Greetings, and welcome to the F&G Annuities and Life Fourth Quarter and Full Year 2022 Earnings Conference Call [Operator Instructions]. As a reminder, this conference has been recorded. It is now my pleasure to introduce your host, Lisa Foxworthy-Parker, Senior President, Investor Relations and External Relations. Thank you. You may begin.

Great. Thanks operator and welcome, everyone, to F&G's Fourth Quarter and Full Year 2022 Earnings Call. Joining me today are Chris Blunt, Chief Executive Officer; and Wendy Young, Chief Financial Officer. We look forward to addressing your questions following our prepared remarks. 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 SEC filings for a discussion of the factors that could cause actual results to differ materially from those expressed or implied. This morning's discussion also includes non-GAAP financial measures that we believe may be meaningful to investors. Non-GAAP measures have been reconciled to GAAP where required in accordance with SEC rules within our earnings release, financial supplement and investor presentation, all of which are available on the company's website. Today's call is being recorded and will be available for webcast replay at fglife.com. It will also be available through telephone replay beginning today at 1:00 PM. Eastern Time through March 9, 2023. And now I'll turn the call over to our CEO, Chris Blunt.

Good morning and thanks for joining us today. We're proud to have reached a milestone in the quarter by becoming a publicly listed company. I'd like to start by thanking our team, our parent Fidelity National Financial and our partners for all of their contributions to achieve F&G's December 1 listing on the New York Stock Exchange. For those new to our story, the purpose of this public listing is to provide for a sum of the parts valuation. That is to provide recognition of F&G's value creation as a stand-alone public company and in turn, to unlock the value of the 85% majority ownership in F&G held by our parent FNF. We view this as a win-win for F&G. It allows investors to invest directly in F&G and creates new optionality for F&G, as we gain access to the public markets over time, while continuing to benefit from FNF's majority ownership. FNF use this as a competitive advantage as F&G's primarily spread-based business provides a steady and growing source of earnings that will benefit FNF over time as well as a countercyclical business model to their title business. I could not be more pleased with our overall results in this inaugural quarter following F&G's transition back to a public company. F&G is well positioned for growth through its multichannel new business platform. And our entire team is working hard every day to create long-term shareholder value. Turning to our results. F&G reported total gross sales of $2.7 billion fourth quarter, a 23% increase over the prior year quarter. On a full year basis, F&G reported record gross sales of $11.3 billion in 2022, an 18% increase over full year 2021, boosting our ending assets under management to nearly $44 billion as of December 31. The continued growth has us…

Thanks, Chris. Today, I'll provide more details about our financial results and key performance metrics, perspective on the new LDTI accounting standard and capital, liquidity and leverage position. Overall, F&G's financial performance in the fourth quarter was strong and builds on our proven track record. We have strong capitalization and financial flexibility to successfully execute our growth strategy. Starting with adjusted net earnings. For the fourth quarter, we reported adjusted net earnings of $138 million or $1.10 per share. This included a $34 million recognized gain from alternative investments, a $58 million onetime tax benefit from carryback of capital losses, $12 million from actuarial assumption updates and other income items. The alternative investments' net investment income based on management's long-term expected return of approximately 10% was $91 million. For full year 2022, we reported adjusted net earnings of $345 million or $3 per share. This included a $100 million recognized gain from alternative investments, $49 million income from actuarial assumption and reserve updates, $21 million of CLO redemption gains and other income, $20 million of net income tax benefits and $5 million of other expenses. The alternative investments' net investment income based on management's long-term expected return of approximately 10% was $265 million. I'll note that on a net income basis, we had a $100 million loss in the quarter prior to non-GAAP adjustments, largely driven by mark-to-market movement and economic assumption review update, reflecting current macroeconomic conditions. Despite short-term volatility reflected in our quarterly results, F&G continues to generate consistent economics over time. Since the merger with FNF over 2 years ago, F&G has far exceeded our original expectation for growth and delivered approximately $1.1 billion of adjusted net earnings over the last 10 quarters on a cumulative basis. Our adjusted return on assets continues to trend over time…

Thanks, Wendy. We're excited about our current opportunities and well positioned to execute on our growth strategy. We expect to continue growing, albeit at a moderated pace compared to recent record levels and to expand our business with a focus on further improving our profitability, which we believe over time will drive multiple expansion to deliver value to shareholders. I look forward to providing further details on our first quarter earnings call. This concludes our prepared remarks, and let me now turn the call back to our operator for questions.

Thank you. We will now be conducting a question-and-answer session [Operator Instructions]. Our first question comes from the line of Andrew Kligerman with Credit Suisse.

First question is around cost of funds. It came in at about 2.38% in the quarter. Last quarter, it was 2.35% and year-over-year, it was 2.83%. Could you talk about the drivers -- especially in a higher interest rate environment than a year ago, could you talk about the drivers of what's keeping it down and where we should expect it to migrate over the course of the year?

Wendy do you want to start, and I'll jump in?

Basically, being a spread business, even though interest rates are up, we're able to purchase the exact option that we need to credit whatever the policyholders are requesting in their policy. So we don't view that number as fluctuating a whole lot. It might with depending on the volatility, but it stays pretty range bound. So I don't expect that just because interest rates are going up that our option cost on the FIA business are going to increase substantially, which is the main driver in that bucket.

So FIA option costs will kind of keep it there unless volatility kind of spikes out or something, got you. Then with regard to the revolving credit, I think, [$552 million] in the year. What's the thinking behind utilizing that as opposed to long-term debt?

Andrew, this is Chris -- go ahead, Wendy…

So great question. At the end of the year, I wanted to make sure that we were starting the year with capital to grow the business. The debt markets were not that favorable towards the end of the year. And as you know, we were able to raise debt at the beginning of the year, but I wanted to have a revolver as a stand-alone company to begin with, and it was just optimized to be able to start the year with growth capital. And we're planning on to go back during the year, but it just depends on the debt market and availability. And we'll pay down the revolver if we're successful later in the year with raising debt.

And Wendy, the cost of those funds currently are at what yield?

The blended rate is around [Indiscernible] between the two.

And then if I could just sneak one last one and that will be it. Just -- you're doing some exciting stuff around acquiring distribution. Can you talk about how your distribution partners are viewing that? Are they seeing that as a conflict? And how are carriers viewing your distributors that you're acquiring?

So Andrew, yes, it's just a space that we've always loved. It's a source of strength traditionally for F&G, particularly on the life side. These are organizations that we've worked with for decades. And so a number of them are growing so quickly. They need capital and their choices effectively are private equity. Private equity has been gobbling up a number of these firms. But many of them don't want to go that route, either looking for a more permanent partnership as opposed to more time-bound, fund investment in their company. And so in a lot of cases, folks have approached us and said, "Hey, we need capital to grow. You guys are strategic partners, is something you would be interested in." So for us, we just view it as 1, further strengthening our relationship with firms we've known for a long time. But more importantly, it's a source of earnings that doesn't have big capital intensity going forward. So we love the space so far. It's really been in the life area, and these are middle market, predominantly cultural market-focused organization. So yes, that's just the space that we love. And if there's an opportunity to do more of that we would do it. We haven't gotten pushed back because, again, a number of our -- from our other distribution partners because they all see the same dynamic that is happening right now. Firms are getting larger, firms are starting to consolidate. So I think they look at it and view it positively.

Our next question comes from the line of A.J. Hayes with Stephens.

Based on past commentary, it appears your index universal life products continue to exceed expectations. Just wanted to see if we could get some color on what's driving the strength and then how you think '23 may stack up in comparison to the strong year you saw in '22?

Yes, as I said before, it's a great tie-in to the prior commentary. It's really driven by the same thing. So one, just huge appetite amongst the middle market, and particularly the cultural markets of the U.S. for life insurance. This is where young family formation is taking place. I said to folks that it feels like the life insurance business of the 1960s in the United States. And so that is really what's driving it for us as well as some select brokerage relationships where we've known folks for a long time. But yes, I think when I first joined 4 years ago, we were doing like $28 million of recurring premium, and we're at a $130 million of recurring premium now in that business. So yes, we like it a ton, and so it is all related. It's a strengthening of distribution relationships. We happen to play in the middle market. A number of our peers play in the affluent market, and that's a space we like in terms of the profit footprint and the growth opportunity. So I think we're up to #3 in policies -- in IUL policies. So it's a dominant business for us. It's still small relative to the annuity business. But yes, it's grown at a break back clip, and we would expect that to continue for some time.

And then, Chris, in your prepared remarks, I believe, if I'm not mistaken, that you had said total institutional sales, it fell within your goal of about $2 billion to $4 billion annually. If I'm not mistaken there, from what I remember, this was -- this $2 billion to $4 billion goal was just for PRT, but is that how we should think about it going forward as in total institutional sales should fall roughly within that $2 billion to $4 billion annually?

I think that is a total number. And the reason there's such a wide band. PRT is a market that we just love. And so yes, our goal is -- our expectation is that we'd be growing that every single year. We like how we're positioned. We like how we've been received by both intermediaries and plan sponsors. We had a really great team. And so that, to us, along with FIA and the retail is just a core product that we expect to grow every single year. And if not, we would be disappointed. The other part of institutional though is the funding agreement back note market, and we love that as well. It's a great source of premiums and therefore, spread. It's just a lot lumpier and opportunistic. So this year, would just happened to be a challenging year, 1, because of where rates and spreads were bouncing around, but also we were an active issuer in the market raising debt and that can create some competition. So yes, if rate environment calms down a little bit, you should expect us to try to jump back in with some FABNs. It's just a little harder for us to predict. And then again, we have so many growth opportunities right now. We're always looking to maximize return on capital. So again, I think of half of institutional is recurring business we want to just go after constantly and some of it is a little more opportunistic issuance.

[Operator Instructions] Our next question comes from the line of Mark Hughes with Truist.

Can you talk about the surrenders, if I'm looking at them properly, maybe up a little bit. I think we might have seen that with some of your competitors, but how are you looking at that number?

Mark, it's not outside a range of expectation. It's up a little bit from the September quarter. But again, it's within our expectation. Half of the lenders for the quarter were just normal MYGA runoff. So MYGA's that we've issued 5, 7 years ago maturing, so not out of our expectations. And just a reminder, 90% of our block is surrender charge protected and a majority of it has MBA coverage. And so our surrender charges were actually up on the higher surrenders because of the MBA that you saw a little bit of increase in that surrender charge fee.

How about the PRT market? I don't know if you mentioned that, but are you seeing any kind of pipeline there. It seems like pension funding is pretty good these days, but interest rates may or may not help. How are you seeing that pipeline?

That pipeline is great, I'm sure, for us and for competitors as well. So hit on the head, if you went back, I don't know, 5 years ago, I think average funding ratios were in the 80% and now it's over 100%. And so yes, I think that's a great market. The timing is good, and we're quite optimistic on it.

On the FIA sales, mixing properly the up about 29%. How do you feel like you're positioned in that market? Is that going to be a good growth market here in 2023?

Yes, it should be. And for all the reasons that we talk about, 1, the rate environment is actually constructive here, meaning option budgets are higher when there's just more crediting to play around with. So that's a positive. And then the volatility that we've seen in the markets. Just people are much more open to the idea of giving up a little upside for some downside protection. So we think opportunities there are great. Our business through our core independent agents continues to be really strong. Our relationships there are really good. And then again, we've added a number of bank and broker-dealer partners. We'll typically add 5 or 6 new relationships per year. So we would expect same-store sales growth, if you will, but we're adding stores as well. So yes, that's a market we're still quite excited about.

Wendy, did you say -- did you repeat this point I think you all have made previously about a 1% return on assets. It's kind of a net return as being a pretty good bogey. Is that still the case?

Yes, it's still a bogey. But as you've seen in the last 10 quarters, we've been increasing that. And as we diversify our earnings, you'll see that uptick a little bit. And then with 15% of our portfolio in floaters, we saw great expansion. In the QFS, there's a page that shows the quarter-over-quarter for '22, the expansion that we got from the floaters. So even though that's our target, you should see that expand in '23.

And the only thing I'd add to that is in a little bit of expense scale here, too. We've doubled our assets in just about 3 years and while we don't have a ton of fixed expenses, we do have some. So there's some margin upside from that as well.

We have reached the end of the question-and-answer session. Ms. Foxworthy-Parker, I'd now like to turn the floor back over to you for closing comments.

Thanks for joining us this morning. If you have any questions regarding our results or anything discussed on today's call, please feel free to contact us. We appreciate your interest in F&G and look forward to updating you on our first quarter earnings call. Thank you.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.