This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk01: Good morning, ladies and gentlemen, and welcome to the FNG's third quarter earnings call. During today's presentation, all parties will be in 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 conference over to Lisa Foxworthy-Parker, senior vice president, investor, and external relations. Please go
spk02: ahead. Thank you. Thank you. Great, thanks. Great,
spk03: 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 on our website following the call. And now I'll turn the call over to our CEO, Chris Blunt.
spk10: Good morning, everyone. Thanks for joining us to discuss our third quarter results. I wanna begin by thanking our employees for their hard work and dedication that has fueled the incredible growth of our business. We have reported another terrific quarter and continue to build on our proven track record. Starting with sales, we delivered strong gross sales of 3.9 billion in the third quarter, up 39% over the prior year quarter, and 11.8 billion year to date, up 30% over the first nine months of 2023. Retail sales from our agency bank and broker dealer channels were a record 3.5 billion in the third quarter, nearly double the prior year quarter, bringing year to date retail sales to 9.5 billion. F&G's retail sales continue to surge, driven by favorable market conditions and strong demand for retirement savings products. We are benefiting from a significant demographic trend with a long tail, as consumers want to secure the relatively higher rates, guaranteed tax deferred growth and principal protection that our products offer. We expect this strong demand to continue in the near term across the industry. As a quick update on RYLA, as of the end of October, we have successfully launched with four broker dealer distribution partners and expect a modest level of sales in 2024. However, we see the potential for RYLA sales to be in the billions over the medium term, as we continue to ramp up sales and add additional distribution partners. Pension risk transfer sales were over 300 million in the third quarter. With strong sales in October, we have now generated 2.1 billion of PRT sales for the first 10 months of 2024, exceeding our full year 2023 sales and with an average deal size of $187 million. Looking ahead to 2025, we continue to see a healthy PRT pipeline with $3.8 trillion of corporate pension plans at or near full funding. We are positioned to compete in our targeted 100 million to $1 billion deal size with potential to strategically move more upmarket or downmarket as opportunities arise. While there were no funding agreements in the third quarter, as a reminder, we issued 1 billion in the first half of the year. Funding agreements are opportunistic and are dependent on our capital allocation priorities based on relative returns across our products. Net sales of 2.4 billion increased 4% over the prior year quarter. Following the September Fed rate cut, one question that I am frequently asked is, what is the impact of lower rates on our sales? As we've seen recently, a Fed rate cut has a more significant impact to short term rates than long term rates. Perhaps even more important than interest rates though are the tailwinds from long term demographics with 10,000 baby boomers retiring every day and a lot of cash remaining on the sidelines. Consumers have more than 6 trillion of cash parked in money market funds and continue to look to lock in the relatively higher interest rates that annuities provide. Importantly, we have a lot of opportunities for sales growth, regardless of the macro environment. We are still adding new distribution partners. The depth and breadth of our retail distribution is going to continue to expand as we add new bank and broker dealer partners and as we further penetrate existing distribution with new selling agents. We continue to add new products and enter new fast growing markets like RYLA and PRT. We have profitably grown assets under management before flow reinsurance to a record 62.9 billion at the end of the quarter, an increase of 20% over the third quarter of 2023. This included record retained assets under management of 52.5 billion and 11% increase over the third quarter of 2023. AUM growth was driven by net new business flows and net debt and equity proceeds over the last 12 months. Turning to our investment portfolio. Overall, the portfolio is diversified, well positioned and high quality with 96% of fixed maturities being investment grade. Since 2020, we have selectively repositioned more than 2.5 billion of assets to optimize and de-risk the portfolio to perform in varying market conditions while also improving the credit quality. Over the last five years, we have expanded from six to 14 asset classes, further diversifying our portfolio. Our asset allocation strategy remains stable and our invested assets are well matched to our liability profile. Excluding alternative investment volatility and variable investment income, our fixed income yield was .66% in the third quarter, 15 basis points higher than the third quarter of 2023, benefiting from higher yields on new investments. Our partnership with Blackstone provides the flexibility to pivot between public and private assets, helping to mitigate the impact of spread compression. Credit related impairments have averaged five basis points since 2020, which is exceptionally low. Through the first nine months of the year, credit related impairments remained below our pricing. Regarding our commercial real estate debt portfolio, it is high quality, diversified and defensive with the vast majority invested in resilient sectors like residential, multifamily and industrial. We have very little office exposure at less than 2% of our total portfolio, which is significantly below the industry average. Next, turning to our own distribution strategy. Independent agent distribution is rapidly consolidating in the industry and generating strong returns for owners. To date, we have invested 680 million in own distribution. Our current portfolio is performing well and we now estimate EBITDA of 65 to 70 million in 2024, and expect double digit annual growth over the medium term. Overall, F&G strong results through the first nine months of the year have positioned us well for the remainder of 2024. We have great momentum and remain focused on continuing to deliver long-term growth by driving sustainable asset growth from our retail and pension risk transfer growth strategies, generating ROA expansion from enhanced investment margin, scale benefits and fee-based earnings from accretive flow reinsurance, and diversifying earnings through strong growth in our middle market life insurance business and own distribution strategies. We continue to make good progress toward the medium term financial targets we laid out at our 2023 investor day. Growing AUM by 50%, expanding adjusted ROA, excluding significant items to 133 to 155 basis points, increasing adjusted ROE, excluding AOCI and significant items to 13 to 14%, and expanding our multiple. Let me now turn the call over to Wendy to provide further details on F&G's third quarter financial highlights.
spk05: Thanks, Chris. This morning, I'll focus my comments on the following. Adjusted net earnings, highlights for the quarter, including updates on flow reinsurance, surrenders and our floating rate asset hedging program, as well as our strong capital and liquidity position. Starting with earnings, adjusted net earnings attributable to common shareholders for the third quarter was 156 million or $1.22 per share and included 131 million of investment income from alternative investments, 21 million of CLO redemption gains and bond prepayment income, and 14 million tax valuation allowance benefits. This was partially offset by 17 million of net expense from the Actual Assumption Review, reflecting experience updates to surrender assumptions for recent and expected near term policyholder behavior, as well as GMWB writer assumptions for emergent utilization rates. Investment income from alternative investments based on management's long-term expected return of approximately 10% was 172 million. Excluding significant items, adjusted net earnings were 179 million in the third quarter, up 21% over 148 million in the third quarter of 23. This increase reflects asset growth, margin diversification from accretive flow reinsurance and own distribution, discipline expense management, and higher interest expense as a result of planned capital market activities. Adjusted ROA excluding significant items was 132 basis points in the third quarter. This was comprised of 107 basis points of retained ROA, 16 basis points of flow reinsurance fee income, and nine basis points of own distribution margin. Adjusted ROA excluding significant items was up 12 basis points, as compared to 120 basis points in the third quarter of 2023, and brings our adjusted ROA over the last 12 months to 126 basis points. Looking ahead, I'm confident in our ability to deliver on our investor day promises to grow assets, expand ROA and ROE, and increase our multiples as we grow our retail distribution, win our share of healthy PRT pipeline, maintain spreads even in a lower rate environment, benefit from demographic tailwinds, and diversify through our accretive flow reinsurance and own distribution strategies, which set F&G apart. Turning to some additional highlights for the quarter, starting with flow reinsurance. In addition to existing flow reinsurance for 90% of MIGA sales, we have initiated flow reinsurance on 80% of sales of one of our FIA products effective July 1st. This allows us to continue to meet consumer demand for one of our best-selling and most profitable products while expanding our capital light in accretive flow reinsurance initiative. As a reminder, we are able to adjust the level of flow reinsurance up and down over time as market economics change and in line with our capital targets. This allows us to manage net sales above the threshold needed to continue to grow our retained AUM. Turning to surrenders, we continue to see steady growth in our FIA account value despite the industry refinancing due to our record new business volume that continues to well outpace terminations. For insurance companies like F&G, terminations provide a boost to earnings from higher surrender charge fees and free up capital that can be deployed to new business volumes with renewed surrender charges and longer surrender periods than older contracts. This should further improve the liability profile and result in stickier and forced liabilities going forward. Our retail fixed annuities are 93% surrender charge protected. Our funding agreements, pension risk transfer, and immediate annuities are not surrenderable. And our fixed rate multi-year guaranteed annuities are predictable, typically having three, five, or seven-year contractual maturities that vary quarter to quarter. Moving to our floating rate asset portfolio, as discussed on prior calls, we have hedged two thirds of our floating rate assets, which are now only 6% of our total portfolio. Through hedging, we have increased our earnings stability and predictability going forward by locking in 188 basis points of incremental yield above original pricing. Finally, turning to our balance sheet, we ended the quarter with F&G equity attributable to common shareholders excluding AOCI of $5.3 billion or $42.28 per share. Additional details of book value per share are provided in our investor presentation. Consolidated debt outstanding was unchanged from the second quarter at 2.1 billion, and our debt to capitalization ratio excluding AOCI was 26.5%. During October, we issued 500 million of senior notes and that proceeds were used to fully pay down our 365 million revolver balance, with the remainder being used for general corporate purposes. We continue to target holding company cash and invested assets at two times interest coverage and debt to capitalization excluding AOCI at 25% over the long term. Additionally, we expect that our balance sheet will naturally de-lever over time as shareholders equity excluding AOCI grows. Our capital allocation priorities focus on deploying our capital to maximize shareholder value through continued investment in our business, as well as returning cash to shareholders. F&G is well positioned to generate growth at attractive returns, and our scale allows us to self-fund our growth with enforced capital generation, reinsurance and capital markets issuances. Our capital allocation priorities also support our now 110 million annual common dividend commitment, as well as 16 million annual dividend on the preferred stock held by F&F. We feel the common dividend is sustainable and expected to increase over time. F&G continues to maintain strong capitalization and financial flexibility across all of our statutory balance sheets, including our offshore entities, which are conservatively managed to the most stringent capital requirements of our regulators and for rating agencies. Notably, all of our new businesses originated in our US subsidiaries. We only use our offshore entities for affiliated reinsurance, and each treaty requires formal approval by the Iowa regulator. We have similar reserve and risk management practices for our offshore entities as our onshore operating companies. Overall, our third quarter performance once again, builds on our proven track record, and we are well positioned for the remainder of the year. We continue to make significant progress toward our investor day targets of asset growth, margin expansion and enhanced earnings from flow reinsurance and own distribution. This concludes our prepared remarks, and let me now turn the call back to our operator for questions.
spk01: Thank you, ladies and gentlemen. We will now begin the question and answer session. Should you have any questions, please press the star followed by the number one on your touchtone phone. You will hear a prompt that your hand has been raised. Should you wish to decline from the polling process, please press star followed by the number two. If you are using a speakerphone, please leave the handset before pressing any keys. Your first question comes from the line of John Barnage of Piper Sander. Your line is open.
spk08: Good morning. Thanks for the opportunity. My first question is on the flow reinsurance. Given your comments about the optimistic view of the positioning of the product to participate in the silver tsunami that's coming, especially with RYLA being added, how do you view the opportunity to grow that flow reinsurance with the existing partners? Into those new products, and where do you view settling in from a flow reinsurance percent rate of like net to gross?
spk10: Yeah, morning John, it's Chris. I know when he's gonna wanna weigh in as well. I don't think that we set a target of what we wanna reinsure. It's more, what's the capacity that's out there? How does it fit a particular product category? How creative is it? And then we make those individual decisions. I would say right now, I don't see a lot of constraints to the availability of flow reinsurance. Obviously we're selective about who we would partner with when it comes to flow reinsurance. But yeah, I think we continue to be quite optimistic about the impact that it can have on margins for us and sort of the availability of quality partners.
spk08: Thank you, and then my follow-up question is given the opportunity in own distribution to grow in a more capital light manner, given financial sponsors' interests in getting more into the wealth solutions business, given that own distribution and where kind of the stock price is gone, does that give you an opportunity to maybe use that as a currency to go larger in own distribution than maybe you had thought before?
spk10: Yeah, I think like everything else, as you know, we're quite bullish on the opportunity. It started bottom up of some partners we've worked with for a long time, engaging us in their strategic thought process. So we continue to be optimistic, but having said that, we wanna be thoughtful and careful. The goal here isn't to scale for scale's sake, right? We're not trying to be the largest roll-up provider. We're there. We wanna make sure that these are strategic partnerships and we're picking them well. We feel great about the portfolio. It's nice to hear. I do think it's starting to get recognized in our stock price. So yeah, I think it's like everything else. We look at it as what's the best use of the next dollar of capital from a strategic perspective, a return perspective. But yeah, we think this is a great asset that at some point could even be its own entity. So we're quite optimistic
spk02: about it. Thanks for the answers. Thank you. Your next question
spk01: comes from the line of Alex Scott of Berkley's. Your line's now open.
spk09: Good morning, everyone. This is Jack on for Alex. So my question has to do with these higher surrender charges. What exactly was the impact and how did it compare to last quarter? And how would you view a more normal level over time? Thanks.
spk04: Thanks, Jack. So as long as interest rates are gonna stay up, we're gonna see elevated surrenders in the industry as we talk about that industry refinancing. If you look at our results, we point everybody to the last 12 months ROA, which is about 126 basis points. Just to try to smooth out any of the lumpiness that have occurred in the surrenders over the last year, some quarters were higher than other quarters. We've had -to-back quarters of a little bit higher surrenders. But all in all, even without that, that last 12 months gives you an indication of kind of the underlying ROA improvement that we've had without the significant surrenders. Does that help?
spk10: And the only thing I'd add is I think when it's quarter to quarter, it wasn't a gigantic differential. It's fairly consistent.
spk09: Great. And then I guess one quick follow-up. Do you mind discussing the outlook for flows and in particular, funding agreements and PRTs heading into the new year?
spk10: Chris, I'll start. And maybe I'll start with retail. Again, we remain incredibly bullish on the opportunity. Not just the fact that I actually think industry sales are gonna continue to expand, but even if they didn't, we've come nowhere close to penetrating our distribution footprint. So honestly, we can grow regardless of what's happening to the total pie. So that would be outlook for retail. I think that's the biggest thing. I think with respect to PRT, yeah, we had a terrific October. So we're already over 2 billion. So we've surpassed last year's PRT sales. Pipelines continue to be strong. So that's a category where we would expect to grow, I'll call it two to 4 billion in any given year. And the reason for the broader range is simply, it's an availability of what's in our target pipeline, where are we with capital and what types of returns are regenerating in PRT relative to retail, relative to owned distribution. So it's a little bit more complicated answer, but there will be plenty of PRT opportunities. I'm confident of that. Funding agreements are just more opportunistic. We constantly look at the market, where could we issue, where could we invest? How does that spread stack up relative to our other opportunities? So that's one where we want to be an issuer of funding agreement back notes. But again, it's gonna continue to be pretty opportunistic.
spk02: Great, thank you.
spk01: Thank you, your next question comes from the line Wes Carmichael of Autonomous. But before I open up this line, again, just a reminder, should you have any questions, please press star one on your touchstone phone. Wes Carmichael, your line's now open.
spk07: Hey, thanks, good morning. First question, Wendy, I think you talked about the assumption review and that being driven by elevated surrender activity. Can you just talk about what's happening near term and just maybe unpack that a little bit for us?
spk04: Sure, so the surrenders are elevated as you've seen, right? So as we're looking at our assumptions, we're just making a decision, how long do we think it's gonna continue to last? And as I said earlier to the other question, as rates stay up, there's still gonna be elevated surrender. So we just changed the assumption going into over the shorter term, not necessarily a larger longer term assumption. And that was a very small part of the overall 17 million. So call about 5 million unlocking on the DAC from that, that we'll see that as just a minor impact on go forward returns from that surrender assumption. Now on the GMWB utilization, unlocking this new product that we've been selling a lot of, the product features there, the policyholders are electing right away. And what that's going to do is with this product is make the MRB changes left volatile because you're locking in the actual benefit right away. And so there's no fluctuation going forward for those policies. So it's a one time kind of hit for the increase in reserve for that assumption change, but there's no volatility to it going forward.
spk02: Got it, thanks.
spk07: And follow up, I guess, one of your big competitors this quarter had some maybe less than positive comments around Cayman as a jurisdiction for offshore reinsurance saying you can kind of haircut capital there by 50%. So Wendy, I know you talked about in your comments that you manage offshore reinsurance conservatively, but can you maybe just talk about Cayman in particular and how that business is capitalized and managed?
spk04: Sure, so we run our Cayman on a statutory basis. And also calculate RBC. So it's very similar. I think you've heard us talk about the difference is basically around the mortality assumption that's being utilized in the reserves onshore versus offshore. You can use a more best estimate for blue collar and white collar instead of the blended table. So it's not around required capital. It's purely around the redundancy in the reserves.
spk10: And Wes, it's Chris, as a reminder, all of this gets approved by Iowa. All of it gets reported up to Iowa. When we do stress testing around capital, it's done in an aggregated basis and that is shared. So yeah, the short answer is none of those comments apply to us in any way, shape or form.
spk02: Thanks.
spk01: Thank you. Next question comes from the line of Maxwell Fitcher from Truvis, your line's open.
spk06: Hi, good morning. I'm one for Mark Hughes. Last quarter you had mentioned targeting the younger demographic for RILA products. Had you seen any progress there in 3Q and maybe early 4Q? I know you had mentioned, or I think you had mentioned, probably have a de minimis effect in 2024, but any color there would be appreciated.
spk10: Yeah, the honest answer is I think that the volumes are still too small to draw any really meaningful conclusions there, but there's a pretty good body of data for the entire industry that you are reaching a younger demographic with that product. So yeah, I would say too soon to tell, but I'd be really surprised if for some reason we are an outlier to the broader
spk02: trend there. All for me, thank you.
spk01: Thank you, and we have a follow-up question coming from the line of Wes Carmichael. Your line's open.
spk07: Hey, thanks for the follow-up. A couple on the investment portfolio, but can you maybe just give us a little bit of detail on what your new money allocation looks like today where you're putting most of that new money to work, especially if you have some attractive opportunities where you can get more spread and some private or originally stuff from Blackstone?
spk10: Yeah, Wes, I probably don't wanna share too much, right? And it's not necessarily secret sauce, but I was saying as a general matter, we'll tend to rotate between privates and publics depending on where the opportunity is and what's being originated. Blackstone's done a really good job of keeping up with origination and continuing to find new diversifying asset classes. I think you've heard Lena say this before. We've gone from six asset classes pre-Blackstone to now 14. So the private opportunities have been quite robust for us this year, whereas last year when right rates spiked up pretty quickly, there was a lot of opportunity in corporates. So yeah, I would say probably a slight tilt toward privates year to date, but those are decisions that are getting made literally real time depending on where the opportunities are.
spk07: I got it, thanks, Chris. And I guess my follow-up on the investment portfolio would be regarding the ALTS allocation. I think, I mean, if I just looked at you across the industry and versus peers, like it seems like your ALTS allocation is a little bit higher. And I know your definition includes some things that aren't private equity and private real estate and private credit, but just curious on, I do the calculation and it's 13 or 14% of AUM. Is that where you kind of want to trend longer term or is that higher or lower than you'd expect to be?
spk10: Oh, yeah, so I guess the way we think about true ALTS, meaning LP commitments, it's six, but even that's a little bit higher than long-term, we said around five, it's hard to be super precise because you're making commitments with some assumptions about how that capital gets called and utilized. Some of it is the performance really good in our ALTS portfolio. I mean, it's obviously underperformed the long-term assumption recently, but we had some blockbuster years early when we were deploying capital. So yeah, I would say for us, when you say pure ALTS, we're thinking of that allocation right now, it's about six and it's probably in the five to six range longer term. There are equity residual tranches that sometimes get scooped up in that bucket. But yeah, true LP commitments. It tends to skew private equity. So almost half of the portfolio is private equity. The next big chunk would be real estate. And that tends to be classic Blackstone plays of everything from solar infrastructure, data centers, things of that nature. So not commercial per se, and then a small amount in credit funds.
spk02: So hopefully that helps. Thank you. There are no further
spk01: questions at this time. Turning the call over back to Chris Blunt for concluding remarks.
spk10: Great, look, we're very pleased with our overall performance. F&G's business is well positioned for the current market. Now we're excited about the opportunities ahead to continue to drive asset growth, deliver margin expansion and generate a creative returns. Thank you for joining us. We appreciate your interest in F&G and look forward to updating you on
spk02: our fourth quarter earnings call.
spk01: Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines. Thank you.
Disclaimer