Good morning, and welcome to F&G's Second Quarter 2025 Earnings Call. [Operator Instructions] I would now like to turn the call over to Lisa Foxworthy-Parker, SVP, Investor and External Relations. Please go ahead. Lisa Fox

Thanks, operator, and welcome, everyone. I'm joined today by Chris Blunt, Chief Executive Officer; and Conor Murphy, President and Chief Financial Officer. 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. 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 Blunt.

Good morning, everyone, and thanks for joining our call. We delivered strong second quarter results with record AUM before flow reinsurance and one of our best sales quarters in history. As we announced yesterday, I'm excited about the launch of our new reinsurance vehicle in partnership with Blackstone Managed Funds. This sidecar will provide long-term on-demand capital to support our growth and move F&G further toward a more fee-based, higher margin and less capital-intensive business model. The reinsurance sidecar went into effect last Friday, August 1, with approximately $1 billion in anticipated capital commitments. This will augment our existing flow reinsurance agreements and is expected to contribute to higher ROE over time. Conor will provide more details of the transaction later on this call. Turning to our results for the quarter. The total annuity market has expanded in recent years as consumers and financial advisers recognize the value of annuities for retirement security. Through the first half of 2025, the industry has benefited from continued strong consumer demand as well as favorable demographics and macro conditions for annuity sales. Demographic trends remain a strong secular driver as the aging population seeks guaranteed lifetime income streams. And the continued macroeconomic volatility increases the relative attractiveness of fixed annuity products for consumers that want guaranteed tax-deferred growth and principal protection. Against this backdrop, F&G's sales engine regained momentum in the second quarter, and we delivered one of our best sales quarters in history with $4.1 billion of gross sales. Our all-time record of $4.4 billion was in the second quarter of 2024, which included $900 million of funding agreements relative to no funding agreements in the current quarter. We had significant growth in our core sales of fixed index annuities, index life and pension risk transfer. Together, these core product sales were $2.2 billion, up 22% over the sequential first quarter and up 10% over the second quarter of 2024. Highlights for our core sales included $1.6 billion of indexed annuity sales that were higher than the second quarter of 2024. FIA continues to be our largest contributor to indexed annuity sales, while RILA continues to gain traction. A record $53 million of IUL sales, up 20% over the second quarter of 2024 as our life insurance solutions are meeting the needs of the underserved multicultural middle market and more than $400 million of pension risk transfer sales compared with approximately $300 million in the second quarter of 2024. This brings PRT sales to $700 million for the first half of the year. MYGA sales were a record $1.9 billion in the second quarter, and we had no funding agreements. Two products we view as opportunistic. This was a 73% increase over the sequential quarter due to higher MYGA sales, although down 21% from the second quarter of 2024 due to no funding agreements in the current quarter. The economics for flow reinsurance were favorable early in the quarter and almost half of the second quarter MYGA sales were generated in the month of April. MYGA sales increased 27% over the second quarter of 2024. As a reminder, opportunistic sales volumes will fluctuate quarter-to-quarter depending on economics and market opportunity. Notably, retail channel sales were a record with more than $3.6 billion in the second quarter, reflecting one of our best quarters for indexed annuities and a record quarter for both IUL and MYGA. For the first half of the year, we have generated $7 billion of gross sales comprised of $4 billion of core sales and $3 billion of opportunistic market sales. Net sales retained were $4.9 billion in the first half of the year. Looking ahead to the remainder of 2025, we will continue to prioritize pricing discipline and allocating capital to the highest return opportunities. With the launch of our reinsurance sidecar during the third quarter, the economics for FIA sales are becoming relatively more attractive, and we expect our mix of sales to shift more to FIA in the back half of the year. We also have the flexibility to optimize our level of flow reinsurance in line with our capital targets by dynamically adjusting MYGA volumes up and down as market economics change as demonstrated in the first half of the year. F&G reported record AUM before flow reinsurance of $69.2 billion at the end of the second quarter, including retained assets under management of $55.6 billion. Compared to the second quarter of 2024, AUM increased 13% and 7%, respectively, driven by net new business flows. Next, turning to the investment portfolio. The retained portfolio is high quality with 97% of fixed maturities being investment grade. Credit-related impairments have remained low and stable, averaging 6 basis points over the last 5 years. Through the first half of the year, credit-related impairments remained below our pricing. During the second quarter, we made significant progress on deploying our excess cash. As a result, our fixed income yield increased 5 basis points from the first quarter, and we believe there is still more opportunity for uplift when the spread environment becomes more attractive. In summary, F&G is uniquely positioned in the industry with a profitable and growing $54 billion in-force block. We generate spread- based earnings from fixed annuities and pension risk transfer, and we have multiple sources of fee-based earnings with the sidecar in place alongside our flow reinsurance, middle market life insurance and well-performing owned distribution portfolio. As our business grows, we're becoming a more fee-based, higher-margin and capital-light business, leveraging our position as one of the industry's largest distributors of annuities and life insurance. Before turning the call to Conor, I'd like to highlight the executive management transition that we announced last evening. First, John Currier has decided to retire next year and will be transitioning from his role as F&G's President into a senior advisory role. John has been an invaluable partner and his deep industry expertise and leadership has been instrumental to our transformation and expansion over the last 10 years. Under John's leadership, we have focused our efforts in the retail space on our mission, helping more and more people achieve their aspirations by expanding our retail footprint in breadth and depth, driving exceptional sales growth, and we've more than doubled our assets under management over the last 5 years. We are now a market leader in several segments, and I am appreciative to John for all of his efforts and on a personal level, his friendship. I look forward to continuing to work with John in his new capacity as a senior adviser until his retirement next year. We also announced that Conor will be taking on the role of President of F&G in addition to his current role as CFO. Conor has made a big impact since joining F&G, and I'm looking forward to working with him in this new capacity. Conor brings a wealth of experience developed through a variety of executive roles at leading insurance companies in both the U.S. and abroad. This experience will be invaluable as we continue to grow the company as well as expand our capital-light fee-generating businesses, which I firmly believe will grow the value of F&G. Let me now turn the call over to Conor to provide further details on F&G's second quarter financial highlights.

Thank you, Chris, and thank you for your support. I'm excited to take on this new role and share your optimism for the many opportunities that lie ahead as we work to transform S&G into more of a fee-based, higher return and capital-light business. I believe that we are well on our way. I'm looking forward to partnering with you in this new capacity. This morning, I'll focus my comments on adjusted net earnings and returns, the new reinsurance sidecar transaction and our balance sheet and capital position. Starting with earnings. On a reported basis, adjusted net earnings were $103 million or $0.77 per share in the second quarter. For the quarter, investment income from alternative investments was $83 million or $0.62 per share below management's long-term expected return. Second quarter adjusted net earnings reflect asset growth, higher fee income from accretive flow reinsurance, growing owned distribution margin and disciplined expense management. Notably, we are benefiting from increased scale as our ratio of operating expenses to AUM before flow reinsurance has decreased to 56 basis points in the quarter from 61 basis points in the second quarter of 2024. We had a $7 million impact from onetime expense actions taken during the second quarter. This was recognized below the line and did not impact our second quarter adjusted net earnings. Going forward, we expect improvement in our operating expense ratio as a result of the second quarter expense actions moving from 60 basis points at year-end 2024 to approximately 50 basis points by year- end 2025. It was a strong quarter, and many of the near-term headwinds that drove margin compression in the first quarter are clearing as expected. CLO prepayments normalized, surrenders are more in line with our expectations in a higher rate environment, and we have made significant progress in putting excess cash balances to work. Our results through the first half of the year have generated sustainable return. As-reported, adjusted ROA on a last 12-month basis was 92 basis points, including short-term fluctuations from investment income on alternative investments. This compares to 91 basis points in the second quarter 2024 last 12-month period. Our adjusted ROA reflects meaningful contributions from our fee-based flow reinsurance and owned distribution strategies. And as- reported adjusted return on equity, excluding AOCI, was 8.8%, up 40 basis points over the second quarter of 2024. Now turning to our reinsurance sidecar transaction and our strong and growing balance sheet. I share Chris' enthusiasm for the reinsurance vehicle announcement. We fund our business from multiple sources of capital, including in-force capital generation, reinsurance and capital market issuances. The sidecar is another source of capital and integral to our long-term success, enabling us to scale in an accretive and capital-efficient manner. To provide some further details on the transaction, the scope of the reinsurance sidecar is new business only and allows for up to 75% of newly originated accumulation-focused FIA products. Blackstone has established a new Cayman-based reinsurer, Fort Green Reinsurance STC Limited that will be managed on a U.S. risk-based capital and NAIC statutory basis. Importantly, F&G does not hold any ownership stake in Fort Green, which is unaffiliated and a Blackstone-owned entity. The new reinsurance vehicle backed by Blackstone managed funds has approximately $1 billion of anticipated capital commitments. This reinsurance vehicle is a strategic capital solution that complements F&G's dynamic capital allocation framework and supports our strong capital position. We will continue to utilize our existing flow reinsurance partnerships for MYGA sales. We will continue to manage capital to the most robust of our regulatory and rating agency requirements, including maintaining RBC at or above 400%. There is no change to our holding company cash and invested assets target of 2x interest coverage, and we remain committed to our long-term target of approximately 25% debt to capitalization, excluding AOCI. The reinsurance sidecar will help expand our fee- based earnings power over time alongside our flow reinsurance, middle market life insurance and owned distribution strategies. Our owned distribution portfolio is performing well and creating value. We have invested nearly $700 million in owned distribution companies. Our holdings are diversified by product and market and reflect growing businesses with strong leadership. Reflecting on my first few months in this role, I've had the opportunity to see firsthand the strength of our business model and dedication of our team. We are well positioned to further expand our return on equity and deliver long-term shareholder value. As we navigate the shifting industry dynamics and macroeconomic environment, we remain disciplined and focused on managing the profitability of our sales and in-force book and optimizing our return on capital, generating retained asset growth and incremental investment margin, continuing to drive an efficient cost structure to capture benefits of scale and further diversifying our spread-based and fee-based earnings, which differentiate F&G. We remain confident that we will deliver on our 2023 Investor Day targets as we move further toward a more fee-based, higher margin and less capital-intensive business model, leveraging our position as one of the industry's largest distributors of annuities and life insurance. This concludes our prepared remarks, and let me now turn the call back to our operator for questions.

[Operator Instructions] Our first question comes from John Barnidge with Piper Sandler.

My question is on the sidecar. With $1 billion in commitments raised, how much capacity do you think that will have? And how quickly do you think you'll be able to fill that?

Yes. John, it's Chris. It's a great question. I think the answer to that really depends on product type because it's obviously going to get different strain. But it's going to give us quite a bit. I want to say multiple billions of capacity in terms of incremental AUM that we can bring on board. More importantly, I think it's part of a broader strategy of moving down a more capital-light path, and it's going to be highly accretive to our earnings as opposed to simply retaining that AUM.

And my follow-up, maybe sticking with that capital-light path you're trying to go down. You've deployed a lot of capital in the owned distribution. You now have a sidecar. It looks like you got that dividend was resumed in the second quarter after even paused for the investments that were made in the first. What does this mean for the potential for additional consolidation on that side?

Yes. I think like everything, we believe one of our most sacred jobs here is making smart capital allocation decisions. And so as we look at the various opportunities, you're right, owned distribution is something that we want to continue to grow that's generating terrific returns for us. So we're excited about that. Continuing down the path of selling FIAs, but utilizing the sidecar, utilizing other reinsurance opportunities, similar return pattern, but something that we're super excited about. And yes, by going down a more capital-light path, we will have more free cash flow. So -- but I would say right now, what we hear from investors is they're not necessarily looking for substantial increases in dividends given the returns that we're able to generate in both owned distribution and flow reinsurance. So yes, I think that's how we think about capital allocation. I don't know, Conor, if you want to add to that.

Yes. I think what's driving, I think this is a great additional tool for us in terms of -- we have a number of MYGA reinsurance partners. We had an existing -- have an existing partner on the FIA side, having another opportunity there as well. I think you know from all of the conversations we've had that that's a very significant core product for us. So I think you'll see a little more emphasis perhaps there on a comparative basis. And -- but yes, the owned distribution opportunity, we continue to believe in and increasingly convinced of the value of that opportunity as well.

And our next question comes from Mark Hughes with Truist Securities.

How are MYGA sales shaping up now? You talked about in Q2, a lot of that was concentrated in April. How do you see the environment so far for Q3?

Yes. I would say probably somewhere in between, meaning maybe a more normalized rate. We had a lot of volatility in the first quarter of this year. You saw the huge rebound in the second quarter. I do think we'll see a little more volatility in MYGA sales. Keep in mind, we flow out the vast majority of our MYGA business. And so it's just a process of every single month. We look at the market, we look at the spread opportunity. We look at the quotes from our reinsurers, and then we compare that to the other opportunities. But I would say, particularly now with the sidecar, FIA becomes even more attractive use of capital. So you could see probably a little bit lower level of MYGA sales, but we would expect a higher level of indexed annuity sales.

Yes. And Mark, maybe I'll add to that as well. We didn't have funding agreement type sales in the quarter. That's another element that we compare from an opportunistic perspective. And so we would put that maybe in that same opportunistic bucket with the MYGA sales. So the relative composition and mix of those two can ebb and flow as well.

And I know it's an obvious point, but indexed annuities, longer duration, higher return, a product that every year, we have some ability within reason to reset the rates and maintain a consistent spread. So I think it's always going to be at the top of our list of preferred places to deploy capital along with owned distribution.

Yes. And then same question on funding agreements. Those were negligible in the quarter. How do you see that shaping up?

Yes. I think, again, opportunistic. I would say part of what drove that was we saw significant MYGA opportunities certainly early in the quarter. If you looked at the composition of the quarter, we did more in April. We had talked about that last quarter's call. And the funding agreement market is looking reasonably attractive or I would say, more than reasonably attractive at the moment. So there's -- we will certainly look closely at it in the third quarter and compare it with the other opportunities and weigh them up accordingly.

And then when we think about RILAs, I think you mentioned they were gaining traction. A lot of talk about FIAs with the new sidecar. How do you feel like the balance of the opportunity across the FIAs versus RILAs as we sit here today?

We very much like the RILA space as well. It's a great partner with the FIAs. Many of our FIA producers and sellers are licensed to sell RILA as well. So we saw significant growth in our RILA relative to the size of our book, but it's still quite a modest book. So yes, still very much like it, still a key element of our expansion plans, but just smaller in scale at this stage. So less material for now.

If I might ask just one more. When we think about your return on assets this quarter, kind of what's the walk from the Q2 return on assets to your Investor Day targets? I wonder if you could just refresh us on that.

Yes. I'll start on that one. So keep in mind, so the Investor Day was not quite 2 years ago, which is kind of in some ways, it seems a lot longer, but it was October of '23. So think of us as not quite 2 years into a 5-year goal. The goal at the time was to have a 50% increase in our assets under management. We are well ahead of that target at only 2 years into it. So we feel really good about achieving that. From an ROA perspective, we said we would go from a baseline spread of 110 to a range of 133 to 155. We tend to look at the last 12 months because that smooths out some of the wrinkles there. And I think that's been in the high 120s, mid-120s. So I'd say we feel good about how we're tracking there. And then obviously, as we took some efforts to bring down expense ratio. I would say that was -- probably will kick in about 10 basis points on top of what we've already seen. So we're feeling really good at this juncture. The other part of the goal is to drive up ROE, and we're making progress there. And I think things like sidecar, owned distribution, those are going to be quite accretive to ROE.

In the mid-120s, how many basis points of that is the -- just normalizing the alts? I'll ask that question. And then as we think about Q3, any body language on how the alts are set up for performing this quarter?

Yes. I think in the alts front, our long-term assumption, again, is 10%. We think that's reasonable. We look at it regularly of should we be revisiting that? Should we be bringing that down. Obviously, we've gone quite a while now without meaningful realizations. And so we don't run the business trying to predict what's going to happen. I know there's been a couple of the prominent folks, particularly Blackstone enthusiastic that we may now see a better deal environment. And if that's the case, that would be a big tailwind for us, not just in terms of returns because people tend to normalize for that, but that would be a positive from a capital perspective because keep in mind that alts book does get mark-to-market every quarter. And then in terms of the walk, I think alts on this quarter, Conor, last 12 months, probably 37 basis points. So think of the base as, I don't know, 92-ish and then 37% for alts would get you to a last 12 months, 129.

Our next question comes from Alex Scott with Barclays.

This is Anling on for Alex. I'm wondering if you're currently taking any cap rate action? And how do you see that impacting your cost of crediting looking forward?

Yes. I would say without maybe disclosing more than we should from a competitor perspective, but it is something that we look at on a regular basis, right? So every single month at a minimum, we're looking at in-force crediting actions as it comes -- as these things come due. And what I would say there is we have pretty good track record over time of maintaining consistent spreads. So where we have had deviations from pricing, we do take in-force crediting rate actions. Now you don't want to overdo that. You want to make sure that you're within a reasonable band and you want to look at the competitive environment, you're being fair from a policyholder perspective. But yes, that is a lever that we would expect to help, particularly when you get into these periods of a fair amount of volatility.

And this will conclude our question-and-answer session. I will now turn the conference back over to CEO, Chris Blunt, for closing remarks.

Great. Thanks again to everyone for joining the call this morning. We had a strong second quarter, and we've got good momentum heading into the second half of the year. I'm excited about the future and our ability to deliver strong results for the shareholders of F&G in the years ahead. Appreciate your interest in F&G, and we look forward to updating you on our third quarter earnings call.

Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines, and have a wonderful day.