FG

Business Context and Reporting Period

F&G Annuities & Life, Inc. (F&G) is a majority-owned subsidiary of Fidelity National Financial, Inc. (FNF). The company provides insurance solutions, including annuities and life insurance products, through retail channels and institutional markets. This Form 10-Q covers the quarterly period ended September 30, 2024.

Key business developments during the period included the consolidation of Roar Joint Venture, LLC (acquired January 2024) and PALH, LLC (acquired July 2024), expanding the company's owned distribution network. F&G also completed a $250 million preferred stock investment from FNF in January 2024 and issued $550 million of 6.50% Senior Notes in June 2024.

Key Financial Metrics

Note: Q3 2024 GAAP net earnings were negative due to significant market-related liability adjustments and recognized losses, though Adjusted Net Earnings remained positive.

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 70% in Q3 2024 compared to Q3 2023, driven by higher interest and investment income ($712M vs. $578M) and recognized gains ($206M vs. a loss of $309M). Nine-month revenues increased 45%.
• Net Earnings Volatility: GAAP net earnings attributable to common shareholders swung from a profit of $306M in Q3 2023 to a loss of $10M in Q3 2024. This was primarily due to a $178M loss on the change in fair value of reinsurance-related embedded derivatives and market-related liability movements.
• Investment Portfolio: Total investments grew to $59.4 billion as of September 30, 2024, from $52.3 billion at year-end 2023. Interest and investment income increased due to asset growth and higher yields (5.41% annualized yield on AAUM in Q3 2024 vs. 4.98% in Q3 2023).
• Acquisitions: The company consolidated results from Roar and PALH, contributing $20M in owned distribution revenues for Q3 2024 (compared to $0 in Q3 2023).
• Debt Structure: Notes payable increased to $2.04 billion from $1.75 billion at year-end 2023, reflecting the issuance of new senior notes and the repayment of older debt.

Guidance, Outlook, and Risks

Management Commentary: Management emphasizes Adjusted Net Earnings as a key performance metric to exclude the volatility of fair value accounting for derivatives and embedded liabilities. Adjusted net earnings for the nine months ended September 30, 2024, were $403 million, a 55% increase over the prior year period.

Outlook: The company expects continued growth in assets under management (AUM) driven by net new business flows. Sales of indexed annuities and fixed rate annuities remain strong. The company is monitoring the interest rate environment, noting that higher rates increase investment income but also increase the cost of hedging indexed products and the liability for guaranteed minimum crediting rates.

Risks and Contingencies:

• Market Risk: Significant exposure to interest rate and equity market volatility. A 100 basis point increase in interest rates would decrease the fair value of fixed maturity securities by approximately $2.8 billion.
• Regulatory Risk: The Department of Labor's "New Fiduciary Rule" remains a key uncertainty. While the effective date was stayed by a federal court in July 2024, the rule could materially affect how agents sell IRA products and the company's liability exposure.
• Legal Proceedings: F&G is a defendant in class action lawsuits related to the MOVEit file transfer software vulnerability. Management does not currently believe these will have a material adverse effect.
• Reinsurance Concentration: Significant reinsurance recoverables are held with specific reinsurers (e.g., Aspida Life Re Ltd, Somerset Reinsurance Ltd). Failure of a major reinsurer could impact financial position.

Investor Verification Checklist

• Derivative Hedging Effectiveness: Verify the correlation between gains on derivative assets (equity options/futures) and the liability changes in embedded derivatives to understand the volatility in GAAP earnings.
• Reinsurance Counterparty Risk: Review the financial strength ratings of major reinsurers (Aspida, Somerset, Everlake, Wilton) and the status of collateral arrangements.
• Actuarial Assumption Updates: Confirm the impact of recent updates to surrender rates, GMWB utilization, and option budgets on future policy benefits and market risk benefits liabilities.
• Preferred Stock Obligations: Note the requirement to pay dividends on the $250M FNF Preferred Stock before any common stock dividends can be declared.
• Regulatory Status of Fiduciary Rule: Monitor the status of the DOL Fiduciary Rule litigation and potential implementation dates.