F&G Annuities & Life(FG) - 2024 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION Condensed Consolidated Financial Statements F&G Annuities & Life, Inc. reported total assets of $78.5 billion and net earnings of $318 million for the six months ended June 30, 2024, reflecting significant growth in assets and a turnaround in profitability Condensed Consolidated Balance Sheet Highlights (in millions) | Metric | June 30, 2024 (Unaudited) | December 31, 2023 | | :--- | :--- | :--- | | Total Investments | $55,562 | $52,289 | | Cash and cash equivalents | $3,526 | $1,563 | | Total Assets | $78,512 | $70,202 | | Total Liabilities | $74,724 | $67,099 | | Total Equity | $3,788 | $3,103 | Condensed Consolidated Statements of Operations Highlights (in millions, except per share data) | Metric | Three Months Ended June 30, 2024 | Three Months Ended June 30, 2023 | Six Months Ended June 30, 2024 | Six Months Ended June 30, 2023 | | :--- | :--- | :--- | :--- | :--- | | Total Revenues | $1,172 | $1,168 | $2,741 | $2,037 | | Net Earnings (Loss) Attributable to F&G | $203 | $130 | $318 | $(65) | | Diluted EPS Attributable to F&G Common Shareholders | $1.55 | $1.04 | $2.45 | $(0.52) | Condensed Consolidated Statements of Cash Flows Highlights (in millions) | Cash Flow Activity | Six Months Ended June 30, 2024 | Six Months Ended June 30, 2023 | | :--- | :--- | :--- | | Net cash provided by operating activities | $2,589 | $2,817 | | Net cash used in investing activities | $(3,229) | $(4,246) | | Net cash provided by financing activities | $2,603 | $2,157 | | Net increase in cash and cash equivalents | $1,963 | $728 | Note A — Basis of Financial Statements F&G provides annuity and life insurance products, recently expanding through acquisitions of Roar and PALH, and strengthening capital via preferred stock and senior note issuances - F&G markets a broad portfolio of annuity and life insurance products through retail (deferred/immediate annuities, IUL) and institutional (PRT, funding agreements) channels[18][19] - On January 2, 2024, F&G acquired a 70% majority stake in Roar Joint Venture, LLC for ~$269 million cash and up to ~$90 million in contingent payments[20][22] - On July 18, 2024, F&G acquired 100% of PALH, LLC for ~$216 million cash[20][22] - In Q1 2024, F&G completed a $250 million preferred stock investment from FNF, extended its credit facility to $750 million, and in Q2 2024, issued $550 million of 6.50% Senior Notes due 2029, using proceeds to tender for $250 million of 5.50% notes[23][24][25] Note B — Fair Value of Financial Instruments F&G's financial instruments, totaling $49.9 billion in assets and $5.4 billion in liabilities, are primarily measured at fair value across Level 2 and Level 3 categories Financial Assets and Liabilities at Fair Value (June 30, 2024, in millions) | Category | Level 1 | Level 2 | Level 3 | NAV | Total Fair Value | | :--- | :--- | :--- | :--- | :--- | :--- | | Total financial assets | $4,413 | $34,453 | $10,999 | $61 | $49,926 | | Total financial liabilities | $— | $— | $5,398 | $— | $5,398 | - The fair value of indexed annuity/IUL embedded derivatives, a significant Level 3 liability, is determined using an option budget method with unobservable inputs like budgeted option cost, surrender rates, and mortality multipliers[55] - For financial instruments not carried at fair value, the estimated fair value of investment contracts was $43.9 billion compared to a carrying amount of $48.8 billion, and the fair value of debt was $2.1 billion versus a carrying amount of $2.0 billion as of June 30, 2024[90] Note C — Investments F&G's investment portfolio includes $43.8 billion in AFS fixed maturity securities with a $3.4 billion net unrealized loss, alongside strong commercial and residential mortgage loan portfolios Available-for-Sale (AFS) Securities (June 30, 2024, in millions) | Metric | Amount | | :--- | :--- | | Amortized Cost | $47,236 | | Gross Unrealized Gains | $407 | | Gross Unrealized Losses | $(3,759) | | Allowance for Credit Losses | $(58) | | Fair Value | $43,826 | - The allowance for expected credit losses on AFS securities increased from $35 million at year-end 2023 to $58 million at June 30, 2024[105] - Commercial mortgage loans totaled $2.6 billion with a weighted average LTV of 56% and DSC of 2.3x[112][123][330] - No CMLs were delinquent[112][123][330] - Residential mortgage loans totaled $2.9 billion, with 98% performing[112][123][330] Note D — Derivative Financial Instruments F&G utilizes derivatives, primarily equity options, to hedge indexed products, with $1.2 billion in assets and $4.9 billion in liabilities, while managing counterparty risk Derivative Assets and Liabilities (Fair Value, in millions) | Category | June 30, 2024 | December 31, 2023 | | :--- | :--- | :--- | | Total Derivative Assets | $1,207 | $977 | | Equity options | $1,024 | $739 | | Total Derivative Liabilities | $4,876 | $4,258 | | Indexed annuities/IUL embedded derivatives | $4,848 | $4,258 | - The company hedges its indexed products by purchasing equity options and futures to fund index credits, managing costs by adjusting caps, spreads, or participation rates on policies annually[143] - F&G manages counterparty credit risk on derivatives by requiring collateral[148][150] - As of June 30, 2024, counterparties posted $1,011 million in collateral, resulting in a net credit risk exposure of $36 million[148][150] Note E — Reinsurance F&G uses reinsurance to manage risk, with $11.1 billion in recoverables as of June 30, 2024, primarily from Aspida and Somerset, and a $21 million allowance for credit losses Principal Reinsurers Recoverable (in millions) | Reinsurer | June 30, 2024 | December 31, 2023 | | :--- | :--- | :--- | | Aspida Life Re Ltd. | $6,845 | $6,128 | | Somerset Reinsurance Ltd. | $1,522 | $716 | | Everlake Life Insurance Company | $1,107 | $509 | | Wilton Reassurance Company | $1,069 | $1,092 | | Total Recoverable, net | $11,031 | $8,960 | - F&G has a significant concentration of reinsurance risk with Aspida Re, Somerset, Everlake, and Wilton Re[160] - This risk is mitigated through collateral arrangements and monitoring of reinsurer financial strength[160] Note F — Intangibles Net intangible assets increased to $5.0 billion, driven by growth in Deferred Acquisition Costs (DAC) and new customer relationship intangibles from the Roar acquisition Other Intangible Assets, Net (in millions) | Intangible Asset | June 30, 2024 | December 31, 2023 | | :--- | :--- | :--- | | Value of business acquired (VOBA) | $1,429 | $1,446 | | Deferred acquisition costs (DAC) | $2,653 | $2,215 | | Deferred sales inducements (DSI) | $450 | $346 | | Customer relationships | $162 | $— | | Total Other intangible assets, net | $4,952 | $4,207 | - DAC amortization expense was $125 million for the six months ended June 30, 2024, up from $83 million in the prior-year period, reflecting business growth[167] Note G — Market Risk Benefits The net Market Risk Benefits (MRBs) liability increased to $356 million, primarily due to attributed fees and new business, partially offset by favorable market movements Market Risk Benefits Roll-forward (Net Liability, in millions) | Description | Six Months Ended June 30, 2024 | | :--- | :--- | | Balance, beginning of period | $315 | | Issuances and benefit payments | $29 | | Attributed fees collected and interest accrual | $71 | | Effects of market related movements | $(61) | | Other (behavior, assumptions) | $27 | | Balance, end of period | $356 | - The increase in the net MRB liability was mainly due to the collection of attributed fees and new reserves for contracts issued, partially offset by favorable market movements from higher risk-free rates and equity market projections[176] Note H — Income Taxes F&G's effective tax rate was 19% for the six months ended June 30, 2024, below the statutory rate due to permanent adjustments, with an $88 million valuation allowance on deferred tax assets Effective Tax Rate | Period | Effective Tax Rate | | :--- | :--- | | Three months ended June 30, 2024 | 20% | | Six months ended June 30, 2024 | 19% | | Three months ended June 30, 2023 | 20% | | Six months ended June 30, 2023 | (63)% | - As of June 30, 2024, the company had a partial valuation allowance of $88 million against its net deferred tax assets of $415 million, an increase of $3 million in the allowance since year-end 2023[182] Note I — Contractholder Funds Total contractholder funds grew to $53.6 billion, driven by strong issuances in indexed and fixed rate annuities, with indexed annuities comprising the largest net liability Contractholder Funds by Product (Gross Liability, in millions) | Product | June 30, 2024 | December 31, 2023 | | :--- | :--- | :--- | | Indexed annuities | $28,994 | $27,407 | | Fixed rate annuities | $15,542 | $13,443 | | Universal life | $2,687 | $2,475 | | Funding Agreement-FABN | $3,215 | $2,613 | | FHLB | $2,856 | $2,539 | | Total | $53,602 | $48,798 | Note J — Future Policy Benefits Future Policy Benefits liability increased to $7.6 billion, primarily due to growth in the Pension Risk Transfer (PRT) block, while other segments remained stable Future Policy Benefits by Product (in millions) | Product | June 30, 2024 | December 31, 2023 | | :--- | :--- | :--- | | Traditional Life | $1,343 | $1,349 | | Immediate annuities | $1,325 | $1,415 | | PRT | $4,869 | $4,189 | | DPL (Immediate Annuities & PRT) | $99 | $97 | | Total | $7,636 | $7,050 | Note L — Notes Payable Total notes payable increased to $2.04 billion, driven by a new $550 million senior note issuance, partially offset by a tender offer for existing notes Notes Payable (in millions) | Note | June 30, 2024 | December 31, 2023 | | :--- | :--- | :--- | | 6.50% F&G Notes | $544 | $— | | 7.95% F&G Notes | $336 | $336 | | 7.40% F&G Notes | $496 | $495 | | 5.50% F&G Notes | $305 | $561 | | Revolving Credit Facility | $357 | $362 | | Total | $2,038 | $1,754 | - On June 4, 2024, F&G issued $550 million of 6.50% Senior Notes due 2029 and used part of the proceeds to repay $250 million of its 5.50% Senior Notes[214][215] Note N — Commitments and Contingencies F&G faces legal proceedings, including class-action lawsuits related to a data breach and a stockholder derivative action, and has $3.9 billion in unfunded commitments, primarily for limited partnerships and whole loans - F&G is a defendant in two class-action lawsuits related to the MOVEit data breach and a stockholder derivative lawsuit regarding a preferred stock sale to FNF[223][224][225] - Management does not expect a material impact from these proceedings[223][224][225] Unfunded Commitments (June 30, 2024, in millions) | Commitment Type | Amount | | :--- | :--- | | Limited partnerships | $1,675 | | Whole loans | $918 | | Fixed maturity securities, ABS | $379 | | Direct Lending | $365 | | Other | $555 | | Total | $3,892 | Note P — Acquisition F&G acquired a 70% stake in Roar Joint Venture for $316 million, recognizing $268 million in goodwill and $183 million in other intangible assets - F&G acquired a 70% stake in Roar on Jan 2, 2024, for a total net initial consideration of $316 million, including cash and contingent payments[237][239] Roar Acquisition - Net Assets Acquired (Fair Value, in millions) | Category | Amount | | :--- | :--- | | Goodwill | $268 | | Other intangible assets | $183 | | Other net assets/(liabilities) | $(135) | | Net assets acquired | $316 | - For the six months ended June 30, 2024, the Roar acquisition contributed $41 million in revenues and $4 million in net earnings attributable to F&G[241] Management's Discussion and Analysis of Financial Condition and Results of Operations Management attributes strong H1 2024 performance to growth in retail and institutional channels, increased annuity sales, and robust liquidity, supported by strategic financing activities Sales by Product (in millions) | Product | Three Months Ended June 30, 2024 | Three Months Ended June 30, 2023 | Six Months Ended June 30, 2024 | Six Months Ended June 30, 2023 | | :--- | :--- | :--- | :--- | :--- | | Total annuity | $3,123 | $2,288 | $5,887 | $5,012 | | Funding agreements | $915 | $200 | $1,020 | $456 | | PRT | $338 | $478 | $922 | $742 | | Net sales | $3,445 | $2,212 | $5,747 | $4,421 | Adjusted Net Earnings (Non-GAAP, in millions) | Period | Adjusted Net Earnings Attributable to Common Shareholders | | :--- | :--- | | Three Months Ended June 30, 2024 | $139 | | Three Months Ended June 30, 2023 | $79 | | Six Months Ended June 30, 2024 | $247 | | Six Months Ended June 30, 2023 | $140 | - The aging of the U.S. population, with over 10,000 people turning 65 daily, is expected to increase demand for the company's retirement savings and income products[255] Liquidity and Capital Resources F&G maintains a strong liquidity position with $3.5 billion in cash, bolstered by recent preferred stock and senior note issuances, and available credit facilities - Operating activities provided $2.6 billion in cash for the six months ended June 30, 2024, while financing activities provided another $2.6 billion, driven by strong net contractholder deposits and debt/equity issuances[348][360][363] - In H1 2024, F&G received $250 million from an FNF preferred stock issuance and raised $550 million in new 6.50% Senior Notes, using part of the proceeds to repay $250 million of older notes[351][353] - As of June 30, 2024, F&G had $385 million of remaining capacity under its revolving credit facility and $200 million under its FNF Credit Facility[356] Investment Portfolio F&G's $54.9 billion investment portfolio is primarily high-quality fixed-income, with 95% investment grade AFS securities and a $3.8 billion gross unrealized loss attributed to interest rates Fixed Maturity AFS Securities by Credit Quality (Fair Value, June 30, 2024) | NAIC Designation | Fair Value (millions) | Percent | | :--- | :--- | :--- | | 1 (Highest Quality) | $28,053 | 64% | | 2 (High Quality) | $13,719 | 31% | | 3-6 (Medium to Lowest) | $2,054 | 5% | | Total | $43,826 | 100% | - The investment portfolio is designed to generate stable earnings and preserve capital, with a focus on high-grade fixed-income assets[316][320] - As of June 30, 2024, 95% of the AFS portfolio was rated investment grade[316][320] - The gross unrealized loss on the AFS portfolio was $3.8 billion as of June 30, 2024, which management attributes primarily to higher treasury rates rather than credit issues[334] Quantitative and Qualitative Disclosures about Market Risk F&G is exposed to interest rate and equity price risks, with a 100 bps rate increase potentially decreasing fixed maturity fair value by $2.6 billion, actively managed through hedging - A 100 basis point increase in interest rates would result in a decrease in the fair value of fixed maturity securities by approximately $2.6 billion[377] - A 10% decrease in market prices would lead to a net decrease in the fair value of the equity securities portfolio by approximately $48 million[378] Controls and Procedures Management concluded that disclosure controls and procedures were effective as of June 30, 2024, excluding the recently acquired Roar business, with no material changes to internal controls - Management concluded that as of June 30, 2024, the company's disclosure controls and procedures were effective[383] - The evaluation of controls excluded the recently acquired Roar business, in accordance with SEC guidance[384] - Roar constituted 0.6% of total assets and 1.5% of H1 2024 revenues[384] PART II. OTHER INFORMATION Legal Proceedings F&G is involved in legal proceedings, including class-action lawsuits related to a data breach and a stockholder derivative action, which management does not expect to be material - The company refers to Note N for details on legal proceedings, which include lawsuits related to the MOVEit data breach and a stockholder derivative action[390] Risk Factors No material changes to risk factors, except for the DOL's 'New Fiduciary Rule' which has been stayed by federal courts, potentially impacting agent business practices - The DOL's 'New Fiduciary Rule', which expands the definition of an 'investment advice fiduciary', was released on April 23, 2024[394] - In July 2024, federal courts in Texas issued stays, delaying the rule's effective date of September 23, 2024, pending further legal challenges[397][398] - The DOL is expected to appeal[397][398] Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer Purchases of Equity Securities No shares were repurchased under the $50 million stock repurchase program during Q2 2024, with $32 million remaining authorized for future repurchases - No shares were repurchased under the company's stock repurchase program during the three months ended June 30, 2024[400] - As of June 30, 2024, approximately $32 million remained authorized for future repurchases under the existing program[400]