Ladies and gentlemen, good morning, and welcome to F&G's First Quarter Earnings Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the call over to Lisa Foxworthy-Parker, SVP, Investor and External Relations. Please go ahead.

Great. 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 May 16, 2024. And now I'll turn the call over to our CEO, Chris Blunt.

Good morning, everyone. Thanks for joining us to discuss our first quarter results. I'm pleased to share that we're off to a terrific start in 2024, having delivered another strong quarter as we execute on our strategic initiatives. We continue to focus on our growth strategy, maintaining a disciplined and balanced capital management process and diversifying our earnings into more capital-light strategies over time. Starting with sales, we continue to see sustainable momentum across our multichannel new business platform and strong demand for our products in the volatile and higher rate environment. Coming off record sales in the fourth quarter, we reported gross sales of $3.5 billion in the first quarter, our second highest on record, which was up 6% over the first quarter of 2023, which was the third highest on record. Retail channel sales through our agent, bank and broker-dealer channels were $2.8 billion in the first quarter. We reported record fixed indexed annuity sales and lower multiyear guaranteed annuity sales, leading to a higher percentage of net sales retained as compared to the sequential quarter. We also began the rollout of our new registered index-linked annuity, or RILA product in the quarter, which we expect will become a significant contributor to sales over the next few years. In fact, industry RILA sales were nearly $45 billion last year, which is a record level. We believe our product offering is differentiated in the market and will uniquely meet the needs of a relatively younger demographic. Pension risk transfer sales set a new first quarter record at $584 million, reflecting a healthy pipeline out of the gate this year. As announced, we have crossed the $5 billion mark for cumulative pension risk transfer sales with over 100,000 plan participants. This milestone is especially impressive given our market entry was…

Thanks, Chris. We are very pleased with F&G's overall financial performance for the first quarter. I'd like to point out before we get into our results that we've updated our quarterly financial supplement this quarter to highlight results from our core product margin, flow reinsurance fees and owned distribution, among other enhancements. Now starting with earnings. Adjusted net earnings attributable to common shareholders for the first quarter were $108 million or $0.86 per share and included $100 million or $0.77 per share of investment income from alternative investments and $6 million or $0.05 per share of CLO redemption gains and bond prepayment income. Alternative investments investment income based on management's long-term expected return of approximately 10% was $152 million or $1.18 per share. Adjusted net earnings for the first quarter of 2023 were $61 million or $0.49 per share and included $99 million or $0.79 per share of investment income from alternative investments partially offset by $37 million or $0.30 per share tax valuation allowance expense. Alternative investments investment income based on management's long-term expected return of approximately 10% was $132 million or $1.05 per share. For comparison, adjusting for these significant items in both periods, adjusted net earnings were $154 million in the first quarter of 2024, up 18% from $131 million in the first quarter of '23. This increase reflects asset growth and diversification of margin from accretive flow reinsurance fees and owned distribution margins, which were partially offset by an increase in interest expense due to planned capital market activity and higher operating costs in line with the growth in sales and assets and continued investments in our operating platform. Our adjusted return on assets, excluding significant items, was 125 basis points in the quarter comfortably above our 110-basis-point baseline as shared at Investor Day in October…

[Operator Instructions] Our first question is from the line of John Barnidge with Piper Sandler.

My first question is on the RILA product. How should we be thinking about contribution in '24? And how meaningful was it in the first quarter that it was rolled out?

Sure. Thanks, John. This is Chris. I would say not very meaningful in the quarter. We rolled out literally with 1 or 2 distribution partners. We've got a number of additional partners in the queue that I expect will roll out in the second quarter and the third quarter. So I don't think this is going to be a big needle mover for us this year, but it should be meaningful for us as we head into 2025. And given the environment right now, we've got plenty of sales opportunities. So yes, I would say it would be relatively modest this year and -- but should start becoming a meaningful contributor next year.

And my follow-up question, Chris, competitive dynamics in the PRT market, you talked about finally crossing a big threshold in sales to the cumulative basis and some participants have talked about this year being a bit more competitive in that institutional product.

Yes. I wouldn't say that we've seen a dramatic change. I mean, obviously, it was a tremendous -- it was a record first quarter for us. So the team has executed really well. We tend to be super selective in terms of what we bid on. So the process is pretty thorough for deciding where we even crank up the engine to bid. And then when we bid, we've had a decent hit rate there. So I think it will always be competitive because it's such an attractive market, but we're obviously still getting our fair share and haven't seen a big change in terms of return dynamics.

[Operator Instructions] Our next question is from the line of Wes Carmichael with Autonomous.

So the ROA baseline in the quarter, I guess, adjusted for alts was 125 basis points, and that's above, I guess, your recent target of 110. So maybe just hoping you could talk about if you see that as a sustainable level going forward and maybe the drivers of a little bit of that outperformance would be great.

Yes, I'll start, and I know Wendy will jump in. I think there was probably a little bit of positive tailwind to that but not a lot. So yes, we feel really good about what we laid out in our Investor Day was a baseline of 110 basis points, and we thought we could grow that 15 to as much as 30 basis points through a few levers, optimizing the investment portfolio that's feeling quite optimistic for us right now, flow reinsurance, you're already seeing the impact of that and then some operating scale as we continue to grow. So yes, we feel pretty good about that. I don't know, Wendy, if you want to walk through maybe a little more of the dynamics of the quarter itself.

Sure. I'll even go back to last quarter, Wes, there was -- based on our reserving methodologies, we're going to get a little bit of fluctuation quarter-to-quarter. Last quarter, it was a little bit of a hit. This quarter, it's a little bit of positive. So we're basically indicated in the script that there's about 5 basis points maybe of positive noise in that mechanics that we have. So we feel really good about expansion from here. And in addition to what Chris said about flow and scalability, owned distribution really popped in the quarters, and that definitely is sustainable.

Got it. And I just wanted to maybe follow up on John's question on PRT. I think one of your private equity/insurance peers made some comments on their earnings call this quarter that there's some recent lawsuits that are likely to chill some of the volumes in the PRT market in 2024. And they also mentioned that they said spreads weren't very attractive this year versus last year. So I just wanted to get any additional perspective on if you think you could see some lower volumes or if that's not the case and if you still see decent spreads in that market.

Sure. Yes. I think there's clearly the potential for that to cast a bit of a pall over the markets, so we're watching for. We haven't really seen that yet. I mean there are quite a few deals in the queue for us and everybody to go bid on. So the spread piece, it's really hard to compare across firms because the single biggest driver is do you have access to unique longer-duration originated credit. And if you do, we're still earning good spreads. If you don't, then it's tough. It's going to be difficult. And that's everything from triple-net leases to infrastructure debt, et cetera. So it can be very bespoke asset specific types of opportunities. And so again, I think it's kind of hard to generalize across the industry. But yes, it's something that we clearly are on. We'll look out for raising our profile on everything from how we use reinsurance to transparency about everything that we do.

And maybe just one more on funding agreements. But you did a little bit of FHLB borrowing in the quarter. You mentioned that conditions were challenging for FABNs in the first quarter. I think there were some peers that kind of returned to that market, but just wanted to get your perspective on the rest of the year, if it looks more attractive in your outlook for FABN issuance.

Yes, I think it does. It's a good environment right now to be an issuer. So I think during the quarter, it was on the cusp. I think it's looking -- definitely looking more attractive right now. I don't know, Wendy, if you want to add to that?

Yes, I was just going to say, we monitor it, Wes, just to see how we're doing from the spread perspective. Our rating is a little bit lower than some of the ones that have gone out in the first quarter, and that impacts the spread. But we are monitoring, and it looks like it's getting better every day.

Yes. And one other thing I would say, Wes, is obviously we're trying to maximize return on capital, right? That's the goal. And so right now, given the attractive opportunities in retail and PRT. So we look at all of them as funding sources and cost of funds, and we're -- Wendy and I are trying to optimize that at all times. But looking at the quarter, I actually walking around feeling like this might have been the best quarter we ever had, inflows continue to be strong. The mix was really positive. So the mix shift towards FIAs from MYGA, obviously, FIA is our most profitable product. It's a longer duration product. So we're locking in spread for longer, and we are already starting to see, as you said, expansion on the margin front. So never declare victory in the third inning of the game. But relative to what we put out there for Investor Day, we're off to a really good start and feeling really good about it.

Our next question is from of Mark Hughes with Truist Securities.

Sorry if I might have -- you might have touched on this. I joined late. But I think you had commented how you're optimistic on RILA sales, which would become a bigger part of your mix. Could you talk about kind of how you see the long-term dynamic between RILAs and fixed indexed annuities and how your distribution kind of matches up to support one or the other, how it may evolve over time to support the RILA sales if it needs to.

Sure. Yes. No, great question, Mark. So I'd say a couple of things. If you think about a fixed indexed annuity, it's got a floor of 0 and an opportunity to participate in markets, but by definition, it's got a capped upside. RILA allows someone to take a risk level below 0, right, typically in the form of a buffer, say, 5%, 10%, even 20% of downside absorbed by the carrier, which just allows us for a lot more upside. So typically, it's a younger demographic. It's someone either with a higher risk tolerance or in many cases, a younger demographic. So it's a market we've never played in at all, right? And so all of this is greenfield and really should be incremental sales and incremental margin for us. So -- and then the other from a distribution channel perspective, not surprisingly, RILA tends to be more popular in the broker dealer channel, whereas FIAs are tend to be more popular in the IMO and in the bank channels. And so a lot of our activity in adding distribution partners starting a couple of years ago, have been to add more broker-dealers in anticipation of the RILA launch. So hopefully, that helps a little bit a bit younger demographic, client with a higher risk tolerance. I've said this before, it opens up a massive pool because you have to ask the question of, yes, everybody should probably own some mutual funds and they've got a very long-term time horizon and some equities, but that comes with a tremendous amount of volatility. And so I think a lot of people like the peace of mind of knowing that there is some constrained outcome set. And so yes, this is a category that I think for the industry is going to be really attractive. But lastly, I will say it's playing to the same strengths. Again, we're just buying a different collared option with a wider band of outcomes. But it's -- at the end of the day, it's a spread-based product and the key drivers that have made us successful in the FIA space should translate in the RILA space.

And then I think a somewhat competitor of yours has talked a bit more about integrating their annuity products into these retirements, the dated funds that they're starting to see some movement there. Can you talk on that opportunity, whether that's something you're pursuing directly as another distribution channel source of growth?

Yes. I would say it's not top of the queue for us. There are a lot of, as you know, complications within -- and challenges within that market. It's been kind of a slow boat coming. I do think the products can have a big impact for society to be able to do that for folks to be able to participate in their 401(k) plans. But I would say right now, with all of the distribution opportunities we have both in institutional and retail that feels like a better priority for us. But we continue to look at it and want to stay close to it. If appropriate, we think that's a market we could compete in if we choose to.

Yes. Would you think the economics at this point are not quite there yet? Or is it just -- there's not as much demand in that 401(k) market?

Yes, I'm probably not the best expert on this topic, although I studied it years ago at a different firm quite intensively. I think the biggest issues are record keeping. So it's kind of the expense and complication of getting plan sponsors to adopt it and more importantly, record keepers to pay for all the enhancements to make it work. And then the other is for it to be get broad-based acceptance, you do end up with a lot of smaller accounts. Now that can be solved for through some sort of omnibus structure. But yes, it's just a little more complicated. I would also think carriers with a big recognized brand name and/or retirement plans, presence of their own, probably will have a little bit of a leg up there. So hopefully, that helps.

Yes, understood. Yes, it sure does.

Our next question comes from the line of Wes Carmichael with Autonomous.

I just had a question on the capital consumption on the RILA product versus an FIA or a MYGA. I imagine there's the same [ C4 ] charge on the premium. But when you look at RBC, is the RILA product favorable relative to a fixed annuity sale? Or is there not much of a difference there?

Wendy, do you want to tackle that one?

Sure. Thank you. Yes, there's not much of a difference. As Chris said, it's -- basically, the difference between the product is the option that we purchase and there's really no difference in the capital charge on that.

Okay. Great. And then just maybe just following up on the DoL and the final rule, obviously, your new business origination capabilities are much more diversified than the last time we saw this, but I think you mentioned 15% or so of gross sales might be the most impacted. Can you maybe just give us any additional perspective on what changed this time around with this version? And if there's any way to kind of dimension the potential expense impact, that would be great.

Yes. I mean the honest answer is not much changed. And I think that's the frustration of the industry is it's eerily similar to the role that was put forth before. So there will be enhanced compliance expense. I don't think any of it is going to rise to a level that's going to cause us to question the forecast that we've put out, et cetera. So I put it more in the -- it's annoying. A number of people feel that it's unnecessary given all the other regulations that are in place. The bigger concern that I have, which I mentioned in the notes, is it could be an impediment for agents serving the middle market and just moving upstream. I do think it's going to take a time -- it's going to take a while for that impact to be felt. And so again, given we probably have more -- not probably, we have more sales opportunity than capital right now. That's -- the constraint is not opportunity for sales. So again, there's nothing in this that's going to cause us to change our plans. The concern on my end is it will be impactful to certain agents. And I think unfortunately, it would be disproportionately impactful to agents that are serving the middle market. I don't know, Wendy, if there's anything you want to add to that?

Yes. I think I would just add, Wes, the biggest difference is that F&G is different, right? Back in the original rule, we weren't in the bank and broker dealer market. So that has significantly improved those percentages that Chris was talking about of where we would be impacted.

Yes. And then we also weren't in the PRT or FABN market. So if you go back 5 years ago, we were doing probably $3 billion of sales. It was all through independent agents. And now as you see, we're $13 billion plus. And we continue to grow the IMO space. And a number of those IMOs, I think, actually will thrive during this because they're fairly sophisticated, it may force independent agents to need to affiliate with one IMO versus multiple IMOs. So I think the best players actually look at this and say, we can build some nice moats for ourselves adapting to this. But there's just a lot of agents and a lot of smaller agents calling on middle market clients that this is going to be quite disruptive for.

Thank you. Ladies and gentlemen, this will conclude our question-and-answer session. I will now turn the conference back over to CEO, Chris Blunt, for his closing remarks. Chris?

Great. Thanks, everybody. Look, we're really pleased with our overall results, which demonstrate the competitive strength and resilience of our business. F&G is positioned to perform through the cycle, and we're successfully executing on our strategic priorities to generate continued growth and profitability. Thanks for joining us. We appreciate your interest in F&G and look forward to updating you on our second quarter earnings call.

The conference of F&G has now concluded. Thank you for your participation. You may now disconnect your lines.