F&G Annuities & Life Inc

NYSE:FG

Earnings Call Transcript 2018-Q4

[Operator]

Good morning, and welcome to the FGL Holdings Fourth Quarter 2018 Earnings Conference Call and Webcast. [Operator Instructions] Please note, this event is being recorded.

I would now like to turn the conference over to Diana Hickert-Hill, Senior Vice President of Marketing, Investor Relations and Communications. Please go ahead.

[Diana Hickert-Hill, executive]

Thank you, operator, and good morning, everyone. We appreciate you joining our earnings call. Today, we will discuss our financial results for the fourth quarter and full year of 2018, which ended on December 31. You can find the financial information for FGL Holdings on the Investors section of our website, fglife.bm.

Today's presenters include Chris Blunt, President and Chief Executive Officer; and Dennis Vigneau, Executive Vice President and Chief Financial Officer. Following our prepared remarks, our Chief Investment Officer, Raj Krishnan, will join the question-and-answer portion of the call.

Some of the comments we make during this conference call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act. We do not intend to update any comments on this call to reflect new information, subsequent events or changes in strategy. A number of risks and uncertainties exist that could cause our actual results to differ materially from those expressed or implied. We discuss these factors in detail in our 2017 Form 10-K and in the 2018 10-K that we plan to file tomorrow with the SEC.

During our conference call, we may refer to non-GAAP financial measures that we believe may be meaningful to investors. Please refer to our fourth quarter earnings release financial supplement and investor presentation that we posted to our website. These documents contain a reconciliation of non-GAAP financial measures to GAAP. And finally, all comparison comments today will be to the fourth quarter of 2017 unless we state otherwise.

I will now turn the call over to Chris.

[Christopher Blunt, executive]

Thanks, Diana, and good morning, everyone. Before I talk about our fourth quarter and full year results, I want to take a couple of minutes to update you on my first 2 months with the company.

In short, I'm thrilled to be here at F&G, and I'm excited about our progress and trajectory. I've spent considerable time with our employees at all levels of the company, and I have to tell you, the team is fired up and we're delivering at our growth targets.

F&G has a long-standing track record in its core markets. Our business focus helping middle-income consumers prepare for and save for retirement, positions us in an attractive segment of financial services, given demographic trends and an aging population. We work primarily with independent insurance agents to market and distribute our products and the strength of our distribution relationships is a source of true differentiation.

Our ability to generate attractively priced stable liabilities allows us to optimize our investment allocation with attractive asset classes. As you know, we favor complexity and liquidity risk over credit risk, which matches well with our liabilities. Given my background with Blackstone Insurance Solutions, I can speak directly to the strategic nature of our investment management partnership. This is a tremendous advantage in a number of ways as we go to market. This merger with CF Corp in late 2017, the company's momentum has accelerated. We have benefited not only from our investment strategy, but also with a stable group of core shareholders who have consistently supported the company. But most importantly, I have been impressed with our team. The level of expertise and discipline across the organization is significant. We're focused on leveraging these talents as we find ways to accelerate growth through organic and inorganic means.

Turning to shareholders, I was pleased to meet with some of our investors in Boston and New York City in my first week on the job. Given our priority of helping investors understand the F&G story, we have more investor marketing plans on the horizon, both near term and throughout the year. In short, we love to tell our story and help people learn more about our company, and it's why we're so optimistic about our better future.

I'll now walk through our top priorities from last April's Investor Day, and we'll start with one of our most important milestones. As you know, we've been focused on securing improved ratings. In November, A.M. Best raised our operating company ratings to A- or excellent. This upgrade helps us accelerate our organic growth in current and new channels and provides us with greater strategic flexibility. In addition, we were especially pleased that they initiated a rating of our F&G Re business at the A- level as well. Now with our A- rating in hand, we're moving full steam ahead with our F&G Re growth plans.

Second, we established plans to drive profitable organic growth in our existing businesses. I will go through our detailed top line results in a minute, but it's clear, we've made great progress on this objective, delivering 33% sales growth this year.

Most importantly, we've been disciplined in writing new business. Our returns have exceeded profitability targets, both in the quarter and in the full year.

Third, we told you that by partnering with Blackstone on investment management, we would be able to leverage their world-class origination, structuring and underwriting capabilities to execute our investment-grade portfolio rotation, and we're doing just that. To date, we have focused on reducing corporate bond holdings, which are largely BBB rated with tight spreads. Our focus is on replacing those investments with investment-grade structured securities sourced by Blackstone.

2018 was a critical transitional year for our portfolio, and we remain confident that this repositioning will be accretive to portfolio yields and net investment income, while actually improving diversification and the overall risk profile. Dennis will provide more information about the repositioning progress in a few minutes.

Now as I alluded to earlier, as part of our investor marketing efforts, we're going to host a deep-dive session on our general account investment portfolio for our shareholders and analysts this April in New York City. So you can learn more specifics about exactly how we're benefiting from our partnership with Blackstone. We will webcast the session as well. So stay tuned for details on logistics in the near future.

Next, we highlighted that our post-merger restructuring enabled us to form a reinsurance company in Bermuda. We are leveraging this capability to generate third-party clients, both block and flow reinsurance business. While it is early days, we have solid momentum and a number of clients and prospects in the pipeline. We expect to generate more than $175 million of flow reinsurance deposits in our first year and have a number of potential transactions that we believe will drive significant growth in 2019. Growing our reinsurance business is a high priority for us as it helps diversify our business, and ultimately, will help lower our overall effective tax rate.

Finally, we stated that M&A would be part of our strategy, and that we were open to looking at whole companies as well as blocks of business. We're pleased to have John Baird join our leadership team as Head of Business Development and Corporate Strategy. John brings extensive experience to the team, enabling us to have a laser-light focus on this important growth lever. In addition, we will continue to leverage our partnership with Blackstone, CC Capital and F&F to help source potential deals as well.

As we mentioned in prior calls, we are consistently evaluating a number of opportunities, both large and small, where we feel we can leverage our competitive strengths. However, our focus remains on being good stewards of capital. Pricing transactions that returns consistent with our organic growth opportunities with a similar risk profile. And we remain confident in our ability to execute our acquisition strategy as accretive opportunities arise.

Again, we just finished our first year post-transaction and are delivering on our strategy.

At a personal level, I can tell you this is my 33rd year in financial services. I have never been more excited about an opportunity than I am about this one.

Now let's turn to our fourth quarter results. F&G exceeded guidance we provided at our April Investor Day, earning $1.19 per share. And I would note, this is inclusive of the share count adjustment from our recent warrant exchange.

We delivered $1.19 common earnings per share or a 40% increase in earnings on a common share count basis.

Our return on equity expanded 460 basis points to 16.6%, demonstrating the effectiveness of our investment thesis and repositioning progress. Dennis will walk through the details as some factors can be lumpy, but it really was a strong finish to a year in which we were driving a lot of change.

I'll note that on a net income available to common shareholders basis, we had $156 million loss in the quarter, largely driven by mark-to-market volatility.

Now let's look at our top line performance. Our fourth quarter sales totaled $1 billion in the quarter, up 60%, and our full year 2018 sales totaled $3.6 billion, up 39% from 2017. We are seeing these results come from across our product portfolio and in line with the overall market demand.

FIA sales totaled $666 million in the quarter, up 44% over last year and up 6% over the third quarter. Full year FIA sales totaled $2.3 billion, up 28% over last year.

Our multiyear guaranteed annuity, or MYGA sales, and federal home loan bank borrowings totaled $290 million in the quarter, up 80% from last year. Year-to-date, MYGA sales and FHLB borrowings totaled $1.1 billion, up 42% from last year.

So a strong annuity sales like we've seen, it's helpful to note what are the key growth drivers. We see the strong sales momentum coming from several factors: attractive market demographics, drawn long-tenured relationships we've developed with our distribution partners, our partners increasing confidence in our company's future and our partnership with Blackstone. Recruitment of new agents who want to sell our products to meet their clients' needs, new agents accounted for 16% of our 2018 FIA sales.

Our comprehensive competitive product portfolio that meets a range of consumer needs. The successful launch of a new performance-based income and a cumulation product series in February, which contributed 12% of our FIA sales in 2018. And finally, the elimination to the cloud of uncertainty related to the Department of Labor's fiduciary role earlier in the year.

Turning to indexed universal life, or IUL business, we delivered $8 million of target premium in the quarter, up modestly from last year and from the third quarter. I will note that sales in this product line are particularly sensitive to ratings. So we expect that our recent upgrade to A- will help boost our sales.

On the flow reinsurance front, our deposits totaled $53 million in the quarter and $185 million for the full year 2018. We remain bullish in our ability to grow our flow reinsurance business at F&G Re, and we're in discussions on a couple of opportunities that we believe could drive nice growth in 2019.

So again, quite pleased with our 2018 sales overall.

Now before I turn the call over to Dennis, I want to make a few high-level comments on capital deployment and include some views on our 2019 goals. Our board recently authorized a share repurchase program of up to $150 million. We view repurchases as a good use of capital depending on competing uses of capital and our evaluation. Additionally, our board authorized a quarterly $0.01 per share dividend beginning with the first quarter of 2019. This step essentially opens up additional funds that can only invest in dividend-paying stocks and so it helps us further diversify our investor base.

Now looking to 2019, we remind you that we do not plan to give earnings guidance. That said, we do want to share some metrics we believe may be helpful for you to see how we think about the year ahead.

First on sales, we expect another strong year and one in which we will outperform industry sales, although, we expect it'll be more in line with earlier years, more in the 10% to 15% growth range.

Next, on taxes, we expect to be in the 20% effective tax rate range for the year. We do expect that rate will begin to decline over the next few years as we build our offshore business, which is not subject to U.S. taxes.

Third, on expenses, we've done a terrific job completing our $15 million reduction in expenses. And in 2019, we'll reinvest roughly half of those savings to fund channel expansion, technology and growth for the year. But by 2020, we'll start to see roughly 2/3 of those expensive savings come through to the bottom line.

And finally, we'll give you more color on specific benefits from our portfolio reposition when we host our update in April.

And with that, I'll turn the call over to Dennis to discuss our results in more detail.

[Dennis Vigneau, executive]

Thanks, Chris, and good morning, everyone. Today, I'll focus my comments on the following: the earnings and performance trends across the business; progress we've made on repositioning the investment portfolio; an update on actions and response to tax reform; and lastly, few thoughts on capital and liquidity as we head into 2019.

Before I get into the specifics of the quarter, let me begin by saying that we are very pleased with the overall performance of the business and are seeing significant momentum on several fronts. Top line annuity sales growth is up 54% in the quarter and 33% year-over-year, slightly ahead of the overall market. The portfolio reposition is delivering tangible lift with clear improvement in net investment income and yields shining through in the current quarter.

Fourth quarter earnings doubled over the prior period and are up 41% year-over-year. The return on equity has expanded 460 basis points year-over-year, and we see potential for further expansion as we look forward.

And lastly, AUM continues to grow nicely with stable policyholder trends contributing to earnings growth.

By just about any measure, Q4 results were terrific and the business is set up very well as we head into 2019.

With those highlights as a backdrop, let me get into more details.

Beginning with adjusted operating income available to common shareholders, we delivered $76 million or $0.34 per share compared to $37 million or $0.17 per share last year. I'll note the current period had some lift from favorable items that, although, core to our overall operating performance, are not consistent period to period. More specifically, the current period at AOI of $13 million of net favorability or $0.06 per from the following. A $24 million favorable tax benefit generated by our BEAT tax planning strategy. I'll speak to that more in a moment, as well as $4 million of mortality gains in our single premium indexed annuity or SPIA line. These 2 items were partially offset by $9 million of unfavorable adjustments for market movement on futures, $4 million higher DAC amortization due to market movement and $2 million of project cost.

Last year's fourth quarter AOI of $37 million also included a net $6 million of unfavorable items. Even adjusting for these lumpy operating items, we had a very strong fourth quarter, with AOI increasing $20 million or 47% over the prior year. This uplift in AOI continues to be driven by ongoing invested asset growth, the benefits of the portfolio reposition lift, a lower effective tax rate, disciplined expense management, and improving underlying trends in net spreads.

One item worth mentioning is the unfavorable adjustment for market movement on futures contracts in the quarter. As background, we statically hedge our liabilities between 90% and 95%, using call options based on expected policyholder behaviors and optionality. We then use futures to dynamically hedge the remainder. Our goal is to be risk neutral with this dynamic aspect over the course at any given year. Given the high degree of volatility in the markets during the fourth quarter, we saw an additional loss of $9 million in 4Q, though, for the full year, this was just $4 million net loss, well within our normal operating parameters. As with the expense of the call options, this modest mark-to-market fluctuation is an integral aspect of our adjusted operating income.

Turning to reported net income on a GAAP basis during the fourth quarter, we reported a net loss available to common shareholders of $156 million or $0.70 per share. There is a page in our presentation detailing the drivers here. But in summary, this GAAP result was driven primarily by several aspects of mark-to-market volatility, all of which are excluded from AOI, and all of which are after DAC and tax.

First, the typical adjustment related to the FIA embedded derivative market movements were $77 million in the quarter. We also had $72 million of net unrealized losses driven by market value changes on preferred equity securities we hold in our portfolio, which now flow through the income statement on a GAAP basis, effective with new accounting requirements effective at the beginning of 2018.

There were $52 million net realized losses related to the wrap up of our Phase 2 portfolio reposition strategy. $31 million of other market and nonoperating items such as the embedded derivative related to a remarketing feature in our outstanding preferred stock issuance. And $15 million of credit-related impairment losses, driven by our holdings in PG&E, as well as a $15 million reversal of prior period benefit from a tax election excluded from AOI in Q1. Again, all of these details can be found in the presentation.

Looking at our results for the full year 2018, we reported $257 million of adjusted operating income or $1.19 per share, which as I mentioned, is up 41% compared to $182 million or $0.85 per share in 2017. This robust earnings performance provides significant capital redeployment options to drive future shareholder value, such as organic new business sales at midteens returns, additional share repurchases or accretive M&A.

To translate this performance to a book value per share perspective, we would view the core book value per share growth to be 16% or an ending $8.16 per share compared to last year at $7.05. We then purposefully reinvested $0.58 of that into portfolio reposition losses to drive higher future investment income and $0.49 into the warrant tender to minimize future dilution. The combined expected IRR of these actions is about 20%.

Mark-to-market volatility during the quarter was another $0.66 per share, resulting in an ending reported book value per share of $6.43. It's important to note that we've seen about 1/3 of the market impact rebound already in the early part of the first quarter. Overall, we expect our underlying strong performance, combined with a disciplined redeployment strategy to drive enhanced value going forward.

Turning to the investment portfolio performance for which we have provided additional information in the presentation as well, the portfolio is performing well, and we made significant progress on the reposition, which is clearly demonstrated in the sequential net investment income growth relative to the third quarter.

Let's walk through what we accomplished during the quarter and how we are positioned entering 2019. Ending average assets under management totaled $25.6 billion at December 31, reflecting an increase of $1.3 billion of net asset flows year-over-year, which is net of expected runoff in our MYGA portfolio. And this also excludes the impact from purchase accounting.

As a reminder, the purchase accounting or PGAAP, mark-to-market is a noncash adjustment which will amortize as a reduction to net investment income over the remaining asset life.

GAAP earned yield on the investment portfolio was 4.51% for the fourth quarter. This level is 20 basis points higher than the 4.31% yield in the fourth quarter of 2017, and reflects the benefits from the portfolio reposition, net of fees and the impact of PGAAP.

As we head into 2019, the run rate net investment yield is about 4.75%, reflecting more than 40 basis points improvement since the merger with further expansion to come in the future. Net investment income was $295 million in the quarter, up $29 million or 11% compared to last year. This lift reflects a $34 million increase from invested asset growth, $31 million of portfolio reposition lift, both of which were partially offset by premium amortization and higher planned fees. Net investment income in the fourth quarter was up $28 million or 10% sequentially, again, from the reposition lift clearly coming through.

Net investment spread for our core product line, FIA, is at 255 basis points. FIA spreads have historically achieved a range of 280 to 300 basis points. Now having been reset post PGAAP for the noncash premium amortization and fees. Page 11 in the earnings presentation lays out the trend in net investment spreads since the transaction closed last year.

As you can see, the underlying trends, which separates out the noncash impact of PGAAP, are squarely within our targeted range and reflect very stable policyholder option and crediting cost as well as profit margins. Overall, we are confident that as we achieve the full annualized lift in net investment income, combined with a runoff of the PGAAP premium amortization, we will see additional sustained increases in reported net investment spreads.

Fourth quarter credit-related impairments were $22 million before DAC and taxes and $15 million after-tax, and they were driven primarily by our investment in PG&E, which filed for bankruptcy in January of 2019. We recorded this impairment in our financials, reflective of the market value and conditions as of the balance sheet date and we did not sell down any of this position, and since the impairment, these bonds have traded back into the mid-90s.

Let me shift to a few details on where we're putting money to work. Fixed income asset purchases during the quarter totaled $2.7 billion at an average net yield of 5.47%. Those purchases were primarily in structured security such as CLOs, mortgage-backed securities and ABS, and represent both new money flows and repositioning.

On a year-to-date basis, we have purchased $10 billion of fixed income assets at a weighted average NAIC rating of 1.5 and an average net book yield of 5.1%.

As far as our progress repositioning the in-force portfolio, that has been executing in 4 phases. You'll recall the first, which was the $2.7 billion block trade in the first quarter, where we picked up 150 basis points of yield. That trade provides $40 million of annualized gross net investment income lift and delivered about $33 million throughout 2018.

Secondly, with respect to structured products, we have now completed a $4.1 billion rotation in the fourth quarter, moving out of corporates and into structured assets at a 5.8% gross and a 5.1% net yield. These trades will provide $55 million of annualized gross investment income lift and delivered about $16 million of that in 2018.

These structured asset trades reflect our mandates with both Blackstone as GSO Capital and Blackstone's real estate manager, BREDS. We continue to favor structured assets which provide attractive yields, enhanced credit protection and floating rate upside relative to corporate public bonds. We increased this asset class from 23% to 34% of the overall portfolio over the past year, with a comparable decrease in public corporates. Our structured asset allocation has reduced the overall duration of the portfolio to about 0.5 year along relative to the liabilities. Additionally, it also supports the ALM profile and cash flow testing as well as giving us flexibility to manage the portfolio irrespective of the rate environment. Again, this phase is completed and we will see the full run rate uplift in 2019.

Third, with respect to alternative assets, this program is well underway. At this time, we have over $550 million or 2% of the portfolio in funded alternative assets, and we ended the year with $1.7 billion of commitments. We expect alternative assets to build to about 3.5% of the portfolio by the end of 2019 on a funded basis as existing commitments turn into those findings. We also expect to continue to build towards 5% level thereafter, with future timing aligned to achieve our profitability and capital targets. On average, we are assuming a net 12% return for this asset class over the life of the investment.

Finally, we continue to pursue some additional optimization actions to enhance new money rates and to expand the reposition to include some additional operating subsidiaries, which combined, delivered $5 million total uplift in 2018, and once completed, will deliver $15 million to $20 million of gross income lift in 2019.

Furthermore, we've initiated in the early part of the first quarter, a $500 million derisking action in BBB- securities, and we'll update you further on that next quarter.

Shifting to a few thoughts on actions related to tax reform during the fourth quarter. You may recall that earlier in 2018, we expected to make a tax election to have our Bermuda-based affiliate company treated as a U.S. taxpayer. This assumed election maintained flexibility for our affiliated reinsurance platform to ensure that, ultimately, we would have no negative exposure to the BEAT tax.

In the fourth quarter, with final guidance and regulations coming out, concluding that the BEAT tax would apply on a gross basis for affiliated reinsurance, we shifted that strategy. And pursuant to that modified tax planning strategy, we decided to not elect a 953(d) election for our Bermuda affiliate company, and instead, due to the phase in of the BEAT tax over 3 years grading from a 5% rate in 2018 to a 12% rate in 2020, we elected to be subject to the BEAT tax through September 30. And then we fully recaptured the affiliated business in the fourth quarter. Since the BEAT impact under this strategy was less than the assumed 21% tax rate under the alternative 953 (d) election, we generated a $39 million tax benefit, of which, as I mentioned, $24 million accrued to the benefit of AOI. The remaining $15 million was excluded due to the -- to reflect the reversal of the tax election previously adjusted from AOI in 2018.

Our reported AOI effective tax rate for the full year 2018 was about 14%, was 7 points lower than the 21%, it would have otherwise been under the 953(d) election. As I mentioned, these types of planning strategies are lumpy in nature, but are a core aspect of our operating performance.

Apart from BEAT, we continue to work on third-party strategies and opportunities to grow our reinsurance platform. These strategies should reduce our overall effective tax rate over a medium term to 15%. The flow reinsurance and block M&A pipeline is active, and we are making good progress with several partners.

For 2019, we expect the tax rate in the 19% to 21% as a couple of potential strategies to reduce the overall ETR emerge.

I'll finish my comments with a few thoughts on capital. We finished the fourth quarter in a strong capital position with an estimated risk-based capital, or RBC ratio, of about 470% on a consolidated basis, which, as we've quoted throughout 2018, includes the impact of tax reform.

Next, with regard to liquidity and deployable capital, at year-end, we had about $250 million comprised of insurance company surplus, available debt capacity and holding company assets.

Let me add a few details on where we're allocating that capital beyond growth in the business. In early October, we successfully completed the warrant tender. On December 19, our Board of Directors authorized a share repurchase program of up to $150 million of F&G outstanding common stock. This program will expire in December of 2020 and may be modified at any time. Since the repurchase program was announced, we've repurchased 1.7 million shares at an average price of $6.89, and will continue to repurchase shares at a measured pace.

Also in December 2018, the company's Board of Directors approved a quarterly cash dividend of $0.01 per share, the first of which was declared yesterday, and will be payable on April 1.

In summary, as we discussed at our Investor Day back in March, F&G's first year after the merger has proven to be productive, and in many ways, transformational for the enterprise. We delivered 33% annuity sales growth, while achieving new business profit and capital targets. We delivered 41% growth in adjusted operating earnings year-over-year and we are seeing significant expansion in net investment spreads. We've successfully executed our tax-planning strategy, while not only avoiding any negative impacts from the BEAT tax, but generating a $24 million benefit on an AOI basis.

Our investment portfolio reposition is largely completed, with $56 million of gross uplift delivered in 2018 and significantly more to come as we look forward to the full year impacts of Phase 1 and 2, along with a growing alternative asset allocation.

Lastly, we are quite pleased to have achieved an upgrade to A- with A.M. Best, and are focused on further upgrades in the future.

As Chris mentioned, we look forward to hosting the upcoming deep dive on investment for shareholders in April, where we'll expand on all the benefits from our partnership with Blackstone.

With that, let me turn the call back to the operator for questions.

[Operator]

[Operator Instructions] The first question will come from John Barnidge of Sandler O'Neill.

[John Barnidge, analyst]

So the second phase of the portfolio repositioning came in a bit earlier than what we were expecting in the third quarter. I'm guessing the market volatility in December allowed you to accelerate those and take advantage of missed-priced assets. Can you talk about kind of where we go from here on the nonalternatives? And then maybe during the quarter, where you saw strength and weaknesses within the portfolio?

[Rajesh Krishnan, executive]

It's Raj. So if you sort of think about the fourth quarter and the portfolio repositioning, we did take advantage of widening spreads in -- across most securitized products, specifically in November and December. If you think about what LIBOR did during the fourth quarter, we took advantage of that as well. And in terms of the repositioning of structured assets, that's largely done. So where we go from here, I think Dennis alluded to our focus on derisking a portion of our BBB- portfolio, which we are underway right now. But I would say the lion's share of the shift from Corps' structure is complete.

[John Barnidge, analyst]

Great. And then a follow-up question. Contribution from sales and new agents recruited was strong, and then you're talking about expanding IUL relationships given an upgrade. How large do you see the IUL relationship market being? And then how much further contribution do you see from the new agents continuing going forward?

[Christopher Blunt, executive]

John, this is Chris. I'd comment on a couple of things. I think -- I don't think we've scratched the surface on sort of expanding the base of agents who can sell our products without the -- probably the only thing I can say there in terms of outlook. Quite bullish on life. It will take a little longer to ramp that up as you know, given our starting point here. But I think there will be a lot of opportunities for us in the IUL space as well as potentially other life products down the road.

[Operator]

Our next question will come from Dan Bergman of Citi.

[Daniel Bergman, analyst]

Now that you've achieved the A.M. Best upgrade, I just wanted to see if you could provide a little more detail on the types and amount of investments you need to make to access the bank and broker-dealer channel. How quickly will that be completed? And kind of in what time frame do you expect to ramp the meaningful sales through banks and broker-dealers? And any sense on just how big that could get over time?

[Christopher Blunt, executive]

Yes, this is Chris. I would say, again, I think there's a big opportunity there. The low-hanging fruit for us is the independent broker-dealer channel. I think to be quite clear, probably won't start seeing meaningful sales in those channels until early 2020. There is some work that needs to be done. Dennis can elaborate on what sort of those investments are. This is largely a technology, price and plumping and a little bit of staffing, getting ready on the sales and marketing side, that's not significant. There are some other channels that will require a higher rating than A- for us to access over time. And there, we're looking at all sorts of options, including whether or not there are other potential carrier partners.

[Dennis Vigneau, executive]

Yes, this is Dennis. I would just add that the investment there is probably in the $4 million to $6 million range.

[Daniel Bergman, analyst]

Great. And then -- it looked like the pace of surrenders and withdrawals picked up a bit in the fourth quarter. So I wanted to see if you could any sense of what drove that? And maybe what level of surrender activity we should expect in 2019 and going forward?

[Dennis Vigneau, executive]

Yes, great question. We had a 5-year MYGA block, that we wrote a big block that we wrote at the end of 2013. A big chunk of that matured in the fourth quarter of '18, and we saw normal experience in shock lapses, really nothing more than that. It was probably in the $300 million range, somewhere in that ballpark that rolled off. We'll see a little bit more of that in the first quarter just given the product issuance cycle, the big program we did in December of '13 rolled over into fourth quarter of '14. So we'll see potentially some more come up for shock lapse in the first quarter. But we'll update you on the next earnings call. Not unexpected in any way.

[Operator]

Our next question will come from John Nadel of UBS.

[John Nadel, analyst]

The portfolio repositioning, that uplift on a quarter-over-quarter basis in the yield and your expectation that you're running at 4.75% or better heading into 2019. I mean, maybe Raj, you could go into a little bit more detail on just how aggressive Blackstone was in the months of November and December. I mean, those look like in hindsight -- with a couple months of hindsight, they look like just terrific investing opportunities. Maybe you can go through that a little bit?

[Rajesh Krishnan, executive]

Certainly. Again, thank you for the comment. We've been very measured over the course of the past year in the repositioning. I know that we spoke earlier in the quarters about how we were being very diligent sort of -- candidly sort of waiting for the market to come to us. As we got our -- as we sort of got our strategies put in place, as we thought about the spread widening that really began to accelerate the end of last year, we did take advantage with our partners at Blackstone to lean into candidly some for selling from some other folks in the market. It's something that we've done before. It's something that we've been able to execute, I think, in scale with our investment partner. So I would characterize it as being judicious in timing as opposed to aggressive in the types of assets being bought. So as we sort of begin the 2019 year, our cash position is zeroed out. The rotation from a Corps' structure is largely complete. And again, I think, we sort of begin the year, as Dennis mentioned, at that running rate, that really does reflect the fully repositioned Corps' structure trade that was executed at the end of last year.

[John Nadel, analyst]

Excellent. And then maybe one for Dennis. If I'm -- so I'm looking at your statutory book value. And I understand the share account is higher given the warrant exchange, and that accounts for some of it. But your RBC ratio is sustained, right? Stable. And yet statutory book value fell quarter-over-quarter. And I guess, I'm just trying to square that circle. It's not intuitive to me how that could occur.

[Dennis Vigneau, executive]

Yes, we did -- as part of the warrant tender, we took a $60 million dividend from the operating company for that warrant tender. So that's part of the driver there.

[John Nadel, analyst]

Okay. So it's the increased share count and the dividend? Got it. Okay, that's very helpful.

[Dennis Vigneau, executive]

That's right. Yes.

[John Nadel, analyst]

And then last one for me real quick. Is there anything in the expense line this quarter that you would call out as sort of onetime in nature that we should maybe ignore on a go-forward basis or at least consider it in our modeling on a go-forward basis?

[Dennis Vigneau, executive]

Yes, there were 2 big items in expenses this quarter. One is, we had about $5 million of transition expense related to Chris Littlefield. And we -- the embedded derivative on the preferred stock issuance that we have outstanding of the mark-to-market on that, which was about $10 million pretax -- $9 million or $10 million pretax, also flows through that line. So it's probably $15 million of onetimers in there.

[Operator]

Our next question will come from Pablo Singzon of JPMorgan.

[Pablo Singzon, analyst]

Dennis, can you please comment on FG's current capital-generation model? How much are you generating every year? And how much is being used for growth, especially now that you see your sales accelerating?

[Dennis Vigneau, executive]

Yes. So on a consolidated statutory basis this year, we generated about $200 million of net earnings. We see that, given the way tax reform is going to phase in, it's got that 8-year phase in coming out of 2017. On a core basis, it's going to continue to grow. But given the tax payments that are associated with that, it's going to range anywhere from $200 million to $250 million over the next couple of years on a bottom line after those impacts of tax reform. So it's good to strong. That's after funding meaningful in 10% to 15% top line growth that Chris mentioned earlier, and all the other initiatives that we have. So I feel pretty good about it, across all of the platforms, they're generating positive earnings. You will -- in the Iowa company, just as a point of note because it'll stand out if you look at the filings once it's sent in a few days, you'll see a net loss in Iowa. You might recall that because we had a split business with the original Modco transaction, we had all the $11 billion offshore with all -- generating strong profits. We had Iowa, which was funding all of the new business during 2018. Until we did that recapture, we had a mismatch of where the earnings were sitting. So Iowa on a full year basis, generated a net loss as well it paid a ceding commission to the Bermuda platform. So that all went through the earnings line on that company, but it all came back in. We moved over $800 million of capital back from Bermuda into the Iowa company in the fourth quarter. So just a bit of an anomaly, and I could certainly chat more with you off-line if you have more questions.

[Pablo Singzon, analyst]

Got it. That's very helpful. And then switching gears for my second question, maybe for Dennis or Chris. I just wanted to get more insight underneath your -- the reassurance blocks you're planning to underwrite. Is it mostly annuities, life insurance? And then how should we think about the impact on the financials and sources of earnings going forward?

[Dennis Vigneau, executive]

Yes. So in terms of the flow deals that we are doing, we've got a partner and that generated $185 million of flow FIA sales that we reinsured back on a 90-10 basis from that partner. In total, right now, we've got about $450 million of liabilities related to that treaty in our Bermuda company. That's just plain vanilla FIA product. And really what our approach is, with some of these partners is, we'll provide product development, product support, reinsure on any basis that they want to 50-50, 80-20, 90-10. And it's plain vanilla and often times, these FIA products are -- have simpler features than what we sell regularly in our own IMO channel. It's high-margin business, comparable or better to what we are selling onshore. And it's just a really nice way for us to leverage our product and distribution capabilities and partner up by bringing that offshore platform to third parties. So in terms of profits, you'll see those come through as you would with any other new business that we generate onshore.

[Operator]

The next question will come from Kenneth Lee of RBC Capital.

[Kenneth Lee, analyst]

Wondering if you could just elaborate more about the BBB rated derisking efforts? And should we expect any further derisking effort? And how you're thinking about potentially mitigating risk? And is there any change in investment approach given concerns for any kind of potential credit downturns?

[Rajesh Krishnan, executive]

Sure. So stepping back for a second, we've had a pretty material rally in 10s as well as a high-grade credit since the beginning of this year. I think the investment grade index has rallied probably 30 basis points or so year-to-date. High yield's up 5-something percent year-to-date. So against that backdrop, we have been executing a trade out of BBB- securities, really focusing on energy names, some financial services names. Really trying to get ahead of potential ratings downgrade and sort of migration considerations. I would say that once $0.5 billion-or-so of trades are done, I think we are done. But I will also say that at any point in time, we want to be thinking about, wherever possible, upgrading the quality of the asset portfolio, and you've heard me talk about this in the past. We think about this portfolio to have flexibility around our capital, around ALM and around liquidity. So we just want to have a lot of dry powder if necessary, and take advantage of opportunities as they arise.

[Kenneth Lee, analyst]

Got you. Great. And just one follow-up question. How do you guys think about cost of crediting? And where do you guys see that trending over the year?

[Dennis Vigneau, executive]

Yes, this is Dennis. It's actually been fairly well behaved. If I were compare and contrast what is costing us now, contracts we're buying relative to, say, periods last year, it's actually come down a bit. But it's been -- overall, whether it was in sort of high point last year or maybe slightly below that currently, it's within the normal volatility from our perspective. We see -- as those changes come through, we dynamically price and reprice our new business every month. So we're responding pretty quickly to that and as we strive to achieve our margins. So overall, it's been behaved. I don't see anything that's going to markedly change that dynamic within. But there'll be some normal fluctuations as we go forward.

[Operator]

The next question will come from Alex Scott of Goldman Sachs.

[Taylor Scott, analyst]

First one I had was I guess, just on the CLO exposure. It became more significant as part of this reallocation in the structured products. I think it's around 2x, your -- get book value access, yes I know. So I was just interested in any kind of commentary you could provide around the credit quality of that portfolio specifically. I guess, maybe, the rating agency categories in terms of the tranches? And how that might differ from like the NAIC classes that you're in? And then also just the floating rate securities overall, I think you mentioned there's an increased allocation, but if you could quantify that just so we could understand how 3-month LIBOR will impact things?

[Rajesh Krishnan, executive]

Certainly. So first the question on the CLOs. We've been really focused on BBB and higher tranches in our CLO exposure. When I think about the composition of our CLO portfolio on a quarter-over-quarter basis, we probably ended the year right around 60%, 65% in solidly -- in A and higher category. There was a material up in quality trade for the CLO portfolio during the fourth quarter. Again, taking advantage of that sort of extraordinary weakness that we saw in leverage loan market that we saw ripple through in November and December. We did take advantage of that to add significantly to our A and AA rated securities. We've targeted a long-term rating for the CLO portfolio at NAIC 1.5, we're actually higher than that as we stand at the end of the year, probably NAIC 1.39, 1.4 roughly. In terms of LIBOR, I think we ended the year somewhere around a 15% exposure to what I consider floating rate assets. We probably have a bit more than that in shorter data securities as well. And certainly, as we've seen the move up in LIBOR, we are benefiting from that in our CLO performance. And then when I think about the aggregate positioning of our CLO portfolio going forward, we really have focused on CLOs as sort of one of the legs of our structured asset portfolio. The other leg is CMBS and RMBS securities, and the third leg is ABS and securitized credit. So that composition, I think we feel pretty good about where we are right now. You probably remember from a couple of years back, we had probably as much as 30% of the portfolio in floating rate assets. I think we sort of watch that very carefully. We like the flexibility it gives us to manage a portfolio in different rate environments. But at some point in time, if there is a normalization of the yield curve, we'll reevaluate that posture.

[Taylor Scott, analyst]

Okay. A follow-up question I had was, yes, just on the reinsurance transaction you did this quarter. I mean, it was relatively small as it appeared. But was interested in just as we look forward, are those the kind of opportunities you'd be looking to do more frequently to increase the amount of capital you have to put towards some of these inorganic opportunities that are out there? And if there's any way to think about how could the EPS accretion from something like that differ from just sort of thinking through deploying the excess capital that you already have today?

[Dennis Vigneau, executive]

Yes, it's Dennis again. You should think about us as we go forward, continually seeking ways in which we can maximize the efficiency of how we deploy capital. In the particular transaction, we did reinsurer off a couple of blocks in sort of 2 different characteristics. The first one was $750 million of deferred annuities. That's on a funds withheld basis. We also reinsured just about $4 billion of FIA in a very capital-efficient transaction at a risk charge of about 250 basis points. That particular treaty has an experienced refund mechanism that's -- as long as the block performs, we'll see the residual profits on that above the 250 basis point risk charge come back to us. We're very confident in the performance of that block as our -- the partners we've worked with on that. So for us, that's just a really efficient way to free up a meaningful amount of capital that we can then redeploy into other unaffiliated businesses. And we talked about this at several points last year that we would seek to free up capital efficiently and then redeploy it into unaffiliated flow and block deals, where we could get profits into the Bermuda platform. So for -- we're earning midteens on the existing business, we're paying about a 250 basis point charge, as long as it performs, those residual profits should come back to us. And then we're taking that capital and we're reinvesting it again at midteens returns. So highly accretive. And I think we'll update you as we go throughout 2019, as Chris and I mentioned, we've got a very good pipeline and I think we'll have some nice progress on both flow and block in 2019.

[Operator]

The next question will come from Andrew Kligerman of Crédit Suisse.

[Andrew Kligerman, analyst]

The first question, just on the alternatives of $500 million -- $550 million funded, could you give a little color on the types of investments there?

[Rajesh Krishnan, executive]

Certainly. The long-term allocation for alternatives portfolio is largely split 1/3, 1/3, 1/3 between private equity, credit-oriented investments and real assets. Where we stand right now, it's probably more heavily weighted towards credit, based on the deployment of the capital right now. It's about 40% credit related, about 20% private equity and 39% real assets.

[Andrew Kligerman, analyst]

Got it. And just thinking about the 4.75% portfolio yield run rate that you've specified, it sounds like you still have a lot of activities occurring in the portfolio. Could you give us a sense of where that 4.75% could go in terms of maybe separating out the alternative impact? And then just all other investments. Where do you think that could go by the end of the year?

[Dennis Vigneau, executive]

It's Dennis. I think at this point, I'll stick with the 4.75%. There are, as you mentioned, still a few activities that are coming online with those other activities I mentioned. I want to see how the fundings come through in the first quarter. I think I can give you a better insight into that on the next call. But feel pretty good about the 4.75%, and I think we'll see some upside on that certainly develop over time.

[Andrew Kligerman, analyst]

Fair enough. And Dennis, the mask you gave on the buyback side, I caught -- I think you said 1.7 million shares times $6-plus, so $10-plus million of the buybacks in the roughly 2 months since you announced the authorization. As we look through the year, is that a pace that you'd like to continue? The stock has certainly moved up, so maybe do you slow it down. What are you thinking as we go through the year? And you have a pretty sizable amount remaining on the authorization?

[Dennis Vigneau, executive]

Yes. I think it's going to depend on a number of factors. We've got a full pipeline. We did, in order to buy during the current period, we had a 10b51 plan. We sort of reached certain limits and parameters within that plan as we initiated it. And you're unable to alter those plans once you're in the blackout period. We'll use a combination of that plus perhaps some open market purchases as we go forward. We can commence buying again next week now that earnings are out. I think, I would just say, it's going to be measured and purposeful. We've got a tremendous number of both organic growth, both domestically, within our existing channels as well as on the flow and block side that we're actively pursuing. So we're going to keep going, but it's going to be measured. I'd hesitate to give you a number that we're seeking to hit. We're trying to be opportunistic with it.

[Andrew Kligerman, analyst]

Got it. And one last quick one. Just on distribution, you mentioned that there is some channels that would require higher ratings. Is that the bank channel? And are you doing anything in that channel?

[Christopher Blunt, executive]

I would say -- this is Chris. I would say, there are opportunities to access the bank channel. Some banks would require a higher rating than that. But it's absolutely on the radar and my comment before, given the scenario that Dennis described of our Bermuda operation, there's also the option to access those channels through flow agreements with other carriers that might have a higher rating. So probably a bit of a misconception out there that you sort of have to wait to get to A to go make a lot of progress from those channels. I don't view it that way, and I think we can make some significant hay, particularly as we head into 2020.

[Operator]

Ladies and gentlemen, at this time we will conclude the question-and-answer session. I'd like to turn the conference back over to CEO, Chris Blunt, for any closing remarks.

[Christopher Blunt, executive]

Great. Thanks, everybody. Look, really appreciate the questions, your interest in F&G. I would just say, looking back over the first full year for the company post-transaction, obviously, you can hear we feel really great about the progress, the momentum, our plans going forward. You see the strong progress with our top line sales growth and our continued bottom line performance. Full year earnings up a strong 41% over last year, and our AOI return on equity at more than 15%. Obviously, we're delivering on the objectives that we set forth. As we get these ratings upgrades, not only -- is already helping to fuel our growth, but we're positioning ourselves for the future additional ratings enhancements. So I just want to say, thank you for your interest, your investment in F&G, and we look forward to updating you again on our progress on our first quarter call. Thanks.

[Operator]

Ladies and gentlemen, the conference has now concluded. We thank you for attending today's presentation. You may now disconnect your lines.