F&G Annuities & Life Inc (FG) 2024 Q3 法說會逐字稿

Good morning, ladies and gentlemen and welcome to the F&G's third quarter earnings call.

(Operator Instructions.) I would now like to turn the conference over to Lisa Foxworthy Parker, Senior Vice President, Investor and External Relations.

Please go ahead.

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.

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 on our website following the call and now I'll turn the call over to our CEO 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.

We have reported another terrific quarter and continue to build on our proven track record.

Starting with sales.

We delivered strong gross sales of $3.9 billion in the third quarter.

Up 39% over the prior year quarter, an $11.8 billion year-to-date up 30% over the first nine months of 2023.

Retail sales from our agency bank and broker dealer channels were a record $3.5 billion in the third quarter, nearly double the prior year quarter, bringing year-to-date retail sales to $9.5 billion F&G's retail sales continue to surge, driven by favorable market conditions and strong demand for retirement savings products.

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.

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.

However, we see the potential for Ryla sales to be in the billions over the medium term as we continue to ramp up sales and add additional distribution partners 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 for the first 10 months of 2024 exceeding our full year 2023 sales.

And with an average deal size of $187 million.

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.

We are positioned to compete in our targeted $100 million to $1 billion deal size with potential to strategically move more upmarket or down market as opportunities arise.

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.

Net sales of $2.4 billion increased 4% over the prior year quarter following the September fed rate cut.

One question that I am frequently asked is what is the impact of lower rates on our sales as we've seen recently, a fed rate cut has a more significant impact to short term rates than long term rates, perhaps even more important than interest rates.

Though are the tailwinds from long term demographics?

With 10,000 baby boomers retiring every day and a lot of cash remaining on the sidelines, consumers have more than $6 trillion of cash parked in money market funds and continue to look to lock in the relatively higher interest rates that annuities provide.

Importantly, we have a lot of opportunities for sales growth regardless of the macro environment.

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, we continue to add new products and enter new fast growing markets like Ryla and PRT, 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.

This included record retained assets under management of $52.5 billion, an 11% increase over the third quarter of 2023.

A growth was driven by net new business flows and net debt and equity proceeds over the last 12 months.

Turning to our investment portfolio overall, the portfolio is diversified, well positioned and high quality with 96% of fixed maturities being investment grade.

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.

Over the last five years, we have expanded from 6 to 14 asset classes.

Further diversifying our portfolio.

Our asset allocation strategy remains stable, and our invested assets are well matched to our liability profile excluding alternative investment, volatility, and variable investment income.

Our fixed income yield was 4.66% in the third quarter, 15 basis points higher than the third quarter of 2023 benefiting from higher yields on new investments.

Our partnership with Blackstone provides the flexibility to pivot between public and private assets helping to mitigate the impact of spread compression.

Credit related impairments have averaged 5basis points since 2020 which is exceptionally low, through the first nine months of the year credit related impairments remained below our pricing.

Regarding our commercial real estate debt portfolio it is high quality diversified and defensive with the vast majority invested in resilient sectors like residential, multi-family and industrial.

We have very little office exposure at less than 2% of our total portfolio which is significantly below the industry average.

Next turning to our own distribution strategy, independent agent distribution is rapidly consolidating in the industry and generating strong returns for owners.

To date we have invested $680 million in own distribution.

Our current portfolio is performing well and we now estimate EBITDA of $65million to $70 million in 2024 and expect double digit annual growth over the medium term.

Overall F&G's strong results through the first nine months of the year have positioned us well for the remainder of 2024 we have great momentum and remain focused on continuing to deliver long term growth by driving sustainable asset growth from our retail and pension risk transfer growth strategies generating ROA expansion from enhanced investment margin scale benefits and fee based earnings from a creative flow re insurance and diversifying earnings through strong growth in our middle market, life insurance business and own distribution strategies.

We continue to make good progress toward the medium term financial targets.

We laid out at our 2023 investor day growing AUM by 50% expanding adjusted ROA excluding significant items to 133basis points to 155 basis points, increasing adjusted ROE excluding AOCI and significant items to 13% to 14% and expanding our multiple.

Let me now turn the call over to Wendy to provide further details on F&G's third quarter financial highlights.

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.

Starting with earnings adjusted net earnings attributable to common shareholders for the third quarter was $156 million or $0.22per 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.

This was partially offset by $17 million of net expense from the actual assumption review reflecting experience updates to surrender assumptions for recent and expected near term policyholder behavior as well as GMWB writer, assumptions for emergent utilization rates.

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 '23.

This increase reflects asset growth margin diversification from a creative flow reinsurance and own distribution, disciplined expense management and higher interest expense as a result of planned capital market activity.

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 slow reinsurance fee income and 9basis points of distribution margin.

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.

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.

When our share of healthy PRT pipeline, maintain spreads even in a lower rate environment benefit from demographic tailwinds and diversify through our creative flow reinsurance and own distribution strategies which set F&G apart.

Turning to some additional highlights for the quarter starting with flow reinsurance.

In addition to existing flow reinsurance for 90% of MYGA sales, we have initiated flow reinsurance on 80% of sales of one our (inaudible) products effective July 01.

This allows us to continue to meet consumer demand for one of our best selling and most profitable products while expanding our capital light in a creative flow reinsurance initiative.

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.

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.

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.

This should further improve the liability profile and result in stickier and force liabilities going forward.

Our retail fixed annuities are 93% surrender charge protected.

Our funding agreements, pension risk transfer and immediate annuities are not surrender.

And our fixed rate multiyear guaranteed annuities are predictable.

Typically having 3,5 or 7 year contractual maturities that vary quarter to quarter.

Moving to our floating rate asset portfolio, we have hedged two thirds of our floating rate assets which are now only 6% of our total portfolio, 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, 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, consolidated debt outstanding was unchanged from the second quarter at $2.1 billion and our debt to capitalization ratio excluding AOCI was 26.5%.

During October, we issued $500 million of senior notes and net proceeds were used to fully pay down our $365 million revolver balance.

With the remainder being used for general corporate purposes.

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 deliver over time as shareholders equity excluding AOCI grows.

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.

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.

Our capital allocation priorities also support our now $110 million annual common dividend commitment as well as $16 million annual dividend on the pervert stock held by F&F.

We feel the common dividend is sustainable and expected to increase over time.

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 poor rating agencies.

Notably, all of our new business is originated in our US subsidiaries.

We only use our offshore entities for affiliated reinsurance and each treaty requires formal approval by the (inaudible) regulator.

We have similar reserve and risk management practices for our offshore entities, as our onshore operating company.

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 own distribution.

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

Thank you.

Ladies and gentlemen, we will now begin the question-and-answer session.

(Operator Instructions.) Your first question comes from the line of John Barnidge of Piper Sandler.

Your line is open.

Good morning.

Thanks for the opportunity.

My first question is on the flow reinsurance.

Given your comments about the optimistic view of the positioning of the product to participate in the silver tsunami, that's coming especially with Ryla being added.

How do you view the opportunity to grow that flow reinsurance with the existing partners into those new products?

And where do you view settling in from a flow reinsurance percent rate of like net gross?

Yeah.

Morning John, it's Chris, when he's going to want to weigh in as well.

I don't think that we set a target of what we want to reinsure.

It's more what's the capacity that's out there?

How does it fit a particular product category?

How creative is it?

And then we make those individual decisions.

I don't see a lot of constraints to the availability of flow reinsurance.

Obviously, we're selective about who we would partner with when it comes to flow reinsurance.

But 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.

Thank you.

And then my follow up question is given the opportunity and own distribution to grow in a more capital, light manner.

Given financial sponsors interest in getting more into the wealth solutions business.

Given that own distribution and where kind of the stock price is gone?

Does that give you an opportunity to maybe use that as a currency to go larger in own distribution than maybe you had thought before?

Yes, 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.

So we continue to be optimistic.

But having said that we want to be thoughtful and careful the goal here isn't 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 strategic partnerships and we're picking them.

Well, we feel great about the portfolio.

It's nice to hear.

I do think it's starting to get recognized in our stock price.

So 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 this is a great asset that at some point could even be its own entity.

So we're quite optimistic about it.

Thanks for the answers.

Thank you.

Your next question comes from the line of Alex Scott of Barclays.

Your line is now open.

Good morning, everyone.

This is 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.

Thanks Jack, 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 any of the lumpiness that have occurred in the surrenders over the last year, some quarters were higher than other quarters.

We've had back-to-back quarters of a little bit higher surrenders.

But in all we're even without that last 12 months gives you an indication of kind of the underlying ROA improvement that we've had without the significant surrenders, does that help.

And the only thing I'd add is when the quarter to quarter, it wasn't a gigantic differential.

It's fairly consistent.

Great.

And then one quick follow up.

Do you mind discussing the outlook for flows and in particular funding agreements and PRT's heading into the New year.

Chris I'll start.

And maybe I'll start with retail.

Again, we're remain incredibly bullish on the opportunity.

Not, just the fact that I actually think industry sales are going to continue to expand, but even if they didn’t, we've come nowhere close to penetrating our distribution footprint.

So honestly, we can grow regardless of what's happening to the total pie.

So that would be outlook for retail, with respect to PRT we had a terrific October.

So we're already over $2 billion so we've surpassed last year's PRT sales pipelines continue to be strong.

So that's a category where we would expect to grow, I'll call it $2billion to $4 billion in any given year.

And the reason for the broader range is simply 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 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.

We constantly look at the market, where could we issue?

Where could we invest?

How does that spread stack up relative to our other opportunities?

So that's one where you know that we want to be an issuer of funding agreement backed notes.

But again, it's going to continue to be pretty opportunistic.

Great.

Thank you.

Thank you.

Your next question comes from the line of Wes Carmichael of Autonomous.

(Operator Instructions.) Wes Carmichael, your line is now open.

Hey, thanks, good morning.

First question, Wendy, you had talked about the assumption review and that being driven by elevated surrender activity.

Can you just talk about like what's happening in your term and just maybe unpack that a little bit for us?

Sure.

So the surrenders are elevated as you've seen, right?

So, as we're looking at our assumptions, we're just making a decision, 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 surrender.

So we just changed the assumption going into over the shorter term, not necessarily a longer-term assumption.

And that was a very small part of the overall $17 million.

So, call about $5 million unlocking on the deck from that we'll see that as just a minor impact on go forward, 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 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.

So it's a onetime kind of hit for the increase in reserve for that assumption change, but there's no volatility to it going forward.

Got it.

Thanks and follow up, one of your big competitors this quarter had some maybe less than positive comments around Cayman as a jurisdiction for reinsurance saying you can kind of (inaudible) capital there by 50%.

So Wendy, 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?

Sure.

So we run us came on a statutory basis and also calculate RBC.

So it's very similar.

You've heard us talk about the difference is basically around the mortality assumption that's being utilized in 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.

And we Chris as a reminder, all of this gets approved by Iowa, all of it gets reported up to Iowa when we do stress testing around capital, it's done in an aggregated basis and that is shared.

So the short answer is none of those comments apply to us in any way, shape, or form?

Okay, thanks.

Thank you.

Your next question comes from the line of Mark Hughes from Truist through your line is open.

Hi, good morning.

I'm on for Mark Hughes.

Last quarter, you'd mentioned targeting the younger demographic for Ryla products.

Have you seen any progress there in Q3 and maybe early Q4 mentioned or I think you had mentioned probably have a (inaudible) effect in 2024 but any color that would be appreciated.

The Honest answer is 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, a younger demographic with that product.

So 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.

All from me.

Thank you.

Thank you.

And we have a follow up question coming from the line of Wes Carmichael.

Your line is now open.

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 if you have some attractive opportunities where you can get more spread and some privately originated stuff from Blackstone.

I probably don't want to share too much.

Right.

And it's not necessarily secret sauce, but I was saying, and as a general matter, we 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, you've heard Lisa say this before.

We've gone from six asset classes, pre-Blackstone to now 14.

So the private opportunities have been quite robust for us this year whereas last year, when right rates spiked up pretty quickly, there was a lot of opportunity in corporate.

So probably a slightly toward privates year-to-date, but those are decisions that are getting made literally real time depending on where the opportunities are.

I got it.

Thanks Chris and my follow up on the investment portfolio would be regarding the ALTs allocation.

I just looked at you across the industry and versus peers, like it seems like your ALTs allocation is a little bit higher and your definition includes some things that aren't private equity and private real estate and private credit, but just curious on just I do the calculation and it's13% or 14% of AUM like is that where you kind of want to trend longer term or is that higher or lower than you'd expect to be?

Oh, yeah.

So, the way we think about true ALTs, right?

Meaning LP commitments, it's six and, but even that's a little bit higher than long term.

We said around five, it's hard to be super precise because you're making commitments with some assumptions about how that capital gets called and utilized.

Some of the performance is really good in our old portfolio, it's obviously underperformed the long-term assumption recently, but we had some Blockbuster years early when we were deploying capital.

When you say pure ALTs we're thinking of that allocation right now.

It's about six and it's probably in the 5 to 6 range longer term.

There are equity residual tranches that sometimes get scooped up in that bucket.

But yes, true like LP commitments, it tends to see private equity.

So almost half of the portfolio's private equity, the next big chunk would be real estate.

And that tends to be classic Blackstone plays of everything from solar infrastructure data centers things of that nature, so not commercial (inaudible) and then a small amount in credit funds.

So hopefully that helps.

Yeah, thank you.

There are no further questions at this time.

Turning the call over back to Chris Blunt for concluding remarks.

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, deliver margin expansion and generate a creed of returns.

Thank you for joining us.

We appreciate your interest in F&G and look forward to updating you on our fourth quarter earnings call.

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.