Q1 2020 Earnings Call

Good morning, and welcome to the FGL Holdings first quarter 2020 earnings conference call and webcast. Please note this event is being recorded and will be available for replay month. I would now like to turn the conference over to West Carmichael corporate development and investor relations, please go ahead appreciate you joining our install today. We will discuss our financial results for the first quarter of two thousand which ended on March 31st.

You can find the financial information for FTL Holdings on the investor section of our website as presenters include Chris want president and chief executive officer Executive Vice President and Chief Financial Officer.

Gap or comparison comments today will be to the first quarter of 2019 unless we stayed otherwise finally as we noted in. Our earnings release issued last night due to the pending transaction with FM. They will not be a question-and-answer session this morning.

Market environment and our business and a deep dive into the Investment Portfolio in partnership with members of blackstone's no date has been set yet, but stay tuned for details of Mystics in the near future.

Assessment spread by 51 basis points year-over-year despite the nearly one hundred twenty-five basis point decline in the 10-year treasury yield in the quarter month or risk-free rates declined dramatically. We saw credit spreads increase across the board, even the dislocation in the market. We took advantage of attractive new money and allocated a fire percentage of purchases for double-a and Triple-A Securities while investing in highly rated assets. We were still able to price products and attractive returns.

Some of the comments we make during this call may contain forward-looking statements within the meaning of the private Securities litigation Reform Act. We not intend to update any comments on this call to reflect new information subsequent events or changes in strategy a number of risks and uncertainties exist that could

Finally, I'd like to make a few comments regarding the merger agreement with f&f. We are on track to close the deal now. We're targeting a close by the end of the second quarter of 2020 and no life in the beginning of the third quarter. I also want to reiterate that we are excited to join the f&f family of companies and believe that under FNS ownership. We will be able to expand growth in our life Channel jump starter launched into new channels and accelerate our path toward higher ratings.

And with that, it's my pleasure to turn the call over to Chris.

Thanks while it's a good morning everyone.

We get in to resolve.

The current environment it's been a challenging time and I hope all of you and your families are well, the covid-19 pandemic is touched all aspects of our lives and it's created unprecedented Global challenges for the economy as well. As our personal life despite the challenges it up and G were operating as close to business as usual as possible while protecting the health and well-being of our employees about 96% of our Workforce is now working remotely and I'm glad to say that we're continuing to provide high-quality and consistent service to our policy holders and distribution Partners off.

Report a deal fell modestly versus the fourth quarter of nineteen given by lower floating-rate income. However, I want to remind everyone that while reported yield is an important element we make money. It is only one driver of the business we can and do regularly re price our products to manage to net investment spread targets if the net investment spread not yield alone, but drives our core earnings and this certainly proved out in the first quarter.

With that, I'll turn it over to John to provide more details on the financial performance during the quarter.

Thanks, Chris and good morning. Everyone today. I'll Focus my comments on the following capital and liquidity earnings and performance Trends across the business and I'll wrap up with some light from our recent portfolio stress test.

F&g is financially strong and well-positioned for the long-term. A products are working as designed. Our policy holders are protected from Market declines and can rely on the Promises. We may be inherent guarantees of our products are built exactly four times like these

Excluding notable items are adjusted operating income was in the line with the first quarter of 2019 at $65 million dollars.

First as a backdrop, we ended 2019 in a very strong financial position today despite the current macroeconomic situation. We remain confident with our liquidity and capital position.

You the market movements in the quarter. I reported gaap earnings and Book value experience the heightened level of mark-to-market volatility since the end of the first quarter the equity and credit markets rebounded and the marks on our Investment Portfolio has improved regarding the Investment Portfolio blackstone's partnership managing, the general account remains a differentiated competitive Advantage for f and g John will walk you through an overview of the portfolio including a new severe stress scenario analysis. The bottom line is that we feel comfortable with the makeup of our Investment Portfolio in particular how it relates to our liabilities. In fact, even in a severe stress scenario that assumes materially hired to fall off and mark the market impacts.

additionally, we're committed to our growth strategy of expanding our annuity distribution and growing our life sales with that our Focus remains on recruiting top talent to f and g month in support of this expansion and we're on

Regarding liquidity. We ended the quarter with over $350 billion dollars of available cash at our operating companies.

This is three times our normal level of cash buffer. In addition. We have meaningful positive net new business high quality liquid assets are $250 off our revolving credit facility remains undrawn and our $550 million dollars senior notes. Do not mature.

For until 2025 with no other debt on our books as it relates to Capital. We finish the first quarter with an estimated risk-based Capital ratio of about 425% on a Consolidated basis compared to 450% in the first quarter of 2019 off and 470% at year end.

to those seen in the great financial crisis, we expect the impact to be manageable even

The RBC decline in the current quarter was driven by the effects of mark-to-market items. I will speak further to these items as we walk through earnings and the performance Trends across the whole business.

We reported adjusted adjusted operating income available to come and share of her folders of thirty-three million dollars or fifteen cents per share are underlying earnings available to, Holders were $65 after adjusting for $32 million dollars fifteen cents per share of unfavorable notable items that are not consistent. A.

These no.

Well items included ten cents per share for charges charges to re-establish a tax valuation allowance for one of our offshore subsidiaries that had been replaced in the third quarter of 2019.

Two cents per share in unfavorable spea mortality experience and other Reserve adjustments.

Two cents per share of add a. Non deferred commission expense true up and one cent per share of higher project related expenses.

For comparison last year's first quarter of $82 or $0.37 per share included favorable notable items.

of Seventeen million dollars or eight cents per share

adjusting for these notable items in both. Thirty-five million dollars. We continue to drive core earnings through ongoing invested asset growth and a disciplined credit app strategy.

Turning to reported net income on a gaap basis.

During the quarter we reported a net loss available to Common shareholders of $346 or a dollar sixty two per share. This result was primarily driven by $379 million of unfavorable mark-to-market movement due to the inherent asymmetry in accounting for assets and liabilities under gaap report all of which are excluded from adjusted operating income. These items are detailed in our earnings release published last night.

We ended the quarter at a book value per share, excluding of $6.82 shipping out investment and liability related mark-to-market movements of a dollar fifty nine per share. Our book value per share was $8.41.

The remaining fifteen cents per share decreased from book value per share of $8.56 a year rent was primarily driven by the adoption of the new current expecting a credit laws or Cecil accounting standard. There was a page in our presentation detailing this analysis of book value per share.

Turning to the Investment Portfolio for which we have provided additional information in the presentation average assets under management for the quarter totaled twenty eight point nine billion dollars reflecting an increase of $3 billion dollars or 12% over the prior-year driven by net new business flows.

The net average investment yield on new money was 4.47% in the quarter including a 5% allocation to Alternative assets.

Our alternative assets represent approximately 1.1 billion dollars or 4% of the portfolio currently funded and 55% off of alternative asset commitments are still undrawn.

On average, we assume a 12% return for this asset class over the life of the investment. And in the first quarter, the annualized return on alts was about 9%

As a reminder income on our alternative assets are reported on a 1/4 lag the effect of the market movement on alternative asset returns in the first quarter will be reflected in second-quarter results.

Next turning to net investment income and portfolio yield net investment income was $370 million in the first quarter up twenty-three million or 10% from the prior quarter net investment income group.

Approximately $34 million dollars from invested assets grow and $16 from net portfolio repositioned uplift. This was partially offset by 16 million dollars lower floating-rate income and six million dollars higher planned investment expense.

Compared to the fourth quarter of 2019 net investment income was $7 lower this quarter primarily driven by lower floating-rate income reported gaap earned yield was 4.38% down 19 basis points from last quarter.

As Chris noted while the portfolio yield is an important element of our business. What is most important is that we actively manage our net investment spread wage, ultimately drives earnings and attract and an attractive return-on-capital net investment spread for our primary product line FIA was 305 basis points up 51 basis points over the prior year and net investment spread across all products was 220 basis points up 7 basis points over the prior year.

Page seven in the earnings presentation lays out our track record of consistently managing FIA spread despite volatility and interest rates.

Finally, I'd like to turn our recent turn to our recent portfolio stress test.

As a baseline are $28 billion dollar portfolio remains high quality in ninety-five per-cent of our fixed-income Securities are rated investment-grade, including corporate and structured securities.

over

For all the f and g portfolio is well Diversified and tightly matched between assets and liabilities in recent years. We recognize that we were late in the credit cycle and took appropriate actions in 2018. We partnered with Blackstone to reposition a portion of the portfolio out of corporate bonds into a mix of investment-grade structure assets while maintaining an average of 1.5 rating.

in 2019 we further be risked by selling 1 billion dollars of lower-quality triple berated corporates and reallocated the higher-quality secure

given the covid-19 Health crisis and the current market environment the risk teams at fmg and Blackstone have collaborated to analyze the performance of the portfolio in a variety of Life scenarios including a severe stress scenario in this scenario we model the recessionary environment based on the extreme conditions of the 2008/2009 a global financial crisis and have a shock which effectively doubles The observed annual default rates relative to the global financial crisis the assumptions are outlined in the presentation we believe the assumptions in our stress testing scenario reflect the material deterioration in the macroeconomic environment relative to our expectations over the near and long-term

That said in the severe scenario, we view the impact of Book value and earnings as manageable and believe the company will remain well-capitalized wage in this scenario. We estimated total defaults of approximately $140 after tax mostly driven by default in the corporate bond portfolio. This is equivalent to roughly fifty basis points on the total portfolio.

In addition, we estimate a $300 million after-tax unrealized loss from Market to Market movements on our Alternatives and preferred stock Holdings Alternatives and preferred stocks to recover over time as the markets rebound.

The total of the sum to $440 after tax loss in a severe stress with over two hundred yards of this coming from assets that are marked to Market as opposed to being permanently impaired. This is equivalent to roughly a hundred sixty basis points of the portfolio.

$440 of after-tax impact on the portfolio is about 1.4 times are full year to eighty million dollars.

This compares to the moderate stress scenario we presented in the first quarter of 2019, which were reflected an impact completely dead One X.

after tax earnings

We review these review these results as manageable within our capital and liquidity framework particularly given the strong characteristics of the liabilities that we right and with money. I'll turn it back over to Chris for his closing remarks.

Thanks, John in summary. We continue to have momentum and executing on our strategy and we're pleased with the underlying performance of the business in the first quarter. Despite the headwind. Yep. Thank everyone for their time this morning. Stay tuned for news regarding our upcoming investor update conference call and webcast in June. We appreciate your interest in a pin G and thank you for joining. Today's call Operator. You can now end the call.

Thank you, sir. Ladies and gentlemen, the conference has concluded. Thank you for attending today's presentation. You may now disconnect.