely related to the level of real estate activity whichthat 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.
AsThe most recent forecast of October 24, 2017 the Mortgage Bankers Association ("MBA") estimated, as of July 20, 2023, estimates (actual for fiscal year 2022) the size of the U.S. residential mortgage originations market as shown in the following table for 20162022 - 20192025 in its "Mortgage Finance Forecast" (in trillions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | 2025 | | 2024 | | 2023 | | 2022 |
Purchase transactions | | | | $ | 1.8 | | | $ | 1.6 | | | $ | 1.4 | | | $ | 1.6 | |
Refinance transactions | | | | $ | 0.7 | | | $ | 0.6 | | | $ | 0.4 | | | $ | 0.6 | |
Total U.S. mortgage originations forecast | | | | $ | 2.5 | | | $ | 2.2 | | | $ | 1.8 | | | $ | 2.2 | |
|
| | | | | | | | | | | | | | | | | | | | |
| | 2020 | | 2019 | | 2018 | | 2017 | | 2016 |
Purchase transactions | | $ | 1.3 |
| | $ | 1.2 |
| | $ | 1.2 |
| | $ | 1.1 |
| | $ | 1.1 |
|
Refinance transactions | | 0.4 |
| | 0.4 |
| | 0.4 |
| | 0.6 |
| | 1.0 |
|
Total U.S. mortgage originations forecast | | $ | 1.7 |
| | $ | 1.6 |
| | $ | 1.6 |
| | $ | 1.7 |
| | $ | 2.1 |
|
As of July 20, 2023, the MBA expects residential purchase transactions to decrease in 2023 before increasing in 2024 and 2025. Additionally, the MBA expects residential refinance transactions and overall mortgage originations to decrease in 2023 before increasing in 2024 and 2025.In 2016, total originations were reflectiveThe Federal Reserve raised the benchmark interest rate from near zero as of March 2022 to a generally improvingrange between 5.0% and 5.25% as of June 2023. Average interest rates for a 30-year fixed rate mortgage increased to 6.5% for the three and six months ended June 30, 2023, as compared to 5.3% and 4.6% for the corresponding periods of 2022. On July 26, 2023, the Federal Reserve raised the benchmark interest rate by an additional 25 basis points.
A shortage in the supply of homes for sale, increasing home prices, rising mortgage interest rates, disrupted labor markets and geopolitical uncertainties associated with the war in Ukraine created some volatility in the residential real estate market driven by increasing home prices and historically low mortgage interest rates. Over the same period, existing homein
2022, which has continued into 2023. Existing-home sales increased and there was a declinedecreased 19% in total housing inventory. In 2017 and beyond, increased mortgage interest rates driven by gradual increases in the target federal funds rate are expected to adversely impact mortgage originations. In a rising interest rate environment, refinance transactions are expected to decline. The MBA predicts overall mortgage originations in 2017 through 2019 will decreaseJune 2023 as compared to the 2016corresponding period duein 2022 while median existing-home sales prices decreased from a record-high of $413,800 in June 2022 to $410,200 in March 2023, a 1% decrease compared with the corresponding period in refinance transactions, offset by a slight increase in purchase transactions. Purchase transactions involve the issuance of both a lender’s policy and an owner’s policy, resulting in higher title premiums, whereas refinance transactions only require a lender’s policy, resulting in lower title premiums.2022.
While projected increases in mortgage interest rates present a potential headwind for mortgage originations, otherOther economic indicators used to measure the health of the United StatesU.S. economy, including the unemployment rate, and consumer confidence, have improved in recent years. According to the United States Department of Labor's Bureau of Labor, theremained strong. The unemployment rate has dropped from 7.4%was 3.6% in 2013 to 4.2%June 2023 and 2022, which was near the record-low of 3.5% set in September 2017. Additionally, the Conference Board's monthly Consumer Confidence Index rose sharply at the end of 2016 and the beginning of 2017 and has remained at historical highs through 2017. We believe that improvements in both of these economic indicators, among other indicators which support a generally improving United States economy, present potential tailwinds for mortgage originations and support recent home price trends.
We cannot be certain how, if at all, the positive effects of a change in mix of purchase to refinance transactions and of a generally improving United States economy and the negative effects of projected decreases in overall originations will impact our future results of operations. We continually monitor 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.February 2020.
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. For several years through 2015,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 the first half of 2022, we experienced continual year-over-year increasesstrong 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 fee per file of commercial transactions. In 2016, we experienced a slight decrease in the volumethree and six months ended June 30, 2023, order volumes and fee per file decreased when compared with the prior year period.
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 commercial transactions as compared to 2015, but commercial markets still remained at historically elevated levels. Through 2017, we have continued to see strongincreased volume when demand for commercial transactions and have experienced historically high fees per file.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 quarter isquarters are typically the strongest quarterquarters in terms of revenue, primarily due to a higher volume of
home sales residential transactions in the spring and summer months. The fourth quarter is typically also 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. The rapid rise in mortgage rates and resulting decline in housing affordability has resulted in deviations in seasonality from historical patterns in 2022, which has continued into 2023.
FNFV
Restaurant GroupF&G
The restaurant industry is highly competitivefollowing factors represent some of the key trends and is oftenuncertainties 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.
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 in our F&G segment, which vary in response to changes in consumer tastesmarket conditions. See Item 1A of Part I of our Annual Report on Form 10-K for the year ended December 31, 2022 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 of June 30, 2023, our reserves, net of reinsurance, and discretionary spending patterns;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 of Part II of our Annual Report on Form 10-K for the year ended December 31, 2022 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 fixed index annuity ("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. 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 18% in 2023 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. For example, the FIA market grew from nearly $12 billion of sales in 2002 to $79 billion of sales in 2022. Additionally, this market demand has positively impacted the IUL market as it has expanded from $100 million of annual premiums in 2002 to $3 billion of annual premiums in 2022.
See Item 7 of Part II of our Annual Report on Form 10-K for the year ended December 31, 2022 for a more detailed discussion of industry factors and trends affecting our Results of Operations.
Critical Accounting Policies and Estimates
As a result of the adoption of ASU 2018-12, we have applied the following additional critical accounting policies and estimates in preparing our Condensed Consolidated Financial Statements included in Item 1 of Part I of this Report. Other than the following additional critical accounting policies and estimates, which are further described in the Notes to our unaudited Condensed Consolidated Financial Statements included in Item 1 of Part 1 of this Quarterly Report on Form 10-Q, which is incorporated by reference into this Item 2 of Part I, there have been no material changes to our critical accounting policies described in Item 7 of Part II of our Annual Report on Form 10-K for the year ended December 31, 2022. See Note A Basis of Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for additional description of certain significant accounting policies that have been followed in preparing our unaudited Condensed Consolidated Financial Statements.
Reserves for Future Policy Benefits and Certain Information on Contractholder Funds
The determination of future policy benefit ("FPB") reserves is dependent on actuarial assumptions. The principal assumptions used to establish liabilities for FPBs are established at issue of the contract and include discount rates, mortality, and cash surrender or policy lapse for our traditional life insurance products. The assumptions used require considerable judgment. We review policyholder behavior experience at least annually and update these assumptions when deemed necessary based on additional information that becomes available. Discount rate assumptions are updated at each reporting period and also incorporate changes in general economic conditions; public safetyrisk 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 in a positive or negative direction.
Mortality refers to the incidence of death on covered lives, which triggers contractual death benefit provisions. On our deferred annuities and life insurance products, these provisions may allow for lump sum payments, payments over a period of time, or spousal continuation of the contract. On our life-contingent immediate annuities, the death of a named annuitant or pension risk transfer (“PRT”) certificate holder may trigger the cessation or reduction of future life-contingent payments due, depending on the presence of a joint annuitant/certificate holder and any remaining guaranteed non-life contingent payment periods. We utilize a combination of internal and industry experience when setting our mortality assumptions.
A surrender rate is the percentage of account value surrendered by the policyholder in exchange for receipt of a cash surrender value. A lapse rate is the percentage of account value canceled by us due to nonpayment of premiums required to maintain coverage on our life insurance products. We make estimates of expected full and partial surrenders of our deferred annuity products, based on a combination of internal and industry experience. Management’s best estimate of surrender behavior generally represents a medium-to-long term perspective, as we expect to experience a range of policyholder behavior and market conditions period to period. If actual surrender rates are significantly different from those estimated, such differences could have a significant effect on our reserve levels and related results of operations.
Discount rates refers to the interest rates used to discount future cash flows to the current period to determine a present value. For liability for FPB reserves the discount rate used is based on the yield curve for A-rated corporate bonds as of the valuation date. Changes in the discount rates from the at-issue or concerns; demographic trends; weather conditions;at-purchase discount rates flow through other comprehensive income (“OCI”).
Our aggregate reserves for contractholder funds, FPBs and market risk benefits ("MRBs") on a direct and net basis as of June 30, 2023 and December 31, 2022 are summarized as follows:
| | | | | | | | | | | | | | | | | |
| As of June 30, 2023 |
| Direct | | Deposit Asset/ Reinsurance Recoverable | | Net |
| (In millions) |
Fixed indexed annuities (“FIA”) | $ | 26,518 | | | $ | (17) | | | $ | 26,501 | |
Fixed rate annuities | 11,484 | | | (5,431) | | | 6,053 | |
Single premium immediate annuities (“SPIA”) and other | 1,810 | | | (116) | | | 1,694 | |
IUL and other life | 3,651 | | | (1,512) | | | 2,139 | |
Funding agreement backed notes ("FABN") | 4,756 | | | — | | | 4,756 | |
PRT | 2,879 | | | — | | | 2,879 | |
Total | $ | 51,098 | | | $ | (7,076) | | | $ | 44,022 | |
| | | | | | | | | | | | | | | | | |
| As of December 31, 2022 |
| Direct | | Deposit Asset/ Reinsurance Recoverable | | Net |
| (In millions) |
FIA | $ | 24,704 | | | $ | (16) | | | $ | 24,688 | |
Fixed rate annuities | 9,360 | | | (3,723) | | | 5,637 | |
SPIA and other | 1,829 | | | (118) | | | 1,711 | |
IUL and other life | 3,486 | | | (1,560) | | | 1,926 | |
FABN | 4,595 | | | — | | | 4,595 | |
PRT | 2,172 | | | — | | | 2,172 | |
Total | $ | 46,146 | | | $ | (5,417) | | | $ | 40,729 | |
FIA and 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 accompanying unaudited Condensed Consolidated Balance Sheets with changes in fair value included as a component of Benefits and other changes in policy reserves in our accompanying unaudited Condensed Consolidated Statements of Earnings.
For life-contingent immediate annuity policies (which includes life-contingent PRT annuities), gross premiums received in excess of net premiums are deferred at initial recognition as a deferred profit liability (“DPL”). Gross premiums are measured using assumptions consistent with those used in the measurement of the related liability for future policy benefits.
Valuation of Fixed Maturity, Preferred and Equity Securities, and Derivatives and Reinsurance Recoverable
Our investments in fixed maturity securities have been designated as available-for-sale ("AFS") and are carried at fair value, net of allowance for expected credit losses, with unrealized gains and losses included within accumulated other comprehensive income (loss) ("AOCI"), net of 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 food products, labor, energythe specific investments sold and other operating costs; and governmental regulations. Higher labor costs dueare credited or charged to state and local minimum wage increases and shopping pattern shifts to e-commerce and “ready to eat” grocery and convenience stores have hadincome on a negative impact on restaurant performance, particularly in the casual and family dining segments in which the company operates. trade date basis.
The restaurant industry is also characterized by high capital investments for new restaurants and relatively high fixed or semi-variable restaurant operating expenses. BecauseManagement’s assessment of all available data when determining fair value of the high fixedAFS securities is necessary to appropriately apply fair value accounting. Management utilizes information from independent pricing services, who take into account perceived market movements and semi-variable expenses, changessector 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 sales in existing restaurants are generally expected to significantly affect restaurant profitability because many restaurant costs and expensesactive markets are not expectedavailable, 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 changevaluations from other independent pricing services, analytical reviews and performance analysis of the prices against trends, and maintenance of a securities watch list. See Note C Fair
Value of Financial Instruments and Note D Investments to our Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q.
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 same rate as sales. Restaurant profitability can also be negatively affected by inflationarybalance 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 regulatory increases in operating costsmarket 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 most significant commoditiesfair value of futures contracts (specifically for FIA 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 maythese obligations will not be fulfilled (“non-performance risk”). For the six months ended June 30, 2023 and the year ended December 31, 2022, our non-performance risk adjustment was based on the expected loss due to default in debt obligations for similarly rated financial companies. See Note C Fair Value of Financial Instruments and Note E Derivative Financial Instruments to our unaudited Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q.
As discussed in Note L Reinsurance of our unaudited Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q, FGL Insurance entered into a reinsurance agreement with Kubera effective December 31, 2018, to cede certain MYGAs and other fixed rate 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, FGL Insurance entered into a reinsurance agreement with Aspida Re effective January 1, 2021, and amended in August 2021 and September 2022, to cede a quota share of MYGA business on a funds withheld basis. Fair value movements in the funds withheld balances associated with these arrangements create an obligation for FGL Insurance 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 Prepaid expenses and other assets if in a net gain position, or Accounts payable and accrued liabilities, if in a net loss position on the accompanying unaudited Condensed Consolidated Balance Sheets. The related gains or losses are reported in Recognized gains and losses, net on the accompanying unaudited Condensed Consolidated Statements of Earnings.
Market Risk Benefits
MRBs are contracts or contract features that both provide protection to the contract holder from other-than-nominal capital market risk (equity, interest and foreign exchange risk) and expose the Company to other-than-nominal capital market risk. MRBs include certain contract features primarily on FIA contracts that provide minimum guarantees to policyholders, such as Guaranteed Minimum Death Benefit (“GMDBs”) and Guaranteed Minimum Withdrawal Benefits (“GMWBs”) riders. MRBs are measured at fair value using a risk neutral valuation method, which is based on current net amounts at risk, market data, internal and industry experience, and other factors.
The principal policyholder behavior assumptions used to calculate MRBs are established at issue of the contract and include mortality, contract full and partial surrenders, and utilization of the GMWB rider benefits. The assumptions used reflect a combination of internal experience, industry experience, and judgment. We review overall policyholder behavior experience at least annually and update these assumptions when deemed necessary based on additional information that becomes available. Changes in, or deviations from, the assumptions previously used can significantly affect our costMRBs and related results of foodoperations in a positive or negative direction.
Mortality refers to the incidence of death amongst policyholders on covered lives, which triggers contractual death benefit provisions. These provisions may allow for lump sum payments, payments over a period of time, or spousal continuation of the contract. We utilize a combination of actual internal and beverage are beef, seafood, poultry,industry experience when setting our mortality assumptions.
A surrender rate is the percentage of account value surrendered by the policyholder in exchange for receipt of a cash surrender value. We make estimates of expected full and dairy, which accounted for approximately halfpartial surrenders of our overall costdeferred annuity products based on a combination of foodinternal and beverage in the past. Generally, temporary increases in these costs are not passed onindustry experience. Management’s best estimate of surrender generally represents a medium-to-long term perspective, as we expect to guests; however, in the past, we have adjusted menu pricesexperience a range of policyholder behavior and market conditions period to compensate for increased costs of a more permanent nature.
Average weekly sales per restaurant are typically higher in the first and fourth quarters than in other quarters, and we typically generate a disproportionate share of our earnings from operations in the first and fourth quarters. Holidays, severe weather and other disruptive conditions may impact sales volumes seasonally in some operating regions.
Our revenues in future periods will continue to be subject to these and other factors that are beyond our control and, as a result, are likely to fluctuate. Our revenues in future periods are also subject to an anticipated Split-Off Plan, as described under Recent Developments in Note A Basis of Financial Statements.
period. If
actual surrender rates are significantly different from those estimated, such differences could have a significant effect on our MRBs and related results of operations.
We have been issuing GMWB products since 2008. We make assumptions for policyholder behavior as it relates to GMWB utilization using a higher degree of industry experience and judgment than our other behavioral assumptions because internal experience, which we review annually, is still emerging. If emerging experience deviates from our assumptions on GMWB utilization, it could have a significant effect on MRBs and related results of operations.
Results of Operations
Consolidated Results of Operations |
| | | | | | | | | | | | | | | |
Consolidated Results of Operations | | | | | | | |
Net Earnings. The following table presents certain financial data for the periods indicated: |
| Three months ended September 30, | | Nine months ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
| (In millions) |
Revenues: | | | | | | | |
Direct title insurance premiums | $ | 558 |
| | $ | 556 |
| | 1,598 |
| | 1,518 |
|
Agency title insurance premiums | 719 |
| | 713 |
| | 2,028 |
| | 1,934 |
|
Escrow, title-related and other fees | 689 |
| | 700 |
| | 2,071 |
| | 1,920 |
|
Restaurant revenue | 269 |
| | 273 |
| | 830 |
| | 858 |
|
Interest and investment income | 34 |
| | 29 |
| | 97 |
| | 96 |
|
Realized gains and losses, net | (4 | ) | | (4 | ) | | 277 |
| | 5 |
|
Total revenues | 2,265 |
| | 2,267 |
| | 6,901 |
| | 6,331 |
|
Expenses: | | | | | | | |
Personnel costs | 646 |
| | 630 |
| | 1,958 |
| | 1,800 |
|
Agent commissions | 553 |
| | 545 |
| | 1,557 |
| | 1,473 |
|
Other operating expenses | 468 |
| | 464 |
| | 1,392 |
| | 1,296 |
|
Cost of restaurant revenue | 243 |
| | 237 |
| | 728 |
| | 727 |
|
Depreciation and amortization | 58 |
| | 56 |
| | 177 |
| | 161 |
|
Provision for title claim losses | 64 |
| | 70 |
| | 181 |
| | 190 |
|
Interest expense | 12 |
| | 18 |
| | 47 |
| | 55 |
|
Total expenses | 2,044 |
| | 2,020 |
| | 6,040 |
| | 5,702 |
|
Earnings from continuing operations before income taxes and equity in losses of unconsolidated affiliates | 221 |
| | 247 |
| | 861 |
| | 629 |
|
Income tax expense | 74 |
| | 88 |
| | 355 |
| | 218 |
|
Equity in losses of unconsolidated affiliates | (3 | ) | | (7 | ) | | (7 | ) | | (6 | ) |
Net earnings from continuing operations | $ | 144 |
| | $ | 152 |
| | $ | 499 |
| | $ | 405 |
|
Net Earnings. The following table presents certain financial data for the periods indicated:Revenues. | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | |
| | | | |
| Three months ended June 30, | | Six months ended June 30, |
| 2023 | | 2022 | | 2023 | | 2022 |
| (In millions) |
Revenues: | | | | | | | |
Direct title insurance premiums | $ | 541 | | | $ | 859 | | | $ | 969 | | | $ | 1,626 | |
Agency title insurance premiums | 713 | | | 1,203 | | | 1,263 | | | 2,302 | |
Escrow, title-related and other fees | 1,212 | | | 786 | | | 2,092 | | | 2,078 | |
| | | | | | | |
Interest and investment income | 618 | | | 463 | | | 1,229 | | | 941 | |
Recognized gains and losses, net | (16) | | | (676) | | | (11) | | | (1,145) | |
Total revenues | 3,068 | | | 2,635 | | | 5,542 | | | 5,802 | |
Expenses: | | | | | | | |
Benefits and other changes in policy reserves | 817 | | | (377) | | | 1,629 | | | (174) | |
Personnel costs | 755 | | | 839 | | | 1,432 | | | 1,662 | |
Agent commissions | 550 | | | 930 | | | 970 | | | 1,774 | |
| | | | | | | |
Other operating expenses | 394 | | | 457 | | | 754 | | | 899 | |
| | | | | | | |
Market risk benefit (gains) losses | (30) | | | (189) | | | 29 | | | (119) | |
Depreciation and amortization | 151 | | | 120 | | | 285 | | | 235 | |
Provision for title claim losses | 56 | | | 93 | | | 100 | | | 177 | |
Interest expense | 43 | | | 31 | | | 85 | | | 61 | |
Total expenses | 2,736 | | | 1,904 | | | 5,284 | | | 4,515 | |
Earnings before income taxes and equity in earnings of unconsolidated affiliates | 332 | | | 731 | | | 258 | | | 1,287 | |
Income tax expense | 90 | | | 202 | | | 104 | | | 358 | |
Equity in earnings of unconsolidated affiliates | 1 | | | 14 | | | 1 | | | 16 | |
Net earnings | $ | 243 | | | $ | 543 | | | $ | 155 | | | $ | 945 | |
Total revenues decreased by $2 million in the three months ended September 30, 2017, compared to the corresponding period in 2016. The decrease consisted of a $38 million increase at FNF Group and a $40 million decrease at FNFV. Revenues.
Total revenues increased by $570 million in the nine months ended September 30, 2017, compared to the corresponding period in 2016. The increase consisted of a $353 million increase at FNF Group and a $217 million increase at FNFV.
Net earnings from continuing operations decreased by $8$433 million in the three months ended SeptemberJune 30, 2017,2023 and decreased by $260 million in the six months ended June 30, 2023 compared to the corresponding periodperiods in 2016. The decrease consisted of a $3 million decrease at FNF Group and $5 million decrease at FNFV. 2022.
Net earnings from continuing operations increaseddecreased by $94$300 million in the ninethree months ended SeptemberJune 30, 2017,2023 and decreased by $790 million in the six months ended June 30, 2023 compared to the corresponding periodperiods in 2016. The increase consisted of a $7 million decrease at FNF Group and $101 million increase at FNFV.2022.
The change in revenue and net earnings from the FNF Group segments and FNFVour reportable segments is discussed in further detail at the segment level below.
Expenses.
Our operating expenses consist primarily of Personnel costs; Other operating expenses, which in our title business are incurred as orders are received and processed; Agent commissions, which are incurred as title agency revenue is recognized; and CostBenefits 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 restaurant revenue.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 and 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. Personnel costs that are directly attributable to the operations of the Restaurant Group are included in Cost of restaurant revenue.
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 on ServiceLink 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.
Cost of restaurant revenue includes cost of food and beverage, primarily the costs of beef, groceries, produce, seafood, poultry and alcoholic and non-alcoholic beverages, net of vendor discounts and rebates, payroll and related costs and expenses directly relating to restaurant level activities, and restaurant operating costs including occupancy and other operating expenses at the restaurant level.
The Provisionprovision for title claim losses includes an estimate of anticipated title and title-related claims, and escrow losses.
The change in expenses from the FNF Group segments and FNFVattributable to our reportable segments is discussed in further detail at the segment level below.
Income tax expense was $74$90 million and $88$202 million in the three-month periodsthree months ended SeptemberJune 30, 20172023 and 2016,2022, respectively, and $355$104 million and $218$358 million in the nine-month periodssix months ended SeptemberJune 30, 20172023 and 2016,2022, respectively. Income tax expense as a percentage of earnings before income taxes was 33%27% and 36% for28% in the three-month periodsthree months ended SeptemberJune 30, 20172023 and 2016,2022, respectively and 41%40% and 35% for28% in the nine-month periodssix months ended SeptemberJune 30, 20172023 and 2016,2022, respectively. IncomeThe decrease in income tax expense as a percentage of earnings before income taxes fluctuates depending on our estimate of ultimate income tax liability and changes in the characteristicsthree months ended June 30, 2023 as compared to the corresponding period in 2022 is primarily attributable to the recording of net earnings, such asvaluation allowances in 2022, partially offset by the weightingrecording of operating income versus investment income.valuation allowances in 2023. The increase in income tax expense as a percentage of earnings before income taxes fromin the nine-month periodsix months ended SeptemberJune 30, 20162023 as compared to the comparable 2017corresponding period wasin 2022 is primarily driven byattributable to recording of valuation allowances in 2023. The valuation allowance is associated with tax benefits from deferred tax assets related to recognized valuation losses on equity securities that we will more likely than not be able to realize for tax purposes. Additionally, the sale of OneDigital, nondeductible legal and regulatory expenses incurredtax benefit associated with the valuation losses on equity securities in the period,three and increased tax expense of $21 million resulting from a change in judgment of the tax deductibility of legal and regulatory settlements finalizedsix months ended June 30, 2023 was further reduced by an increase in the 2017 period.valuation allowance in 2023.
Equity in lossesThe Inflation Reduction Act of unconsolidated affiliates2022 (the "IRA") was $3 millionsigned into law on August 16, 2022. Among other changes, the IRA introduced a 15% corporate alternative minimum tax on adjusted financial statement income and $7 million fora 1% excise tax on treasury stock repurchases. The effective date of these provisions was January 1, 2023. We do not anticipate that the three-month periods ended September 30, 2017 and 2016, respectively, and $7 million and $6 million for the nine-month periods ended September 30, 2017 and 2016, respectively. The equity in losses in 2017 and 2016 consisted primarily of net losses related toIRA will have a material effect on our investment in Ceridian, offset by earnings at various other unconsolidated affiliates, which is described further at the segment level below.current or future financial condition or results from operations.
FNF Group
Title
The following table presents the results from operations of our Title segment:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended June 30, | | Six months ended June 30, |
| 2023 | | 2022 | | 2023 | | 2022 |
Revenues: | (In millions) |
Direct title insurance premiums | $ | 541 | | | $ | 859 | | | $ | 969 | | | $ | 1,626 | |
Agency title insurance premiums | 713 | | | 1,203 | | | 1,263 | | | 2,302 | |
Escrow, title-related and other fees | 581 | | | 706 | | | 1,052 | | | 1,371 | |
Interest and investment income | 79 | | | 35 | | | 160 | | | 62 | |
Recognized gains and losses, net | (50) | | | (249) | | | (28) | | | (424) | |
Total revenues | 1,864 | | | 2,554 | | | 3,416 | | | 4,937 | |
Expenses: | | | | | | | |
Personnel costs | 656 | | | 821 | | | 1,254 | | | 1,597 | |
Agent commissions | 550 | | | 930 | | | 970 | | | 1,774 | |
Other operating expenses | 330 | | | 409 | | | 626 | | | 806 | |
Depreciation and amortization | 39 | | | 34 | | | 76 | | | 67 | |
Provision for title claim losses | 56 | | | 93 | | | 100 | | | 177 | |
| | | | | | | |
Total expenses | 1,631 | | | 2,287 | | | 3,026 | | | 4,421 | |
Earnings before income taxes and equity in earnings of unconsolidated affiliates | $ | 233 | | | $ | 267 | | | $ | 390 | | | $ | 516 | |
Orders opened by direct title operations (in thousands) | 347 | | | 443 | | | 655 | | | 965 | |
Orders closed by direct title operations (in thousands) | 233 | | | 348 | | | 421 | | | 728 | |
Fee per file (in dollars) | $ | 3,598 | | | $ | 3,557 | | | $ | 3,530 | | | $ | 3,210 | |
|
| | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
| (In millions) |
Revenues: | | | | | | | |
Direct title insurance premiums | $ | 558 |
| | $ | 556 |
| | $ | 1,598 |
| | $ | 1,518 |
|
Agency title insurance premiums | 719 |
| | 713 |
| | 2,028 |
| | 1,934 |
|
Escrow, title-related and other fees | 563 |
| | 569 |
| | 1,634 |
| | 1,587 |
|
Interest and investment income | 32 |
| | 29 |
| | 93 |
| | 94 |
|
Realized gains and losses, net | — |
| | (2 | ) | | 6 |
| | 1 |
|
Total revenues | 1,872 |
| | 1,865 |
| | 5,359 |
| | 5,134 |
|
Expenses: | | | | | | | |
Personnel costs | 605 |
| | 570 |
| | 1,755 |
| | 1,633 |
|
Agent commissions | 553 |
| | 545 |
| | 1,557 |
| | 1,473 |
|
Other operating expenses | 348 |
| | 379 |
| | 1,042 |
| | 1,064 |
|
Depreciation and amortization | 40 |
| | 38 |
| | 117 |
| | 109 |
|
Provision for title claim losses | 64 |
| | 70 |
| | 181 |
| | 190 |
|
Total expenses | 1,610 |
| | 1,602 |
| | 4,652 |
| | 4,469 |
|
Earnings from continuing operations before income taxes and equity in earnings of unconsolidated affiliates | $ | 262 |
| | $ | 263 |
| | $ | 707 |
| | $ | 665 |
|
Orders opened by direct title operations (in thousands) | 501 |
| | 616 |
| | 1,497 |
| | 1,708 |
|
Orders closed by direct title operations (in thousands) | 367 |
| | 433 |
| | 1,071 |
| | 1,156 |
|
Fee per file | $ | 2,368 |
| | $ | 2,015 |
| | $ | 2,320 |
| | $ | 2,055 |
|
Total revenues for the Title segment increaseddecreased by $7$690 million,, or 0%27%, in the three months ended SeptemberJune 30, 20172023 and increaseddecreased by $225$1,521 million, or 4%,31% in the ninesix months ended SeptemberJune 30, 20172023 from the corresponding periods in 2016.
2022.
The following table presents the percentages of title insurance premiums generated by our direct and agency operations:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended June 30, | | Six months ended June 30, |
| | | % of | | | | % of | | | | % of | | | | % of |
| 2023 | | Total | | 2022 | | Total | | 2023 | | Total | | 2022 | | Total |
| (Dollars in millions) |
Title premiums from direct operations | $ | 541 | | | 43 | % | | $ | 859 | | | 42 | % | | $ | 969 | | | 43 | % | | $ | 1,626 | | | 41 | % |
Title premiums from agency operations | 713 | | | 57 | | | 1,203 | | | 58 | | | 1,263 | | | 57 | | | 2,302 | | | 59 | |
Total title premiums | $ | 1,254 | | | 100 | % | | $ | 2,062 | | | 100 | % | | $ | 2,232 | | | 100 | % | | $ | 3,928 | | | 100 | % |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| | | % of | | | | % of | | | | % of | | | | % of |
| 2017 | | Total | | 2016 | | Total | | 2017 | | Total | | 2016 | | Total |
| (Dollars in millions) |
Title premiums from direct operations | $ | 558 |
| | 44 | % | | $ | 556 |
| | 44 | % | | $ | 1,598 |
| | 44 | % | | $ | 1,518 |
| | 44 | % |
Title premiums from agency operations | 719 |
| | 56 |
| | 713 |
| | 56 |
| | 2,028 |
| | 56 |
| | 1,934 |
| | 56 |
|
Total title premiums | $ | 1,277 |
| | 100 | % | | $ | 1,269 |
| | 100 | % | | $ | 3,626 |
| | 100 | % | | $ | 3,452 |
| | 100 | % |
Title premiums increaseddecreased by 1%$808 million, or 39% in the three months ended SeptemberJune 30, 20172023 from the corresponding period in 2022. The decrease was comprised of a decrease in Title premiums from direct operations of $318 million, or 37%, and a decrease in Title premiums from agency operations of $490 million, or 41%.
Title premiums decreased by $1,696 million, or 43%, in the six months ended June 30, 2023 as compared to the corresponding period in 2016.2022. The increase isdecrease was comprised of an increasea decrease in Title premiums from direct operations of $2$657 million, or 0%40%, and an increasea decrease in Title premiums from agency operations of $6$1,039 million or 1%, in the three months ended September 30, 201745%. Title premiums increased by 5% in the nine months ended September 30, 2017 as compared to the corresponding period in 2016. The increase is comprised of an increase in Title premiums from direct operations of $80 million, or 5%, and an increase in Title premiums from agency operations of $94 million, or 5%, in the nine months ended September 30, 2017.
The following table presents the percentages of openopened and closed title insurance orders generated by purchase and refinance transactions by our direct operations:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended June 30, | | Six months ended June 30, |
| 2023 | | 2022 | | 2023 | | 2022 |
Opened title insurance orders from purchase transactions (1) | 79 | % | | 75 | % | | 79 | % | | 68 | % |
Opened title insurance orders from refinance transactions (1) | 21 | | | 25 | | | 21 | | | 32 | |
| 100 | % | | 100 | % | | 100 | % | | 100 | % |
| | | | | | | |
Closed title insurance orders from purchase transactions (1) | 81 | % | | 71 | % | | 80 | % | | 62 | % |
Closed title insurance orders from refinance transactions (1) | 19 | | | 29 | | | 20 | | | 38 | |
| 100 | % | | 100 | % | | 100 | % | | 100 | % |
|
| | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
Opened title insurance orders from purchase transactions (1) | 62.1 | % | | 49.5 | % | | 64.0 | % | | 53.7 | % |
Opened title insurance orders from refinance transactions (1) | 37.9 |
| | 50.5 |
| | 36.0 |
| | 46.3 |
|
| 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % |
| | | | | | | |
Closed title insurance orders from purchase transactions (1) | 64.7 | % | | 54.0 | % | | 63.5 | % | | 55.5 | % |
Closed title insurance orders from refinance transactions (1) | 35.3 |
| | 46.0 |
| | 36.5 |
| | 44.5 |
|
| 100.0 | % | | 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 increaseddecreased in the three and ninesix months ended SeptemberJune 30, 2017 as2023 from the corresponding period in 2022. The decreases were primarily attributable to decreased closed order volume, partially offset by increases in the average fee per file, which were driven by increases in the proportion of purchase transactions versus refinance transactions.
We experienced a significant decrease in closed title insurance order volume from both purchase and refinance transactions in the three and six months ended June 30, 2023 from the corresponding periods in 2022. Total closed order volume was 233,000 in the three months ended June 30, 2023 compared to 348,000 in the three months ended June 30, 2022 and 421,000 in the six months ended June 30, 2023 compared to 728,000 in the six months ended June 30, 2022. This represented an overall decrease of 33% and 42% in the three and six months ended June 30, 2023, respectively, from the corresponding periods in 2022. The decreases were primarily attributable to higher average mortgage interest rates in the three and six months ended June 30, 2023 when compared to the corresponding periods in 2016. The increase in both periods is primarily attributable to an increase in the fee per file driven by a favorable change in the mix of closed orders from purchase and refinance transactions, partially offset by a decrease in closed order volume. We experienced an increase in closed2022.
Total opened title insurance order volumes from purchase transactions which was more than offset by a decrease in closed title insurance order volumes from refinance transactionsvolume decreased in the threethree and ninesix months ended SeptemberJune 30, 2017 as compared to2023 from the corresponding periods in 2016. Total closed order volumes2022. The decreases were 367,000 and 1,071,000 in the three and nine months ended September 30, 2017, respectively, compared with 433,000 and 1,156,000 in the three and nine months ended September 30, 2016, respectively. This represented an overall decrease of 15% and 7%, respectively. Openattributable to decreased opened title orders changed consistently with closed orders over the threefrom both purchase and nine months ended September 30, 2017 as compared to the corresponding periods in 2016. refinance transactions.
The average fee per file in our direct operations was $2,368$3,598 and $2,320$3,530 in the three and ninesix months ended SeptemberJune 30, 2017,2023, respectively, compared to $2,015$3,557 and $2,055$3,210 in the three and ninesix months ended SeptemberJune 30, 2016.2022. The increase in average fee per file in both periodsthe three and six months ended June 30, 2023 reflects the favorable change in mixan increased proportion of purchase transactions relative to total closed orders from purchase and refinance transactions.compared to the corresponding periods in 2022. 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.
The increase in titleTitle premiums from agency operations is primarilydecreased $490 million, or 41%, in the result of an increasethree months ended June 30, 2023 and decreased $1,039 million, or 45% in remittedthe six months ended June 30, 2023 from the corresponding period in 2022. The current trends in the agency premiums that reflects an improvingbusiness reflect a softening residential purchase environment in many markets throughout the country. The increase also reflectscountry and a concerted effort by management to increase remittancesdramatic decline in residential refinance transactions, consistent with existing agents as well as cultivate new relationships with potential new agents while reducing unprofitable agency relationships.recent trends in our direct business.
Escrow, title-related and other fees decreased by $6$125 million, or 1%18%, in the three months ended SeptemberJune 30, 2017,2023 and increased by $47decreased $319 million or 3%,23% in the ninesix months ended SeptemberJune 30, 20172023 from the corresponding periods in 2016.2022. Escrow fees which are more closely related to our direct operations, decreased by $6$76 million, or 3%26%, in the three months ended SeptemberJune 30, 2017,2023 and increased $23$181 million, or 4%,32% in the ninesix months ended SeptemberJune 30, 2017 compared to2023 from the corresponding periods in 2016.2022. The increase is representative of the favorable increase in closed title insurance orders from purchase transactions previously discussed. Other feesdecreases in the Title segment,three and six month periods were primarily attributable to the decrease in residential refinance transactions, which have relatively higher escrow fees per transaction than residential purchase and commercial transactions. Other fees, excluding escrow fees, remained flatdecreased by $49 million, or 12%, in the three months ended SeptemberJune 30, 2017,2023 and increased $24decreased by $138 million, or 2%,17% in the ninesix months ended SeptemberJune 30, 20172023 from the corresponding periods in 2016. This increase relates2022. The decreases in Other fees were attributable to increases in fees in our home warranty business, loan processing revenue at certain subsidiaries of ServiceLink and acquisitions. The increases were offset by decreased revenue at certain other ServiceLink subsidiaries.various immaterial items.
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 by $3$44 million, or 126%, in the three months ended June 30, 2023 and increased $98 million, or 158% in the six months ended June 30, 2023 from the corresponding periods in 2022. The increases were primarily attributable to increased income from our tax-deferred property exchange business and higher yields on our short-term investments when compared to the corresponding period in 2022.
Net recognized losses were $50 million and $249 million in the three months ended SeptemberJune 30, 20172023 and decreased by $12022, respectively. Net recognized losses were $28 million and $424 million in the ninesix months ended SeptemberJune 30, 20172023 and 2022, respectively. The variations in recognized gains and losses, net in the three and six months ended June 30, 2023 compared to the corresponding periods in 2016. The increase2022 are primarily attributable to fluctuations in the three-month period was primarily driven by increased interest rates earnednon-cash valuation changes on our equity and preferred security holdings in our tax-deferred property exchange business, partially offset by a decrease in our fixed maturity holdings period over period.addition to various other 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. There was a $35Personnel costs decreased $165 million,, or 6% increase20%, in the three-month periodthree months ended SeptemberJune 30, 2017,2023 and a $122decreased $343 million, or 7%, increase21% in the nine-month periodsix months ended SeptemberJune 30, 20172023 compared to the corresponding periods in 2016.2022. The increasedecreases are due to lower average head count in the 2017 period is primarily due2023 periods in response to higher commissions and bonuses associated with increased headcount to process increased closed order counts from purchase transactions and increased expense associated with acquisitions. the decline in title orders.Personnel costs as a percentage of total revenues from direct title premiums and escrow, title-related and other
fees were 54%58% and 52% for both of the three months ended June 30, 2023 and nine-month periods ended September 30, 2017,2022, respectively, and 51%62% and 53% for the threesix months ended June 30, 2023 and nine-month periods ended September 30, 2016,2022, respectively. The increase in personnel cost as a percentage of total revenues from direct title premiums and escrow, title-related and other fees was primarily impacted by the January 1, 2017 realignment of Property Insight to us from Black Knight which resulted in reduced other operating expense offset by increased personnel expense within our Title segment. Average employee count in the Title segment was 23,67121,527and 22,49026,283 in the three-month periodsthree months ended SeptemberJune 30, 20172023 and 2016,2022, respectively, and 23,12921,521 and 21,71426,628 in the nine-month periodssix months ended SeptemberJune 30, 20172023 and 2016,2022, respectively.
Other operating expenses consist primarily
Other operating expenses decreased by $31$79 million, or 8%19%, in the three months ended SeptemberJune 30, 20172023, and decreased $22by $180 million, or 2%,22% in the ninesix months ended SeptemberJune 30, 20172023 from the corresponding periods in 2016.2022. Other operating expenses as a percentage of total revenue excluding agency premiums, interest and investment income, and realizedrecognized gains and losses decreased approximately 3%were 29% and 2%26% in the three and nine months ended SeptemberJune 30, 2017 from2023 and 2022, respectively, and 31% and 27% in the comparable periodssix months ended SeptemberJune 30, 2016,2023 and 2022, respectively. The decrease is primarily driven by decreased cost of sales at certain subsidiaries of ServiceLink, lower title plant costs associated with lower order counts, and the January 1, 2017 realignment of Property Insight to us from Black Knight which resulted in reduced other operating expense offset by increased personnel expense within our Title segment.
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.
The following table illustrates the relationship of agent premiums and agent commissions, which havehas remained relatively consistent since 2016:2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended June 30, | | Six months ended June 30, |
| 2023 | | % | | 2022 | | % | | 2023 | | % | | 2022 | | % |
| (Dollars in millions) |
Agent premiums | $ | 713 | | | 100 | % | | $ | 1,203 | | | 100 | % | | $ | 1,263 | | | 100 | % | | $ | 2,302 | | | 100 | % |
Agent commissions | 550 | | | 77 | % | | 930 | | | 77 | % | | 970 | | | 77 | % | | 1,774 | | | 77 | % |
Net retained agent premiums | $ | 163 | | | 23 | % | | $ | 273 | | | 23 | % | | $ | 293 | | | 23 | % | | $ | 528 | | | 23 | % |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2017 | | % | | 2016 | | % | | 2017 | | % | | 2016 | | % |
| (Dollars in millions) |
Agent premiums | 719 |
| | 100 | % | | 713 |
| | 100 | % | | $ | 2,028 |
| | 100 | % | | $ | 1,934 |
| | 100 | % |
Agent commissions | 553 |
| | 77 | % | | 545 |
| | 76 | % | | 1,557 |
| | 77 | % | | 1,473 |
| | 76 | % |
Net retained agent premiums | $ | 166 |
| | 23 | % | | $ | 168 |
| | 24 | % | | $ | 471 |
| | 23 | % | | $ | 461 |
| | 24 | % |
Depreciation and amortization increased by $2 million in the three months ended September 30, 2017 and increased $8 million in the nine months ended September 30, 2017 compared to the corresponding periods in 2016.
The claim loss provision for title insurance was $64$56 million and $70$93 million for the three-month periodsthree months ended SeptemberJune 30, 20172023 and 2016,2022, respectively, and $100 million and $177 million for the six months ended June 30, 2023, and 2022, respectively. The provision reflects an average provision rate of 5.0% and 5.5% of title premiums, respectively. The claim loss provision for title insurance was $181 million and $190 million for the nine-month periods ended September 30, 2017 and 2016, respectively, and reflects an average provision rate of 5.0% and 5.5%4.5% of title premiums in the 2017 and 2016 periods, respectively.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, we have five distribution channels across retail and institutional markets. Our three retail channels include agent-based Independent Marketing Organizations ("IMOs"), banks and broker dealers. We have deep, long-tenured relationships with our network of leading IMOs and their agents to serve the needs of the middle-income market and develop competitive annuity and life products to align with their evolving needs. Upon FNF’s ownership and F&G’s subsequent rating upgrades in mid-2020, we launched into banks and broker dealers. Further, in 2021, we launched two institutional channels to originate Funding Agreement Backed Note ("FABN") and PRT transactions. The FABN Program offers funding agreements to institutional clients by means of capital markets transactions through investment banks. The funding agreements issued under the FABN Program are in addition to those issued to the Federal Home Loan Bank of Atlanta ("FHLB"). The PRT solutions business was launched by building an experienced team and then working with brokers and institutional consultants for distribution. These markets leverage our existing team's spread-based capabilities as well as our strategic partnership with Blackstone.
In setting the fourthfeatures 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 (FIA and fixed rate annuities), IUL, immediate annuities, funding agreements and PRT 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. IUL 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.
Under U.S. GAAP, premium collections for deferred annuities, FIAs, 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 value of insurance and reinsurance contracts acquired ("VOBA"), deferred acquisition costs ("DAC"), deferred sales inducements ("DSI") and unearned revenue liability ("URL"), 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 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.
As noted above, MRBs are contracts or contract features that both provide protection to the contract holder from other-than-nominal capital market risk (equity, interest and foreign exchange risk) and expose the Company to other-than-nominal capital market risk. MRBs are measured at fair value using a risk neutral valuation method, which is based on current net amounts at risk, market data, internal and industry experience, and other factors. The change in fair value of MRBs generally reflects impacts from actual policyholder behavior (including surrenders of the benefit), changes in interest rates, and changes in equity market returns. Generally higher interest rates and equity returns result in gains whereas lower interest rates and equity returns result in losses.
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.
F&G Results of Operations
The results of operations of our F&G segment for the three and six months ended June 30, 2023 and 2022 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended | | Six months ended |
| June 30, 2023 | | June 30, 2022 | | June 30, 2023 | | June 30, 2022 |
| (In millions) |
Revenues: | | | | | | | |
Life insurance premiums and other fees | $ | 576 | | | $ | 71 | | | $ | 941 | | | $ | 667 | |
Interest and investment income | 525 | | | 425 | | | 1,044 | | | 876 | |
Recognized gains and (losses), net | 67 | | | (426) | | | 52 | | | (723) | |
Total revenues | 1,168 | | | 70 | | | 2,037 | | | 820 | |
Benefits and expenses: | | | | | | | |
Benefits and other changes in policy reserves | 817 | | | (377) | | | 1,629 | | | (174) | |
Market risk benefit (gains) losses | (30) | | | (189) | | | 29 | | | (119) | |
Depreciation and amortization | 104 | | | 80 | | | 109 | | | 64 | |
Personnel costs | 56 | | | 34 | | | 69 | | | 49 | |
Other operating expenses | 33 | | | 31 | | | 194 | | | 156 | |
Interest expense | 25 | | | 9 | | | 47 | | | 17 | |
Total benefits and expenses | 1,005 | | | (412) | | | 2,077 | | | (7) | |
| | | | | | | |
Earnings (loss) before income taxes | 163 | | | 482 | | | (40) | | | 827 | |
Income tax expense (benefit) | 33 | | | 97 | | | 25 | | | 203 | |
Net earnings (loss) | $ | 130 | | | $ | 385 | | | $ | (65) | | | $ | 624 | |
| | | | | | | |
| | | | | | | |
|
Revenues
Life insurance premiums and other fees
Life insurance premiums and other fees primarily reflect premiums on life-contingent PRTs 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, included within Escrow, title-related and other fees on the accompanying unaudited Condensed Consolidated Statements of Earnings, for the three and six months ended June 30, 2023 and 2022:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended | | Six months ended |
| June 30, 2023 | | June 30, 2022 | | June 30, 2023 | | June 30, 2022 |
| (In millions) |
Life-contingent pension risk transfer premiums | $ | 474 | | | $ | (5) | | | $ | 737 | | | $ | 520 | |
Traditional life insurance premiums | 5 | | | 2 | | | 11 | | | 7 | |
Life-contingent immediate annuity premiums | 5 | | | 7 | | | 11 | | | 12 | |
Surrender charges | 16 | | | 13 | | | 39 | | | 23 | |
Policyholder fees and other income | 76 | | | 54 | | | 143 | | | 105 | |
Life insurance premiums and other fees | $ | 576 | | | $ | 71 | | | $ | 941 | | | $ | 667 | |
•Life insurance premiums and other fees for the three and six months ended June 30, 2023 increased compared to the three and six months ended June 30, 2022 reflecting higher PRT premiums.
•Surrender charges increased for the three months and six months ended June 30, 2023 compared to the three and six months ended June 30, 2022, primarily reflecting 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 three and six months ended June 30, 2023 compared to the three and six months ended June 30, 2022, 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 for the three and six months ended June 30, 2023 and June 30, 2022:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended | | Six months ended |
| June 30, 2023 | | June 30, 2022 | | June 30, 2023 | | June 30, 2022 |
| (In millions) |
Fixed maturity securities, available-for-sale | $ | 448 | | | $ | 336 | | | $ | 880 | | | $ | 655 | |
Equity securities | 4 | | | 4 | | | 9 | | | 8 | |
Preferred securities | 12 | | | 15 | | | 22 | | | 26 | |
Mortgage loans | 57 | | | 49 | | | 108 | | | 88 | |
Invested cash and short-term investments | 17 | | | 9 | | | 33 | | | 13 | |
Limited partnerships | 44 | | | 58 | | | 101 | | | 171 | |
Other investments | 5 | | | 1 | | | 14 | | | 7 | |
Gross investment income | 587 | | | 472 | | | $ | 1,167 | | | $ | 968 | |
Investment expense | (62) | | | (47) | | | (123) | | | (92) | |
Interest and investment income | $ | 525 | | | $ | 425 | | | $ | 1,044 | | | $ | 876 | |
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 $76 million and $134 million for the three and six months ended June 30, 2023, respectively, and $20 million and $38 million for the three and six months ended June 30, 2022, respectively.
Recognized gains and (losses), net
Below is a summary of the major components included in recognized gains and losses, net for the three and six months ended June 30, 2023 and June 30, 2022:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended | | Six months ended |
| June 30, 2023 | | June 30, 2022 | | June 30, 2023 | | June 30, 2022 |
| (In millions) |
Net realized and unrealized (losses) gains on fixed maturity available-for-sale securities, equity securities and other invested assets | $ | (29) | | | $ | (162) | | | $ | (77) | | | $ | (269) | |
Change in allowance for expected credit losses | (21) | | | (6) | | | (29) | | | (7) | |
Net realized and unrealized (losses) gains on certain derivatives instruments | 99 | | | (394) | | | 157 | | | (702) | |
Change in fair value of reinsurance related embedded derivatives | 17 | | | 141 | | | (2) | | | 263 | |
Change in fair value of other derivatives and embedded derivatives | 1 | | | (5) | | | 3 | | | (8) | |
Recognized gains and (losses), net | $ | 67 | | | $ | (426) | | | $ | 52 | | | $ | (723) | |
Recognized gains and losses, net 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. Recognized gains (losses) attributable to these agreements, and thus excluded from the totals in the table above, was $21 million and $(1) million for the three and six months ended June 30, 2023, respectively, and $151 million and $279 million for the three and six month periods ended June 30, 2022, respectively.
•For the three and six months ended June 30, 2023, net realized and unrealized gains (losses) on fixed maturity available-for-sale securities, equity securities and other invested assets is primarily the result of realized losses on fixed maturity available-for-sale securities, partially offset by and mark-to-market gains on our equity securities and realized gains on other invested assets.
•For the three and six months ended June 30, 2022, net realized and unrealized gains (losses) on fixed maturity available-for-sale securities, equity securities and other invested assets is primarily the result of mark-to-market losses on our equity securities and realized losses on fixed maturity 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 for the three and six months ended June 30, 2023 and June 30, 2022:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended | | Six months ended |
| June 30, 2023 | | June 30, 2022 | | June 30, 2023 | | June 30, 2022 |
| (In millions) |
Call options: | | | | | | | |
Realized (losses) gains | $ | (68) | | | $ | (41) | | | $ | (159) | | | $ | 4 | |
Change in unrealized (losses) gains | 166 | | | (354) | | | 312 | | | (713) | |
Futures contracts: | | | | | | | |
(Losses) gains on futures contracts expiration | 3 | | | (4) | | | 6 | | | (2) | |
Change in unrealized gains (losses) | (2) | | | (4) | | | (1) | | | (3) | |
Foreign currency forward: | | | | | | | |
(Losses) gains on foreign currency forward | — | | | 9 | | | (1) | | | 12 | |
Total net change in fair value | $ | 99 | | | $ | (394) | | | $ | 157 | | | $ | (702) | |
| | | | | | | |
Annual Point-to-Point Change in S&P 500 Index during the periods | 8 | % | | (16) | % | | 16 | % | | (21) | % |
•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.
The average index credits to policyholders are as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended | | Six months ended |
| June 30, 2023 | | June 30, 2022 | | June 30, 2023 | | June 30, 2022 |
Average Crediting Rate | 1 | % | | 1 | % | | 1 | % | | 2 | % |
S&P 500 Index: | | | | | | | |
Point-to-point strategy | 1 | % | | 1 | % | | 1 | % | | 2 | % |
Monthly average strategy | 1 | % | | 3 | % | | — | % | | 3 | % |
Monthly point-to-point strategy | — | % | | — | % | | — | % | | 1 | % |
3 year high water mark | 7 | % | | 9 | % | | 10 | % | | 12 | % |
•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 F&G 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:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended | | Six months ended |
| June 30, 2023 | | June 30, 2022 | | June 30, 2023 | | June 30, 2022 |
| (In millions) |
PRT agreements | $ | 488 | | | $ | — | | | $ | 754 | | | $ | 532 | |
FIA/IUL market related liability movements | 119 | | | (555) | | | 488 | | | (1,114) | |
Index credits, interest credited & bonuses | 170 | | | 148 | | | 304 | | | 354 | |
Other changes in policy reserves | 40 | | | 30 | | | 83 | | | 54 | |
Total benefits and other changes in policy reserves | $ | 817 | | | $ | (377) | | | $ | 1,629 | | | $ | (174) | |
•PRT agreements increased for the three and six months ended June 30, 2023 compared to the three and six months ended June 30, 2022, reflecting higher PRT transactions during the periods and are subject to fluctuation period to period.
•The FIA/IUL market related liability movements during the three and six months ended June 30, 2023 and 2022, respectively, are mainly driven by changes in the equity markets, non-performance spreads, and risk free rates during the periods. The change in risk free rates and non-performance spreads (decreased) increased the FIA market related liability by $(59) million and $(253) million during the three months ended June 30, 2023 and 2022, respectively. The change in risk free rates and non-performance spreads (decreased) increased the FIA market related liability by $6 million and $(559) million during the six months ended June 30, 2023 and 2022, respectively. The remaining changes in market value of the market related liability movements for all periods was driven by equity market impacts. See “Revenues — Recognized gains and (losses), net” 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 first quarter of 2016,2023, based on increases in interest rates and pricing changes, we revised our loss provisionupdated certain FIA assumptions used to calculate the fair value of the embedded derivative component within contractholder funds. These changes resulted in an increase in contractholder funds of $102 million.
•Index credits, interest credited & bonuses for the three months ended June 30, 2023, were higher compared to the three months ended June 30, 2022, and primarily reflected higher amounts for PRT, based the growth in the portfolio, and fixed rate annuities, partially offset by lower index credits on FIA policies as a result of market movement during the respective periods. Index credits, interest credited & bonuses for the six months ended June 30, 2023, were lower compared to 5.0% from 5.5% based upon an analysisthe six months ended June 30, 2022, and primarily reflected lower index credits on FIA policies as a result of historical ultimate loss ratios,market movement during the reduced volatilityrespective periods partially offset by higher amounts for PRT and fixed rate annuities. Refer to average policyholder index discussion above for details on drivers.
Market Risk Benefit Losses
Below is a summary of developmentmarket risk benefit losses:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended | | Six months ended |
| June 30, 2023 | | June 30, 2022 | | June 30, 2023 | | June 30, 2022 |
| (In millions) |
Market risk benefits (gains) losses | $ | (30) | | | $ | (189) | | | $ | 29 | | | $ | (119) | |
•Market risk benefits (gains) losses is primarily driven by attributed fees collected, effects of those historical ultimate loss ratios,market related movements (including changes in equity markets and lower policy year loss ratiosrisk-free rates), actual policyholder behavior as compared with expected and changes in recent years.assumptions during the periods. Changes in market risk benefit (gains) losses for the three and six months ended June 30, 2023, compared to the three and six months ended June 30, 2022, primarily reflect a favorable GMWB utilization assumption change in 2022, less favorable market related movements and higher attributed fees. In addition, actual policyholder behavior for the three and six months ended June 30, 2023 was more in line with expected, as compared to the three and six months ended June 30, 2022, resulting in a favorable change to the market risk benefit (gains) losses.
Depreciation and OtherAmortization
The FNF Group CorporateBelow is a summary of the major components included in depreciation and amortization:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended | | | Six months ended |
| June 30, 2023 | | June 30, 2022 | | | June 30, 2023 | | June 30, 2022 |
| (In millions) |
Amortization of VOBA, DAC and DSI | $ | 97 | | | $ | 70 | | | | $ | 179 | | | $ | 139 | |
| | | | | | | | |
| | | | | | | | |
Amortization of other intangible assets and other depreciation | 7 | | | 10 | | | | 15 | | | 17 | |
Total depreciation and amortization | $ | 104 | | | $ | 80 | | | | $ | 194 | | | $ | 156 | |
•VOBA, DAC and DSI are amortized on a constant level basis for the grouped contracts over the expected term of the related contracts to approximate straight-line amortization.
•Depreciation and amortization increased for the three and six months ended June 30, 2023 compared to the three and six months ended June 30, 2022 and primarily reflected increased DAC and DSI associated with the growth in business.
Personnel Costs and Other segment consistsOperating Expenses
Below is a summary of personnel costs and other operating expenses: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended | | | Six months ended |
| | June 30, 2023 | | June 30, 2022 | | | June 30, 2023 | | June 30, 2022 |
| | (In millions) |
Personnel costs | | 56 | | | 34 | | | | $ | 109 | | | $ | 64 | |
Other operating expenses | | 33 | | | 31 | | | | 69 | | | 49 | |
Total personnel costs and other operating costs | | $ | 89 | | | $ | 65 | | | | $ | 178 | | | $ | 113 | |
| | | | | | | | | |
| | | | | | | | | |
•Personnel costs and other operating expenses for the three and six months ended June 30, 2023 were higher compared to the three and six months ended June 30, 2022, and primarily reflect headcount growth to support higher volumes and strategic growth capabilities.
Other Items Affecting Net Earnings
Income Tax (Benefit) Expense
Below is a summary of the operationsmajor components included in income tax (benefit) expense:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended | | Six months ended |
| June 30, 2023 | | June 30, 2022 | | June 30, 2023 | | June 30, 2022 |
| (Dollars in millions) |
Income (loss) before taxes | $ | 163 | | | $ | 482 | | | $ | (40) | | | $ | 827 | |
| | | | | | | |
Income tax expense (benefit) before valuation allowance | 31 | | | 97 | | | (14) | | | 165 | |
Change in valuation allowance | 2 | | | — | | | 39 | | | 38 | |
Federal income tax expense | $ | 33 | | | $ | 97 | | | $ | 25 | | | $ | 203 | |
Effective rate | 20 | % | | 20 | % | | (63) | % | | 25 | % |
•Income tax expense for the three months ended June 30, 2023 was $33 million, compared to income tax expense of the parent holding company, certain other unallocated corporate overhead expenses, and other smaller real estate and insurance related operations.
The FNF Group Corporate and Other segment generated revenues of $114 million and $83$97 million for the three months ended SeptemberJune 30, 2017 and 2016, respectively, and $3292022. The effective tax rate was 20% for both periods. The decrease in income tax expense quarter over quarter is primarily related to the decrease in pre-tax income.
•Income tax expense for the six months ended June 30, 2023 was $25 million, and $201compared to income tax expense of $203 million for the ninesix months ended SeptemberJune 30, 20172022. The effective tax rate was (63)% and 2016,25% for the six months ended June 30, 2023 and June 30, 2022, respectively. The revenuedecrease in all periods represents revenue generated by our real estate brokerage subsidiaries and other real estateincome tax expense period over period is primarily related companies offset by the elimination of certain revenues between segments. The increase of $31 million, or 37%, in the three-month period and the increase of $128 million, or 64%, in the nine-month period are primarily attributable to the acquisitiondecrease in pre-tax income.
Investment Portfolio
The types of Commissions, Inc. ("CINC") and to revenue growth and acquisitions by Pacific Union, a luxury real estate broker based in Californiaassets in which we have a 66%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 and balance risk across diverse asset classes and is primarily invested in high quality fixed income securities.
As of June 30, 2023 and December 31, 2022, the fair value of our investment portfolio was approximately $46 billion and $41 billion, respectively, and was divided among the following asset classes and sectors:
| | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2023 | | December 31, 2022 |
| Fair Value | | Percent | | Fair Value | | Percent |
| | | | | | | |
Fixed maturity securities, available for sale: | (Dollars in millions) |
United States Government full faith and credit | $ | 211 | | | — | % | | $ | 32 | | | — | % |
United States Government sponsored entities | 37 | | | — | % | | 42 | | | — | % |
United States municipalities, states and territories | 1,558 | | | 3 | % | | 1,410 | | | 3 | % |
Foreign Governments | 170 | | | — | % | | 148 | | | — | % |
Corporate securities: | | | | | | | |
Finance, insurance and real estate | 6,222 | | | 14 | % | | 5,085 | | | 12 | % |
Manufacturing, construction and mining | 893 | | | 2 | % | | 737 | | | 2 | % |
Utilities, energy and related sectors | 2,180 | | | 5 | % | | 2,275 | | | 6 | % |
Wholesale/retail trade | 2,065 | | | 5 | % | | 2,008 | | | 5 | % |
Services, media and other | 3,406 | | | 7 | % | | 2,794 | | | 7 | % |
Hybrid securities | 677 | | | 1 | % | | 705 | | | 2 | % |
Non-agency residential mortgage-backed securities | 1,974 | | | 4 | % | | 1,479 | | | 4 | % |
Commercial mortgage-backed securities | 3,949 | | | 9 | % | | 3,036 | | | 7 | % |
Asset-backed securities | 8,057 | | | 18 | % | | 7,245 | | | 18 | % |
Collateral loan obligations ("CLO") | 4,783 | | | 10 | % | | 4,222 | | | 10 | % |
Total fixed maturity available for sale securities | 36,182 | | | 78 | % | | 31,218 | | | 76 | % |
Equity securities (a) | 756 | | | 2 | % | | 823 | | | 2 | % |
Limited partnerships: | | | | | | | |
Private equity | 1,175 | | | 3 | % | | 1,129 | | | 3 | % |
Real assets | 435 | | | 1 | % | | 431 | | | 1 | % |
Credit | 988 | | | 2 | % | | 867 | | | 2 | % |
Limited Partnerships | $ | 2,598 | | | 6 | % | | $ | 2,427 | | | 6 | % |
Commercial mortgage loans | 2,144 | | | 5 | % | | 2,083 | | | 5 | % |
Residential mortgage loans | 2,377 | | | 5 | % | | 1,892 | | | 5 | % |
Other (primarily derivatives and company owned life insurance) | 1,419 | | | 3 | % | | 809 | | | 2 | % |
Short term investments | 347 | | | 1 | % | | 1,556 | | | 4 | % |
Total investments | $ | 45,823 | | | 100 | % | | $ | 40,808 | | | 100 | % |
(a) Includes investment grade non-redeemable preferred stocks ($607 million and $672 million as of June 30, 2023 and December 31, 2022, respectively). |
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.
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 interest.of securities to the SVO when such securities are eligible for regulatory filings. The increase inSVO conducts credit analysis on these securities for the nine-month period was also driven by a $15 million increase related to recording one additional monthpurpose of results of operations during the second quarter of 2017 for our real estate brokerages in order to catch up their results which were previously reported on a one-month lag.
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 NAIC published comparison of NRSRO ratings to NAIC designations.
Other operating expensesThe NAIC determines ratings for non-agency Residential Mortgage Backed Securities (“RMBS”) and CMBS using modeling that estimates security level expected losses under a variety of economic scenarios. For such assets issued prior to January 1, 2013, an insurer’s amortized cost basis in applicable assets can impact the FNF Group Corporate and Other segment were $95 million and $60 million forassigned rating. In the three months ended September 30, 2017 and 2016, respectively, and $270 million and $152 million fortables below, we present the nine months ended September 30, 2017 and 2016, respectively. Both periods reflect expenses at our real estate brokerage subsidiaries and other real estate related companies. The increaserating of $35 million, or 58%, in the three-month period ended September 30, 2017structured securities based on ratings from the corresponding 2016 periodNAIC 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.
The following table summarizes the credit quality by NRSRO rating, or NAIC designation equivalent, of our fixed income portfolio at June 30, 2023 and December 31, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | June 30, 2023 | | | December 31, 2022 | | | | |
NRSRO Rating | NAIC Designation | | | Fair Value | | Fair Value Percent | | | | Fair Value | | Fair Value Percent | | | | | | | | |
| | | (Dollars in millions) | | | | | | | | |
AAA/AA/A | 1 | | | $ | 23,055 | | | 64 | % | | | | $ | 18,681 | | | 60 | % | | | | | | | | |
BBB | 2 | | | 11,261 | | | 31 | % | | | | 10,737 | | | 34 | % | | | | | | | | |
BB | 3 | | | 1,531 | | | 4 | % | | | | 1,425 | | | 5 | % | | | | | | | | |
B | 4 | | | 187 | | | 1 | % | | | | 236 | | | 1 | % | | | | | | | | |
CCC | 5 | | | 69 | | | — | % | | | | 67 | | | — | % | | | | | | | | |
CC or lower | 6 | | | 79 | | | — | % | | | | 72 | | | — | % | | | | | | | | |
Total | | | | $ | 36,182 | | | 100 | % | | | | $ | 31,218 | | | 100 | % | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Investment Industry Concentration
The tables below present the increasetop ten industry categories of $118 million, or 78%, inour fixed maturity and equity securities including the nine-month period ended Septemberfair value and percent of total fixed maturity and equity securities fair value as of June 30, 2017 from the corresponding 2016 period are primarily attributable to the acquisition of CINC2023 and growth and acquisitions at Pacific Union. The increase in the nine-month period was also driven by a $14 million increase related to recording one additional month of results of operations in the 2017 period forDecember 31, 2022. Effective January 1, 2023, we updated our real estate brokerages in order to catch up their results which were previously reported on a one-month lag.
Interest expense was $11 million and $14 million for the three months ended September 30, 2017 and 2016, respectively, and $39 million and $47 million for the nine months ended September 30, 2017 and 2016, respectively. The decrease is primarily attributable to decreased interest on our convertible Notes resulting from redemptions in the 2017 periods.
This segment generated pretax losses of $20 million and $12 million for the three months ended September 30, 2017 and 2016, respectively, and $63 million and $52 million, for the nine months ended September 30, 2017 and 2016, respectively. The increased losses are attributable to the factors discussed above.
Asindustry classifications as a result of a change in our investment accounting software and related service providers. Our investment strategy has remained consistent and our portfolio mix has not materially changed. The December 31, 2022 table was updated to reflect a consistent presentation with the BK Distribution,June 30, 2023 classifications:
| | | | | | | | | | | | | | | | |
| | June 30, 2023 | | |
Top 10 Industry Concentration | | Fair Value (In millions) | | Percent of Total Fair Value | | |
ABS Other | | $ | 8,057 | | | 22 | % | | |
CLO securities | | 4,783 | | | 13 | % | | |
Commercial mortgage backed securities | | 3,949 | | | 11 | % | | |
Diversified financial services | | 2,906 | | | 8 | % | | |
Banking | | 2,116 | | | 6 | % | | |
Whole loan collateralized mortgage obligations | | 1,685 | | | 5 | % | | |
Municipal | | 1,558 | | | 4 | % | | |
Insurance | | 1,555 | | | 4 | % | | |
Electric | | 1,067 | | | 3 | % | | |
Telecommunications | | 598 | | | 2 | % | | |
Total | | $ | 28,274 | | | 78 | % | | |
| | | | | | |
| | December 31, 2022 | | |
Top 10 Industry Concentration | | Fair Value (In millions) | | Percent of Total Fair Value | | |
ABS Other | | $ | 7,245 | | | 23 | % | | |
CLO securities | | 4,222 | | | 13 | % | | |
Whole loan collateralized mortgage backed 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 | % | | |
| | | | | | |
The amortized cost and fair value of fixed maturity AFS securities by contractual maturities as of June 30, 2023 and December 31, 2022, are shown below. Actual maturities may differ from contractual maturities because issuers may have the financial resultsright to call or prepay obligations.
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2023 | | December 31, 2022 | | |
| Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value | | | | |
Corporate, Non-structured Hybrids, Municipal and U.S. Government securities: | (In millions) | | | | |
Due in one year or less | $ | 227 | | | $ | 222 | | | $ | 124 | | | $ | 123 | | | | | |
Due after one year through five years | 3,116 | | | 2,968 | | | 2,193 | | | 2,059 | | | | | |
Due after five years through ten years | 2,065 | | | 1,862 | | | 1,840 | | | 1,633 | | | | | |
Due after ten years | 15,046 | | | 12,330 | | | 14,417 | | | 11,379 | | | | | |
Subtotal | $ | 20,454 | | | $ | 17,382 | | | $ | 18,574 | | | $ | 15,194 | | | | | |
Other securities, which provide for periodic payments: | | | | | | | | | | | |
Asset-backed securities | $ | 13,492 | | | $ | 12,840 | | | $ | 12,209 | | | $ | 11,467 | | | | | |
| | | | | | | | | | | |
Commercial-mortgage-backed securities | 4,307 | | | 3,949 | | | 3,309 | | | 3,036 | | | | | |
| | | | | | | | | | | |
Residential mortgage-backed securities | 2,121 | | | 2,011 | | | 1,631 | | | 1,521 | | | | | |
Subtotal | $ | 19,920 | | | $ | 18,800 | | | $ | 17,149 | | | $ | 16,024 | | | | | |
Total fixed maturity available-for-sale securities | $ | 40,374 | | | $ | 36,182 | | | $ | 35,723 | | | $ | 31,218 | | | | | |
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 Black Knight have been reclassifiedsensitivity to discontinued operations forinterest rates, positive convexity to prepayment rates and correlation between the threeprice of the securities and nine months ended September 30, 2017the unfolding recovery of the housing market.
The fair value of our investments in subprime securities and 2016. Earnings from discontinued operations were $31Alt-A RMBS securities was $36 million and $17$53 million for the three months ended Septemberas of June 30, 2017 and 2016,2023, respectively, and $59$40 million and $54 million as of December 31, 2022, respectively. As of June 30, 2023 and December 31, 2022 approximately 94% and 91%, 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 of June 30, 2023, the CLO and ABS positions were trading at a net unrealized loss position of $130 million and $515 million, respectively. As of December 31, 2022, the CLO and ABS positions were trading at a net unrealized loss position of $236 million and $499 million, respectively.
The following table summarizes the credit quality by NRSRO rating, or NAIC designation equivalent, of our AFS ABS portfolio (dollars in millions) at June 30,2023 and December 31, 2022.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | June 30, 2023 | | December 31, 2022 |
| | Fair Value | | Percent | | Fair Value | | Percent |
NRSRO Rating | NAIC Designation | | | | | | | |
AAA/AA/A | 1 | $ | 6,247 | | | 77% | | $ | 5,570 | | | 77% |
BBB | 2 | 1,365 | | 17% | | 1,232 | | 17% |
BB | 3 | 366 | | 5% | | 344 | | 5% |
B | 4 | 47 | | 1% | | 72 | | 1% |
CCC | 5 | 8 | | —% | | 9 | | —% |
CC and lower | 6 | 24 | | —% | | 18 | | —% |
Total | | $ | 8,057 | | | 100% | | $ | 7,245 | | | 100% |
The following table summarizes the credit quality by NRSRO rating, or NAIC designation equivalent, of our AFS CLO portfolio (dollars in millions) at June 30, 2023 and December 31, 2022.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | June 30, 2023 | | December 31, 2022 |
| | Fair Value | | Percent | | Fair Value | | Percent |
NRSRO Rating | NAIC Designation | | | | | | | |
AAA/AA/A | 1 | $ | 2,968 | | | 62% | | $ | 2,678 | | | 64% |
BBB | 2 | 1,374 | | 29% | | 1,225 | | 29% |
BB | 3 | 384 | | 8% | | 256 | | 6% |
B | 4 | 19 | | —% | | 19 | | —% |
CCC | 5 | — | | —% | | 9 | | —% |
CC and lower | 6 | 38 | | 1% | | 35 | | 1% |
Total | | $ | 4,783 | | | 100% | | $ | 4,222 | | | 100% |
Municipal Bond Exposure
Our municipal bond exposure is a combination of general obligation bonds (fair value of $232 million and $188 million and an amortized cost of $269 million and $231 million as of June 30, 2023 and December 31, 2022, respectively) and special revenue bonds (fair value of $1,324 million and $1,017 million and an amortized cost of $1,522 million and $1,248 million as of June 30, 2023 and December 31, 2022, respectively).
Across all municipal bonds, the largest issuer represented 5% and 6% of the category as of June 30, 2023 and December 31, 2022, respectively, with less than 1% of the entire portfolio rated NAIC 1. Our focus within municipal bonds is on NAIC 1 rated instruments, and 97% of our municipal bond exposure is rated NAIC 1 as of June 30, 2023.
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 June 30, 2023 and December 31, 2022, 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 55% and 57%, respectively. See Note D Investments to the unaudited Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for additional information on our CMLs, including our distribution by property type, geographic region and LTV and DSC ratios.
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 ninecarrying value is reduced to the fair value of the underlying collateral, net of estimated costs to obtain and sell at the point of foreclosure. At June 30, 2023, we had one CML that was delinquent in principal or interest payments and none in the process of foreclosure. As of December 31, 2022, we had one CML that was delinquent in principal or interest payments or in process of foreclosure.
Residential Mortgage Loans
F&G's RMLs are closed end, amortizing loans and 100% of the properties are in the United States. F&G diversifies its RML portfolio by state to attempt to reduce concentration risk. RMLs have a primary credit quality indicator of either a performing or nonperforming loan. F&G defines non-performing 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 D Investments to the unaudited Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for additional information on our RMLs.
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 June 30, 2023 and December 31, 2022, were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2023 |
| Number of securities | | Amortized Cost | | Allowance for Expected Credit Losses | | Unrealized Losses | | Fair Value |
Fixed maturity securities, available for sale: | (In millions) |
United States Government full faith and credit | 12 | | | $ | 67 | | | $ | — | | | $ | (2) | | | $ | 65 | |
United States Government sponsored agencies | 57 | | | 34 | | | — | | | (4) | | | 30 | |
United States municipalities, states and territories | 193 | | | 1,588 | | | — | | | (246) | | | 1,342 | |
Foreign Governments | 64 | | | 202 | | | — | | | (41) | | | 161 | |
Corporate securities: | | | | | | | | | |
Finance, insurance and real estate | 805 | | | 6,591 | | | — | | | (858) | | | 5,733 | |
Manufacturing, construction and mining | 129 | | | 1,002 | | | — | | | (163) | | | 839 | |
Utilities, energy and related sectors | 356 | | | 2,558 | | | — | | | (532) | | | 2,026 | |
Wholesale/retail trade | 388 | | | 2,311 | | | — | | | (444) | | | 1,867 | |
Services, media and other | 497 | | | 3,787 | | | — | | | (770) | | | 3,017 | |
Hybrid securities | 44 | | | 725 | | | — | | | (74) | | | 651 | |
Non-agency residential mortgage-backed securities | 316 | | | 1,759 | | | (5) | | | (110) | | | 1,644 | |
Commercial mortgage-backed securities | 527 | | | 3,617 | | | (15) | | | (345) | | | 3,257 | |
Asset-backed securities | 1,133 | | | 11,202 | | | (6) | | | (710) | | | 10,486 | |
Total fixed maturity available for sale securities | 4,521 | | | 35,443 | | | (26) | | | (4,299) | | | 31,118 | |
Equity securities | 49 | | | 729 | | | — | | | (130) | | | 599 | |
Total investments | 4,570 | | | $ | 36,172 | | | $ | (26) | | | $ | (4,429) | | | $ | 31,717 | |
| | | | | | | | | |
| December 31, 2022 |
| Number of securities | | Amortized Cost | | Allowance for Expected Credit Losses | | Unrealized Losses | | Fair Value |
Fixed maturity securities, available for sale: | (In millions) |
United States Government full faith and credit | 6 | | | $ | 34 | | | $ | — | | | $ | (2) | | | $ | 32 | |
United States Government sponsored agencies | 58 | | | 39 | | | — | | | (4) | | | 35 | |
United 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 | |
The gross unrealized loss position on the fixed maturity AFS fixed and equity portfolio was $4,429 million and $4,744 million as of June 30, 2023 and December 31, 2022, respectively. Most components of the portfolio exhibited price depreciation caused by lower treasury rates and spread compression. The total amortized cost of all securities in an unrealized loss position was $36,172 million and $34,164 million as of June 30, 2023 and December 31, 2022, respectively. The average market value/book value of the investment category with the largest unrealized loss position was 87% for Finance, insurance and real estate as of June 30, 2023. In the aggregate, Finance, insurance and real estate represented 19% of the total unrealized loss position as of June 30, 2023. 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 of December 31, 2022. In aggregate, finance, insurance and real estate represented 18% of the total unrealized loss position as of December 31, 2022.
The amortized cost and fair value of fixed maturity AFS securities under watch list analysis and the number of months ended Septemberin a loss position with investment grade securities (NRSRO rating of BBB/Baa or higher) as of June 30, 20172023 and 2016,December 31, 2022, were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2023 |
| Number of securities | | Amortized Cost | | Fair Value | | Allowance for Credit Loss | | Gross Unrealized Losses |
Investment grade: | (Dollars in millions) |
Less than six months | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
Six months or more and less than twelve months | 5 | | | 12 | | | 11 | | | — | | | (1) | |
Twelve months or greater | 78 | | | 858 | | | 573 | | | — | | | (285) | |
Total investment grade | 83 | | | 870 | | | 584 | | | — | | | (286) | |
| | | | | | | | | |
Below investment grade: | | | | | | | | | |
Less than six months | 2 | | | 10 | | | 9 | | | — | | | (1) | |
Six months or more and less than twelve months | — | | | — | | | — | | | — | | | — | |
Twelve months or greater | 9 | | | 67 | | | 55 | | | — | | | (12) | |
Total below investment grade | 11 | | | 77 | | | 64 | | | — | | | (13) | |
Total | 94 | | | $ | 947 | | | $ | 648 | | | $ | — | | | $ | (299) | |
| | | | | | | | | |
| December 31, 2022 |
| Number of securities | | Amortized Cost | | Fair Value | | Allowance for Credit Loss | | Gross Unrealized Losses |
Investment grade: | (Dollars in Millions) |
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) | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
Expected Credit Losses and Watch List
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.
At June 30, 2023, our watch list included 88 securities in an unrealized loss position with an amortized cost of $947 million, no allowance for credit loss, unrealized losses of $298 million and a fair value of $648 million.
At December 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.
The watch list excludes structured securities as we have separate processes to evaluate the credit quality on the structured securities.
There were 59 and 64 structured securities with a fair value of $254 million and $162 million to which we had potential credit exposure as of June 30, 2023 and December 31, 2022, respectively. ReferOur analysis of these structured securities, which included cash flow testing, resulted in allowances for expected credit losses of $32 million and $16 million as of June 30, 2023 and December 31, 2022, respectively.
Exposure to Sovereign Debt and Certain Other Exposures
Our investment portfolio had an immaterial amount of direct exposure to European sovereign debt as of June 30, 2023 and December 31, 2022, respectively. We have no exposure to investments in Russia or Ukraine 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 K Discontinued Operations ofD Investments to the unaudited Condensed Consolidated Financial Statements included in Item 1 of Part I of this Quarterly Report on Form 10-Q.
AFS Securities
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 of June 30, 2023 and December 31, 2022, refer to Note D Investments to the unaudited Condensed Consolidated Financial Statements included in Item 1 of Part I of this Quarterly Report on Form 10-Q.
Concentrations of Financial Instruments
For certain information regarding our concentrations of financial instruments, refer to Note D Investments to the unaudited Condensed Consolidated Financial Statements included in Item 1 of Part I of this Quarterly Report on Form 10-Q.
There have been no other material changes in the concentrations of financial instruments described in our Annual Report on Form 10-K for further detailsthe year ended December 31, 2022.
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 as U.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 term Treasury securities, bank deposits and commercial paper rated A1/P1, which are included in Cash and cash equivalents in the accompanying unaudited Condensed Consolidated Balance Sheets.
See Note E Derivative Financial Instruments to the unaudited Condensed Consolidated Financial Statements included in Item 1 of Part I of this Quarterly Report on Form 10-Q for additional information regarding our derivatives and our exposure to credit loss on call options.
Corporate and Other
The Corporate and Other segment consists of the resultsoperations of Black Knight.
Restaurant Groupthe parent holding company 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 fromof operations of our Restaurant GroupCorporate and Other segment:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended June 30, | | Six months ended June 30, |
| 2023 | | 2022 | | 2023 | | 2022 |
| | | |
Revenues: | (In millions) |
| | | | | | | |
| | | | | | | |
Escrow, title-related and other fees | $ | 55 | | | $ | 9 | | | $ | 99 | | | $ | 40 | |
Interest and investment income | 14 | | | 3 | | | 25 | | | 3 | |
Recognized gains and losses, net | (33) | | | (1) | | | (35) | | | 2 | |
Total revenues | 36 | | | 11 | | | 89 | | | 45 | |
Expenses: | | | | | | | |
Personnel costs | 43 | | | (16) | | | 69 | | | 1 | |
| | | | | | | |
Other operating expenses | 31 | | | 17 | | | 59 | | | 44 | |
Depreciation and amortization | 8 | | | 6 | | | 15 | | | 12 | |
| | | | | | | |
Interest expense | 18 | | | 22 | | | 38 | | | 44 | |
Total expenses | 100 | | | 29 | | | 181 | | | 101 | |
Loss from continuing operations, before income taxes and equity in earnings of unconsolidated affiliates | $ | (64) | | | $ | (18) | | | $ | (92) | | | $ | (56) | |
|
| | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
| (In millions) |
Revenues: | | | | | | | |
Total restaurant revenue | $ | 269 |
| | $ | 273 |
| | $ | 830 |
| | $ | 858 |
|
Realized gains and losses, net | (3 | ) | | (1 | ) | | (4 | ) | | (4 | ) |
Total revenues | 266 |
| | 272 |
| | 826 |
| | 854 |
|
Expenses: |
| |
| |
| |
|
Personnel costs | 13 |
| | 13 |
| | 39 |
| | 40 |
|
Cost of restaurant revenue | 243 |
| | 237 |
| | 728 |
| | 727 |
|
Other operating expenses | 16 |
| | 13 |
| | 46 |
| | 50 |
|
Depreciation and amortization | 11 |
| | 11 |
| | 33 |
| | 31 |
|
Interest expense | 2 |
| | 2 |
| | 5 |
| | 4 |
|
Total expenses | 285 |
| | 276 |
| | 851 |
| | 852 |
|
(Loss) earnings from continuing operations before income taxes | $ | (19 | ) | | $ | (4 | ) | | $ | (25 | ) | | $ | 2 |
|
The revenue in the Corporate and Other segment represents revenue generated by our non-title real estate technology subsidiaries as well as mark-to-market valuation changes on certain corporate deferred compensation plans.Total revenues forin the Restaurant groupCorporate and Other segment decreased $6increased $25 million, or 2%227%, in the three months ended SeptemberJune 30, 20172023 and decreased $28increased $44 million, or 3%,98% in the ninesix months ended SeptemberJune 30, 2017,2023 from the corresponding periods in 2016.2022. The decrease for the nine month period isincreases are primarily attributable to lower same store salesan increase in valuations associated with our deferred compensation plan assets of approximately $51 million and to a lesser extent,$64 million in the sale ofthree and six months ended June 30, 2023, respectively, and various other immaterial items.
Personnel costs in the Max & Erma's concept in January 2016.
Cost of restaurant revenueCorporate and Other segment increased by $6$59 million, or 3%369%, in the three months ended SeptemberJune 30, 20172023, and increased $1$68 million, or less than 1%,6,800% in the ninesix months ended SeptemberJune 30, 2017,2023 from the corresponding periods in 2016. Cost of restaurant revenue as a percentage of restaurant revenue increased from approximately 87% to 90% and from 85% to 88%2022. The increases in the three and nine months ended September 30, 2017 from2023 periods were primarily attributable to the comparable 2016 periods. The increaseaforementioned increases in cost of restaurant revenue as a percentage of restaurant revenue was primarily driven by reduced operating leveragevaluations associated with lower same store sales,our deferred compensation plan assets, which increased hourly laborboth revenue and personnel costs, and an increase in value promotions offeredvarious other immaterial items.
Other operating expenses in the 2017 periods.
(Loss) earnings from continuing operations before income taxes decreased (loss increased) by $15Corporate and Other segment increased $14 million, or 375%82%, in the three months ended SeptemberJune 30, 2017,2023 and decreased (loss increased) by $27increased $15 million, or 1,350%,34% in the ninesix months ended
September June 30, 20172023 from the corresponding periods in 2016.2022. The decreaseincreases were attributable to various immaterial items.
Interest expense in earnings (increasethe Corporate and Other segment decreased $4 million, or 18%, in losses)the three months ended June 30, 2023 and decreased $6 million or 14%, in the six months ended June 30, 2023 from the corresponding periods in 2022. The decrease was primarily attributable to the factors discussed above.
FNFV Corporate and Other
The FNFV Corporate and Other segment includes our sharelower average debt outstanding in the operations of certain equity investments, including Ceridian; OneDigital, through May 5, 2017, the date it was sold;three and other smaller operations which are not title-related. This segment also includes our Investment Success Incentive Program ("ISIP") which is tied to monetization or liquidity events producing realized or realizable economic gains relating to our investments.
The FNFV Corporate and Other segment generated revenues of $13 million and $47 million for the threesix months ended SeptemberJune 30, 2017 and 2016, respectively, and $387 million and $142 million for2023 from the nine months ended September 30, 2017 and 2016, respectively. The decrease of $34 millioncorresponding periods in the three-month period is primarily attributable to the sale of OneDigital and the exclusion of its results in the 2017 period. The increase of $245 million in the nine-month period is primarily attributable to the gain on sale of One Digital of $276 million, offset by the aforementioned factors driving the decrease in the comparable three-month period.2022.
Other operating expenses were $9 million and $12 million for the three months ended September 30, 2017 and 2016, respectively, and $34 million and $30 million for the nine months ended September 30, 2017 and 2016, respectively.
Personnel costs were $6 million and $29 million for the three months ended September 30, 2017 and 2016, respectively and $97 million and $80 million for the nine months ended September 30, 2017 and 2016, respectively. The decrease in the three-month period is primarily attributable to the sale of OneDigital and the exclusion of its results in the 2017 period. The increase in the nine-month period is primarily attributable to ISIP bonuses related to the sale of OneDigital, acquisitions and growth at OneDigital prior to its sale, and to costs associated with smaller FNFV acquisitions in the current year, offset by the aforementioned decrease in the three-month period.
This segment generated pretax (loss) earnings of $(2) million and $0 million for the three months ended September 30, 2017 and 2016, respectively, and $242 million and $14 million for the nine months ended September 30, 2017 and 2016, respectively. The change in earnings is attributable to the aforementioned changes in earnings and expenses.
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 $0.25$0.45 per share in the thirdsecond quarter of 2017,2023, or approximately $68$121 million to our FNF Group common shareholders. On October 25, 2017,August 8, 2023, our Board of Directors declared cash dividends of $0.27$0.45 per share, payable on DecemberSeptember 29, 2017,2023, to FNF Group common shareholders of record as of DecemberSeptember 15, 2017. 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. Additional uses
As of June 30, 2023, we had cash flow are expected to include acquisitions, stock repurchases and debt repayments.
cash equivalents of $3,136 million, short term investments of $972 million and available capacity under our Revolving Credit Facility of $800 million. 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 existing credit facilities.our Revolving 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 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 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 of December 31, 2016, $2,1492022, $1,442 million of our net assets were restricted from dividend payments without prior approval from the relevant departments of insurance. Effective March 1, 2017, three of the Company’s title insurance underwriters, Fidelity National Title Insurance Company, Chicago Title Insurance Company and Commonwealth Land Title Insurance Company, redomesticated
from their former states of domicile to Florida. In conjunction with the Redomestication, the Company received a special dividend from these title insurance underwriters of $280 million on March 15, 2017. We anticipate that our title insurance subsidiaries will pay or make dividends in the remainder of 20172023 of approximately $153$307 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 FNF Group'sour operations will be used for general corporate purposes including to reinvest in core 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 ninesix months ended SeptemberJune 30, 20172023 and 20162022 totaled $566$3,139 million and $745 million, respectively. The decrease of $179 million is primarily attributable to increased payments for income taxes in the current period of $51 million, the payment of legal settlements of $65 million, increased payments for certain prepaid assets, and unfavorable timing of various payables, partially offset by increased net earnings.
Investing Cash Flows. Our cash provided by (used in) investing activities for the nine months ended September 30, 2017 and 2016 were $1 million and $(292)$1,495 million, respectively. The increase in cash provided by (decreaseoperating activities in cash used in) investing activities2023 of $293$1,644 million from the 2017 period to the 2016 period is primarily attributable to increased net cash inflows associated with the proceedschange in funds withheld from reinsurers of approximately $1,363 million, increased net cash inflows associated with the salechange in future policy benefits of OneDigital of $325 million, a $260 million decrease in spending on acquisitions of businesses, a reduction in investments made in unconsolidated affiliates of $103approximately $91 million and a reduction in spending on fixedreduced net cash outflows associated with the timing of receipts and payments of prepaid assets and payables of $98approximately $631 million, partially offset by a reductionthe decrease in net earnings of approximately $790 million in 2023 and increased net cash outflows associated with the change in reinsurance recoverable of approximately $236 million.
Investing Cash Flows. Our cash flows used in investing activities for the six months ended June 30, 2023 and 2022 were $4,231 million and $5,891 million, respectively. The decrease in cash used in investing activities in 2023 of $1,660 million was primarily attributable to increased cash inflows from net proceeds from sales and maturities of available for saleshort-term investments short term investments,of approximately $3,272 million and cost method investments, netincreased cash inflows from distributions from unconsolidated affiliates of approximately $94 million, partially offset by decreased proceeds from sales, calls and maturities of investment securities of approximately $1,313 million, increased purchases of $489investment securities of approximately $212 million and increased cash outflows associated with acquisitions of approximately $273 million.
Capital Expenditures. Total capital expenditures for property and equipment and capitalized software were $132$69 million and $240$77 million for the nine-month periodssix months ended SeptemberJune 30, 20172023 and 2016, respectively, with the decrease primarily related to the purchase of our corporate headquarters for $71 million in April 2016 and other miscellaneous spending reductions.2022, respectively.
Financing Cash Flows. Our cash flows used inprovided by financing activities for the ninesix months ended SeptemberJune 30, 20172023 and 20162022 were $895$1,942 million and $476$2,462 million, respectively. The increasedecrease in cash used inprovided by financing activities in 2023 of $419$520 million from the 2017 period to the 2016 period iswas primarily attributable to reduced cash inflows from contractholder deposits of approximately $666 million, increased cash outflows from contractholder withdrawals of approximately $336 million, and decreased cash inflows associated with the $87change in secured trust deposits of approximately $215 million, of cash transferred as a resultpartially offset by the issuance of the spin-off of Black Knight, increased net debt principal payments, net of borrowings, of $160 million, an increase in dividends paid of $33 million, payment of premiums to repurchase convertible7.40% F&G Notes of $317$500 million in 2023, and reduced cash outflows associated with the 2017 period, and repurchasespurchase of BKFS stock by Black Knight of $47 million in the 2017 period, offset by a reduction in spending on treasury stock repurchases of $228approximately $292 million.
Financing Arrangements.For a description of our financing arrangements see Note E G Notes Payable included in Item 18 of Part 1II of this Quarterlyour Annual Report on Form 10-K for the year ended December 31, 2022.
Capital Stock Transactions. On August 3, 2021, our Board of Directors approved the 2021 Repurchase Program (the "Repurchase Program") under which is incorporated by reference into this Item 2we may purchase up to 25 million shares of Part I.
Duringour FNF common stock through July 31, 2024. We repurchased 100,000 shares of FNF common stock during the ninesix months ended SeptemberJune 30, 2017,2023 for approximately $4 million, at an average price of $38.45 per share. Subsequent to June 30, 2023 and through market close on August 8, 2023 we have not repurchased additional shares under this program. Since the original commencement of the Repurchase Program, we repurchased $229a total of 16,449,565 FNF common shares for approximately $701 million, at an average price of principal$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 our 4.25% convertible senior notes due August 2018 ("Notes") for $548 million. Asequity and preferred security investments held as of September 30, 2017, we had outstanding Notesany given period end within earnings. Our results of $68 million, net of unamortized debt issuance costs.
Seasonality.Historically, real estate transactions have produced seasonal revenue levels for the real estate industry including title insurers. 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 third calendar quarter has been typically the strongest in terms of revenue primarily due to a higher volume of home sales in the summer months and the fourth quarter is usually also strong due to commercial entities desiring 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.
In our Restaurant Group, average weekly sales per restaurant are typically higher in the first and fourth quarters, and we typically generate a disproportionate share of our earnings from operations in the first and fourth quarters. Holidays, severe weather and other disruptive conditions may impact sales volumes seasonally in some operating regions.future periods is anticipated to be subject to such volatility.
Contractual Obligations.ThereOff-Balance Sheet Arrangements. Other than our unfunded investment commitments discussed below, there have been no significant changes to our long-term contractual obligationsoff-balance sheet arrangements since our Annual Report on Form 10-K for the year ended December 31, 2016, filed on February 27, 2017, other than our entry into2022.
We have unfunded investment commitments as of June 30, 2023 based upon the Equity Commitment Letters with CFCOUtiming of when investments are executed compared to when the actual investments are funded, as described insome investments require that funding occur over a period of months or years. Please refer to Note A Basis of Financial StatementsF Commitments and the extinguishment and restructuring of certain debt as described in Note E Notes PayableContingencies to the unaudited Condensed Consolidated Financial Statements included in Item 1 of Part I of this Quarterly Report.Report on Form 10-Q for additional details on unfunded investment commitments.
Capital Stock Transactions. On February 18, 2016, our Board of Directors approved a new FNFV Group three-year stock repurchase program, effective March 1, 2016, under which we may repurchase up to 15 million shares of FNFV Group common stock through February 28, 2019. Purchases may be made from time to time by us in the open market at prevailing market prices or in privately negotiated transactions. We repurchased 1,491,800 shares under this program during the nine months ended September 30, 2017 for $23 million, or an average of $15.22 per share. Since the original commencement of the program through market close on November 2, 2017, we have repurchased a total of 5,446,800 shares for $68 million, or an average of $12.95 per share, and there are 9,553,200 shares available to be repurchased under this program.
On July 20, 2015, our Board of Directors approved a new three-year stock repurchase program under which we can purchase up to 25 million shares of our FNF Group common stock through July 30, 2018. 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. Since the original commencement of the plan through market close on November 2, 2017, we have repurchased a total of 10,589,000 FNF Group common shares for $372 million, or an average of $35.10 per share, and there are 14,411,000 shares available to be repurchased under this program. We have not made any repurchases under this program in the nine months ended September 30, 2017 or in the subsequent period ended November 2, 2017.
Equity Security and Preferred Stock Investments. Our equity security and preferred stock investments may be subject to significant volatility. Should the fair value of these investments fall below our cost basis and/or the financial condition or prospects of these companies deteriorate, we may determine in a future period that this decline in fair value is other-than-temporary, requiring that an impairment loss be recognized in the period such a determination is made.
Off-Balance Sheet Arrangements.There have been no significant changes to our off-balance sheet arrangements since our Annual Report for the year ended December 31, 2016.
Critical Accounting Policies
There have been no material changes to our critical accounting policies described in our Annual Report for our fiscal year ended December 31, 2016.
Item 3. Quantitative and Qualitative DisclosureDisclosures about Market Risk
There have been no material changes in the market risks described in our Annual Report on Form 10-K for the year ended December 31, 2016.2022.
Item 4. Controls and Procedures
As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended. Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is: (a) recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms; and (b) accumulated and communicated to management, including our principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.
There were no changes in our internal control over financial reporting that occurred during the quarter ended SeptemberJune 30, 20172023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 5. Other Information
During the three months ended June 30, 2023, no director or officer of the Company adopted or terminated a “Rule 10b5-1 trading arrangement” or “non-Rule 10b5-1 trading arrangement,” as each term is defined in Item 408(a) of Regulation S-K.
PART II
Part II: OTHER INFORMATION
Item 1. Legal Proceedings
See discussion of legal proceedings in Note F Commitment and Contingenciesto the unaudited Condensed Consolidated Financial Statements included in Item 1 of Part I of this Quarterly Report on Form 10-Q, which is incorporated by reference into this Item 1 of Part II.
Item 1A. Risk Factors
In addition to the information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the "Risk Factors" disclosed under "Item 1A. Risk Factors" in our Annual Report on Form 10-K, which was filed with the SEC on February 27, 2023. You should be aware that these risk factors and other information may not describe every risk facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.
We adopted Accounting Standards Update (“ASU”) 2018-12, Financial Services-Insurance (Topic 944), Targeted Improvements to the Accounting for Long-Duration Contracts (“ASU 2018-12”) using the full retrospective transition method effective January 1, 2023, with changes applied as of January 1, 2021, also referred to as the transition date. The following updates to Risk Factors relate to the adoption of ASU 2018-12. There have been no other material changes from the Risk Factors previously disclosed in "Item 1A. Risk Factors" in our Annual Report filed with the SEC on February 27, 2023 and hereby incorporated by reference.
ASU 2018-12 requires that VOBA, DAC and DSI be amortized on a constant level basis for the grouped contracts over the expected term of the related contracts to approximate straight-line amortization. Based on this change, we have removed the risk factor previously titled “The pattern of amortizing our VOBA, DAC and DSI balances relies on assumptions and estimates made by management. Changes in these assumptions and estimates could impact our results of operations and financial condition.”
Interest rate fluctuations could adversely affect our business, financial condition, liquidity and results of operations.
Interest rate risk is a significant market risk for us, as our F&G business involves issuing interest rate sensitive obligations backed primarily by investments in fixed income assets. F&G also maintains a portion of the assets in its investment portfolio in floating rate instruments and had executed a variable interest rate Credit Agreement, which are both subject to an element of market risk from changes in interest rates.
Prior to 2022, interest rates had been at or near historical low levels over the preceding several years. A prolonged period of low rates exposes us to the risk of not achieving returns sufficient to meet our earnings targets and/or our contractual obligations. Furthermore, low or declining interest rates may reduce the rate of policyholder surrenders and withdrawals on our life insurance and annuity products, thus increasing the duration of the liabilities, creating asset and liability duration mismatches and increasing the risk of having to reinvest assets at yields below the amounts required to support our obligations. Lower interest rates may also result in decreased sales of certain insurance products, negatively impacting our profitability from new business.
During periods of increasing interest rates, we may offer higher crediting rates on interest-sensitive products, such as universal life insurance and fixed rate annuities, and we may increase crediting rates on in-force products to keep these products competitive. We may be required to accept lower spread income (the difference between the returns we earn on our investments and the amounts we credit to contract holders), thus reducing our profitability, as returns on our portfolio of invested assets may not increase as quickly as current interest rates. Rapidly rising interest rates may also expose us to the risk of financial disintermediation, which is an increase in policy surrenders, withdrawals and requests for policy loans as customers seek to achieve higher returns elsewhere, requiring us to liquidate assets in an unrealized loss position. If we experience unexpected withdrawal activity, we could exhaust our liquid assets and be forced to liquidate other less liquid assets such as limited partnership investments. We may have difficulty selling these investments in a timely manner and/or be forced to sell them for less than we otherwise would have been able to realize, which could have a material adverse effect on our business, financial condition or operating results. We have developed and maintain asset liability management programs and procedures that are, we believe, designed to mitigate interest rate risk by matching asset cash flows to expected liability cash flows. In addition, we assess surrender charges on withdrawals in excess of allowable penalty-free amounts that occur during the surrender charge period. There can be no assurance that actual withdrawals, contract benefits, and maturities will match our estimates. Despite our efforts to reduce the impact of rising interest rates, we may be required to sell assets to raise the cash necessary to respond to an increase in surrenders, withdrawals and loans, thereby realizing capital losses on the assets sold.
Liabilities that are held on our balance sheet at fair value, including embedded derivatives on our FIA and IUL business and MRBs on our FIA and fixed rate annuity business, are sensitive to fluctuations in interest rates. Decreases in interest rates generally would have the impact of increasing the value of these liabilities, which will result in a reduction in our net income. Liabilities for future policyholder benefits are valued using locked-in discount rates, and any changes in interest rates since the inception of those contracts are reflected in OCI. Decreases in interest rates would result in a reduction in our OCI. In addition, certain statutory capital and reserve requirements are based on formulas or models that consider interest rates and a prolonged period of low interest rates may increase the statutory capital we are required to hold as well as the amount of assets we must maintain to support statutory reserves.
Economic conditions, including higher interest rates, could materially adversely affected our business, results of operations and financial condition. However, we cannot predict if it will impact our business, results of operations or financial condition in the future for the forgoing reasons.
Equity market volatility could negatively impact our business.
The estimated cost of providing GMWB riders associated with our annuity products incorporates various assumptions about the overall performance of equity markets over certain time periods. Periods of significant and sustained downturns in equity markets or increased equity volatility could result in an increase in the valuation of the MRB or contractholder funds balance liabilities associated with such products, resulting in a reduction in our revenues and net income.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds |
None
Item 3. Defaults Upon Senior Securities
None.
Item 5. Other Information
None.
Item 6. Exhibits
(a) Exhibits:
| | | | | | | | |
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds |
The following table summarizes repurchases of equity securities by FNFV during the three months ended September 30, 2017:
|
| | | | | | | | | | | | | |
Period | | Total Number of Shares Purchased | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1) | | Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs (2) |
7/1/2017 - 7/31/2017 | | 196,000 |
| | 15.97 |
| | 196,000 |
| | 9,553,200 |
|
8/1/2017 - 8/31/2017 | | — |
| | — |
| | — |
| | 9,553,200 |
|
9/1/2017 - 9/30/2017 | | — |
| | — |
| | — |
| | 9,553,200 |
|
Total | | 196,000 |
| | $ | 15.97 |
| | 196,000 |
|
|
|
| |
(1) | On February 18, 2016, our Board of Directors approved a new FNFV Group three-year stock repurchase program, effective March 1, 2016, under which we may repurchase up to 15 million shares of FNFV Group common stock through February 28, 2019. |
| |
(2) | As of the last day of the applicable month. |
Item 6. Exhibits
(a) Exhibits:
|
| | |
| | |
2.1 | | |
10.1 | | |
| | |
10.2 | | |
| | |
10.3 | | |
| | |
10.4 | | |
| | |
10.5 | | |
| | |
10.6 | | Indenture relating to the 7.400% Senior Notes due 2028, dated as of January 13, 2023, among F&G Annuities & Life, Inc., the guarantors named therein and New BKH Corp. (incorporated by referenceCitibank, N.A., as trustee, filed as Exhibit 4.1 to Exhibit 2.1 to the Registrant’sour Current Report on Form 8-K filed on June 9, 2017)January 13, 2023
|
| | |
2.210.7 | | Agreement and Plan of Merger,First Supplement Indenture relating to the 7.400% Senior Notes due 2028, dated as of June 8, 2017, byJanuary 13, 2023, among F&G Annuities & Life, Inc., the guarantors named therein and among Fidelity National Financial, Inc.Citibank, N.A., New BKH Corp., Black Knight Financial Services, Inc., Black Knight Holdco Corp., New BKH Merger Sub, Inc., and BKFS Merger Sub, Inc. (incorporated by referenceas trustee, filed as Exhibit 4.2 to Exhibit 2.2 to the Registrant’sour Current Report on Form 8-K filed on June 9, 2017)January 13, 2023
|
| | |
10.110.8 | | First Amendment, datedForm of 7.400% Senior Notes due 2028, filed as of February 27, 2017,Exhibit 4.3 to Credit Agreement, dated as of August 19, 2014, among ABRH, LLC, the lenders party thereto, Wells Fargo Bank N.A., as administrative agent, and the other agents party thereto (incorporated by reference to Exhibit 10.1 to the Registrant'sour Current Report on Form 8-K filed on March 2, 2017)January 13, 2023 |
| | |
10.210.9 | | Restated CreditRegistration Rights Agreement relating to the 7.400% Senior Notes due 2028, dated as of April 27, 2017,January 13, 2023, among F&G Annuities & Life, Inc., the guarantors named therein and BofA Securities, Inc., J.P. Morgan Securities LC and RBC Capital Markets, LLC, as representatives of the initial purchasers, filed as Exhibit 10.1 to Existing Credit Agreement, dated as of June 25, 2013, by and among Fidelity National Financial, Inc., a Delaware corporation, as the borrower, Bank of America, N.A., as administrative agent, the other agents party thereto and the financial institutions party thereto as lenders (incorporated by reference to Exhibit 10.2 to the Registrant'sour Current Report on Form 8-K filed on May 2, 2017)January 13, 2023 |
| | |
31.1 | | |
| | |
31.2 | | |
| | |
32.1 | | |
| | |
32.2 | | |
| | |
99.1101.INS | | Inline XBRL Instance Document*
|
| | |
99.2101.SCH | | Inline XBRL Taxonomy Extension Schema Document
|
| | |
101101.CAL | | The following materials from Fidelity National Financial, Inc.'s Quarterly Report on Form 10-Q for the quarter ended September 30, 2017,Inline XBRL Taxonomy Extension Calculation Linkbase Document
|
| | |
101.DEF | | Inline XBRL Taxonomy Extension Definition Linkbase Document
|
| | |
101.PRE | | Inline XBRL Taxonomy Extension Presentation Linkbase Document
|
| | |
101.LAB | | Inline XBRL Taxonomy Extension Label Linkbase Document
|
| | |
104 | | Cover Page Interactive Data File formatted in Extensible Business Reporting Language (XBRL): (i)Inline XBRL and contained in Exhibit 101.
|
| | |
|
(1) A management or compensatory plan or arrangement required to be filed as an exhibit to this report pursuant to Item 601(b)(10)(ii) of Regulation S-K. |
* The instance document does not appear in the Condensed Consolidated Balance Sheets, (ii)interactive data file because its XBRL tags are embedded within the Condensed Consolidated Statements of Earnings, (iii) the Condensed Consolidated Statements of Comprehensive Earnings, (iv) the Condensed Consolidated Statements of Stockholders' Equity, (v) the Condensed Consolidated Statements of Cash Flows, and (vi) the Notes to the Consolidated Financial Statements.inline XBRL document.
|
** Furnished herewith in accordance with Item 601(b)(32) of Regulation S-K.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
| | | | | | | | | | | | | |
Date: | November 2, 2017August 9, 2023 | FIDELITY NATIONAL FINANCIAL, INC. (registrant) | |
| | By: | /s/ Anthony J. Park | |
| | | Anthony J. Park | |
| | | Chief Financial Officer (Principal Financial and Accounting Officer)
| |
EXHIBIT INDEX
|
| | |
| | |
2.1 | |
|
| | |
2.2 | | Agreement and Plan of Merger, dated as of June 8, 2017, by and among Fidelity National Financial, Inc., New BKH Corp., Black Knight Financial Services, Inc., Black Knight Holdco Corp., New BKH Merger Sub, Inc., and BKFS Merger Sub, Inc. (incorporated by reference to Exhibit 2.2 to the Registrant’s Current Report on Form 8-K filed on June 9, 2017)
|
| | |
10.1 | | First Amendment, dated as of February 27, 2017, to Credit Agreement, dated as of August 19, 2014, among ABRH, LLC, the lenders party thereto, Wells Fargo Bank N.A., as administrative agent, and the other agents party thereto (incorporated by reference to Exhibit 10.1 to the Registrant's Current Report on Form 8-K filed on March 2, 2017) |
| | |
10.2 | | Restated Credit Agreement, dated as of April 27, 2017, to Existing Credit Agreement, dated as of June 25, 2013, by and among Fidelity National Financial, Inc., a Delaware corporation, as the borrower, Bank of America, N.A., as administrative agent, the other agents party thereto and the financial institutions party thereto as lenders (incorporated by reference to Exhibit 10.2 to the Registrant's Current Report on Form 8-K filed on May 2, 2017) |
| | |
31.1 | | |
| | |
31.2 | | |
| | |
32.1 | | |
| | |
32.2 | | |
| | |
99.1 | | |
| | |
99.2 | | |
| | |
101 | | The following materials from Fidelity National Financial, Inc.'s Quarterly Report on Form 10-Q for the quarter ended September 30, 2017, formatted in Extensible Business Reporting Language (XBRL): (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Earnings, (iii) the Condensed Consolidated Statements of Comprehensive Earnings, (iv) the Condensed Consolidated Statements of Stockholders' Equity, (v) the Condensed Consolidated Statements of Cash Flows, and (vi) the Notes to the Consolidated Financial Statements.
|