F&G Annuities & Life Q1 2025 Earnings Call Transcript

Quartr
Provided by Quartr
May 8, 2025

There are 6 speakers on the call.

Operator

Good morning, and welcome to F and G's First Quarter twenty twenty five Earnings Call. During today's presentation, all callers will be placed in a listen only mode. Following management's prepared remarks, the conference will be open for questions with instructions to follow at that time. I'd now like to turn the call over to Lisa Foxworthy Parker, Senior Vice President of Investor and External Relations. Thank you.

Operator

You may begin.

Speaker 1

Thanks, operator, and welcome, everyone. I'm joined today by Chris Blunt, Chief Executive Officer and Connor Murphy, Chief Financial Officer. Also, Wendy Young, Chief Liability Officer, will be available for Q and A. Before we get started, I wanted to note that we have recast prior period financial results during the quarter. We have removed CLO redemption and bond prepay income from our significant items and have updated definitions for the cost of funds and flow reinsurance fee income within our A and E management view income statement.

Speaker 1

Importantly, historical reported net earnings and adjusted net earnings, or A and E, have not changed. The recast financial results are available in our quarterly financial supplement and earnings release, as well as our spring twenty twenty five investor presentation. Also, starting this quarter, we are presenting our financial results on an as reported basis throughout our earnings materials. Therefore, these results, including A and E, ROA, and ROE, are no longer presented on an excluding significant items basis. On page six of our quarterly financial supplement, you can find a summary of the impacts to A and E from significant items and investment income from alternative investments.

Speaker 1

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. Please refer to our most recent quarterly and annual reports and other SEC filings for details on important factors that could cause actual results to differ materially from those expressed or implied. This morning's discussion also includes non GAAP measures, which management believes are relevant in assessing the financial performance of the business. Non GAAP measures have been reconciled to GAAP where required and in accordance with SEC rules within our earnings materials available on the company's investor website.

Speaker 1

Please note that today's call is being recorded and will be available for webcast replay. And with that, I'll hand the call over to Chris Bluntz.

Speaker 2

Good morning, everyone, and thanks for joining our call. Our first quarter results reflect near term headwinds from the volatility of the overall environment, the majority of which we believe to be temporary in nature. From a top line perspective, we continue to manage sales and in force profitability to optimize our return on capital. This resulted in a reduction in MYGA sales in the first quarter with continued strong fixed indexed annuity and pension risk transfer sales, which are our highest returning businesses. From bottom line perspective, while we gave up some spread during the first quarter, we believe much of that was short term in nature and not indicative of any longer term challenge to our business model.

Speaker 2

The four main drivers were excess cash due to CLO prepayments coupled with a drop in cash rates, lower surrender income as there was a noticeable pause and refinancing of old policies by agents, a relatively weaker quarter for our own distribution business largely driven by the same slowdown as well as some one time growth investments by one of our distribution companies, and simply the timing effect of in force pricing changes which can occur in periods where there are precipitous increases or decreases in interest rates. As things stand today, we would expect each of these drivers to improve throughout 2025 and we remain committed to achieving our twenty twenty three investor day targets. Connor will provide more details on our sales and financial results later in the call. Overall, our in force book of business and the investment portfolio are performing well and as expected in the current environment. For the in force book, we have a young fixed annuity block that is surrender charge protected.

Speaker 2

We lock in spread at the time of sale and also have the flexibility to reprice a large majority of our liabilities to economics on an annual basis. We maintain pricing discipline over the life cycle of the product and during periods of market volatility like we're seeing now, we take a measured approach to renewal rates, balancing pricing consistency with distribution. Next turning to the investment portfolio in more detail. The portfolio is well matched to our liability profile and diversified across asset types. We are now in the seventh year of our season partnership with Blackstone and have a fully developed public and private asset toolkit.

Speaker 2

This enables us to be competitive without taking on additional credit risk. If spreads in one asset class are shrinking, we have many others to choose from. The retained portfolio is high quality with 96% of fixed maturities being investment grade. We continue to invest in defensive sectors having an up in quality bias. Our real estate exposure is high quality and moderate leverage with diversified exposure across property types.

Speaker 2

Notably, we hold very little office exposure at 1.6 of our total portfolio. Our portfolio credit quality has improved since 2020 through implementation of various portfolio repositioning programs. We have had excellent credit performance in the portfolio. Credit related impairments have remained low and stable averaging six basis points over the last five years and two basis points in the first quarter well below pricing. The portfolio is conservatively positioned to outperform under various economic scenarios while maintaining the ability to withstand a downturn.

Speaker 2

During the first quarter, we have modestly increased our hedge ratio to 75% of our floating rate assets, which are now only 5% of our total portfolio net of hedging. Our fixed income yield was 4.53% in the first quarter, a decrease of three basis points from the first quarter of twenty twenty four. This reflects the benefit of higher yields on new investments offset by the runoff of higher yielding in force assets. On a sequential basis, our fixed income yield decreased six basis points from the fourth quarter, primarily due to the runoff of higher yielding shorter duration in force assets that generated excess cash. We continually look for opportunities to add yield over time by taking advantage of the market dislocations and continuing to work with Blackstone to source new asset categories.

Speaker 2

Next, I'd like to provide a few brief topical updates on tariff exposure, CLOs and alternative limited partnerships. During the first quarter, we conducted a comprehensive analysis across the portfolio to assess direct tariff exposure and broader economic implications. Our analysis confirmed that the portfolio is resilient and largely insulated from tariff related impacts due to our focus on credit and the robust structural protections that we have in place. Turning to our CLO portfolio, we have a diversified portfolio that represents 3,700,000,000.0 or 7% of the total retained portfolio. It's a well seasoned portfolio that is approximately 89% investment grade and has outperformed most purchases dating prior to 2021.

Speaker 2

And many have already prepaid since spreads have narrowed, which is reflected in our net investment income as prepay income. Our CLOs are backed by a highly diversified pool of loans with ample par subordination. Our portfolio uses 85 CLO managers and invest in close to 2,000 companies operating within 30 plus industries. By industries, CLOs skew toward high-tech, health care and pharma, and financial industries with low exposure to energy and retail. Historic studies have shown that CLOs have had superior performance compared to corporates, and we benefit from Blackstone's capabilities and expertise, which allows our CLO portfolio to be underwritten at the underlying loan level.

Speaker 2

Within our overall alternative investments, I want to spend a few minutes on limited partnerships. We held 6% of the portfolio in LPs as of March 31. As a reminder, our target allocation is 5% and we expect that our allocation will move between a range of 5% to 7% given that the pace of capital calls and distributions can vary. The LP portfolio is very well diversified from a sector vintage and funds perspective with 37 different funds. By asset class, our LP portfolio was 57% in private equity, 27% in real estate, and 16% in credit for the first quarter.

Speaker 2

And by sector, the real estate funds skew towards industrial, residential, and REITs, while the private equity funds are weighted toward financials, information technology and industrials. The bottom line is that we do not have a lot of direct tariff exposure. And for our private equity holdings, we remain confident that there's real value in these underlying companies despite a delay in realizations. Our LP portfolio is a relatively young book. Since the inception of our LP portfolio build out with Blackstone in 2018, we have seen a return of over half of the capital invested.

Speaker 2

As an asset class, we like LPs because they provide our portfolio with a long duration asset at a very attractive return on capital. Turning to our growth strategies beyond AUM growth, we continue to diversify our earnings between spread based and fee based sources, including our own distribution stakes. In aggregate, we've invested $680,000,000 in own distribution companies through two majority stakes taken in 2024 and two minority stakes purchased in 2023. These stakes are held at the holding company level under our peak altitude entity and our strategic long standing relationships. Our holdings are diversified by product and market and reflect growing businesses with strong leadership.

Speaker 2

Overall, the owned distribution portfolio is performing well and creating value with double digit annual growth of EBITDA expected over the medium term. Looking ahead to the remainder of 2025, we will continue to execute on our strategy while prioritizing pricing discipline and allocating capital to the highest return opportunities. Let me now turn the call over to Conor to provide further details on F and G's first quarter sales and financial highlights.

Speaker 3

Thank you, Chris. This morning, I'll focus my comments on assets under management and sales, updates to our financial reporting, adjusted net earnings and returns, and our balance sheet and capital position. Starting with AUM and sales, F and G reported record AUM before flow reinsurance of $67,400,000,000 as of March 31, despite the near term pressures, including retained assets under management of $54,500,000,000 Compared to the first quarter of twenty twenty four, this reflects 169% increases respectively, driven by net new business flows. F and G's gross sales were $2,900,000,000 17 percent lower than the first quarter of twenty twenty four, primarily due to lower MYGA sales. As we continue to prioritize allocating capital to the highest returning business, specifically indexed annuity sales and pension risk transfer sales, we intentionally scaled back MYGA.

Speaker 3

Excluding MYGA, gross sales increased 5% over the first quarter of twenty twenty four. Indexed annuity sales were strong at $1,500,000,000 in the first quarter, in line with the first quarter of twenty twenty four. FIA continues to be our largest contributor to indexed annuity sales, although our RILEH product is gaining traction and building momentum. We took a measured approach in reflecting rate volatility in our pricing during the early part of twenty twenty five, but have subsequently seen increasing levels of submitted annuity business in March and April. Indexed Universal Life sales were strong at $43,000,000 in the first quarter, in line with the first quarter of twenty twenty four.

Speaker 3

Pension risk transfer or PRT sales are off to a solid start with $311,000,000 in the first quarter, while down from $584,000,000 in the first quarter of twenty twenty four, which was a record first quarter, our full year PRT sales are typically more weighted to the back half of the year. Funding agreements were $525,000,000 in the first quarter as compared to $105,000,000 in the first quarter of twenty twenty four. We view funding agreement sales as opportunistic and volumes vary quarter to quarter depending on market conditions. MIGA sales were $562,000,000 in the first quarter as compared to $1,300,000,000 in the first quarter of twenty twenty four. F and G has the flexibility to optimize its level of flow reinsurance in line with capital targets by dynamically adjusting MYGA volumes up and down as market economics change.

Speaker 3

Net sales retained were $2,200,000,000 compared to $2,300,000,000 in the first quarter of twenty twenty four. Next, turning to our financial reporting updates. As Lisa mentioned at the top of the call, there were two retrospective management reporting changes in the quarter. First, we have refined the classification of acquisition costs between the flow reinsurance fee income and cost of funds line items in our adjusted net earnings management view income statement to better align amortization and expenses. Second, significant income and expense items now exclude CLO redemptions and bond prepay income, as we consider these indicative of the economic performance of our business.

Speaker 3

Applicable periods have been recast to conform to these changes. Importantly, there was no impact to GAAP earnings or reported A and E. Please refer to our quarterly financial supplement for further detail. Also beginning this quarter, we are presenting our financial results on an as reported basis throughout our earnings materials. Therefore, these results, including A and E, ROA and ROE are no longer presented on an excluding significant items basis.

Speaker 3

Turning to earnings. First quarter reported adjusted net earnings were $91,000,000 or $0.72 per share as compared to 108,000,000 or $0.86 per share in the first quarter of twenty twenty four. First quarter of '20 '20 '5 A and E reflects a $16,000,000 benefit from a reinsurance true up. For the quarter, investment income from alternative investments was $63,000,000 below management's long term expected return. First quarter of twenty twenty four A and E included a $2,000,000 benefit from other income items.

Speaker 3

For the prior year quarter, investment income for alternative investments was $52,000,000 below management's long term expected return. Compared to the first quarter of twenty twenty four, adjusted net earnings decreased by $17,000,000 This was primarily driven by margin compression due to near term headwinds as Chris outlined, lower owned distribution margin and higher interest expense in line with our capital market activity. These were partially offset by asset growth, higher flow reinsurance fee income and disciplined expense management. Notably, we are benefiting from increased scale as our ratio of operating expenses to AUM before flow reinsurance decreased to 58 basis points in the quarter from 63 basis points a year ago. As Chris mentioned, while we gave up some spreads during the first quarter, we believe much of that was short term in nature and not indicative of any longer term challenge to our business model.

Speaker 3

First quarter reported adjusted return on assets was 68 basis points. ROA was pressured from near term headwinds as well as the short term fluctuations in investment income from alternative investments. On a last twelve month basis, adjusted ROA of 100 basis points decreased six basis points from 106 basis points in the fourth quarter of twenty twenty four. And reported adjusted return on equity, excluding AOCI was 9.7%, up 2.3% over the first quarter of twenty twenty four. Now turning to our strong and growing balance sheet, we continue to maintain RBC at or above 400%, remain committed to our long term target of approximately 25% debt to capitalization excluding AOCI and expect that our balance sheet will naturally delever as shareholders' equity excluding AOCI grows.

Speaker 3

F and G has successfully completed the following recent capital markets activity as expected. In January, F and G issued $375,000,000 of junior subordinated notes with the net proceeds to be used for general corporate purposes, including the repayment of debt. In February, F and G fully redeemed its $300,000,000 of outstanding senior notes due in May of twenty twenty five. On a pro form a basis, our annualized interest expense is approximately 165,000,000 or roughly a 7% blended yield on $2,300,000,000 of total debt outstanding. We target holding company cash and invested assets at two times interest coverage.

Speaker 3

In March, F and G completed the public offering of 8,000,000 shares of common stock with net proceeds of approximately $269,000,000 to be used for general corporate purposes, including the support of organic growth opportunities. Fidelity National Financial Inc, F and G's major stockholder purchased 4,500,000.0 shares and held an ownership stake in F and G of approximately 82% as of March 31. We ended the quarter with a GAAP book value attributable to common shareholders, excluding AOCI of $5,800,000,000 or $43.31 per share at March 31. I share Chris' enthusiasm for F and G's future opportunities to deliver long term shareholder value. As we navigate the near term headwinds and macro uncertainty, we are focused on managing sales and in force profitability to optimize our return on capital, diversifying our spread based and fee based earnings through middle market life insurance, low reinsurance and own distribution, and continuing our progress toward the targets set out at our twenty twenty three Investor Day, which will continue to drive expansion of our return on equity.

Speaker 3

This concludes our prepared remarks, and let me now turn the call back to our operator for questions.

Operator

Great, thank you. At this time, we will be conducting a question and answer session. If you'd like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press 2 to remove yourself from the queue.

Operator

Participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. First question here is from John Barnidge from Piper Sandler. Please go ahead.

Speaker 2

Good morning. Thank you for the opportunity. My first question is around sales and distribution. With the Ryla product now entering the second year, can you maybe talk about how you think about the growth opportunity there, both from a sales perspective, but also from a distribution one too? Thank you.

Speaker 2

Yeah, happy to. Good morning, John. So, couple of things. One, just a comment on sales during the quarter. As I think you saw, we had a decline in MIGA, and that was just simply a function of the volatility that was going on in the markets, which caused challenges not just for us, but for some of our reinsurance partners.

Speaker 2

But that has rebounded nicely. In fact, we've done more MIGA business in the month of April than we did the entire first quarter. So I think the sales engine is in great shape. Specifically to Ryla, yeah, we're still super excited about that. Given that we were not a player registered products before, it has admittedly taken longer to get onto platforms, but that is happening.

Speaker 2

So we're adding broker dealers pretty consistently now. So yes, as we've said before, that's a product that in the medium term we think can actually be in the billions for us. So we're pretty excited about Ryla. Thank you very much. And then maybe my follow-up question.

Speaker 2

Are you able to parse out the impact on own distribution from lower industry volume versus the own distribution partner that may be invested in the platform? Yeah, boy, that's a good question. I don't know that I have that at my fingertips, but I think they were fairly balanced. And when it comes to owned distribution, I will say similarly, we've seen a really nice rebound there in April. So I don't know if it's exactly half we could get back to you, but I would guess it's probably about half of it was an investment that we supported, that had a pretty quick payback by one of our partners.

Speaker 2

And the rest was just a which I think the entire industry saw a slowdown in October activity. But again, that has rebounded in April and May, which is why when we characterize some of this as temporary headwinds, we truly think they're temporary.

Speaker 3

Thanks for the answers.

Operator

Next question here is from Wes Carmichael from Autonomous Research. Please go ahead.

Speaker 4

Hey, good morning. First question, just on the decision to raise common equity in the quarter. We received a lot of questions from investors at the time, and I think it came as maybe a bit of a surprise in weight on the stock. But can you maybe just help us with your thoughts on deployment And are you maybe wanting to hold any of that capital back given some of the recent volatility that we've seen?

Speaker 2

Yeah, it's a great question. I think, you know, in terms of deployment, as I gave you the MIGA stats, so I don't think our plans have changed. Think it is to deploy it thoughtfully into new business. As you know, our business model is pretty sound. We like it.

Speaker 2

We're pretty disciplined about how we price new business. 57% of our reserves are in FIAs, so we go through a similar annual process when policies come up for renewal. So I think the most important thing is the business model is still intact and we see lots of opportunities there. So yeah, I don't think from an environment perspective, we were cautious when it came to MYGA in the first quarter of wanting to make sure we understood the lay of the land with rates and with spreads. So we did have some cash build up, but we are now deploying that.

Speaker 2

And I think our patience has been rewarded. I think we're deploying it now at spreads, frankly, better than what we price for. So again, we're not market timers, but that's probably the only area where some caution came in to just try to get the the lay of the land there.

Speaker 3

And and, Connor, I I know you know this, but just a reminder that the timing of the capital raise, it was right at the end of the first quarter. So there there wasn't time to do anything noteworthy with it until Q2.

Speaker 4

Yep. Understood. Thank you. I guess just second one, just looking at the cost of funds at three eighteen basis points, that was up, I think, sequentially 22 basis points and I guess more of a significant jump that we've seen in prior quarters. But Chris, how much of that do you think is a function of competition in the market?

Speaker 4

Was there something going on in the first quarter? And would you expect that to get better with some of the in force pricing actions you're contemplating?

Speaker 2

Yeah, and again, I'll let Connor kind of disaggregate for you, Wes, because it's good question. But I would just keep in mind that again, the base model, nothing's really changed in terms of our new business pricing target. So we're quite disciplined on that and we're quite disciplined at maintaining our spreads on our in force, balancing that obviously if wanting to do the right thing for policyholders and be fair to our distribution partners. So none of that has changed. I think some of what happened is you had a little bit less surrender income.

Speaker 2

But again, that has picked up again. So some of this is just there is a lag effect, as you're repricing your in force book relative some of those changes. I don't know, Connor, if want to add.

Speaker 3

Well, yeah, maybe to underscore some of it. If you break down, maybe I'll talk a little more broadly. I'll talk sequentially from a product margin point of view, so both from an income and the cost of funds perspective. Drivers maybe in terms of proportional size order, the all returns would be the first, but we see if you're normalizing for that, then the next most impactful was the lower surrenders, which is coming through that cost of crediting line. And then the third element, which Chris outlined in his opening remarks, is just the lower cash yield impact in the sequential quarter as well.

Speaker 3

So hopefully that helps you.

Speaker 2

Wes, if I could just squeeze in one more comment here, you know, terms of progress toward Investor Day, we still feel really good right about that for a couple of reasons. One, the expense piece we control and you heard from Connor, driving that operating expense ratio down and we will continue to do so. That's 100 in our control. Flow reinsurance income was down a bit in the quarter, but that's because the reinsurers are struggling with the same thing we were of How do you price in an environment where rates are bouncing all around and you're not sure what the spread outlook is? That has already normalized, so that's a positive.

Speaker 2

We covered own distribution. So those are three big drivers for us, right, in terms of our Investor Day targets. And then, we talked about the base spread model. Again, that hasn't changed. We don't see anything right now that says, we're seeing outsized moves that we can't accommodate within our normal mechanisms.

Speaker 2

So hence the comment of still feeling like we're on track.

Operator

Yes, got it. Thank you, everyone. Next question is from Mark Hughes from Truist Securities. Please go ahead.

Speaker 5

Yes, thank you. I think you've touched on this, Chris. But for the MIGAs bouncing back in April, is that a market phenomenon? Or is that you got comfortable with the environment and kind of leaned into that market?

Speaker 2

Yeah, it's hard to tell. We don't really get a sense of how other folks are doing and pretty unusual for us to give a monthly number, but it really it was just to punctuate the point of there were some unusual things happening of trying to price MIGA business. We pride ourselves on being disciplined. So yeah, I would say it was very much in our camp. And once we again had clarity on a little bit of rates calming down a bit, spreads widening a bit, reinsurers getting comfortable that they could earn a good return.

Speaker 2

It sort of all came together. So in this type of an environment, MIGA is going to be a bit lumpier. We like the business. It's quite profitable for us. But again, fixed index annuities, RILA, in a perfect world, we would grow that every single quarter.

Speaker 2

PRT, we want to continue to grow that business. MYGA is going to be a bit more volatile because you can imagine, we want to be good allocators of you and your clients capital. And so we're going to see a little more MYGA volatility. And then last but not least, FABNs are just purely opportunistic. If the spreads make sense, we've got capital and it, you know, makes the list of good capital return, we'll write it and if not, we won't.

Speaker 2

So hopefully that helps. Let me add just one thing too, because I think

Speaker 3

this is important. The MYGA activity was not to the detriment of other retail opportunities that we enjoy too around either indexed universal life or the fixed indexed annuity businesses, they had good Aprils as well. So it's not like we did MYGA and didn't do the others.

Speaker 2

Yeah, great point.

Speaker 5

Understood. And then Chris, in your experience, is this reminiscent of other times in the past where you saw this sort of similar volatility? Any kind of takeaways? I know every time is different. But based on your experience, any conclusions you draw about this?

Speaker 2

Yeah, it's a really great question. And I would point folks back to COVID. When COVID hit, I don't if folks remember, but LIBOR just collapsed. It was almost overnight. I think in my mind, I remember like 140 basis points.

Speaker 2

And we had a fair amount in floaters. We've since hedged a lot of that out, I think our net floating rate exposure is only 5%, but back then it was, I want to say it was like 15%. So that was significant, But again, we began the repricing exercise within our in force. As I recall, even with a really extreme move like that within a year, we had sort of recaptured and regained our original spread target. So again, that proves the business model works.

Speaker 2

This isn't our first rodeo. We've been doing this a long time now, I think the business model has proven to be quite resilient, I don't see anything that's changed that despite the volatility we have now.

Speaker 5

The investment that you called out for one of the own distribution companies, what was the nature of that investment? And is that just kind of one quarter and done? Or is that to have some carryover?

Speaker 2

Yeah, it was really quite simple. It was an opportunity for one of our IMOs to acquire a stake in a smaller IMO that they had a relationship with and it had a very quick, very attractive payback. So as board members, we looked at it and said, frankly, we'd rather have you do that than get a dividend in the quarter. So it's really that simple. I don't think that's a normal something that we're going to see every single quarter.

Speaker 2

It was a bit more opportunistic. But again, without being able to go into specific details, felt like a good use of capital.

Speaker 5

Yeah. Are they going to be in position to start paying the dividends again?

Speaker 2

Yeah, it's our expectation.

Speaker 5

Yeah.

Operator

Okay.

Speaker 5

Thank you very much.

Operator

Next question is from John Barnidge from Piper Sandler. Please go ahead.

Speaker 2

Thanks for the opportunity to

Operator

do a

Speaker 2

follow-up. With market volatility, is there anything to think about as far as RBC sensitivity to equity market volatility?

Speaker 3

Hey, John, it's Coler. Especially, we're still managing. Obviously, we do this. We talk about it publicly on an annual basis, but I think the simplest answer to your question is nothing's changing in terms of our RBC expectations, targets, you know, being above 400 at the end of the year, etcetera.

Speaker 4

Okay, thanks a lot. Appreciate it.

Operator

Next question is from Wes Carmichael from Autonomous Research. Please go ahead.

Speaker 4

Hey, thanks for taking the follow-up. I just wanted to touch on the alts portfolio and I think this includes the direct lending and non direct lending securitizations. But would you be able to just break out the performance of that bucket a little bit in the quarter? I know you called out Conor the $63,000,000 below expectations, but any way to think about how the return came in with traditional alts versus securitizations and maybe how you're thinking about that on a go forward basis.

Speaker 3

I'll do a little and others can add as well. But yeah, you've kind of got a blended return, which I think you published. Within that, you're right. There are a few categories. What I would describe as maybe the direct lending portfolio, more margin is more debt like securities, we're at the higher end of that, you know, the closer to the expectation.

Speaker 3

And it was really the LP portfolio that probably came in lower kind of think like mid single digits, which is impactful in terms of the overall yield. Think that's what you're getting at. I would put whole loans kind of in the middle, maybe a little maybe on the lower end as well. If you're trying to get sort of the relative comparison performance of the three, the direct lending book would have been the high performer of the three of them.

Speaker 2

Unless it's an obvious point, but you know it's kind of the one thing we can't control is the pace of realizations in private equity funds and people have a tendency sometimes to say alts and it's too broad a definition. So you appreciate your refining it and going a bit deeper because people sometimes think that our entire alts portfolio is sitting in PE funds, which it's not.

Speaker 4

Yeah, no. Thanks. That's helpful. And then I guess just going back to the surrenders, if we kind of remain in this environment, are expecting surrender activity to pick back up relative to the first quarter? Or should we kind of maybe expect that to be a little bit more of a drag on cost of funds going forward?

Speaker 3

It's an interesting question. So what I would say it this way, that the surrender activity would have peaked third quarter of last year, but it was pretty elevated second quarter, third quarter, fourth quarter. So what we saw in q one is lower than those three quarters. What we saw in April was almost the same as q one. So the mathematical answer to your question at this stage is we're projecting something pretty similar q two to q one based just based on April results.

Speaker 3

That's probably pretty close to where we were a year ago as well.

Speaker 2

Yeah. Thanks, Ken. And I don't know if this is helpful at all at all, Wes, but when we look at our book and the policies that we wrote back when rates were really low, sort of red, orange, green, what are the ones that are perhaps the most vulnerable to being replaced, there's still a fair amount of that that hasn't been worked through. So I think surrenders are going to be just hard to predict, but it's not like, oh, that's over. I think if rates stay where they are, there's still quite a few policies for us and other companies get replaced.

Speaker 2

And we've talked about this before. Ironically, you end up in a better place because you have even stickier liabilities that are more less likely to get pulled out or surrendered early on you going forward, But it does create some of this near term noise.

Speaker 4

Thanks, Chris.

Operator

This concludes the question and answer session. I'd like to turn the floor back to Chris Blunt for any closing comments.

Speaker 2

Great, thank you. Just want to conclude by saying I'm confident in our underlying operating performance and the long term stability of our business despite the near term headwinds. F and G's business is resilient and well positioned for the many opportunities ahead through the strength and flexibility that's provided by our multichannel distribution model, our disciplined pricing and underwriting of our spread based products and our ability to generate fee based earnings. Thank you for joining us. We appreciate your interest in F and G and look forward to updating you on our second quarter earnings call.

Operator

This concludes today's teleconference. You may disconnect your lines at this time. Thank you again for your participation.

Speaker 4

Goodbye.

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F&G Annuities & Life Q1 2025
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