Good morning, and welcome to the F&G's Second Quarter Earnings Conference Call. [Operator Instructions] And 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 maybe 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 August 13, 2024. And now, I'll turn the call over to our CEO, Chris Blunt.

Good morning, everyone. Thanks for joining us to discuss our second quarter results. We've delivered another terrific quarter and continue to build on our proven track record. Before reviewing our performance over the last three months, I'd like to highlight the strong progress we've made over the last year in delivering towards our Investor Day value creation levers. During our Investor Day held in October 2023, we outlined the potential for upside from asset growth, margin expansion and multiple uplift. We used performance in the second quarter of 2023 as our baseline and looked out over a five-year medium-term horizon to illustrate key financial targets. Over the last 12 months, our business has been hitting on all cylinders and we are currently on pace to achieve our targets. Starting with asset growth. Second quarter AUM before flow reinsurance of $61.4 billion increased 21% over the last year, driven by retail and PRT sales. We are well on our way toward our targeted 50% growth in AUM before flow reinsurance by 2028. We now expect to achieve this target on a net basis as well. As we deploy proceeds from the $250 million preferred stock investment that FNF made earlier this year to accelerate the growth of our retained AUM above the level considered at the time of our Investor Day. Next, margin expansion. Adjusted return on assets, excluding significant items, expanded to 130 basis points in the second quarter, primarily driven by investment margin, disciplined expense management and accretive flow reinsurance as well as enhanced earnings power from owned distribution. This is above our 110 basis point ROA baseline from our Investor Day and we are closing in on our targeted range of 133 basis points to 155 basis points. This strong performance has generated both ROE and multiple expansion.…

Thanks, Chris. This morning, I'll focus my comments on the following: adjusted net earnings, details on our surrender experience and strong positive cash flow position, an update on our floating rate asset hedging program as well as our strong capital and liquidity position. Starting with earnings. Adjusted net earnings attributable to common shareholders for the second quarter was $139 million or $1.10 per share and included $145 million or $1.11 per share of investment income from alternative investments and $4 million or $0.03 per share of CLO reduction gains and bond prepayment income. The quarter also included $16 million or $0.12 per share of net expense from actuarial model updates and refinements, which are separate from our annual actuarial assumption review that will be performed in the third quarter. Investment income from alternative investments based on management's long-term expected return of approximately 10% was $165 million or $1.26 per share. Excluding significant items, adjusted net earnings were $171 million in the second quarter, up 33% over $129 million in the second quarter of 2023. This increase reflects asset growth, margin diversification from accretive flow reinsurance and owned distribution, disciplined expense management and higher interest expense as a result of planned capital market activity. Adjusted return on assets, excluding significant items was 130 basis points in the second quarter, comprised of 107 basis points of core margin, 14 points of flow reinsurance fee income and 9 basis points of owned distribution margin. This was up 14 basis points over the second quarter 2023 and brings our adjusted ROA over the last 12 months to 124 basis points. With regard to surrenders, we continue to see steady growth in our FIA account value as net deposits from new business continued to well outpace terminations. FIA positive net inflows were over $575 million…

Thank you. We will now begin the question-and-answer session. [Operator Instructions] And our first question today will come from John Barnidge with Piper Sandler. Please go ahead.

Good morning. Thanks for the opportunity. Can you maybe talk about the decision to increase the ownership stake in Freedom Equity Group to 130% pipeline for additional deployment. You clearly chopped a lot of wood here in a short amount of time on the owned capital in deploying that $1 billion target into targets. So, yes, curious about Freedom Equity Group and the pipeline for additional? Thank you.

Sure. Great. Thanks, John. Yes, I'd say a couple of things. One, we just love the business. It's been a long-standing partnership for us. They represent a huge chunk of our IUL sales, which is one of our more profitable products, but we just really like the business. We like the growth of the business, the earnings growth, how they're positioned. They have a dominant position in the middle market, specifically in the cultural markets in the US, which are growing very, very rapidly. So -- really excited about it. I think when we took the minority stake, the hope that was that this would play out the way that it's played out. And you're right we've now deployed almost $700 million into owned distribution. I think you heard from Wendy, it's already making a meaningful contribution to spread and giving us a diversified source of earnings. In terms of pipeline, it's very deal specific. So Again, the $1 billion was more a question around the opportunity as opposed to a near-term target for deployment. But yes, we do think there's probably other interesting opportunities for us. But thanks for the question.

Thanks for that answer, Chris. My follow-up question is on the floating rate portfolio. You clearly reduced your exposure by about two-thirds. Can you maybe talk about the earnings sensitivity of the remaining portion of the floating portfolio to movements in rates? And then maybe how is your new money rate trended as well? Thank you.

Yes. Great. So I'd say with respect to the hedging, yes, we're really pleased. I mean we -- again, the key here is not to be greedy. So we've not only done a number of portfolio derisking over the last four or five years. From a credit perspective, you just continue to tighten up the portfolio in anticipation of eventually a turn in the credit cycle. But we try to do the same thing with respect to rates. We were getting pretty close to 20% of our portfolio in floaters. Now a lot of that was put on years ago when short-term rates were pretty close to zero. So that seemed like a smart call at the time. But as rates popped up we had an opportunity to take that risk off the table. So we've hedged that down now to where I believe it's about 6.6% of the portfolio. So we've dramatically reduced our exposure to a drop here in short-term interest rates. So if you think about that 6.6% of the portfolio in floaters, theoretically, a 100 basis point drop in short-term rates would be only a 6.6 basis point impact to our overall yield. And then with respect to new money rates, yes, continue to be strong. Obviously, in the last couple of weeks, we've seen some volatility. We've seen treasury rates drop, probably 40 basis points to 50 basis points, but you've seen corporate spreads widen I don't know, 12 basis points to 15 basis points. But again, we're running a really dynamic business. So we reprice our products quite frequently. And so for us, it's really is the spread in the market and is there an opportunity to deploy those premiums pretty quickly. So, we feel really good about the environment still.

Thanks for the answers. Appreciate it.

And our next question will come from John Campbell with Stephens. Please go ahead. Q – Unidentified Analyst: Hey, guys. This is Jonathan on for John. Thanks for taking my questions. So you guys had a few different records this quarter, so congrats there. I want to touch on one of those records, annuity sales in particular. You touched on the trends that are driving the strength there and it seems like that's going to continue, obviously. But maybe thinking how should we think about the growth trajectory in the back half of this year? And I know 25% is still a ways out, but any kind of direction you could provide there would be appreciated.

Sure. This is Chris. I'll start. Wendy may want to jump in here, too. But I think the momentum continues to be incredibly positive. So probably one of the big misnomers out there as well, rates are now going to start moving down and demand is going to dry-up for fixed annuities. I think we're going to see the exact opposite. I've mentioned in my talking points, money market fund assets post-COVID have doubled from $3 trillion with a T to $6 trillion. So there's a massive amount sitting in cash and I think when people start seeing those money market yields go from 5 to 4.5 to potentially 4, they're going to look to lock-in some rate, and we think that's going to bode extremely well for our core products. Plus, if you see the short end fall in the longer end of the curve stay a bit stable, in a more traditional steep yield curve is positive for demand as well. So -- and then just on top of that, as the demographics, right? You got 10,000 boomers retiring every single day in the US. So yes, I think the demand outlook for the second half of the year, the demand outlook for 2025, I don't see anything slowing down top line growth right now. Q – Unidentified Analyst: Okay. Thank you. And then as a follow-up, at your last Analyst Day, you guys talked to the upwards pressure you expect to see in the normalized ROA, you've clearly seen that, but it seems like you're running ahead a bit ahead of schedule. Last quarter, you posted a record but take down the sustainability. This quarter, you posted another record. So maybe that was just conservative -- conservatism or maybe there were some favorable things in play. So, I'm hoping you can talk a bit more to the strength this quarter. And moving forward, how are you thinking about the import metric and whether that outlook changes a lot depending on the rate environment?

Yes. I'll just frame a couple of high-level things. And then Wendy can talk to the specifics of how you should think about the quarter itself. But again, I take everybody back to our Investor Day presentation of October of last year. And we were try to be really specific about where the uplift was going to come from. We saw uplift on the investment portfolio of just continually optimizing the portfolio, and we've seen good progress there. We've seen some uplift, obviously, from the rise in short-term rates, and we had a significant portion of the portfolio in floaters. We're getting operating expense scale as we've been growing our assets at a pretty healthy clip. And yet, we've committed to hold our fixed expenses to a single-digit rate, and we've been doing that. So that's a source of uplift. And then as you're starting to see, we're getting tremendous leverage from flow reinsurance. When we take a sale and put it on a reinsurance balance sheet. We're generally capturing a disproportionate amount of the spread relative to the amount of required capital. So that's obviously accretive. And then lastly, has been owned distribution. So yes, I would say, overall, those things are progressing at a faster clip than we probably anticipated. So you want to get too excited, right? Games not over in the third inning, but you'd rather be up by a few runs in the third than down. And then, Wendy, do you want to talk about the 130 and maybe some of the one-timers that might be in there?

Sure. Thanks, Chris. So, I'll point you to Page 22 of the investor presentation. We've added a column last quarter, the last 12 months. And that will kind of normalize out even any noise that we get quarter-to-quarter, there'll be some positive and negatives in there. This quarter, we had some additional CLO prepayments and then we had a model conversion that we put into place due to materiality in the quarter, so a bit of noise in there. But the last 12 months is now at 124, and we view that as very sustainable. Q – Unidentified Analyst: Perfect. Thank you, guys.

And our next question will come from Wes Carmichael with Autonomous Research. Please go ahead.

Hey good morning. First question is on funding agreement issuance in the quarter. Can you talk about what made that market a little bit more attractive? And how should we think about your outlook for issuance for the remainder of the year in FABN?

Yes. I would say, Wes, it's a market that obviously was pretty dormant for us for the last couple of years. But as you saw rates start to stabilize and come down, there's a bit of a lag effect in terms of the statutory rate that affects your cost of capital. And at the same time, new money yields were coming up, and we have seen attractive investment opportunities where we could earn a good spread. So it's something that we look at pretty much constantly. And when it makes sense -- particularly when it makes sense relative to other uses of that capital, we tend to participate. I don't know, Wendy, if you want to add anything to that?

No, you hit the nail on the head there. As far as going forward, those factors, it will depend on the valuation rate and the spread that we can earn off of that. So if it looks positive, then we potentially could see additional activity. But it's kind of a week-to-week view of the market, and we just monitor it very closely.

Got it. And then -- and just on surrenders and FIA, I know you've talked about it a little bit in your prepared remarks, but can you talk about the experience just in the quarter? I realize you're still in a net flow position, but it's a pretty big sequential tick up and I think there's about a couple of billion of FIA account values that are sitting outside of the surrender charge right now. So, just wondering, if you kind of expect a little bit of elevated surrenders in the near term.

Yes. Two things I would say if they're out of surrender charge, we would expect that and priced for that already. So that's not necessarily wouldn't be an outlier in terms of how we planned going forward. And I just want to reiterate what Wendy said, someone this is more analogous, probably to refinancing your mortgage. So that's what's happening. You're in this huge refinancing where the movement rates were so strong that yes, add blocks of business and policies where it's actually smart for the customer to move into a new policy, get better terms. Agents are obviously incented to do that as well. So they're doing well. And actually, for us, it's not a bad thing at all. I mean, we're capturing surrender charge income. So we're covered from that perspective. And now we're writing a new policy, and I think people underestimate the impact of that, meaning what the stuff we're writing right now might prove to be some of the stickiest assets we've ever written because if rates do, in fact, move down from here, it's going to be very hard to move those contracts prematurely. So yes, I don't think there was anything in the activity that either surprised us or was troubling. And I think we're going to see it probably continue for another couple of quarters and would expect that will probably stabilize next year. But Wendy, anything you want to call out specifically?

No. I mean if we're looking just at the FIA, yes, there was an uptick, but there's a lot of activity going on in that refinancing, as Chris indicated, and there's also lags to that. So as Chris said, we do expect excess renders to continue until rates drop significantly.

And the only thing I'd add less to that is obviously, it benefits a lot of our own distribution because some of the investments we've made have been in annuity-oriented IMOs and they're just crushing it in this environment, not only in terms of new sales, but obviously in terms of smart replacement sales. Q – Wes Carmichael: That's helpful. And maybe just one more. But on base spreads, if we kind of exclude all, I think that did kind of quarter-over-quarter contract a little bit. And just kind of wondering how you're thinking about that going forward, especially in the macro backdrop. There's -- a few of your peers are pointing to where investment spreads have probably peaked and could kind of potentially compress a little bit going forward. So just curious how you guys are thinking about that, too.

I would just say, Wes, it's really hard to generalize, right, because everybody's got access to different investment opportunities. And so yes, we wouldn't consider that material like a few basis points. You're going to see noise quarter-to-quarter. But we're not -- right now, I wouldn't characterize that we're experiencing spread compression. You'll see volatility, but it's not like, oh, we have this hugely profitable blocks runoff to be replaced by less profitable. I mean we're pretty comfortable with the returns we're generating on our new business right now. So and then some of that "core margin" could also be a function of how much we choose to flow out versus retain. I don't know, Wendy, do you want to comment on that?

Yes, that's where I was going to go, Wes. If you look at our ROA, FIA, the core margin actually did increase sequentially, but then there's additional from the flow and own distribution. And we've tried to highlight that in the QFS. What's, what's coming from those two items. So you can kind of go back into the -- what we consider core by taking the product margin and the expenses and get to that core, and that has increased. Q – Wes Carmichael: Thank you.

[Operator Instructions] Our next question will come from Mark Hughes with Truist. Please go ahead.

Yeah. Thank you. Good morning.

Good morning, Mark.

Good morning.

Good morning, Chris, morning, Wendy. Chris, the PRT business, if we see a declining interest rates, what is that going to do for the pipeline, new opportunities?

Yeah. It's an excellent question. I don't think you're going to see a material change in the pipeline. There's a long lead time for people to run a process and for consultants in particular, to do RFPs. So I don't think you can see any near-term impact on that. Most of the plans are pretty comfortably above that 100 funding level, where there's certainly a lot of them. So the pipeline right now looks really, really strong. If you saw some dramatic rates plummeted 200 basis points. I don't think we're going to see that. Maybe you could see a slowing in that market. But I don't think we're going to see any material change to the pipeline anytime soon.

And then on the RILA, you talked about targeting kind of the younger demographic. Could you talk about that? And then also, I think you mentioned you're pursuing some strategic relationships to the extent that you can give us some sort of sense of magnitude, timing and what it all means, that would be great.

Sure. Happy to. Yeah, I'm smiling because younger demographic, I just bought one. I don't know if I fall in that category, but younger meaning as a general rule for folks who have an elevated time line relative to when they're actually looking to turn on income, but they're great products for that purpose. So one extremely large market, as we've talked about before, allows us to tap into folks with one, a bit younger, but two also with a different risk tolerance. Every product we have sold to date has a complete floor of 0 for people. Here's an opportunity for folks to say, hey, I'll take some limited downside risk. I'll get a buffer a cushion on the downside. And therefore, can have more upside. So we're super excited about that. It will be a slow ramp up simply because you have to add distributors, and that's a process. Now we've added a couple of big ones recently. So I think that's going to help accelerate some of our growth. So as we said, I think it will be probably not much of a contributor this year to be pretty modest. But I would also say that we have plenty of other sales opportunities. But when we get into 2025 and beyond, I think this will start becoming significant. And if you said, gee, over the medium term, call it, the next five years, could it start to rival the volumes that we see in our FIA business, I think we actually think that it can. It's also a great diversifier in terms of these -- we now meet a ton of consumer need off of really one core platform right, which is this whole indexed platform. And I think that's another piece that people miss. Initially, it was kind of a niche product. It's no longer a product. It's a platform. So you can have income now, guaranteed income in the future, you can have sort of more of a buffer style of more upside, plan fixed annuity. So we're able to hit a ton of consumer need right now with one core chassis.

Well, when buys one of these things, that's when I'll note, it's for a younger demographic.

Perfect.

Right, Mark.

Here we go. One other question. One of the other major RILA players is kind of participating in some of these targeted funds, getting some flows in that way. I know in the times past, you've talked in kind of a different way, I'll say about that opportunity? What do you think about that?

Yeah. I would say, the idea of annuities and 401(k) plans is a great -- it's a great idea. I do think it's getting closer to getting some real adoption. We research it constantly. And it looks like the market is there and we see a slot for us to play, I suspect at some point, we will play. It just hasn't been our number one priority. We have so many opportunities right now in some of these other core channels. It's more -- much more complex, as you know, to pull off. So yes, I don't think anything has changed from that perspective. I don't think we view this as something that we're a segment of the market that we're urgently expecting to jump into.

Understood. Thank you.

And this will conclude our question-and-answer session. I'd like to turn the conference back over to CEO, Chris Blunt, for any closing remarks.

Great. Thanks. We're very pleased with our performance through the first half of the year. F&G's business is well positioned for the current market and for the longer-term growth. Our opportunities are compelling with many prospects ahead to drive asset growth, deliver margin expansion and generate accretive returns. So thanks for joining us. We appreciate your interest in F&G. And look forward to updating you on our third quarter earnings call.

Thank you for attending today's presentation. And the conference has now concluded. You may now disconnect your lines at this time.