Good morning, and welcome to F&G's Fourth Quarter and Full Year 2023 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. 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. 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 February 29, 2024. And now I'll turn the call over to our CEO, Chris Blunt.

Good morning, everyone. Thanks for joining us to discuss our fourth quarter and full year results. Before reviewing the quarter, I'd like to share with you the progress we've made over the last year. On December 1, 2022, FNF completed its partial spin-off of F&G, retaining 85% majority interest, and F&G was listed on the New York Stock Exchange. Since then, our first year as a public company has been a very successful one. I'd like to start by recognizing our employees for their hard work and achievements over the last year. Thank you as well to our many partners and to our customers whose feedback resulted in F&G being ranked number one for highest customer satisfaction among annuity providers in the U.S. by J.D. Power. And lastly, I'd like to express my appreciation to our parent company, FNF, for all of their support throughout the year. In short, 2023 was one of our best years with numerous accomplishments worth highlighting. First, our retail and pension risk transfer businesses continue to generate sustainable asset growth. We reported record gross sales of $13.2 billion in 2023, which exceeded the top end of the $12 billion to $13 billion range we provided at our Investor Day in October and were up 17% over the prior year, well in line with our goal of growing annual gross sales of a double-digit clip. This demonstrates the strength of our multichannel distribution platform that is hitting on all cylinders and generated $10 billion of retail gross sales through our agent, bank and broker-dealer channels. $2 billion of pension risk transfer sales and $1 billion of FHLB funding agreements. We also had record net sales of $9.2 billion in 2023, well above the threshold of $6 billion to $7 billion of annual net sales needed to…

Thanks, Chris. We are pleased with F&G's overall financial performance for the full year, and we continue to maintain strong capitalization and financial flexibility to successfully execute our growth strategy. Adjusted net earnings for the full year 2023 were $335 million or $2.68 per share and included $405 million or $3.24 per share of investment income from alternative investments and $51 million or $0.41 per share of other significant expense items. Alternative investments, investment income based on management's long-term expected return of approximately 10% was $558 million or $4.46 per share. Adjusted net earnings for the full year 2022 were $353 million or $3.07 per share and included $202 million or $1.75 per share of investment income from alternative investments and $99 million or $0.86 per share of other significant income items. Alternative investments, investment income based on management's long-term expected return of approximately 10% was $419 million or $3.64 per share. For comparison, adjusting for these significant items in both periods, adjusted net earnings were $539 million in full year 2023, up 14% from $471 million in full year 2022 and reflect asset growth, product margin expansion and accretive flow reinsurance fees partially offset by an increase in interest expense due to planned capital market activity and higher operating costs in line with our growth in sales and assets and continued investments in our operating platform. Adjusted return on assets was 117 basis points in full year 2023, above our 110 basis point forecast and in line with 118 basis points in the prior year. Excluding significant items, adjusted return on equity, excluding AOCI, was 10.4% in 2023 as compared to approximately 9.6% in 2022. Next, turning to the results for the quarter. Adjusted net earnings for the fourth quarter of 2023 were $75 million or $0.60 per share…

Thanks, Wendy. To conclude, we have real momentum across our platform as we enter 2024 that positions us to deliver sustainable asset growth, ongoing margin expansion and improved returns as well as enhanced earnings power as we strive to build upon this past year's many successes. Importantly, I remain optimistic that we can continue to deliver double-digit gross sales growth in 2024, driven by our retail and pension risk transfer growth strategies. The launch of our RILA product earlier this month will be a nice tailwind to our sales growth as we enter a large and fast-growing market. In fact, industry RILA sales are forecasted to be between $44 billion and $48 billion this past year, which is a record level. We believe our product offering is differentiated in the market and we uniquely meet customers' needs, though it will obviously take some time to gain traction and ramp up. We also expect to deliver ongoing margin expansion from enhanced investment margin opportunities, effectively managing our operating expenses while scaling our organization over time and driving fee-based earnings from accretive flow reinsurance. We have historically spoken of a goal of delivering an adjusted ROA, excluding significant items of 100 basis points, which we have been exceeding and, therefore, reset to 110 basis points as the new baseline during our Investor Day. We expect to deliver 15 to 30 basis points of core margin expansion and an additional 8 to 15 basis points of own distribution margin expansion to increase our baseline adjusted ROA, excluding significant items over the medium term. We also expect to achieve 300 to 400 basis points of expansion to adjusted ROE, excluding AOCI, and significant items over that same time horizon. Lastly, we continue to diversify and enhance our earnings power as we execute on our own distribution strategy. Our ownership stakes generate a higher margin earnings stream at a lower cost of capital, which we expect to be accretive to our returns over time. As you can tell, I could not be more excited with the opportunities we have in front of us as we entered 2024. This concludes our prepared remarks. So let me now turn the call back to our operator for questions.

[Operator Instructions] Our first question comes from John Barnidge with Piper Sandler. Please proceed.

Good morning. Thanks for the opportunity. The new RILA product, can you talk about how you view the ramp, maybe total addressable market and needed costs and then distributions positioning for that? Thank you.

Yes, happy to. Morning John, this is Chris. So yes, we're really, really excited about this. So just to put it in perspective, RILA is the fastest-growing category in annuities or one of the fastest-growing categories since about, I think, $47 billion of RILA sales last year. But as you probably heard me say before, I think it's just scratching the surface. I think this is a product that now starts to compete very actively with mutual funds, which, as you know, is a $1 trillion marketplace. So we're really psyched about it. In fact, we got our first few RILA contracts in this week. So it's really a big milestone for us. We think we're well positioned. Obviously, it'll take time to get approved on various broker-dealer shelves, but this is something we're really excited about and, frankly, our clients on the distribution side that individual agents have been asking for. So we're pretty pumped.

Thank you. The actuarial charge, is there any impact to go-forward earnings out of that?

Wendy, do you want to take that one?

Sure. Thanks, John. No, this is -- this will happen every year around the same where the actuarial tables get updated for the guaranteed withdrawal benefit so that impacts the MRB. But I don't expect any significant changes to how the MRB changes over time. Again, that reserve will fluctuate a little bit more than the old reserve regime, but I don't expect that this current charge will impact it significantly.

Great. Thank you.

The next question comes from Jon Bass with Stephens. Please proceed.

Hi guys. Thanks for taking my questions. Maybe could we get your latest thoughts on capital allocation? I know there are a few moving parts, considering the common and now preferred dividend. You also have a lot of authorization remaining on our buyback. And you've also talked to, you've been active in recent quarters with the own distribution strategy. So maybe if you guys could just give your view on all of it?

Yes, I'll start. I'm sure Wendy is going to want to chime in as well. But number one priority right now is retained assets under management. I mean we're in just a fantastic environment for our products. Demand is quite robust. I think first priority would be to continue to fund new sales. We're really pleased with the returns we're getting on new business right now. Having flow reinsurance in place just allows us to expand gross sales overall and is accretive to the returns that we're getting. So I would say that is priority number one. For us, obviously, we want to continue to pay a strong and growing common dividend and we've been able to do that. I think there will be opportunistically some own distribution acquisition opportunities for us. You saw that we just did our largest deal, which brings us to about $500 million of assets under management or invested capital in the own distribution space. Obviously, Wendy can speak to what the annual debt cost is now and the cost of the preferred dividend, but I don't think that's going to dramatically change how we think about allocating capital. Fortunately, the stock has been doing well. So we have a buyback authorization, but I think that's really in place should there be some pretty dramatic market disruptions. I don't know, Wendy, if there's anything you want to add to that.

No, you hit on all the key points.

Okay. Thank you. And then maybe could you give us some commentary on the reinsurance market as you guys see it? Are there any significant changes to reinsurance economics or maybe the outlook you're anticipating for 2024?

Wendy, why don't you start?

Sure. Thanks. I don't see any significant changes in outlook. We continue to get approached by potential partners. But as Chris said, we want to grow that retained sales and AUM. So I'm not expecting us to expand too much in '24. But as we head into '25, we could see differences in the market depending on where the interest rates go and go from there.

Perfect. Thank you, guys.

[Operator Instructions] Our next question comes from Mark Hughes with Truist Securities. Please proceed.

Yes, thanks. Good morning.

Good morning, Mark.

Where do you think assets under management will end the year? You've given a lot of guidance on new sales up double digits. You've got $1 billion in capital generation internally. You've got, obviously, a lot in terms of debt capital. I think you mentioned you need $6 billion to $7 billion of net sales to grow assets under management. Any just kind of rough thoughts about where you think, given the opportunity here, given your balance sheet where you anticipate AUM will end up?

Sure. I'll maybe drop some breadcrumbs and Wendy could provide probably maybe a little more specifics around that. But yes, I think the top line environment is fantastic. So you saw this past year, we did $13 billion of gross sales. I want to say, $9-and-change billion in net sales. So obviously, the capital infusion from FNF is helpful. So we've said publicly, we still think we can continue to grow top line at a healthy double-digit pace. We've obviously done better than that in years past. I think now we can retain a higher level given what's there. I think if you look at our traditional growth in net sales, my guess is that's still a pretty decent barometer for what we can add despite the fact that we've doubled the assets in the last three years. So yes, we feel really good about it. There's been a lot of hoopla about, well, surrenders are up, but inflows are way up. And so I know it sounds odd, but unlike a bank, someone surrendering a very old contract with a small surrender charge, but then bringing in a brand-new contract with a brand-new surrender charge. Ironically, we're actually improving the risk profile of our liabilities. And generally, we're booking a profit when someone's paying a surrender charge. So it's an unusual scenario. Yes, surrenders are up a little bit, but I don't think it changes materially kind of our pattern of net sales. I don't know, Wendy, if there's any more precise you can give there.

Yes. So Mark, if you think about what we said in the past, every billion dollars of retained business cost us about $150 million. So you can do the math on what that $250 million can possibly do to increasing our net retained.

Okay. Thank you for that. The assumption about the 10% return, is that still a good return assumption? It seems like obviously, there's been a lot of market volatility lately that's been challenging with the better equity markets. Are you more likely to hit that bogey? How should we think about that?

Yes. I mean this is something we look at on a very regular basis. We had a lot of robust debate on what is the right return expectation. But I would say we're still very comfortable with that number. Obviously, there's a lot sitting in dry powder in terms of opportunities. We've done traditionally comfortably better than that. I do think you're going to see more volatility just because of realizations are down. But again, it could be a very attractive opportunity going forward, particularly in private equity and probably selectively in real estate, I would think the same way. But yes, I don't think anything has happened to cause us to want to move off that long-term number.

And then anything you can share in terms of valuation parameters around the $270 million deal you did in January, PE EBITDA, expected earnings contribution. I think you've touched on some of that, but if you could expand, that would be great.

Yes. Yes, sure. So I'll start at the highest level, which is, one, it has to come with at least an equal, if not better return expectation than just running our daily playbook, which is using it to retain assets under management. And so yes, when we look at all of these acquisitions with that one, in particular, we're looking at high teens, if not north of 20% IRRs or expectations. These are businesses which are generally not capital intensive, right? If they're heavy cash flow businesses, so that's helpful as well. And then most importantly, they're not ongoing capital intensive. So there's a hope, which I believe that over time, we will get rewarded in our multiple for the consistency of those earnings, the diversification of those earnings. But most importantly, we're making investments in businesses that we know well. Management teams, we have a lot of confidence in and ones that we think are going to give us an even higher return than we could get by putting it into a new AUM. And then obviously, there is some just long-term strategic benefit. I mean many of these are relationships that the company has had for 20 years. And so just further cementing that relationship is something we think has a lot of strategic benefit.

Okay, appreciate it. Thank you.

Our next question is a follow-up by John Barnidge with Piper Sandler. Please proceed.

Thank you for the opportunity. You talked about hedging your floating portion of the portfolio and considering to evaluate other options for the remainder of that. What's the line of sight into that? And can you talk about that a little bit more, the sensitivity to the short end of the curve that remains?

Yes, 100%. So maybe start by saying what it's not. We don't fancy ourselves as rate traders or having deep insights about where interest rates are going, but I think our Chief Investment Officer had a very good insight, which was given where we put a lot of that floating rate exposure on. We had an ability to lock in some excess profitability and just take some variability off the table. So we had a pretty substantial position in floating rate assets. We've effectively now cut that by more than half by doing some hedging. I think you saw in the commentary we locked in approximately 190 basis points of outperformance. So I would say, it's just consistent with how we think about the world, which is don't be greedy, and when you have opportunities to take some risk off the table. So look, at some point, nobody knows exactly when. We're going to see rates march back down, and this was a choice on our part of let's go for stability there. How much more you do going forward is kind of an open question of what's the ultimate landing spot for your floating rate exposure. But I would expect in the near term, it's going to come down. It's going to continue to come down a bit more.

Great. Thanks a lot for the opportunity.

Thank you.

Thank you, and this will conclude our question-and-answer session. Thank you for attending today's presentation, and the conference call has concluded. You may now disconnect your lines.