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

All right. We will go ahead and get started here. So I've got F&G annuities for you all. And first, I'd like to thank Conor Murphy, CEO and President; Mike Bailey, CFO; and Lena...

Punjabi.

Sorry. My apologies. CIO. So we've got the whole crew here. It should be a good session. I wanted to kick it off with more of a broad question about the strategy. So starting off with the big picture. You've laid out intentions to align the business model to be less capital intensive and more fee-based over time. Can you frame where you are in that transition today and some of the things that you're leaning into to further the shift?

Yes. Absolutely. I'd love to -- and first of all, just thank you for having us. Thank you for the support. Yes, so while F&G has been around for a long time of giants the 1950s in many respects, the F&G that exists today had about an 8- or 9-year journey. In that time, we've grown very significantly from being predominantly a fixed indexed annuity distributed through independent distribution to being much more multifaceted across life and annuities. But I would argue that we were -- yes, we were largely a spread business. We hadn't evolved to where we were doing segment reporting. But this year-end, we did at least take a step in that direction by highlighting that, for example, back in 2022, we were virtually all spread by 2025, 15% of our earnings have come from fee businesses on the life side. On the reinsurance side and on our own distribution ownership business. And then just by virtue of the 3-year plan 2025, by 2028, we expect it to be at 25%, which I think is very achievable. Obviously, a lot of levers where you can make that number bigger or smaller as you see fit. So at the same time, it's been a pretty fast growing over the last handful of years, we've gone from about $25 billion of gross AUM to 55 of that retained. So yes, so it's been fast growth. It's been an AM focus with an ROA expansion story that we largely achieved in an ROE story that continuing to evolve.

Got it. Okay. Very helpful. Next 1 on competition. Can you talk about the competitive environment a bit and specifically for some of the spread products? How do you balance the discipline first profitable growth? And what are the things we should be focused on?

So it differs at the moment by product, to some extent, by distribution opportunity as well. So just maybe running through the FIA space I would argue it remains very healthy. We had a particularly strong first half of the year. We were up about 4%. I think the industry was down 5%. But I would say that broadly speaking, it's an area of a market that has done well pretty consistently. And perhaps in any individual quarter, you might see a bit of a change in the tables about how someone even over the course of the year, how it may have moved around. But we just had this conversation with the Board actually, and we were looking back over 5 years. The 70% of the business is written by 10 companies, and basically everybody is -- it all shakes out. Everybody has basically done the same over the last 5 years. I would say everybody is up 15% to 20%. The -- but it's a little time. I would say that 2025 was a little less profitable than 2024, I would say, '26 so far has been somewhere in the middle. Switching over to Riles we were newer to the buffered annuity space. For us, it's been a great growth but off a small base. So we're very, very happy with everything in that space right now. In fact, we've written as much Ria already this year that we wrote all of last year. So that's -- but of admittedly off a smaller base. So that's been pretty good. Switching over -- well, maybe staying within -- on the MYGA space, we have deemphasize that pretty significantly for us. And that's just been a capital allocation return trade for us. We -- it ebbs and flows second quarter of last year, we wrote a lot because we had a -- it was a great spread opportunity and a great reinsurance opportunity. We reinsured 90% of our Migas. But at the moment, we're seeing better opportunities elsewhere. And in fact, as you know, we did a probably an outsized level of for our company in the second quarter, and it was capital that we would -- that we didn't use on MyGatha we used on the buyback. So we see the mice spaces remaining very competitive. So we're just not seeing the returns there to ride very much of it at the moment. We're still running some. We're still in the space, and we'll move that -- we'll ratchet that up and down as the opportunities arise. On the life side, still seeing a lot of attractiveness with the IUL space. Again, a lot of how we distribute through the independent distribution organizations. We're really focused on middle America and multicultural Americas. So that's been strong. I would -- we're the #6 -- so we're #6 in NFI, #6 in IUL but that's on premium dollars. We're actually #3 on policies. But we're selling on average smaller face month policies, probably a little under $250,000. So that's maybe $1,200 to $1,500 a year in annual premium. We're seeing smaller dollars from a premium point of view. So Middle America is less able to afford a policy in 2026 than they could in 2025. So that's interesting. So similar policy kind, but dollars are down a little bit. On the pension side, the PRT space is interesting. It tends -- you tend to see less in the first half of the year. You see more in the third quarter more again in the fourth, and we wrote $500 million or $600 million in the first half of the year, which was probably about what we thought we would do. I'd say we kind of got our fair share. We end up writing about 1 in every 4 or 5 of the opportunities we bid on. But that was pretty modest. Maybe from an overall industry, I think we see some of the bigger carriers coming down market a little bit. We don't participate in the above $1 billion space. We're more in the $100 million to $600 million, $700 million. So certainly some of that competitiveness, I would say we've seen more -- we've seen some of the big mutuals come back to that space that we haven't seen for a while. Good space, but yes, definitely increased competition there. We'll see how the second half of the year plays out. These pension funds are much more well funded than they had been previously as well. So it might be quite as robust as it's been in the last couple of years. And that's -- it's core for us, but we also -- we're not trying to grow that the way that we are on life and FIA, we'd like to write at least as much as we did in the equivalent quarter of the prior year. On PRT, we're trying to write roughly the same, call it, $1 billion, $1.5 billion a year, given the size of our balance sheet. And then the last piece, just FABN type stuff that was very good late last year and the beginning of '26, just private credit concerns and other things have capped that out. So we've stayed on the sidelines there a little bit.

Makes sense. Next topic, we've seen a couple of your larger competitors that have merged your prior firm even. And so I wanted to ask about that and just how important is operational scale in this industry do you all feel like you're positioned well to compete just with the backdrop of some of the peers becoming much more consolidated.

All right. Maybe I'll go first, but then we'll bring in Mike in here as well. It's very important, but I think it -- it's not just about scale. So we are very much in the relationship business. And for us, too, because so much of our business is in the independent distribution space, -- those are not contractual relationships. They might have been decades ago, but they really unearned relationship that your -- how well you show up for your both of your clients, both the, call it, the advisory client on the consumer client is really, really important. You clearly, from a, call it, a pure operational service perspective, we're very focused on that. But also remember, when the FIA and IUL space, those are policies that get repriced every year. So we talk about being in the spread margin, but I would -- you've heard me say already in the spread maintenance business. And that's a bouncing act. You've got to do the right thing in terms of the company and the invest -- sorry, the company, the adviser and the shareholder. So I think we show up very well there, and we focus very hard on that. Lots of these companies have a choice they all have a tried to say they do business with. Everybody does business with multiple carriers. I don't think anybody has a monopoly, but we have to manage that pretty carefully. And at the same time, we've grown very quickly. So we did look to improve our our expense base from a ratio perspective. So we've gone from 60 basis points at the beginning of '25. We have a target of getting down to 45 basis points with an expense ratio by the end of next year. We went 60 to 50 last year, we were at 47 in the middle of the year. So I would say that's ahead of plan. It will necessarily keep going quite so consistently, but we will get there. And I think that's helpful from all sorts of reasons, including the ROA side. So I think for us, it's about doing your business very well, spending your dollars well because the competitiveness, I think 1 on the competitive is tough. And you have to have that lever as well. It would be hard without it. So you're balancing the, call it, the investing opportunity with the expense part of it and then just being able to maintain that core spread, I think, is really important -- but broadly, in the answer, obviously, we've got something very big opening with Econ coverage, but maybe not a lot outside of it.

I'll just add. I mean, I think I'll echo some of Conor's comment I think that it's a competitive space, and so efficiency is critically important. Some my former employer included. There -- and I say this fully spectrally of both sides they've decided to look for those efficiencies in the form of scale in terms of an acquisition or not, I'm sure they will deliver on that. For us, we're a smaller and more nimble organization. And as such, we have the ability to execute on efficiency initiatives and automation initiatives at a rapid pace and in an efficient manner. So I think that there's -- those are just kind of given the position of 2 core bridge Equitable, those larger firms, they took a particular approach. We took a particular approach that we take a particular approach, which we felt confident in. I guess it's a different live saying there are different ways to achieve that operating efficiency.

And I think just to underscore 1 thing that Mike said, we are a great sized company, right? So we're big enough to motor. We're fomented top 6 in FIA, IUL, PRT. I think we're the only top 10 rider that doesn't own or isn't owned by an asset manager, we sort of joke internal, we're all refugees from bigger companies. So it feels great because we can be very reactive. It's not cumbersome for us to move quickly in the marketplace. And I think that's important as well, right? Everything happens so quickly in terms of just -- I mean, half of the annuity products sold that there are replacement products too. So you just -- you've got to be in lockstep with everybody else. Having said that, if you go out and do something incredibly unique, it gets copied very, very quickly. So good balancing.

Yes. Okay. Next topic was on the ROA. If I rewind back to the Investor Day you guys did some time ago, it is a medium-term range that was put out, I think it was $1.33 to $1.55, if I'm not mistaken. Can you talk a bit about how you're tracking? I think you made some comments earlier on this as well. But what are the different things that are sort of moving the Ray around? How do you think tracking relative to that? Do you have any kind of update to that range?

So I'll tee up here a little bit. Going back to -- that was from our Investor Day metrics a few years ago and ROA expansion that was partly coming from the investment side, probably coming from the scale side. We've talked a little bit about the ROA, ROE, AUM I think were the key metrics from that time. I would argue AUM maintains a very key metric, both gross and net. On the ROA, we talked about it being a little more card. We're probably closer to that $1.20 range at the moment. I think we're going to be 1.19 over the last trailing 12 months. One of the elements that had contributed on the positive side that may not necessarily stay that high just the level of surrenders in the industry, which is an important thing to call out because we're agnostic about surrenders. We're just happy to keep the business on the books. We wrote -- can back to being able to maintain the spread. And if it happens, if the business is rendered, we can take that capital and reinvest it on a very similar basis. But it's hard to imagine the level of surrenders and therefore, the level of sort of under fee income will stay this hard for very long. It may for several quarters. I'm not sure we'll for several years, but we'll see rate. Obviously, it will be an interesting week to see where rates come on. Prepayments, we probably had seen those. We would rather not have -- because they talk about make whole provisions, but their seldom they hold their partial -- those have really dissipated. So that's helpful. We're seeing a very low level of prepaid. You always have a little bit, but we're seeing a low level of prepayment. I think that's a good thing. Scale will continue to be a positive thing. The interesting thing is that the investment opportunities remain, but you really have to look at everything on a capital adjusted basis. And that, I think, is a constant mean everything. It seems like there's enough lot of wins around that as well. So with that, let me just invite in into this piece.

Yes. Conor, you covered it really well. We've made a lot of progress on the investment portfolio to add margin the last 3 years, I would say, -- some of it was taken back by the prepayment that Conor referred to CLOs that we had acquired back when spreads were pretty high in 2018 specifically. And so as those paid off, we did earn quite a bit of prepayment income, but those have slowed down. So now our efforts to add margin in the portfolio should be more pronounced going forward.

Got it. So 1 of the other things you've referenced is the focus on ROE as well.

And I think things have maybe evolved since we last me at this Investor Day. So I appreciate that maybe ROA is not the only way to look at it, right? It's ROE and you're talking about these fee-based businesses. So are there levers or they go beyond just what we're seeing in the ROA? And like what are those. Well, I think a lot of it will -- so at the core of the shift to be more capital-light, more fee-based the reinsurance opportunity. So at this stage, we reinsure about 90% of the gas and about 50% of the FIAs. Now within the FIA space, if I roughly we do about as much income as accumulation. On the income side, we have a noteworthy reinsurance partners, we just done a large 1 in July. On the accumulation side, we have a side rather than -- well, it's about a year old outside car with Blackstone. So those, I think, are opportunities -- real expansion opportunities for us as well. So we -- it's relatively new that we've gotten to this, call it, 50% level. There's no limitation I think there's every likelihood we will reinsure more. It's a nice diversifier to Blackstone. So the Blackstone IMA applies to the retained assets. But the reinsured assets back to the point of being the only 1 of the top 10 FIA riders that isn't owned by their own asset management firm, the others there as going to want to reinsure that business with us for their own reasons, and that works very well. So the beauty about this is when you ride and retain business, I think everybody probably know this, you've got a pretty high capital charge on the investment side and an annual charge on the capital side, a onetime charge on the insurance side. When you're reinsuring it, you're getting the capital charge refunded. So you just have the insurance charge for the first year. So after year 1, you have an income stream the fees from the reinsurance with no capital against it. So that's a great piece of ROE expansion. So in RV, just to frame it for folks, we're at about 11% to 12% right now with a target of 13% to 14%. That we are very focused on, and there should -- we should be able to continue to grow that. So that's a big part of it. And then just to kind of round that out, we don't reinsure the PRT business, for example, and we're up to almost $9 billion in assets there. We don't reinsure the life business or indeed the Rylo but it isn't big enough. But there are lots of people in the industry who are exploring Rila and PRT reinsurance as well. So we watch that kind of interestingly and see what might come with that.

Got it. Okay. That's all very helpful. I'm going to jump around a little bit. I'm going to come back to some of the growth items and questions on the products. But I want to go to Leena and ask on private credit. There's a ton of investor focus on this still you can imagine. Can you talk just about the importance of it in the new money that you're putting to work? And why it's an attractive asset class for F&G?

Yes, absolutely. So just to set the stage, private credit to us is anything that is imliquid. But for the purpose of this discussion, I'll just focus on middle market lending and asset back lending. And within those buckets, we think about it in 3 categories: the first 1 being sort of asset classes that have insurance companies have been doing for a long time, like middle market lending. They've been on insurance balance sheet for a long time. And then the middle bucket is asset classes that have been on institutional balance sheets for a long time, so for example, the banking channel, but are new to insurance balance sheet. So like a lot of the collateral that we invest in through asset-backed lending, is new to insurance balance sheet. And then there's a third bucket, which is just new, right? Like I mean, it's not being invested in before, things like buy now, pay later loans. And the reason I break it out this way is that we invest in the first and second bucket, but we stay away from the loss purchase because for the first 2 buckets, that is real observable history and data that you can look at and see how those assets have performed during downturns, and you can see what the downside risk is and what you would want to get paid for that. On the third -- in the third bucket, you don't get to do that. So we stay away from it. So I just want to make that distinction. And then we find it very attractive. So when you diversify your book between public and private assets, you're by design diversifying across issuers, and so you're taking less idiosyncratic risk. Now yes, there is more complexity with some of these private assets because they are structured but as long as you have the infrastructure to understand that complexity and price it which we do with our asset manager of Blackstone, they manage over $1 trillion of assets. And that entire ecosystem is built to tackle this complexity, understand it, take advantage of it and earn a premium as a result of it. So both we like the complexity premium. We like the illiquidity premium. We do a lot of analysis on the liquidity side to make sure that even in a stress scenario, we have ample liquidity in our public investment-grade book to meet our liabilities and so very comfortable with the liquidity risk we are taking and like to earn the premium over there. So it's important to our book. And with not soon as our partner, we do it in a very sensible way in a conservative way.

I mean if I may, some of these -- these are not small companies.