Q2 2023 F&G Annuities & Life Inc Earnings Call
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Our gross sales were $6 3 billion in the first half up 11% over the prior year. We're on track with our stated goal of growing annual gross sales at a double digit clip.
And with net sales of $4 4 billion in the first half we are on track with our stated goal of managing that sales retained above the $6 billion to $7 billion annual level continues to grow our retained a U M.
Next looking at the quarter's results more closely we reported gross sales of 3 billion in the second quarter, a decrease of 3% from the prior year quarter due to lumpy institutional sales with a 9% decrease over the sequential first quarter, which reflected a record level of sales boosted by the effects of <unk>.
Market volatility and the U S Regional bank crisis.
Retail channel sales were $2 3 billion in the second quarter, an increase of 5% over $2 2 billion in the second quarter of 2022. This reflects our fifth consecutive quarter of retail channel sales exceeding $2 billion driven by continued strong consumer demand for our.
<unk>.
Fixed annuities are an attractive solution for consumers given their relatively higher rates guaranteed growth principal protection and tax advantaged accumulation in annuities Asian options.
Our sales mix was consistent across the three retail channels, including agent bank and broker dealer in the second quarter as compared to the prior year.
Institutional market sales were nearly $700 million in the second quarter comprised of $500 million of pension risk transfers and 200 million funding agreements compared to nearly $900 million in the second quarter of 2022 solely comprised of funding agreements.
Funding agreement activity in the second quarter was driven by FHL Bee transactions as current market conditions remain challenging for funding agreement backed notes.
Issuances for.
For the first six months of 2023. This brings our institutional market sales to $1 2 billion and with six months to go we are on track with our annual target of $2 billion.
<unk> net sales retained were $2 2 billion in the second quarter as compared to $2 5 billion for the prior year quarter.
This expected trend reflects the attractiveness of third party flow reinsurance, which increased from 50% to 75% of <unk> sales in September of 2022.
F N profitably grown as retained assets under management to a record 46 billion at June 30th bat a flow reinsurance adjusting.
Adjusting for flow reinsurance, we estimate gross assets under management at 51 billion as of June 30th that is before the approximately $5 billion of cumulative new business ceded.
Next turning to our investment portfolio, we continue to have conviction that our portfolio is well positioned to withstand uncertainty in the macro environment and perform through the cycle given its diversification and blackstone's extensive expertise.
Our fixed income yield was 439% in the second quarter, excluding alts volatility as compared to 393% in the second quarter of 2022.
This reflects our fourth consecutive quarter of maintaining fixed income yield above 4% driven by relatively higher yields on floating rate assets and new investments given higher interest rates over the past year.
Our portfolio is high quality with 95% of fixed maturities being investment grade.
There has been no change in our commercial real estate and office holdings from last quarter, which skews toward the lower end of industry exposure.
Credit related impairments have averaged five basis points over the past three years, well below our pricing assumption and remained below that level in the second quarter.
Overall, our portfolio continues to perform well and is well matched to our clean and stable liability profile.
Our spread based business is a simple one we target a return on assets or ROA above 100 basis points on our <unk>.
Excluding significant items, we have now delivered our sixth consecutive quarter of adjusted ROA, well above our 100 basis point target in fact, averaging 113 basis points, excluding significant items over the last six quarters.
Beyond spread based earnings we are further diversifying into capital light fee based earnings, including slow reinsurance and owned distribution.
We utilized flow reinsurance, which provides a lower capital requirement on ceded new business, while allocating capital to the highest returning retained business.
In addition, the strategy enhances cash flow provides fee based earnings and is accretive to <unk> returns.
Wendy will provide further perspective in a few minutes we.
We have also been expanding our own insurance distribution holdings.
This strategy solidifies relationships with key partners that we have worked with for a couple of decades, while boosting our presence in underserved multicultural and middle market segments. Importantly, this strategy plays to key experience and expertise within our management team, which helps these companies to accelerate their growth.
Over time, <unk> will earn a dividend stream from our ownership stakes, providing for higher margins at a lower marginal cost of capital.
We value the power of capital light earnings streams from these strategic owned distribution Stakes, which are expected to be accretive to Roe.
<unk> is also committed to strong ratings and achieving upgrades over time, we remain on positive outlook with a M. Best and were pleased that Moody's upgraded the financial strength ratings of F&B as primary operating companies to a three last months <unk>.
Recognizing the financial strength and stability of <unk> business as we execute on our diversified growth strategy.
I'd like to thank our team for all that they have done to execute on our diversified growth strategy, having doubled gross AUM before reinsurance and nearly doubled adjusted net earnings excluding significant items since the merger with <unk> three years ago, our success would not be possible without them.
We have strong momentum as we head into the second half of the year with many opportunities ahead of us to further expand our business, which will ultimately drive margin expansion and improved returns and we remain focused on delivering long term value to our shareholders.
Let me now turn the call over to Wendy Yang to provide further details on <unk> second quarter financial highlights.
Thanks, Chris.
Today I'll provide more details about our financial results and key performance drivers capital liquidity and leverage positions and wrap up with a few additional thoughts on our reinsurance strategy.
Overall F&B financial performance in the second quarter was strong and builds on our proven track record.
And we continue to have strong capitalization and financial flexibility to successfully execute our growth strategy.
With adjusted net earnings for the second quarter of 2023, we reported adjusted net earnings.
79 million or <unk> 63 per share our core earnings per share were $1 <unk>.
After adjusting for <unk> 40 per share of unfavorable significant items that are not consistent period to period. These significant items include 44 per share for alternative investment returns below our long term expectation, partially offset by four cents per share and bond prepay income.
For comparison last year's second quarter, adjusted net earnings of $155 million or $1 45 per share included favorable significant items at 39 cents per share.
Adjusting for these significant items in both periods second quarter adjusted net earnings increased by 14% over the prior year.
I also wanted to highlight that on July 13th 2023, F&B filed an 8-K to provide investors and analysts with a supplemental disclosure of our 2022 10-K, and first quarter financial supplement and Investor presentation.
This filing revised our prior <unk> accounting standard recast for calculation refinement of F&B as any adjustment to remove all market related movement, including the current period from market risk benefit from income.
We believe this approach to be in line with peers. This change had a modest favorable benefit to adjusted net earnings which is reflected in our first half 2023 results and we expect to persist in 2023 in future years and.
Importantly, F&B has generated consistent economics over time as Chris mentioned, excluding significant items F&B has delivered six consecutive quarters of adjusted ROA above 100 basis points, averaging 113 basis points.
Now looking at our second quarter results more closely and starting with asset growth or retain assets under management were $46 3 billion as of June 30th up from $45 4 billion as of March 31st.
This reflects $1 9 billion of net new business asset inflows in the quarter, partially offset by $1 one of <unk>.
Hello reinsurance outflows.
With regard to our in force book this quarter, we saw outflows from minor products right in line with the past couple of quarters. These are predictable cash flows and expect it to be lumpy over time, depending on contractual maturity date set at our origination.
During the second quarter. We also saw fixed indexed annuity outflows for combined surrenders withdrawals and death were slightly elevated as compared to past couple of quarters, although not concerning given market conditions and notably we continue to experience strong in place our retail fixed.
Annuities comprised 74% of total net reserves and have policy features which serve as a disincentive for policyholders to surrender early nine.
91% of our fixed annuities or surrender protected with an average remaining surrender charge at roughly 7% of account value and approximately 70% of these policies also have market value adjustment protection.
Overall F&B continues to have positive net inflows and as a reminder, we benefit from a boost to earnings from higher surrender charge fees and freed up capital from the policy surrenders.
And <unk>.
Next turning to our disciplined expense management.
For the past three years, <unk> has grown and diversified and modernize its business.
More than tripling, its topline sales and doubling gross AUM before flow reinsurance.
We are disciplined in our expense management approach and focus on our operating expenses relative to growth in sales and assets to help put it in perspective from 2019 to 2022, we grew gross sales by 43% CAGR and gross assets under management before flow reinsurance by a 21%.
AGR.
To generate that growth, we needed to make significant investments in our operating platform and Paris.
Personnel costs and other operating expenses net of deferred acquisition costs and expense allowances from reinsurance partners increased by a 16% CAGR.
Looking ahead, we would expect our variable operating expenses, which are roughly about one third of our cost base will continue to increase generally in line with our growing enforced book as well as gross sales, which are expected to grow at a double digit clip.
We also expect that fixed operating expenses, which are about two thirds of our cost base or approximately $200 million on an annual basis will grow at a single digit growth rate.
And we expect that our reinsurance expense allowances or the expense reimbursements that are reported separately under our benefits are there changes in policy reserve line items will increase over time as benefit of cash generation flow reinsurance with third party.
All in we expect that our operating costs will continue to grow as we scale and invest in the business, albeit at a slower growth rate relative to our gross sales and gross assets under management before flow reinsurance and with the benefit from the reinsurance expense allowances, thereby generating operating leverage over time at a continued measured.
Hey.
And next turning to interest expense, our interest expense has increased to $47 million or 21 basis points of ROA in the first six months of 2023 as compared to $17 million or nine basis points of ROA in the first half of 2022.
This reflects $515 million drawn on our new revolving credit facility, which was put into place in the fourth quarter of 2022, and 500 million senior note issuance in the first quarter of 2023 as planned to support our future growth and liquidity needs.
Our annual interest expense remains approximately $95 million or roughly a 6% blended yield on the $1 6 billion of total debt outstanding.
<unk> debt to capitalization ratio, excluding a OCI was 23% as of June 30th below our long term target of 25%.
Now turning to our balance sheet.
We ended the second quarter with a GAAP book value, excluding OCI of $5 1 billion or $40 70 per share with 126 million common shares outstanding as of June 30, there is a page in our investor presentation, providing an analysis and book value per share.
We continue to target holding company cash and invested assets at two times fixed charge coverage.
Our strong capitalization supports growth and distributable cash during the second quarter, we returned $41 million of capital to shareholders, including $25 million of common dividends and $16 million of share repurchases and.
In the second quarter <unk> repurchased approximately 790000 shares for $16 4 million at an average price of $20 79 per share.
Capacity remaining under the 25 million share repurchase authorization was $8 6 million at June 32023.
Following yesterday's announcement of the third quarter cash dividend of <unk> 20 per share we view our current annual common dividend of approximately 100 million as sustainable this.
This translates into a dividend yield of approximately 3%.
Based on <unk> recent market capitalization of approximately $3 5 billion and demonstrates the underlying strength in our business as well as our commitment to creating value for our shareholders.
Dividend is reviewed quarterly and expect it to increase over time subject to cash flows alternative uses of capital and market conditions.
<unk> is well positioned to fund its continued growth with positive and growing enforce capital generation available debt capacity as our balance sheet delivers with book value growth over time and ample opportunities for future reinsurance program.
Let me wrap up with an update on flow reinsurance strategy as Chris shared last quarter, 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 economic for.
N G for every $1 billion of new business slow reinsurance, we free up approximately $75 million of capital to redeploy to the highest returning retained business. This is meaningful and to help put that amount in perspective that is nearly 10% of the estimated 800 million capital generation from our entire enforced.
Lock in 'twenty two 'twenty three.
Importantly, we expect to grow gross sales at a double digit clip, while managing net sales to a level that continues to grow our retained AUM. We estimate that we could retain as little as $6 billion to $7 billion of gross sales continue to grow the retained block in this scenario.
Mario as long as cells are well in excess of outflows, we are still growing with net inflows, albeit at a smaller spread but with significantly less required capital.
Within these parameters during the second half of 2023, we expect to increase our flow reinsurance or Mike or new business from the current 75% level to as much as 90% by Onboarding additional high quality and established flow reinsurance partners importantly.
My gut flow reinsurance provides fee based earnings while also generating a higher Roe.
Fully retained sales. Additionally, in contrast to a 100 basis points ROA a rule of thumb for fully retained spread based business for reinsurance sales based on the current economics, which could change we would expect to receive approximately one third of the ROI with proportionately less or about one fifth of the capital requirement.
We are well into execution of our flow reinsurance opportunities for the second half of 'twenty, three and I look forward to providing further details next quarter. This concludes our prepared remarks, and let me now turn it the call back to our operator for questions.
Thank you we will now be conducting a question and answer session.
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Your first question comes from Mark Hughes with true with Securities. Please go ahead.
Yes. Thank you good morning.
Yeah.
Good morning, Mike do you do.
Good morning, when do you are talking about.
If you retain 57 billion that would be sufficient to grow the block offset outflows.
What kind of.
Growth rate are you thinking of when you're talking about grow the block is that just.
Low single digits or whats the right right number.
I would say, it's single digits, but on the upper end.
Okay.
And under those circumstances.
Is there a.
Kind of a rule of thumb about.
Capital.
Return of capital.
This capital generation up here.
Reinsured, 90% of the <unk>.
Retaining enough good kind of single digit growth in the block.
Mark.
Your did you say your ROA profile improves relative to your capital usage.
What does that mean for capital return.
Yes, so we believe we'll be able to increase the <unk>.
The dividend overtime.
And the only thing I would add to that this is Chris is that.
Right now.
New business, we're getting.
At least mid teen Roe.
Our new business.
The economics on flow are pretty meaningfully north of that so.
This will show up relatively quickly in terms of its ability to expand.
Overall net spread.
And then Chris.
Sales this quarter.
So quite strong in absolute terms, but year over year.
Up mid single.
Digits I think.
Probably.
The industry numbers suggest the overall sales growth was somewhat higher than that.
With this.
Competitive situation did you are with the <unk>.
Mike.
Quite as attractive this quarter.
And again not to criticize what's a good.
Good growth rate, but but what was the dynamic this quarter.
Yeah. So I would say no nothing has really changed in terms of competitive environment, there's always pockets of product we're.
Perhaps you are seeing someone be a bit aggressive and you choose not to go chase it I think for us.
We look across now all of the channels when deciding where to allocate.
Capital So no I would say return targets for us with continued to be quite.
Attractive, but keep in mind, we're also writing PRT business.
We've got <unk> borrowings et cetera. So.
We go through the process, it's pretty real time of where we want to allocate capital.
Quarter over quarter look like it slowed a little bit, but just keep in mind, we had an absolute blowout <unk>.
First quarter, so right now our retail business is on a pace to do $10 billion of sales on its own.
Yes.
So we're feeling like there is just tons of.
Of sales opportunity right now.
Great. Thank you.
Once again, if you would like to ask a question. Please press star one on your telephone keypad next.
Next question comes from a J Hayes with Stephens. Please go ahead.
Hey, good morning, guys.
Good morning, Congrats on the quarter and thanks for taking our questions Christian when do you both called US out during your prepared remarks, but when we look at your normalize our way or would you utilize your long term expected return assumption of approximately 10% on alternative assets and and back out any other one timers your Iowa as you guys said it has been.
Over a 100 basis points for six consecutive.
Quarters now so first off congrats on that but can.
Can you generally talk to what is driving this outperformance and then whether we should expect this trend of hovering above 100 basis points to kind of continue for the foreseeable future here.
Yeah, that's where are we.
We're trying to give some.
Discussion point for you and some modeling help with <unk>.
Spanning the reinsurance and the owned distribution you should see that ROA expand even above the levels that we're currently.
Experience.
We're seeing spread expansion in the existing business you know we've had.
With the run up in the interest rates. The floaters are performing very well and we in the GFS a J we show a nice exhibit that.
That demonstrates how that has contributed to.
On the NII line, we have had some increase in the cost of funds.
But the.
Product margin is basically what's causing that expansion.
Yeah, and the only thing I'd add to that is which we talked about on the call I mean, we've.
<unk> grown the topline at a pretty incredible clip as you know.
Effectively doubled assets.
Earnings in three years when the goal was five and look we had to make some pretty significant investments in new channels and new technologies to.
To execute upon that but despite that we're still getting some.
Some good expense synergies in other words, we've grown fixed expenses at a rate well below what we've grown our sales and I think now we.
Should see more of that going forward. So it's really across the board Blackstone has done a terrific job working with our investment team in terms of continuing to generate attractive additional spread for the portfolio product margins as <unk> said have been have been growing and then as we go.
Continued to tightly manage fixed expense growth going forward, it's a good picture and yes, I would say.
It's pretty hard for us with a straight face to say that the goal is 100 basis points.
We've averaged 113 and I think they are more tailwind than headwinds to that.
Great. Thanks for the color there.
Chris I believe as you that mentioned you're on track to hitting your goal of achieving institutional sales of $2 billion to $4 billion in 2023 a year.
But could you provide more color here in <unk> have you had any more of these lumpy institutional transactions so far during the quarter.
We have so we closed one transaction I'll double check with doses of $170 million or so pipeline is good.
<unk>.
Continue to like the market a lot.
There is a lot of activity.
We're really selective on what we go after it it's quite a unimpressive and sophisticated funnel.
That the team uses to SaaS, even do we even want to bid on.
Deal, but once we've decided and we've narrowed in on we like the profile of the deal we think it lines up well with our line of sight on asset availability and we go after it we've had a really good hit rate effectively one in four.
Despite frankly being one of the lower rated players competing in the market. So we see a lot of upside there we like the long duration profile.
Of that business and.
It's a small but mighty team and so these are assets, we talked about expense leverage.
We've got a group of about a dozen people leading this effort, bringing in billions of sales so that the.
Positive contribution all around.
Okay, and then just looking at gross sales here.
Institutional channel has been strong you you expect to achieve that goal.
You mentioned there.
Retail channel as well has been performing well here.
No.
Wrong year in 2023 is kind of the expectation of where we were expecting can you talk to gross sales maybe in 2024.
You expect to hit the double digit clip here in 2023 is that a reasonable expectation again for 2024.
Yeah, I would say I would say it is.
We've got new products in the works as well.
Close to entering the <unk> market and I think thats going to open up a lot of avenues and other district pockets of distribution for us, which I think will be really attractive we talked about PRT I think there is.
Certainly <unk>, there and then retail demand for fixed annuities, you referenced some of the industry numbers.
It was really just off the charts right now youre looking at crediting.
Rates of five five ish percent.
Tax deferred with principal guarantee so I don't I honestly don't see that slowing down anytime soon and again for us it's really.
We view, our most important job on behalf of our shareholders is to allocate capital smartly and now we've got a new business engine.
Thats cooking along in sourcing premiums from.
From multiple directions. So yeah, we would continue expect to continue to grow the top line at a double digit clip.
Alright, Thanks, again and good luck the rest of the year.
Thank you. Thank you.
I would now like to turn the floor back over to Mr. Black for closing remarks.
Great look we're pleased with our overall results despite the uncertainty and volatility in the current macro environment. We think <unk> is poised to benefit in this higher rate environment is off to a strong start in the first half of the year, we expect to expand our business with a focus on further improving our profitability, which we believe over time will draw.
<unk> multiple expansion to deliver value to shareholders. Along these lines, we look forward to discussing our business in emerging growth strategies in more detail at our upcoming Investor day on October three additional information will be provided on our investor site as we get closer to the event. Thanks for joining us today and we appreciate your interest in <unk>.
Thank you for attending today's presentation and the conference call has concluded you may now disconnect.
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