FIDELITY NATIONAL FINANCIAL : Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

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, 2019 and other filings with the SEC.
The following discussion should be read in conjunction with our Annual Report.
Overview
For a description of our business, including descriptions of segments and recent
business developments, see the discussion under Basis of Financial Statements in
Note A to the Condensed Consolidated Financial Statements included in Item 1 of
Part I of this Report, which is incorporated by reference into this Part I, Item
2.
Business Trends and Conditions
Title
Our Title segment revenue is closely related to the level of real estate
activity which includes sales, mortgage financing and mortgage refinancing.
Declines in the level of real estate activity or the average price of real
estate sales will adversely affect our title insurance revenues.
We have found that residential real estate activity is generally dependent on
the following factors:
•mortgage interest rates;
•mortgage funding supply;
•housing inventory and home prices;
•supply and demand for commercial real estate; and
•the strength of the United States economy, including employment levels.
While the severity and duration of the negative impacts related to the outbreak
of COVID-19 are not yet known, the most recent forecast of the Mortgage Bankers
Association ("MBA"), as of October 21, 2020, estimates (actual for fiscal year
2019) the size of the U.S. residential mortgage originations market as shown in
the following table for 2019 - 2022 in its "Mortgage Finance Forecast" (in
trillions):
                                                                2022       2021       2020       2019
        Purchase transactions                                  $ 1.6      $ 1.5      $ 1.4      $ 1.3
        Refinance transactions                                 $ 0.5      $ 1.0      $ 1.8      $ 1.0
        Total U.S. mortgage originations forecast              $ 2.1      $ 2.5      $ 3.2      $ 2.3



In 2019, total originations were reflective of a strong residential real estate
market driven by increasing home prices and low mortgage interest rates.
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 year which
significantly increased refinance transactions and slightly increased purchase
transactions when compared to 2018. Additionally, existing home sales increased
in each quarter of 2019. Average interest rates on 30-year fixed rate mortgages,
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averaged 4.4% in the first quarter of 2019 but subsequently decreased in the following three quarters to an average of 3.7% in the fourth quarter of 2019.

As of October 21, 2020, the MBA expects residential purchase transactions to
steadily increase in 2020 and beyond from 2019 levels. Additionally the MBA
expects residential refinance transactions to increase in 2020 due to record low
interest rates followed by a decreases in 2021 and 2022 as interest rates are
expected to rise. The MBA expects overall mortgage originations to increase in
2020 followed by a decreases in 2021 and 2022.

On March 11, 2020, the World Health Organization declared that the novel
coronavirus or COVID-19 "can be characterized as a pandemic," which is defined
as a worldwide spread of a new disease for which most people do not have
immunity. On March 15, 2020, the Federal Reserve took emergency action and
reduced its benchmark interest rate by a full percentage point to nearly zero.
Through the nine months ended September 30, 2020, mortgage interest rates
continued to decline to below 3.20%. Concerns over a slowing global economy and
the impact of a prolonged trade war, now combined with the worldwide COVID-19
pandemic, have resulted in significant uncertainty in the economic outlook.
However, existing-home sales climbed month-over-month and year-over-year between
June 2020 and September 2020, showing strong signs of a market turnaround after
three consecutive months of sales declines caused primarily by the ongoing
pandemic, according to the National Association of Realtors.
Other economic indicators used to measure the health of the U.S. economy,
including the unemployment rate and consumer confidence, indicated that the U.S
was on strong footing prior to the outbreak of COVID-19. However, the impact of
COVID-19 reduced the outlook related to these economic indicators in March 2020.
According to the U.S. Department of Labor's Bureau of Labor, the unemployment
rate was at a historically low 3.5% in February 2020 but as of October 2, 2020,
the unemployment rate had risen to 7.9%. Additionally, the Conference Board's
monthly Consumer Confidence Index remained at high levels through February 2020
before falling as a result of the COVID-19 outbreak. As of September 30, 2020,
the Consumer Confidence Index had fallen by 24% from its February 2020 highs.

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 have experienced decreases in commercial volumes and
commercial fee-per-file as a result of the outbreak of COVID-19. 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 recent Federal
rate cuts.
We cannot be certain how the outbreak of COVID-19 and the steps taken to attempt
to mitigate its spread will impact our future results of operations. We
continually monitor mortgage origination trends and believe that, based on our
ability to produce industry leading operating margins through all economic
cycles, we are well positioned to adjust our operations for adverse changes in
real estate activity and to take advantage of increased volume when demand
increases.
See Item 1A of Part II of this Quarterly Report for further discussion risk
factors related to COVID-19.
Seasonality. Historically, real estate transactions have produced seasonal
revenue fluctuations in the real estate industry. The first calendar quarter is
typically the weakest quarter in terms of revenue due to the generally low
volume of home sales during January and February. The second and third calendar
quarters are typically the strongest quarters in terms of revenue, primarily due
to a higher volume of residential transactions in the spring and summer months.
The fourth quarter is typically strong due to the desire of commercial entities
to complete transactions by year-end. Seasonality in 2020 may deviate from
historical patterns due to COVID-19. We have noted short-term fluctuations
through recent years in resale and refinance transactions as a result of changes
in interest rates.
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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.
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 II of this Quarterly Report for further discussion of risk factors that
could affect market conditions.
Interest Rate Environment
Some of our products include guaranteed minimum crediting rates, most notably
our fixed rate annuities. As of September 30, 2020, the Company's reserves, net
of reinsurance, and average crediting rate on our fixed rate annuities were $4.0
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 3 of Part II of this Quarterly Report for a more detailed discussion of
interest rate risk.
Aging of the U.S. Population
We believe that the aging of the U.S. population will increase the demand for
our products. As the "baby boomer" generation prepares for retirement, we
believe that demand for retirement savings, growth, and income products will
grow. The impact of this growth may be offset to some extent by asset outflows
as an increasing percentage of the population begins withdrawing assets to
convert their savings into income.
Industry Factors and Trends Affecting Our Results of Operations
Demographics and macroeconomic factors are increasing the demand for our FIA and
IUL products. Over 10,000 people will turn 65 each day in the United States over
the next 15 years, and according to the U.S. Census Bureau, the proportion of
the U.S. population over the age of 65 is expected to grow from 15% in 2015 to
20% in 2030.
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. Accordingly, the FIA market grew from nearly $12 billion of
sales in 2002 to $73 billion of sales in 2019. Additionally, this market demand
has positively impacted the IUL market as it has expanded from $100 million of
annual premiums in 2002 to $4 billion of annual premiums in 2019.




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Critical Accounting Policies and Estimates
As a result of the F&G acquisition, 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 Condensed Consolidated Financial
Statements included in Item 1 of Part 1 of this Quarterly Report 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.
We have identified the following accounting policies and estimates as critical
as they involve a higher degree of judgment and are subject to a significant
degree of variability: valuation of AFS securities and derivatives, amortization
of DAC, DSI and VOBA, reserves for future policy benefits and product guarantees
and recognition of deferred income tax valuation allowances.
In developing these accounting estimates and policies, we make subjective and
complex judgments that are inherently uncertain and subject to material changes
as facts and circumstances develop. Although variability is inherent in these
estimates, we believe the amounts provided are appropriate based upon the facts
available upon preparation of our audited condensed consolidated financial
statements. We continually update and assess the facts and circumstances
regarding all of these critical accounting matters and other significant
accounting matters affecting estimates in our financial statements.
Valuation of AFS Securities, Derivatives and Fund withheld for reinsurance
receivables
Our fixed maturity securities classified as AFS are reported at fair value, with
unrealized gains and losses included within AOCI, net of associated impact on
intangibles adjustments, SOP 03-1 reserve adjustments, and deferred income
taxes. Our equity securities are reported at fair value, with unrealized gains
and losses included within net earnings (loss). Unrealized gains and losses
represent the difference between the cost or amortized cost basis and the fair
value of these investments. We measure the fair value of our AFS securities
based on assumptions used by market participants, which may include inherent
risk and restrictions on the sale or use of an asset. The estimate of fair value
is the price that would be received to sell an asset in an orderly transaction
between market participants ("exit price") in the principal market, or the most
advantageous market in the absence of a principal market, for that asset or
liability. We utilize independent pricing services in estimating the fair values
of AFS securities. The independent pricing services incorporate a variety of
observable market data inputs in their valuation techniques, including reported
trading prices, benchmark yields, broker-dealer quotes, benchmark securities,
bids and offers, credit ratings, relative credit information and other reference
data.
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We categorize our AFS securities into a three-level hierarchy based on the
priority of the inputs to the valuation technique. The fair value hierarchy
gives the highest priority to quoted prices in active markets for identical
assets (Level 1) and the lowest priority to unobservable inputs (Level 3). If
the inputs used to measure fair value fall within different levels of the
hierarchy, the category level is based on the lowest priority level input that
is significant to the fair value measurement of the instrument. The following
table presents the fair value of F&G's fixed maturity securities and equity
securities by pricing source and hierarchy level as of September 30, 2020.
                                                                            

As of September 30, 2020

                                              Quoted Prices in                                     Significant
                                             Active Markets for            Significant            Unobservable
(Dollars in millions)                         Identical Assets          Observable Inputs            Inputs                Total
                                                 (Level 1)                  (Level 2)              (Level 3)
Fixed maturity securities
available-for-sale and equity
securities:
Prices via third party pricing
services                                    $           660            $         21,746          $      1,179          $    23,585
Priced via independent broker
quotations                                                -                           -                 1,604                1,604
Priced via other methods                                  -                           -                     1                    1
Total                                       $           660            $         21,746          $      2,784          $    25,190
Available-for-sale embedded
derivative:
Priced via other methods                                  -                           -                    23                   23
Total                                       $           660            $         21,746          $      2,807          $    25,213
% of Total                                                3    %                     86  %                 11  %               100  %




Management's assessment of all available data when determining fair value of the
AFS securities is necessary to appropriately apply fair value accounting. The
independent pricing services also take into account perceived market movements
and sector news, as well as a security's terms and conditions, including any
features specific to that issue that may influence risk and marketability.
Depending on the security, the priority of the use of observable market inputs
may change as some observable market inputs may not be relevant or additional
inputs may be necessary. We generally obtain one value from our primary external
pricing service. In situations where a price is not available from the
independent pricing service, we may obtain broker quotes or prices from
additional parties recognized to be market participants. We believe the broker
quotes are prices at which trades could be executed based on historical trades
executed at broker-quoted or slightly higher prices. When quoted prices in
active markets are not available, the determination of estimated fair value is
based on market standard valuation methodologies, including discounted cash
flows, matrix pricing, or other similar techniques.
We validate external valuations at least quarterly through a combination of
procedures that include the evaluation of methodologies used by the pricing
services, comparisons to valuations from other independent pricing services,
analytical reviews and performance analysis of the prices against trends, and
maintenance of a securities watch list. See Note D Fair Value of Financial
Instruments and Note E Investments to our unaudited Condensed Consolidated
Financial Statements included in Item 1 of Part I of this Report.
The fair value of derivative assets and liabilities is based upon valuation
pricing models and represents what we would expect to receive or pay at the
balance sheet date if we canceled the options, entered into offsetting
positions, or exercised the options. Fair values for these instruments are
determined internally using a conventional model and market observable inputs,
including interest rates, yield curve volatilities and other factors. Credit
risk related to the counterparty is considered when estimating the fair values
of these derivatives. However, we are largely protected by collateral
arrangements with counterparties when individual counterparty exposures exceed
certain thresholds. The fair value of futures contracts at the balance sheet
date represents the cumulative unsettled variation margin (open trade equity net
of cash settlements). The fair values of the embedded derivatives in our FIA
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 embedded derivative liabilities includes
an adjustment to reflect the risk that these obligations will not be fulfilled
("non-performance risk"). For the period ended September 30, 2020, our
non-performance risk adjustment was based
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on the expected loss due to default in debt obligations for similarly rated
financial companies. See Note D Fair Value of Financial Instruments and Note F
Derivative Financial Instruments to our unaudited Condensed Consolidated
Financial Statements included in Item 1 of Part I of this Report.
As discussed in Note P Reinsurance to our Condensed Consolidated Financial
Statements included in Item 1 of Part I of this Report, FGL Insurance entered
into a reinsurance agreement with Kubera effective December 31, 2018, to cede
certain multi-year guaranteed annuities ("MYGA") and deferred annuity statutory
reserve on a coinsurance funds withheld basis, net of applicable existing
reinsurance. Fair value movements in the funds withheld balances associated with
this arrangement create an obligation for FGL Insurance to pay Kubera at a later
date, which results in an embedded derivative. This embedded derivative is
considered a total return swap with contractual returns that are attributable to
the assets and liabilities associated with this reinsurance arrangement. The
fair value of the total return swap is 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 derivative is reported in Accounts payable and
accrued liabilities on the Condensed Consolidated Balance Sheets and the related
gains or losses are reported in Recognized gains and losses, net on the
Condensed Consolidated Statements of Earnings.

Intangibles

Acquisition costs that are incremental, direct costs of successful contract
acquisition are capitalized as DAC. DAC consists principally of commissions.
Indirect or unsuccessful acquisition costs, maintenance, product development and
overhead expenses are charged to expense as incurred. DSI consists of contract
enhancements such as premium and interest bonuses credited to policyholder
account balances.
VOBA is an intangible asset that reflects the amount recorded as insurance
contract liabilities less the estimated fair value of in-force contracts in a
life insurance company acquisition. It represents the portion of the purchase
price that is allocated to the value of the rights to receive future cash flows
from the business in force at the acquisition date. VODA is an intangible asset
that represents the value of an existing distribution network. Internally
developed software and trade name intangible assets are amortized on a
straight-line basis over their deemed useful lives while VODA is amortized using
the sum of years digits method.
DAC, DSI, and VOBA are subject to loss recognition testing on a quarterly basis
or when an event occurs that may warrant loss recognition.
For annuity and IUL products, DAC, DSI and VOBA are generally being amortized in
proportion to estimated gross profits from net investment spread margins,
surrender charges and other product fees, policy benefits, maintenance expenses,
mortality net of reinsurance ceded and expense margins, and recognized gains and
losses on investments. Current and future period gross profits for FIA contracts
also include the impact of amounts recorded for the change in fair value of
derivatives and the change in fair value of embedded derivatives. At each
valuation date, the most recent quarter's estimated gross profits are updated
with actual gross profits and the assumptions underlying future estimated gross
profits are evaluated for continued reasonableness. If the update of assumptions
causes estimated gross profits to increase, DAC, DSI and VOBA amortization will
decrease, resulting in lower amortization expense in the period. The opposite
result occurs when the assumption update causes estimated gross profits to
decrease. Current period amortization is adjusted retrospectively through an
unlocking process when estimates of current or future gross profits (including
the impact of recognized investment gains and losses) to be realized from a
group of products are revised. Our estimates of future gross profits are based
on actuarial assumptions related to the underlying policies' terms, lives of the
policies, duration of contract, yield on investments supporting the liabilities,
cost to fund policy obligations, and level of expenses necessary to maintain the
polices over their entire lives.
Changes in assumptions can have a significant impact on DAC, DSI and VOBA,
amortization rates and results of operations. Assumptions are management's best
estimate of future outcomes, and require considerable judgment. We periodically
review assumptions against actual experience, and update our assumptions based
on historical results and our best estimates of future experience when
additional information becomes available.
  Estimated future gross profits are sensitive to changes in interest rates,
which are the most significant component of gross profits. Assumptions related
to interest rate spreads and credit losses also impact estimated gross profits
for products with credited rates. These assumptions are based on the current
investment portfolio yields and credit quality, estimated future crediting
rates, capital markets, and estimates of future interest rates and defaults.
Significant assumptions also include policyholder behavior assumptions, such as
surrender, lapse,
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and annuitization rates. We use a combination of actual and industry experience
when setting and updating our policyholder behavior assumptions.
We perform sensitivity analyses to assess the impact that certain assumptions
have on DAC, DSI and VOBA. Lower assumed interest rates or higher assumed
annuity surrender rates tend to decrease the balances of DAC, DSI and VOBA, thus
decreasing income before income taxes. Higher assumed interest rates or lower
assumed annuity surrender rates tend to increase the balances of DAC, DSI and
VOBA, thus increasing income before income taxes.
Reserves for Future Policy Benefits and Product Guarantees
The determination of future policy benefit reserves is dependent on actuarial
assumptions. The principal assumptions used to establish liabilities for future
policy benefits are based on our experience. These assumptions are established
at issue of the contract and include mortality, morbidity, contract full and
partial surrenders, investment returns, annuitization rates and expenses. The
assumptions used require considerable judgment. We review overall policyholder
experience at least annually and update these assumptions when deemed necessary
based on additional information that becomes available. For traditional life and
immediate annuity products, assumptions used in the reserve calculation can only
be changed if the reserve is deemed to be insufficient. For all other insurance
products, changes in assumptions will be used to calculate reserves. These
changes in assumptions will also incorporate changes in risk free rates and
option market values. Changes in, or deviations from, the assumptions previously
used can significantly affect our reserve levels and related results of
operations.
Mortality is the incidence of death amongst policyholders triggering the payment
of underlying insurance coverage by the insurer. In addition, mortality also
refers to the ceasing of payments on life-contingent annuities due to the death
of the annuitant. We utilize a combination of actual and industry experience
when setting our mortality assumptions.
A surrender rate is the percentage of account value surrendered by the
policyholder. A lapse rate is the percentage of account value canceled by us due
to nonpayment of premiums. We make estimates of expected full and partial
surrenders of our fixed annuity products. Our surrender rate experience in the
period ended September 30, 2020 on the fixed annuity products averaged 4%, which
is within our assumed ranges. Management's best estimate of surrender behavior
incorporates actual experience over the entire period, as we believe that, over
the duration of the policies, we will experience the full range of policyholder
behavior and market conditions. If actual surrender rates are significantly
different from those assumed, such differences could have a significant effect
on our reserve levels and related results of operations.
The assumptions used to establish the liabilities for our product guarantees
require considerable judgment and are established as management's best estimate
of future outcomes. We periodically review these assumptions and, if necessary,
update them based on additional information that becomes available. Changes in
or deviations from the assumptions used can significantly affect our reserve
levels and related results of operations.
At issue, and at each subsequent valuation, we determine the present value of
the cost of the GMWB rider benefits and certain GMDB riders in excess of
benefits that are funded by the account value. We also calculate the present
value of total expected policy assessments, including investment margins, if
applicable. We accumulate a reserve equal to the portion of these assessments
that would be required to fund the future benefits less benefits paid to date.
In making these projections, a number of assumptions are made and we update
these assumptions as experience emerges, and determined necessary. We have
minimal experience to date on policyholder behavior for our GMWB products which
we began issuing in 2008. As a result, future experience could lead to
significant changes in our assumptions. If emerging experience deviates from our
assumptions on GMWB utilizations, such deviations could have a significant
effect on our reserve levels and related results of operations.
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Our aggregate reserves for contractholder funds, future policy benefits and product guarantees on a direct and net basis as of September 30, 2020 are summarized as follows:

        (Dollars in millions)          Direct       Reinsurance Recoverable         Net
        Fixed indexed annuities      $ 19,456      $                      -      $ 19,456
        Fixed rate annuities            4,818                          (860)        3,958
        Immediate annuities             3,593                          (156)        3,437
        Universal life                  1,694                          (982)          712
        Traditional life                1,975                        (1,154)          821
        Total                        $ 31,536      $                 (3,152)     $ 28,384


Certain FIA 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 embedded derivative is valued at fair value and included
in the liability for contractholder funds in our Condensed Consolidated Balance
Sheets with changes in fair value included as a component of Benefits and other
changes in policy reserves in our Condensed Consolidated Statements of Earnings.
Deferred Income Tax Valuation Allowance
Accounting Standards Codification section 740, Income Taxes (ASC 740), provides
that deferred income tax assets are recognized for deductible temporary
differences and operating loss and tax credit carry-forwards. A valuation
allowance is recorded if, based on available information, it is more likely than
not that deferred income tax assets will not be realized. Assessing the need
for, and the amount of, a valuation allowance for deferred income tax assets
requires significant judgment.
Future realization of deferred tax assets ultimately depends on the existence of
sufficient taxable income of the appropriate character (i.e., ordinary income or
capital gain) in either the carryback or carry-forward period under tax law. The
four sources of taxable income that may be considered in determining whether a
valuation allowance is required are:
•Future reversals of existing taxable temporary differences (i.e., offset of
gross deferred tax assets against gross deferred tax liabilities);
•Taxable income in prior carryback years, if carryback is permitted under tax
law;
•Tax planning strategies; and
•Future taxable income exclusive of reversing temporary differences and
carry-forwards.
At each reporting date, management considers evidence that could impact the
future realization of deferred tax assets. As of September 30, 2020, management
gathered the following evidence concerning the future realization of deferred
tax assets:
Positive Evidence:
•As of September 30, 2020, we were in a cumulative income position based on
pre-tax income over the prior 12 quarters;
•We are projecting pre-tax GAAP income from continuing operations;
•We have a history of utilizing all significant tax attributes before they
expire;
•For U.S. Life Companies, under new tax laws, net operating losses generated
after December 31, 2017 can be carried forward indefinitely; and
•We have net unrealized capital gains as of September 30, 2020.
Negative Evidence:
• §382 limited carry-forwards reduce our ability to utilize tax attributes in
future years; and
• Brief carryback/carry-forward period for capital losses.
Based on management's evaluation of the above positive and negative evidence,
management concluded that a valuation allowance continues to be necessary for
the deferred tax assets of the non-life insurance companies and FSRC deferred
tax assets at September 30, 2020. For the three and four month periods ended
September 30, 2020, the valuation allowance release recorded to the income
statement related to the items above was $8 million and $9 million respectively.
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