F&G Annuities & Life Q3 2026 Earnings Call Transcript

F&G Annuities & Life (NYSE:FG) reported third-quarter financial results on Friday. The transcript from the company’s third-quarter earnings call has been provided below.

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Summary

F&G Annuities & Life reported a strong third quarter with record assets under management (AUM) of $76.2 billion, a 7% increase over the previous year. The company achieved its highest-ever core retail sales quarter, driven by indexed annuities and indexed life products, increasing 24% over the prior year quarter.

Adjusted net earnings were $96 million, or $0.74 per share, for the quarter, with alternative investments income below the 12% long-term expected return. The investment portfolio performed well, with 97% of fixed maturities being investment grade, and a fixed income yield of 4.98% in the third quarter.

Management is exploring strategic alternatives for Peak Altitude, a distribution franchise, to unlock its intrinsic value for shareholders. The company is benefiting from increased scale, targeting a cumulative 25% improvement in operating expense ratio by year-end 2027.

F&G Annuities & Life maintains a strong capital position with a debt to capitalization ratio below 25% and a target RBC ratio of approximately 400%. Management is focused on disciplined capital allocation, prioritizing high-return opportunities and maintaining return targets while navigating regulatory changes.

Full Transcript

OPERATOR

Good morning and welcome to F&G Annuities & Life’s third quarter earnings call. During today’s presentation, all callers will be placed in listen-only mode. Following management’s prepared remarks, the conference will be open for questions with instructions to follow at that time. I would now like to turn the conference over to Lisa Foxworthy Parker, Senior Vice President, Investor and External Relations. Please go ahead.

Lisa Foxworthy Parker (Senior Vice President, Investor and External Relations)

Thanks, operator, and welcome, everyone. I’m joined today by Conor Murphy, Chief Executive Officer and President, and Mike Bailey, 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 Conor Murphy.

Conor Murphy (President and CEO)

Good morning and thank you for joining today’s call. We delivered strong third quarter results demonstrating solid performance across our business as our momentum continues heading into year end. We generated record AUM before flow reinsurance and the investment portfolio is performing very well. We continue to expand our retail and institutional franchises and delivered our best core retail sales quarter in history. We have made great progress on our operating expense target.

We delivered strong adjusted net earnings in the third quarter that were right in line with our expectations and we remain focused on expanding the earnings contribution of our fee-based flow reinsurance, middle market life insurance, and owned distribution strategies. As proud as I am of our financial performance, I am especially proud of our team. Following the leadership transition last quarter, we have truly coalesced around our shared mission to help people turn their aspirations into reality.

Together we proudly serve over 1 million customers and their families through our annuity and life solutions, and over 150,000 pensioners who have trusted F&G Annuities & Life to help them navigate their futures. Today I would like to share some perspective on our AUM growth and highlights of our third quarter sales results, discuss the performance and positioning of our investment portfolio, and briefly touch on owned distribution. Then I’ll turn it over to Mike to cover our results in more detail. From a top line perspective, AUM before reinsurance increased to $76.2 billion at September 30, up 7% over the prior year. This includes retained assets under management of $56.2 billion.

One question that I often receive is how we view growth. As a reminder, we view AUM as our primary metric to track the top line growth of our business. Since sales volumes may fluctuate year to year depending on opportunities and returns, our top line AUM growth is driven by positive net flows. This is where our strategy over the past five years has really paid off. We have successfully scaled the business from $26 billion gross AUM in 2019 to over $76 billion AUM today while significantly diversifying by product and channel.

Today we are one of the largest sellers of annuities and life insurance in the industry with a diverse product suite across multiple distribution channels. Importantly, we remain disciplined and write business that clears our return targets. In today’s competitive environment, others may have shorter-term needs to prioritize growth over profitability. However, we are focused on creating long-term value. Our business model provides the flexibility to choose our product mix, sales volume, and level of reinsurance as market conditions change.

And this is where our pristine, predictable in-force book comes into play. This is a younger book. There are no problematic legacy liabilities. Retail annuities are 92% surrender-protected. Pension risk transfer funding agreements and immediate annuities are not surrenderable. Asset and liability cash flows are well matched. Our new business and in-force are actively managed to maintain our return targets. This results in strong in-force capital generation and in-force flows that complement our new business flows.

Looking at our sales results more closely, for the third quarter gross sales were $3 billion. This was comprised of $2.3 billion of core sales and nearly $700 million of opportunistic sales as we continue to allocate capital to the highest return opportunities. Record core retail sales of indexed annuities and indexed life were $2.1 billion for the third quarter, a 24% increase over the prior year quarter and a 17% increase over the sequential quarter.

This reflects our continued focus to grow core retail sales over the prior year quarter while maintaining our target returns. Once again, F&G has demonstrated noteworthy growth. In contrast to industry FIA sales which contracted again this quarter versus the prior year, the majority of our fixed indexed annuity sales are sold through independent marketing organizations to middle market consumers. We believe this is one of the most attractive segments of the market and one where our scale, product capabilities, and distribution relationships provide meaningful competitive advantage.

Core institutional sales of pension risk transfers were $200 million for the third quarter. We have sold over $700 million of PRT in the first nine months and expect to generate between $1 billion to $1.5 billion for the full year. Opportunistic sales were comprised of $600 million of funding agreements and $100 million of multi-year guaranteed annuities for the third quarter. As a reminder, we have de-emphasized MYGA sales over the past year due to returns currently below our threshold.

We have significant flexibility in our product mix and are not dependent on any one product to sustain attractive inflows. For the first nine months of the year, gross sales were approximately $9 billion, comprised of $6 billion of core sales and nearly $3 billion of opportunistic sales. Excluding MYGAs, gross sales were $8.5 billion in the first nine months of 2026, up 9% over $7.8 billion in the first nine months of 2025. F&G’s net sales were $5.1 billion in the first nine months of 2026, including $1.4 billion in the third quarter.

This reflects flow reinsurance in line with capital targets for about 50% of fixed indexed annuities and about 90% of MYGAs. Next, turning to F&G’s retained investment portfolio which has 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 4.98% in the third quarter, an increase of 7 basis points over the second quarter of 2026 and 5 basis points over the third quarter of 2025. Credit-related impairments have remained low and stable, averaging 6 basis points over the past five years and a modest 2 basis points in the first nine months of the year.

Our private credit portfolio continues to perform well as expected. Our software exposure across the retained portfolio is below 5%. We are highly selective, with most positions protected by high switching costs, large competitive moats, regulatory barriers, and embedded in workflows that are integral and difficult to disrupt. Our investments in AI infrastructure are below 3% of the retained portfolio. We are focused on investment grade deals with high quality counterparties that fully amortize within the initial contract and have no reliance on terminal value.

They have short maturities, strict underwriting, and robust, conservative credit protections. Our alternative investments portfolio is $4 billion. This includes approximately $3 billion of limited partnerships that comprise 5% of the retained portfolio and $1 billion of other equity interests that comprise 2% of the retained portfolio. 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 returns. During the third quarter we saw our annualized return at approximately 5%, down from 6% in the sequential quarter and 8% in the first quarter of 2026.

To break this down further, our limited partnerships generated an annualized return of approximately 9% in the third quarter, in line with the sequential quarter and in line with our expectation for returns in the early to mid-stage of their life cycle. However, this was partially offset by a lower return in the third quarter on the other equity interest component of the alternatives portfolio. As seen, our limited partnership portfolio has momentum, and although hard to predict, we don’t expect as much offset from the other equity interest in the fourth quarter.

Turning to the questions that we have all received around affiliated investments in recent months, for F&G this is very straightforward. There are a lot of reasons why our strategic partnership with Blackstone, which is now in its ninth year, is important to us, starting with the notion of affiliated investments. Blackstone is not an affiliate of F&G. Blackstone owns 0% equity stake in F&G. F&G owns 0% equity stake in Blackstone. F&G’s credit exposure to Blackstone portfolio companies is modest at only 2% of the retained portfolio, and F&G has flexibility to add new asset managers to augment origination and through flow reinsurance.

For our $76 billion of AUM before reinsurance, the majority of the $56 billion retained book is managed by Blackstone and the majority of the $20 billion of cumulative net reinsurance to third parties is largely managed by other asset managers. Turning to our independent governance model, F&G’s CIO and CRO offices set strategic asset allocation and risk limits. We start with F&G’s liability profile, which drives the investment strategy. F&G’s investment committee reviews and determines whether or not the recommended investments are appropriate and approves all major decisions. F&G’s robust internal risk assessment process ensures suitability for our insurance company balance sheet. Blackstone is solely F&G’s asset management partner.

It does not own nor is it involved in governance of the insurance company. And Blackstone is responsible for idea generation and security selection. As our Chief Investment Officer often describes, we pick the neighborhood, Blackstone picks the houses, and we inspect the houses. Next, turning to our commitment to transparency as a public company, we give serious consideration to the level and quality of our investment disclosures and continue to expand and evolve them based on investor and analyst feedback. Our investment portfolio is managed completely separate from FNF’s, and there are no sports franchises, entertainment venues, or related hospitality properties in our investment portfolio. To be clear, we have no affiliated investments with either Blackstone or FNF.

F&G’s affiliated investments under a statutory definition are our wholly owned subsidiaries. And finally, we also have regular engagement with our Iowa regulator, who is an active group supervisor that monitors the investment portfolio and approves all reinsurance transactions. Overall, we have a clear governance structure, mature enterprise risk management capabilities, and we have a very clean governance model with Blackstone with no inherent conflict of interest.

Turning briefly to Peak Altitude, our attractive small-cap distribution franchise. As a reminder, our owned distribution strategy is a capital-light, diversified source of fee-based earnings. Here we have invested approximately $700 million in growing life and annuity distribution businesses that generated approximately $80 million in annual EBITDA in 2025. The portfolio is performing well with plenty of runway ahead to continue to grow. We believe the market is ascribing little to no value in our share price today for the value of Peak.

As previously announced, we have launched a process to explore strategic alternatives for Peak Altitude and to capture its significant growth opportunities and unlock that intrinsic value for F&G shareholders. Today I can report that the process is active and ongoing and will provide more specifics at the appropriate time. F&G reported GAAP equity excluding AOCI of $6.7 billion at quarter end and has grown its book value per share excluding AOCI to $51.37, up 87% 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. I think one of the most important and, in our view, underappreciated aspects of our business is that we have such a clean and simple in-force book without any problematic legacy liabilities.

That was a big part of what attracted me and Mike to the company. The $54 billion retained in-force book is the engine that funds new business growth and contributes to positive net flows that, together with the new business engine, drive steady AUM growth. 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. I would also highlight that at recent levels the F&G stock has an especially attractive dividend yield of around 5%, which is above average for the publicly traded life and annuity sector.

Our focus remains on executing against the opportunities in front of us, maintaining our return discipline, growing our AUM and earnings, and creating long-term value for our shareholders. Let me now turn the call over to Mike to provide further details on F&G’s third quarter highlights.

Mark Wiltse (Chief Financial Officer)

Thank you, Conor. Starting with earnings, on a reported basis, adjusted net earnings were $96 million, or $0.74 per share, in the third quarter. Alternative investments income was $60 million, or $0.46 per share, below management’s current long-term expected return of 12%. Alternative investments income was at the low end of the range that was preannounced in early October. We completed our annual actuarial assumption review in the third quarter. As a result, amortization expense was approximately $6 million after-tax higher in the third quarter. We expect that level of higher amortization to remain during 2027 and diminish to neutral during 2028. For the third quarter, this was more than offset by a benefit from favorable PRT and IUL mortality, reflecting quarterly variability and timing.

As Conor had described last quarter, compared to the second quarter of 2026, adjusted net earnings increased by $11 million. This reflects higher product margin, steady fee-based flow reinsurance fee income, owned distribution margin and IUL product fees, and disciplined expense management. These items were partially offset by lower returns on alternative investments. Compared to the third quarter of 2025, adjusted net earnings decreased by $69 million.

The three primary drivers, as expected: First, the after-tax effect of lower returns on alternative investments and bond prepay income was $32 million. Secondly, the after-tax incremental benefit of F&G Life Re prior to its sale was $21 million in the prior-year period. Finally, the after-tax effect of lower surrender charge fee income was $6 million. Otherwise, business fundamentals were solid year over year with consistent core spread, steady fee-based flow reinsurance fee income, owned distribution margin and IUL product fees, and disciplined expense management.

Next, turning to scale benefit: as AUM grows and we continue to manage expenses, we are benefiting from increased scale. As a reminder, we are targeting a cumulative 15 basis point, or 25%, improvement in our operating expense ratio over the three-year period from 60 basis points at year-end 2024 to 45 basis points by year-end 2027. At the end of the third quarter, our ratio of operating expense to AUM before reinsurance decreased to 46 basis points.

The third quarter ratio decreased despite the typical seasonal increase in operating expenses that we expect in Q3, which continues into Q4 as well. Now regarding our returns: As reported, adjusted ROE excluding AOCI was 6.7% for the third quarter. Taking into consideration management’s long-term expected return for alternative investments would have resulted in 3.4 percentage points of additional ROE. Notably, reported ROE reflects higher average adjusted equity in the denominator resulting from favorable GAAP net income. This was driven by market risk benefit liability adjustments, which are excluded from adjusted net earnings.

Total F&G Annuities & Life equity attributable to common shareholders excluding AOCI was $6.7 billion, or $51.37 per share, as of September 30, 2026. This reflects an increase of $712 million, or $5.44 per share, as compared with June 30, 2026, primarily driven by $355 million of favorable market risk benefit liability adjustments and $297 million of actuarial reserve releases following the annual assumption review. As reported, adjusted ROA was 69 basis points for the third quarter.

Taking into consideration management’s long-term expected return for alternative investments would have resulted in 37 basis points of additional ROA for the quarter. Turning to our strong capital position, we remain committed to our long-term target of approximately 25% debt to capitalization excluding AOCI, and we were below that target at quarter end. We continue to target holding company cash and invested assets at two times interest coverage, which covers more than one year of HoldCo liquidity requirements. Our annualized interest expense is approximately $165 million, or roughly a 7% blended yield on the $2.3 billion of total debt outstanding.

We expect to maintain our estimated company action level risk-based capital, or RBC, ratio at our target of approximately 400%. F&G Annuities & Life maintains strong capitalization and financial flexibility. We conservatively manage to the most stringent capital requirements of our regulators and four rating agencies. Turning quickly to our ratings: Recently, Moody’s affirmed our ratings and we are not currently under any negative credit watch. Following their review, which highlighted FNF’s reduced ownership stake in F&G Annuities & Life at year end that increased the public float and was beneficial for us, Moody’s commented that their outlook for F&G Annuities & Life was negative. Over the outlook period, Moody’s will evaluate the evolution of F&G Annuities & Life’s standalone profile both with and without the current one-notch support of FNF.

I would highlight that F&G Annuities & Life already holds standalone financial strength ratings of A by Fitch and A by AM Best, in addition to our A- rating by S&P and A3 rating by Moody’s. In our view, nothing has inherently changed in our business and, regardless of our current ratings, we continue to manage the business to an A level. We also have multiple reliable sources of capital supporting our business. Our strong in-force book provides a stable foundation of earnings and capital generation. We expect even stronger capital flexibility in the future as we move towards a more fee-based, higher-margin, and less capital-intensive business model. Our reinsurance sidecar provides on-demand third-party capital that we can access without diluting shareholders. For the inaugural year, we have seen steady usage of the $1 billion reinsurance sidecar, with approximately $800 million of remaining capacity at September 30th.

Our strategic flow reinsurance partnerships add another layer of flexibility, allowing us to adjust retained sales levels and support cash from operations as we grow. We have added yet another noteworthy flow reinsurance partner in July as we continue to be a partner of choice for the industry. Our statutory excess capital provides additional capital strength in line with our ratings and, as the balance sheet continues to delever, our available debt capacity will only grow over time.

For the first nine months, our capital self-funded the following: $113 million of holding company interest expense, $112 million of common and preferred dividends paid, and $120 million in opportunistic share repurchases. We view repurchases as a tool at our disposal that we weigh up against other opportunities while balancing the public float. We did all of this while maintaining momentum in our core retail and core institutional businesses. As Conor mentioned, we remain disciplined in allocating capital to our highest-return opportunities and have de-emphasized MYGA sales at this time due to returns currently below our threshold.

Taken together, our capital allocation reflects the financial strength and flexibility we have built and our confidence in the future. I look forward to partnering with Conor to continue to build an industry-leading business. I was drawn to F&G Annuities & Life because it is well positioned for success through continuing to scale, leveraging our pristine balance sheet—which contains no variable annuity, universal life with secondary guarantee, or long-term care liabilities—expanding its strong relationships, including key long-term distribution partners, Blackstone and other complementary asset managers, and strategic relationships with highly rated reinsurers; maintaining pricing discipline and our commitment to return targets; being diligent in allocating to the highest-return opportunities; delivering on our more fee-based, higher-margin, and less capital-intensive strategy; innovating through our agile operating model; and cultivating the extensive and diverse experience of our leadership team in the insurance sector—all of which leads to creating long-term shareholder value.

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. If you would 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 star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Once again, that’s star one at this time.

One moment while we poll for the first question. The first question comes from Wilma Burtis with Raymond James. Please proceed.

Wilma Burtis (Analyst at Raymond James)

Can you just talk about retail sales in FIA and RILA, which were some of the highest to date? What are you seeing in the market, and have you seen market share open up amidst some, I guess, regulatory pressures at some other carriers? Thanks.

Conor Murphy (President and CEO)

Thank you. Wilma, it’s Conor. So, yeah, as we mentioned, this was our best quarter ever with respect to core retail. And we’re particularly focused on core retail compared perhaps with the more opportunistic. I’ll start out with saying it’s not because of anything revolutionary or very different. This is the momentum that’s been building throughout the last many quarters, continuing into this quarter. It’s not because of new products or capabilities in particular. It’s just the grinding of the sales team, and kudos to them. And it’s been with the same partners. We didn’t add any new distribution partners or anything else. So we’ve been very disciplined.

We’ve been maintaining our profitability profile. And so it’s just been a really solid recognition of what we’ve been able to do. And I mentioned a little bit in the opening remarks, but on the FIA basis, I got LIMRA information yesterday that suggested that the industry was down 6% in the first nine months and we were up 12 on the FIA basis. So that’s good. So I think we’re right around that number five, number six slot on FIA. I think you mentioned RILA as well. Obviously, we were a later entrant to that. So we’re top 20. We’re not top 10. But, yeah, we wrote—I think by August we had written as much RILA this year as we wrote in all of last year.

I think part of that, too, is that there’s such a need for these products, particularly in Middle America, multicultural America. Life business has been strong as well. But I would say we’ve written about the same number of policies as last year, but the premium dollars are down a bit because Middle America can’t afford the same level of premium payment that perhaps they could a year ago. So that’s good. I know your reference to other entities perhaps being off some shelves. I don’t expect that will be noteworthy for us in the grand scheme of things. We do sell through the banks and broker-dealers. I would argue that’s probably the most competitive spot, so it will definitely create room for folks. But we sell more in the independent distribution organization, so it’ll be less meaningful of a shift for us.

But I would also say, you know, in a particular year, any company can show higher or lower growth, but in the FIA space over sort of a five-year period, it’s mostly the same entities that write, broadly speaking, the same level of business, and it all kind of evens out pretty much over the longer term.

Wilma Burtis (Analyst at Raymond James)

Okay, thank you. And then can you talk about expected alternative investment returns? Is 12% to 14% achievable next year, or even maybe in 2028, especially in light of the higher interest rate environment? Thanks.

Mark Wiltse (Chief Financial Officer)

Yeah, so right now we do have an expected return of 12%. As we mentioned on the call, it was a good quarter with respect to the LP portfolio. That’s three-quarters of what’s in there for us. So they, on a standalone basis, were over 9% in the quarter. So that was pretty good. In our instance, we also have equity residuals. So within our space we had the equity residuals where we had just some negative market sentiment running through the process that the valuation agents run.

And I think that can lead to a—well, we had a bit of a mark, if you will, in the quarter, which led to a negative return. We do this on a one-quarter lag and we know we’ve got pretty good color on that segment of the market for our Q4 already, and it’s pretty benign. It’s a positive number; it’s not a negative that pulled us down last quarter. So my crystal ball on this honestly isn’t much more than a quarter. Do I expect a pretty good third quarter—sorry, fourth quarter? Yes, but it’s probably an expectation that’s better than Q3. I don’t expect it will be the full 12%. And then, you know, we’ll continue. We revisit these all the time. We’ll revisit them as part of the planning process, etc., as well. So if I could just remind you, and for everybody, it’s in the disclosure that the one page in the presentation on the ALTs portfolio with the aging, if you will, the maturity of our portfolio, this is right around where we expect to be.

So we have a longer-term expectation, but they’re not fully grown yet. So these are the types of returns that we expect. But again, I’m trying to be careful to not go more than kind of a quarter out on that perspective. Yeah, so I would say there will, Mike, two things. So the 6 million after-tax that I quoted is the notable item in terms of A&E for the quarter from a net income perspective. As we covered, you know, we did have roughly 300 million reduction in reserves. In addition, there were some market risk benefit liabilities that reduced as well, causing kind of a strong net income quarter.

But if I think about the unlocking, I mean really what happens here is we’ve seen elevated surrenders; we’ve been seeing that in surrender income and we sort of trued up our surrender assumption to what we think will be our best estimate. And so that 6 million after-tax will be sort of elevated DAC amortization over 2027 and into 2028. That should normalize back to sort of current levels as the business projects out. If I may, just to be clear on where we’ll see that in cost of funds: in our financial supplement, we do break apart cost of funds and we do show kind of a sequential approximately 11 million pre-tax improvement in the line item that would include that number. So if I were to normalize that for DAC amortization, absent the increase in amortization coming from unlocking, we would have seen there’s roughly a 20 million improvement period-over-period.

And that’s driven by favorable mortality relative to the second quarter. Conor had signaled on the second quarter earnings call that we thought there were some timing impacts relative to mortality. That’s worth about half of the 20 million. And then the remaining is more in line with what we would expect to generate from the block.

OPERATOR

The next question comes from Joel Hurwitz with Dowling and Partners. Please proceed.

Joel Hurwitz (Analyst at Dowling & Partners)

Hey, good morning. Just wanted to start on flow reinsurance on the FIA side. You’ve talked about flowing out around 50%, but it looks to have dipped, or I guess your retained portion has dipped below that 50% mark the past couple of quarters. Just any color on what’s driving the increased use of flow reinsurance the past two quarters and how you’re thinking about that going forward.

Conor Murphy (President and CEO)

Yeah. Hey, Joe, thank you. It’s a little bit, you know, as we go. So within the FIA space, we have the income products and the accumulation products. I would say that it was a particularly strong quarter on the income side where we have a couple of noteworthy reinsurance partners, but one of them only came on board at the beginning of the third quarter. So when you have strong reinsurance partners with a healthy appetite, that can impact the level that you reinsure.

And I think we reinsured out probably closer to two-thirds this period. The accumulation side is where we have the sidecar with Blackstone. So it can move a little bit within that range, but it’s not. I said it’s really down to what the best economic return opportunity is for us in conjunction with our partners.

Joel Hurwitz (Analyst at Dowling & Partners)

Got it. That’s helpful. And then just shifting to the regulatory front. The NAIC is exploring new risk charges on reinsurance to non-reciprocal jurisdictions like the Caymans. You guys have some exposure there, both with an affiliate as well as the sidecar. Just interested how you’re thinking about the potential implications if that’s pushed through. And then just second, just wanted to see if there’s an update on VM22 implementation and potential impacts there for you guys.

Michael Bailey (EVP)

Hey, Joel, it’s Mike. I’m glad you asked that question. Regulatory developments are an important topic for us and we continually monitor at both the federal and state levels. We have been tracking the work being done by the NAIC Committee on non-reciprocal jurisdictions. We understand that AG55-related disclosures are sort of being reviewed across the industry and we certainly appreciate the focus on those disclosures, and we welcome fair and appropriate regulation.

But we do prefer that such regulation and changes to regulation be properly vetted and based on detailed analysis. We view the NAIC’s work in this area as very manageable for our third-party reinsurance business. While the details of the proposal are still emerging, based on how we structure our offshore reinsurance treaties, we are very comfortable that there would not be a material impact to our capital position. And we base that on, first of all, the majority of our flow reinsurance partners are based in Bermuda, which has reciprocal jurisdiction. Secondly, with the majority of our reinsurance partners, we are holding assets equal to the statutory reserves on our balance sheet.

Additionally, we’re holding over-collateralization to the tune of 3% to 4%. And then third, we review each of these reinsurance treaties with our Iowa regulator and every treaty is subject to AG55 asset adequacy testing and analysis. And then finally, we ensure that our reinsurance partners follow the Iowa investment guidelines to ensure appropriate asset allocations. So we view the NAIC’s work in this area very manageable. For our affiliated reinsurance business, which I think is what you’re specifically asking about, while F&G Annuities & Life has a Cayman entity where we cede 80% of our PRT business for the purpose of differentiating between white-collar and blue-collar mortality, this has been reviewed by our Iowa regulator and undergoes AG55 testing and analysis. And this appropriate mortality differentiation has not been available under the current U.S. statutory framework and that results in redundant reserving.

We expect the new statutory framework, VM22, to update this PRT mortality requirement, and at that time we would expect to reevaluate PRT cessions to our Cayman entity. We would also have the option to recapture business ceded to Cayman. And we’re monitoring the NAIC’s discussion around the ability to retrospectively apply VM22, which in a recapture scenario would put us on equal footing, similar to our current utilization of our Cayman entity. One last point. Our Blackstone sidecar uses full U.S. Stat reserving with over-collateralization and a full RBC with no modifications. So if I sort of bring all that together, we continue to work with our regulators and the NAIC on the issue and we do not expect a noteworthy impact on F&G’s capital position from the proposals that are currently floating around.

Joel Hurwitz (Analyst at Dowling & Partners)

Okay, thank you. Thank you. I guess just anything else more broader on VM22 implementation? I know you touched on a little there on the PRT side, but what about—

Michael Bailey (EVP)

Yeah, so we’ll just add a little more to that, Joel. You know, we’re actively building models. We anticipate early adoption of VM22 for some of our businesses, and then we certainly will—PRT being a perfect case, the perfect example. We have a VM22 model available and we just need to make sure that we have clarity on when we’re adopting and what we’re allowed to do retrospectively. We view VM22 as a positive development in certain situations. We’re using certain third-party reinsurance partners to hold what is essentially much more of a principles-based reserve, and we would love to do that directly within our own Iowa-based entity.

Joel Hurwitz (Analyst at Dowling & Partners)

Okay, thanks for all the color, Mike.

OPERATOR

The next question comes from Alex Scott with Barclays. Please proceed.

Alex Scott (Analyst at Barclays)

Hey, good morning. I have one on capital and capital management. So when I look at the flows and the growth, it slowed down a bit, which is totally reasonable and rational, I think, just based on the competitive environment. That being said, if capital is not being deployed as heavily towards growth, then I just want to understand where it is getting deployed. And seeing that the buybacks I think were not active this quarter, I just want to understand how is that capital going to get redeployed?

Is there capital building because of all the slower issuance and slower growth? And how do you plan to use it?

Conor Murphy (President and CEO)

Thanks, Alex. Yeah, I’m not sure I’m fully aligned with. I think from a growth perspective I would argue we’ve got the growth that we want. So we’ve been sort of setting out at the core retail level around, you know, what did we do in the prior year’s quarter? Can we keep the momentum going? Can we write, you know, perhaps, you know, marginally more and we’ve done better than that. So I would argue we’ve probably written more on the high end of core retail than perhaps what we might have expected because we are seeing the opportunity to write that at a very profitable margin.

And the reason I would say that is I can envision a quarter in the future where you may say, hey, you didn’t write quite as much as we did in the prior year. And the answer would be, well, the returns were not quite as strong and the upshot of that is we have more capital to, you know, to deploy when the returns swing back again. But that hasn’t been the case. And yeah, we shied away from MIGAs, but that’s been more because we haven’t seen the returns.

We shied away from FABNs again, a bit, probably just with the gapping out on the credit side. We did, I would argue that the buybacks we did in Q2 and Q1 were sort of a reallocation from what might have been kind of ascribed towards the sales budget. So that’s opportunistic for us, but it’s not, you know, we do, obviously we’re capital self-sufficient and we do prioritize putting a lot of that into the growth engine. But could we have sold more in the quarter?

Yeah, but you’re at that sort of efficient frontier of sales and returns. So again, it’s kind of hard to think that way when you’ve had the best core retail quarter you’ve ever had. But I think, yeah, I mean we’ve got a. Clearly we have capital plan, we have capital plans all the way out to 2029. So we’re balancing it with a very long term horizon. But yes, I would, I mean, if you ask me, did we execute the capital plan this quarter or indeed all three quarters of this year pretty much exactly in line with our expectations. I would say we did with maybe the one switch being we did a bit more towards the, a little bit more towards the buybacks than maybe we had initially anticipated at the start of the year.

I might also point out like there have been a lot of regulatory changes. I mean I would suggest that the regulatory changes that have actually come through this year were probably north of $500 million in terms of impact from a capital point of view. And we’ve navigated through all of that as well with various things that we don’t need to revisit. So we’re constantly navigating a balancing act but one that we feel very comfortable at because we’re absolutely in control of.

Michael Bailey (EVP)

Yeah, Alex. Mike, I’ll just add a couple of things here. So you know, we’ve talked previously before, the in-force as currently construed inclusive of any contributions from PEAK will contribute somewhere in the 900 million to a billion of capital every year. As we outlined in some of our prepared remarks, we’ve got about 300 million of Holdco needs in the form of, you know, planned dividends and servicing debt. And the balance is really what we use to sort of fund the new business growth.

So if we’re looking sort of at a capital attribution in terms of where we’re heading, that’s what we would do. Now obviously in there there’s all kinds of factors like Conor is referring to where we can dial up. We can redeploy capital to different purposes depending on where we see the returns. We also have to be mindful of the current environment where we do see some capital creep as the NAIC has made some changes to its capital structure. That’s going to impact us as well.

Conor Murphy (President and CEO)

Yeah, and I’ll just add two more things because this is important for us. I’m not sure there’s a growth story like us in the industry in terms of meaningful insurance companies and that’s really the metric that we focus on is continuing to grow profitably and nothing about that has changed. I might footnote by the way, we did announce an additional hundred million dollar buyback capacity that got approved by the board yesterday.

Alex Scott (Analyst at Barclays)

Got it. That’s all helpful. Yeah. I mean on the growth front, I hear you. On the sales growth, the surrenders have been higher too though if I just look at average AUM that we’re calculating our return on assets off of, I think it’s been fairly flat. And I know there’s like an interest rate impact in there, but it’s, I think it’s flat year over year. And it’s, you know, part of that is the flow of reinsurance becoming more fee based too. Like you’re still selling a lot of gross business.

I get it. But the benefit to all of that I would think would be, you know, the growth algorithm doesn’t take away from capital generation and ability to redeploy that as much. And so, you know, I, that was the intent of the question. Why I’m trying to understand it.

Mark Wiltse (Chief Financial Officer)

I would just say as we look year over year in terms of net retained assets under management, we should just be careful that we’re picking up the impact of the F&G Life Re Bermuda sale in there, which would obviously kind of impact those net assets under management. So we’re happy to unpack that with you.

Alex Scott (Analyst at Barclays)

Yeah, that’s almost a $2 billion AUM switch from that sale. So that’s impactful as well. Yep, understood. Okay. Can you talk a bit about your exposure to, you know, data centers, hyperscalers, that kind of thing and just, you know, capacity to do that kind of business and, you know, just the risk-reward you see in that. It’s a question we’re getting increasingly from investors.

Conor Murphy (President and CEO)

Yeah, yeah, I guess so. So I, and I did reference this in the opening remarks as well. Like, I mean for us it’s pretty modest. It’s under 3% with respect to, I’m going kind of right to the core of the AI infrastructure debt. We talked about really being focused on the investment-grade deals, the high-quality counterparties, having contracts in place that are sufficient in terms of the loan balances. And look, I understand within that there’s various types of deals.

You’ve got your construction and refinancing and cash-flow deals that are longer. You’ve got your power deals in the middle and your chip deals that are more short duration. But across all of that, we just, we stick to our guns in terms of we have the choice and the ability to just go to the highest end of those investment opportunities. And obviously there’s a lot of conversation around how, you know, what the events of this week may do to the landscape at, certainly at a state level. But, you know, where we are, we’re already investing in things that are, you know, in place rather than speculation for what’s coming. So if anything, we’re probably more secure now than we were last week. If there’s less availability for the demand, I would argue that what we’ve already invested in will probably hold up even better than we probably expected a week ago.

Alex Scott (Analyst at Barclays)

Got it. That’s helpful. And could I just ask for a quick update on PEAK and the strategic, I guess, initiative there?

Conor Murphy (President and CEO)

Yes. So there’s really not, there’s nothing I can really add beyond what I had said in the prepared remarks. So we are, we’re in a process. There is interest in those properties from an overarching and even indeed from an individual level. So we’re going to weigh all of that up and make the best decisions and we’ll come back to you with news on that when we have something more substantial to share.

Alex Scott (Analyst at Barclays)

Okay, thank you.

Conor Murphy (President and CEO)

Thanks, Alex.

OPERATOR

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

Mark Hughes (Analyst at Truist Securities)

Yeah, thank you. Good morning. The surrenders, withdrawals were down a little bit in absolute terms. Any observations on the behavior you’re seeing there?

Michael Bailey (EVP)

Hey, it’s Mike. Happy to take that one. I think overall we’ve seen increased surrender activities. I think the other thing that I would note is we did see a pretty big increase in rates during the quarter. If I look at the 10-year at the end of the second quarter it was 4.46% and was up at 5.29%, 83 basis points higher at the end of the third quarter. But most of that increase sort of came at the tail end of the quarter. So I think surrenders were kind of within the range of our expectation.

But also, you know, it can take some time for a policyholder, an annuitant to work with their advisor to actually work towards, you know, whatever their planned action is and to the rate environment. So sometimes that can come in somewhat slowly. It can also depend, can be very bespoke in terms of where policies are with respect to their surrender charge period or how much of a market value adjustment there may be. So I would say we continue to expect elevated surrenders, especially in this rate environment.

And I wouldn’t view the level in the quarter as anything outside of our, within our range of expectations.

Mark Hughes (Analyst at Truist Securities)

Appreciate that. Thank you.

OPERATOR

Thank you. We have a follow-up question from Wilma Burtis with Raymond James. Please proceed.

Wilma Burtis (Analyst at Raymond James)

Hey, good morning. Thanks for taking my follow-up. Has the mortality in the IUL and PRT blocks leveled off for a more steady cost of funds rate? Just a little bit of volatility there. Just want to understand what we should expect going forward. Thanks.

Mark Wiltse (Chief Financial Officer)

Yeah, so thanks, Wilma. I’ll try to give you a little bit more color there. Let’s go back to the second quarter. We saw relatively $10 million adverse, mostly PRT mortality develop in the second quarter. Our thought just based on looking at the data, this was a timing issue and that turned out to be the case. And so that, I would say, that $10 million sort of reversed. So I would say there’s, you know, if you look at that kind of, if we spread that $10 million evenly over the second and third quarter, you know that’s a factor there.

And then I would say the remaining sort of favorable impact I think is what we could look to as much more in line with what our expectation is. So if you look at the schedule in our financial supplement that is going to talk about the impact of cost of funds in sort of that all other bucket, once we normalize out for the increased DAC amortization from the actuarial assumption update, you end up in roughly a $20 million period-over-period improvement from mortality. And roughly half of that should be thought of as the catch-up from timing from the second quarter. And the remaining half is something that we would sort of expect going, kind of a newer run rate or established run rate, going forward.

Wilma Burtis (Analyst at Raymond James)

Okay, thank you. That helped.

OPERATOR

Thank you. And this will conclude our question-and-answer session. I will now turn the conference back over to the CEO and President, Conor Murphy, for closing remarks.

Conor Murphy (President and CEO)

Thanks, Latanya. And thanks again everyone for joining us this morning. We’re really pleased with our momentum through the third quarter. Expect that momentum to continue at the year end and we’ll continue to generate AUM growth. We’ll remain disciplined on our approach to pricing and profitability. We’ll prioritize business that meets our return targets and we’ll keep allocating capital to the most attractive opportunities. We really appreciate your continued interest in F&G Annuities & Life as we remain focused on delivering long-term shareholder value.

We look forward to updating you on the fourth quarter earnings call. Thanks.

OPERATOR

Thank you for attending today’s presentation. The conference call has concluded. You may now disconnect and have a great day.

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