F&G Annuities & Life, Inc. (FG) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to the FGL Holdings Fourth Quarter 2019 Earnings Conference Call. Please note, this event is being recorded and will be available for replay. I would now like to turn the conference over to Mr. Wes Carmichael, EVP, Corporate Development and Investor Relations. Please go ahead.

Thank you, operator, and good morning, everyone. We appreciate you joining our earnings call. Today, we will discuss our financial results for the fourth quarter of 2019, which ended on December 31. You can find the financial information for FGL Holdings on the Investors section of our website, fglife.bm. Today's presenters include Chris Blunt, President and Chief Executive Officer; and John Fleurant, Executive Vice President and Chief Financial Officer. Some of the comments we make during this conference call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act. We do not intend to update any comments on this call to reflect new information, subsequent events or changes in strategy. A number of risks and uncertainties exist that could cause our actual results to differ materially from those expressed or implied. We discussed these factors in detail in our 2018 Form 10-K and in the 2019 10-K that we plan to file with the SEC in the coming days. During this conference call, we may refer to non-GAAP financial measures that we believe may be meaningful to investors. Please refer to our fourth quarter earnings release and financial supplement posted to our website. These documents contain a reconciliation of non-GAAP financial measures to GAAP. And finally, all comparison comments today will be to the fourth quarter of 2018, unless we state otherwise. Additionally, as we noted in our press release issued last night, due to the pending transaction with FNF, there will not be a question-and-answer session this morning. It's my pleasure to now turn the call over to Chris.

Thanks, Wes, and good morning, everyone. I'm pleased to announce strong results for the fourth quarter of 2019, building on the momentum we established in the first 3 quarters of the year. John will provide additional details on financial performance in the quarter shortly, but I'd like to touch on a few highlights for the year. The fourth quarter rounded out a terrific year for F&G, highlighted by strong organic growth and increased profitability. From a top line perspective, we delivered 22% growth in totaled sales. While sales were pressured in the third quarter, sales rebounded sharply in the fourth quarter as competitors adjusted to pricing actions we took in the middle of the year. This led to sales growth in annuities of 16% for the full year, surpassing our target of double-digit growth. Profitability was robust as we delivered 24% growth in adjusted operating earnings, which drove an adjusted operating ROE of 20%. Most importantly, we were able to increase spreads despite a sharp decline in interest rates while also maintaining our competitiveness with respect to new sales. Moreover, consistent with the growth of our business, it was also a great year with respect to attracting top talent from across the industry. Last year, we recruited numerous professionals across a range of disciplines and we continue to win awards as a best place to work. I'd now like to make a few comments regarding the merger agreement with FNF. We're excited to join the FNF family of companies and believe that under FNF's ownership, we will be able to expand growth in our core channel, jump-start our launch into new channels and accelerate our path towards higher ratings. Finally, on a personal level, I'm excited to work closely with the FNF team. Over the past few weeks, I've had the opportunity to get to know FNF's senior management and Board of Directors, and I'm confident they will be terrific partners to us and that the transaction represents a very positive outcome for the various stakeholders at F&G. And with that, I'm going to turn it over to John Fleurant to provide more details on the financial performance during the quarter.

Thanks and good morning. Today, I'll focus my comments on the following: earnings and performance trends across the business, results in our investment portfolio, and I'll wrap up with where we stand on capital and liquidity. I'm pleased to share that we have delivered strong results in the quarter and as well as the full year in a challenging interest rate environment. We've seen solid top line growth and bottom line growth as well as a strong return on equity. We reported adjusted operating income available to common shareholders of $94 million or $0.44 per share compared to $76 million or $0.34 per share last year, an increase of 24%. On a full year basis, we reported AOI of $320 million or $1.48 per share compared to $1.19 reported in 2018, an increase of 25%. Our underlying earnings available to common shareholders were $70 million even after adjusting for net favorable items that are not consistent period to period. The current quarter AOI had $24 million of net favorability or $0.11 per share from the following: $0.07 per share in favorable SPIA mortality experience, $0.06 per share in favorable market movement on futures and options contracts held to hedge our index products partially offset by $0.02 per share of other net unfavorable items. For comparison, last year's fourth quarter AOI of $76 million included a net $13 million of favorable items. Adjusting for these uneven notable operating items in both periods, we had a very solid fourth quarter, up 11% from the prior year quarter. We continue to experience positive uplift in AOI driven by ongoing invested asset growth, the benefits of the portfolio reposition lift and a disciplined crediting strategy. We ended the quarter at a book value per share, excluding AOCI, of $8.56, including $0.58 per share of favorable mark-to-market movements in the quarter. Book value was up 13% from $7.56 reported last quarter and up 33% from a year ago. Turning to the investment portfolio. Overall, it is performing well due to the significant reposition activities throughout 2018 and continued funding and seasoning of our alternative asset portfolio during 2019. Average assets under management for the year totaled $27.4 billion, reflecting an increase of $1.8 billion. This reflects growth of 7% net of reinsurance transactions. The net average investment yield on new money was about 4.63% in the quarter and 4.78% for the full year, including a 5% allocation to alternative assets. Our alternative assets program is progressing as expected, with approximately $1.1 billion or nearly 4% of the portfolio funded to date. Next, turning to net investment income and portfolio yield. Net investment income of $324 million in the quarter was up $29 million or 10% over the prior year due to the portfolio reposition uplift and invested asset growth. Overall, the reported GAAP earned yield was 4.57% in the quarter, up from 4.32% in the third quarter. The earned yield for the full year was around 4.5%. Net investment spread across all products was 241 basis points, up 31 basis points over the prior year, driven by increased portfolio yield, including alternative assets uplift and favorable interest credited. This year is another great example of our ability to maintain spreads even with a decline in the 10-year treasury yield of nearly 80 basis points. I'll finish my comments with a few thoughts on capital. We finished the fourth quarter with a strong and stable capital position with an estimated risk-based capital, or RBC, ratio of about 475% on a consolidated basis, reflecting strong statutory earnings. Next, with regard to liquidity. Deployable capital at year-end was about $300 million comprised of insurance company surplus, available debt capacity and holding company assets. And with that, I'll turn the call back over to Chris for closing remarks.

Great. Thanks, John. So in summary, we continue to have great momentum across the business and delivered a solid fourth quarter, even adjusting for the notable items in both periods. For the full year 2019, we delivered 22% growth in total sales while achieving new business profitability and capital targets. We delivered 25% growth in adjusted operating income and are seeing steady expansion in net investment spread. Our comprehensive investment portfolio reposition is completed with run rate uplift delivered as expected and more to come as we look forward to full uplift from the growing alternative asset allocation. And lastly, we're pleased that following the recent merger announcement, the company's ratings were placed on CreditWatch positive by S&P Global Ratings, review for upgrade by Moody's Investors Service and Rating Watch by Fitch Ratings. I'd like to thank everyone for their time this morning, and we appreciate your interest in F&G and for joining today's call. Operator, you can now end the call.

Thank you, sir. Ladies and gentlemen, the conference has concluded. Thank you for attending today's presentation. You may now disconnect.