The statements contained in this Quarterly Report on Form 10-Q that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including statements regarding our expectations, hopes, intentions or strategies regarding the future. All forward-looking statements included in this document are based on information available to us on the date hereof, and we assume no obligation to update any such forward-looking statements. It is important to note that our actual results could vary materially from those forward-looking statements contained herein due to many factors, including, but not limited to: the ability of FNF to successfully integrate F&G's operations and employees; the potential impact of the F&G acquisition on relationships, including with employees, suppliers, customers and competitors; changes in general economic, business and political and COVID-19 conditions, including changes in the financial markets; weakness or adverse changes in the level of real estate activity, which may be caused by, among other things, high or increasing interest rates, a limited supply of mortgage funding, a weak
U.S.economy; our potential inability to find suitable acquisition candidates, acquisitions in lines of business that will not necessarily be limited to our traditional areas of focus, or difficulties in consummating and integrating acquisitions; our dependence on distributions from our title insurance underwriters as our main source of cash flow; significant competition that our operating subsidiaries face; compliance with extensive government regulation of our operating subsidiaries; and other risks detailed in the "Statement Regarding Forward-Looking Information," "Risk Factors" and other sections of our Annual Report on Form 10-K (our "Annual Report") for the year ended December 31, 2020and other filings with the SEC. The following discussion should be read in conjunction with our Annual Report. Overview For a description of our business, including descriptions of segments and recent business developments, see the discussion in Note A Basis of Financial Statements in the accompanying unaudited Condensed Consolidated Financial Statements included in Item 1 of Part I of this Report, which is incorporated by reference into this Part I, Item 2. Business Trends and Conditions Title Our Title segment revenue is closely related to the level of real estate activity which includes sales, mortgage financing and mortgage refinancing. Declines in the level of real estate activity or the average price of real estate sales will adversely affect our title insurance revenues. We have found that residential real estate activity is generally dependent on the following factors: •mortgage interest rates; •mortgage funding supply; •housing inventory and home prices; •supply and demand for commercial real estate; and •the strength of the United Stateseconomy, including employment levels. While we cannot predict the severity and duration of the negative impacts related to the outbreak of COVID-19, the most recent forecast of the Mortgage Bankers Association("MBA"), as of July 21, 2021, estimates (actual for fiscal year 2020) the size of the U.S.residential mortgage originations market as shown in the following table for 2020 - 2023 in its "Mortgage Finance Forecast" (in trillions): 2023 2022 2021 2020 Purchase transactions $ 1.8 $ 1.7 $ 1.7 $ 1.4Refinance transactions $ 0.6 $ 0.6 $ 1.9 $ 2.4Total U.S. mortgage originations forecast $ 2.4 $ 2.3 $ 3.6 $ 3.8As of July 21, 2021, the MBA expects residential purchase transactions to steadily increase in 2021 and beyond from 2020 levels. Additionally the MBA expects residential refinance transactions to decrease in 2021 and beyond as interest rates are expected to rise while the supply of refinance candidates decreases. The MBA expects overall mortgage originations to decrease in 2021 and beyond as a result of record refinance originations in 2020. 56 -------------------------------------------------------------------------------- Table of Contents In recent years, total originations have been reflective of a strong residential real estate market driven by increasing home prices and low mortgage interest rates. Mortgage rates rose consistently between 2016 and the beginning of 2019. Concerns over a slowing global economy and the impact of a prolonged trade war resulted in interest rate cuts in the second half of the 2019, which significantly increased refinance transactions and slightly increased purchase transactions when compared to 2018. In the beginning of 2020, refinance and purchase transactions remained strong until the outbreak of COVID-19. On March 11, 2020, the World Health Organizationdeclared that the novel coronavirus or COVID-19 "can be characterized as a pandemic," which is defined as a worldwide spread of a new disease for which most people do not have immunity. On March 15, 2020, the Federal Reservetook emergency action and reduced its benchmark interest rate by a full percentage point to nearly zero. Following this emergency action, average interest rates for a 30-year fixed rate mortgages fell throughout the remainder of the year, bottoming out at 2.65% on January 7, 2021. The outbreak of COVID-19 resulted in significant uncertainty in the economic outlook in the second quarter of 2020, and as a result real estate activity decreased significantly as consumers moved to the sidelines to assess the ongoing impact of COVID-19. However, real estate activity began to rebound in June 2020, with increases in purchase activity and a surge in refinance transactions as a result of historically low interest rates. Strong purchase and refinance activity continued into the first half of 2021. However, the slight widening of credit spreads has resulted in recent increases to mortgage interest rates, which combined with historically low housing inventory and historically high housing prices have resulted in month-over-month decreases in existing-home sales in February through May of 2021, before unexpectedly increasing 1.4% in June of 2021. Mortgage interest rates averaged 3.2% in the second quarter of 2021. Despite the recent increase in interest rates and fluctuation in existing-home sales, the market is still outperforming pre-pandemic levels. Other economic indicators used to measure the health of the U.S.economy, including the unemployment rate and consumer confidence, indicated that the United Stateswas on strong footing prior to the outbreak of COVID-19. However, the impact of COVID-19 reduced the outlook related to these economic indicators in March 2020. According to the U.S. Department of Labor's Bureau of Labor, the unemployment rate was at a historically low 3.5% in February 2020but subsequently rose to a record 14.8% in April 2020before declining to a still-elevated level of 6.7% in December 2020. In 2021, the unemployment rate has continued to fall to 5.9% in June 2021. Additionally, the Conference Board'smonthly Consumer Confidence Index remained at high levels through February 2020before falling as a result of the COVID-19 outbreak. Consumer confidence has since rebounded, and as of June 2021, is at its highest level since the onset of the pandemic. Because commercial real estate transactions tend to be generally driven by supply and demand for commercial space and occupancy rates in a particular area rather than by interest rate fluctuations, we believe that our commercial real estate title insurance business is less dependent on the industry cycles discussed above than our residential real estate title business. Commercial real estate transaction volume is also often linked to the availability of financing. Factors including U.S.tax reform and a shift in U.S.monetary policy have had, or are expected to have, varying effects on availability of financing in the U.S.Lower corporate and individual tax rates and corporate tax-deductibility of capital expenditures have provided increased capacity and incentive for investments in commercial real estate. In recent years, we have experienced strong demand in commercial real estate markets and from 2015 through 2019, we experienced historically high volumes and fee-per-file in our commercial business. In 2020, we experienced decreases in commercial volumes and commercial fee-per-file as a result of the outbreak of COVID-19. In the second half of 2020 and the first quarter of 2021, commercial volumes have continued to recover, but at a slower rate than residential volumes. While COVID-19 will likely have an impact on the timing and volume of commercial real estate transactions in the short term as the logistics of transactions evolve and some buyers move to the sidelines until the pandemic is resolved, we believe that refinance activity will likely remain elevated in response to the pandemic related Federal rate cuts. We continually monitor mortgage origination trends and believe that, based on our ability to produce industry leading operating margins through all economic cycles, we are well positioned to adjust our operations for adverse changes in real estate activity and to take advantage of increased volume when demand increases. Seasonality. Historically, real estate transactions have produced seasonal revenue fluctuations in the real estate industry. The first calendar quarter is typically the weakest quarter in terms of revenue due to the generally low volume of home sales during January and February. The second and third calendar quarters are typically the strongest quarters in terms of revenue, primarily due to a higher volume of residential transactions in the spring and summer months. The fourth quarter is typically strong due to the desire of commercial entities to complete transactions by year-end. We have noted short-term fluctuations through recent years in resale and 57 -------------------------------------------------------------------------------- Table of Contents refinance transactions as a result of changes in interest rates. Due to COVID-19, seasonality deviated from historical patterns in 2020 and we may continue to see deviations in 2021. F&G We acquired F&G on June 1, 2020. The following factors represent some of the key trends and uncertainties that have influenced the development of our F&G segment and its historical financial performance, and we believe these key trends and uncertainties will continue to influence the business and financial performance of our F&G segment in the future. COVID-19 Pandemic While continuously evolving, the COVID-19 pandemic has caused significant economic and financial turmoil in the U.S.and around the world. These conditions may continue in the near term. At this time, it is not possible to estimate the longer term-effects the COVID-19 pandemic could have on our F&G segment or our consolidated financial statements. F&G has seen increased life claims, which have been offset by COVID-19 impacts on our SPIAproducts. However, prolonged COVID-19 deaths may cause additional volatility in the future. Increased economic uncertainty and increased unemployment resulting from the economic impacts of the spread of COVID-19 may result in F&G policyholders seeking sources of liquidity and withdrawing at rates greater than was previously expected. If policyholder lapse and surrender rates significantly exceed expectations, it could have an adverse effect on our F&G segment's financial condition, results of operations, liquidity and cash flows. Such events or conditions could also have an adverse effect on its sales of new policies. F&G is monitoring the impact of COVID-19 on its investment portfolio and the potential for ratings changes caused by the sudden slowdown of economic activity. The extent to which the COVID-19 pandemic impacts our F&G segment's results of operations, financial condition, liquidity or prospects will depend on future developments which cannot be predicted. Market Conditions Market volatility has affected and may continue to affect our business and financial performance in varying ways. Volatility can pressure sales and reduce demand as consumers hesitate to make financial decisions. To enhance the attractiveness and profitability of our products and services, we continually monitor the behavior of our customers, as evidenced by annuitization rates and lapse rates, which vary in response to changes in market conditions. See Item 1A of Part I of our Annual Report on Form 10-K for the year ended December 31, 2020for further discussion of risk factors that could affect market conditions. Interest Rate Environment Some of our products include guaranteed minimum crediting rates, most notably our fixed rate annuities. As of June 30, 2021, the Company's reserves, net of reinsurance, and average crediting rate on our fixed rate annuities were $5.0 billionand 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, 2020for a more detailed discussion of interest rate risk. Aging of the U.S.Population We believe that the aging of the U.S.population will increase the demand for our products. As the "baby boomer" generation prepares for retirement, we believe that demand for retirement savings, growth, and income products will grow. The impact of this growth may be offset to some extent by asset outflows as an increasing percentage of the population begins withdrawing assets to convert their savings into income. Industry Factors and Trends Affecting Our Results of Operations Demographics and macroeconomic factors are increasing the demand for our FIA and IUL products. Over 10,000 people will turn 65 each day in the United Statesover the next 15 years, and according to the U.S.58
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Census Bureau, the proportion of the U.S.population over the age of 65 is expected to grow from 17% in 2020 to 21% in 2035. We operate in the sector of the insurance industry that focuses on the needs of middle-income Americans. The underserved middle-income market represents a major growth opportunity for the Company. As a tool for addressing the unmet need for retirement planning, we believe that many middle-income Americans have grown to appreciate the "sleep at night protection" that annuities such as our FIA products afford. See Item 7 of Part II of our Annual Report on Form 10-K for the year ended December 31, 2020for a more detailed discussion of industry factors and trends affecting our Results of Operations.
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