Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the F&G Annuities & Life First Quarter 2023 Earnings Call. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to your host, Lisa Foxworthy-Parker, Senior Vice President, Investor and External Relations for F&G. Thank you. You may begin.

Great. Thanks, operator, and welcome, everyone, to F&G's First Quarter 2023 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 p.m. Eastern Time through May 11, 2023. And now I'll turn the call over to our CEO, Chris Blunt.

Good morning, and thanks for joining us today. For F&G, 2023 is off to a solid start, as shown in our first quarter results. I'm proud of this result especially given the tumultuous nature of the first quarter macro environment, characterized by ongoing market volatility and inflationary pressures, stress on the banking system given the recent regional bank failures and concerns around credit and commercial real estate exposure with the prospect of a recession on the horizon. Although a difficult environment, it really highlights what makes F&G different, how our superior ecosystem operates and how F&G is well positioned to weather the storm. I'd like to share some of those insights with you. First, starting with the effects of market volatility and inflationary pressures. Higher interest rates and extended periods of market volatility are known to spur fixed annuity sales as financial advisers and consumers seek resilience for their investment portfolios and retirement savings. Fixed annuities are increasingly viewed as an attractive solution offering relatively higher rates, guaranteed growth, principal protection, tax advantaged accumulation and annuitization options. Importantly, we're an industry that makes good on promises and serves as a steward to meet long-term policy objectives. These factors drove record industry annuity sales in the fourth quarter of 2022, and the momentum continues, with LIMRA forecasting another record-breaking first quarter for 2023. Similarly, for F&G, these dynamics have contributed to record gross sales in the first quarter and are generating a level of profitable sales and issuance of new policies that substantially exceed policy maturities and other withdrawals. We reported record total gross sales of $3.3 billion in the first quarter, a 27% increase over the prior year quarter and a 22% increase over the sequential fourth quarter. Our retail channels reported record gross annuity and life sales of $2.8…

Thanks, Chris. Today, I'll provide more details about our financial results and key performance metrics and capital liquidity and leverage position. Overall, F&G's financial performance in the first quarter was strong and builds on our proven track record. We continue to have strong capitalization and financial flexibility to successfully execute our growth strategy. Starting with adjusted net earnings. We have adopted the new accounting standard, targeted improvements to the accounting for long-duration contracts or LDTI using the full retrospective transition method effective January 1, 2023, with changes applied as of January 1, 2021, also referred to as the transition date. As a reminder, LDTI is a U.S. GAAP accounting standard only with no impact to statutory results, insurance company cash flows or regulatory capital. The most significant effects of the new accounting standard on F&G's adjusted net earnings are, first, the adoption of constant-level amortization of actuarial intangibles, which will now show a more predictable trend and grow with the in-force book over time; and second, the new market risk benefit or MRB reserve change, which replaces the prior SOP 03-1 reserve change for the guaranteed minimum withdrawal or death benefits. We expect future quarterly fluctuations in market risk benefit actual experience that differs from expectations and with less amortization offset. Our 2021 and 2022 financials have been adjusted for the retrospective update, as shown in our earnings release and quarterly financial supplement. For full year 2022, we reported adjusted net earnings of $328 million or $2.85 per share as recast for the new accounting standard as compared to the previously reported results of $345 million or $3 per share. For full year 2021, we reported adjusted net earnings of $656 million or $6.25 per share as recast for the new accounting standard as compared to previously reported results of…

Thanks, Wendy. We continue to execute on our planned reinsurance initiatives to support the ongoing growth of the business, including additional optimization through flow reinsurance. The ability of our new business platform to generate premiums is attractive to third-party asset managers, especially those who are not paired with an insurer as a means for them to take on asset growth and generate fees from the flow. To illustrate the economics for F&G, for every $1 billion of new business flow reinsurance, we free up approximately $75 million of capital to redeploy to the highest-returning retained business. This is meaningful. And to help put that amount in perspective, that is nearly 10% of the estimated $800 million of capital generation from our entire in-force block in 2023. Importantly, we expect to grow gross sales at a double-digit clip while managing net sales retained to a level that continues to grow our AUM. We estimate that we could retain as little as $6 billion to $7 billion of gross sales and continue to grow the block. In this scenario, as long as sales are well in excess of outflows, we're still growing with net inflows, albeit at a smaller spread but with less capital. This is highly accretive to ROE and also provides free cash flow from the ceding commission and expense allowances generated. We are well into our planning process, and I look forward to providing further details next quarter. So to wrap up, F&G is well positioned to fund its continued growth with positive and growing in-force capital generation, ample opportunity for future reinsurance programs and available debt capacity as our balance sheet delevers with book value growth over time. And taken together, our common dividend and share repurchase programs demonstrate our commitment to creating shareholder value through a healthy return of capital to our shareholders. This concludes our prepared remarks. And let me now turn the call back to our operator for questions.

[Operator Instructions] Our first question is from A.J. Hayes with Stephens Inc.

Congrats on the quarter. Can we first off just walk through your earnings rule of thumb that you've shared in the past of earnings largely equating to 1% times average AUM? So after adopting LDTI, first off, you mentioned in prepared remarks that you continue to expect ROA to be 100 basis points or maybe north of that. But with that said, would this historic rule of thumb still be a good measure of adjusted net earnings long term?

Yes. This is Chris. We do think that's still a good measure long term. And as we've said before, I think we've averaged probably closer to 105 or 106. Obviously, there was a little bit of noise and a couple of onetimers this quarter. But if we adjust for what we consider to be unusual or not recurring items, we're still comfortably in that zip code.

Great. And then, Chris, you also mentioned that RILA is expected to launch later this year. Can you kind of expand on that planned rollout of that product offering? How quickly do you think you can gain traction in that space? And then maybe what potential contributions from RILA it may contribute here in 2023?

Yes. And maybe just a little bit of background here, as you know, it tends to be a bit more popular product in the broker-dealer channel. And so if you look at our channel expansion, we have had success selling FIAs and certainly MYGAs through broker-dealers, but the bulk of the sales have really been through banks, so banks much more fixed-oriented. RILA tends to have a much bigger following in the BD community. So that's really why we're doing it. And a lot of our adds to our distribution partners have been in the broker-dealer space in anticipation of this. Frankly, I don't think we're going to see the big splash like we saw when we launched at Raymond James. I think we did $1 billion in the first year, and that was pretty incredible. I think this will be a bit more of a slow build of probably a couple of hundred million of sales and building after that. But long term, we're quite excited about it. And again, it plays to the exact same strengths of why we compete and win in the FIA space applied to RILA.

Great. And then one more if I may. It seems your own distribution strategy is a growing piece of the F&G story. Maybe if you were to take a crystal ball and look a couple of years down the road, 3 to 5 years, I'll give you the flexibility there, but what does your owned distribution strategy look like? And maybe how does that contribute to earnings long term?

Yes. I'm sure my team is going to kick me under the table here, but I think we could deploy $1 billion of capital in the next few years into these types of investments. And our early experience has been really, really positive. In many cases, they're firms that we've got a couple of decades of experience working with, very strong management teams. And as you know, these are not capital-intensive earnings, and they're earnings that trade at a much higher multiple or rewarded with much higher multiples than typically spread-based earnings. So yes, I think part of the strategy of utilizing a little more reinsurance, taking some of that cash flow and reinvesting it in some of these partners, I think, is going to prove to be highly accretive to shareholders.

[Operator Instructions] Our next question is from Mark Hughes with Truist Securities.

Yes. What is the economics here of the MYGAs? You obviously had a big jump in sales. I know you're reinsuring a lot of that. Refresh me on what the implication is around capital. And then with the interest rates, et cetera, where they're at now, do you anticipate that, that will continue to be a big contributor as we go through the year?

Yes. I'll start, and I'm sure Wendy is going to want to jump in here, too. I think when we look at the economics of it right now, the demand for profitable premiums is red-hot right now in the reinsurance community. And so we have an ability to -- in a retained sale, as we've said, we put up a fair amount of capital. It could be as much as 15% upfront. We capture north of 100 basis points of spread. In a reinsured sale, and you see examples of that in our Investor Day presentation on the website, we're obviously getting less spread but putting up a tiny fraction of the amount of capital. So it is highly accretive and something we believe can drive significant ROE expansion going forward. So yes, that is something you could expect us to do more. It has the other benefit of increasing free cash flow. So for every $1 billion of sales that we reinsure, think of it as roughly saving maybe $75 million of capital. So you can do that math. And I said in the prepared remarks that we can retain as little as $6 billion or $7 billion of our sales, still grow the block because we don't want to run off the block. We want the block to grow. And if we reinsure the amounts over that, you can do that math, it creates a fair amount of cash. And we're on positive outlook with a couple of the rating agencies. Obviously, every CEO believes they're due an upgrade. And that's really important to us, is keeping a really strong capital position.

Is there..

The only thing I would add, Mark...

Yes, yes.

Yes. The only thing I would add, the reason for it being really accretive is in the second year, you're releasing all the capital that you put up in the first year, whereas on a retained sale, you still have half the capital that you need to hold and that gradually wears down over the life of the contract. So that's why it's very accretive.

And I think, Mark, to jump ahead where I think you were going next, so yes, we don't have $1 billion of cash sitting around right now. But again, these are investments we would make over the next few years. And on average, they're $100 million or less at a crack. They're not gigantic investments. So I mean if you took, say, $4 billion of reinsured sales, used that $75 million, you're freeing up $300 million of cash in a year.

Right. Okay. And are there enough of these businesses that are out there of sufficient size and capability and are being transacted that you could reasonably put that amount of capital or lower?

Yes, we believe there are.

Okay. How do you see demand? I think you've talked about the competitive environment being maybe relatively favorable because there's been very strong demand. And so carriers had to reduce crediting rates just to control that volume. Do you still see the market like that now? And is there anything around the evolution of the banking crisis here that is changing that dynamic? And I'll throw in one other variable, which is that if interest rates do come down as the Fed is threatening, does that impact, do you think, the demand environment?

Yes. I'll try to hit them all. I think anytime you see market volatility like this, it's just good for our core products because again, insurers and banks are the only folks that are legally allowed to use the G word for guarantees, right? And so I think that's a huge positive. Obviously, the rate differential over CDs is always positive. And so it's a positive for us right now. And again, the level of rates, and you've seen sort of our historical spread relative to the 10-year treasury, it's been as low as 39 basis points and as high as high 4s, and we're able to eke out a spread. So it's really that differential with the banks. I would suspect, given some of the capital pressures, that banks will likely be a little less competitive on CDs, so just my hypothesis here. And then the other, which I think is more of a longer-term impact, to the extent that some of the banks, particularly the regionals have to pull back from some of the lending activity that they used to do, I think that creates opportunities for the Blackstones of the world, and that's something I think we could benefit from as well.

Ladies and gentlemen, we have reached the end of the question-and-answer session. And I would like to turn the call back to Chris Blunt for closing remarks.

We're pleased with our overall results, as you can tell. Despite the uncertainty and volatility in the current macro environment, we think F&G is poised to benefit in this higher rate environment. And we're off to a strong start in our second quarter as a publicly traded company. As I said earlier, we expect 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. Thanks for your time this morning. We appreciate your interest in F&G and look forward to updating you on our second quarter earnings call.

This concludes today's conference. Thank you for your participation. You may disconnect your lines at this time.