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

Good morning, and welcome to F&G's second quarter earnings call. [Operator Instructions] I would now like to turn the call over to Lisa Foxworthy-Parker, Senior Vice President, Investor and External Relations. Please go ahead.

Thanks, operator, and welcome, everyone. I'm joined today by our new CEO and President, Connor Murphy; and Interim CFO, Mark [indiscernible] We're also glad to welcome F&G's incoming CFO, Mike Bailey, who joined the company earlier this week and will listen in on today's call. 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 Conor Murphy.

Good morning, and thanks for joining today's call. I'm very honored to speak with you today on my first earnings call as Chief Executive Officer and President. Since joining the company in April of last year, I have served as CFO ingraining myself in the financial elements of F&G and President running the day-to-day insurance company and building relationships with our teams and distribution partners. What drew me to F&G was an appreciation for the business, both in terms of what has been written and the opportunity to expand our services to an increasingly larger customer base as well as the exceptional culture of the team. I would also like to thank Chris Blunt for bringing me to the company and his partnership over the last year. I have a huge amount of respect for Chris and what he and the team have built here at F&G. I'm very excited to continue the momentum as we expand our reach scale and institutional franchises and accelerate our move towards a more fee-based higher-margin and less capital-intensive business a natural advantage of our position as one of the largest sellers of annuities and life insurance in the industry. Now I would like to share some highlights of our second quarter results which were largely in line with our expectations as well as details of our investment portfolio and provide an owned distribution update. Then I'll turn it over to Mark to cover our results in more detail. From a top line perspective, AUM before reinsurance increased to $74.7 billion at June 30, up 8% over the prior year. This includes retained assets under management of $55.9 billion. Retained AUM reflects positive asset flows offset by the $1.8 billion in-force block ceded with the F&G Life resale in the first quarter and a $750 million funding agreement back note maturity in the second quarter. Gross sales were $2.7 billion for the second quarter, comprised of $2 billion of core sales and $700 million of opportunistic sales. As F&G navigates the competitive landscape, we are focused on disciplined sales growth and capital allocation priorities between core and opportunistic sales to power our AUM growth. Core retail sales of indexed annuities and indexed life reflect strong momentum at $1.8 billion for the second quarter. This is one of our strongest quarters on record for core retail sales and reflects continued momentum for F&G despite another quarter of contraction in industry LIA sales as compared to the prior year quarter. For institutional sales of pension risk transfer were $200 million for the second quarter as was expected, ahead of a seasonal increase in PRT sales typically seen in the second half of the year. Opportunistic sales were primarily comprised of $600 million of funding agreements as well as $100 million of multi-year guaranteed annuities, which we have deemphasized due to returns currently below our threshold. F&G's net sales were $1.5 billion in the second quarter, this reflects flow reinsurance in line with capital targets for fixed indexed annuities and multiyear guaranteed annuities. F&G's retained investment portfolio performed very well once again this quarter. Our portfolio is high quality, with 97% of fixed maturities being investment grade. It is well matched to the liability profile and diversified across asset types. Our fixed income yield was 4.91% in the second quarter an increase of 14 basis points over the first quarter of 2026 and 8 basis points over the second quarter of 2025. Credit-related impairments have remained low and stable averaging 6 basis points over the past 5 years and a modest 2 basis points in the first half of the year. Our alternative investments portfolio was $4 billion or approximately 8% of the total retained portfolio. This includes approximately $3 billion of limited partnerships and $1 billion of other equity interests. Many of these alternative investments are still in the earlier phases of their value creation cycle so we are not yet fully realizing the long-term expected return. During the second quarter, we saw our annualized return at approximately 5.9%, down from 8.3% in the first quarter of 2026. Turning to our own distribution portfolio. As previously announced, Chris Blunt is continuing as a Director of F&G and CEO of Peak Altitude, a business that Chris has been building over time. With approximately $700 million deployed into this business and approximately $80 million in annual EBITDA in 2025, we believe the market is ascribing little to no value in our share price today for the value of peak. As a result, Chris has launched a formal process to explore strategic alternatives for peak altitude to capture its significant growth opportunities and unlock that intrinsic value for F&G shareholders. We believe that both F&G and subsidiary Peak altitudes have plenty of runway ahead to continue growing AUM, growing earnings and growing shareholder value. S&G reported GAAP equity, excluding AOCI, of $6 billion at quarter end and has grown its book value per share, excluding AOCI, to $45.93 up 68% since the 2020 FNF acquisition. We believe that the components of our business, our new business platform, our profitable in-force block and our capital-light fee-based strategies represent a distinct and measurable source of value. Taken together, we believe that some of the parts framework reveals meaningful value that is not yet fully reflected in F&G's current market valuation and we remain focused on closing that gap with strategic alternatives for peak being an important part of this process. Let me now turn the call over to Mark to provide further details on F&G's second quarter highlights.

Thank you, Conor. Starting with earnings. Overall, second quarter results were largely in line with our expectations and core spread remained consistent as the business maintained disciplined pricing. On a reported basis, adjusted net earnings were $85 million or $0.65 per share in the second quarter. Alternative investment income was $49 million or $0.38 per share below management's current long-term expected return of 12%, but in line with our post-tax estimate of $51 million preannounced in early July. Compared to the first quarter of 2026, adjusted net earnings decreased by $25 million. The after-tax impact of lower returns on alternative investments was $21 million. And the after-tax of the FEG life free sale on March 1, 2026, reduced incremental earnings by $8 million in the second quarter as compared to the first quarter. These items were partially offset by consistent core spread, growing fees from accretive flow reinsurance and owned distribution margin and operating expense discipline. Compared to the second quarter of 2025, adjusted net earnings decreased by $18 million. The after-tax effect of the FEG Life free sale reduced earnings by $12 million in the second quarter as compared to the prior year quarter. Product margin also reflects lower surrender charge fee income and higher other liability costs that include increased amortization expense as expected. These items were partially offset by higher returns and alternative investments consistent core spread, steady fees from flow reinsurance and own distribution margin and disciplined expense management. Next, turning to our scale benefit. As AUM grows, and we continue to manage expenses, we are benefiting from increased scale. Our ratio of operating expense to AUM for reinsurance decreased to 47 basis points at the end of the second quarter as compared to 48 basis points in the first quarter of 2026. We have reduced the operating expense ratio from 60 basis points at the end of 2024 to 50 basis points at year-end 2025 and expect further improvement to approximately 45 basis points by year-end 2027 for a cumulative 15 basis points or 25% improvement over the 3-year period. Now regarding our turns. As reported, adjusted ROE, excluding AOCI, was 8% for the second quarter. And also as reported, adjusted ROA was 68 basis points for the second quarter. Taking into consideration management's long-term expected return for alternative investments would have resulted in 3.1 percentage points of additional ROE and 35 basis points of additional ROA for the quarter. Turning to our strong capital position. We remain committed to our long-term target of approximately 25% and debt to capitalization, excluding AOCI and expect that our balance sheet will naturally delever over time. We continue to target holding company cash and invested assets at 2x interest coverage. Our annualized interest expense is approximately $165 million or roughly a 7% blended yield on the $2.3 billion of debt outstanding. We expect to maintain our estimated company action level risk-based capital or RBC ratio above our 400% target. We view the NAIC's adoption of higher capital charges on CLOs invested in both broadly syndicated loans and middle-market loans is very manageable. After properly adjusting for funds withheld reinsurance assets, the estimated effect of the new capital charges for our CLO portfolio at June 30, would translate to a decrease in RBC of approximately 10 points. Note, this is before any management action to minimize the capital impact ahead of year-end. Importantly, F&G maintains strong capitalization and financial flexibility. We conservatively manage to the most stringent capital requirements of our regulators and 4 rating agencies. We also have multiple reliable sources of capital supporting our business. Our in-force generates approximately $1 billion from the existing book of business. We expect even strong capital generation in the future as we rapidly move toward a more fee-based, higher-margin and less capital-intensive business model. Our reinsurance sidecar provides on-demand third-party capital that we can access without diluting shareholders. Our strategic flow reinsurance partnerships add another layer of flexibility allowing us to adjust retained sales levels and support cash from operations as we grow. We have added yet another noteworthy flow reinsurance partner in July as we continue to be a partner of choice for the industry. Our statutory excess capital provides additional capital strength in line with our rate ratings. And as the balance sheet continues to delever, our available debt capacity will only grow over time. For the first 6 months, our capital self-funded the following: $75 million of common and preferred dividends paid $80 million of holding company interest expense and $120 million in opportunistic share repurchases as we have bought back 4.5 million shares at an average price of $26.44. We view repurchases as a tool at our disposal that we weigh up against other opportunities. We did all of this while maintaining momentum in our core retail and core institutional businesses and opportunistically taking advantage of attractive market windows for funding agreements, including a [ Paven ] issuance earlier this year. As Conor mentioned, we remain disciplined in allocating capital to our highest return opportunities and have deemphasized MYGA sales at this time due to return as currently below our threshold. Taken together, our capital allocation reflects the financial strength and flexibility we have built and our confidence in the future. Let me now turn the call over to Conor to wrap up.

Thank you, Mark. I would personally like to thank Mark for stepping in as interim CFO. As expected, he has brought deep financial management and operational expertise to guide our strong finance organization during the leadership transition period. I'm also very excited to officially welcome Mike Bailey to F&G as our next CFO. Mike is an actuary with deep knowledge and extensive experience in the life and annuity sector having held a variety of executive roles at industry-leading insurance companies. Most recently, Mike was the retail Chief Financial Officer at Core Bridge Financial. Mike joined S&G just a couple of days ago, and while he is in the room with me, we can expect him to formally join the call in Q3. I look forward to partnering with Mike to continue to build an industry-leading business. We believe F&G is well positioned to grow assets under management aligned with disciplined sales and capital allocation to the highest return opportunities, expand return on equity through strong, high-quality earnings generation and create long-term shareholder value. This concludes our prepared remarks. Let me now turn the call back to our operator for questions. Operator?

[Operator Instructions] Our first question will hear from Wilma Burtis with Raymond James.

The spread-based competitors have seen spreads stabilize a little bit this quarter. And maybe you can give us a little bit of color on what you're seeing based on FG's book and the prevailing interest rate environment. And along those lines, maybe just talk a little bit about what you saw with the spread in this [indiscernible]

Wilma, thank you very much. Okay. There's quite a lot to that. So I'll let me break it down into a few different components. If I start with the core fixed income that was very much in line with our expectations. It was higher than Q1. In Q1, we had a few things that we mentioned that we believe were temporary and would resolve themselves in Q2. And indeed, that is the fact. Then if we look at -- maybe I could separate cost of crediting from surrender charges and the acquisition costs, I would say, on the cost of crediting, that is also almost exactly where we expected it to be. Very consistent with both Q1 and Q4 of last year. But it's a little higher than a year ago, but I want to be careful to explain why. With FIA and IUL, those are annual reset products, and we price them and then we focus on maintaining the spread, maintaining the corridor. And we do that very well and very successfully. So those are exactly where we thought very consistent. But also remember, with PRT or funding agreements, we were putting them on this year at a rate higher than for example, 12 months ago. So those will tick up. But again, very much exactly where we thought that they would be. surrender charges, they're still, I would say, reasonably elevated in the industry, but that was very consistent Q3 as well we saw 58% compared with 56% last quarter, 57% the quarter before, lower than a year ago. I think we had 70-ish. And then within the acquisition costs, I would say there's probably 2 things that are maybe on the margin throwing some anal models off a little bit. One is we do a third quarter assumption review every year. And last year's third quarter assumption review, so an increase in DAC amortization because of the increase in surrenders in the industry. It ticked up, I think, probably $10 million in each of this subsequent quarters. And then the last part I would point to is mortality is pretty consistent for us, but it can move a little bit. And in this quarter, we did have a little softness in mortality on the PRT book that I would refer to [indiscernible] I expect that will resolve itself in the second half of the year. So hopefully, that helps tie all together for you.

Yes. And you saw pretty strong buybacks this quarter, but can you just talk about the appetite going forward in the limited float? Just give us a little bit of color on where you stand with that.

Yes. Thank you. It's a good question and Paul Barton one. For us, big capital return or reputed buybacks in Q2 as an opportunity to deploy capital in the optimum way. So I would start carefully by saying that you should not assume that we'll necessarily continue to do that. But as we took advantage of the stock being taped at on. And I think that has worked out very well for us. But it's not a primary expenditure capital go going forward. And I think it's a balancing act. It was a lower line of opportunistic in the quarter between MICO and SAPN. I guess we've been deemphasized we talked about it, FABNs. I think a lot of the industry of the life company saw gapping out in credit. So we as a better opportunity in -- but again, not a tool to retain for when it makes sense, but not 1 that would be a primary source of deploying capital necessarily going forward.

And next, we'll hear from Alex Scott with Barclays.

Conor congratulations first on the new role. First question for you. As you think about the business from a longer-term perspective, are there any strategic areas that you're particularly focused on today?

Thank you. As I alluded to in the opening remarks, I'd say there's a lot of consistency with what we've been doing. We're going to focus on some of the key things -- so 1 momentum, we've had -- we're very pleased with the business that we've put on the books of the core business, particularly core retail. As I mentioned, it was 1 of our best core retail quarters. And it was a challenging enough quarter in the industry in the FIA space. As we mentioned, it was a a 5% decline in the first half of the year, and we were up 4%. That momentum is carrying into the third quarter as well. So you should expect that we will continue the focus on core -- on the core retail side. I would also -- we've been focused on expanding fee compared with spread. We've made a lot of progress in that over the last couple of years, you should expect it. a continuation of that. That's a combination of optimizing peak, the life business, which is also performing very well and the reinsurance opportunities. I would -- we disclosed our top reinsurers in the QFS. But I would acknowledge we added another noteworthy reinsurance partner on July 1. So another 2 in the 2 there as well. So really continued momentum on those areas of focus that we think will help unlock some of the value that hasn't been ascribed to us. I think you might acknowledge that we have been viewed largely as a spread business. So I would argue that there's more value that has made it appreciated not just in peak, which I mentioned on the call, but in the life business, the PRT business, et cetera. So we'll do our best to unlock that by delivering consistent growing core earnings here in the coming quarters.

Got it. That's helpful. Second, maybe an update on peak. Can you help us understand how it fits within your broader capital deployment framework? And the factors that you're weighing as you evaluate those strategic alternatives for the business?

Yes. Great. Thank you. So we're getting going there. I have nothing declarative to say, but maybe I can frame what it is that we would like to optimally achieve. But the primary intention would be to bring in a strategic partner that would acquire slightly over half of peak. So call it a 51-49 or something along those lines, where we would retain our ability to grow our half as well because we believe there's great growth opportunities within Peak in the 4 entities that are already there. They themselves can continue to expand and grow their business and we think that the increase in value in even half of that business could be very meaningful both for us. But it also peak itself does not have any debt. So I think in in a future view, Peak could likely take on that and fund much of its growth from that. Obviously, we can continue to reinvest even just the dividends. That would be that would be optimal as well. And today, we -- it doesn't -- it's a bit challenging from an accounting perspective, if you will. You don't get to really reflect the value of all of the business in peak. We're writing probably about 30% of our life business and at least 10% of our annuity business in Peak, and we end up consolidating some of that away. So from my perspective, certainly, I would prefer to have the cleaner accounting that would end up with something like a 49% shareholding. So there's been a lot of interest, but it's early days, and we'll certainly update you as soon as we have something meaningful or tangible with respect to a resolution there. All right. Operator, do we have any other questions?

Yes, this is Maxwell on for Mark Huges from Truist. Are you seeing any incremental competition in the RILA market? Or what are your general observations around competition there?

Yes. So thank you. So for us, within our core retail, our 3 key areas are the RILA and FIA on the annuity side and the IUL and the life side. So there's certainly -- we are a comparably smaller competitor. We're probably a top 20 without necessarily being a top 10. We're probably about a top 5 or 6 on the FIA space. So -- so there's definitely increased competition. I would argue we're one of them. For us, we continue to gain really positive traction on our side. So we're not I would say we're not feeling a lot of competitive pressure there because the RILA space in general has been performing well. It's probably being just about the best performing subset in the space. So we're doing great in the areas that we compete in and expect to continue to expand there.

And then I guess moving to Migas -- can you give us an update on what you're seeing in that market? I assume with the volume in the quarter returns maybe are still more attractive elsewhere, but an update on the micros would be great.

Yes. Yes, that's true as well. And we -- that's we sort of increased or decreased that faucet, if you will, or that flow periodically. A year ago, we we saw a lot of opportunity enrolled quite a lot of Mig. We haven't -- we've been, I would say, quite modest in the first couple of quarters in 2026. Again, it's a relative return. We are still writing like business, and we look for the opportunity to do that. And we have reinsurance partners. So to some extent, it can be the -- yes, it can be a little bit their appetite as well because we're reinsuring 90% of the MYGA business. But having said that, I would -- we'll see. I mean, as I -- look, dry near term in the third quarter, yes, we will be in the MYGA space in the third quarter, but I would expect that we'll probably stay reasonably consistent in our focus on the core retail over MYGA in the near term as well. But as those economics change, we're very comfortable and happy to pivot that there as well.