F&G Annuities & Life(FG) - 2023 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Condensed Consolidated Financial Statements Total assets grew to $63.6 billion and liabilities to $61.3 billion by Q3 2023, while net earnings for the nine months ended September 30, 2023, significantly decreased to $241 million due to lower gains and higher expenses, following ASU 2018-12 adoption Financial Statements Overview Condensed Consolidated Balance Sheet Highlights (Unaudited) | (Dollars in millions) | September 30, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Total investments | $46,868 | $41,387 | | Total assets | $63,623 | $54,628 | | Contractholder funds | $46,011 | $40,843 | | Total liabilities | $61,251 | $52,223 | | Total equity | $2,372 | $2,405 | Condensed Consolidated Statement of Operations Highlights (Unaudited) | (Dollars in millions, except per share data) | Nine months ended Sep 30, 2023 | Nine months ended Sep 30, 2022 | | :--- | :--- | :--- | | Total revenues | $2,888 | $1,722 | | Total expenses | $2,548 | $657 | | Earnings before income taxes | $340 | $1,065 | | Net earnings | $241 | $811 | | Net earnings per share, diluted | $1.93 | $7.24 | Condensed Consolidated Statement of Cash Flows Highlights (Unaudited) | (Dollars in millions) | Nine months ended Sep 30, 2023 | Nine months ended Sep 30, 2022 | | :--- | :--- | :--- | | Net cash provided by operating activities | $3,612 | $1,888 | | Net cash used in investing activities | $(5,654) | $(6,205) | | Net cash provided by financing activities | $2,824 | $4,168 | | Net increase (decrease) in cash and cash equivalents | $782 | $(149) | Notes to Unaudited Condensed Consolidated Financial Statements The notes detail accounting policies, including retrospective ASU 2018-12 adoption, and recent corporate actions like dividend declarations, expanded share repurchases, strategic investments, and debt issuances - F&G is a majority-owned subsidiary of Fidelity National Financial, Inc. (FNF) and provides a portfolio of annuity and life insurance products through retail and institutional channels[31] - The company adopted ASU 2018-12 on January 1, 2023, with a transition date of January 1, 2021, using the full retrospective method. This resulted in a cumulative-effect adjustment that increased opening 2021 retained earnings by $75 million, net of tax[32][44] - On November 7, 2023, the Board declared a quarterly cash dividend of $0.21 per share[33] - The Board approved a three-year, $25 million stock repurchase program in March 2023, which was later increased to $50 million in November 2023. As of September 30, 2023, approximately $18 million had been used to repurchase 870 thousand shares[34][35][36] - In 2023, F&G made minority ownership investments in three insurance distribution companies: Quility Holdings (30%), DCMT Worldwide (40%), and Syncis Holdings (49%)[38] - In January 2023, F&G issued $500 million of 7.40% Senior Notes due 2028[40] - The company amended its revolving credit facility, increasing the available principal from $550 million to $665 million. As of September 30, 2023, $515 million was drawn, with $150 million available[41] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses how demographic trends and interest rates influence performance, with net sales of $6.7 billion and adjusted net earnings of $260 million for the nine months ended September 30, 2023, supported by a $46.2 billion investment portfolio and strong liquidity Business Trends and Conditions - The aging U.S. population is a key demographic trend expected to increase demand for the company's retirement products, with the proportion of the population over 65 projected to grow from 18% in 2023 to 21% in 2035[293] - The interest rate environment significantly impacts product profitability. Higher rates can enhance investment income but may require offering more competitive crediting rates, while low rates can compress investment spreads[291] - The company focuses on the underserved middle-income market, which it views as a major growth opportunity. The Fixed Index Annuity (FIA) market grew from $12 billion in sales in 2002 to $79 billion in 2022, and the Indexed Universal Life (IUL) market expanded from $100 million to $3 billion in annual premiums over the same period[294] Results of Operations Sales by Product Type (in millions) | Product | Q3 2023 | Q3 2022 | YTD 2023 | YTD 2022 | | :--- | :--- | :--- | :--- | :--- | | FIA | $1,122 | $1,109 | $3,557 | $3,185 | | Fixed rate annuities (MYGA) | $736 | $1,108 | $3,313 | $2,668 | | IUL | $38 | $36 | $117 | $92 | | Funding agreements | $415 | $0 | $871 | $1,443 | | PRT | $470 | $620 | $1,212 | $1,147 | | Gross Sales | $2,781 | $2,873 | $9,070 | $8,535 | | Sales attributable to flow reinsurance | $(513) | $(660) | $(2,381) | $(1,440) | | Net Sales | $2,268 | $2,213 | $6,689 | $7,095 | Reconciliation of Net Earnings to Adjusted Net Earnings (in millions) | | Q3 2023 | Q3 2022 | YTD 2023 | YTD 2022 | | :--- | :--- | :--- | :--- | :--- | | Net earnings (loss) | $306 | $187 | $241 | $811 | | Recognized (gains) and losses, net | $(4) | $(25) | $100 | $(19) | | Market related liability adjustments | $(237) | $(237) | $(95) | $(751) | | Purchase price amortization | $5 | $5 | $16 | $16 | | Transaction costs and other | $1 | $4 | $3 | $8 | | Income taxes on non-GAAP adjustments | $49 | $54 | $(5) | $158 | | Adjusted net earnings | $120 | $(12) | $260 | $223 | - For the nine months ended Sep 30, 2023, interest and investment income increased to $1.62 billion from $1.22 billion YoY, driven by higher average assets under management (AAUM) and improved yields[344][346] - Recognized losses for the nine months ended Sep 30, 2023 were $257 million, a significant improvement from losses of $863 million in the prior-year period, primarily due to smaller losses on derivative instruments[347] - Total benefits and expenses for the nine months ended Sep 30, 2023, increased to $2.55 billion from $657 million YoY, largely due to higher benefits and other changes in policy reserves, which included significant movements in FIA/IUL market-related liabilities[338][354] Investment Portfolio Investment Portfolio Composition by Fair Value (in millions) | Asset Class | Sep 30, 2023 | % of Total | Dec 31, 2022 | % of Total | | :--- | :--- | :--- | :--- | :--- | | Total fixed maturity AFS securities | $36,871 | 80% | $31,218 | 76% | | Equity securities | $721 | 2% | $823 | 2% | | Limited Partnerships | $2,639 | 5% | $2,427 | 6% | | Commercial mortgage loans | $2,148 | 5% | $2,083 | 5% | | Residential mortgage loans | $2,326 | 5% | $1,892 | 5% | | Other | $1,295 | 3% | $809 | 2% | | Short term investments | $168 | 0% | $1,556 | 4% | | Total investments | $46,168 | 100% | $40,808 | 100% | Fixed Income Portfolio Credit Quality (by Fair Value) | NAIC Designation | NRSRO Rating | Sep 30, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | :--- | | 1 | AAA/AA/A | 64% | 60% | | 2 | BBB | 31% | 34% | | 3-6 | Below Investment Grade | 5% | 6% | | Total | | 100% | 100% | - The investment portfolio is primarily composed of high-grade fixed-income assets. As of September 30, 2023, 95% of the fixed income portfolio was rated investment grade (NAIC 1 or 2)[365][368] - The gross unrealized loss on the fixed maturity and equity portfolio was $5.3 billion as of September 30, 2023, up from $4.7 billion at year-end 2022, primarily due to higher treasury rates[386][387] Liquidity and Capital Resources - Primary sources of cash are operating activities, subsidiary dividends, and financing activities. For the nine months ended Sep 30, 2023, cash from operations was $3.6 billion[402][419] - The company issued $500 million of 7.40% Senior Notes in January 2023 and increased its revolving credit facility to $665 million, of which $515 million was drawn as of September 30, 2023[411][412] - A stock repurchase program was initiated in March 2023 for $25 million and increased to $50 million in November 2023. Through September 30, 2023, the company repurchased $18 million worth of its common stock[407][408][409] - The company paid dividends of $0.20 per share in each of the first three quarters of 2023, totaling approximately $75 million. A dividend of $0.21 per share was declared for Q4 2023[406] Item 3. Quantitative and Qualitative Disclosures about Market Risk The company manages primary market risks, including interest rate, equity price, and credit risks, through ALM programs, hedging strategies, and disciplined underwriting, with a $2.1 billion estimated impact from a 100 basis point interest rate increase - The company's primary market risk is interest rate risk, arising from investing premiums in interest-sensitive assets to back interest-sensitive liabilities. This is managed through an Asset Liability Management (ALM) program[438][440] - Equity price risk stems from holdings of equity securities and liabilities for FIA/IUL products linked to equity indices. This risk is economically hedged using derivatives like call options and futures[447][449] - Credit and counterparty risk arises from the debt securities portfolio and derivative/reinsurance counterparties. This is managed through credit evaluation, diversification, and collateral agreements[462][464] Market Risk Sensitivity Analysis (as of Sep 30, 2023) | Risk Factor | Scenario | Estimated Impact on Fair Value | | :--- | :--- | :--- | | Interest Rate | +100 basis points | ~$2.1 billion decrease in fixed maturity securities | | Equity Price | -10% | ~$72 million decrease in equity securities portfolio | Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were effective as of September 30, 2023, with no material changes to internal control over financial reporting during the quarter - Management, including the CEO and CFO, concluded that as of September 30, 2023, the company's disclosure controls and procedures were effective[471] - No changes occurred during the quarter ended September 30, 2023, that have materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting[474] Part II - Other Information Item 1. Legal Proceedings The company is involved in consolidated class action lawsuits concerning a data security incident, which it does not expect to materially impact business or financial results - F&G is a defendant in two putative class action lawsuits (Miller v. F&G and Cooper v. Progress Software Corp.) related to a data breach via the MOVEit file transfer software used by its vendor, PBI[258] - These lawsuits have been transferred to a multidistrict litigation (MDL) in the U.S. District Court for the District of Massachusetts for consolidated handling[259][260] - A lawsuit related to FNF's acquisition of F&G, filed by dissenting shareholders, was decided in F&G's favor, and the company is seeking reimbursement for legal expenses[257] Item 1A. Risk Factors Key risks include interest rate fluctuations, which can cause disintermediation and unrealized losses, and equity market volatility, which impacts guaranteed benefit liabilities, with ASU 2018-12 adoption altering certain intangible asset amortization - Interest rate fluctuations are a significant market risk. Rapidly rising rates could lead to financial disintermediation, where policyholders surrender contracts, forcing the company to liquidate assets in an unrealized loss position[482][485] - Higher interest rates have decreased the fair value of the investment portfolio, resulting in an Accumulated Other Comprehensive Income (AOCI) loss of $3.0 billion as of September 30, 2023[487] - Equity market volatility could negatively impact the business by increasing the valuation of liabilities for products with guaranteed minimum benefits, such as GMWB riders[488] - Following the adoption of ASU 2018-12, which mandates a constant level amortization for VOBA, DAC, and DSI, the company has removed a previous risk factor related to the pattern of amortizing these balances[481] Item 2. Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer Purchases of Equity Securities The company's share repurchase program was increased to $50 million in November 2023, with 81,566 shares repurchased in Q3 2023 at an average price of $23.77 per share - The Board of Directors increased the company's share repurchase authorization by $25 million to a total of $50 million in November 2023[490] Equity Security Repurchases (Q3 2023) | Period | Total Shares Purchased | Average Price Paid per Share | Approx. Dollar Value Remaining ($ millions) | | :--- | :--- | :--- | :--- | | July 2023 | 81,566 | $23.77 | $7 | | August 2023 | 0 | N/A | $7 | | September 2023 | 0 | N/A | $7 | | Total | 81,566 | $23.77 | $7 |