Q3 2024 F&G Annuities & Life Inc Earnings Call
Speaker Change: Good morning ladies and gentlemen and welcome to the FNG's third quarter earnings call.
During today's presentation, all parties will be in listen-only mode.
Following the presentation, the conference will be open for questions, with instructions to follow at that time. As a reminder, this conference call is being recorded.
Great, thanks.
Speaker Change: Great. Thanks, Operator, and welcome, everyone. Joining me today are Chris Blunt, Chief Executive Officer, and Wendy Young, Chief Financial Officer. We look forward to addressing your questions following our prepared remarks.
Speaker Change: 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.
Speaker Change: We do not undertake any duty to revise or update such statements to reflect new information, subsequent events, or changes in strategy.
Speaker Change: 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.
Speaker Change: This morning's discussion also includes non-GAAP financial measures that we believe may be meaningful to investors.
Speaker Change: 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.
Speaker Change: Today's call is being recorded and will be available for webcast replay on our website following the call. And now, I'll turn the call over to our CEO, Chris Blunt.
Chris Blunt: Good morning, everyone. Thanks for joining us to discuss our third quarter results. I want to begin by thanking our employees for their hard work and dedication that has fueled the incredible growth of our business.
Chris Blunt: We have reported another terrific quarter and continue to build on our proven track record.
Chris Blunt: Starting with sales, we delivered strong gross sales of $3.9 billion in the third quarter, up 39% over the prior year quarter, and $11.8 billion year-to-date, up 30% over the first nine months of 2023.
Chris Blunt: Retail sales from our agency, bank, and broker-dealer channels were a record three and a half billion in the third quarter, nearly double the prior year quarter, bringing year-to-date retail sales to 9.5 billion.
Chris Blunt: F&G's retail sales continue to surge driven by favorable market conditions and strong demand for retirement savings products.
Chris Blunt: We are benefiting from a significant demographic trend with a long tail as consumers want to secure the relatively higher rates, guaranteed tax-deferred growth, and principal protection that our products offer. We expect this strong demand to continue in the near term across the industry.
Chris Blunt: As a quick update on RYLA, as of the end of October, we have successfully launched with four broker-dealer distribution partners and expect a modest level of sales in 2024.
Chris Blunt: However, we see the potential for RILA sales to be in the billions over the medium term as we continue to ramp up sales and add additional distribution partners.
Chris Blunt: Pension risk transfer sales were over 300 million in the third quarter. With strong sales in October, we have now generated 2.1 billion of PRT sales.
Chris Blunt: for the first 10 months of 2024, exceeding our full year 2023 sales and with an average deal size of $187 million.
Chris Blunt: Looking ahead to 2025, we continue to see a healthy PRT pipeline with $3.8 trillion of corporate pension plans at or near full funding.
Chris Blunt: We are positioned to compete in our targeted $100 million to $1 billion deal size with potential to strategically move more up-market or down-market as opportunities arise.
Chris Blunt: While there were no funding agreements in the third quarter, as a reminder, we issued $1 billion in the first half of the year. Funding agreements are opportunistic and are dependent on our capital allocation priorities based on relative returns across our products.
Chris Blunt: Net sales of $2.4 billion increased 4% over the prior year quarter.
Chris Blunt: Following the September Fed rate cut, one question that I am frequently asked is what is the impact of lower rates on our sales?
Chris Blunt: As we've seen recently, a Fed rate cut has a more significant impact to short-term rates than long-term rates.
Chris Blunt: Perhaps even more important than interest rates, though, are the tailwinds from long-term demographics.
Chris Blunt: with 10,000 baby boomers retiring every day and a lot of cash remaining on the sidelines. Consumers have more than six trillion of cash parked in money market funds and continue to look to lock in the relatively higher interest rates that annuities provide.
Chris Blunt: Importantly, we have a lot of opportunities for sales growth regardless of the macro environment.
Chris Blunt: We are still adding new distribution partners. The depth and breadth of our retail distribution is going to continue to expand as we add new bank and broker-dealer partners and as we further penetrate existing distribution with new selling agents.
Chris Blunt: We continue to add new products and enter new, fast-growing markets like Ryla and PRT.
Chris Blunt: We have profitably grown Assets Under Management before Flow Reinsurance to a record $62.9 billion at the end of the quarter, an increase of 20% over the third quarter of 2023.
Chris Blunt: This included record retained assets under management of $52.5 billion, an 11% increase over the third quarter of 2023.
Chris Blunt: AUM growth was driven by net new business flows and net debt and equity proceeds over the last 12 months.
Chris Blunt: Turning to our investment portfolio, overall the portfolio is diversified, well positioned, and high quality with 96% of fixed maturities being investment grade.
Chris Blunt: Since 2020, we have selectively repositioned more than $2.5 billion of assets to optimize and de-risk the portfolio to perform in varying market conditions while also improving the credit quality.
Chris Blunt: Over the last five years, we have expanded from six to 14 asset classes.
Chris Blunt: further diversifying our portfolio. Our asset allocation strategy remains stable and our invested assets are well-matched to our liability profile.
Chris Blunt: Excluding alternative investment volatility and variable investment income, our fixed income yield was 4.66% in the third quarter.
Chris Blunt: 15 basis points higher than the third quarter of 2023, benefiting from higher yields on new investments.
Chris Blunt: Our partnership with Blackstone provides the flexibility to pivot between public and private assets, helping to mitigate the impact of spread compression.
Chris Blunt: Credit-related impairments have averaged five basis points since 2020, which is exceptionally low. Through the first nine months of the year, credit-related impairments remained below our pricing.
Chris Blunt: Regarding our commercial real estate debt portfolio, it is high quality, diversified, and defensive, with a vast majority invested in resilient sectors like residential, multifamily, and industrial.
Chris Blunt: We have very little office exposure at less than 2% of our total portfolio, which is significantly below the industry average.
Chris Blunt: Next, turning to our own distribution strategy. Independent agent distribution is rapidly consolidating in the industry and generating strong returns for owners.
Chris Blunt: To date, we have invested $680 million in owned distribution. Our current portfolio is performing well, and we now estimate EBITDA of $65 to $70 million in 2024, and expect double-digit annual growth over the medium term.
Chris Blunt: Overall, F&G's strong results through the first nine months of the year have positioned us well for the remainder of 2024.
Chris Blunt: We have great momentum and remain focused on continuing to deliver long-term growth.
Chris Blunt: By driving sustainable asset growth from our retail and pension risk transfer growth strategies
Chris Blunt: Generating ROA expansion from enhanced investment margin, scale benefits, and fee-based earnings from accretive flow reinsurance.
Chris Blunt: and Diversifying Earnings Through Strong Growth in Our Middle Market Life Insurance Business and Owned Distribution Strategies.
Chris Blunt: We continue to make good progress toward the medium-term financial targets we laid out at our 2023 Investor Day.
Growing AUM by 50%
Chris Blunt: Expanding Adjusted ROA Excluding Significant Items to 133 to 155 basis points.
Chris Blunt: Increasing adjusted ROE, excluding AOCI and significant items to 13% to 14% and expanding our multiple.
Speaker Change: Thanks Chris. This morning I'll focus my comments on the following. Adjusted net earnings, highlights for the quarter including updates on flow reinsurance, surrenders, and our floating rate asset hedging program, as well as our strong capital and liquidity position.
Speaker Change: Starting with earnings, adjusted net earnings attributable to common shareholders for the third quarter was $156 million or $1.22 per share and included $131 million of investment income from alternative investments, $21 million of CLO redemption gains and bond prepayment income, and $14 million tax valuation allowance benefit.
Chris Blunt: This was partially offset by $17 million of net expense from the Actuarial Assumption Review, reflecting experience updates to surrender assumptions for recent and expected near-term policyholder behavior, as well as GMWB rider assumptions for emergent utilization rates.
Chris Blunt: Investment income from alternative investments based on management's long-term expected return of approximately 10% was $172 million. Excluding significant items, adjusted net earnings were $179 million in the third quarter, up 21% over $148 million in the third quarter of 2023.
Chris Blunt: This increase reflects asset growth, margin diversification from accretive flow reinsurance and owned distribution, discipline expense management, and higher interest expense as a result of planned capital market activity.
Chris Blunt: Adjusted ROA excluding significant items with 132 basis points in the third quarter. This was comprised of 107 basis points of retained ROA, 16 basis points of flow reinsurance fee income, and nine basis points of owned distribution margin.
Chris Blunt: Adjusted ROA excluding significant items was up 12 basis points as compared to 120 basis points in the third quarter of 2023 and brings our adjusted ROA over the last 12 months to 126 basis points.
Chris Blunt: Looking ahead, I'm confident in our ability to deliver on our Investor Day promises to grow assets, expand ROA and ROE, and increase our multiples as we grow our retail distribution.
Chris Blunt: win our share of healthy PRT pipeline, maintain spreads even in a lower rate environment, benefit from demographic tailwinds, and diversify through our accretive flow reinsurance and own distribution strategies, which set F&G apart.
Chris Blunt: Turning to some additional highlights for the quarter, starting with flow reinsurance. In addition to existing flow reinsurance for 90% of MIGA sales, we have initiated flow reinsurance on 80% of sales of one of our FIA products effective July 1st.
Chris Blunt: This allows us to continue to meet consumer demand for one of our best selling and most profitable products while expanding our capital light and accretive flow reinsurance initiative.
Chris Blunt: As a reminder, we are able to adjust the level of flow reinsurance up and down over time as market economics change and in line with our capital targets. This allows us to manage net sales above the threshold needed to continue to grow our retained AUM.
Chris Blunt: Turning to surrenders, we continue to see steady growth in our FIA account value despite the industry refinancing due to our record new business volume that continues to well outpace terminations.
Chris Blunt: For insurance companies like F&G, terminations provide a boost to earnings from higher surrender charge fees and free up capital that can be deployed to new business volumes with renewed surrender charges and longer surrender periods than older contracts.
Chris Blunt: This should further improve the liability profile and result in stickier enforced liabilities going forward.
Chris Blunt: Our retail fixed annuities are 93% surrender charge protected. Our funding agreements, pension risk transfer, and immediate annuities are not surrenderable. And our fixed-rate, multi-year guaranteed annuities are predictable, typically having three, five, or seven-year contractual maturities that vary quarter to quarter.
Chris Blunt: Moving to our floating rate asset portfolio, as discussed on prior calls, we have hedged two-thirds of our floating rate assets, which are now only 6% of our total portfolio.
Chris Blunt: Through hedging, we have increased our earnings stability and predictability going forward by locking in 188 basis points of incremental yield above original pricing.
Finally, turning to our balance sheet.
Chris Blunt: We ended the quarter with F&G equity attributable to common shareholders, excluding AOCI, of $5.3 billion, or $42.28 per share. Additional details of book value per share are provided in our investor presentation.
Chris Blunt: Consolidated debt outstanding was unchanged from the second quarter at $2.1 billion and our debt to capitalization ratio excluding AOCI was 26.5%.
Chris Blunt: During October, we issued $500 million of senior notes and that proceeds were used to fully pay down our $365 million revolver balance.
with the remainder being used for general corporate purposes.
Thank you for joining us.
Chris Blunt: We continue to target holding company cash and invested assets at two times interest coverage and debt to capitalization excluding AOCI at 25% over the long term. Additionally, we expect that our balance sheet will naturally de-lever over time as shareholders' equity excluding AOCI grows.
Chris Blunt: Our capital allocation priorities focus on deploying our capital to maximize shareholder value through continued investment in our business, as well as returning cash to shareholders.
Chris Blunt: F&G is well positioned to generate growth at attractive returns and our scale allows us to self fund our growth with enforced capital generation, reinsurance, and capital markets issuances.
Chris Blunt: Our capital allocation priorities also support our now $110 million annual common dividend commitment, as well as $16 million annual dividend on the preferred stock held by F&F.
Chris Blunt: We feel the common dividend is sustainable and expected to increase over time.
Chris Blunt: F&G continues to maintain strong capitalization and financial flexibility across all of our statutory balance sheets, including our offshore entities, which are conservatively managed to the most stringent capital requirements of our regulators and for rating agencies.
Chris Blunt: Notably, all of our new businesses originated in our U.S. subsidiaries. We only use our offshore entities for affiliated reinsurance and each treaty requires formal approval by the Iowa regulator.
Chris Blunt: We have similar reserve and risk management practices for our offshore entities as our onshore operating companies.
Chris Blunt: Overall, our third quarter performance once again builds on our proven track record and we are well positioned for the remainder of the year. We continue to make significant progress toward our investor-day targets of asset growth, margin expansion, and enhanced earnings from flow reinsurance and owned distribution.
Chris Blunt: This concludes our prepared remarks and let me now turn the call back to our operator for questions.
Speaker Change: Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have any questions, please press the star followed by the number one on your touchtone phone. You will hear a prompt that your hand has been raised. Should you wish to decline from the polling process, please press star followed by the number two.
Speaker Change: If you are using a speakerphone, please leave the handset before pressing any keys.
Speaker Change: Your first question comes from the line of John Barnidge of Piper Center. Your line is open.
Good morning.
Speaker Change: Thanks for the opportunity. My first question is on the flow reinsurance. Given your comments about...
Speaker Change: the optimistic view of the positioning of the product to participate in the silver tsunami that's coming, especially with Ryla being added.
Speaker Change: How do you view the opportunity to grow that flow reinsurance?
Speaker Change: with the existing partners into those new products and where do you view settling in from a flow reinsurance percent rate of like net to gross?
Speaker Change: Morning, John. It's Chris. I know Wendy's going to want to weigh in as well. I don't think that we set a target of what we want to re-insure. It's more, you know, what's the capacity that's out there? How does it fit a particular product category? How accretive is it?
Speaker Change: and then we make those individual decisions. I would say right now.
Speaker Change: I don't see a lot of constraints to the availability of flow reinsurance. Obviously we're selective about who we would partner with.
Speaker Change: when it comes to flow reinsurance, but yeah, I think we continue to be quite optimistic about the impact that it can have on margins for us and sort of the availability of quality partners.
Speaker Change: Thank you. And then my follow-up question is, given the opportunity in owned distribution to grow in a more capital-like manner, given financial sponsors' interest in getting more into the wealth solutions business,
Thank you for joining us.
Speaker Change: Given that owned distribution and where kind of the stock price has gone, does that give you an opportunity to maybe use that as a currency to go larger in owned distribution than maybe you had thought before?
Speaker Change: Yeah, I think like everything else, as you know, we're quite bullish on the opportunity. It started bottom-up of some partners we've worked with for a long time.
engaging us in their strategic thought process.
Speaker Change: So we continue to be optimistic, but having said that, we, you know, we want to be thoughtful and careful, you know, the goal here isn't to
Speaker Change: scale for scale's sake, right? We're not trying to be the largest roll-up provider there. We want to make sure that these are
Speaker Change: strategic partnerships and we're picking them well. We feel great about the portfolio.
Speaker Change: It's nice to hear. I do think it's starting to get recognized in our...
in our stock price, so.
Speaker Change: Yeah, I think it's like everything else. We look at it as what's the best use of the next dollar of capital from a strategic perspective, a return perspective. But yeah, we think this is a great asset that, you know, at some point could even be its own entity. So we're quite optimistic about it.
Speaker Change: Thank you. Your next question comes from the line of Alex Scott of Barclays. Your line is now open.
Speaker Change: Good morning, everyone. This is Jack on for Alex. So my question has to do with these higher surrender charges. What exactly was the impact and how did it compare to last quarter and how would you view a more normal level over time? Thanks.
Speaker Change: Thanks, Jack. So, you know, as long as interest rates are going to stay up, we're going to see elevated surrenders in the industry as we talk about that industry refinancing. If you look at our results, we point everybody to the last 12 months ROA, which is about 126 basis points.
just to try to smooth out.
Speaker Change: Lisa Foxworthy, Christopher Blunt, Lisa Foxworthy, Christopher Blunt, Lisa Foxworthy, Christopher
A little bit higher, higher surrenders, but.
you know, all in all, we're
you know.
Speaker Change: even without that, that last 12 months gives you an indication of kind of the underlying
ROA improvement that we've had without this sort of...
Speaker Change: The only thing I'd add is I think when he's quarter to quarter, it wasn't a gigantic differential.
It's fairly fairly consistent
John Barnidge, John Barnidge,
Speaker Change: Great, and then I guess one quick follow-up. Do you mind discussing the outlook for flows and in particular funding agreements and PRTs heading into the new year?
Speaker Change: Chris, I'll start and maybe I'll start with retail. Again, we remain incredibly bullish on the opportunity, not just the fact that I actually think industry sales are going to continue to expand.
Speaker Change: But even if they didn't, we're still, we've come nowhere close to
Speaker Change: penetrating our distribution footprint. So honestly we can grow regardless of what's what's happening to the total.
Speaker Change: pie, so that would be Outlook for retail. I think with respect to PRT, yeah, we had a terrific October, so we're already, you know, over $2 billion, so we've surpassed last year's
Speaker Change: PRT sales pipelines continue to be strong. So that's that's a
category where we would expect
Speaker Change: to grow, you know, I'll call it two to four billion in any given year. And the reason for the broader range is simply, you know, it's an availability of what's in our target pipeline. Where are we with capital and what types of returns are regenerating in PRT relative to retail, relative to owned?
Speaker Change: distribution. So it's a little bit more complicated answer, but there will be plenty of PRT opportunities. I'm confident of that. Funding agreements are just more opportunistic. You know, we constantly look at the market. Where could we issue? Where could we invest?
Speaker Change: How does that spread stack up relative to our other opportunities? So that's one where, you know, we want to be an issuer of funding agreement back notes, but again, it's going to continue to be pretty optimistic, opportunistic.
Great, thank you.
Speaker Change: Thank you. Your next question comes from the line of Wes Carmichael of Autonomous, but before I open up this line, again, just a reminder, should you have any questions, please press star 1 on your touchtone phone.
Wes Carmichael, your line is now open.
Wes Carmichael: Hey, thanks. Good morning. First question, Wendy, I think you talked about the assumption review and that being driven by elevated surrender activity. Can you just talk about like what's happening near term and just maybe unpack that a little bit for us?
Sure, so
Speaker Change: The surrenders are elevated as you've seen, right? So as we're looking at our assumptions, we're just making a decision.
Speaker Change: How long do we think it's going to continue to last, and as I said earlier to the other question, as rates stay up, there's still going to be elevated surrenders, so we just changed the assumption going into the shorter term, not necessarily a larger, longer term assumption, and that was a very small part of the overall $17 million.
So,
Speaker Change: call it about 5 million, unlocking on the DAC from that, that we'll see that as just a minor impact on go-forward.
Speaker Change: returns from that surrender assumption. Now on the GMWB utilization, unlocking this new product that we've been selling a lot of,
the product features there, the policyholders are electing.
Speaker Change: right away, and what that's going to do is, with this product, is make the MRB changes less volatile, because you're locking in the actual benefit right away, and so there's no fluctuation going forward for those policies.
Speaker Change: So it's a one-time kind of hit for the increase in reserve for that assumption change, but there's no volatility to it going forward.
Speaker Change: Got it, thanks. And follow-up, I guess, one of your big competitors this quarter had some maybe less than positive comments around Cayman as a jurisdiction for offshore reinsurance, saying you can kind of haircut capital there by 50%. So, Wendy, I know you talked about in your comments that you manage offshore reinsurance conservatively, but can you maybe just talk about Cayman in particular and how that business is capitalized and managed?
Speaker Change: The difference is basically around the mortality assumption that's being utilized.
Wendy Young: and the reserves onshore versus offshore, you can use a more best estimate for blue collar and white collar instead of the blended table. So it's not around required capital, it's purely around the redundancy in the reserves.
Speaker Change: And Wes, since Chris is a reminder, all of this gets approved by Iowa, all of it gets reported up to Iowa.
Speaker Change: when we do stress testing around capital it's done in an aggregated basis and that is shared. So yeah the short answer is none of those comments apply to us in any way shape or form.
Speaker Change: Thank you. Your next question comes from the line of Maxwell Fitcher from Truebeats. Your line is now open.
Speaker Change: Hi, good morning. I'm on for Mark Hughes. Last quarter, you had mentioned targeting the younger demographic for variola products. Have you seen any progress there in 3Q and maybe early 4Q? I know you mentioned or I think you had mentioned how they have a de minimis effect in 2024, but any color that would be appreciated?
Speaker Change: Yeah, the honest answer is I think that the volumes are still too small to draw any really meaningful conclusions there, but there's a pretty good body of data for the entire industry that you are reaching.
Speaker Change: You know a younger demographic with that product So yeah, I would say too soon to tell but I'd be really surprised if for some reason we are an outlier to the broader trend there
Speaker Change: Thank you. And we have a follow-up question coming from the line of Wes Carmichael. Your line is now open.
Wes Carmichael: Hey, thanks for the follow-up. A couple on the investment portfolio, but can you maybe just give us a little bit of detail on what your new money allocation looks like today, where you're putting most of that new money to work, especially you know if you have some attractive opportunities where you get more spread and some privately originated stuff like that?
Thank you.
Speaker Change: Yeah, Wes, I probably don't want to share too much, right?
Speaker Change: necessarily secret sauce, but I would say as a general matter, we'll tend to rotate between privates and publics depending on where the opportunity is and what's being originated. Blackstone's done a really good job of keeping up with origination and continuing to find new diversifying asset classes. I think you've heard Lena say this before, we've gone from six asset classes pre-Blackstone to now 14.
Speaker Change: So the private opportunities have been quite robust for us this year, whereas, you know, last year when rates spiked up pretty quickly, there was a lot of opportunity in corporate. So.
Speaker Change: Yeah, I would say probably a slight tilt toward privates year-to-date, but you know, that's that those are decisions that are getting made You know literally real-time depending on where the opportunities are
[inaudible]
Speaker Change: I got it, thanks Chris. And I guess my follow-up on the investment portfolio would be regarding the alts allocation, I think, I mean, if I just looked at you across the industry and versus peers, like it seems like your alts allocation is a little bit higher and I know your definition includes some things that aren't, you know, private equity and private real estate and private credit, but just curious on, I do the calculation and it's, you know, 13 or 14 percent of AUM, like is that where you kind of want to trend longer term or is that, you know, higher or lower than you'd expect to be?
Thank you for joining us.
Speaker Change: Oh, yeah. So I guess the way we think about true alts, right, meaning LP commitments, it's six. But even that's a little bit higher than, you know, long-term, we said around five. It's hard to be super precise, you know, because you're making commitments with some assumptions about how that capital gets called and utilized. Some of it is the performance really good in our alts portfolio. I mean, it's obviously underperformed the long-term assumption recently, but we had some blockbuster years early when we were deploying.
Speaker Change: capitals. So yeah, I would say for us when you say pure alts
Speaker Change: You know, we're thinking of that allocation right now, it's about six.
Speaker Change: You know, it's probably in the five to six range, longer term. There are, you know, equity residual tranches that sometimes get scooped up in that in that bucket. But yeah, true, like LP commitments.
Speaker Change: It tends to skew private equity, so almost half of the portfolio is private equity. The next big chunk would be real estate, and that tends to be classic Blackstone plays of...
Speaker Change: You know, you know everything from, you know, solar infrastructure, data centers, things of that nature, so not commercial per se, and then a small amount in credit funds. So hopefully that helps.
Thank you.
Speaker Change: There are no further questions at this time. Turning the call over back to Chris Blunt for concluding remarks.
Chris Blunt: Great. Look, we're very pleased with our overall performance. F&G's business is well positioned for the current market and we're excited about the opportunities ahead to continue to drive asset growth.
Speaker Change: Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines. Thank you.
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