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

All right. We are going to get going with our next session. have F&G up here on stage with me. We'll make introductions, Conor Murphy, directly next to me, CEO and President; Mike Bailey, CFO, who recently joined few months ago -- 6 weeks ago and then Leena Punjabi is the Chief Investment Officer.

But I'm going to start with Conor. You recently took over as CEO of the company at the end of June after you had joined F&G as CFO about 18 months ago. So I wanted to start by having you discuss what your strategic priorities for F&G moving forward.

All right. Well, thank you, and thanks for having us. Delighted to be here. I had the opportunity to be here with you last year with Chris Blunt, who recently shifted his role. I would say there's a fair amount of continuity to what we're doing. Growth and momentum are a couple of words that come to mind. We have been, I think, a little bit of an exceptional growth story for larger life and annuity companies. We've been able to grow the gross AUM every single quarter. the net AUM every quarter, but last quarter, and that was just because we had sold the Bermuda business. But otherwise, both of those continue to be metrics that we remain focused on -- at the same time, we're an ROE expansion story and leveraging reinsurance is helping us do that at this stage in our evolution, and we can talk about -- we've been around in one form or another since the 1950s. But really, I'm talking about the F&G that's existed over the last 8 years since F&F and Blackstone and others and Chris Blunt. But in that time, we had evolved -- we hadn't quite gotten to the segment reporting part. But at year-end, we talked about the continued shift to being more capital-light, more fee-based and disclosed that the fee composition of earnings had grown from almost nothing a few years ago if you really fully allocated expenses to about 15% year-end with an expectation just by virtue of the 3-year plan that we had done at year-end '25 that it would be at about 25% in 2028. I would view that as a pretty easy 25%, very achievable. And obviously, you can get there faster with more reinsurance? Or are you optimize or you prioritize fee businesses over spread businesses? So that's been a continuation. I think you've heard us in recent quarters to A lot of the focus has been on core. Core retail has continued to be arguably every quarter is better than the equivalent quarter of the year before. So that's the IUL, the FIA. Those are meaningful businesses for us. Riva is newer for us. FIA and IUL were a top 10 business, probably top 6-ish. We were a later entrant to the Riva space, but that's been noteworthy for us as well. And then PRT, we've been in for about 5 years. That's also become a [indiscernible] but #7, #8 meaningful for us as well. So call that core institutional. At the same time, we shied away from the MYGA space, FABN opportunistic, more so late last year, early this year than perhaps currently. And then I'm sure we'll get into it. We have the own distribution business with peak as well. So yes, a lot of continued momentum. I would say underneath the covers, it's stability in revenue growth stability in earnings in so far as you can, the surrenders are obviously a little bit out of our control. The alts portfolio is underperforming. I think probably in line with pretty much everybody else if you or everything else that was very predictable and hitting remarks. And the last part of it, I would say, is under the covers to the core spread, right? You have heard me say we're -- I would argue we're not really in the spread margin business. We're in spread maintenance business. And that's part of the reason we really favor the FIA and IUL because we're repricing that every year. And that balancing act is a very thorough process within the company and 1 that we manage well. So pricing, new business, rate setting, rate renewals, all of that all much of the same. So yes, we're adding running good value every day.

I wanted to delve into the reinsurance strategy more, which is part of the way you're increasing fee income and being more capital light. I guess, can you review what products you're reinsuring versus retaining at this point on an ongoing basis? And then like on the reinsured business, just how the economics are actually flowing through for fee income to F&G?

Yes, sure. So it has and continues to be an expansion. So it began mostly with the MYGA product. Those we heavily reinsure up to about 90% with a couple of noteworthy partners that we disclose what we can talk about. We have expanded the FIA reinsurance. And broadly speaking, we're targeting about 50% FIA. About half of our FIA is income-based. About half of it is accumulation based. So on the income base, we've got a couple of noteworthy reinsurance partners there as well. So they will pay ceding commissions, and covered some expenses. So when we talk about fee businesses, it's the peak business, that's fee business. It's the flow reinsurance seating commission business. And then you would bifurcate the life between the fee and spread. So those are what we're talking about. On the accume side of FIA though, that's where we have the relatively new -- what's about the year old now sidecar with Blackstone. So that's predominantly the, call it, the capital provider there. Yes. But at this point in time, we haven't done more on the FIA. We could. We haven't done anything with PRT. There's obviously been some interest around that. We just haven't felt the need to necessarily, but we would consider that nor have we done anything with IUL and the rye is just not big enough yet to consider doing that. So yes, an expansion. At the same time, even just going back over the last 5 years -- I mean, 5 years ago, on a retained basis. So we've grown to $75 billion gross, $55 billion retained. 5 years ago, I think we were at $25 billion. And part of that expansion has come from selling other than Riva similar products, but in narrower scope, on distribution, if you will. So the -- we now have a couple of dozen broker-dealer and financial institution partners as well. So there's an expansion there. So that's where we are. But I think I'd be inclined to think probably more reinsurance from here than last. Another element that I think is not of the sizable players, there aren't many that aren't either owned by an asset manager or own an asset manager. I would argue for a reinsurer of choice for a lot of folks for whom they can then obviously take advantage of their own asset management partnerships or structures to available that, whereas we don't. It's a nice diversifier from Blackstone. Obviously, there anything that we retain. That's almost all of that line can get into it. The vast majority of that is managed with Blackstone. But anything, obviously, that we reinsure on a flow basis is someone else's, which I think works well for a lot of people as well.

And then on growth, how are you thinking about the growth of your total AUM before reinsurance compared to the growth you'd expect in your retained AUM after reinsurance, given the reinsurance strategy you have now?

Yes. So it's the continued growth momentum, I mean, we probably grow 8-ish percent on a gross basis a year or, call it, $6-ish billion. I would expect that to grow pretty consistently every year from every quarter and every year. The retained numbers, obviously, if you just take -- well, less of an emphasis on MYGA, but that it might be half that. But I would still expect that $2 billion to $3 billion every year on that as well. I think that will I would expect that, that would continue. And then the ROAs will probably be a bit corridor bid for all sorts of different reasons. There's so many components to that, but you should see an ROE expansion by virtue of the impact of the flow business coming through. And then we have a -- we've been focused on the scale optimization as while bringing down the expense ratio, et cetera. And I think that will be meaningful too.

Okay. And then peak altitude. So you announced a few months ago, you were going to explore strategic alternatives. Chris Blunt is still leading that business. I guess maybe just to start, what was the reason that led to the decision to explore strategic alternatives for this business?

So let me take a step back a little bit and talk about maybe why we were in the peak onto business or how it came to be. While in many ways, we've been in this iteration of F&G might be considered sort of 8-ish years old, the relationships go back decades and more than that. And we have senior employees who've been with us for a quarter of a century or more. One of whom is the President of Peak, John Phillips, who works alongside Chris. And the back story would be several of the entities where -- you have an own distribution business with several founders for whom perhaps the runway has gotten a little short and they're interested or maybe 2 out of 3 are interested in getting out and 1 would like to stay and where we get very interested is where we have a founding partner who wants to spend another 5, 7, 10 years in this business. And respectfully, I think their choice -- a choice for them would be to sell to private equity. And I think as a general rule, many of them felt they would rather work with a partner they've known for 25 years. And we were approached a number of times over the last half a dozen years or so to see whether we would take a stake in these entities. We've focused on predominantly 4 of them. Two of them, I would say, are life businesses, 2 are annuity businesses. We own them in various sizes. We have 100% and a 49% on the life side, 70% and 40% on the annuity side. But importantly, the 49% and 40% have a path to majority. Those entities, collectively on that basis, they earn around $80 million, $85 million of EBITDA. But we've also funded. So we've put about $700 million in, but we've funded some of that through debt at the holding company. So peak itself has no debt. For us, the growth opportunity for those entities, we view it as very significant for what's literally right in front of their face, Increasing the investment is higher to get bigger stakes in the 4, but they themselves are rolling up businesses underneath, and that's kind of a -- that's a playbook that we know well. It's one that the FNF team, and Bill Foley knows well and makes a lot of sense. So it's not about adding other entities. It's about getting the most out of these entities. So from our perspective, yes, we've begun the process. And it's hard to say for sure. I mean the entities or the enterprises who show up with interest as we'll find out here in short order in 2 courses. We've talked about a we would certainly appreciate a structure where we could continue to participate in the upside. So something like where somebody might have a 51-49 split. I would rather own half of an entity that was twice as big and have someone partner with deep pockets. So it wouldn't probably be typically be another insurance company, it might be just more of an investment entity. Continue to invest, grow the EBITDA, grow our share of that, grow with them. Similarly, we have other distribution partners who might be interested, but they probably wouldn't want us to remain as a minority. And again, I'd rather stay as -- I'd like to continue to participate in the upside of this and -- about 30% of our life sales come from these entities, about 10% of our annuity sales, which is noteworthy. So we know the business as well. We like them. We've known them for a long time. So that's the expectation. Then perhaps the silver lining a little bit is some of those entities, the accounting -- GAAP accounting isn't wonderful because of the ownership stakes that we have, 49% would just be cleaner. Pound for pound, you'd be reflecting the value ownership in the businesses. So -- that's all. But it's a bouncing act. You have your regular distribution partners, and you've got to balance everybody's needs here.

I guess maybe -- you talked about the path to 25% fee income, I believe. I guess, how does what you end up doing with Peak altitude affect that? Because I assume if you sell 51% of it, that's going to lower your fee income, but then you're also growing the reinsurance business.

And yes, but I would also expect to -- maybe that's why my preferred path would be to continue to retain roughly half interest, and we would continue to invest. So we might I wouldn't want to necessarily take on more debt at F&G to do that, but I'd be more than willing to reinvest the divi. Like today, the dividends from peak that we receive service the debt to some extent. I'd be more than happy to continue to just reinvest in that, have peak bring on some debt, grow that way and just participate in the upside of that growth. And so you'd get there in a different way. But you're right, I think the life business, we're the #6 writer of IUL in terms of premium, we're actually the #3 in terms of policy count. So we're continuing to see good growth there. So that's an expansion we would expect to continue. And then like I said, the reinsurance, it's really up to us. If we could write more business, reinsured more heavily. I should acknowledge our partners' appetites can change. I mean that's one of the advantages of having the sidecar is it's a bit -- you know what you're getting day in, day out. But I would bounce that with -- we have so far had no shortage of noteworthy entities who want to continue to be reinsurance partners. So yes, maybe more of that. It's a nice position to be in where you can pick and choose.

maybe shifting to the retail annuity market and competitive conditions. Could you discuss your view of the competitive conditions currently in the market and also and differentiate between MYGA, FIA, I guess, maybe mostly those, but you are a newer entrant in Riva too, so if you want to touch on Riva and to what extent you've seen changes, I guess, in the environment competitively over the last year or so?

Okay. So it's pretty different in our space in each one. MYGA, almost since I joined, we have talked about calling MYGA -- differentiating between core and opportunistic. And MYGA has stayed very much to the opportunistic. Now to be clear, we are still in the MYGA space, but we're picking our spots. And in fact, second quarter of last year, we did write a fair amount of us made a lot of sense for us at the time. But since then, I think we've now had 4 quarters in a row with a reduced level of MYGA. In the second quarter, for example, we looked at the marketplace. And one of the decisions we made is we'll sell less MYGA and we did, for us, a reasonably large amount of buybacks, but that was almost like a straight capital trade. The capital for the buybacks was the capital we didn't spend on the MYGAs. And MYGA is interesting, and everybody will give you their own view. From our perspective, a lot of the space is maybe the entities that are owned by an asset manager or the mu tools, there aren't too many large-ish or large public life and annuity entities. There are some and we know them well. He's smiling because he just left one of them. So there's that. But we just -- relatively speaking, we haven't seen the returns to write as much. We're still writing them, but not as much. And obviously, then you've got the -- what's the appetite for your flow partner because sometimes it's a decent MYGA with a great return on the ceding commission. Sometimes that one or other of those numbers can go up or down and you play it out. But it's been a relative choice, right? And so I should be careful. FIA for us, it Yes, it has been competitive as well. But honestly, we've been able to write FIA at a consistent return. I would say in '25, it was probably a little tighter than '24. First half of '26, it's probably somewhere in between. So is it competitive? Yes. in any individual quarter or even over 12 months, if you looked at the top 10 riders the table, the ranking table can shift a lot within a year. But if you look over 5 years, [indiscernible] hardly shifted at all. It's the same 10 folks who've written 70% of the business, and that includes us as well. And I think we've we would sit here and go, yes, we've written 15% to 20% more in that time frame. I think everybody else when you -- if you really leveled at all, I think we'd all be very similar. Now we like that space very much. But the other thing for us, too, is I mentioned we do sell in a couple of [indiscernible] broker dealer, financial institutions, but we sell an awful lot in the own distribution space. And it's a different space. Again, it's Middle-America. It's multicultural America, it's not as competitive. It's more of a relationship business there at the adviser level at the firm level. So I think that probably dampens the impact of the competitiveness a little bit. And then Shifting to RILA, I personally like the RILA space a lot. I think it's a great first annuity product for a lot of people, certainly the first annuity product I bought. You know where I came from. Obviously, and I spent a lot of my career at Matting familiar with the space. We were later to the party. I think there were probably more than 20 -- maybe 25 players in the space for the time we come in. For us, it has -- it is still smaller. It's not the others, as I mentioned, we're top 6-ish in PRT, IUL, FIA. RILA, we're probably -- we're in the teens, probably in the higher teens. Having said that, we've already written more RILA this year than all of last year, not huge numbers yet, but the momentum is wonderful. And we'll continue to focus on that. So I like the product very much. yes, there's more competitiveness there. But remember, we're not -- we weren't a VA shop. Like one of the nice things about us is we don't have any legacy liabilities that are complicated, right? There's no VA, ULSG, LTC, disability, anything like that. So we're not trying to replace VA business with Rite business, we're just adding riders to the portfolio. And again, for that middle America multicultural America, for whom they're maybe getting introduced to the product for the first time. I think there's a lot of appetite. So where we compete, I think we'll grow nicely. It will become -- it is absolutely core for us. It's just not that big yet, but it will it will get there, I think, probably easier than anything else.

A few different follow-ups on all is. So one would just be on MYGA. Given that you reinsure 90% of it to partners. How do you actually -- like is the amount of volumes of RILA that you write mostly contingent on the pricing of the reinsurance partners given that you don't retain much of it. So I guess, how do you actually go about that are you making the decision first and then you find the partners? Or do you kind of -- is it the opposite, the partners tell you what the pricing is and then you decide if you want to write MYGA.

It is a -- there are 2 parts to that. It is a hand in glove together literally hand-in-hand, we know on an ongoing basis, what everybody's appetite, what the rates are, if you will, with the ceding commission. So it's a decision at every stage, knowing what the economic commitment from the other side is. That is part of it. But part of it with MYGA is too, is that some of the places that we sell, you have to show up with some MYGA as well. Yes, I've heard I've heard another industry executive refer to it as the gateway drug, right? And I can kind of understand what that means, right? So there is a little bit of -- there are some places where if you're looking to sell FIA, you're selling some mega as well. And that's a bit of a balancing act as well.

And then on FIA, so I don't know how many years ago, but you used to almost solely sell through IMOs. I thought you've been expanding into financial institutions and other distributors. Like where are you at? And you're also, I think, just talking that, in some cases, IMOs are. But yes, I guess just any context on how the mix for FIAs has evolved with distribution? And is it an ongoing priority to continue to diversify the distribution there?

It is, but the competition is tougher in the financial institution part. So that's what you have to weigh up is. The nice thing for us is we're not selling a single FIA product. We have a number of products that some that cater more to the own distribution some to the financial institutions and broker dealers. And if you bifurcated it, I would say, income is probably a little easier at the moment than accumulation and own distribution is a little easier than financial institutions and having the diversification that's helpful. Now that can shift on a dime, but that's probably Q2 2026 is what I would say.

Okay. Yes. And on PRT, so for really the whole industry, it's been a bit quieter so far, at least in the first half of the year. I guess or at least for a lot of the companies. I guess why do you think that is? And then how is your pipeline look as we go forward?

Okay. So that's been interesting for us. So we ride about $1.5 billion to $2 billion a year at this stage, have done over the last couple of years. And on the other -- on the core retail, like we're always trying to write maybe a little more than we have in the equivalent quarter of the prior year, assuming that the economic environment is there to do that, and there's some flexibility around that. with PRT, we're probably trying to write up by the. We're not really trying to write more PRT business given our ratings, the size of our balance sheet, that's probably about a decent amount for us. And we compete largely in the $100 million to $600 million, $700 million, $800 million. So we're not in the big, big lease. The $1 billion plus where some of the large players are. I actually like the smaller, but it depends on the business. If it's a nice, clean, easy to operate piece of business, smaller is great. If it's complicated, it's almost not worth it. So I would say, over the last couple of years, we have -- you show up, you bid for this business. And we've probably we probably win about 1 in every 4 or 5 bids. In the first half of the year, like -- I think in Q1, we only saw 3 deals. We wrote one of them. I would say we saw on 1 -- on the other 2, I would say, a noteworthy name pretty aggressive and a big name who came down to a lower level. So that's interesting. I think Q2 was also a bit quite, not a lot of bids. We want to refer share. It was fine. So you see a modest Q1, Q2, you see more in Q3 and even more in Q4. Q3, it's probably a bit less than other Q3. There's certainly some out there. I noticed more mutual presence, some of the big mutuals who have been reasonably quiet in the space recently are showing up again. So that's interesting. That will make it -- that will just add to the competitiveness. So I think we'll get our fair share. It might end up being closer to $1 billion and $1.5 billion, something like that. The nice thing for us though is because we're established at the stage, we have a number of these of these deals are from big entities that part the idea individual component. So we're at the stage now where we've maybe -- I can think of at least one large American company where we've done 4 deals with the same company. And we show up well from a, call it, an operational perspective. I mean, again, you're looking after policyholders or pensioners. So we probably punch above our weight there. But occasionally, you'll lose in a tie because a very large, very highly rated entity will be picked ahead of it. So I love the business. I think it's great. It's particular I like the mortality level of it. It can bounce around a little bit. I did mention in the second quarter and a we had a little bit of that. But overall, the book, if you look back and go, well, what are your expectations? And how is it turning out? Look, it's pretty easy. It's pretty predict I shouldn't say easy, it's pretty predictable. You don't get a lot of surprises. The range of outcomes is pretty narrow, which is a good thing. So it's a comfortable business to write? Maybe that's a better way to say it.

And [indiscernible] it's is not discussed as much with your company, but I think it is does have strategic importance. So can you talk a little bit about more on how you compete in that market? And how meaningful is it financially to the company?