F&G Annuities & Life, Inc. quarterly report, Q3 FY2023

F&G Annuities & Life, Inc. — Q3 2023 Form 10-Q Summary

Business Context and Reporting Period

F&G is a majority-owned subsidiary of Fidelity National Financial, Inc. It provides fixed indexed annuities, fixed-rate and immediate annuities, indexed universal life insurance, funding agreements and pension risk transfer solutions through retail and institutional channels. The filing covers the unaudited quarter and nine months ended September 30, 2023, with comparisons primarily to September 30, 2022.

F&G adopted ASU 2018-12 using full retrospective application beginning January 1, 2023, with comparative periods adjusted. The adoption increased opening 2021 retained earnings by $75 million, net of tax.

Key Financial Metrics

Metric	Q3 2023	Q3 2022	9M 2023	9M 2022
Total revenues	$851 million	$902 million	$2.888 billion	$1.722 billion
Earnings before taxes	$380 million	$238 million	$340 million	$1.065 billion
Net earnings	$306 million	$187 million	$241 million	$811 million
Diluted EPS	$2.45	$1.50	$1.93	$7.24
Net margin	Approximately 36%	Approximately 21%	Approximately 8%	Approximately 47%
Operating cash flow	Not separately provided	Not separately provided	$3.612 billion	$1.888 billion

Interest and investment income increased to $578 million in Q3 and $1.622 billion for nine months, from $340 million and $1.216 billion, respectively.
Recognized gains and losses were net losses of $309 million in Q3 and $257 million for nine months, compared with net losses of $140 million and $863 million in the prior-year periods.
Adjusted net earnings, a non-GAAP measure, were $120 million in Q3 and $260 million for nine months, compared with an adjusted net loss of $12 million and adjusted net earnings of $223 million in the prior-year periods.
Gross sales were $2.781 billion in Q3 and $9.070 billion for nine months; net sales after flow reinsurance were $2.268 billion and $6.689 billion, respectively.

Balance Sheet, Debt and Liquidity

Total assets were $63.623 billion at September 30, 2023, up from $54.628 billion at December 31, 2022. Total investments were $46.868 billion, including $36.871 billion of fixed maturity available-for-sale securities.
Contractholder funds increased to $46.011 billion from $40.843 billion. Future policy benefits increased to $5.823 billion from $5.021 billion.
Cash and cash equivalents were $1.742 billion, compared with $960 million at year-end; short-term investments were $168 million, compared with $1.556 billion.
Notes payable totaled $1.569 billion, including $500 million of 7.40% senior notes due 2028, $550 million of 5.50% senior notes due 2025 and $515 million drawn under the revolving credit facility. The amended revolver had $150 million of remaining availability.
Nine-month financing cash flow was $2.824 billion, including $5.718 billion of contractholder deposits, $3.258 billion of withdrawals, $500 million of senior-note proceeds, $75 million of dividends and $18 million of share repurchases.
Equity was $2.372 billion at September 30, 2023, compared with $2.405 billion at December 31, 2022. Accumulated other comprehensive loss was $3.040 billion, primarily reflecting unrealized investment losses and insurance-liability discount-rate effects.

Material Changes Versus the Prior Comparable Period

Q3 net earnings increased 64% year over year, while nine-month net earnings declined 70% because the prior-year period benefited from more favorable market-related liability and derivative results.
Q3 revenue declined 6% despite higher investment income, primarily because life insurance premiums and other fees decreased to $582 million from $702 million and recognized investment losses increased.
Nine-month revenue increased 68%, principally because investment income was higher and recognized losses were substantially lower than in 2022.
Benefits and other changes in policy reserves were $292 million in Q3 versus $570 million in Q3 2022, but $1.921 billion for nine months versus $396 million in the prior-year period. The nine-month increase primarily reflected PRT activity and less favorable market-related liability movements.
Q3 sales of fixed-rate annuities declined to $736 million from $1.108 billion, while FIA sales increased to $1.122 billion from $1.109 billion. Nine-month total annuity sales increased to $6.870 billion from $5.853 billion.
Personnel and other operating expenses increased to $96 million in Q3 and $274 million for nine months, reflecting headcount growth and strategic expansion.
F&G purchased minority interests in Syncis, DCMT Worldwide and Quility during 2023, expanding owned distribution capabilities. Investments in unconsolidated affiliates increased to $2.920 billion from $2.455 billion.

Guidance, Outlook, Commentary, Risks and Unusual Items

The filing does not provide formal earnings guidance. Management expects results to remain sensitive to interest rates, equity markets, credit spreads, policyholder behavior, reinsurance activity and the timing of PRT and funding-agreement transactions.
Management stated that higher interest rates supported investment income and demand for retail products, but also reduced the fair value of fixed-income assets and increased potential disintermediation risk if policyholders surrender contracts and assets must be sold at losses.
The fixed maturity portfolio had $5.140 billion of gross unrealized losses at September 30, 2023, compared with $4.570 billion at year-end 2022. Management attributed the increase primarily to higher Treasury rates and stated that most losses were not credit-related.
A 100-basis-point increase in interest rates was estimated to reduce the fair value of fixed maturity and certain preferred securities by approximately $2.1 billion. A 10% decline in equity prices was estimated to reduce the equity securities portfolio by approximately $72 million.
Third-quarter assumption updates for FIA and fixed-rate annuity business, including surrender, partial-withdrawal, mortality-improvement and option-budget assumptions, reduced benefits and policy-reserve expense by approximately $23 million in Q3 but increased it by approximately $74 million for the nine-month period.
Reinsurance recoverables were $7.462 billion, including $5.326 billion from Aspida Re, $1.126 billion from Wilton Re and $535 million from Somerset. Concentration and reinsurer-performance risk remain material.
The company reported approximately $4.062 billion of unfunded investment commitments, primarily involving limited partnerships, whole loans, direct lending and fixed-income investments.
A vendor-related MOVEit cybersecurity incident potentially affected approximately 783,000 policyholders or customers. Two putative class actions were pending, and the matter had been transferred into multidistrict litigation. Management did not believe the incident would have a material impact, but acknowledged litigation and regulatory risks.
The company declared a $0.21 per-share dividend payable in December 2023 and increased its share-repurchase authorization to $50 million after quarter-end. Approximately $32 million remained available under the revised authorization.
Disclosure controls and procedures were reported effective as of September 30, 2023, with no material changes in internal control over financial reporting during the quarter.

Important Facts for Investors to Verify

Reconcile GAAP net earnings of $241 million for nine months with adjusted net earnings of $260 million, focusing on derivative, market-related liability, investment and tax adjustments.
Assess the sustainability of investment income gains relative to credited rates, hedging costs, investment expenses and alternative-investment performance.
Review the $5.140 billion unrealized loss position in fixed maturity securities, portfolio credit quality, liquidity needs and potential forced-sale exposure.
Evaluate debt maturities, the $515 million revolver balance, $150 million of revolver availability and the 7.40% senior notes due 2028.
Monitor reinsurance concentration, collateral arrangements and the collectability of the $7.462 billion reinsurance recoverable balance.
Review statutory capital, permitted accounting practices and restrictions on dividends from insurance subsidiaries, which may differ materially from GAAP equity and liquidity.
Track the MOVEit litigation and regulatory inquiries, as ultimate losses and related costs were not yet determinable.