F&G Annuities & Life, Inc. quarterly report, Q2 FY2023

F&G Annuities & Life, Inc. — 2023 Q2 Form 10-Q Summary

Reporting period: Quarter and six months ended June 30, 2023. The interim financial statements are unaudited and prepared under U.S. GAAP. F&G is a majority-owned subsidiary of Fidelity National Financial and provides annuities, life insurance, funding agreements and pension risk transfer solutions through retail and institutional channels.

Key Financial Metrics

Metric	Three months ended June 30	Six months ended June 30
Total revenues	$1.168 billion	$2.037 billion
Pre-tax earnings (loss)	$163 million	$(40) million
Net earnings (loss)	$130 million	$(65) million
Diluted EPS	$1.04	$(0.52)
Adjusted net earnings	$79 million	$140 million
Operating cash flow	—	$2.817 billion

Second-quarter pre-tax and net margins were approximately 14.0% and 11.1%, respectively. Six-month margins were negative because the company reported a pre-tax loss and net loss. Adjusted net earnings, a non-GAAP measure, exclude investment gains and losses, market-related liability adjustments, purchase price amortization, transaction and other unusual items, and related taxes; it should not be viewed as a substitute for GAAP earnings.

Sales: Gross sales were $3.008 billion in the quarter and $6.289 billion year to date; net sales after flow reinsurance were $2.212 billion and $4.421 billion, respectively.
Investment income: $525 million in the quarter and $1.044 billion year to date, up from $425 million and $876 million in the prior-year periods.
Investments and assets: Total investments were $46.378 billion and total assets were $62.587 billion at June 30, 2023, compared with $41.387 billion and $54.628 billion at December 31, 2022.
Equity: Total equity was $2.518 billion, including accumulated other comprehensive loss of $2.610 billion.
Cash and liquidity: Cash and cash equivalents were $1.688 billion; short-term investments were $347 million. The revolving credit facility had $515 million drawn and $150 million of remaining availability.
Debt: Notes payable totaled $1.571 billion, including $500 million of 7.40% senior notes due 2028, $550 million of 5.50% senior notes due 2025 and $515 million drawn on the revolver before discounts and issuance-cost adjustments.
Contractholder funds: $45.070 billion at June 30, 2023, compared with $40.843 billion at year-end 2022.

Material Changes Versus the Prior Comparable Period

Second-quarter revenue increased from $70 million to $1.168 billion, primarily reflecting higher life-contingent PRT premiums, investment income and favorable derivative-related results.
Second-quarter net earnings declined from $385 million to $130 million despite higher revenue. Benefits and policy-reserve expenses rose to $817 million from a prior-year benefit of $377 million, principally because of higher PRT activity and market-related liability movements.
Six-month net earnings declined from $624 million to a $65 million loss. The comparison was affected by substantially different derivative, market-risk-benefit and policy-reserve valuations.
Recognized gains, net improved to $67 million in the quarter and $52 million year to date, versus losses of $426 million and $723 million in the prior-year periods. Six-month derivative gains were $158 million, compared with a $447 million loss in 2022.
Sales composition shifted toward annuities and PRT. Six-month FIA sales rose to $2.435 billion from $2.076 billion, MYGA sales rose to $2.577 billion from $1.560 billion, while funding agreement sales fell to $456 million from $1.443 billion.
Operating cash flow increased to $2.817 billion from $728 million, while investing cash outflow was $4.246 billion and financing cash inflow was $2.157 billion.
Personnel costs and other operating expenses increased to $178 million year to date from $113 million, reflecting headcount growth and strategic capabilities.

Accounting, Capital Allocation and Unusual Items

F&G adopted ASU 2018-12 using full retrospective application. The adoption changed the measurement and presentation of future policy benefits, market risk benefits and acquisition-related balances, and increased opening 2021 retained earnings by $75 million net of tax. Historical periods were adjusted.
The company issued $500 million of 7.40% senior notes in January 2023 and amended its revolving facility to increase total capacity to $665 million.
F&G launched a three-year, $25 million stock repurchase program. It repurchased approximately 790,000 shares for $16 million at an average price of $20.79; approximately $9 million remained authorized at June 30.
The company paid approximately $50 million of dividends during the first six months and subsequently declared a quarterly dividend of $0.20 per share payable September 29, 2023.
F&G acquired minority interests in Syncis Holdings and DCMT Worldwide to expand owned distribution. The filing does not provide the purchase prices in the supplied text.

Outlook, Risks and Contingencies

No formal earnings or financial guidance was provided. Management described demand for retail annuity products as benefiting from higher interest rates and market volatility, while noting that PRT and funding-agreement sales may fluctuate materially between periods.

Interest-rate risk: A 100-basis-point increase was estimated to reduce the fair value of fixed maturity and certain preferred securities by approximately $2.1 billion and reduce the combined fair value of embedded derivatives and market risk benefits by approximately $0.4 billion. A 100-basis-point change in floating rates would affect annual revolver interest expense by approximately $10 million.
Investment portfolio: Fixed maturity securities had a $4.299 billion gross unrealized loss position and total AFS fair value of $36.182 billion. Management attributed most unrealized losses to interest rates, liquidity and macroeconomic factors rather than issuer-specific credit concerns.
Reinsurance concentration: Net recoverables from Aspida Re, Wilton Re and Somerset were $4.857 billion, $1.157 billion and $543 million, respectively. Reinsurer nonperformance could materially affect financial condition.
Liquidity and regulatory constraints: Approximately $2.4 billion of net assets were restricted from dividends without prior insurance-regulator approval as of December 31, 2022. Insurance subsidiaries are also subject to statutory capital, surplus and dividend restrictions.
Unfunded commitments: Investment commitments totaled approximately $4.059 billion at June 30, 2023.
Legal matters: Accrued legal and regulatory liabilities were insignificant. The company stated that pending matters were not expected to have a material adverse effect, although actual outcomes may differ.
Cybersecurity incident: A third-party vendor incident involving MOVEit potentially exposed information for approximately 783,000 policyholders or customers, including Social Security numbers and account numbers. The company did not expect a material financial impact but remains exposed to potential litigation and regulatory scrutiny.
Market volatility: Equity prices, surrender behavior, credit spreads, policyholder utilization assumptions and derivative valuations can cause significant earnings volatility and may not be fully offset by hedging.

Facts Investors Should Verify

Reconcile GAAP net earnings of $(65) million year to date with adjusted net earnings of $140 million and assess the sustainability of the excluded market and investment items.
Review the effect of ASU 2018-12 retrospective adoption on historical earnings, reserves, AOCI, DAC, VOBA and market risk benefits.
Monitor fixed maturity unrealized losses, credit-loss allowances, structured-security exposure and the potential for forced asset sales if policyholder withdrawals increase.
Assess leverage, the $515 million revolver balance, the $500 million 2028 notes and the $550 million 2025 maturity against holding-company liquidity.
Evaluate concentration and collateral protection for reinsurance recoverables, derivative counterparties and FHLB funding agreements.
Track the MOVEit incident, potential regulatory actions and any related costs or claims.
Confirm future dividend and repurchase capacity in light of statutory capital requirements, regulatory dividend restrictions and the $4.059 billion of unfunded investment commitments.