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

All right. So we will go ahead and kick off the next session. First, I'd like to say thank you, everybody, for joining us. Chris Blunt, CEO of F&G Annuities; Conor Murphy, CFO. I really appreciate you all being here. We're looking forward to the conversation.

To kick it off, I wanted to start with a higher-level discussion of your strategy you've talked about to transform F&G into a more fee-based capital-light business over time. And I just wanted to get a feel for what are some of the key things you're working on? What will that mix look like over time?

Sure. Yes, I'll start. I'm sure Conor is going to want to jump in here. So good to see everybody. Yes, I would say, traditionally, the bulk of the growth of the last 6 years for F&G, where we've kind of more than doubled AUM and our earnings has come by making annuity sales and retaining them on our books, right, holding those assets. And now with the launch of the sidecar with Blackstone, some of the reinsurance deals that we have put forth, we are moving towards a more capital-light model, and that's simply because the return on equity is meaningfully higher to write a piece of business and be more of a distribution company. We have also invested about $700 million in actually owning some distribution channels. So we have bought a number of properties. Those are performing really well. It's already throwing off about $85 million of EBITDA. And then lastly, we've got a middle market life insurance business, which is growing quite well. It's one of our more profitable lines of business. So yes, I would say a bit of an evolution for us as we've come along this journey, but the sidecar, $1 billion of committed capital, it seems an appropriate time to really be more clear about what our intentions are as a company.

Maybe we could dig a little more into the reinsurance and how are you using the flow reinsurance to improve the capital efficiency, capital requirements for your growth? Can you just kind of walk us through what it is that actually alleviate some of that capital heavy nature of the business and so forth.

Yes. I'll just do the quick math. Conor can walk through the strategy and the different relationships we have in place. But right now, when we write a piece of business, keep it on our own balance sheet, you put up approximately 15% capital in year 1, that drops down to 7.5% in the remaining years of the contract. In a reinsured sale, that's 7.5% upfront dropping down to 0. So technically, return on capital is unlimited years 2 through 5 or 7 or depending on the tenure of the contract. So it's meaningfully accretive for us to be a distributor of premiums versus holding them on our balance sheet. Now having said that, it's not all or none. We'll continue to hold assets on our balance sheet. We will retain some portion of the business. And then Conor, you probably talk about some of the other flow related.

Well, I think for us, too, if we think about it perhaps in terms of product priority, we have our core products, of which the most noteworthy on the annuity side is the fixed indexed annuities, where we had a reinsurance arrangement in place but it wasn't a comprehensive one like what we've just added with the sidecar. Another core product for us is on the life side, our IUL product. We have our PRT product, which we don't reinsure. And we have RILA, which is just emerging. So it's core, but it's small. And then on the more opportunistic side, we have the MYGA and the FABN. So in 4 of those products, we're a top 10 seller IUL, FIA, PRT, MYGA. But we had comprehensive reinsurance available on the MYGA side, less so as I said, on the FIA. And when we think about what we want to do, we would like to continue to write -- to grow our FIA business day in, day out. We'd like to do the same with our IUL business. We'll grow our PRT business, but that it will be lumpier. As I said, RILA is quite small. So this gives us the ability now to really do as much FIA as we want or as we're comfortable with. And at the same time, we'll probably have a trade-off with the MYGA side because we're probably seeing -- while we have a diverse and very well-established set of reinsurance partners, their own dynamics are changing. We have less certainty and clarity as to whether we're going to get the returns we want in that space. We feel very comfortable that we can write the business at the spreads we want on the FIA space. And then the last thought, which may provoke another question is on the FIA and the IUL, that's business we get to reprice. So we're in the spread margin business. I would also argue we're in the spread maintenance business. We get to do that with IUL. We get to do that with FIA. On the MYGA side, you're writing mostly a 3- or 5, some 7-year product. You got to get it right at the start. You're not repricing that along the way.

Yes. And then I would just say the last -- I think you mentioned, but the last source of liabilities would be funding agreement-backed notes. And as we said the other day, we were active in the market and did about $800 million of funding agreement-backed notes last week. So...

Yes. That's been a market that's been pretty active. So I definitely want to come back to that. While we're still on the topic of being more capitalized, more fee-based, I wanted to come back to the capital raise earlier in the year. I think from what I can tell, it confused people a little bit from the standpoint of you have a company that's talking about becoming more capital efficient, more capital light, but yet you raised capital. So could you help us think through how that is going to be additive to what you're doing, the ways you'll deploy it to clear some of that up?

Sure. I would say the biggest driver of that is, as you may have recalled, earlier, I think it was maybe a year prior or so, FNF had put $250 million into F&G in the form of a preferred investment. And so we always have opportunities to grow. So it was less a we need capital as much as it was, hey, if we had even more capital, we could grow even faster. We were hopeful that we could do the sidecar, but there were no guarantees that you're going to be able to pull that off. They are complex things to do. It have been in the works for about 18 months. The decision was made to extend it to third-party investors to sort of help with the float and a little more float at the margin. I would say the lesson learned from that is, yes, no, it didn't go over well. I think folks were surprised by the raise. Terms of execution weren't what we were hoping to get out of that. Now having said that, we were able to deploy it and deploy it at good returns. So we still feel good about that. But yes, part of the sidecar announcement was to take a little bit of that risk off the table and say to folks, no, we're -- we've got plenty of sources of capital now. You shouldn't expect us to be out in the capital markets raising money again anytime soon.

And you may have this perspective. I think there was a fear maybe that we said we were doing it for capital raising purposes, but was there a challenge of capital which there wasn't, but I think you can only allay those fears when you can actually replace them with a permanent solution or a more permanent solution like we did with the sidecar. So hopefully, that's been put to rest.

Yes. Understood. And as we think about capital redeployment, whether it's capital that was raised or the capital you're generating every day, what are your priorities for putting that to work? Is there enough organic growth, enough opportunity in your markets right now that you'll be putting that to work organically?

Yes. I would say from a pecking order of returns, obviously, we love our own distribution business. Those returns are terrific. Those platforms that we already own are performing quite well. We do think over time, there's an opportunity to buy additional platforms. The bigger immediate opportunity is probably to roll up some sub-agencies underneath where you can buy some smaller players at very attractive multiples and consolidate them up into a bigger. So that's quite high on the list. With the sidecar, I would now say writing an FIA through the sidecar is extremely high return business for us, IUL, which Conor mentioned, is quite strong. So we have a lot of places to deploy capital right now. Speaker 2.

Yes. And maybe just to play that a little further behind that, even retained FIA because we will do that and then PRT. PRT probably ahead of MYGA. That's probably the order.

Okay. I wanted to dig into the owned distribution next. I think it's something that's pretty unique about what you've done, and it's different. So I want to make sure we dig into that a bit. There's only so much disclosure that we get on it. Can you help us maybe think through some of the things that if we're analyzing the value of that business stand-alone, the people we care about, right? Like I think the organic growth of that business, what do the margins look like? And what does the trajectory of it look like? When you're doing new buy -- new purchases and bringing it together, what is the compound of the integration look like? And what does that all look like over time?

Yes, 100%. So I'll start. We have 4 platforms today, 2 are in the middle market/cultural market, life distribution space, and we just love that. They're recruiting machines, great growth rates. Super high-margin business, clean business. So that's fantastic. So that we want to continue to scale. We own what you might consider a traditional annuity IMO, but one that we think has some really unique competitive advantages and that would do well in even a pure fiduciary world. They have opportunities to grow and are growing at a really rapid clip. And then we own one that is more of an annuity expert where they are mostly wholesaling and providing expertise to larger financial services firms, but firms whose primary focused product is not annuities. It might be life insurance or something else. So all a bit different, but all we think really, really fantastic businesses. I'll start with what it's not. It's not -- oh, if we buy distribution, we can force F&G product down their throats. It doesn't work that way. They're totally separate teams. We want them to be successful. And if the best way for them to be successful is to sell some annuities of a competitor of ours, that's great. That just means my competitor is paying commission income to me, and that's kind of a beautiful thing. So those businesses, we like a great deal. When we underwrite them, the returns are fantastic, high teens, if not greater, on those acquisitions. And that is without operational improvement. We have seen some operational improvements of getting some of the businesses to work together. If someone's life focused, we plug them into our annuity expert. We get higher annuity sales, and we're effectively paying ourselves. So a lot of the classic things you would get from a private equity firm, but what we're differentiating ourselves with is time line and relationships. So these are, in every case, firms who've been working with F&G for, in some cases, 20-plus years. So they know us. We're not strangers to them. We've got a longer-term time horizon there. So yes, very high growth rates, high margins, private markets, these businesses have been trading at 14x EBITDA. So we feel good about what we own already. As I said, we've put in $700 million. It's already throwing off about $85 million of EBITDA.

Got it. That's all really helpful. Can you remind us just on the ownership you have in some of those distributors and any potential opportunities to increase those stakes over the next few years?

Yes. So 2 are majority. One, we actually own 100% with an incentive plan for the management team. Another is 70%. One is 49%, but with a contractual right to take control in the future. And then the last is a 40% stake with more of a right of first offer. So I would say they're either controlling stakes or a relatively clear path to control. So yes, I think there is an opportunity to take a bigger stake. And as I said, an even bigger opportunity to provide capital for them to roll up some players underneath them.

Next, I wanted to dive into retail annuities a bit more. One of the things that I guess we're beginning to hear more consistently is just that the environment is becoming a bit more competitive. I think some of the private equity-backed funds have talked about it recently. And so what are you seeing in your markets? Are you able to still get the kind of IRRs you're looking for when we think through the different products like FIAs and MYGAs in particular?

I would say from where we compete on the FIA space, it's still very consistent, very strong and it remains at the top of the list. I think the -- which was why it was important, even retained FIA, we would value very highly. The reinsurance opportunity just helps to improve that even more so. Yes, I would say so just from our own perspective, we wrote -- we didn't do a lot of MYGA in the first quarter. We actually did -- I would say that we were kind of at the low end of our range in the first quarter and the high end of our range in the second quarter. And maybe those are kind of near-term bookends for us. I think that's tougher definitely at the moment. It's just there are more entrants, there's more competition. And as I said to the reinsurance partners that we have where they themselves, I think, are weighing out the relative opportunities there as well. So I think that's probably where we're seeing the most -- that is where we're seeing the most competition. The rest of it, IUL, FIA less. So PRT, we probably end up winning about 1 in 4 of our PRT bids. That will probably stay. The volume may change. Very often, fourth quarter are just bigger volumes, for example. But I will be there or thereabouts. It's not always price there, too. It's a little bit of ratings and so on.

Yes. The only thing I'd add is we're really a distributor of MYGA, right? So we need reinsured demand to do that. So a base MYGA return is not bad. It's just we have better things to do with our capital. But if a reinsurer wants it and wants to pay us an attractive ceding commission to source it, then it goes from like okay to good, and we like allocating capital there. And so yes, it's also the easiest place for competitors to break into because it's yield times ratings and brand name doesn't really matter. FIAs are a completely different business, right? It's the ultimate Trust Me product. We -- someone buys one of our contracts, they're locked up for 5, 7, maybe even 10 years, and we can change the terms every single year. So your reputation matters, like you get grilled on every in-force crediting decision you've made. Were you taking advantage of policyholders? Were you doing the old bait and switch. So that stuff matters. Service matters, not screwing up the admin, paying your producers on time, relationships actually matter. So that is a lot tougher. And that's why I think you've seen a lot of new entrants will come in, they'll sell MYGA at sort of the low end of the independent producer channel, but it's hard for them. It's a long slog to get from that to selling FIAs to the top distributors.

I would say, too, on MYGA, we're kind of free agents, right? We don't -- it's away from Blackstone. We can do it with whoever we want. We don't have -- we're not captive. We don't have our own asset manager or are owned by an asset manager. So we can do it with whomever we want. So I will say that there is no shortage of potential partners all the time. There's a constant number of folks showing up at the door going, hey, can we have a conversation about doing some flow business with you. So that is encouraging. But having said that, I'd say there's a little tightening.

Got it. Any views on RILA's in particular? I mean it's just been such a booming part of annuities for the last handful of years. I'd be interested there, too.

I joke that we're a bit player, and I'm like the biggest cheerleader for RILA, but we've just started. It's taken a long time to sort of get ourselves on platforms. I think we're on 7 platforms now. So that we clearly misestimated how long it would take to get on these platforms. Once we're on, the product is getting traction. So we have producers who sell our FIAs who want to sell our RILA. We just have to get approved on their broker-dealers. So it's not a product competitiveness issue. And I think the category over time is going to be massive. I mean now you are squarely competing in the world of mutual funds, right, in terms of the risk/reward trade-off. It's a younger demographic generally that's buying a RILA. So yes, we're quite bullish on it.

So one of the other dynamics I wanted to ask about is just the massive amount of AUM and 401(k)s that sort of concentrated in the older cohorts and whether Peak 65 or whatever you want to call it, as that is occurring, what do you see unfolding here from like a growth trajectory standpoint? And how do we think about that relative to, I think, maybe uniquely strong growth that we've seen recently because rates came up? And what will that trajectory look like in your view?

I was going to say you're maybe the target audience. It's not that...

Well, no, look, it's massive. I say this all the time. I'm a baby boomer, my friends are baby boomers. I mean if I -- if you were all being honest and I polled you in the audience, you all have at least one 401(k) you forgot about sitting somewhere that you don't pay a lot of attention to. So the rollover business is just going to continue to boom for another 20 years. I mean that's just going to be -- it's massive. So that's a big opportunity. In-plan annuities, it's going to take a while. I still think that's more of an advice sale. I think most people are going to choose to roll their money and deal with whoever their favorite financial adviser is versus trying to bundle it into some combined solution in a plan. But if a small percentage of that happens, it will still be big numbers given the trillions that are sitting in unqualified plans. So yes, it's -- we haven't come close. I've said this before, like there's going to be more demand for these products than global capital to source at all in the next 10 years. I really believe that. I think you're going to have mediocre companies will do quite fine.

The implant thing is interesting, and I had a bit of a front row view of the BlackRock Equitable Brighthouse exercised. At a minimum, I think it will raise awareness. I think it will be good for the industry overall. I think it remains to be seen how that will compare with just the ability to buy an annuity when you're ready to do so. So I'm sure we have slightly different views on this. But as a whole, I think it's -- I think it's a great addition. We'll see how meaningful it becomes.

So next, let's go back to the pension risk transfer market. I think it started off maybe a little slower for the industry. You guys, I think, actually had a decent sized transaction this last quarter. But how is that market responding to some of this litigation that's out there? Is that having any impact, the volatility? I mean, would you expect a normal 3Q, 4Q seasonality to unfold here with more transactions?

Well, so where we compete is in the $100 million to the $1 billion stage. So we're -- that's not where Athene, MET and PRU are. We're more where PacLife, Principal, EA interestingly and some others. But within that space, first of all, we haven't felt that kind of the regulatory external loss pressure that others have had. I think it's been very -- it's been a sensible market. It hasn't changed very much. I would say that the pricing exercises that we were going through a year ago and what we're doing today are very consistent. The same number of players, ratings matter, reputation matters. We have some old souls in this space. We don't have a big PRT team, but they've been around a long time. And I think that's important. They're well trusted. They've been in the industry a long time before they came to us. So there's that, call it, that reputation of the team and the corporate. And as I said, if we're -- if we continue to do in that, we'll always be 1 in 4 as competition increases, but I think we'll get our fair share of that. The returns are good. But yes, we -- and honestly, there may be quarters where we just don't write something and there will be others. I think the high watermark was fourth quarter of last year. I think we did maybe $2.25 billion roughly last year. I think we're at sort of $750 million or something so far this year. I don't think we'll go from $2 billion to $4 billion in it anytime soon, but would I like to stay in this sort of range? For the -- at least for the near term and maybe grow a bit more from there, absolutely.

And I think competitive set has been really consistent. And your best competitors are also your most rational competitors. So you just don't see stupid stuff in PRT, meaning these are more -- they tend to be more established companies. And it's not that, hey, someone hasn't won a deal in 3 quarters. You know they're going to go in aggressively. And sometimes we just let that deal go by the wayside. But you don't -- at least we don't see like stupid pricing. We are like how is someone making money doing that, which is good.

I guess along the same line, for a while, you guys were working towards like better ratings with some of the agencies and so forth to get you into certain markets. I mean, is that done at this point? Do you have access to all of the areas of the markets that you'd like to be involved in? Is there anything left to do there?

Yes. I can't say it constrains us, but it still pisses me off that we're not -- sorry, I'm not allowed to say that. We think we're a notch -- we're rated a notch lower than we should be. We think our clear peer group is one notch higher. All we can do is make our case the rating agencies. They have to agree with us, and they have to go through their process. We run the business at the level we think we should be at, not where we're being rated today. If you think about it, since we were last upgraded by a couple of the rating agencies, we've doubled our business. We've doubled our -- the cash that comes off our block every year. And our sales capacity went from $3 billion to $15 billion. So you tell me, if there's a stronger case for an upgrade, I'm not sure what it is, but I understand it. They have a process that they need to go through. Does it constrain us? I don't think that constrain us.

Well, but to echo that, as I kind of looked over the fence myself before coming in on April 1 is when you look around, I don't know that there's another growth story like ours. I don't know that there's another positive flow story like ours. I don't know if there's a cleaner set of liabilities than ours as well. There really isn't anything that would make somebody go, yes, there's some good stuff. There's some gemstones here, but there's a few [ dogs ] as well. I don't -- that's not the case. So we will continue. We're heading into rating agency season later this week actually. So we'll find that drum as hard as we dare.

But again, to be honest, if you said if we were upgraded tomorrow, would we double our sales plan or increase it by 20? Not really. It would be most helpful probably in PRT.

We win a few markets.

There are in the market...

Is where maybe we've been in a relative tie with somebody who had a notch higher rating, they're going to get that. Or maybe even had a slightly outside price, but they'll take it. And that's understandable.

Got it. Really helpful. Next topic, alternative investments. I just wanted to touch on this, in particular, the allocation to alternatives. So on one hand, I know that the returns speak for themselves over a longer period of time. On the other hand, the volatility of earnings caused by having a higher allocation of alternatives relative to many of the companies I cover, maybe undermines some of the potential unlock of value associated with becoming fee-based and more capital light, right? So -- how do you think about that trade-off? And how should we expect that allocation to trend over time?

Yes, it's tricky. So if you look at, I think the scheduled BA assets, it's a big number, but there's a lot of like credit residuals that sit on that. So our LP interest is 6% of the portfolio right now, roughly half of that, a little over half of that is PE. And so that is simply a -- yes, we haven't -- it hasn't been a good environment for realizations, right? So I joked in an earlier meeting, John Gray is excited, so I guess I'm excited. But I hope we are starting to see a change. We'll see more IPOs, more M&A activity. That would be a huge tailwind for us. We don't plan on it. We run the business assuming that it could still be somewhat mediocre. That's probably the biggest wildcard. The rest of it is real estate. And if you look at the themes from Blackstone, it's been warehouses, data centers, multifamily housing, like these are good bets. It's not the stuff that maybe people are more concerned about there, but you've got the same issue, like assets need to trade for value to get realized. So we go through a pretty laborious process every quarter where -- and we have like risk folks, we have folks outside of investments to try to get at is the long-term assumption, which we target 10% on a huge broad pool of alts, if you will. Is that still valid? And we still feel that it is. So we don't have a vintage issue. We don't have huge pockets within alts. So where it would probably benefit us the most, frankly, is not earnings, it would be capital, right? Because if you start doing 10s versus 6s, that's a positive contribution from a capital perspective.

One quick follow-up I had. You guys break out the fixed income, and I know you have sort of this bucket that has the alts and I think you mentioned credit residuals. I just want to see if you could give a little bit more on what's that portfolio? Because I think the longer-term assumption on that is close to a 10, 2 maybe or somewhere maybe not quite that high. But I think sometimes I get questions on it, I'm not always as well versed in what's in there.

Yes, we probably should because if you take that of the $10 billion -- it's getting close to $10 billion, about $6 billion of it is debt like. And then I think maybe $3 billion is LPs and then the residuals are probably another one. So yes, we probably, a good takeaway. We probably could do a job of maybe helping understand that the fair amount of this is more predictable and might have there's probably a bunch of stuff in there that has maybe more of a 7-ish expectation that would maybe alleviate some of the concerns.

Is that equity risk some kind of...

Not the way you think of equity risk, right? So it's a tranched up loan that might have a blended return of, to Conor's point, 6.5% or 7%. But yes, the equity residual piece could have a double-digit return associated with it, but it's a very -- it's a smaller piece of that. And then obviously, most of these things are amortizing. So it's not a 0 to 10 lottery at the end of 6 years or something like that. But it's a good takeaway. I agree. We could provide more detail on what's in there.

So next, I wanted to get into some of the spread dynamics of your business as we think through that. And we've heard, I think, some companies begin to talk more about, well, maybe the IRRs aren't quite as good on new business as what we were getting during COVID or before COVID and so forth and that there's some spread compression out there associated with that. What are you seeing in your own business on that front?

I'll start. I would say retained business, we've seen some spread compression. It hasn't been huge, but there's been some spread compression. In our case, it has been more than offset by the accretion we get from reinsurance. So again, if you're retaining every dollar, like if you're owned by an asset manager, you're not doing flow deals with your competitors, right? You're keeping it all yourself. It's also been offset by own distribution margin because some of the expense actions that we've taken. So yes, I think there's a little bit of pressure at the core level, but we just -- we have some levers that perhaps some of our other competitors don't have to offset that.

Yes. And I would add -- and we certainly are finding plenty of opportunity to write business at spreads that, again, we get to maintain on the IUL and the FIA because we have the ability to reprice the book every year. So that's again, you kind of abuse it, you have to be a good partner and a good manager and a good customer manager, but that gives us a lot of flexibility as well.

Got it. Okay. That's helpful. And just to give you guys a heads up, I will open it up in a minute for questions. I'll ask one more of my own, and then I'll open it up to see if there's any questions out there. Just to follow up on the spreads. I know there's different dynamics out there. I think I can think of one company that maybe has called out market value adjustments is something that's kind of moving the crediting rates around a little bit. I think you all actually give probably the best disclosure around surrender fees and how that kind of influences things a little bit. I mean is there any lagged nature to the crediting rate that we need to be aware of as we think through where you're at today and sort of that trajectory to where you all have outlined you'll get in your medium-term plan?

I'll start. I don't think so. I mean if you go back to -- we talked -- just go back to the first quarter a little bit, part of the conversation was, hey, your surrender income is down and actually so is your prepay income. I would view both of those as a positive, actually, right? But I would rather retain the assets, I'd rather retain the book. Now it's probably a little harder to get those assets again. But on the business, yes, it obviously view it as a make-whole provision, if you will. Our ability to take that and take the surrender charge, be made whole and go write the business again tomorrow, that's pretty strong for us. So we feel pretty good there. Having said that, the level of -- so we got into the second quarter where we had a level of surrender fees more consistent with fourth quarter and third quarter of last year. That will likely come down. And again, I would view that positively. I would like -- I would like to have fewer surrenders. It's just going to be something that's going to move things around a little bit. I think in a quarter where it happens in isolation, and it's expected, that's probably fine. I think in the first quarter, it happened alongside the prepay, alongside own distribution who had invested more, alongside having a cash problem of having too much cash, which isn't the worst cash problem to have, but there you go. So we'll see. So I don't think we'll have this level -- I wouldn't project this level of surrender income for us for 2026 or 2025. Don't ask me when. It's -- we might stay here for another 3 or 4 quarters. But beyond that, it's hard to imagine we'll stay quite at that level. But that's okay. It's just one level in this. We still have an expanding ROA journey. We've been on that since the Investor Day a couple of years ago. That is an element, taking our expense ratio from 60% to 50% this year, there's a pretty good offset right there. And by the way, we're not -- we won't stop at 50%. We will continue to bring that down. I would like to bring it down at least a basis point every quarter from here.

And I would say, if you go back and look at that 5-year Investor Day target, which was not even 2 years ago, not quite 2 years ago, October of '23. We said we're going to increase AUM by 50%. We're going to beat that handily. We said that we had upside from flow reinsurance. We're already running ahead of that. Upside from owned distribution, we're going to beat that number. Expenses, we're going to obliterate that number in terms of progress on expense. Portfolio uplift, I think we will meet or beat that number from a spread perspective. So yes, a little bit of spread compression in the core base spreads. I think we've more than offset from some of these other levers. So if you go back to grow AUM by 50%, take spread from 110% to 133% to 155%, I think we're tracking really nicely on that. And then the last one was ROE, and I think that's moving in the right direction as well.

Great. I'll pass it to the audience. Is there anybody that would like to ask one? All right. We have a couple -- let's go first.

You want me to go first?

Please.

I'm not the insurance expert in my group. I'm just auditing this presentation, but we do own the name. Just a question about this idea that you're going more asset-light, more fee dependent. Given you don't -- you're not going to own those assets on the balance sheet, does that mean that you are more cyclical as a result of that because you're more dependent on flow and fee generation on a year-by-year basis?

Yes, it's a great question. So it would depend on where that dependency is. So in own distribution, the answer is no. You wouldn't necessarily be more -- any more or less cyclical, I guess, than you are today because that's commission income, commission revenue that's coming in through fees. Same thing for life insurance, middle market life insurance, most of our margin there is admin fees. So I'd give you the same answer, no. Pure flow reinsurance, yes, appetite for flow reinsurance. I don't know if I would call that cyclical. I think that's going to be driven by a lot of things as to what drives flow reinsurance. And then the sidecar, the beauty of the sidecar, what differentiates it from traditional flow reinsurance is committed capital. So it's a $1 billion pot of capital as long as we're hitting our minimum return targets, we can take business, put it into the sidecar with a predetermined return for us as a carrier. So I think you would say of the 4 levers, maybe one could make you a little more cyclical, but maybe not in the way that we're thinking about it. Can you give it a touch...

That's fair.

And then you mentioned that there were in your competitors, not you, some bad assets or bad liabilities. Can you identify like what are the bad assets and bad liabilities from our -- my group, from my limited knowledge of the insurance business, annuities is a bad business and has a bad reputation, particularly from the fixed annuities business and some promises that were made that were overextended or a little too high for what they can actually achieve and ended in tears. So I don't think everyone's gotten over that, but is that something that you have seen in other competitors? Or is that something that you have taken actions to prevent in your own business?

Let me be very careful here. What I -- Well, what I would say is from the perspective of understanding a liability book, the hardest part to understand or predict the emergence of really would be the VA book, which we don't have. We don't have any VAs. I think variable annuities yet. I think within that space, there are disparate stories, but the products became more and more complicated. And there were really sort of 2 theses, one of which I think, hasn't held out and one has. I think there was the -- will consumers really take advantage of all the bells and whistles. I think that's not really the case. There might be a few people on the planet who know how to do that. But the actual -- the consumer behavior has been pretty much exactly what was expected. I think they've just proven to be very expensive to hedge and very difficult to hedge, and that's just been the challenge. And therefore, across the, I would say, the life and annuity industry or the annuity industry, those entities that are heavy variable annuity just have a -- they're just -- it's a tougher valuation. It's viewed as, let's call them, capital heavy, if you will. I think those that are less so enjoy better and then you get into more fees and more asset management and other things that move away from that.

Yes. And I would just say, in general, there aren't a lot of critics of fixed annuities. I mean, honestly, even the government and the Department of Labor loves income annuities in particular. Where annuities get a bad wrap or you get the [ Suzi Orman ] and I would never own an annuity or whatever, generally directed to variable annuities as to where their IR is, and it's usually -- it's always about expense, and I'm not here to defend or a sale whether variable annuities are a good product. But generally, fixed annuities are not in that category. They're pretty straightforward in terms of the value proposition. And actually, income annuities, even the Department of Labor through 3 or 4 different administrations are big fans that people should be annuitizing some portion of their retirement assets.

But you mentioned that you can change the terms of contracts and things. Isn't that something reputationally that the industry has suffered from -- you have guaranteed 5% loan, maybe not 5%? Or is this not really enforceable because Sally was named a different name than you thought they should be, that kind of thing.

Yes. The quick answer is 100% if it's abused. So one, it's always disclosed like you can't buy one of these contracts without it being disclosed in 9 different places that those terms can change every year. And you need a business rationale to change them. But also keep in mind, we're not talking about like, oh, you thought you were going to get 9% and now you're going to get 0, right? It might be, hey, you thought your S&P return was capped at 9% and this year, it's 8.5% or 8% because there's not enough option budget to buy you that, but exchange for that, you've got a floor for 0. So it's not generally a source of angry consumers calling in. And now if you were to try to abuse that, if you did the teaser rate and dropped it down to 5, your distributors would eat you alive and you get thrown out that platform pretty quickly. So I don't -- no, I don't walk around feeling like that's an industry reputational.

To that end, I'm assuming fixed index annuities have to be hedged because you give them downside protection in those. I mean is that something that is at risk in terms of volumes or volatility? And also just generally, with interest rates falling, is that a risk for the business in terms of getting to the types of returns you need to?

Yes. Great question. So really, if you think about what we're doing, we're buying a collar option on the investor's behalf. So a traditional fixed annuity, you give us $100,000, we say you're tied up for 5 years, we'll pay 5% tax deferred. 5 years from now, we're going to give you your money back. Indexed annuities, same drill. Instead of you paying 5% in cash, we're going to take that 5% and we're going to go buy a collar option on your behalf with a floor of 0. A participation in the S&P capped at 8.5%. I'm making it up right now. I don't know what it would be today. I should know that. So the answer is no. It's -- we're doing for you which you can't do on your -- which you could do on your own. If you had a margin account and you were sophisticated enough to do options, you could put $95,000 in a bond portfolio and take $5,000 and buy a collar custom option. but we're doing it for you in a contract. And because it's an annuity contract, you get tax deferral. So it's pretty straightforward from a hedging perspective, very different than what Conor mentioned with a variable annuity where you're trying to both dynamically and statically hedge the S&P 500. Yes. But again, that's going to be at the point of sale. In other words, once we get premiums in, we get it invested, we don't really care what happened to interest rates, like -- but -- and then if they come down, yes, a new contract wouldn't have a cap at 9%. It might have a cap at 7%, but the policyholder can either decide I'd rather do that than be in a money market at 2% or not. It depends on what the alternative returns are. We killed it when money market rates were 20 basis points, and we were offering 2.5%. The actual -- the relative extra value is greater than it is today. We like a steep yield curve because our competition is savings accounts and CDs. The fact that the industry has toned it with an inverted yield curve that then became flat that then became slightly steep, a steepening yield curve would actually be really good for us.

All right. Well, I think I have to take the rest of the questions offline. Thank you all for being here. Thanks to the audience, too.

Awesome.

Thank you.