Participants

Lisa Foxworthy-Parker; SVP, Investor & External Relations; F&G Annuities & Life Inc

Christopher Blunt; President, Chief Executive Officer, Director; F&G Annuities & Life Inc

Wendy Young; Chief Financial Officer; F&G Annuities & Life Inc

John Barnidge; Analyst; Piper Sandler

Wes Carmichael; Analyst; Autonomous Research

Mark Hughes; Analyst; Truist Securities, Inc.

Presentation

Operator

Ladies and gentlemen, good morning and welcome to F&G's first quarter earnings call. (Operator Instructions) As a reminder, this conference call is being recorded.
I would now like to turn the call over to Lisa Foxworthy-Parker, SVP, Investor and External Relations. Please go ahead.

Lisa Foxworthy-Parker

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 at fglife.com. It will also be available through telephone replay beginning today at 1 PM Eastern Time through May 16, 2024.
And now I'll turn the call over to our CEO, Chris Blunt.

Christopher Blunt

Good morning, everyone. Thanks for joining us to discuss our first quarter results. I'm pleased to share that we're off to a terrific start in 2024, having delivered another strong quarter as we execute on our strategic initiatives. We continue to focus on our growth strategy, maintaining a disciplined and balanced capital management process and diversifying our earnings into more capital-light strategies over time.
Starting with sales, we continue to see sustainable momentum across our multi-channel new business platform and strong demand for our products and the volatile and higher rate environment. Coming off record sales in the fourth quarter, we reported gross sales of $3.5 billion in the first quarter, our second highest on record, which was up 6% over the first quarter of 2023, which was the third highest on record.
Retail channel sales through our agent bank and broker dealer channels were $2.8 billion in the first quarter. We reported record fixed indexed annuity sales and lower multi-year guaranteed annuity sales, leading to a higher percentage of net sales retained as compared to the sequential quarter.
We also began the rollout of our new registered index-linked annuity or RILA product in the quarter, which we expect will become a significant contributor to sales over the next few years. In fact, industry RILA sales were nearly $45 billion last year, which is a record level.
We believe our product offering is differentiated in the market and will uniquely meet the needs of a relatively younger demographic. Pension Risk Transfer sales set a new first quarter record at $584 million, reflecting a healthy pipeline out of the gate this year.
As announced, we have crossed the $5 billion mark for cumulative pension risk transfer sales with over 100,000 plan participants. This milestone is especially impressive given our market entry was in mid-2021, just under three years ago. We rounded out gross sales with $105 million of FHLB funding agreements in the quarter.
We continue to monitor opportunities to return to the market for funding agreement backed notes or FABN issuances. Although conditions remain challenging in the first quarter. Net sales were $2.3 billion in the first quarter, reflecting accretive third-party flow reinsurance on 90% of our MYGA sales in line with our capital targets.
As a reminder, flow reinsurance generates fee-based earnings and frees up incremental capital to be deployed to the highest returning retained business. As noted, the higher interest rates have been driving strong product demand over the last few quarters, while also leading to a higher level of indexed annuity surrenders.
Fixed indexed annuity terminations are up over the prior year quarter as expected, although relatively in line with the fourth quarter of 2023. Our new business continues to well outpace surrenders, providing positive net cash flows and our in-force annuity account balance continues to steadily grow.
As a reminder, for insurance companies like F&G's surrenders typically provide a boost to earnings from higher surrender charge fees and freed up capital from the policy lapse. Further, our record new business volumes effectively replace older contracts with newer contracts, having higher surrender charges and longer surrender periods, further improving the liability profile.
We have profitably grown retained assets under management to a record $49.8 billion at March 31. This is an increase of $4.5 billion or 10% over the first quarter of 2023 and driven by net new business flows, stable in-force retention and net debt and equity proceeds over the last 12 months.
Retained AUM was up nearly $700 million over the fourth quarter of 2023, primarily driven by net new business flows. AUM before flow reinsurance was $58 billion, adjusting for the approximately $8.2 billion of cumulative new business ceded.
Looking ahead, we continue to target gross sales growth at a double-digit clip while managing net sales retain to a level that continues to grow our assets under management.
I would also highlight that the new Department of Labor fiduciary rules have been released. We view the new structure as manageable and are prepared to make necessary compliance enhancements when they become effective.
As a reminder, the industry has been monitoring this development over the past eight years and making enhancements to comply with the NAIC state-based best interest regulation. Our IMOs are very sophisticated firms, and many have their own RIAs and broker-dealers. Approximately 21% of our total gross sales were from producers that do not have a registered license with 15% being from qualified accounts, which we expect to have the most impact.
Overall, we do not expect the momentum in our business to be impacted, although we do worry that it will discourage agents from serving middle market clients. Our investment portfolio is well diversified, actively managed through our selective de-risking programs and well positioned to perform in varying market conditions.
Importantly, our invested assets are well-matched to our clean and stable liability profile. Our fixed income yield, excluding alternative investment volatility and variable investment income has expanded to 4.56% in the first quarter as compared to 4.33% in the first quarter of 2023. This reflects upside from higher yields on new investments and floating rate assets.
The portfolio remains high-quality with 95% of fixed maturities being investment grade and credit related impairments were a modest 2 basis points in the first quarter. We have hedged nearly 60% of our $10 billion in floating rate asset portfolio due to the potential for interest rate decreases in the future.
This is locked in about 185 basis points of incremental yield beyond what was originally priced in and translates to approximately 15 to 20 basis points of annual incremental investment margin above our pricing over the next three to five years.
I'd like to put a brief spotlight on our $2.6 billion alternatives LP portfolio, which has performed extremely well since inception. The portfolio has generated an average historical return of 13%, comprised of return-on-investment, mark to market and return of capital and returns have been less volatile than the S&P 500 Index.
Since inception, we've received back nearly $1.3 billion, almost half the capital we invested since 2017, providing an approximate 7% yield on distributions alone. And we've experienced approximately 30% appreciation in the value of capital that we invested since 2017, including both distributions and residual value for the portfolio, which is expected to grow as the Alts portfolio matures.
Turning next to our results for the quarter, excluding significant items, we delivered adjusted net earnings of $154 million, which generated an adjusted ROA of 125 basis points, and we reported an adjusted ROE of 11%. Notably our ROA is above our [110 basis points] baseline that we shared at our Investor Day back in October.
When you will get into the results more in a few minutes. But the quarter, once again demonstrates that we are positioned to perform across market cycles and that we can consistently deliver strong results with attractive and expanding margins over time.
We have plenty of momentum to continue to deliver sustainable asset growth from our retail and pension risk transfer growth strategies and ongoing margin expansion from enhanced investment margin opportunities, operational scale benefits and fee-based earnings from accretive flow reinsurance.
We are also well positioned to diversify our earnings given the strong growth of our middle market life insurance business and own distribution strategies. Our strategic investment in own distribution stakes will generate a meaningfully higher risk-adjusted return on capital than retain business and provides a diversifying source of earnings.
Own distribution further strengthens our relationships with key partners. And with industry consolidation underway, we believe we are uniquely positioned to partner as a distribution consolidator. To date, we've invested $530 million, and we expect EBITDA for the portfolio to be $45 million to $50 million in 2024 with double-digit growth over the medium term.
Wrapping up, I am very proud of our team's accomplishments. The business is hitting on all cylinders, and we remain focused on our strategic priorities, fulfilling the commitments we made in connection with our Investor Day and creating long-term value for all of our stakeholders.
Let me now turn the call over to Wendy to provide further details on F&G's first quarter financial highlights.

Wendy Young

Thanks, Chris. We are very pleased with F&G's overall financial performance for the first quarter. I'd like to point out before we get into our results that we've updated our quarterly financial supplement this quarter to highlight results from our core product margin, flow reinsurance fees and own distribution among other enhancements.
Now starting with earnings. Adjusted net earnings attributable to common shareholders for the first quarter were $108 million or $0.86 per share and included $100 million or $0.77 per share of investment income from alternative investments and $6 million or $0.05 per share of CLO redemption gains and bond prepayment income.
Alternative investments investment income based on management's long-term expected return of approximately 10% was $152 million or $1.18 per share. Adjusted net earnings for the first quarter of 2023 were $61 million or $0.49 per share and included $99 million or $0.79 per share of investment income from alternative investments, partially offset by $37 million or $0.30 per share tax valuation allowance expense.
Alternative investments investment income based on management's long-term expected return of approximately 10% was $132 million, or [$1.05] per share. For comparison, adjusting for the significant items in both periods, adjusted net earnings were $154 million in the first quarter of 2024, up 18% from $131 million in the first quarter of 2013.
This increase reflects asset growth and diversification of margin from accretive flow reinsurance fee and owned distribution margins, which were partially offset by an increase in interest expense due to planned capital market activity and higher operating costs in line with the growth in sales and assets and continued investments in our operating platform.
Our adjusted return on assets, excluding significant items, was 125 basis points in the quarter, comfortably above our 110 basis point baseline I shared at Investor Day in October of 2023. The current quarter includes 5 basis points of favorable [actuarial] liability movement that is within our expected range and reflects the effects of our methodology, which can be lumpy for inter-quarter variability.
Next, turning to our balance sheet. We ended the quarter with F&G equity attributable to common shareholders, excluding AOCI, of $5.2 billion or $41.10 per share, with 126 million common shares outstanding as of March 31.
There are a couple of pages in our investor presentation providing an analysis of book value per share. F&G's debt to capitalization ratio, excluding AOCI, was 24% as of March 31. This is in line with our long-term target of 25% and includes the $250 million preferred stock issuance in January 2024.
Our annualized interest expense is approximately $120 million or roughly 6.6% blended yield on the $1.8 billion of total debt outstanding. We continue to target holding company cash and invested assets at 2 times fixed charge coverage.
Our strong capitalization supports both growth and distributable cash. During the first quarter, F&G paid $26 million of common dividends and a $4 million dividends on its preferred stock held by FNF. F&G is well positioned to self-fund its continued growth with positive and growing in-force capital generation available debt capacity as our balance sheet delevers with book value growth over time and ample opportunity for future reinsurance programs.
For 2024, specifically, our stable profitable in-force is expected to generate more than $1 billion in capital. And we have strong capital generation in the range of $500 million from existing reinsurance arrangements.
In summary, we have great momentum in executing on our strategy and delivered a terrific first quarter. In addition, we continue to maintain strong capitalization and financial flexibility to successfully execute on our growth strategy.
This concludes our prepared remarks. Let me now turn the call back to our operator for questions.

Question and Answer Session

Operator

Thank you. Ladies and gentlemen, we will now be conducting a question-and-answer session. (Operator Instructions)
John Barnidge, Piper Sandler.

John Barnidge

Good morning. Thank you for the opportunity. My first question is on the RILA product. How should we be thinking about contribution in '24? How meaningful was it in the first quarter that it was rolled out? Thanks.

Christopher Blunt

Sure. Thanks, John. This is Chris. I would say not very meaningful in the quarter. We rolled out literally with one or two distribution partners. We've got a number of additional partners in the Q that I will expect -- that I expect will roll out in the second quarter in the third quarter.
So I don't think this is going to be a big needle mover for us this year, but it should be meaningful for us as we head into 2025. And given the environment right now, we've got plenty of sales opportunities. So yeah, I would say would be relatively modest this year and it should start becoming a meaningful contributor next year.

John Barnidge

Thank you for that. And my follow-up question, Chris, competitive dynamics in the PRT market, you talked about finally crossed a big threshold in sales to the cumulative basis and some participants have talked about this year being a bit more competitive and that institutional product?

Christopher Blunt

Yeah, I wouldn't say that we've seen a dramatic change, but obviously, it was a tremendous. It was a record first quarter for us. So the team has executed really well. We tend to be super selective in terms of what we bid on. So the process is pretty thorough for deciding where we even crank up the engine to bid.
And then when we bid, we've had a decent hit rate there. So I think it will always be competitive because it's such an attractive market but we're obviously still getting our fair share and haven't seen a big change in terms of return dynamics.

John Barnidge

Thank you.

Operator

(Operator Instructions) Wes Carmichael, Autonomous.

Wes Carmichael

Hey, good morning. Thanks. So the ROA baseline in the quarter, I guess adjusted for Alts was 125 basis points, and that's above your recent target of [110 basis points]. So maybe just hoping you could talk about if you see that as a sustainable level going forward and maybe the drivers of a little bit of that outperformance would be great.

Christopher Blunt

Yeah, I'll start and then Wendy will jump in. I think there's probably a little bit of positive tailwind to that, but not a lot. So yeah, we feel really good about what we laid out in our Investor Day was a baseline of 110 basis points, and we thought we could grow that [15 basis points] to as much as 30 basis points through a few levers, optimizing the investment portfolio.
That's feeling quite optimistic for us right now. Flow reinsurance, and you're already seeing the impact of that. And then some operating scale as we continue to grow so on. Yeah, we feel pretty good about that. I don't know, Wendy, if you would walk through maybe a little more of the dynamics of the quarter itself.

Wendy Young

Sure. I'll even go back to last quarter, there is -- based on our reserving methodologies, we're going to get a little bit of fluctuation quarter to quarter. Last quarter, it was a little bit of a hit. This quarter, it's a little bit of positive. So we're basically indicated in the script, there's about a 5 basis points maybe of positive noise in that mechanics that we have.
So we feel really good about expansion from here. And in addition to what Chris said about flow and scalability, own distribution really popped up in the quarters and that definitely is sustainable.

Wes Carmichael

Yeah, thanks. And I just wanted to maybe follow up on John's question on PRT. I think one of your private equity/and turns peers made some comments on their earnings call this quarter that there's some recent lawsuits that are likely to show some of the volumes in the PRT market in 2024.
And they also mentioned that they said spreads weren't very attractive this year versus last year. So I just wanted to get any additional perspective on -- if you think you could see some lower volumes or if that's not the case and if you still see decent spread in that market?

Christopher Blunt

Sure. Yeah. I think there's clearly the potential for that to cast a bit of a pall over the market. So we're watching for -- we haven't really seen that yet. I mean there are quite a few deals in the queue for us and everybody to go bid on.
To the spread piece, it's really hard to compare across firms because the single biggest driver is do you have access to unique longer-duration originated credit. And if you do, we're still earning good spreads. If you don't, then it's tough. It's going to be difficult. And that's everything from triple net leases to infrastructure et cetera.
So it can be very bespoke asset specific types of opportunities. And so again, I think it's hard to generalize across the industry. But yes, it's something that we clearly are on the lookout for and raising our profile on everything from how we use reinsurance to transparency about everything that we do.

Wes Carmichael

Thanks, Chris. And maybe just one more on funding agreements, but you did a little bit of FHLB borrowing in the quarter. You mentioned that conditions were challenging or FABN. In the first quarter, I think there were some peers that kind of return to that market. But just wanted to get your perspective on the rest of the year, if it looks more attractive in your outlook for FABN industry?

Christopher Blunt

Yeah, I think it does. It's a good environment right now to be an issuer. So I think during the quarter it was on the cost -- I think it's definitely looking more attractive right now. Wendy, if you want to add to that.

Wendy Young

Yeah, I was just going to say we monitor it, Wes, just to see how we're doing from the spread perspective. Our rating is a little bit lower than some of the ones that have gone out in the first quarter and that impacts the spread, but we are monitoring, and it looks like it's getting better every day.

Christopher Blunt

Yeah. And one other thing I would say, Wes. Obviously we're trying to maximize return on capital That's the goal. And so right now, given the attractive opportunities in retail and PRT, so we look at all of them as funding sources and cost of funds and we're waiting are trying to optimize that at all times.
But looking at the quarter, I actually walking around feeling like this might have been the best quarter we ever had, inflows continued to be strong, the mix was really positive. So the mix shift towards FIA is from MYGA. Obviously, FIA is our most profitable product. It's a longer duration product.
So we're locking in a spread for longer, and we are already starting to see, as you said, expansion on the margin front. So never declare victory in the third inning of the game. But relative to what we put out there for Investor Day, we're off to a really good start and feeling really good about it.

Operator

Mark Hughes, Truist Securities.

Mark Hughes

Yeah, thank you. Good morning. Sorry if I might have -- you might have touched on this. I joined late, but I think you'd comment on how you're optimistic on RILA sales that should become a bigger part of your mix.
Could you talk about how you see the long-term dynamic between RILA in fixed indexed annuities and how your distribution matches up to support the one or the other? How it may evolve over time to support the RILA sales if it needs to?

Christopher Blunt

Sure. Yeah. No, great question, Mark. So I'd say a couple of things. If you think about a fixed index annuity. It's got a [floor of zero] and an opportunity to participate in markets. But by definition, it's got a capped upside.
RILA allows someone to take a risk level below [zero], right, typically in the form of a buffer of, say, 5%, 10%, even 20% of downside absorbed. By the carrier, which has allowed us for a lot more upside. So typically, it's a younger demographic. It's someone -- with either with a higher risk tolerance or in many cases, a younger demographic. So it's a market we've never played in at all, right.
And so all of this is greenfield and really should be incremental sales and incremental margin for us. So in any other from a distribution channel perspective, not surprisingly RILA tends to be more popular in the broker-dealer channel, whereas our FIAs are tend to be more popular in the IMO and in the bank channels.
And so a lot of our activity in adding distribution partners starting a couple of years ago has been to add more broker-dealers in anticipation of the RILA launch. So hopefully that helps a little bit younger demographic client with a higher risk tolerance.
I've said this before, you know, it opens up a massive pool because you have to ask the question of, yes, everybody should probably own some mutual funds that they've got a very long-term time horizon and some equities, but that comes with a tremendous amount of volatility.
And so I think a lot of people like the peace of mind of knowing that there is some constrained outcomes to that. And so, yeah, this is a category that I think for the industry is going to be really attractive. Lastly, I will say it's playing to the same strengths.
Again, we're just buying a different colored option with a wider band of outcomes. But at the end of the day, it's the spread based product and the key drivers that have made us successful in the FIA space and it should translate in the RILA space.

Mark Hughes

And then I think somewhat competitor of yours has talked a bit more about that integrating their annuity products into these retirement -- the dated funds that they're starting to see some movement there. Can you talk on that opportunity, whether that's something you're pursuing directly as another distribution channel source of growth?

Christopher Blunt

Yeah, I would say it's not on top of the queue for us. There are a lot of, as you know, complications within -- challenges within of that market. It's been kind of a slow boat coming. I do think the product is going to have a big impact for society to be able to do that and for folks to be able to participate in their [for 1K] plans but I would say right now with all of the distribution opportunities we have both in institutional and retail, that feels like a better priority for us. But we continue to look at it and want to stay close to it. If appropriate, we think that's a market we could compete in if we choose to.

Mark Hughes

Would you think the economics at this point are not quite there yet? Or there's not as much demand in that for one key market?

Christopher Blunt

Yeah, I'm probably not the best expert on this topic, although I studied it years ago to a different firm quite intensively, I think the biggest issues are record-keeping. So it's kind of the expense and complication of getting plan sponsors to adopt it.
And more importantly, record keepers to pay for all of the enhancements to make it work. And then the other is for to be get broad-based acceptance. You do end up with a lot of smaller accounts. Now that can be solved for it through some sort of omnibus structure.
But yeah, it's just a little more complicated. I would also think carriers with a big recognized brand name and or retirement plans presence of their own probably will have a little bit of a leg up there. So hopefully that.

Mark Hughes

Yeah, understood. Thank you. Appreciate it.

Operator

Wes Carmichael, Autonomous.

Wes Carmichael

Thanks for taking my follow up on that. I had a question on the capital consumption on the RILA product versus an FIA or MYGA. I imagine there's the same [C4] charge on the premium. But when you look at RBC, is the RILA product favorable relative to fixed annuity, is there not much of a difference there?

Christopher Blunt

Wendy, do you want to tackle that one?

Wendy Young

Yes, sure. Thank you. There's not much of a difference, as Chris said, it's basically the difference between the product is the option that we purchase, and there's really no difference in the capital charge on that.

Wes Carmichael

Great. And then just maybe just following up on the DOL and the final rule. Obviously, your new business origination capabilities are much more diversified than last time we saw this, but I think you mentioned 15% or so of gross sales might be the most impacted.
Can you maybe just give us any additional perspective on what changed this time around with this version? And if there's any way to kind of dimension the potential expense impact that would be great?

Christopher Blunt

Yeah. I mean, the honest answer is not much changed. And I think that's the frustration of the industry is that it's some eerily similar to the rule that was put forth before. So there will be enhanced compliance expense. I don't think any of it is some going to rise to a level that's going to cause us to question the forecast that we've put out, et cetera.
So I put it more in the -- it's annoying. A number of people feel that it's unnecessary, given all the other regulations that are in place. The bigger concern that I have, which I mentioned in the notes is it could be an impediment for agents serving the middle market and just moving upstream.
Ideally as it takes time, it's going to take a while for that impact to be felt. And so again, given that we probably have more -- probably we have more sales opportunity than capital right now, that's the constraint is not opportunity for sales.
So again, there's nothing in this that's going to cause us to change our plans. The concern on my end is it will be impactful to certain agents. And I think unfortunately, it would be disproportionately impactful to agents that are serving the middle market. I don't know, Wendy, if there's anything you want to add to that?

Wendy Young

I think I would just add, Wes, the biggest difference is that F&G is different back in the original world. We weren't in the bank and broker-dealer market. So that has significantly improved those percentages that Chris was talking about of where we would be impacted.

Christopher Blunt

Yeah. And we also weren't in the prior to your FABN market. So if you go back five years ago, we were doing probably $3 billion of sales that was all through independent agents. And now as you see, we're $13 billion-plus, and we've continued to grow the IMO space.
And a number of those IMOs, I think actually will thrive during this because they're fairly sophisticated. It may force independent agents to me to affiliate with one eye about versus multiple IMOs. So I think the best players actually look at this and say we can build some nice moats for ourselves adapting to this. But there's just a lot of agents and a lot of smaller agents calling on middle market clients that this is going to be quite disruptive for us.

Wes Carmichael

Great. Thank you.

Operator

Thank you. Ladies and gentlemen, this will conclude our question-and-answer session. I will now turn the conference back over to CEO, Chris Blunt, for his closing remarks. Chris?

Christopher Blunt

Great. Thanks, everybody. Look, we're really pleased with our overall results which demonstrate the competitive strengths and resilience of our business. F&G is positioned to perform through the cycle, and we're successfully executing on our strategic priorities to generate continued growth and profitability.
Thanks for joining us. We appreciate your interest in F&G and look forward to updating you on our second quarter earnings call.

Operator

The conference of F&G has now concluded. Thank you for your participation. You may now disconnect your lines.