F&G Annuities & Life, Inc.

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the F&G Annuities in Life first quarter 2023 earnings call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. Should you require operator assistance during the conference, please press star zero to signal an operator. Please note this conference is being recorded. I will now turn the conference over to your host, Lisa Foxworthy-Parker, Senior Vice President, Investor and External Relations for F&G. Thank you. You may begin.

Great. Thanks, Operator. And welcome, everyone, to F&G's first quarter 2023 earnings call. Joining me today are Chris Blunt, Chief Executive Officer, and Wendy Young, Chief Financial Officer. We look forward to addressing your questions following our prepared remarks. Today's earnings call may include forward-looking statements and projections under the Private Securities Litigation Reform Act, which do not guarantee future events or performance. We do not undertake any duty to revise or update such statements to reflect new information, subsequent events, or changes in strategy. Please refer to our most recent SEC filings for a discussion of the factors that could cause actual results to differ materially from those expressed or implied. This morning's discussion also includes non-GAAP financial measures that we believe may be meaningful to investors. Non-GAAP measures have been reconciled to GAAP where required in accordance with SEC rules within our earnings release, financial supplement, and investor presentation, all of which are available on the company's website. Today's call is being recorded and will be available for webcast replay at fglife.com. It will also be available through telephone replay beginning today at 1 p.m. Eastern time through May 11th, 2023. And now I'll turn the call over to our CEO, Chris Blunt.

Good morning, and thanks for joining us today. For F&G, 2023 is off to a solid start as shown in our first quarter results. I'm proud of this result, especially given the tumultuous nature of the first quarter macro environment. Characterized by ongoing market volatility and inflationary pressures, stress on the banking system given the recent regional bank failures, and concerns around credit and commercial real estate exposure with the prospect of a recession on the horizon. Although a difficult environment, it really highlights what makes F&G different, how our superior ecosystem operates, and how F&G is well-positioned to weather the storm. I'd like to share some of those insights with you. First, starting with the effects of market volatility and inflationary pressures. Higher interest rates and extended periods of market volatility are known to spur fixed annuity sales as financial advisors and consumers seek resilience for their investment portfolios and retirement savings. Fixed annuities are increasingly viewed as an attractive solution offering relatively higher rates, guaranteed growth, principal protection, tax-advantaged accumulation, and annuitization options. Importantly, we're an industry that makes good on promises and serves as a steward to meet long-term policy objectives. These factors drove record industry annuity sales in the fourth quarter of 2022, and the momentum continues with LIMRA forecasting another record-breaking first quarter for 2023. Similarly for F&G, these dynamics have contributed to record gross sales in the first quarter, and are generating a level of profitable sales and issuance of new policies that substantially exceed policy maturities and other withdrawals. We reported record total gross sales of $3.3 billion in the first quarter, a 27% increase over the prior year quarter, and a 22% increase over the sequential fourth quarter. Our retail channels reported record gross annuity and life sales of $2.8 billion in the first quarter, an 87% increase over the prior year quarter, and a 12% increase over the sequential quarter. We saw growth across all three retail channels, including agent, bank, and broker-dealer channels as compared to the prior year. Institutional sales were $520 million in the first quarter, split evenly between pension risk transfer and funding agreements. We have also closed an additional pension risk transfer transaction of approximately $200 million in April, which was not reflected in first quarter sales. F&G's net sales retained were 2.2 billion in the first quarter, which reflects 67% of gross sales as compared to 70% for the sequential quarter and 92% for the prior year quarter. This trend reflects third-party flow reinsurance, which increased from 50% to 75% of MIGA sales in September of 2022. As a reminder, we utilize flow reinsurance, which provides a lower capital requirement on seeded new business, while allocating capital to the highest returning retained business. From our perspective, this is a smart financial decision as it enhances cash flow, provides fee-based earnings, and is accretive to F&G's returns. Our ending assets under management grew to $45 billion as of March 31st, an 18% increase due to positive net flows over the prior year. driven by new business net of low reinsurance, stable in-force retention, and debt issuance net proceeds. Next, turning to the topics of asset liability management, liquidity, and risk management, which were brought to the forefront by the recent regional bank failures. I often say that insurance companies are a better form of a bank. In contrast to banks who borrow short and lend long, insurance companies borrow long and invest long. We are asset and liability matched, and there are important characteristics of life insurance liabilities that ensure that they are not susceptible to runs like bank deposits, including a product design which mitigates disintermediation risk. In this regard, F&G is uniquely positioned with an enforced book of liabilities that are sticky and predictable and that do not contain problematic legacy blocks of business. Our liabilities are primarily spread-based and not tied to legacy economic assumptions. When we sell a policy, the spread is essentially locked in. New business is priced for current economics. And for our in-force fixed indexed annuity and indexed universal life, we have the ability to reprice to current economics typically every year. This flexibility allows us to actively manage our in-force and new business to maintain pricing targets, and we have a long history of doing so regardless of volatility in the marketplace. Our liabilities are also relatively young, given the robust levels of new business over the past three years. Our GAAP net reserves were approximately $43 billion at March 31st, with 88% as either surrender-protected or non-surrenderable. Fixed annuities comprise 74% of total net reserves, of which 91% are surrender-protected, with an average remaining surrender charge roughly 7% of account value. In addition, approximately 70% of these policies also have a market value adjustment protection. These policy features serve as a disincentive for policyholders to surrender early. Pension risk transfer, funding agreements, and immediate annuities comprise 21% of total net reserves, all of which are essentially non-surrenderable. Even with these protections, we monitor policyholder behavior regularly. Fixed deferred annuity surrenders were slightly elevated in the current quarter and during April, although in line with our long-term pricing expectations, and we experienced strong positive net inflows during the month. Our asset and liability cash flows are tightly matched within a year or less. Assets are generally held to maturity, and we have many sources of liquidity. Our strong new business inflows are more than sufficient to meet outflows, as evidenced by our growth in assets under management. F&G does not expect to sell assets to meet a liability claim. As a further safeguard, we have ample sources of liquidity, including untapped capacity on our third-party credit facility, our parent revolver, and FHLB borrowings. We also have $2.4 billion of cash and short-term investments on our balance sheets. And unlike many in the industry, we have a positive statutory interest maintenance reserve, or IMR, position of approximately $125 million, which protects statutory capital by serving as an offset to any realized loss on a portfolio asset sale. We are vigilant in our risk management approach, which includes counterparty reviews and regular stress testing of our assets and liabilities to meet internal regulatory and rating agency requirements. These various stress test results demonstrate the predictable nature of F&G's liabilities, given our product design, and also highlight another key differentiator between insurance companies and banks. In a theoretical scenario where annuity surrenders are modeled with an unexpected spike, insurance companies like F&G would typically have a boost to earnings from the higher surrender charge fees and free up capital from the policy lapse. And next, turning to our investment portfolio, our high-quality portfolio is diversified and well-positioned to withstand uncertainty in the macro environment and well-matched to our clean and stable liability profile. Our fixed income yield, excluding alternative investment volatility and variable investment income, has expanded to 4.33% for the first quarter as compared to 3.73% in the first quarter of 2022. This primarily reflects upside from the 18% of our portfolio held in floating rate assets and higher yields on new investments. Our portfolio is allocated across 14 asset classes, given our access to both public and private markets through Blackstone's asset origination capabilities. The fixed income portfolio is 95% investment grade, and we have a modest average credit-related impairments of five basis points over the last three years. well below our pricing assumption. Credit-related impairments net of reinsurance were negligible at two basis points in the first quarter. Given broader market concerns around credit exposure and commercial real estate sector with the prospect of a recession, I'd like to walk through a few aspects of our portfolio, including alts, commercial real estate, CLOs, and regional bank exposure. First, with regard to alternative limited partnerships in our financial supplements, The net asset value of our alts limited partnerships is about $2.6 billion or 6% of the total portfolio as of March 31st. The majority of our alts are in private equity and real estate strategies with an underweighting to credit and real estate. In fact, only 54 million or 3% of the total alts portfolio is held in office and 5 million or less than 1% in retail. Our long-term targeted allocation to alternative assets remains approximately 5%, although there will be some quarterly variation based on the timing as new commitments fund and existing alts run off. Given the book was mostly deployed in 2018 and 2019, our timing was good and the alts are seasoned and have performed well as expected. Since the FNF merger in June of 2020, F&G's alternative investment portfolio has returned 11% on average, and returns have been less volatile than the S&P 500 index. Next, with regard to commercial real estate exposure, looking at our CMBS, CML, and alternatives portfolios combined, our exposure to office is $1 billion in aggregate, or less than 3% of the total portfolio, while retail is $400 million, or 1% of the total portfolio. Our CMBS and CML portfolios are of high quality and moderate leverage, with diversified exposure across various geographic locations and property types, including residential, multifamily, industrial, and logistics. F&G is well insulated and underweighted relative to peers, and also benefits from the expertise and insights that Blackstone holds as one of the largest property owners in the world. And next, with regard to collateralized loan obligations, or CLOs, we hold $4.3 billion, or 10% of the total portfolio fair value in CLOs as of March 31st, which is well diversified across industry, issuer, and manager, with 95% of our CLO portfolio investment grade and having ample structural protection with 19% PAR subordination. F&G has been a valuation-sensitive and opportunistic buyer of CLOs with much of our position initiated in 2018. We have opportunistically reduced our CLO allocation over time and notably hold less than $18 million of CLO equity. Our seasoned portfolio has performed well, remains over-collateralized, and is actively managed through Blackstone's investment professionals and rigorous underwriting capabilities. We feel that CLOs, if properly underwritten, have a better risk profile than holding the underlying loans directly given the inherent structural protections. In fact, historic data shows that CLOs hold a lower default rate relative to corporate credit and lower loss rate relative to its structured peers. Finally, with regard to regional bank exposure, we do not have any holdings in Silicon Valley Bank, Silvergate Bank or Signature Bank, and we reduced our modest year-end position in First Republic during the quarter with only a de minimis preferred stock holding remaining as of March 31st. Overall, we have conviction that our portfolio is well positioned to withstand an economic downturn and is well matched to our liability cash flows. We take a dynamic approach to continually re-underwriting the portfolio, taking advantage of market dislocations to not only increase the credit quality, and diversification of the portfolio while also implementing targeted de-risking programs to refine the portfolio on the margin over time as defensive positioning for potential macroeconomic conditions. Our strategic investment management partnership with Blackstone remains a differentiated competitive advantage for F&G. We benefit from Blackstone's extensive origination capabilities, depth and breadth of expertise in having over 300 investment professionals, and are in continual real-time communications as we assess the portfolio relative to anticipated market conditions. Looking ahead, our prospects are bright. We see many opportunities to expand our profitability in addition to growing our assets and our management. Our first quarter results demonstrate the underlying earnings power of the F&G business model, where profitable asset growth drives earnings, and we benefit from the higher rate environment. We compete and win in some of the industry's highest growth product segments, including fixed and fixed indexed annuities and pension risk transfer, and we expect to launch our new registered indexed linked annuity or RILA product later this year. We are also pursuing a strategy to expand our owned life insurance distribution while boosting our presence in underserved multicultural and middle market segments. We have taken minority equity interest in two of our top life distribution groups, Census in early 2023 and FEG in 2021, and expect to expand with additional investments over time. We value the power of capital light earnings streams from these own distribution stakes, which are accretive to ROE and tend to trade at two to three times the price earnings multiple of traditional life insurers. We also expect to build on our partnerships for accessing flow reinsurance, which provides cash generation, fee-based earnings diversification, and is also accretive to ROE. To recap, we have strong momentum as we head into the second quarter, with many opportunities ahead of us to further expand our business, which will ultimately drive margin expansion and improved returns. We continue on positive ratings outlook with both AM Best and Moody's, which reflects our proven track record, balance sheet strength, financial transparency, and commitment to achieving upgrades over time. And we remain focused on delivering long-term value to our shareholders. Let me now turn the call over to Wendy Young to provide further details on F&G's first quarter financial highlights.