F&G Annuities & Life, Inc. 2026 Q2 Earnings Call

Please go ahead. Thanks, operator, welcome everyone.

I'm joined today by our new CEO and President, Conor Murphy, and Interim CFO, Mark Wiltse. We're also glad to welcome F&G's incoming CFO, Mike Bailey, who joined the company earlier this week and will listen in on today's call. 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. With that, I'll hand the call over to Conor Murphy.

Good morning, thanks for joining today's call. I'm very honored to speak with you today on my first earnings call as Chief Executive Officer and President. Since joining the company in April of last year, I have served as CFO, ingraining myself in the financial elements of F&G, and President, running the day-to-day insurance company and building relationships with our teams and distribution partners. What drew me to F&G was an appreciation for the business, both in terms of what has been written and the opportunity to expand our services to an increasingly larger customer base, as well as the exceptional culture of the team. I would also like to thank Chris Blunt for bringing me to the company and his partnership over the last year. I have a huge amount of respect for Chris and what he and the team have built here at F&G.

I'm very excited to continue the momentum as we expand our retail and institutional franchises and accelerate our move toward a more fee-based, higher margin, and less capital-intensive business, a natural advantage of our position as one of the largest sellers of annuities and life insurance in the industry. I would like to share some highlights of our second quarter results, which were largely in line with our expectations, as well as details of our investment portfolio and provide an owned distribution update. I'll turn it over to Mark to cover our results in more detail. From a top-line perspective, AUM before reinsurance increased to $74.7 billion at June 30, up 8% over the prior year. This includes retained assets under management of $55.9 billion.

Retained AUM reflects positive asset flows, offset by the $1.8 billion in-force block ceded with the F&G Life Re sale in the first quarter and a $750 million Funding Agreement-Backed Note maturity in the second quarter. Gross sales were $2.7 billion for the second quarter, comprised of $2 billion of core sales and $700 million of opportunistic sales. As F&G navigates the competitive landscape, we are focused on disciplined sales growth and capital allocation priorities between core and opportunistic sales to power our AUM growth. Core retail sales of indexed annuities and indexed life reflect strong momentum at $1.8 billion for the second quarter. This is one of our strongest quarters on record for core retail sales and reflects continued momentum for F&G despite another quarter of contraction in industry FIA sales as compared to the prior year quarter.

Core institutional sales of pension risk transfer were $200 million for the second quarter, as expected, ahead of the seasonal increase in PRT sales typically seen in the second half of the year. Opportunistic sales were primarily comprised of $600 million of funding agreements, as well as $100 million of Multi-Year Guaranteed Annuities, which we have de-emphasized due to returns currently below our threshold. F&G's net sales were $1.5 billion in the second quarter. This reflects slow reinsurance in line with capital targets for fixed-indexed annuities and Multi-Year Guaranteed Annuities. F&G's retained investment portfolio performed very well once again this quarter. Our portfolio is high quality with 97% of fixed maturities being investment-grade. It is well-matched to the liability profile and diversified across asset types.

Our fixed income yield was 4.91% in the second quarter, an increase of 14 basis points over the first quarter of 2026 and 8 basis points over the second quarter of 2025. Credit-related impairments have remained low and stable, averaging six basis points over the past five years and a modest two basis points in the first half of the year. Our alternative investments portfolio was $4 billion or approximately 8% of the total retained portfolio. This includes approximately $3 billion of limited partnerships and $1 billion of other equity interests. Many of these alternative investments are still in the earlier phases of their value creation cycle, so we are not yet fully realizing the long-term expected return. During the second quarter, we saw our annualized return at approximately 5.9%, down from 8.3% in the first quarter of 2026.

Turning to our own distribution portfolio, as previously announced, Chris Blunt is continuing as a director of F&G and CEO of Peak Altitude, a business that Chris has been building over time. With approximately $700 million deployed into this business and approximately $80 million in annual EBITDA in 2025, we believe the market is ascribing little to no value in our share price today for the value of Peak. As a result, Chris has launched a formal process to explore strategic alternatives for Peak Altitude to capture its significant growth opportunities and unlock that intrinsic value for F&G shareholders. We believe that both F&G and subsidiary Peak Altitude have plenty of runway ahead to continue growing AUM, growing earnings, and growing shareholder value.

F&G reported GAAP equity excluding AOCI of $6 billion at quarter end and has grown its book value per share excluding AOCI to $45.93, up 68% since the 2020 FNF acquisition. We believe that the components of our business, our new business platform, our profitable in-force block, and our capital-light fee-based strategies represent a distinct and measurable source of value. Taken together, we believe a sum of the parts framework reveals meaningful value that is not yet fully reflected in F&G's current market valuation. We remain focused on closing that gap with strategic alternatives for Peak being an important part of this process. Let me now turn the call over to Mark to provide further details on F&G's second quarter highlights.

Thank you, Conor. Starting with earnings, overall second quarter results were largely in line with our expectations. Core spread remained consistent as the business maintained disciplined pricing. On a reported basis, adjusted net earnings were $85 million, or $0.65 per share in the second quarter. Alternative investments income was $49 million, or $0.38 per share, below management's current long-term expected return of 12%, but in line with our post-tax estimate of $51 million pre-announced in early July. Compared to the first quarter of 2026, adjusted net earnings decreased by $25 million. The after-tax impact of lower returns on alternative investments was $21 million. The after-tax effect of the F&G Life Re resale on March 1st, 2026 reduced incremental earnings by $8 million in the second quarter as compared to the first quarter.

These items were partially offset by consistent core spread, growing fees from accretive flow reinsurance and own distribution margin, and operating expense discipline. Compared to the second quarter of 2025, adjusted net earnings decreased by $18 million. The after-tax effect of the F&G Life Re resale reduced earnings by $12 million in the second quarter as compared to the prior year quarter. Product margin also reflects lower surrender charge fee income and higher other liability costs that include increased amortization expense as expected. These items were partially offset by higher returns on alternative investments, consistent core spread, steady fees from flow reinsurance, and own distribution margin, and disciplined expense management. Turning to our scale benefit. As AUM grows and we continue to manage expenses, we are benefiting from increased scale.

Our ratio of operating expense to AUM for reinsurance decreased to 47 basis points at the end of the second quarter as compared to 48 basis points in the first quarter of 2026. We have reduced the operating expense ratio from 60 basis points at the end of 2024 to 50 basis points at year-end 2025 and expect further improvement to approximately 45 basis points by year-end 2027, for a cumulative 15 basis point or 25% improvement over the three-year period. Regarding our returns. As reported, adjusted ROE, excluding AOCI, was 8% for the second quarter, and also as reported, adjusted ROA was 68 basis points for the second quarter. Taking into consideration management's long-term expected return for alternative investments would have resulted in 3.1 percentage points of additional ROE and 35 basis points of additional ROA for the quarter. Turning to our strong capital position.