F&G Annuities & Life, Inc.

Ladies and gentlemen, good morning and welcome to FNG's first quarter earnings call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions with instructions to follow at that time. As a reminder, this conference call is being recorded. I would now like to turn the call over to Lisa Foxworthy-Parker, SVP, Investor, and External Relations. Please go ahead.

Great. Thanks, Operator, and welcome, everyone. 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 16, 2024. And now I'll turn the call over to our CEO, Chris Luntz.

Good morning, everyone. Thanks for joining us to discuss our first quarter results. I'm pleased to share that we're off to a terrific start in 2024, having delivered another strong quarter as we execute on our strategic initiatives. We continue to focus on our growth strategy, maintaining a disciplined and balanced capital management process, and diversifying our earnings into more capital light strategies over time. Starting with sales, We continue to see sustainable momentum across our multi-channel new business platform and strong demand for our products in the volatile and higher rate environment. Coming off record sales in the fourth quarter, we reported gross sales at $3.5 billion in the first quarter, our second highest on record, which was up 6% over the first quarter of 2023, which was the third highest on record. Retail channel sales through our agent, bank, and broker-dealer channels were $2.8 billion in the first quarter. We reported record fixed indexed annuity sales and lower multi-year guaranteed annuity sales, leading to a higher percentage of net sales retained as compared to the sequential quarter. We also began the rollout of our new registered index-linked annuity, or RILA, product in the quarter, which we expect will become a significant contributor to sales over the next few years. In fact, industry RILA sales were nearly $45 billion last year, which is a record level. We believe our product offering is differentiated in the market and will uniquely meet the needs of a relatively younger demographic. Pension risk transfer sales set a new first quarter record at $584 million, reflecting a healthy pipeline out of the gate this year. As announced, we have crossed the $5 billion mark for cumulative pension risk transfer sales, with over 100,000 plan participants. This milestone is especially impressive given our market entry was in mid 2021, just under three years ago. We rounded out gross sales with 105 million of FHLB funding agreements in the quarter. We continue to monitor opportunities to return to the market for funding agreement backed notes or FABN issuances, although conditions remain challenging in the first quarter. Net sales were $2.3 billion in the first quarter, reflecting accretive third-party flow reinsurance on 90% of our MIGA sales in line with our capital targets. As a reminder, flow reinsurance generates fee-based earnings and frees up incremental capital to be deployed to the highest-returning retained business. As noted, the higher interest rates have been driving strong product demand over the last few quarters, while also leading to a higher level of index annuity surrenders. Fixed index annuity terminations are up over the prior year quarter as expected, although relatively in line with the fourth quarter of 2023. Our new business continues to well outpace surrenders, providing positive net cash flows, and our in-force annuity account balance continues to steadily grow. As a reminder, for insurance companies like F&G, surrenders typically provide a boost to earnings from higher surrender charge fees and freed up capital from the policy lapse. Further, our record new business volumes effectively replace older contracts with newer contracts, having higher surrender charges and longer surrender periods, further improving the liability profile. We have profitably grown retained assets under management to a record $49.8 billion at March 31. This is an increase of $4.5 billion, or 10% over the first quarter of 2023, and driven by net new business flows stable in-force retention, and net debt and equity proceeds over the last 12 months. Retained AUM was up nearly $700 million over the fourth quarter of 2023, primarily driven by net new business flows. AUM before flow reinsurance was $58 billion, adjusting for the approximately $8.2 billion of cumulative new business seeded. Looking ahead, we continue to target gross sales growth at a double-digit clip while managing net sales retained to a level that continues to grow our assets under management. I would also highlight that the new Department of Labor fiduciary rules have been released. We view the new structure as manageable and are prepared to make necessary compliance enhancements when they become effective. As a reminder, the industry has been monitoring this development over the past eight years and making enhancements to comply with the NAIC state-based best interest regulation. Our IMOs are very sophisticated firms, and many have their own RIAs and broker dealers. Approximately 21% of our total gross sales were from producers that do not have a registered license, with 15% being from qualified accounts, which we expect to have the most impact. Overall, we do not expect the momentum in our business to be impacted, although we do worry that it will discourage agents from serving middle market clients. Our investment portfolio is well diversified, actively managed through our selective de-risking programs, and well positioned to perform in varying market conditions. Importantly, our invested assets are well matched to our clean and stable liability profile. Our fixed income yield, excluding alternative investment volatility and variable investment income, has expanded to 4.56% in the first quarter, as compared to 4.33% in the first quarter of 2023. This reflects upside from higher yields on new investments and floating rate assets. The portfolio remains high quality with 95% of fixed maturities being investment grade and credit related impairments were a modest two basis points in the first quarter. We have hedged nearly 60% of our 10 billion in floating rate asset portfolio due to the potential for interest rate decreases in the future. This has locked in about 185 basis points of incremental yield beyond what was originally priced in and translates to approximately 15 to 20 basis points of annual incremental investment margin above our pricing over the next three to five years. I'd like to put a brief spotlight on our $2.6 billion Alternatives LP portfolio, which has performed extremely well since inception. The portfolio has generated an average historical return of 13%, comprised of return on investment, mark-to-market, and return of capital. And returns have been less volatile than the S&P 500 index. Since inception, we've received back nearly $1.3 billion, or almost half the capital we invested since 2017, providing an approximate 7% yield on distributions alone. And we've experienced approximately 30% appreciation in the value of capital that we invested since 2017. 2017, including both distributions and residual value for the portfolio, which is expected to grow as the ALTS portfolio matures. Turning next to our results for the quarter, excluding significant items, we delivered adjusted net earnings of $154 million, which generated an adjusted ROA of 125 basis points, and we reported an adjusted ROE of 11%. Notably, our ROA is above our 110 basis point baseline that we shared at our investor day back in October. Wendy will get into the results more in a few minutes, but the quarter once again demonstrates that we are positioned to perform across market cycles and that we can consistently deliver strong results with attractive and expanding margins over time. We have plenty of momentum to continue to deliver sustainable asset growth from our retail, and pension risk transfer growth strategies and ongoing margin expansion from enhanced investment margin opportunities, operational scale benefits, and fee-based earnings from accretive flow reinsurance. We are also well positioned to diversify our earnings given the strong growth of our middle market life insurance business and owned distribution strategies. Our strategic investment in owned distribution stakes will generate a meaningfully higher risk-adjusted return on capital then retain business and provides a diversifying source of earnings. Owned distribution further strengthens our relationships with key partners, and with industry consolidation underway, we believe we are uniquely positioned to partner as a distribution consolidator. To date, we've invested $530 million, and we expect EBITDA for the portfolio to be $45 to $50 million in 2024 with double-digit growth over the medium term. Wrapping up, I am very proud of our team's accomplishments. The business is hitting on all cylinders, and we remain focused on our strategic priorities, fulfilling the commitments we made in connection with our investor day, and creating long-term value for all of our stakeholders. Let me now turn the call over to Wendy to provide further details on F&G's first quarter financial highlights.

Thanks, Chris. We are very pleased with F&G's overall financial performance for the first quarter. I'd like to point out before we get into our results that we've updated our quarterly financial supplement this quarter to highlight results from our core product margin, low reinsurance fees, and owned distribution among other enhancements. Now starting with earnings. Adjusted net earnings attributable to common shareholders for the first quarter were 108 million or 86 cents per share and included 100 million or 77 cents per share of investment income from alternative investments and $6 million or $0.05 per share of CLO redemption gains and bond prepayment income. Alternative investments, investment income based on management's long-term expected return of approximately 10% was $152 million or $1.18 per share. Adjusted net earnings for the first quarter of 2023 were $61 million or 49 cents per share and included 99 million or 79 cents per share of investment income from alternative investments partially offset by 37 million or 30 cents per share tax valuation allowance expense. Alternative investments investment income based on management's long-term expected return of approximately 10% was 132 million or $1.05 per share. For comparison. Adjusting for these significant items in both periods, adjusted net earnings were $154 million in the first quarter of 2024, up 18% from $131 million in the first quarter of 23. This increase reflects asset growth and diversification of margin from accretive flow reinsurance fees and owned distribution margins, which were partially offset by an increase in interest expense due to planned capital market activity and higher operating costs in line with the growth in sales and assets and continued investments in our operating platform. Our adjusted return on assets, excluding significant items with 125 basis points in the quarter, comfortably above our 110 basis point baseline as shared at Investor Day in October of 2023. The current quarter includes five basis points of favorable actuarial liability movement that is within our expected range and reflects the effects of our methodology, which can be lumpy for inter-quarter variability. Next, turning to our balance sheet. We ended the quarter with F&G equity attributable to common shareholders excluding AOCI of $5.2 billion, or $41.10 per share, with 126 million common shares outstanding as of March 31st. There are a couple of pages in our investor presentation providing an analysis of book value per share. F&G's debt-to-capitalization ratio excluding AOCI was 24% as of March 31st. This is in line with our long-term target of 25% and includes the $250 million preferred stock issuance in January 2024. Our annualized interest expense is approximately $120 million or roughly 6.6% blended yield on the $1.8 billion of total debt outstanding. We continue to target holding company cash and invested assets at two times fixed charge coverage. Our strong capitalization supports both growth and distributable cash. During the first quarter, F&G paid $26 million of common dividends and a $4 million dividend on its preferred stock, held by F&F. F&G is well-positioned to self-fund its continued growth with positive and growing enforced capital generation, available debt capacity as our balance sheet delevers with book value growth over time, and ample opportunity for future reinsurance programs. For 2024 specifically, our stable, profitable, enforced, is expected to generate more than $1 billion in capital, and we have strong capital generation in the range of $500 million from existing reinsurance arrangements. In summary, we have great momentum in executing on our strategy and delivered a terrific first quarter. In addition, we continue to maintain strong capitalization and financial flexibility to successfully execute on our growth strategy. This concludes our prepared remarks. Let me now turn the call back to our operator for questions.

Thank you. Ladies and Chairman, we will now be conducting a question and answer session. If you would like to ask a question, please press star and 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star and 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Ladies and gentlemen, we will wait for a moment while we poll for questions. Our first question is from the line of John Barnage with Piper Sandler. Please go ahead.

Good morning. Thank you for the opportunity. My first question is on the Ryla product. How should we be thinking about contribution in 24, and how meaningful was it in the first quarter that it was rolled out?

Thanks. Sure. Thanks, John. This is Chris.

I would say not very meaningful in the quarter. We rolled out literally with one or two distribution partners. We've got a number of additional partners in the queue that I expect we will roll out in the second quarter and the third quarter. So, you know, I don't think this is going to be a big needle mover for us this year, but it should be meaningful for us as we head into 2025. And Given the environment right now, you know, we've got plenty of sales opportunities. So, yeah, I would say it would be relatively modest this year and should start becoming a meaningful contributor next year.

Thank you for that. And my follow-up question, Chris, competitive dynamics in the PRT market, you talked about finally crossing a big threshold in sales on a cumulative basis, and some participants have talked about this year being a bit more competitive in that institutional product.

Yeah, I wouldn't say that we've seen a dramatic change, but obviously it was a tremendous, it was a record first quarter for us. So the team has executed really well. We tend to be super selective in terms of what we bid on. So the process is pretty thorough for deciding where we even crank up the engine to bid. And then when we bid, we've had a decent hit rate there. So I think it will always be competitive because it's such an attractive industry. market, but we're obviously still getting our fair share and haven't seen a big change in terms of return dynamics.

Thank you.

Thank you.

Ladies and gentlemen, a reminder, if you wish to ask a question, please press star and one. Our next question is from the line of Wes Carmichael with Autonomous. Please go ahead.

Hey, good morning. Thanks. So the ROA baseline in the quarter, I guess, adjusted for alts was 125 basis points, and that's above, I guess, your recent target of 110. So maybe just hoping you could talk about if you see that at the sustainable level going forward, and maybe the drivers of a little bit of that outperformance would be great.

Yeah, I'll start, and I know Wendy will jump in. I think there was probably a little bit of a positive tailwind to that, but not a lot. So, yeah, we feel really good about what we laid out. in our investor day was a baseline of 110 basis points. And we thought, you know, we could grow that 15 to as much as 30 basis points through a few levers, optimizing the investment portfolio. That's feeling quite optimistic for us right now. Flow reinsurance, you're already seeing the impact of that. And then some operating scale as we continue to grow. So, yeah, we feel pretty good about that. I don't know, Wendy, if you want to walk through maybe a little more of the dynamics of the quarter itself.

Sharon, I'll even go back to last quarter, Wes. There was, based on our reserving methodologies, we're going to get a little bit of fluctuation quarter to quarter. Last quarter, it was a little bit of a hit. This quarter, it's a little bit of positive. So we're basically indicated in the script that there's about a five basis points maybe of positive noise in that mechanics that we have. So we feel really good about expansion from here. And in addition to what Chris said about flow and scalability, own distribution really popped in the quarters. And that definitely is sustainable.

Got it. Thanks. And I just wanted to maybe follow up on John's question on PRT. I think one of your private equity slash insurance peers made some comments on their earnings call this quarter that there's some recent lawsuits that are likely to chill some of the volumes in the PRT market in 2024. And they also mentioned that they said spreads weren't very attractive this year versus last year. So I just wanted to get any additional perspective on if you think you could see some lower volumes or if that's not the case and if you still see decent spread in that market.

Sure. Yeah, I think there's clearly the potential for that to cast a bit of a pall over the markets we're watching for. We haven't really seen that yet. I mean, there are quite a few deals in the queue for us and everybody to go bid on. To the spread piece, it's really hard to compare across firms because the single biggest driver is, do you have access to unique, longer duration originated credit? And if you do, we're still earning good spreads. If you don't, then it's tough. It's going to be difficult. And that's everything from triple net leases to infrastructure debt, et cetera. So it can be very bespoke asset-specific types of opportunities. And so, again, I think it's kind of hard to generalize across the industry. But, yeah, it's something that we clearly are on. We'll look out for in raising our profile on, you know, everything from how we use reinsurance to, you know, transparency about everything that we do.

Thanks, Chris. And maybe just one more on funding agreements, but you did a little bit of FHLB borrowing in the quarter. You mentioned that conditions were challenging for FABNs in the first quarter. I think there were some peers that kind of returned to that market, but just wanted to get your perspective on the rest of the year if it looks more attractive in your outlook for FABN issuance.

Yeah, I think it does. You know, it's a good environment right now to be an issuer. So I think during the quarter, it was on the cusp. I think it's looking – definitely looking more attractive right now. Wendy, if you want to add to that.

Yeah, I was just going to say we monitor it, Wes, just to see how we're doing from the spread perspective. You know, our rating is a little bit lower than some of the ones that have gone out in the first quarter, and that impacts the spread. But we are monitoring, and it looks like it's getting better every day.

Yeah, and one other thing I would say, Wes, is obviously we're trying to maximize return on capital, right? That's the goal. And so right now, given the attractive opportunities in retail and PRT, so we look at all of them as funding sources and cost of funds, and Wendy and I are trying to optimize that at all times. But, you know, looking at the quarter, I'm actually walking around feeling like this might have been the best quarter we've ever had. you know, inflows continue to be strong. The mix was really positive, you know, so the mix shift towards FIAs from MIGA, you know, obviously FIA is, uh, you know, our most profitable product. It's a longer duration product. So we're locking in a spread for longer and we are already starting to see, as you said, um, expansion on the margin front. So, you know, never declare victory in the third inning of a game, but, uh, Relative to what we put out there for investor day, we're off to a really good start and feeling really good about it. Thanks.

Thank you.

Our next question is from the line of Mark Hughes with Truist Securities. Please go ahead.

Yeah, thank you. Good morning. Sorry if I might have touched on this. I joined late. But I think you commented how you're optimistic on RILA sales. It should become a bigger part of your mix. Could you talk about, you know, kind of how you see the long-term dynamic between RILAs and fixed index annuities and how your distribution kind of matches up to support one or the other, how it may evolve over time to support the RILA sales if it needs to?

Sure. Yeah, no, great question, Mark. So I say a couple of things. If you think about a fixed index annuity, it's got a floor of zero and an opportunity to participate in markets, but by definition, it's got a capped upside. RILA allows someone to take a risk level below zero, right, typically in the form of a buffer, say 5%, 10%, even 20% of downside absorbed. by the carrier, which just allows for a lot more upside. Typically, it's a younger demographic. It's someone either with a higher risk tolerance or, in many cases, a younger demographic. It's a market we've never played in at all. All of this is greenfield and really should be incremental sales and incremental margin for us. Then the other, from a distribution channel perspective, not surprisingly, Ryla tends to be more popular in the broker-dealer channel, whereas FIAs tend to be more popular in the IMO and in the bank channels. And so a lot of our activity in adding distribution partners starting a couple years ago have been to add more broker-dealers in anticipation of the RILO launch. So hopefully that helps a little bit. Bit younger demographic, client with a higher risk tolerance, I've said this before, you know, it opens up a massive pool because, you know, you have to ask the question of, you know, yes, everybody should probably own some mutual funds if they've got a very long-term time horizon and some equities. But that comes with a tremendous amount of volatility. And so I think a lot of people like the peace of mind of knowing that there is some constrained outcome set. And so... Yeah, this is a category that I think for the industry is going to be really attractive. But lastly, I will say it's playing to the same strengths. Again, we're just buying a different colored option with a wider band of outcomes. But at the end of the day, it's a spread-based product, and the key drivers that have made us successful in the FIA space should translate in the RILA space.

And then I think a... somewhat competitor of yours has talked a bit more about integrating their annuity products into these retirement, the dated funds, that they're starting to see some movement there. Can you talk on that opportunity, whether that's something you're pursuing directly as another distribution channel source of growth?

Yeah, I would say it's not top of the queue for us. There are a lot of, as you know, complications and challenges within that market. It's been kind of a slow boat coming. I do think the products can have a big impact for society to be able to do that and for folks to be able to participate in their 401k plans. But I would say right now, with all of the distribution opportunities we have both in institutional and retail, that feels like a better priority for us. But, you know, we continue to look at it and want to stay close to it. If appropriate, we think that's a market we could compete in if we choose to.

Yeah. Would you think the economics at this point are not quite there yet or it's just there's not as much demand in that 401k market?

Yeah, I'm probably not the best expert on this topic, although I studied it years ago at a different firm quite Intensively, I think the biggest issues are record keeping. So it's kind of the expense and complication of getting plan sponsors to adopt it, and more importantly, record keepers to pay for all the enhancements to make it work. And then the other is for it to be get broad based acceptance, you do end up with a lot of smaller accounts. Now that can be solved for through some sort of omnibus structure. But, yeah, it's just a little more complicated. I would also think carriers with a big recognized brand name and or retirement plans presence of their own probably will have a little bit of a leg up there. So hopefully that helps.

Yeah, understood. Yeah, it sure does. Thank you. Appreciate it.

Thank you. Our next question comes from the line of Wes Carmichael with Autonomous. Please go ahead.

Hey, thanks for taking my follow-up. I just had a question on the capital consumption on the RILA product versus an FIA or a MIGA. I imagine there's the same C4 charge on the premium, but when you look at RBC, is the RILA product favorable relative to a fixed annuity sale, or is there not much of a difference there?

Wendy, do you want to tackle that one?

Sure, thank you. There's not much of a difference. As Chris said, basically the difference between the products is the option that we purchase, and there's really no difference in the capital charge on that.

Okay. Great. And then maybe just following up, on the DOL and the final rule, obviously your new business origination capabilities are much more diversified than the last time we saw this, but I think you mentioned 15% or so of gross sales might be the most impacted. Can you maybe just give us any additional perspective on what changed this time around with this version? And if there's any way to kind of dimension the potential expense impact, that'd be great.

Yeah. I mean, the honest answer is not much changed. And I think that's the frustration of the industry is that it's eerily similar to the rule that was put forth before. So there will be enhanced compliance expense. I don't think any of it is going to rise to a level that's going to cause us to question the forecasts that we've put out, etc. So I put it more in the, you know, it's annoying. A number of people feel that it's unnecessary given all the other regulations that are in place. The bigger concern that I have, which I mentioned in the notes, is it could be an impediment for agents serving the middle market and just moving upstream. I do think it's going to take a time. It's going to take a while for that impact to be felt. And so, again, given the, you know, we probably have more, not probably, we have more sales opportunity than capital right now. That's the constraint is not opportunity for sales. So, again, there's nothing in this that's going to cause us to change our plans. The concern on my end is, It will be impactful to certain agents, and I think, unfortunately, it would be disproportionately impactful to agents that are serving the middle market. I don't know, Wendy, if there's anything you want to add to that.

I think I would just add, Wes, the biggest difference is that F&G is different. Back in the original rule, we weren't in the bank and broker-dealer market, so that has significantly improved. those percentages that Chris was talking about of where we would be impacted.

Yeah. And then we also weren't in the PRT or FABN market. So, you know, if you go back five years ago, we were doing probably 3 billion of sales. It was all through independent agents. And now as you see, we're, you know, 13 billion plus and we've continued to grow the IMO space. And a number of those IMOs, I think actually will thrive during this because they're fairly Sophisticated, it may force independent agents to need to affiliate with one IMO versus multiple IMOs. So I think the best players actually look at this and say, we can build some nice moats for ourselves adapting to this. But there's just a lot of agents and a lot of smaller agents calling on middle market clients that this is gonna be quite disruptive for.

Great. Thank you. Thank you.

Ladies and gentlemen, this will conclude our question and answer session. I will now turn the conference back over to CEO Chris Blunt for his closing remarks. Chris?

Great. Thanks, everybody. We're really pleased with our overall results, which demonstrate the competitive strengths and resilience of our business. FNG is positioned to perform through the cycle, and we're successfully executing on our strategic priorities to generate continued growth and profitability. Thanks for joining us. We appreciate your interest in FNG and look forward to updating you on our second quarter earnings call.

The conference of FNG has now concluded. Thank you for your participation. You may now disconnect your lines.