Q1 2023 F&G Annuities & Life Inc Earnings Call

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Good morning, ladies and gentlemen, and thank you for standing by and welcome to the F. N G annuities and life first quarter 2023 earnings call. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation should you require operator assistance during the conference.

<unk>. Please press star zero to say go on operator, please note discount participating recorded.

Great. Thanks, operator, and welcome everyone to <unk> first quarter 2023 earnings call. Joining me today are Chris wanted to Chief Executive Officer, and Wendy Yang Chief Financial Officer, We look forward to addressing your questions. Following our prepared remarks.

We do not undertake any duty to revise or update such statements to reflect new information subsequent events or changes in strategy. Please.

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.

It will also be available through telephone replay beginning today at one P. M. Eastern time through May 11th 2023.

And now I'll turn the call over to our CEO , Chris Blunt.

And thanks for joining us today for F and G 2023 is off to a solid start as shown in our first quarter results I'm proud of this result, especially given the tumultuous nature of the first quarter macro environment characterized by ongoing market volatility and inflationary pressures stress on the banking system given the recent.

Regional bank failures and concerns around credit and commercial real estate exposure with the prospect of a recession on the horizon.

Although a difficult environment. It really highlights what makes us different our superior ecosystem operates and how <unk> is well positioned to weather the storm I'd like to share some of those insights with you.

First starting with the effects of market volatility and inflationary pressures.

Interest rates and extended periods of market volatility are known to spur fixed annuity sales as financial advisers and consumers seek resilience for their investment portfolios and retirement savings.

Fixed annuities are increasingly viewed as an attractive solution offering relatively higher rates guaranteed growth principal protection tax advantaged accumulation in annuities Asian options.

We reported record total gross sales of $3 3 billion in the first quarter, a 27% increase over the prior year quarter, and a 22% increase over the sequential fourth quarter.

From our perspective this is a smart financial decision as it enhances cash flow provides fee based earnings and is accretive to <unk> returns.

Our liabilities are also relatively young given the robust levels of new business over the past three years.

With much of our position initiated in 2018.

For full year 2021, we reported adjusted net earnings of $656 million or $6 25 per share as recapture the new accounting standard as compared to previously reported results at $551 million or $5.25 per share.

After excluding significant income and expense items and normalizing for short term alternative investments volatility our underlying earnings are 5% higher for the full years 2021, and 2022 under the new accounting standard.

This reflects timing differences when sources of actual earnings emerge although from an economic perspective, the underlying product profitability is unchanged.

For the first quarter of 2023, we reported adjusted net earnings of 49 million or <unk> 39 per share. This included $99 million of investment income from alternative investments offset by 37 million tax valuation allowance expense.

Alternative investments investment income based on management's long term expectation return of approximately 10% with $132 million.

And a net income basis, we had $195 million loss in the quarter prior to non-GAAP adjustments largely driven by the mark to market movement.

Going forward, we expect additional volatility in our quarterly adjusted net earnings trend due to timing differences from both the alternatives investment portfolio short term mark to market movement that differs from long term return expectations as well as M. RMB reserve changes for actual to expected experience variances.

Which were previously partially offset by intangible amortization.

Again underlying economics have not changed and under the new accounting standard our adjusted return on asset continues to trend over time above our return on assets target of 100 basis points.

Further details are provided in our earnings release and quarterly financial supplement as well as our investor presentation.

Available on our website. Our 10-Q will also include expanded disclosures pursuant to new L. D T I accounting standard.

Turning to our balance sheet, our capital liquidity and leverage position this strong.

Starting with our GAAP book value per share our balance sheet for 2021 and 2022 have been adjusted for the retrospective L. D T I update.

As of December 31, 2022, we reported GAAP book value, excluding <unk> of $5 2 billion or $41 45 per share as recast for the new accounting standard as compared to previously reported.

At $4 6 billion or $36.66 per share the approximately 600 million increase in equity reflects three primary updates to retained earnings including approximately 500 million increase for changes in the <unk> reserve and elimination of former S. O P O dash.

Reserve and $170 million increase for the migration to a constant actuarial intangible amortization methodology, partially offset by $60 million decrease for other items.

We ended the first quarter with a GAAP book value, excluding a OCI of $5 billion or $39.94 per share with 126 million common shares outstanding as of March 31st.

There is a page in our investor presentation detailing the analysis of book value per share.

<unk> debt to capitalization ratio excluding M. C. I was 24% as of March 31st in line with our long term target. This reflects both the restatement of equity under the new accounting standard and $500 million of new senior notes issued during the quarter.

We intend to use the net proceeds from the senior notes issuance to support the growth of the business and for future liquidity needs. Our annual interest expense is approximately 95 million or roughly 6% blended yield on the $1 6 billion total debt outstanding.

We target holding company cash and invested assets at two times fixed charge coverage.

Our strong capitalization supports growth in distributable cash during the first quarter, we paid our first public company quarterly dividend in the amount of 20 cents per share of common stock or $25 million.

Following yesterday's announcement in the second quarter cash dividend of <unk> 20 per share we view our current annual common dividend of approximately 100 million as sustainable.

This translates into a dividend yield of approximately 4%.

Based on <unk> recent market capitalization of approximately $2 4 billion and demonstrates the underlying strength in our business as well as our commitment to creating value for our shareholders.

The dividend is reviewed quarterly and expect it to increase over time subject to cash flows.

And alternative uses of capital and market conditions.

Our board of Directors has also authorized the initiation of a three year 25 million share repurchase program as announced on March 21st to take advantage of our shares currently trading at a significantly discount to intrinsic value.

As we have executed on our business plan to double assets under management and earnings per share by expanding our business into new channels of distribution well ahead of our original target time frame. The market has been slow to recognize the value that has been created and we felt the repurchase program authorization was important to demonstrate our commitment to creating shareholder value.

Finally, turning to our statutory capital position, we came into 2023 with a strong balance sheet and we continue to target a company action level risk based capital or RBC ratio of 400%.

Let me now turn the call over to Chris to provide further details on <unk> reinsurance initiative.

Wendy we continue to execute on our planned reinsurance initiatives to support the ongoing growth of the business, including additional optimization through flow reinsurance.

The ability of our new business platform to generate premiums is attractive to third party asset managers, especially those who are not paired with an insurer as a means for them to take on asset growth and generate fees from the flow.

To illustrate the economics for F. N G. For every 1 billion of new business flow reinsurance, we free up approximately $75 million of capital to redeploy to the highest returning retained business.

This is meaningful and help put that amount in perspective that is nearly 10% of the estimated $800 million of capital generation from our entire in force block in 2023.

Importantly, we expect to grow gross sales at a double digit clip, while managing net sales retained to a level that continues to grow our AUM. We estimate that we could retain as little as six to 7 billion of gross sales and continue to grow the block.

In this scenario as long as sales are well in excess of outflows were still growing with net inflows, albeit at a smaller spread but with less capital. This is highly accretive to ROE and also provides free cash flow from the ceding Commission and expense allowances generated.

We are well into our planning process and I look forward to providing further details next quarter.

To wrap up F&B is well positioned to fund its continued growth with positive and growing enforce capital generation.

Opportunity for future reinsurance programs and available debt capacity as our balance sheet de levers with book value growth over time.

And taken together, our common dividend and share repurchase programs demonstrate our commitment to creating shareholder value through a healthy return of capital to our shareholders.

This concludes our prepared remarks, so let me now turn the call back to our operator for questions.

Thank you at this time, we'll be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. If at any time you wish to remove your question from the queue. Please press star two.

It disappoints using speaker equipment, it may be necessary to pick up your handset before pressing the star keys, one moment, please I'll be poll for questions.

Our first question is from a J Hayes with Stephens, Inc.

Hey, good morning, guys, congrats on the quarter and thanks for taking our questions.

Can we first off just walk through your earnings rule of thumb that you've shared in the past that's earnings largely equating to one person times I. Appreciate you win so after adopting LTE DTI first off you mentioned in prepared remarks that you continue to expect our way to be 100 basis points, maybe north of that but.

With that said with this historic rule of thumb still be a good measure of adjusted net earnings long term.

Yeah, Hey, Jay This is Chris we do think that's still a good measure of long term and as we've said before I think we've averaged probably closer to 105 or 106.

Obviously, there was a little bit of noise in a couple of one timers. This.

This quarter, but if we adjust for what we consider to be unusual or non recurring items, we're still comfortably in that Zip code.

Great and then Chris you also mentioned that a railroad is expected to launch later this year.

Can you kind of expand on that planned rollout of that product offering how quickly do you think you've gained traction in that space and then maybe what potential contributions from Brian .

Contribute here in 2023.

Yeah, and maybe just a little bit of a background here as you know it tends to be a bit more popular product in the broker dealer channel and so if you look at our channel expansion. We have had success selling <unk> and certainly my goes through broker dealers, but the bulk of the sales have really been through bags. So.

Banks much more fixed oriented.

<unk> tends to have a much bigger following in the BD community. So that's really why we're doing it in a lot of our adds to our distribution partners have been in the broker dealer space in anticipation of this.

Frankly, I don't think we're going to see the big Splash like we saw when we launched at Raymond James I think we did $1 billion in the first year.

No that was that was pretty incredible I think this will be a bit more of a slow build of probably a couple of hundred million dollars of sales and building after that but long term. We are quite excited about it and again it plays to the exact same strengths of why we compete and win in the FIA space applied a rigor.

Great. Thank you for the color there and then one more if I may it seems your own distribution strategies is a growing piece of the effigy story.

Maybe if you were to take a crystal ball and look a couple of years down the road three to five years I'll give you the flexibility there, but what is your own distribution strategy look like and maybe how does that contribute to earnings long term.

Yes, I am sure my team is going to kick me under the table here, but.

Think we could deploy a $1 billion of capital in the next few years into these types of investments in.

Our early experience has been really really positive. Many cases, there are firms that we've got a couple of decades of experience working with very strong management teams.

And as you know these are not capital intensive earnings and their earnings that trade at a much higher.

Multiple or rewarded with much higher multiples than tip.

Typically spread based starting so.

Yes, I think part of the strategy of utilizing a little more reinsurance taking some of that cash flow.

And reinvesting it in some of these partners I think is going to prove to be highly.

Highly accretive to shareholders.

Great. Thank you so much.

Once again to ask a question. Please press star one our next question is from Mark Hughes with <unk> Securities.

Yeah. Thanks, good morning.

Good morning.

Yes.

Good morning, Wendy what is the.

Economics here Mike.

You, obviously had a big jump in sales.

I know Youre re insuring a lot of bad.

Chris.

What the implication is around capital and then.

With the.

Interest rates et cetera, where they are at now do you anticipate that that will continue to be a big contributor as we go through the year.

Yeah, I'll start and I'm sure when you don't want to jump in here too I think when we look at the economics of it right now the demand.

For profitable premiums is red Hot right now and the reinsurance community and so.

We have an ability to in a retail.

<unk> retained sale as we've said, we put up a fair amount of capital could be as much as 15% upfront.

We capture north of 100 basis points of spread in a reinsured sale and you see examples of that in our Investor day presentation on the website.

We're obviously getting less spread.

But putting up a tiny fraction of the amount of capital. So it is highly accretive and something we believe can drive significant Roe.

Expansion going forward. So yeah that is that is something that you could expect us to do more and as the other benefit.

Of increasing free cash flow. So for every billion of sales that we reinsure think of it as roughly saving.

Maybe $75 million of capital.

So you can do that math and we I said in the prepared remarks that.

We can retain as little as six or $7 billion of our sales are still grow the block because we don't want to run off the block we want the block to grow.

And if we reinsure the amounts over that.

You can do that math it creates a fair amount of cash and you know what.

On positive outlook with a couple of the rating agencies, obviously every CEO believes they're due.

Upgrade and that's really important to us is keeping up.

Really strong capital position.

Is there the only thing I would add mark.

Yeah Yeah.

Yeah, the only thing I would add.

The reason for it being really accretive as in the second year, you're releasing all the capital that you put up in the first year, whereas on a retained sale you still have half the capital.

That you need to hold and that gradually wears down over the life of the contract. So that's why it's it's very accretive.

And I think Mark to jump ahead, where I think you we're going next.

Yeah, we don't have a $1 billion of cash sitting around right now but again. These are these are investments we would make over the next few years and on average there.

$100 million or less.

They're not.

Gigantic investment. So if you took a say $4 billion of reinsured sales use that $75 million.

Youre freeing up $300 million of cash in a year.

Yeah.

Right Okay.

And are there enough of these businesses that are out there of sufficient size and.

Capability.

Or.

Being transacted, but.

But you could reasonably quickly.

Put that amount of capital to work.

Yes, we believe there are.

Okay.

<unk> demand I think you've talked about.

The competitive environment, maybe relatively favorable because there has been very strong demand and so.

Reduce crediting rates used to control the volume.

We'll see the market like that now.

Is there anything around the.

Evolution of the banking crisis here.

As the changing that dynamic at all.

Threw in one other variable which is done if interest rates do come down.

Uh huh.

Threatening.

Yes.

Does that impact do you think the demand environment.

Yes, I'll try to hit them, all I think anytime.

Anytime you see market volatility like this it's just good for our core products, because again insurers and banks are the only.

Folks that are legally allowed to use the G word for guarantees right and so I think.

That's a huge positive obviously the rate differential oversee DS.

It was always positive and so.

As a positive for us right now.

Again, the level of rates and you've seen sort of our historical spread relative to the 10 year Treasury, it's been as low as 39 basis points and as high as you know high fours.

And we're able to eke out a spread so it's really that differential with the banks I would suspect given some of the capital pressures that.

We will likely be a little less competitive on Cds, just my hypothesis here.

And then the other which I think is more of a longer term impact.

Very good thank you.

Ladies and gentlemen, we have reached the end of the question and answer session and I would like to turn the call back to Chris Blunt for closing remarks.

We're pleased with our overall results as you can tell you know despite the uncertainty and volatility in the current macro environment. We think <unk> is poised to benefit in this higher rate environment and we're off to a strong start in our second quarter as a publicly traded company.

As I said earlier, we would expect 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. Thanks for your time. This morning. We appreciate your interest in <unk> and look forward to updating you on our second quarter earnings call.

This concludes today's conference.

Thank you for your participation you may disconnect your lines at this time.

Yeah.

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