F&G Annuities & Life, Inc. Q3 FY2025 Earnings Call

Thanks, operator, and welcome, everyone. I'm joined today by Chris Blunt, Chief Executive Officer; and Conor Murphy, President and Chief Financial Officer. 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 quarterly and annual reports and other SEC filings for details on important factors that could cause actual results to differ materially from those expressed or implied. This morning's discussion also includes non-GAAP measures, which management believes are relevant in assessing the financial performance of the business. Non-GAAP measures have been reconciled to GAAP where required and in accordance with SEC rules within our earnings materials available on the company's investor website. Please note that today's call is being recorded and will be available for a webcast replay. And with that, I'll hand the call over to Chris Blunt.

Good morning, everyone, and thanks for joining our call. We delivered strong third quarter results with record AUM before flow reinsurance, fueled by one of our best sales quarters in history, the launch of our new reinsurance sidecar, and strong performance across the business as we execute on our strategy and make continued progress toward our 2023 Investor Day targets. F&G is uniquely positioned in the industry with a profitable and growing $56 billion in-force block. We generate spread-based earnings from fixed annuities and pension risk transfer, and we have multiple sources of fee-based earnings with the sidecar in place alongside our flow reinsurance, middle-market life insurance and well-performing own distribution portfolio. As our business grows, we're becoming a more fee-based, higher-margin and capital-light business, leveraging our position as one of the industry's largest sellers of annuities and life insurance. We are balancing this with continuing to grow our spread-based business prioritizing pricing discipline and allocating capital to the highest return opportunities. As we execute on our strategy, we expect both gross and net AUM to continue to grow. F&G reported a record $71.4 billion of AUM before flow reinsurance at the end of the third quarter, including retained assets under management of $56.6 billion. Compared to the third quarter of 2024, AUM increased 14% and 8%, respectively, driven by net new business flows. For the first 9 months of the year, we generated $11 billion of gross sales. This reflects $6 billion of core sales, which include index annuities, index life and pension risk transfer and $5 billion of opportunistic sales, including MYGA and funding agreements. Looking at the third quarter, we delivered one of our best sales quarters with $4.2 billion of gross sales and strength across all products and distribution channels. Core sales were half of the total at $2.2 billion, modestly above both the second quarter of 2025 and the third quarter of 2024. Highlights for our core sales include indexed annuities of $1.7 billion in the quarter and $4.8 billion year-to-date. FIA is our largest contributor to index annuity sales and with the launch of the reinsurance sidecar in August, we have started flowing a portion of our accumulation-focused FIA sales during the quarter. RILA continues to be a modest but growing contributor to our sales as we are gaining momentum. IUL sales were over $40 million in the quarter and $137 million year-to-date, up 10% over the prior year-to-date period as our life insurance solutions are meeting the needs of the underserved multicultural middle market. And PRT sales were more than $500 million in the quarter, including a multiple repeat client and $1.3 billion year-to-date, in line with the prior year-to-date period. The PRT market continues to see a robust pipeline for midsized deals between $100 million to $500 million where F&G competes well, and we're on track to achieve our targeted $1.5 billion to $2.5 billion of PRT sales for the full year. Opportunistic sales were $2 billion in the third quarter with over $1 billion of funding agreements and nearly $1 billion of MYGA sales. Opportunistic sales volumes will fluctuate quarter-to-quarter depending on economics and market opportunity. Here's a few details. We took advantage of an attractive market window and executed a record $800 million FABN issuance in the third quarter and expanded our high-quality investor base, bringing our third quarter and year-to-date funding agreement placements to $1 billion and $1.6 billion, respectively. Coming off a record second quarter, MYGA sales were nearly $1 billion in the third quarter and $3.4 billion year-to-date. We optimize our level of flow reinsurance in line with our capital targets by dynamically adjusting MYGA volumes up and down as market economics change. While short-term interest rates declined following the recent Fed cuts, the shape of the yield curve has a bigger impact on our business. We do not have significant exposure to changes in short-term interest rates as we have hedged the majority of our floating rate portfolio to lock in higher rates over the past couple of years. Our floating rate assets are now only $2.4 billion or 5% of our total portfolio, net of hedging. We expect continued strong demand for retirement savings products, including a growing demand for annuities by consumers and financial advisors for retirement security. Demographic trends remain a powerful secular driver as the growing retirement population seeks guaranteed lifetime income streams. And the continued macroeconomic volatility increases the relative attractiveness of fixed annuity products for consumers that want guaranteed tax-deferred growth and principal protection. Next, turning to the investment portfolio. Our portfolio is diversified, well positioned and high quality with 96% of fixed maturities being investment grade. Credit-related impairments have remained low and stable, averaging 6 basis points over the past 5 years. Through the first 9 months of the year, credit-related impairments remained below our pricing. Given broader market concerns around credit exposure to bank loans, we don't have any direct holdings in First Brands, Tricolor or PrimaLend and our exposure to the subprime auto and regional bank sectors was a modest $20 million and $13 million, respectively, as of September 30. Our fixed income yield of 4.68% increased 10 basis points over the sequential quarter, primarily driven by a prospective floating rate asset model refinement. As a reminder, our fixed income yield excludes alternative investment income as well as variable investment income. Looking at our alternative investment portfolio, we saw improvement in our annualized return at 7% in the quarter, up from 6% in the sequential quarter and as compared to our 10% long-term expected return. Our alternative investment portfolios comprise 30% of all LPs with the remainder of more debt-like in nature. Next, turning to variable investment income. We reported $24 million of pretax, prepaid income in the quarter, which was above our run rate expectation as compared to $26 million in the prior year quarter and $6 million in the sequential quarter. As far as asset managers go, we really think we have the best of both worlds in terms of our competitive positioning and flexibility. This month marks that we are 8 years into our strong and seasoned relationship with a world-class manager in Blackstone. And we have the flexibility to work with other asset managers, whether for flow reinsurance or specialty asset classes that complement Blackstone's capabilities. In summary, F&G's results for the first 9 months of the year have positioned us well for a strong finish for the remainder of 2025. We are executing on our strategy, leveraging the strength of our distribution partners to continue to grow our spread-based business alongside our growing sources of fee-based, higher-margin and capital-light earnings through our flow reinsurance, middle-market life insurance and own distribution strategies. I'm excited about the future and our ability to continue to further expand our return on equity to deliver long-term shareholder value. Let me now turn the call over to Conor to provide further details on F&G's third quarter highlights.

Thank you, Chris. I'd like to start by thanking our employees for their efforts in delivering an all-around strong quarter. Our solid foundation and focused execution continue to drive results across the business. Looking at our third quarter results more closely. On a reported basis, adjusted net earnings were $165 million or $1.22 per share in the third quarter. Alternative investment income was $67 million or $0.48 per share below management's long-term expected return for the quarter. Adjusted net earnings included two significant items, a $10 million or $0.07 per share benefit from a tax valuation allowance release as well as $4 million or $0.03 per share from an actuarial reserve release. Additionally, our third quarter adjusted net earnings benefited by approximately $25 million as a result of two other items in the quarter, strong prepayment fees as well as a lower effective tax rate. We completed our annual actuarial assumption review in the third quarter. As a result, amortization expense was approximately $6 million after-tax higher in the third quarter and we expect higher amortization over the next year with approximately $5 million after tax in the fourth quarter, incrementally diminishing through the first half of 2026. Overall, as compared to the prior year quarter, third quarter adjusted net earnings reflect asset growth, growing fees from accretive flow reinsurance, steady own distribution margin and operating expense discipline driving scale benefit. Our results have generated sustainable returns. As reported, adjusted ROA on a last 12-month basis was 92 basis points, including short-term fluctuations from alternative investment income. This is stable and in line with the last 12-month period for the prior year and sequential quarters of 95 and 92 basis points, respectively. All else equal, we expect this is indicative of our current run rate for adjusted ROA on a reported basis. Our adjusted ROA reflects meaningful contributions from our fee-based flow reinsurance and own distribution strategies. As reported, our adjusted return on equity, excluding AOCI, was 8.8%, in line with the sequential quarter. Our fee income from accretive flow reinsurance has grown to $41 million in the first 9 months, up 46% over $28 million in the first 9 months of 2024. F&G launched its flow reinsurance strategy in 2020, which builds on our core competencies, enables us to scale in an accretive and capital-efficient manner and produces diversifying fee income which generates strong cash flows. Our flow reinsurance strategy, augmented by the new reinsurance sidecar effective August 1, provides third-party capital for a portion of F&G's FIA and MYGA sales. Today, we expect to reinsure the vast majority of MYGA sales depending on economics. As discussed on last quarter's call, the economics for FIA sales are relatively more attractive with the sidecar and we expect we will evolve toward 50-50 retained versus flow for FIA sales. Importantly, we will continue to grow retained AUM as we balance retaining business versus optimizing flow reinsurance and preserving capital flexibility. Our own distribution portfolio is performing well and creating value. We have invested nearly $700 million in our four own distribution investments and expect to generate over $80 million of EBITDA for the full year 2025. Our holdings are diversified by product and market and reflect growing businesses with strong leadership. Two of our holdings are life IMOs that produce about 50% of F&G's IUL sales as the majority of their sales mix. The other two holdings are annuity IMOs that produce approximately 15% of F&G's annuity sales as the minority of their sales mix. In the future, we have plenty of opportunity to expand the value of own distribution through our existing holdings. And as independent agent distribution continues to consolidate in the industry, we expect to be selective in expanding to additional strategic partners, being thoughtful about where it makes sense and where it's the right fit with our long-standing relationships. We are benefiting from increased scale as our ratio of operating expense to AUM before flow reinsurance has decreased to 52 basis points in the quarter, down from 62 basis points in the third quarter of 2024. We expect continued improvement in our operating expense ratio as a result of the expense actions we took earlier this year, moving from 60 basis points at year-end 2024 to approximately 50 basis points by year-end 2025. Further, we see the potential to decrease by an additional 1 basis point per quarter on average in 2026. Two years in, and we have made significant progress towards the medium-term financial targets we laid out at our October '23 Investor Day to grow AUM by 50%, expand adjusted ROA, excluding significant items to 133 to 155 basis points, increase adjusted ROE, excluding AOCI and significant items, to 13% to 14% and expand our multiple. We are well positioned to deliver on our targets as we move further toward a more fee-based, higher-margin and less capital-intensive business model, leveraging our position as one of the industry's largest distributors of annuities and life insurance. This concludes our prepared remarks, and let me now turn the call back to our operator for questions.

Thanks, operator. Early this morning, we issued a press release with FNF, our majority owner, announcing the FNF Board of Directors has approved a change in FNF's equity ownership stake in F&G. FNF plans to distribute approximately 12% of the outstanding shares of F&G's common stock to FNF shareholders. Following the distribution, FNF will retain control and majority ownership of approximately 70% of the outstanding shares of F&G. This will increase F&G's public float from approximately 18% today to approximately 30% after the distribution, strengthening our positioning within the equity markets and facilitating greater institutional ownership.

First question I had, maybe it's a bit broader of a question on capital allocation. But as I think about the stock, it's been under a little bit of pressure this year year-to-date. And I know you raised some growth equity earlier in the year. Now you have the sidecar. So I'm just wondering how you're thinking about prioritizing capital deployment and how you think about share buybacks relative to things like allocation to own distribution or even just faster organic growth?

Sure. Thanks, Wes. It's Chris. I'll start. I know Conor will have some views here as well. I would say right now, obviously, we want to continue to grow our fixed index annuity business that's core for us. And so that's always going to be fairly high on the list. Own distribution is attractive and where we've got opportunities to either potentially add a platform, although we want to be selective there or add some capital to help some of our existing ownership stake scale, that's very high on the list. Index Universal Life is a high priority for us and continuing to grow that, although it's not a large consumer of capital right now. You probably also noticed we increased the dividend by 13.6%. So we're trying to share some of the new capital-light model with our shareholders right away. I would say right now, buybacks would probably be a pretty low priority for us just because, obviously, the distribution of shares by FNF is to try to help us increase our float, not take float out of the market. But I don't know Conor...

It's a little bit of a reiteration. Thanks, Wes. We're seeing very attractive opportunities for our core products. Again, IUL, the FIA, the RILA and the PRT, we've continued to be active in the PRT market as well and expect that momentum across all of that to continue in the near term. So we're very comfortable. We've plenty of capacity from a capital perspective to continue to focus on those. The opportunistic will be just that. It was a pretty active quarter this quarter, but we're watching where MYGA returns are in the near term and we will write as much or as little there depending on the economic opportunity. And yet, we continue to really, really like the own distribution expansion opportunity as well.

It makes sense on the float comments, Chris. Second question I had, I guess, on variable investment income outside of the alternatives portfolio. I think that was pretty strong in the quarter, but I imagine that will bounce around a little bit quarter-to-quarter. But just maybe if you could think about a run rate level of non-alt VII going forward. Is there any help you can give us on that?

Yes, I'll give you a sense. So you're right. We were higher this quarter. I think we were in the $24 million pretax range and like our expectation near term. You're always going to have an element of this. Our expectation is probably at the high single digits, 10-ish roughly, maybe a little less, but it will move around a little bit, and that's fine, but they were certainly a little bit higher, which is why we called them out in the quarter.

That's helpful from a modeling perspective. And just maybe one final one. Just on the investment portfolio. I guess in recent weeks, there's been more focus on, I guess, private letter rated assets and these private structures, particularly those that are rated by Egan Jones, I'm just wondering if there's any color you can provide on that exposure for F&G maybe as a percentage of the portfolio? And maybe if you would disagree with the spirit of these recent articles in the media on private credit?

Yes, maybe to in reverse order. I think, look, everyone is concerned about the same things in the private credit space. So there's been some kind of big, I would say, bold statements made on both sides of the argument here. I think the only thing we can speak to specifically is our own portfolio, which we're feeling quite comfortable with. With respect to Egan Jones, yes, I think like a lot of firms, we're increasingly utilizing two different agencies. The number of securities or loans that we have that are rated by Egan Jones is quite small, like quite small. And we're trying as a general rule to get two agencies and wherever possible, one of what you would call the big 3 to rate every single deal, not just because of the backdrop or concerns about any one rating reliable, so to speak, but also you have turnover. We have an analyst on leave. And so it's always better to have two where you can have that. So I think we've made a ton of progress there.

A couple of questions on the alternatives performance. First, can you provide some color on the moving pieces of the $67 million of unfavorable alts in the quarter? And I guess how much of that was just the LPs versus that direct lending? And then what are the targeted returns on the different pieces that fall in that $10.5 billion bucket of alternative assets?

Yes. I'll give you a sense. I'm not sure we give a complete and full breakdown, but I kind of know what you're going after. And I would say this from an expectation of where we came out, we were pretty close on the whole loan and direct lending parts. And I think we talk about a $10 billion portfolio in total, of which about $3 billion of it is the LP. So the LPs had a stronger performance. And I would say that the increased performance was broadly there as well, but they are also in the main, the area that are still falling short of the long-term expectation. We were pretty much there or thereabouts on the whole loans and on the direct lending side.

And Joel, as you know, some of the LPs, particularly on the PE funds, you get a lot of that information comes with a lag. So that's part of the issue, too. So obviously, the sense is that activity is picking up. Hopefully, that's true and that persists.

Yes. To achieve an average of 10%, I would say that is modestly accurate. However, there isn't a significant range when you look at all the components, but there are some small differences, not on the statement, correct.

Okay. And then, Conor, just on the base yield jump of 10 basis points. You guys mentioned a floating rate refinement. Just what exactly was that? And how much of the basis point quarter-over-quarter increase was that?

Yes, I'm not certain if it was 10 basis points. I believed it was probably closer to $10 million and perhaps 3 or 4 basis points regarding what I would refer to as the core fixed income impact. However, we did experience a slight change. Initially, we were only using the forward curve, and now we employ a decision tree methodology where anything that's a placeholder or unhedged, or if it's an FABN, is treated as short and spot, while anything longer term is considered forward. We highlighted that this indicated a slight increase in the fixed income yield. Honestly, I think the fixed income yield for the quarter was really flat from the previous quarter when you look closely at the core components.

Conor, I think you had talked about kind of all else equal, a good run rate ROA for the business. On an adjusted basis, what would that number look like?

On an adjusted basis, we've been in the high 120s, right around the lower end. Remember, we set a target a couple of years ago at the Investor Day to reach the 130s to 150 range. Currently, we're at the bottom end of that range. So over the last 12 months, on an adjusted basis, I think we're probably around the 129 or 130 mark.

Okay. And then maybe a two-part question on RILA. Just looking at the Q3 stats out of LIMRA, says that RILA is up 20%, FIAs down a little bit. Just sort of curious, any observations on that dynamic? What's causing it? Is that likely to persist? And then just any update on your progress in the RILA product?

Yes, Mark, this is Chris. I'd say a couple of things. I think what's driving it, probably a little bit as rates has come down a bit and cap rates lower on fixed product, markets have obviously been outperforming quite well, equity markets. And so yes, you're always going to see everyone's well some sentiment shift between RILAs and FIAs, which is why we like the product; we want to have it in our portfolio. I would say, as we've acknowledged before, it's taken longer to get on platforms. So once we're on platforms, we're getting good flows and good adoption from advisors. So yes, it's continuing to grow. It's continuing to grow at a healthy clip just off of a small base. And again, given the number of opportunities that we have in FIAs, particularly FIAs that we can utilize the sidecar for, that's been pretty high on our list. So we haven't felt particularly constrained by the growth of it, but it's a strategic product for us, and we want to continue to grow it over time.

Very good. Maybe another two-parter. The $80 million in EBITDA and own distribution, how does that compare to the prior year? And then you're seeing much private equity activity there. Competition for other deals, how does that stand now?

Yes. The EBITDA figure we projected a couple of quarters ago was around $85 million, but it's decreased slightly since then. However, I expect it will fluctuate a bit each month. Overall, the portfolio is performing exceptionally well, exceeding our expectations, which gives us confidence in our future growth rate. In terms of activity, it remains consistent. For every platform we acquired, there was private equity competition, whether they chose not to go with another roll-up player or had offers from them. Our competitive positioning hasn't changed, and we're still quite optimistic about our prospects.

First one for you is just more of a broad question around the competitive landscape. And maybe if you could comment both on the liability side but also even on the asset side and just how you're viewing competition for loan origination and so forth.

Let me start with the liability side. We feel comfortable in the near term, which I would define as the next few months as we look to maintain momentum heading into Q4 and assess the current market conditions. The FIA space is okay; it's competitive but still reasonable. This also applies to RILA and IUL. From a PRT perspective, activity is still fairly strong. Typically, there is a good amount of activity in the fourth quarter, and I believe the environment remains favorable for that, although predicting too far ahead can be challenging. The volume and pricing in the PRT space, particularly within the $100 million to $600 million and up to $1 billion range, looks promising as well. In terms of MYGA, as I previously mentioned, that area is tighter. It seems that the appetite for MYGA has diminished somewhat compared to the other opportunities we are currently seeing.

Yes. And on the sort of credit origination side, which is an important engine, right, from a competitiveness standpoint, obviously, that is tighter. There's more competition for deals for sure, but the market is just huge and continues to expand in terms of opportunities. So we've been able to find our spots. Probably takes a little bit longer to get some premiums invested, particularly in the private credit area. But yes, I would agree with Conor's assessment, tighter in spots, but overall, still pretty attractive.

Got it. All helpful. My second question is about the hedging and short-term interest rates. Could you help us understand how that impacts earnings? Is there a delay or is it amortized? Was there a significant impact this quarter from rates decreasing at the short end of the curve? I am not very familiar with how that affects adjusted earnings.

Yes, I don't think there's anything particularly significant to mention. The main perspective for us is that there is a floating rate component in the portfolio that is not substantial, representing less than $2.5 million or 5% of the total portfolio.

Yes. It's important to have some floaters because when great opportunities arise, these assets are often the easiest to move and reposition for something better. We'll follow up with you on that, but I don't believe there are any significant timing delays related to the hedging.

That's exactly right. To emphasize, it's really tied to the purpose of the asset. It was modest. The reason we highlighted it is to illustrate that from a core fixed income perspective, there’s significant focus on the ROA. It was positive, but it was a flat quarter. It remains the same. We weren't suggesting that it had increased due to anything we adjusted in the portfolio, which is why we called it out.

I just had a couple more for you. But one on operating leverage. If I look at the operating expense line, that's declined over the past couple of quarters, and I think that's a good development. I imagine part of that's related to the actions you took earlier in the year. But how are you thinking about that going forward? Is there more opportunity for reducing costs? Or should we just think about the spend is going to increase less than the pace of AUM going forward?

Yes, I think it's the latter. Thank you, and I made some of these comments earlier as well. From our perspective, we aim to reduce the cost basis as a percentage of assets under management from 60 to 50 basis points. We started this effort in the second quarter. My expectation is that we will decrease this further from 50 to roughly 46 over the next year. I believe this will be achieved by broadly maintaining the current inflation levels while continuing our growth. After that, I anticipate the decline will continue but at a more modest pace, possibly around 0.5 basis points per quarter. By 2027, we might see another 2 basis points drop after the 4 this year. Therefore, you could view this as an ongoing improvement in our expense ratio rather than a reduction in core expenses.

Yes. I mean, I would agree with Conor. We have taken a number of actions to lower our costs, operational efficiencies. So you're seeing the benefit of that in the past couple of quarters. I think we have more levers we can pull to drive efficiency as we continue to grow in size and scale. And as we move forward, I think we will see that the pace of AUM growth will outstrip operational expense growth, which is a good sign for the overall health of the company. Thanks again, everyone, for joining our call this morning. We had a really strong third quarter and have good momentum heading into the end of the year. I'm excited about the future and our ability to deliver strong returns for the shareholders of F&G in the years ahead. We appreciate your interest in F&G and look forward to updating you on our fourth quarter earnings call.

Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.