F&G Annuities & Life Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
February 22, 2024

There are 7 speakers on the call.

Operator

Good morning, and welcome to F and G's 4th Quarter and Full Year 2023 Earnings Conference Call. As a reminder, this conference is being recorded. I would now like to turn the call over to Lisa Foxworthy Parker, Senior Vice President, Investor and External Relations. Please go ahead.

Speaker 1

Thanks, operator, and welcome, everyone. Joining me today are Chris Blunt, Chief Executive Officer and Wendy Young, Chief Financial Officer. We look forward to addressing your questions following our prepared remarks. Today's earnings call may include forward looking statements and projections under the Private Securities Litigation Reform Act, which do not guarantee future events or performance. We do not undertake any duty to revise or update such statements to reflect new information, subsequent events or changes in strategy.

Speaker 1

Please refer to our most recent SEC filings for a discussion of the factors that could cause actual results to differ materially from those expressed or implied. This morning's discussion also includes non GAAP financial measures that we believe may be meaningful to investors. Non GAAP measures have been reconciled to GAAP where required in accordance with SEC rules within our earnings release, financial supplement and investor presentation, all of which are available on the company's website. Today's call is being recorded and will be available for webcast replay at fglife.com. It will also be available through telephone replay beginning today at 1 p.

Speaker 1

M. Eastern Time through February 29, 2024. And now, I'll turn the call over to our CEO, Chris Blunt.

Speaker 2

Good morning, everyone. Thanks for joining us to discuss our Q4 and full year results. Before reviewing the quarter, I'd like to share with you the progress we've made over the last year. On December 1, 2022, FNF completed its partial spin off of F and G retaining 85 percent majority interest and F and G was listed on the New York Stock Exchange. Since then, our 1st year as a public company has been a very successful one.

Speaker 2

I'd like to start by recognizing our employees for their hard work and achievements over the last year. Thank you as well to our many partners and to our customers whose feedback resulted in F and G being ranked number 1 for highest customer satisfaction among annuity providers in the U. S. By J. D.

Speaker 2

Power. And lastly, I'd like to express my appreciation to our parent company, FNF for all of their support throughout the year. In short, 2023 was one of our best years with numerous accomplishments worth highlighting. First, our retail and pension risk transfer growth. We reported record gross sales of $13,200,000,000 in 2023, which exceeded the top end of the $12,000,000,000 to $13,000,000,000 range we provided at our Investor Day in October and were up 17% over the prior year, well in line with our goal of growing annual gross sales at a double digit clip.

Speaker 2

This demonstrates the strength of our multi channel distribution platform that is hitting on all cylinders and generated $10,000,000,000 of retail gross sales through our agent, bank and broker dealer channels, dollars 2,000,000,000 of pension risk transfer sales and $1,000,000,000 of FHLB funding agreements. We also had record net sales of $9,200,000,000 in 2023, well above $7,000,000,000 of annual net sales needed to grow our retained AUM and managed in line with our capital targets. Net sales reflect 3rd party flow reinsurance, which has increased from 50% to 90% of MYGA sales during 2023 as expected. F and G has successfully expanded from 1 to 3 high quality and established flow reinsurance partners, which provides counterparty diversification and additional capacity. The higher percentage of flow reinsurance provides a lower capital requirement on the ceded new business, while allocating capital to the highest returning retained business enhances cash flow and generates fee based earnings resulting in accretive returns to F and G.

Speaker 2

We have profitably grown retained assets under management to a record $49,500,000,000 at December 31. This is an increase of 14% over the prior year and was driven by net new business flows, stable in force retention and net debt proceeds over the last 12 months. AUM before flow reinsurance was $56,300,000,000 adjusting for the approximately $7,000,000,000 of cumulative new business ceded. A second area to highlight has been the steady and predictable performance of our profitable in force book. While markets were volatile through 2023, we benefited from the superior foundation that our in force book provides.

Speaker 2

Importantly, our book has no legacy liability issues. Our funding agreements, pension risk transfer and immediate annuities are non surrenderable. And our retail fixed annuities are 92% surrender charge protected with 75% also subject to market value adjustments. We generated very positive and strong net inflows in 2023 and Wendy will provide further insights to our surrender trends in the current market environment in a few minutes. A third area of achievement over the last 12 months has been the outstanding performance of our investment portfolio that is well matched to our clean and stable liability profile.

Speaker 2

We continually evaluate opportunities for upside, risk adjusted returns and downside protection in our investment portfolio. In 2023, we enhanced the return while improving the credit quality of our portfolio by executing on our dynamic portfolio allocation and continuing to derisk in light of market dislocations and ongoing macro environment uncertainty. We also successfully We also successfully negotiated a new fee agreement with our partner Blackstone. During 2023, our fixed income yield, excluding alternative investment volatility and variable investment income has expanded to 4.45 percent in the 4th quarter as compared to 4.37% in the Q4 of 2022. This reflects upside from higher yields on new investments and floating rate assets.

Speaker 2

At year end 2023, the portfolio is high quality 95% of fixed maturities being investment grade. We hold significantly lower exposure to the commercial real estate and office sectors in our CML portfolio. Credit related impairments remain low, averaging 5 basis points over the past 3 years, well below our pricing assumptions. Given the potential for an economic slowdown and lower interest rates in the years ahead, we took some downside risk off the table by hedging approximately $5,000,000,000 of our $10,000,000,000 floating rate asset portfolio, locking in about 190 basis points of incremental yield beyond what was originally priced in. This translates approximately 12 basis points of annual incremental investment margin above our pricing over the next 3 to 5 years.

Speaker 2

We expect to continue to evaluate hedging additional floating rate assets where beneficial and possible. Also, we've refreshed our annual portfolio stress test, which is conservative and assumes no management action and is once again confirmed that our portfolio is well positioned to to withstand a sharp downturn in the economy. A 4th area to highlight in 2023 centers on our balance sheet strength and capital allocation. Given we were well prepared to drive growth and capture the market opportunity. In our 1st year as a public company, F and G has self funded its growth through our in force capital generation, reinsurance programs and the planned issuance of senior debt.

Speaker 2

And we have increased our annual common dividend to $105,000,000 a 5% increase to $0.21 from $0.20 per share and allocated capital to launch our new share repurchase program to take advantage of these locations. Our commitment to strong ratings and achieving ratings upgrades over time was recognized through 2 rating upgrades to A or excellent by A. M. Best last month and to A3 by Moody's in July. These upgrades provide 3rd party recognition of our progress, support further organic growth and give us greater strategic flexibility.

Speaker 2

Another vote of confidence came from FNF's $250,000,000 mandatory convertible preferred stock investment in F and G last month to further grow retained assets under management, given the compelling market opportunity that exists. A final area that I'd like to highlight is our own distribution strategy. As we said at our Investor Day, F and G is uniquely positioned to be a capital provider to key distribution partners. In January of 2024, F and G acquired a 70% majority ownership stake in a wholesaler of life and aduity products, 2 financial institutions and the broker dealer community for approximately $270,000,000 This is our 5th and largest transaction to date and brings our cumulative deployed capital above $500,000,000 Owned distribution further strengthens our relationships with key partners as well as providing us with an earnings stream from our ownership stakes, providing for higher margins and a lower marginal cost of capital, which is expected to be accretive to ROE. Overall, 2023 was a big year for us in terms of execution in our 1st year as a public company.

Speaker 2

For the full year and excluding significant items, we delivered A and E of $539,000,000 which generated an adjusted ROA of 117 basis points, and we reported an adjusted ROE in excess of 10%. We continue to execute on the plans we outlined during our Investor Day and are pleased to see investors recognize F and G's success utilization has more than doubled from $2,400,000,000 at the time of the partial spin off in December 2022 to approximately $5,800,000,000 at the end of 2023. Looking ahead to 2024, we have plenty of momentum to continue to deliver sustainable asset growth from our retail and pension risk transfer growth strategies and ongoing margin expansion from enhanced investment margin opportunities, operational scale benefits and fee based earnings from accretive flow reinsurance. We are also well positioned to diversify our earnings given the strong growth of our middle market life insurance business and owned distribution strategies. I'm very proud of our accomplishments and confident that F and G will continue to generate shareholder value through continued execution of our strategic priorities because of the strong culture that we've created, which has allowed us to recruit and develop exceptional talent.

Speaker 2

Let me now turn the call over to Wendy to provide further details on F and G's full year and Q4 financial highlights.

Speaker 3

Thanks, Chris. We are pleased with F and G's overall financial performance for the full year and we continue to maintain strong capitalization and financial flexibility to successfully execute our growth strategy. Adjusted net earnings for the full year 2023 were $335,000,000 or $2.68 per share and included $405,000,000 or 3 point

Speaker 2

$4 per share of investment income from alternative

Speaker 3

investments and $51,000,000 or $0.41 per share of other significant expense items. Alternative investments investment income based on management's long term expected return of approximately 10% was $558,000,000 or $4.46 per share. Adjusted net earnings for the full year 2022 were $353,000,000 or $3.07 per share and included $202,000,000 or $1.75 per share of investment income from alternative investments and $99,000,000 or $0.86 per share of other significant income items. Alternative investment income based on management's long term expected return of approximately 10% was $419,000,000 or $3.64 per share. For comparison, adjusting for these significant items in both periods, adjusted net earnings were $539,000,000 in full year 2023, up 14% from $471,000,000 in full year 2022 and reflect asset growth, product margin expansion and accretive flow reinsurance fees, partially offset by an increase in interest expense due to planned capital market activity and higher operating costs in line with our growth in sales and assets and continued investments in our operating platform.

Speaker 3

Adjusted return on assets was 117 basis points in full year 2023 above our 110 basis point forecast and in line with 118 basis points in the prior year. Excluding significant items, adjusted return on equity excluding AOCI was 10.4% in 2023 as compared to approximately 9.6% in 2022. Next, turning to the results for the quarter, adjusted net earnings for the Q4 of 2023 were $75,000,000 or $0.60 per share and included $110,000,000 or $0.88 per share of investment income from alternative investments and $19,000,000 or $0.15 per share of other significant expense items comprised of $9,000,000 unfavorable actuarial industry assumption update and $10,000,000 onetime fixed asset impairment charge. Alternative investment income based on management's long term expected return of approximately 10% was $147,000,000 or $1.18 per share. Adjusted net earnings for the Q4 of 2022 were 130 $1,000,000 or $1.04 per share and included $41,000,000 or $0.32 per share of investment income from alternative investments and $58,000,000 or $0.46 per share of significant income for a one time tax benefit from carryback of capital losses.

Speaker 3

Alternative investments investment income based on management's long term expected return of approximately 10% was $113,000,000 or $0.90 per share. For comparison, adjusting for these significant items in both periods, adjusted net earnings were $131,000,000 in the Q4 2023, down 9% from $144,000,000 in Q4 of 2022 and reflect modest product margin expansion due to inherent timing lag between the precipitous decline in rates and our pricing actions in the Q4 of 2023 and accretive flow reinsurance fees, which were more than offset by higher interest expense due to planned capital market activity and higher operating costs in line with our growth in sales and assets and continued investments in our operating platform. Turning to reported net income on a GAAP basis, we reported $299,000,000 net loss in the 4th quarter of 2023 and a $58,000,000 net loss in 2023 for full year. This result is primarily driven by unfavorable mark to market movement, which is excluded from adjusted net earnings. We view the short term mark to market movements as point in time accounting driven and not economic.

Speaker 3

Given adequate liquidity levers, we do not expect to sell securities and realize losses to meet corporate liquidity needs. To recap, despite some volatility in our earnings in the Q4, our full year performance nonetheless builds on our proven track record over successive years and demonstrates progress toward our targeted value creation levers of asset growth, margin expansion and enhanced earnings from Flow Reinsurance. I'd now like to provide additional perspective on the volatility that we encountered this past year. From a retention perspective in 2023, we saw predictable outflows from our MYGA fixed rate annuities, which are aligned to the contractual maturity date set This was expected given the spike in new money rates that the industry hasn't seen in over a decade, which consumer demand to surrender their annuities for new policies under 1035 exchanges. We generated very strong positive net inflows in 2023, given our record new business volumes, which restart the surrender charge period, further improving the liability profile.

Speaker 3

And our in force annuity count balance continues to steadily grow on both a quarterly and annual basis. As a reminder, for insurance companies like F and G, surrenders typically provide a boost to earnings from the higher surrender charge fees and freed up capital from the policy laps. Importantly, our new business and in force are actively managed to maintain pricing targets over time. That being said, we can expect pockets of market volatility. During the Q4, we saw some margin compression from the interest rate volatility that the annuities industry experienced as rates fell dramatically through the end of the year and consumers rushed to lock in rates, creating a dynamic environment for crediting rates and strategy.

Speaker 3

We were disciplined and actively managed to maintain new business pricing targets. However, there are expected timing lags between precipitous rate movements and our pricing actions for both new business pricing and annual in force renewal rate setting. This is not the first time we have navigated these issues and in our experience we view the resulting quarterly volatility as a blip given the rapid movement in rates. There is no change in our economics or expectation for 2024 margins and the long term outlook for our business remains unchanged. We are positioned to sustain our product margin in a variety of interest rate and economic environments.

Speaker 3

Our proven track record in recent years demonstrates that we can profitably grow the business and maintain consistent pricing in any rate and spread environment whether peak or trough. Next, I'd like to provide an update on our own distribution strategy. During 2023, our own distribution stakes increased throughout the year from approximately $20,000,000 to $260,000,000 Notably, this excludes the majority ownership stake in a life and annuity wholesaler that we closed in January of 2024 for approximately $270,000,000 that Chris mentioned earlier. We are working on enhancements to our financial supplement for the Q1 2024 to reflect the emerging performance of owned distribution on GAAP reporting basis, which we expect to provide fee based earnings and higher returns over time. Now turning to our balance sheet.

Speaker 3

We ended the year with a GAAP book value excluding AOCI of $5,100,000,000 or $40.42 per share with 126,000,000 common shares outstanding as of December 31. There is a page in our investor presentation providing an analysis of book value per share. F and G's debt to capitalization ratio excluding AOCI was 25.7% as of December 31. This is in line with our long term target of 25% and excludes the $250,000,000 preferred stock issuance in January 2024. During 2023, we successfully executed on 2 senior note issuances including a $345,000,000 issuance in December and $500,000,000 issuance in January 2023 with proceeds used to support AUM growth and a revolver partial pay down.

Speaker 3

On February 16, 2024, we entered into an amended and restated credit agreement, which included an increase to the size of the facility commitments to $750,000,000 from $665,000,000 and extended the maturity of the facility by 2 years to November of 2027, thereby enhancing our liquidity profile and financial flexibility. The outstanding balance is $365,000,000 which reflects 1 $150,000,000 pay down in the Q4. In 2023, our interest expense was $97,000,000 or 21 basis points of adjusted ROA as compared to $29,000,000 or 7 basis points of adjusted ROA in 2022 as expected and in line with our capital markets activity over the last 12 months. Our annualized interest expense is approximately $120,000,000 or roughly 6.8% blended yield on the $1,800,000,000 of total debt outstanding. We continue to target holding company cash and invested assets at 2x fixed charge coverage.

Speaker 3

Our strong capitalization supports both growth and distributable cash. During 2023, F and G returned $119,000,000 of capital to shareholders, including $101,000,000 of common dividends and $18,000,000 of share repurchases. During the year, we repurchased approximately 870,000 shares at an average cost per share of 21.07 dollars On November 7, we expended the capacity of the share repurchase program from $25,000,000 to $50,000,000 The remaining authorization yet to be purchased under the program was $32,000,000 as of December 31 to take advantage of future market dislocations. On February 15, 2024, we declared a $0.21 per share dividend payable on March 29 to the stockholders of record as of March 15. As Chris mentioned earlier, FNF's recent investment in F and G will accelerate the growth of our retained AUM given the current market opportunity.

Speaker 3

Here's a few points. On January 16, 2024, FNF and F and G announced the closing of a $250,000,000 mandatory convertible preferred stock investment issued by F and G Annuities and Life, our top holding company to FNF. F and G intends to use net proceeds from the investment to support growth of its assets under management. A portion of the proceeds will be held to fund the 6.875 preferred dividend, which is subject to declaration by the Board of Directors. The preferred dividends can be paid in either cash or common shares.

Speaker 3

If dividends are deferred until the mandatory conversion date in 2027, the cumulative payment of dividends will be converted into common shares. On February 15, 2024, we declared a quarterly cash dividend of $0.8976 per share on its preferred stock held by FNF. On a pro form a basis, our year end 2023 debt to capitalization ratio excluding AOCI would be 24.8% based on current debt outstanding including the new preferred stock as equity. Going forward, we would expect to conform our earnings presentation to report net earnings available to common shareholders and adjusted net earnings available to common shareholders. Now moving on to our strong statutory capital position.

Speaker 3

As expected, we ended the year with a strong and stable capital position having an estimated company action level risk based capital or RBC ratio of approximately 4 40% for our primary operating subsidiary, in line with the prior year and providing a buffer well above our 400% target. Notably, our RBC ratio as of December 31 excludes net proceeds of the $250,000,000 preferred stock investment from FNF in January of 20 24. F and G is well positioned to self fund its continued growth with positive and growing in force capital generation, available debt capacity as our balance sheet delevers with book value growth over time and ample opportunities for future reinsurance programs. We expect to be active in the capital markets in 2024 to fund our growth, to pay down our revolver and debt maturities. We also expect our stable profitable in force to generate more than $1,000,000,000 in capital.

Speaker 3

Let me now turn the call over to Chris to wrap up.

Speaker 2

Thanks, Wendy. To conclude, we have real momentum across our platform as we enter 2024 that positions us to deliver sustainable asset growth, ongoing margin expansion and improved returns as well as enhanced earnings powers we strive to build upon this past year's many successes. Importantly, I remain optimistic that we can continue to deliver double digit gross sales growth in 2024, driven by our retail and pension risk transfer growth strategies. The launch of our Ryla product earlier this month will be a nice tailwind to our sales growth as we enter a large fast growing market. In fact, industry Ryla sales are forecasted to be between $44,000,000,000 $48,000,000,000 this past year, which is a record level.

Speaker 2

We believe our product offering is differentiated in the market and will uniquely meet customers' needs, though it will obviously take some time to gain traction and ramp up. We also expect to deliver ongoing margin expansion from enhanced investment margin opportunities, effectively managing our operating expenses while scaling our organization over time and driving fee based earnings from accretive flow reinsurance. We have historically spoken of a goal of delivering an adjusted ROA, excluding significant items of 100 basis points, which we have been exceeding and therefore reset to 110 basis points as the new baseline during our Investor Day. We expect to deliver 15 to 30 basis points of core margin expansion and an additional 8 to 15 basis points of owned distribution margin expansion to increase our baseline adjusted ROA excluding significant items over the excluding AOCI and significant items over that same time horizon. Lastly, we continue to diversify and enhance our earnings power as we execute on our own distribution strategy.

Speaker 2

Our ownership stakes generate a higher margin earnings stream at a lower cost of capital, which we expect to be accretive to our returns over time. As you can tell, I could not be more excited with the opportunities we have in front of us as we enter 2024. This concludes our prepared remarks. And let me now turn the call back to our operator for questions.

Operator

Thank you. We will now conduct a question and answer session. Our first question comes from John Bainbridge with Piper Cender. Please proceed.

Speaker 4

Good morning. Thanks for the opportunity. The new Ryla product, can you talk about how you view the ramp, maybe total addressable market and needed costs and then distributions positioning for that? Thank you.

Speaker 2

Yes, happy to. Morning, John. This is Chris. So, yes, we're really, really excited about this. So just to put it in perspective, Ryla is the fastest growing category in annuities or one of the fastest growing categories.

Speaker 2

It's got I think $47,000,000,000 of Rylos sales last year. But as you probably heard me say before, I think it's just scratching the surface. I think this is a product that now starts to compete very actively with mutual funds, which as you know is a $1,000,000,000,000 marketplace. So we're really psyched about it. In fact, we got our first few Ryla contracts in this week.

Speaker 2

So it's really big milestone for us. We think we're well positioned. Obviously, it will take time to get approved on various broker dealer shelves, but this is something we're really excited about and frankly our clients on the distribution side and individual agents have been asking for. So we're pretty pumped.

Speaker 4

Thank you. The actuarial charge, is there any impact to go forward earnings out of that? Wendy, you

Speaker 2

want to take that one?

Speaker 3

Sure. Thanks, John. No, this is this will happen every year around the same time where the actuarial tables get updated for the guarantee withdrawal benefit. So that impacts the MRB, but I don't expect any significant changes to how the MRB changes over time. Again, that reserve will fluctuate a little bit more than the old reserve regime, but I don't expect that this current charge will impact it significantly.

Speaker 4

Great. Thank you.

Operator

The next question comes from John Bass with Stephens. Please proceed.

Speaker 5

Hey, guys. Thanks for taking my questions. Maybe could we get your latest thoughts on capital allocation? I know there are a few moving parts considering the common and now preferred dividend. You also have a lot of authorization remaining on your buyback and you've also talked to and been active in recent quarters with the own distribution strategy.

Speaker 5

So maybe if you guys could just give your view on all of it?

Speaker 2

Yes, I'll start and I'm sure Wendy is to chime in as well. But number one priority right now is retained assets under management. I mean, we're in just a fantastic environment for our products. Demand is quite robust. I think first priority would be to continue to fund new sales.

Speaker 2

We're really pleased with the returns we're getting on new business right now. Having flow reinsurance in place just allows us to expand gross sales overall and is accretive to the returns that we're getting. So I would say that is priority number 1. For us, obviously, we want to continue to pay a strong and growing common dividend, and we've been able to do that. I think there will be opportunistically some owned distribution acquisition opportunities for us.

Speaker 2

You saw that we just did our largest deal, which brings us to about $500,000,000 of assets under management or invested capital in the owned distribution space. Obviously, Wendy can speak to what the annual debt cost is now and the cost of the preferred dividend, but I don't think that's going to dramatically change how we think about allocating capital. Fortunately, the stock has been doing well. So we have a buyback authorization, but I think that's really in place should there be some pretty dramatic market disruptions. I don't know Wendy, if there's anything you want to add to that?

Speaker 3

No, you hit on all the key points.

Speaker 5

Okay. Thank you. And then maybe could you give us some commentary on the reinsurance market as you guys see it? Are there any significant changes to reinsurance economics or maybe the outlook you're anticipating for 2024?

Speaker 2

Wendy, why don't you start?

Speaker 3

Sure. Thanks. I don't see any significant changes in outlook. We continue to get approached by potential partners. But as Chris said, we want to grow that retained sales and AUM.

Speaker 3

So I'm not expecting us to expand too much in 2024. But as we head into 2025, we could see differences in the market depending on where the interest rates go and go from there.

Speaker 5

Perfect. Thank you, guys.

Operator

Our next question comes from Mark Hughes with Truist Securities. Please proceed.

Speaker 6

Yes, thanks. Good morning.

Speaker 3

Good morning, Mark.

Speaker 6

Where do you think assets under management will end the year? You've given a lot of guidance on new sales of double digits. You've got $1,000,000,000 in capital generation internally. You've got, I would say, a lot in terms of debt capital. I think you mentioned you need $6,000,000,000 to $7,000,000,000 of net sales to grow assets under management.

Speaker 6

Any just kind of rough thoughts about where you think given the opportunity here, given your balance sheet, where you anticipate AUM will end up?

Speaker 2

Sure. I'll maybe drop some bread crumbs and Wendy could probably maybe a little more specifics around that. But yes, I think the top line environment is fantastic. So you saw this past year, we did $13,000,000,000 of gross sales. I want to say $9,000,000,000 and change in net sales.

Speaker 2

So obviously, the capital infusion from FNF is helpful. So we've said publicly, we still think we can continue to grow top line at a healthy double digit pace. We've obviously done better than that in years past. I think now we can retain a higher level given what's there. I think if you look at our traditional growth in net sales, my guess is that's still a pretty decent barometer for what we can add despite the fact that we've doubled assets in the last 3 years.

Speaker 2

So yes, we feel really good about it. There's been a lot of hoopla about, well, surrenders are up, but inflows are way up. And so I know it sounds odd, but unlike a bank, someone surrendering a very old contract with a small surrender charge, but then bringing in a brand new contract with a brand new surrender charge. Ironically, we're actually improving the risk profile of our liabilities. And generally, we're booking a profit when someone's paying a surrender charge.

Speaker 2

So it's an unusual scenario where, yes, surrenders are up a little bit, but I don't think it changes materially kind of our pattern of net sales. I don't know, Wendy, if there's any more precise you can give there.

Speaker 3

Yes. So Mark, if you think about what we said in the past, every $1,000,000,000 of retained business cost us about $150,000,000 So you can do the math on what that $250,000,000 can possibly do to increasing our net retained?

Speaker 6

Okay. Thank you for that. The alt assumption about the 10% return, is that still a good return assumption? It seems like obviously there's been a lot of market volatility lately that's been challenging with the better equity markets. They're more likely to hit that bogey.

Speaker 6

How should we think about that?

Speaker 2

Yes. I mean, this is something we look at, on a very regular basis. We have a lot of robust debate on what is the right return expectation. But I would say we're still very comfortable with that number. Obviously, there's a lot sitting in dry powder in terms of opportunities.

Speaker 2

We've done traditionally comfortably better than that. I do think you're going to see more volatility just because of realizations are down, but again, could be a very attractive opportunity going forward, particularly in private equity and probably selectively in real estate, I would think the same way. But yes, I don't think anything has happened to cause us to want to move off that long term number.

Speaker 6

And then anything you can share in terms of the valuation parameters around the $270,000,000 deal you did in January, PE, EBITDA, expected earnings contribution. I think you've touched on some of that, but if you could expand

Speaker 4

that would be

Speaker 2

Yes, sure. So I'll start at the highest level, which is, 1, it has to come about at least an equal, if not better return management. And so, yes, when we look at all of these acquisitions, but that one in particular, we're looking at high teen, if not north of 20% IRRs are expectations. These are businesses that are generally not capital intensive, right? They're heavy cash flow businesses, so that's helpful as well.

Speaker 2

And then most importantly, they're not ongoing capital intensive. So there's a hope, which I believe that over time, we will get rewarded in our multiple for the consistency of those earnings, the diversification of those earnings. But most importantly, we're making investments in businesses that we know well, managing teams that we have a lot of confidence in and ones that we think are going to give us an even higher return than we could get by putting it into a new AUM. And then obviously, there is some just long term strategic benefit. I mean, many of these are relationships that the company has had for 20 years.

Speaker 2

And so just further cementing that relationship to something we think has a lot of strategic benefit.

Speaker 6

Okay. Appreciate it. Thank you.

Operator

Our next question is a follow-up by John Barnidge with Piper Stanley. Please proceed.

Speaker 4

Thank you for the opportunity. You talked about hedging your floating portion of the portfolio and considering to evaluate other options for the remainder of that. What's the line of sight into that? And can you talk about that a little bit more, the sensitivity to the short end of the curve that remains?

Speaker 2

Yes, 100%. So maybe start by saying what it's not. We don't fancy ourselves as rate traders or having deep insights about where interest rates are going. But I think our Chief Investment Officer had a very good insight, which was given where we put a lot of that floating rate exposure on, we had an ability to lock in some excess profitability and just take some variability off the table. So we had a pretty substantial position in floating rate assets.

Speaker 2

We've effectively now cut that by more than half by doing some hedging. I think as you saw in the commentary, we locked in approximately 190 basis points of outperformance. So I would say it's just consistent with how we think about the world, which is, don't be greedy and when you have opportunities to take some risk off the table. So look, at some point, nobody knows exactly when we're going to see rates march back down and this was a choice on our part of let's go for stability there. How much more you do going forward is kind of an open question of what's the ultimate landing spot for your floating rate exposure.

Speaker 2

But I would expect in the near term, it's going to come down. It's going to continue to come down a bit more.

Operator

Thank you. And this will conclude our question and answer session. Thank you for attending today's presentation.

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Earnings Conference Call
F&G Annuities & Life Q4 2023
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