Q4 2022 F&G Annuities & Life Inc Earnings Call
Greetings and welcome to the F&B annuities and life fourth quarter and full year 2022 earnings conference call.
At this time all participants are in a listen only mode.
A brief question and answer session will follow the formal presentation.
If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.
As a reminder, this conference is being recorded.
It is now my pleasure to introduce your host Lisa Foxworthy Parker Senior Vice President Investor Relations and external relations. Thank you you may begin.
Thanks, operator, and welcome everyone to <unk> fourth quarter and full year 2022 earnings call.
With me today are Chris Blunt, Chief Executive Officer, and Wendy Yang 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.
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 F. G life Dot com.
It will also be available through telephone replay beginning today at one P. M. Eastern time through March nine 2023.
And now I'll turn the call over to our CEO , Chris Blunt.
Good morning, Thanks for joining us today, we're proud to have reached a milestone in the quarter by becoming a publicly listed company I'd like to start by thanking our team our parent fidelity National financial and our partners for all of their contributions to achieve F and G. As December 1st listing on the New York Stock Exchange.
For those new to our story the purpose of this public listing is to provide for a sum of the parts valuation that is to provide recognition of <unk> value creation as a standalone public company that didn't turn to unlock the value of the 85% majority ownership in F and G held by our parent F enough.
We view this as a win win for F and G. It allows investors to invest directly in F and G. It creates new Optionality for F. N G. As we gained access to the public markets over time while.
While continuing to benefit from Fnf's majority ownership.
That's enough views this as a competitive advantage as effigies, primarily spread based business provides a steady and growing source of earnings that will benefit us it up over time as well as a counter cyclical business model to their title business.
I could not be more pleased with our overall results in this inaugural quarter following effigies transition back to a public company.
F N G is well positioned for growth through its multichannel new business platform and our entire team is working hard every day to create long term shareholder value.
Turning to our results FRG reported total gross sales of $2 $7 billion in the fourth quarter.
23% increase over the prior year quarter on a full year basis FRG reported record gross sales of $11 3 billion in 2022, and 18% increase over full year 2021 boosting.
Boosting our ending assets under management to nearly 44 billion as of December 31.
The continued growth has us well ahead of our goal of doubling assets under management to 50 billion over five years.
Outlined at the time of our acquisition by up enough in 2020, we are on target to achieve that goal this year.
Our retail channels reported record gross sales of $2 5 billion in the fourth quarter of 79% increase over the prior year quarter.
Full year basis, our retail channels reported record gross sales of $8 5 billion, a 37% increase over the full year 2021.
We saw growth across all three retail channels, including agent bank and broker dealer channels, which was driven by increased demand for our products in the rising rate environment, expanding relationships with new and existing distribution partners track.
Traction from our comprehensive product portfolio that meets a broad range of consumer needs and backed by strong customer satisfaction levels as F. And G was ranked number two by J D power among individual annuity providers in 2022.
We are well positioned for continued profitable growth in our retail channels and excited about several initiatives that are underway at our bank and broker dealer channels. We are a leading carrier with our top partners and have a growing product and partner footprint with nearly 20 partners at year end.
Our agent channel, we are committed to our deep long tenured partners is a leading provider of annuity and life insurance solution.
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 were pleased to announce a 49% equity investment in a leading independent agent life insurance distribution partner since this last month, which aligns to our diversified growth strategy and is accretive to our shareholders.
This builds on our 30% equity investment in Freedom equity group, one of <unk> top independent agent life distribution partners, which closed in late 2021.
Next turning to institutional markets, where we have achieved cumulative sales of $6 3 billion since launch in mid 2021, providing meaningful diversification and scale. These.
These cumulative sales include two and a half billion in pension risk transfer with 11 transactions completed ranging from $65 million to $500 million in size and over 47000 covered lives.
$2 6 billion of funding agreement backed note issuances under our $5 billion shelf registration.
$1.2 billion of federal home loan bank funding agreements.
For the fourth quarter institutional sales included approximately $250 million of pension risk transfer for.
For the full year, we reported $2 8 billion of institutional sales in 2022 split evenly between pension risk transfer and funding agreements and in line with our expected $2 billion to $4 billion annual sales run rate dependent on appetite and market conditions.
<unk> total net sales retained were one 9 billion in the fourth quarter and 9 billion for the full year, a 7% decrease in a 3% increase over fourth quarter and full year 2021, respectively.
This reflects the increase of maiga flow reinsurance from 50% to 75% with the speed of re effective September one.
As a reminder, we utilized flow reinsurance, which provides a lower capital requirement unseated 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 effigies returns.
Assets under management for the quarter totaled nearly 44 billion at December 31, reflecting a $7 billion or 19% increase over the prior year quarter, driven primarily by new business growth.
And stable in force retention.
Our high quality investment portfolio is performing very well and our strategic investment management partnership with Blackstone remains a differentiated competitive advantage for F N G.
Our portfolio is diversified and well positioned to withstand uncertainty in the macro environment.
And well matched to our clean and stable liability profile.
Fixed income yield excluding alternative investment volatility and variable investment income is expanded to 4.27% for the fourth quarter as compared to 375% in the fourth quarter of 2021. This.
This primarily reflects upside from the 18% of our portfolio held in floating rate assets and higher yields on new investments.
Our targeted allocation to alternative assets remains approximately 5%.
Since the FNF merger in June of 2000, 20-F, and G. As alternative investment portfolio has returned 12% on average and returns have been less volatile than the S&P 500 index.
Our financial results for 2020 to demonstrate the underlying earnings power of the F and G business model, where profitable asset growth drives earnings and we benefit from a rising rate environment.
<unk> growth is underpinned by a strong balance sheet ample sources of liquidity and financial flexibility to optimize returns are.
Our management team is seasoned and has experienced throughout various economic cycles.
And we've reached an inflection point of scale, where our strong capitalization supports both organic growth and the distribution of a portion of our adjusted net earnings to shareholders over time.
Overall 2022 was another breakout year for F. N G. We continued to execute on our diversified growth strategy when in our target markets and position ourselves for the future as a public company.
Looking ahead, we're in a great position to further grow the company and deliver value to our shareholders.
As part of this we see many opportunities to expand our profitability. In addition to growing our assets under management for 2023, we expect to generate double digit growth in total gross sales.
To recap we have strong momentum as we head into 2023 with many opportunities ahead of us to further expand our business, which will ultimately drive margin expansion and improved returns.
We're also focused on unlocking the inherent value in our business as we focus on delivering value to our shareholders well.
We look forward to updating you on our progress and execution through the balance of the year.
Let me now turn the call over to Wendy Yang to provide further details on <unk> fourth quarter highlights strong balance sheet and financial flexibility.
Thanks, Craig.
Today I'll provide more details about our financial results and key performance metrics.
Perspective on the new <unk> accounting standard and capital liquidity and leverage position.
Overall F&B financial performance in the fourth quarter was strong and builds on our proven track record.
We have strong capitalization and financial flexibility.
Fully execute our growth strategy.
Starting with adjusted net earnings.
For the fourth quarter, we reported adjusted net earnings of $138 million or $1 10 per share.
This included a $34 million recognized gains from alternative investments.
The 8 million onetime tax benefit from carry back of capital losses.
Well from actuarial assumption update and other income items.
The alternative investment net investment income based on management's long term expected return of approximately 10% with $91 million.
For full year 2022, we reported adjusted net earnings of $345 million or $3 per share.
This included a $100 million recognize gains from alternative investments.
$49 million income from actuarial assumption and reserve update.
$1 million of yellow redemption games, and other income $20 million of net income tax benefit and $5 million of other expense.
The alternative investment net investment income based on management's long term expected return of approximately 10% with $265 million.
Note that on a net income basis.
A 100 million loss in the quarter prior to non-GAAP adjustment, largely driven by mark to market movements and economic assumption review update reflecting current macroeconomic condition.
Despite short term volatility reflected in our quarterly results.
<unk> continues to generate consistent economics over time.
Since the merger with FNF over two years ago, F&B has far exceeded our original expectation for growth and delivered approximately $1 1 billion of adjusted net earnings over the last 10 quarters on a cumulative basis.
Our adjusted return on asset continues to trend over time above our target of 100 basis points, well, even having moderated.
No.
Further details are provided in our earnings release and quarterly financial supplement as well as our investor presentation available on our website.
Next as we look forward to 2023, the new accounting standard for long duration targeted improvements or L. DTI becomes effective and is geared to fair value of certain long dated liability.
Overall, we view the adoption of <unk> as an insignificant to our total book value given our mix of business prudent liability assumptions.
Purchase accounting associated with the FNF acquisition, which marked our assets and liabilities at fair value as of June 1st 2020 margin day off.
So as a reminder.
Next annuity base to me there are already at fair value and not impacted by L. D.
Our estimate of the January one 2021 transition impact remains in line with our previously disclosed range. We are expecting an increase to GAAP shareholders' equity by up to $200 million, reflecting the net after tax effect of the new L. D measurement drivers offset by the removal of Shadow accounting.
We're actually well intangible balances.
As of December 31.
'twenty two we expect the L D Ti impact in relation to the current market conditions to support a favorable impact to total shareholders' equity at or greater than the transition impact although subject to our ongoing implementation process.
Of course, the ultimate impact upon adoption of L. D G I.
January 1st 2023 may differ materially from our estimate based on the performance of the company's business during 2022 and macro economic conditions, including changes in interest rate.
We look forward to providing further details with the first quarter of 2023 resolved, which will include re casted resolved and then U L. D G I basis.
Likely be timing differences my sources of actual earnings emerge, although from an economic perspective, the underlying product profitability is unchanged.
As a reminder, this is a U S GAAP accounting standard only with no impact to statutory result insurance company cash flow of regulatory capital.
Turning to our balance sheet, our capital liquidity and leverage position is strong.
We ended the quarter with a GAAP book value, excluding <unk> of $4 6 billion or 36 66 per share with 126 million common shares outstanding as of December 31, 2022.
Our underlying business fundamentals mental delivered solid growth in GAAP book value, excluding <unk> of 7% year over year before capital actions and non economic mark to market movement.
There is a page in our investor presentation detailing this analysis and book value per share.
As just mentioned our GAAP shareholders' equity will be restated for adoption of <unk> accounting standard in the first quarter of 2023.
Our strong capitalization supports growth in distributable cash our board of directors has approved the initiation of a dividend program.
Initial aggregate amount of approximately $100 million per year.
This translates into a dividend yield of approximately three 6% based on <unk> recent market capitalization of approximately $2 7 billion and demonstrates the underlying strength in our business as well as our commitment to creating value for our shareholders.
We paid our first public company quarterly dividend in January 2023, and the amount of <unk> 20 per share of common stock or $25 million.
Going forward, starting next quarter, we expect to announce the record date and payment date for each dividend subject to board of director approval. Following completion of the relevant fiscal quarter and with payment in the third month of each subsequent quarter.
Next turning to leverage.
<unk> debt to capitalization ratio, excluding <unk> was 19% as of December 31, including $515 million proceeds from the new senior unsecured third party revolving credit facility that closed in the fourth quarter.
We are pleased to also successfully complete our first debt issuance.
As a public company on January 13, 2023, issuing $500 million of seven 4% senior unsecured notes due in 2028.
The senior note issuance as well as a $35 million partial pay down on our revolving credit facility in January are not reflected in our capital position as of December 31st.
Based on current debt outstanding our pro forma debt to capitalization ratio. Excluding <unk> is in line with our long term target of 25% and our annual interest expense on debt outstanding is approximately $95 million we.
We intend to use the net proceeds from the revolver and senior note issuance to support the growth of the business and for future liquidity needs.
On February 21, 2023, we have executed an amendment to increase the revolving credit facility from $550 million to $665 million, although the additional capacity remains undrawn.
F&B received strong support from our Bank group.
And the additional Undrawn revolver.
Availability provides us with more financial flexibility to execute our growth plan and capital deployment strategy as we work to enhance return for shareholders.
Now moving onto our statutory capital position.
We came into 2022 with a strong balance sheet, which allowed us to effectively weather a period of significant market volatility while growing the business.
As expected we ended the year with a strong and stable capital position, having an estimated company action level risk based capital or RBC ratio of approximately 440% for our primary operating subsidiary, providing a buffer well above our 400% target.
For full year 2022, we had positive capital generation from our in force book and successfully executed on our planned reinsurance and debt capacity initiatives to support growth of the business to wrap up.
<unk> is well positioned to fund its continued growth with positive and growing enforce capital generation ample opportunity for future reinsurance program and available debt capacity as our balance sheet Delever with book value growth over time on the ratings front. We are pleased that ambev has revised our outlook to positive from stable.
In December and we continue on a positive outlook with Moody's.
This reflects the focus that we have placed on our interactions with the rating agencies as well as our proven track record balance sheet strength financial transparency and commitment to achieving upgrades over time with that I will now hand back to Chris to provide some final comments before we head into Q&A.
Thanks, Wendy we're excited about our current opportunities and well positioned to execute on our growth strategy. We expect to continue growing, albeit at a moderated pace compared to recent record levels and to expand our business with a focus on further improving our profitability, which we believe over time will drive multiple expansion to deliver value.
To shareholders.
I look forward to providing further details on our first quarter earnings call.
This concludes our prepared remarks, so let me now turn the call back to our operator for questions.
Thank you we will now be conducting a question and answer session.
I would like to ask a question. Please press star one on your telephone keypad.
Confirmation tone will indicate your line is in the question queue.
You May press Star two 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, one moment, please while we poll for questions.
Thank you. Our first question comes from the line of Andrew <unk> with Credit Suisse. Please proceed with your question.
Hey, good morning.
First question is around cost of funds it came in at about 2.38% in the quarter.
Last quarter, it was 235 and year over year it was $2 83.
Could you talk about the drivers, especially in a higher interest rate environment than a year ago could you talk about the drivers of.
What's keeping it down and where we should expect it to to migrate over the course of the year.
Sure when do you want to start and I will jump in.
Sure. Thanks, Andrew for the question.
Basically you know being a spread business.
Even though interest rates are up we're able to purchase the exact option that we need to credit whatever the policyholders are requesting and and their policy. So we don't view that number as fluctuating a whole lot at night with that.
Depending on the volatility, but it stays pretty range bound.
Don't expect that just because interest rates are going up that our option cost on the FIA business.
We are going to increase substantially which is the main driver in that bucket.
Okay. So the FIA option costs.
Okay.
It there unless unless volatility spikes out or something got Ya.
Then with regard to the revolving credit.
Thank God.
<unk> two <unk>.
And the year.
What's the thinking behind utilizing that as opposed to long term debt.
Sure Chris Chris.
Crystal Alright, Okay. Yeah go ahead, Wendy sorry, okay.
Great question, we are at the end of the year.
Wanted to make sure that we we were starting the year with capital to grow the business the debt markets were not that favorable towards the end of the year.
And as you know we were able to raise that at the beginning of the year, but wanted to have a revolver as a stand alone company to begin with and it was just.
Optimized to be able to start the year with a gross capital and what we're planning on to go back.
During the year, but it just depends on the debt market.
And availability.
And more we will pay down the revolver. If we're successful later in the year with raising debt.
And Wendy the cost of those funds currently are at what yield.
The blended rate is around.
Around five six between the two.
Got it and then if I could just sneak one last one and that'll be it.
Just doing some exciting stuff around acquiring distribution can you talk about.
How you are.
Your distribution partners are viewing that or are they seeing that as a conflict and.
How are carriers viewing your distributors that you've acquired.
Yes. This is Chris so Andrew.
The space that we've always.
Loved.
Source of strength traditionally.
Traditionally for LNG, particularly on the life side. These are organizations that we've worked with for decades and so on.
Number of them are growing so quickly they need capital or their choices effectively our private equity private equity has been gobbling up a number of these firms, but many of them don't want to go that route either looking for a more permanent partnership as opposed to.
More time bound fund investment in their company and so in a lot of cases folks have approached us and said Hey, we need capital to grow you guys are a strategic partner or is that something you'd be interested in so for us we just view it as well.
One further strengthening our relationship with firms we've known for a long time, but more importantly, it's a source of earnings that doesn't have big capital intensity going forward. So we love the space. So far it's really been in the life area and these are middle market predominantly cultural market focused.
Organization. So yeah. That's that's just the space that we love and if Theres an opportunity to do more of that we would do it we haven't gotten pushed back.
Again, a number of our from our other distribution partners because they all see the same dynamic that is happening right now firms are getting larger firms are starting to.
To consolidate so I think they look at it and view it positively.
Awesome. Thanks, so much.
Yeah.
Our next question comes from the line of a J Hayes with Stephens. Please proceed with your question.
Good morning, Thank you for taking my questions.
Just on past commentary it appears your index Universal life products continue to exceed expectations.
Wanted to see if we can get some color on what's driving the strength and then how you think 23 may stack up in comparison to the strong year you saw in 'twenty two.
Yes, Hey, Thanks This is Chris.
As I said before it's a great tie in to the prior common.
Commentary its really driven by the same thing so one.
Just huge appetite.
Amongst the middle market, and particularly the cultural markets of the U S. For life insurance you know this is where young family formation is taking place I've said to folks it it feels like the life insurance business of the 19 sixties in the United States and so that is really what's driving it for us as well as some select brokerage.
<unk> chips, where we've known folks for a long time, but yes, I think when I first joined four years ago, we were doing like $28 million of recurring premium and we're at.
130.
$1 million of recurring premium now in that business. So we like it a ton and so it is it is all related it's a strengthening of distribution relationships, we happen to play.
In the middle market, a number of our peers playing in the affluent market and that's a space we like in terms of.
The profit footprint and the growth opportunities. So I think we're up to number three and policies.
All policies. So that's a dominant business for us its still small relative to the annuity business, but yes, it's grown at a breakneck clip and we would expect that to continue for some time.
Great I appreciate the clarity there and then Chris in your prepared remarks, I believe if I'm not mistaken that you had said total institutional sales if it fell within your goal of about $2 billion to $4 billion annually.
If im not mistaken there from what I remember this was $2 4 billion.
Gold was just for PRT, but is that how we should think about it going forward is in total institutional sale should fall roughly within that $2 billion to $4 billion annually.
Yes, I think I think that is a total number and the reason, there's just such a wide band PR.
PRT is a market that we just laws and so yes. Our goal is and we our expectation is that we'd be growing that.
Every single year, we like how we're positioned with like how we've been received by.
By both intermediaries and plan sponsors we had a really great team. So.
That to us along with FIA in the retail is just a core product.
We expect to grow every single year, and if not we would be disappointed the other part of institutional those the funding agreement backed note market and we love that as well, it's a great source of premiums and therefore spread it's just a lot lumpier than opportunistic. So this year was just happened to be a challenging year, one because of where rates and spreads were.
Bouncing around but also we were an active issuer in the market are raising debt and that can create some competition. So.
Yes.
Environment comes down a little bit you you should expect us to try to jump back in with some F. N B S. It's just a little harder.
For us to predict and then again.
We have so many growth opportunities right now we're always looking to maximize.
Our return on capital. So again I think of half of institutional is recurring business. We want to just go after constantly and some of it is a little more opportunistic opportunistic issuance.
Great. Thank you so much and congrats on the quarter.
Great. Thank you.
As a reminder, if you would like to ask a question press star one on your telephone keypad.
Our next question comes from the line of Mark Hughes with Truest. Please proceed with your question.
Thank you and good morning.
Can you talk about those surrenders, if im looking at them properly maybe up a little bit I think we might have seen that with some of your competitors, but how are you looking at that number.
Thanks Mark.
Yep Yep, Thanks, Chris Yeah, Mark its not outside our range of expectation that it's up a little bit from the September quarter.
But again its within our expectation half of the surrender.
Lenders for the quarter were just normal Mega run off though Mike is that we've issued.
Five seven years ago maturing theyre not out of our expectation and just a reminder, you know 90% of our our block is surrender charge protected and a majority of it has an MBA coverage and so our surrender charges were actually up on.
The higher surrenders because of the MBA that you saw a little bit increase in that surrender charge state.
How about the PRT market I don't know if you mentioned, but are you seeing any kind of.
Pipeline there.
Like pension funding is a pretty good these days the interest rate.
May or may not help but how are you seeing that playbook.
Yes. This is Chris that that pipeline is great I'm sure for us and for our competitors as well. So you hit it on the head. If you went back I don't.
No it <unk>.
Five years ago, I think average funding ratios, where the 80% and now it's over 100 and so yeah I think that's a great market the tiny.
Is good.
We're quite optimistic on it.
Yes.
<unk> sales.
Mixing properly the up about 20.
29%.
How do you feel like you're losing.
Position in that market.
That's going to be a good growth market here in 2023.
Yes, it should be in for all the reasons that we talk about one.
The rate environment is actually constructive here, meaning option budgets are higher when when theres just more crediting to to play around with so that's a positive and then the volatility that we've seen in the markets. Just people are much more open to the idea of giving up a little upside for some downside protection.
So we think opportunities there great.
Business through our core independent agents continues to be really strong relationships that are really good and then again, we've added a number of bank and broker dealer partners.
We will typically add five or six new relationships per year. So we would expect same store sales growth. If you will but we're adding stores as.
As well so yeah, that's that's a market we're still quite excited about.
So when did you say.
Could you repeat that point.
I think you all have made previously about a 1% return on kind of a.
The net return is being.
Pretty good bogey is that still the case.
Yes.
Thanks, Mark Yeah, it's still a bogey, but as you've seen over the last 10 quarters I mean, we've been increasing that and as we diversify our earnings you'll see that uptick a little bit and then with 15% of our portfolio and in floaters.
We saw great expansion.
In the Q that there is a page that shows quarter quarter over quarter for 'twenty two the expansion that we got from the floaters.
Even though that's our target and you should see that expand.
And 'twenty three.
And only thing I'd add to that is in a little bit of expense scale here too we've doubled our assets in just about three years.
While we don't have a ton of fixed expenses, we do have some so theres some margin upside from that as well.
Thank you.
Thank you we have reached the end of the question and answer session. Ms. Foxworthy Parker I'd now like to turn the floor back over to you for closing comments.
Hey, Thanks for joining us. This morning, if you have any questions regarding our results or anything discussed on today's call. Please feel free to contact US. We appreciate your interest in <unk> and look forward to updating you on our first quarter earnings call. Thank you.
Ladies and gentlemen, this does conclude today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation and have a wonderful day.