Q3 2023 F&G Annuities & Life Inc Earnings Call

Greetings and welcome to the F N G annuities and life third quarter 2023 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 and external relations. Thank you you may begin.

Great. Thanks, operator, and welcome everyone to <unk> third quarter 2023 earnings call. Joining 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.

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 at F. G life Dot com.

It will also be available through telephone replay beginning today at one P. M. Eastern time through November 22nd 2023, and now I'll turn the call over to our CEO Chris Blunt.

Good morning, and thanks for joining us today I'm pleased to announce another set of strong results for the third quarter as we continue to execute on our diversified growth strategy, while maintaining a disciplined and balanced capital management process.

I want to recognize and thank our team for all that they've done to deliver record gross sales in the first nine months of this year, which have in turn generated record assets under management and an adjusted return on assets, excluding significant items that is well above our expectations.

All of this while pursuing opportunities to further grow assets expand our future profitability and deliver long term value for our shareholders.

Starting with year to date results, we have generated record gross sales, while maintaining pricing discipline and executing on our flow reinsurance strategy.

Gross sales were $9 1 billion for the nine months ended September 30 up 7% over eating half billion in the prior year.

Year to date retail gross sales were 7 billion up 17% over the prior year period.

Institutional sales were $2 1 billion comprised of $1 2 billion of pension risk transfer and $900 million of funding agreements.

We are on track to deliver 2023 annual gross sales of between 12 and $13 billion in line with our stated goal of growing at a double digit clip.

Our net sales were $6 7 billion in the first nine months of the year on an annualized basis. This places us well above our stated goal of managing net sales retain above the $6 billion to $7 billion annual level that continues to grow our retained.

Next looking at third quarter results more closely coming off record sales in the first half of the year retail sales were intentionally lower in the quarter as we finalized our reinsurance agreements and enhanced product features to position us to finish strong in 2023 and create momentum for 2024.

Sure.

Within this market environment, we've seen a sharp uptick in submitted annuity premiums in September and October which positions us for a strong growth in annuity sales in the fourth quarter.

Gross sales were $2 8 billion in the third quarter, a decrease of 3% from the prior year quarter and down 7% from the sequential second quarter.

Retail channel sales were $1 9 billion in the third quarter, a decrease of 17% from $2 3 billion in both the third quarter 'twenty, two and sequential quarter.

Institutional market sales were $900 million in the third quarter comprised of $500 million of pension risk transfers and 400 million of funding agreements.

F N G's net sales retained were over 2 billion in the third quarter in line with the prior year and sequential quarters.

In addition, and as expected we have increased flow reinsurance to 90% of micro sales in September.

Stepping back we feel confident about finishing 2023 strong and be well positioned as we move into 2024.

The industry continues to report record annuity sales as consumers find annuities to be attractive solutions, given their relatively higher rates.

Guaranteed gross principal protection and tax advantaged accumulation and a new innovation options.

And we were very proud to be ranked number one in customer satisfaction in this year's J D power individual annuities study we.

We attribute this recognition to our deep distribution relationships and commitment to operational excellence in prioritizing improvements that matter most to customers and have the biggest impact on their experience.

Also we're excited to launch our new registered index linked annuity or rail our product through key broker dealer partners in the first quarter of 2024.

Ryan was one of the fastest growing markets in recent years and we believe this further enhances our retail product suite.

Waiting customers another way to gain access to market returns with downside protection.

These factors together with the fourth quarter, typically providing a healthy pipeline for pension risk transfer sales.

Sets us up well for another record year of gross sales in 2023 and to continue growing gross sales at a double digit pace in 2024.

F N G as profitably grown its retained assets under management to a record $47 billion at September 30 athletes.

Assets under management before flow reinsurance with 53 billion adjusting for the approximately 6 billion of cumulative new business ceded.

Our investment portfolio continues to perform well and is well matched to our clean and stable liability profile.

The portfolio is high quality with 95% of fixed maturities being investment grade credit.

Credit related impairments have averaged five basis points over the past three years, well below our pricing assumption and remain below that level in the third quarter.

We continually evaluate opportunities for upside risk adjusted returns and downside protection in our investment portfolio.

Through our portfolio of asset allocation yield enhancement opportunities to maintain competitive positioning and floating rate portfolio interest rate hedge.

About $9 5 billion or 20% of the portfolio was invested in floating rate assets.

Of which 8 billion are linked to the secured overnight financing rate or sofa and are easily hedgeable.

Notably we have now hedged approximately $2 7 billion of floating rate assets locking in about 213 basis points of incremental yield versus what was originally priced in.

This translates to approximately 12 basis points of annual incremental investment margin above our pricing over the next three to five years.

We expect to continue to evaluate hedging additional floating rate assets were beneficial and possible.

Next turning to effigies recent Investor day, which was held on October three and included a deep dive into our proven track record of profitable and diversified growth.

We are pleased to see investor recognition of <unk> success is our market capitalization has increased from $2 4 billion at the time of a partial spin off last December to approximately $4 billion today, and we feel our prospects are bright.

During our Investor day, we highlighted the strategic levers that the team is employing to create value for our stakeholders.

And which will benefit FNF as our majority shareholder too.

To recap <unk> future potential upside from the following areas.

First sustainable asset growth from our retail and pension risk transfer growth strategies.

Next margin expansion from three sources.

Enhanced investment margin opportunities.

Effectively managing operating expenses for operational scale benefit over time.

An incremental fee based earnings from accretive flow reinsurance.

And enhanced earnings power from owned distribution.

And finally, we believe there is potential for LNG share price to more fully reflect its core business performance and the accretive nature of its flow reinsurance and owned distribution strategies as they scale over time.

Wendy and I look forward to providing updates and progress on these strategic initiatives and priorities in future quarterly earnings calls.

Let me now turn the call over to Wendy Yang to provide further details on <unk> third quarter financial highlights.

Thanks, Chris.

We are very pleased with <unk> financial performance in the third quarter, and we continue to maintain strong capitalization and financial flexibility to successfully execute our growth strategy.

Starting with our year over year increase.

Net earnings were $120 million or 96 cents per share for the third quarter of 2023 and included 149 or 91 cents per share.

Net income from alternative investments.

Alternative investments investment income based on management's long term expected return of approximately 10% with $142 million or dollar 13 cents per share.

Last year, we reported an adjusted net loss of 12 million or <unk> 10 per share for the third quarter of 2022 that included $11 million or nine cents per share of investment want an alternative investment.

7 million or <unk> 90 per share and other net expense item.

Alternative investments investment income based on management's long term expected return of approximately 10% with 106 million or <unk> 85, a share.

Our comparison adjusting for these significant items in both periods adjusted net earnings were $148 million up 28% from $116 million in the third quarter of 2022, and adjusted return on assets was 119 basis points as compared to 111 basis points in the prior year quarter.

$32 million increase in adjusted net earnings an eight basis point increase in our L. A was generated by 56 million or 24 basis points from higher product margin over the prior year, driven by I think right at floating rate asset uplift and disciplined pricing and $14 million or seven basis points increase.

They just flow reinsurance, which includes expensing allowance reimbursement.

By 34 million or 21 basis point decrease from higher expenses related to higher interest expense in line with our capital markets activity and higher operating costs in line with our both in scale and assets and continued investments in our operating platform and 4 million a two basis point decrease in our annual <unk>.

Well assumption updates in other.

Excluding significant items adjusted return on equity excluding and yeah.

10, 5% in the third quarter as compared to approximately 9% in the third quarter of 2022.

To recap this quarter's performance not only built on our proven track record, but also demonstrates progress towards our targeted value creation levers and asset growth margin expansion and enhanced earnings from reinsurance.

Now turning to your own distribution.

As we said at our Investor Day, F&B is uniquely positioned to be a distribution consolidator.

In the third quarter F. N E signed an agreement to acquire a majority ownership stake in annuity I am now for approximately $270 million, which is expected to close in early 2024. This is our largest transaction to date and brings our accumulative.

Capital above $500 million.

Looking forward, we see an opportunity to deploy another roughly 500 million in the next few years.

Distribution generates a dividend stream from our ownership stake providing for higher margins at a lower marginal cost of capital and which is expected to be accretive to ROE and drive multiple re rating for our SSG share price over time.

Now turning to our balance sheet, we ended the third quarter with a GAAP book value, excluding a OCI of $5 4 billion or $43 30 per share, but the 125 million common shares outstanding as of September 30th.

This reflects a 6% increase over the sequential quarter. There is a page in our investor presentation, providing an analysis of book value per share.

<unk> debt to capitalization ratio, excluding LCI was 22% as at September 30th below our long term target of 25%. Our interest expense has increased to 71 million or 21 basis points of Iowa, and the nine months of 2023 as compared to $23 million or eight basis points of early in the new.

Nine months of 2022.

As expected and in line with our capital markets activity over the last 12 months.

Our annual interest expense remains a practice of not only $95 million or roughly 86% blended yield on the $1 6 billion of total debt outstanding.

Continued to target holding company cash and invested assets at two times fixed charge coverage, our strong capitalization supports growth in distributable cash during the third quarter, we returned $27 million of capital to shareholders, including $25 million of common dividend and $2 million of share repurchase in the.

Third quarter F. N G. We purchased approximately 82000 shares for $1 9 million at an average price of $23 77 per share.

<unk> is well positioned to fund its continued growth with positive and growing enforce capital generation available debt capacity as our balance sheet deleverage.

Every time and ample opportunity for future reinsurance program. This concludes our prepared remarks, let me now turn the call back to our operator for questions.

Thank you we will now be conducting a question and answer session.

If you would like to ask a question. Please press star one on your telephone keypad.

Information 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 John Campbell with Stephens. Please proceed with your question.

Hey, guys good morning, and nice work on the continuation of really great results.

Thanks, Sean.

Sure Oh on the on the normalized ROA. So if we if we factor in the long term alternative investment you all read normalize that I mean, that's been creeping higher I think at 120 bps or so this quarter.

Your Investor day, because I think you talked to you know expected a degree.

A degree of upward pressure over time, nothing no meaningful, but maybe just some kind of upward momentum are you still feeling confident about that and then maybe moving forward I'm caught near to medium term do you think you can hold near this market, possibly keep moving at modestly higher.

Yeah, I think you know it was a particularly good quarter, but it's the same drivers right. So we've seen an uptick in short term interest rates. That's helped the floaters and the portfolio, we're getting a little bit of expense scale, we would expect to get over time and then as we've said before.

I think it's quite accretive some of the flow reinsurance deals that we've put in place and.

And then the last thing is you know Wendy mentioned some of the hedging we've done on the floaters trying to lock in some outperformance there. So yeah, we still feel good about you know.

Upside in terms of margin from here.

Okay very helpful and then Chris I, just maybe two more here on on the annual gross cells. You mentioned 12 to 13 billion as we start doing the modeling for <unk> I'm thinking PRT is probably the answer here, but what else should we consider for kind of the key swing factors from the low to high end of that range.

Yeah, I think it's I think it's across the board, we're having a good fourth quarter in retail pipeline in PRT is usually quite strong in the fourth quarter and that's the case here. So you know I would quite frankly say, we're probably going to be at the higher end of the range.

That we gave for annual sales.

Okay, that's great to hear and then on the dividend it was nice to see the 5% raise you guys announced yesterday.

It looks like you've got a lot of wiggle room, I mean, if I go off the last 12 months of the kind of normalized earnings all sorts of earlier like 'twenty, one cent dividend is implying like a 19% payout ratio I could probably get this later, but I'm, hoping you guys might be able to shortcut. It what are your what are your peers paying out typically from a payout ratio standpoint, and then thinking about it longer term.

What do you guys feel comfortable as far as is.

Our payout ratio might might be concerned.

Yeah, It's interesting I don't I don't know that we necessarily think about it that way because one thing is different from us from our peers is one we don't really have a legacy block that's running off.

It's frankly, all new business, earning terrific returns right now on that new business. So primary source of capital return for us is going to be the dividend. We've said we believe it's sustainable we believe it's something we can grow at a healthy clip.

Going forward. So I don't think anything changes with respect to that we did also upped the share buyback.

Buyback authorization, but that's more just because you know some of the limited float we've seen some volatility in our stock and we wanted to make sure. We had that that lever available I don't know Wendy if theres anything you want to add to that.

You hit all the key factors.

A lot of the competitors payout ratios.

Larger repurchase.

Programs so.

Ours won't be as high.

Yeah, I think part of that again to be clear we hear this directly from investors is hey, if you're generating the types of return youre generating for effectively taking.

You know investment grade fixed income risk, which is how we think about the business. Then we want you to continue to invest in the business I think the point on the dividend is just you know it opens up a set of investors that obviously like a steady and growing dividend stream.

Yeah, I agree with that makes a lot of sense. Thanks guys.

Awesome. Thank you.

Thank you we have reached the end of the question answer session. Mr. Blend I would like to turn the clock floor back over to you for closing comments.

Thank you. So we're pleased obviously with our overall results despite the uncertainty and volatility in the current macro environment LNG remains poised to benefit in this hot from this higher rate environment and is well positioned as we enter the fourth quarter and move into 2024 as we outlined in our recent Investor day, we have clear levers to deliver on.

Hence the results with a focus on asset growth and margin expansion, which we believe will drive multiple expansion and deliver value to shareholders. Thanks for your time. This morning. We appreciate your interest in <unk> and we look forward to updating you on our fourth quarter earnings call.

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.

Goodbye.