F&G Annuities & Life, Inc. — FY2022 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2022. This is an annual filing rather than a standalone fourth-quarter filing. The audited financial statements were prepared under U.S. GAAP; Ernst & Young issued an unqualified opinion. F&G became separately traded on the NYSE under “FG” on December 1, 2022, following FNF’s distribution of approximately 15% of F&G shares. FNF retained approximately 85% ownership and control.
Business Context
F&G provides fixed indexed annuities, fixed-rate annuities, indexed universal life insurance, immediate annuities, funding agreements and pension risk-transfer solutions through retail and institutional channels. As of December 31, 2022, the company reported approximately 623,000 policyholders, approximately $43.6 billion of assets under management, approximately $41.6 billion of net in-force liabilities and approximately 872 employees.
- Gross sales were $11.3 billion, generated across independent marketing organizations, banks, broker dealers, funding agreements and pension risk transfer.
- Fixed indexed annuities represented approximately 40% of gross sales; fixed-rate annuities represented 33%, funding agreements 13%, PRT 13% and IUL 1%.
- Approximately 91% of the $41 billion investment portfolio was managed by Blackstone ISG-I Advisors LLC, creating both investment-management leverage and concentration risk.
FY2022 Financial Highlights
| Metric | FY2022 | FY2021 | Change |
|---|---|---|---|
| Life insurance premiums and other fees | $1.695 billion | $1.395 billion | Up 21% |
| Net investment income | $1.655 billion | $1.852 billion | Down 11% |
| Recognized gains and losses, net | $(1.010) billion | $715 million | Material deterioration |
| Total revenues | $2.340 billion | $3.962 billion | Down 41% |
| Pre-tax earnings | $598 million | $1.077 billion | Down 44% |
| Net earnings attributable to common shareholders | $481 million | $865 million | Down 44% |
| Adjusted net earnings | $345 million | $551 million | Down 37% |
| Adjusted return on assets | 86 basis points | Not clearly provided in the filing text | Not clearly provided |
| Operating cash flow | $3.171 billion | $1.871 billion | Up 69% |
| Cash and cash equivalents | $960 million | $1.533 billion | Down $573 million |
| Total investments | $41.387 billion | $38.910 billion | Up 6% |
| Total equity | $1.816 billion | $4.485 billion | Down 59% |
Net earnings and adjusted net earnings were pressured by lower alternative-investment returns, investment losses, derivative mark-to-market losses and higher interest rates. The company reported a 20% effective tax rate for FY2022, compared with 20% in the prior-year discussion, although the detailed tax note reports 19.6% for FY2022 and 20.5% for FY2021.
Sales, Balance Sheet and Capital
| Sales category | FY2022 | FY2021 | Change |
|---|---|---|---|
| Fixed indexed annuities | $4.550 billion | $4.310 billion | Up 6% |
| Fixed-rate annuities | $3.744 billion | $1.738 billion | Up 115% |
| Funding agreements | $1.443 billion | $2.310 billion | Down 38% |
| Pension risk transfer | $1.390 billion | $1.147 billion | Up 21% |
| Indexed universal life | $127 million | $87 million | Up 46% |
| Gross sales | $11.254 billion | $9.592 billion | Up 17% |
| Net sales after flow reinsurance | $9.006 billion | $8.723 billion | Up 3% |
- Contractholder funds increased to $41.233 billion from $35.525 billion, while future policy benefits increased to $5.923 billion from $4.732 billion.
- The investment portfolio was $41.387 billion, including $31.218 billion of fixed maturity available-for-sale securities. Approximately 94% of the fixed-income portfolio was investment grade under NRSRO ratings, and 94% was NAIC 1 or NAIC 2 under NAIC designations.
- Accumulated other comprehensive loss was $2.803 billion at year-end, compared with accumulated other comprehensive income of $734 million in 2021. The change was driven primarily by higher interest rates and unrealized investment losses.
- FGL Insurance’s estimated U.S. RBC ratio was approximately 440%, versus 451% in 2021 and 415% in 2020. Management stated that it targets an RBC ratio of at least 400%.
Debt, Liquidity and Cash Flow
- Year-end notes payable totaled $1.114 billion, consisting primarily of $550 million of revolving credit borrowings and $550 million principal amount of 5.50% senior notes due 2025.
- The revolving facility was fully drawn at December 31, 2022. A $35 million net paydown occurred on January 6, 2023, and the facility was subsequently increased by $115 million to $665 million on February 21, 2023.
- F&G issued $500 million of 7.40% senior notes due 2028 on January 13, 2023. The filing states that proceeds are intended for general corporate purposes, growth in AUM and liquidity needs.
- The company reported $960 million of cash and cash equivalents, $1.556 billion of short-term investments and $200 million of available capacity under the FNF Credit Facility at year-end.
- Approximately $2.4 billion of net assets were restricted from dividend payments without prior regulatory approval. FGL Insurance’s ordinary dividend capacity for 2023 was reported as $0.
- Contractual obligations totaled $61.841 billion, including $49.709 billion for annuity and universal-life products, $6.158 billion for PRT annuity payments, $4.784 billion for funding agreements, $1.100 billion of debt principal and $75 million of interest on fixed-rate notes.
Material Changes Versus FY2021
- Sales increased 17%, led by more than doubling fixed-rate annuity sales; however, net sales increased only 3% after substantially higher flow reinsurance.
- PRT and life-contingent PRT activity expanded, with PRT sales of $1.390 billion and PRT-related premiums of $1.362 billion.
- Net investment income declined $197 million, mainly because alternative-investment returns fell by approximately $686 million, partly offset by growth in invested assets.
- Recognized gains and losses shifted from a $715 million gain to a $1.010 billion loss. The 2022 result included derivative losses, realized fixed-maturity losses and equity-security mark-to-market losses.
- Adjusted net earnings fell $206 million, or approximately 37%, to $345 million. Management attributed part of the decline to lower actual alternative-investment income than its long-term expected return.
- Operating cash flow increased to $3.171 billion, partly reflecting approximately $1.3 billion of cash received for PRT transactions compared with approximately $840 million in 2021.
- During the fourth quarter, FIA-related assumption changes increased contractholder funds and future policy benefits by $97 million and increased intangible assets by $47 million.
- FNF converted a $400 million intercompany promissory note into F&G common stock in June 2022. F&G declared its inaugural quarterly dividend of $0.20 per share, paid January 31, 2023.
Outlook, Management Commentary and Unusual Items
Management intends to continue growing AUM and adjusted net earnings through diversified product and distribution channels, reinsurance, statutory earnings and unused debt capacity. The company expects scale to improve expense ratios and intends to increase dividends over time, subject to board review, regulatory approvals, capital needs, debt covenants and business conditions. The filing does not provide formal quantitative earnings or sales guidance.
- The company expects continued opportunity from retirement-income demand, demographic aging, underserved middle-market consumers, institutional funding agreements and pension de-risking.
- F&G will not early adopt the long-duration targeted-improvements accounting standard and expects adoption beginning January 1, 2023 using the full retrospective method. Management estimated that transition could increase total stockholders’ equity by up to approximately $200 million, net of tax, but stated that the final impact could differ materially.
- Unusual FY2022 items included a $1.010 billion net recognized loss, $4.744 billion of gross unrealized investment losses, a $2.8 billion AOCI loss, lower alternative-investment returns and the fourth-quarter actuarial assumption updates.
- Legal and regulatory accruals were insignificant, and management did not consider pending legal proceedings or market-conduct examinations material to the company’s financial condition. FGL Insurance had four ongoing market-conduct examinations.
Principal Risks
- Interest-rate and liquidity risk: a 100-basis-point increase in rates was estimated to reduce the fair value of fixed maturity and certain preferred investments by approximately $1.9 billion. Rising rates could also increase surrenders and force sales of securities at unrealized losses.
- Investment and credit risk: the portfolio includes substantial asset-backed securities, CLOs, mortgage-backed securities, private investments and broker-quoted or Level 3 assets. The company recorded $31 million of AFS credit-loss allowance at year-end.
- Reinsurance counterparty concentration: net recoverables from Aspida Re, Wilton Re and Somerset were $3.121 billion, $1.231 billion and $570 million, respectively.
- Capital and debt constraints: restrictive debt covenants, rating sensitivity and regulatory limits on subsidiary dividends may constrain growth, capital allocation and holding-company liquidity.
- Accounting-estimate volatility: reserves, embedded derivatives, VOBA, DAC, DSI and GMWB liabilities depend on assumptions for rates, option costs, mortality, surrenders, withdrawals and policyholder behavior.
- Ownership and governance: FNF’s approximately 85% ownership makes F&G a controlled company and permits reliance on exemptions from certain NYSE governance requirements.
- Operational and regulatory exposure: cybersecurity, outsourcing, evolving annuity best-interest and fiduciary standards, SECURE 2.0, tax changes, litigation and market-conduct requirements could increase costs or reduce sales.
Important Facts for Investors to Verify
- Reconcile GAAP net earnings of $481 million with adjusted net earnings of $345 million and assess whether the excluded investment and derivative effects are economically recurring or reversing.
- Review the sustainability of sales growth after flow reinsurance, particularly the economics and counterparty risk of the 75% MYGA cession program.
- Evaluate liquidity under higher surrender activity, further rate increases, collateral calls, debt maturities and restricted subsidiary dividends.
- Assess the quality, valuation methodology and unrealized-loss exposure of the $41.4 billion investment portfolio, including Level 3 and broker-quoted securities.
- Confirm the final impact of the long-duration insurance accounting adoption on equity, OCI, earnings volatility and disclosures.
- Monitor FGL Insurance’s RBC ratio, statutory earnings, dividend capacity and the effect of permitted statutory accounting practices.
- Review FNF’s continuing control, related-party arrangements, Blackstone investment-management agreements and the terms of the 2025 and 2028 debt.
- Verify the company’s ability to maintain the inaugural dividend and its stated intention to increase dividends over time.