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[Audio Gap]
And we've generated record gross sales, whilst maintaining pricing discipline. Our gross sales were $6.3 billion in the first half, up 11% over the prior year. We're on track with our stated goal of growing annual gross sales at a double-digit clip. And with net sales of $4.4 billion in the first half, we are on track with our stated goal of managing net sales retained above the $6 billion to $7 billion annual level that continues to grow our retained AUM.
Next, looking at the quarter's results more closely. We reported gross sales of $3 billion in the second quarter, a decrease of 3% from the prior year quarter due to lumpy institutional sales with a 9% decrease over the sequential first quarter, which reflected a record level of sales, boosted by the effects of market volatility and the U.S. regional bank crisis. Retail channel sales were $2.3 billion in the second quarter, an increase of 5% over $2.2 billion in the second quarter of 2022. This reflects our fifth consecutive quarter of retail channel sales exceeding $2 billion, driven by continued strong consumer demand for our products. Fixed annuities are an attractive solution for consumers given their relatively higher rates, guaranteed growth, principal protection and tax-advantaged accumulation and annuitization options. Our sales mix was consistent across the 3 retail channels, including agent, bank and broker dealer in the second quarter as compared to the prior year.
Institutional market sales were nearly $700 million in the second quarter comprised of $500 million of pension risk transfers and $200 million funding agreements compared to nearly $900 million in the second quarter of 2022, solely comprised of funding agreements. Funding agreement activity in the second quarter was driven by FHLB transactions as current market conditions remain challenging for funding agreement-backed notes issuances.
For the first 6 months of 2023, this brings our institutional market sales to $1.2 billion and with 6 months to go, we are on track with our annual target of $2 billion. F&G's net sales retained were $2.2 billion in the second quarter as compared to $2.5 billion for the prior year quarter. This expected trend reflects the attractiveness of third-party flow reinsurance, which increased from 50% to 75% of MYGA sales in September of 2022. F&G has profitably grown its retained assets under management to a record $46 billion at June 30 net of flow reinsurance. Adjusting for flow reinsurance, we estimate gross assets under management at $51 billion as of June 30. That is before the approximately $5 billion of cumulative new business ceded.
Next, turning to our investment portfolio. We continue to have conviction that our portfolio is well positioned to withstand uncertainty in the macro environment and perform through the cycle given its diversification and Blackstone's extensive expertise. Our fixed income yield was 4.39% in the second quarter, excluding alts volatility as compared to 3.93% in the second quarter of 2022. This reflects our fourth consecutive quarter of maintaining fixed income yield above 4% driven by relatively higher yields on floating rate assets and new investments given higher interest rates over the past year.
Our portfolio is high quality, with 95% of fixed maturities being investment grade. There has been no change in our commercial real estate and office holdings from last quarter, which skews toward the lower end of industry exposure. Credit-related impairments have averaged 5 basis points over the past 3 years, well below our pricing assumption and remained below that level in the second quarter. Overall, our portfolio continues to perform well and is well matched to our clean and stable liability profile.
Our spread-based business is a simple one. We target a return on assets or ROA above 100 basis points on our AUM. Excluding significant items, we have now delivered our sixth consecutive quarter of adjusted ROA, well above our 100 basis point target, in fact, averaging 113 basis points, excluding significant items over the last 6 quarters. Beyond spread-based earnings, we are further diversifying into capital-light fee-based earnings, including flow reinsurance and owned distribution.
We utilize flow reinsurance, which provides a lower capital requirement on ceded new business while allocating capital to the highest returning retained business. In addition, the strategy enhances cash flow, provides fee-based earnings and is accretive to F&G's returns. Wendy will provide further perspective in a few minutes.
We have also been expanding our own insurance distribution holdings. This strategy solidifies relationships with key partners that we have worked with for a couple of decades while boosting our presence in underserved, multicultural and middle market segments. Importantly, the strategy plays to key experience and expertise within our management team, which helps these companies to accelerate their growth. Over time, F&G will earn a dividend stream from our ownership stakes, providing for higher margins at a lower marginal cost of capital.
We value the power of capital-light earnings streams from these strategic-owned distribution stakes which are expected to be accretive to ROE. F&G is also committed to strong ratings and achieving upgrades over time. We remain on positive outlook with A.M. Best, and we're pleased that Moody's upgraded the financial strength ratings of F&G's primary operating companies to A3 last month, recognizing the financial strength and stability of F&G's business as we execute on our diversified growth strategy.
I'd like to thank our team for all that they have done to execute on our diversified growth strategy, having doubled gross AUM before reinsurance and nearly doubled adjusted net earnings, excluding significant items since the merger with FNF 3 years ago. Our success would not be possible without them. We have strong momentum as we head into the second half of the year with many opportunities ahead of us to further expand our business, which will ultimately drive margin expansion and improved returns. And we remain focused on delivering long-term value to our shareholders.
Let me now turn the call over to Wendy Young to provide further details on F&G's second quarter financial highlights.
Thanks, Chris. Today, I'll provide more details about our financial results and key performance drivers, capital liquidity and leverage positions and wrap up with a few additional thoughts on our reinsurance strategy.
Overall, F&G's financial performance in the second quarter was strong and builds on our proven track record, and we continue to have strong capitalization and financial flexibility to successfully execute our growth strategy.
Starting with adjusted net earnings. For the second quarter of 2023, we reported adjusted net earnings of $79 million or $0.63 per share. Our core earnings per share were $1.03, after adjusting for $0.40 per share of unfavorable significant items that are not consistent period to period. These significant items include $0.44 per share for alternative investment returns below our long-term expectations partially offset by $0.04 per share of bond prepay income.
For comparison, last year's second quarter adjusted net earnings of $155 million or $1.45 per share included favorable significant items of $0.39 per share. Adjusting for these significant items in both periods, second quarter adjusted net earnings increased by 14% over the prior year. I also wanted to highlight that on July 13, 2023, F&G filed an 8-K to provide investors and analysts with a supplemental disclosure of our 2022 10-K and first quarter financial supplement and investor presentation.
This filing revised our prior LDTI accounting standard recast for calculation refinement of F&G's A&E adjustment to remove all market-related movements, including the current period for market risk benefit from income. We believe this approach to be in line with peers.
This change had a modest favorable benefit to adjusted net earnings, which is reflected in our first half 2023 results, and we expect to persist in 2023 in future years. Importantly, F&G has generated consistent economics over time. As Chris mentioned, excluding significant items, F&G has delivered 6 consecutive quarters of adjusted ROA above 100 basis points, averaging 113 basis points.
Now looking at our second quarter results more closely and starting with asset growth, our retained assets under management were $46.3 billion as of June 30, up from $45.4 billion as of March 31. This reflects $1.9 billion of net new business asset inflows in the quarter, partially offset by $1.1 billion of flow reinsurance outflows. With regard to our inforce book, this quarter, we saw outflows from MYGA products right in line with the past couple of quarters. These are predictable cash flows and expected to be lumpy over time depending on contractual maturity dates set at origination.
During the second quarter, we also saw fixed indexed annuity outflows for combined surrenders, withdrawals and death were slightly elevated as compared to past couple of quarters. Although not concerning given market conditions and notably, we continue to experience strong inflows. Our retail fixed annuities comprised 74% of total net reserves and have policy features which serve as a disincentive for policyholders to surrender early. 91% of our fixed annuities are surrender-protected with an average remaining surrender charge at roughly 7% of account value and approximately 70% of these policies also have market value adjustment protection.
Overall, F&G continues to have positive net inflows. And as a reminder, we benefit from a boost to earnings from higher surrender charge fees and freed-up capital from the policy surrenders. And next, turning to our disciplined expense management. Over the past 3 years, F&G has grown, diversified and modernized its business while more than tripling its topline sales and doubling gross AUM before flow reinsurance. We are disciplined in our expense management approach and focus on our operating expenses relative to growth in sales and assets. To help put it in perspective from 2019 to 2022, we grew gross sales by 43% CAGR and gross assets under management before flow reinsurance by a 21% CAGR.
To generate that growth, we needed to make significant investments in our operating platform and personnel costs and other operating expenses net of deferred acquisition costs and expense allowances from reinsurance partners increased by a 16% CAGR. Looking ahead, we would expect our variable operating expenses, which are roughly about 1/3 of our cost base will continue to increase generally in line with our growing in-force book as well as gross sales, which are expected to grow at a double-digit click.
We also expect that fixed operating expenses, which are about 2/3 of our cost base or approximately $200 million on an annual basis will grow at a single-digit growth rate. And we expect that our reinsurance expense allowances or the expense reimbursements that are reported separately under our benefits and other changes in policy reserve line item will increase over time as benefit of cash generation through flow reinsurance to third parties.
All in, we expect that our operating costs will continue to grow as we scale and invest in the business, albeit at a slower growth rate relative to our gross sales and gross assets under management before flow reinsurance and with the benefit from the reinsurance expense allowances, thereby generating operating leverage over time at a continued measured pace.
And next, turning to interest expense. Our interest expense has increased to $47 million or 21 basis points of ROA in the first 6 months of 2023 as compared to $17 million or 9 basis points of ROA in the first half of 2022. This reflects $515 million drawn on our new revolving credit facility which was put into place in the fourth quarter of 2022 and $500 million senior note issuance in the first quarter of 2023 as planned to support our future growth and liquidity needs.
Our annual interest expense remains approximately $95 million or roughly a 6% blended yield on the $1.6 billion of total debt outstanding. F&G's debt-to-capitalization ratio, excluding AOCI was 23% as of June 30, below our long-term target of 25%.
Now turning to our balance sheet. We ended the second quarter with a GAAP book value, excluding AOCI of $5.1 billion or $40.70 per share with 126 million common shares outstanding as of June 30. There is a page in our investor presentation providing an analysis of book value per share. We continue to target holding company cash and invested assets at 2x fixed charge coverage. Our strong capitalization supports growth and distributable cash.
During the second quarter, we returned $41 million of capital to shareholders, including $25 million of common dividends and $16 million of share repurchases. In the second quarter, F&G repurchased approximately 790,000 shares for $16.4 million at an average price of $20.79 per share. Capacity remaining under the $25 million share repurchase authorization was $8.6 million at June 30, 2023.
Following yesterday's announcement of the third quarter cash dividend of $0.20 per share, we view our current annual common dividend of approximately $100 million as sustainable. This translates into a dividend yield of approximately 3% based on F&G's recent market capitalization of approximately $3.5 billion and demonstrates the underlying strength in our business as well as our commitment to creating value for our shareholders.
The dividend is reviewed quarterly and expected to increase over time, subject to cash flows, alternative uses of capital and market conditions. F&G is well positioned to fund its continued growth with positive and growing in-force capital generation, available debt capacity as our balance sheet delivers with book value growth over time and ample opportunities for future reinsurance program.
Let me wrap up with an update on flow reinsurance strategy. As Chris shared last quarter, the ability of our new business platform to generate premiums is attractive to third-party asset managers, especially those who are not paired with an insurer as a means for them to take on asset growth and generate fees from the flow to illustrate the economics for F&G. For every $1 billion of new business flow reinsurance, we free up approximately $75 million of capital to redeploy to the highest returning retained business. This is meaningful and to help put that amount in perspective, that is nearly 10% of the estimated $800 million capital generation from our entire in-force block in 2023.
Importantly, we expect to grow gross sales at a double-digit clip while managing net sales to a level that continues to grow our retained AUM. We estimate that we could retain as little as $6 billion to $7 billion of gross sales continue to grow the retained block. In this scenario, as long as sales are well in excess of outflows, we are still growing with net inflows, albeit at a smaller spread, but with significantly less required capital.
Within these parameters, during the second half of 2023, we expect to increase our flow reinsurance on MYGA new business from the current 75% level to as much as 90% by onboarding additional high-quality and established flow reinsurance partners. Importantly, MYGA flow reinsurance provides fee-based earnings while also generating a higher ROE than fully retained sales.
Additionally, in contrast to our 100 basis point ROA rule of thumb for fully retained spread-based business for reinsurance sales based on the current economics, which could change, we would expect to receive approximately 1/3 of the ROA with proportionately less or about 1/5 of the capital requirement. We are well into execution of our flow reinsurance opportunities for the second half of '23, and I look forward to providing further details next quarter.
This concludes our prepared remarks and let me now turn the call back to our operator for questions.
[Operator Instructions]
Your first question comes from Mark Hughes with Truist Securities.
When do you talk about if you retain $57 billion, that would be sufficient to grow the block, offset outflows, what kind of growth rate are you thinking of when you're talking about grow the block? Is that just low single digits? Or what's the right number?
I would say, it's single digits, but on the upper end.
Okay. And under those circumstances, is there a kind of a rule of thumb about the capital return or capital -- excess capital generation, if you're reinsuring 90% of the MYGA if you're retaining enough to get kind of single-digit growth in the block. Your -- as you say, your ROA profile improves relative to your capital usage, what does that mean for capital return?
Yes. So we believe we'll be able to increase the dividend over time.
And the only thing I would add to that, this is Chris, is that right now, new business we're getting at least mid-teen ROEs on new business. The economics on flow are pretty meaningfully north of that. So we think this will show up relatively quickly in terms of its ability to expand overall net spread.
And then, Chris, the sales this quarter, still quite strong in absolute terms, but year-over-year, up mid-single digits. I think that's probably, I think the industry numbers suggest the overall sales growth was somewhat higher than that. Was this just competitive situation? Did you -- was the MYGA not quite as attractive this quarter? And again, not to criticize what's a good growth rate, but what was the dynamic this quarter?
Yes. So I would say, no, nothing has really changed in terms of competitive environment. There's always pockets of products where perhaps you're seeing someone be a bit aggressive and you choose not to go chase it. I think for us, it's -- we look across now all of the channels when deciding where to allocate capital. So no, I would say return targets for us have continued to be quite attractive. But keep in mind, we're also writing PRT business. We've got FHLB borrowings, et cetera.
So we just -- we go through the process, it's pretty real time of where we want to allocate capital. The quarter-over-quarter looked like it slowed a little bit. But just keep in mind, we had an absolute blowout first quarter. So right now, our retail business is on a pace to do $10 billion of sales on its own. So no, we're feeling like there's just tons of sales opportunity right now.
[Operator Instructions]
Next question comes from A.J. Hayes with Stephens.
Congrats on the quarter, Chris and Wendy, you both called this out during your prepared remarks, but when we look at your normalized ROA or we utilize your long-term expected return assumption of approximately 10% on alternative assets. And back out any other one-timers, your ROA, as you guys said, has been over 100 basis points for 6 consecutive quarters now. So first off, congrats on that. But can you generally talk to what is driving this outperformance? And then whether we should expect this trend of hovering above 100 basis points to kind of continue for the foreseeable future here?
Yes, that's where we're trying to give some discussion points for you and some modeling help with expanding the reinsurance and the owned distribution. You should see that ROA expand even above the levels that we currently experienced. We're seeing spread expansion in the existing business. We've had -- with the run-up in the interest rates, the floaters are performing very well. And we -- in the QFS, A.J., we show a nice exhibit that demonstrates how that has contributed to the NII line. We have had some increase in the cost of funds, but the product margin is basically what's causing that expansion.
Yes. And the only thing I'd add to that is, which we talked about on the call, I mean, we've grown the topline at a pretty incredible clip. As you know, we've effectively doubled assets and earnings in 3 years when the goal was 5%. And look, we've had to make some pretty significant investments in new channels and new technologies to execute upon that. But despite that, we're still getting some good expense synergies. In other words, we've grown fixed expenses at a rate well below what we've grown sales at. And I think now we should see more of that going forward. So it's really across the board.
Blackstone has done a terrific job working with our investment team in terms of continuing to generate attractive additional spread for the portfolio product margins, as Wendy said, have been growing. And then as we continue to tightly manage fixed expense growth going forward, it's a good picture. And yes, I would say, it's pretty hard for us with a straight face to say that the goal is 100 basis points when we've averaged 113 and I think there are more tailwinds than headwinds to that.
Great. Chris, I believe it was you that mentioned you're on track to hitting your goal of achieving institutional sales of $2 billion to $4 billion in 2023 here. But could you provide more color here in 3Q? Have you had any more of these lumpy institutional transactions so far during the quarter?
We have. So we closed 1 transaction. I'll double check, it was $170 million or so. Pipeline is good. We continue to like the market a lot. There's a lot of activity. We're really selective on what we go after. It's quite an impressive and sophisticated funnel that the team uses to assess even -- do we even want to bid on a deal. But once we've decided and we've narrowed in on we like the profile of the deal. We think it lines up well with our line of sight on asset availability, and we go after it. We've had a really good hit rate effectively 1 and 4 despite, frankly, being one of the lower-rated players competing in the market.
So we see a lot of upside there. We like the long duration profile of that business. And it's a small but mighty team. And so these are assets, we talk about expense leverage, we got a group of about a dozen people leading this effort, bringing in billions of sales. So that positive contribution all around.
Okay. And then just looking at gross sales here, institutional channel has been strong. You expect to achieve that goal that I just previously mentioned there. Retail channel as well has been performing well here. So a strong year in 2023 is kind of the expectation where we're expecting. Can you talk to gross sales maybe in 2024? You expect to hit the double-digit clip here in 2023. Is that a reasonable expectation again for 2024?
Yes. I would say, it is. We've got new products in the works as well. We're close to entering the RIA market, and I think that's going to open up a lot of avenues and other pockets of distribution for us, which I think will be really attractive. We talked about PRT. I think there's certainly, tailwinds there. And then retail demand for fixed annuities, you referenced some of the industry numbers is really just off the charts right now.
You're looking at crediting rates of 5-ish percent tax deferred with principal guarantee. So I don't -- I honestly don't see that slowing down anytime soon. And again, for us, it's really -- we view our most important job on behalf of our shareholders is to allocate capital smartly. And now we've got a new business engine that's cooking along in sourcing premiums from multiple directions. So yes, we will continue -- expect to continue to grow the topline at a double-digit clip.
I would now like to turn the floor back over to Mr. Blunt for closing remarks.
Great. Look, we're pleased with our overall results despite the uncertainty and volatility in the current macro environment. We think F&G is poised to benefit in this higher rate environment and is off to a strong start in the first half of the year. We expect to expand our business with a focus on further improving our profitability, which we believe over time will drive multiple expansion to deliver value to shareholders.
Along these lines, we look forward to discussing our business and emerging growth strategies in more detail at our upcoming Investor Day on October 3. Additional information will be provided on our investor site as we get closer to the event.
Thanks for joining us today, and we appreciate your interest in F&G.
Thank you for attending today's presentation, and the conference call has concluded. You may now disconnect.