F&G Annuities & Life, Inc. — Q1 2023 Form 10-Q Summary
Business context and reporting period
F&G is a majority-owned subsidiary of Fidelity National Financial, Inc. and provides fixed indexed and fixed-rate annuities, immediate annuities, indexed universal life insurance, funding agreements and pension risk transfer solutions through retail and institutional channels. The filing covers the three months ended March 31, 2023; financial statements are unaudited and prepared under U.S. GAAP.
Key financial metrics
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Total revenues | $869 million | $750 million | +16% |
| Net investment income | $519 million | $451 million | +15% |
| Benefits and other policy-reserve changes | $812 million | $203 million | +$609 million |
| Pre-tax earnings (loss) | $(203) million | $345 million | Down $548 million |
| Net earnings (loss) | $(195) million | $239 million | Down $434 million |
| Basic and diluted EPS | $(1.56) | $2.28 | Down $3.84 |
| Adjusted net earnings | $49 million | $80 million | Down $31 million |
| Operating cash flow | $1.437 billion | $423 million | +$1.014 billion |
Net loss margin was approximately 22% of revenue, compared with a net earnings margin of approximately 32% in the prior-year quarter. The reported loss primarily reflected higher policy-reserve and market-related liability expenses, rather than a decline in investment income. The effective tax rate was 4%, compared with 31% in Q1 2022, and included an $8 million tax benefit.
At March 31, 2023, total assets were $59.4 billion, including $44.4 billion of investments and $1.6 billion of cash and cash equivalents. Contractholder funds were $43.4 billion, future policy benefits were $5.4 billion, total liabilities were $56.9 billion and total equity was $2.5 billion. Accumulated other comprehensive loss was $2.5 billion.
Gross sales were $3.281 billion and net sales after flow reinsurance were $2.209 billion. FIA sales were $1.211 billion, MYGA sales were $1.513 billion, funding agreement sales were $256 million and PRT sales were $264 million.
Material changes versus the prior comparable period
- Revenue increased despite a $231 million decline in life insurance premiums and other fees, primarily because net investment income rose $68 million and recognized investment losses improved from $(297) million to $(15) million.
- PRT premiums declined to $263 million from $525 million, reflecting fewer PRT transactions.
- FIA and MYGA sales increased substantially, supported by higher interest rates, market volatility and demand for retail annuity products. Funding agreement and PRT sales declined.
- Benefits and other policy-reserve changes increased sharply, including $369 million of FIA/IUL market-related liability movements versus a $559 million benefit in Q1 2022. The company also recorded a $102 million increase in contractholder funds from updated FIA assumptions.
- Personnel and other operating expenses increased to $89 million from $48 million, primarily because of headcount growth and strategic expansion.
- Operating cash flow increased to $1.437 billion, while investing cash use increased to $2.408 billion, largely reflecting purchases of investment securities and investments in unconsolidated affiliates.
- The company adopted ASU 2018-12 using full retrospective application. The adoption increased opening 2021 retained earnings by $73 million, net of tax, and changed the measurement and presentation of future policy benefits, DAC, VOBA, DSI, unearned revenue liabilities and market risk benefits.
Debt, liquidity and capital allocation
Notes payable totaled $1.572 billion at March 31, 2023, consisting primarily of $515 million outstanding under the revolving credit facility, $494 million carrying value of the 7.40% senior notes due 2028 and $567 million carrying value of the 5.50% senior notes due 2025. The revolving facility was increased to $665 million, with $150 million of availability at quarter-end. The company issued $500 million principal amount of 7.40% senior notes in January 2023.
Cash and cash equivalents increased to $1.584 billion from $960 million at year-end, while short-term investments declined to $776 million from $1.556 billion. Financing cash flow included $500 million of new senior-note borrowings, a $35 million revolver paydown, $25 million of dividends and $1.165 billion of net contractholder account deposits.
The company paid a quarterly dividend of $0.20 per share, or approximately $25 million, and authorized a three-year program to repurchase up to $25 million of common stock through March 2026. Approximately $2.4 billion of net assets were restricted from dividends without prior regulatory approval as of December 31, 2022.
Guidance, outlook, commentary and risks
The filing does not provide formal earnings or sales guidance. Management expects demand for retirement and income products to benefit from an aging U.S. population, but results remain sensitive to interest rates, equity markets, credit spreads, policyholder surrenders, mortality, lapse and withdrawal behavior, reinsurance performance and investment returns.
- The investment portfolio had fair value of approximately $44 billion, with 77% in fixed-maturity available-for-sale securities. Gross unrealized losses on fixed-maturity and equity securities were $4.3 billion at quarter-end.
- A 100-basis-point increase in interest rates was estimated to reduce the fair value of fixed-maturity securities and certain preferred securities by approximately $2.5 billion and reduce the combined fair value of embedded derivatives and MRBs by approximately $0.4 billion.
- A 10% decline in equity prices was estimated to reduce the fair value of the equity securities portfolio by approximately $80 million.
- Reinsurance recoverables were $6.4 billion, including $4.1 billion from Aspida Re, $1.2 billion from Wilton Re and $553 million from Somerset. Concentration and counterparty nonperformance are material risks.
- Unfunded investment commitments totaled $3.866 billion. The company also had significant exposure to structured securities, mortgage loans, alternative investments and Level 3 fair-value measurements.
- Legal and regulatory accruals were insignificant, and management did not consider pending proceedings material to financial condition. However, unfavorable outcomes could affect a particular period’s results or cash flows.
Important facts for investors to verify
- Reconcile the $49 million of adjusted net earnings with GAAP net loss of $195 million, particularly the $229 million market-related liability adjustment and $74 million recognized-gains-and-losses adjustment.
- Assess whether the increase in FIA and MYGA sales can be sustained without unfavorable changes in crediting rates, hedging costs, surrender behavior or acquisition costs.
- Monitor the $4.3 billion unrealized investment loss position, asset quality, credit-loss allowances and the potential need to sell securities to fund policyholder withdrawals.
- Evaluate liquidity relative to $1.572 billion of notes payable, the $3.866 billion of unfunded commitments, collateral requirements and regulatory restrictions on subsidiary dividends.
- Review the effects of ASU 2018-12 adoption and subsequent changes in discount rates, policyholder behavior assumptions and market risk benefit valuations.
- Verify reinsurance recoverability and concentration risk, especially the $4.073 billion recoverable from Aspida Re and the funds-withheld arrangements.