F&G Annuities & Life Inc

NYSE:FG

Earnings Call Analysis

F&G's Strong Performance and Growth Outlook for 2024

F&G celebrated a successful first year as a public company with gross sales hitting $13.2 billion, a 17% increase from the previous year. Net sales also saw a record $9.2 billion, supporting a 14% growth in retained AUM to $49.5 billion. The company boasts a stable, high-quality investment portfolio, with a 4.45% fixed income yield and 95% investment-grade status. F&G's balance sheet remains robust, with a debt-to-capitalization ratio of 25.7% and plans for capital market activities. Key to future growth is the own distribution strategy, with a recent 70% stake acquisition in a wholesaler for $270 million. Adjusted ROA reached 117 basis points, and an adjusted ROE over 10%. Ahead in 2024, double-digit gross sales growth is expected, driven by retail and pension risk strategies and the launch of their RILA product. The goal is to achieve an adjusted ROA of 110 basis points and expanded adjusted ROE by 300-400 basis points over the medium term.

F&G's Year-End Financial Performance: Strong and Adaptable

F&G concluded the financial year with robust health and financial flexibility, tailoring their strategy for growth amid market uncertainties. Adjusted net earnings for the whole year featured a 14% rise from the previous year, signaling asset growth and product margin expansion. The company has also made strategic investments to bolster their operating platform with a focus on maintaining pricing targets and managing new business cost effectively.

Adjusting to Quarterly Fluctuations While Maintaining Growth Trajectory

In the fourth quarter of 2023, F&G's adjusted net earnings saw a decline of 9% compared to the same quarter in the prior year. This was attributed to a modest product margin expansion, countered by higher interest expense and operating costs aligned with growth. Despite the challenges, the firm adapted by actively managing assets and ensuring pricing actions kept pace with the market, reflecting a disciplined approach to maintaining financial stability.

Balance Sheet and Capital Management: A Foundation for Future Investments

F&G's balance sheet remains solid, with a debt-to-capitalization ratio aligning with their long-term target. Capital market activities conducted throughout 2023 aimed to support asset management growth and enhance liquidity. The company has prioritized the growth of retained assets under management, and despite the expected rise in annual debt cost due to recent activities, they managed to return substantial capital to shareholders – indicative of their continued strong financial position.

New Product Perspectives and Capital Allocation Priorities

F&G is poised to penetrate a $1 trillion marketplace with the introduction of a new RILA product, signifying a major strategic move to capture a segment of the fast-growing annuities market. The company also places a high priority on retaining assets under management and funding new sales, ensuring a steady dividend payout and exploring acquisition opportunities in their own distribution strategy.

Managing Market Expectations and Preparing for the Future

The company conveyed confidence in their long-term expected investment return rate of 10%, notwithstanding market volatility. Regarding the outlook for the reinsurance market, F&G anticipates no significant changes in 2024, but remains open to adapting to interest rate shifts in 2025 and beyond. They also remain focused on growing retained sales and assets under management, reflecting an enduring commitment to strategic growth and adaptability.

Earnings Call Transcript 2023-Q4

[Operator]

Good morning, and welcome to F&G's Fourth Quarter and Full Year 2023 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded.

I would now like to turn the call over to Lisa Foxworthy-Parker, Senior Vice President, Investor and External Relations. Please go ahead.

[Lisa Foxworthy-Parker, executive]

Thanks, operator, and welcome, everyone. Joining me today are Chris Blunt, Chief Executive Officer; and Wendy Young, Chief Financial Officer. We look forward to addressing your questions following our prepared remarks.

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 SEC filings for a discussion of the factors that could cause actual results to differ materially from those expressed or implied.

This morning's discussion also includes non-GAAP financial measures that we believe may be meaningful to investors. Non-GAAP measures have been reconciled to GAAP, where required, in accordance with SEC rules within our earnings release, financial supplement and investor presentation, all of which are available on the company's website.

Today's call is being recorded and will be available for webcast replay at fglife.com. It will also be available through telephone replay beginning today at 1:00 p.m. Eastern Time through February 29, 2024.

And now I'll turn the call over to our CEO, Chris Blunt.

[Christopher Blunt, executive]

Good morning, everyone. Thanks for joining us to discuss our fourth quarter and full year results. Before reviewing the quarter, I'd like to share with you the progress we've made over the last year. On December 1, 2022, FNF completed its partial spin-off of F&G, retaining 85% majority interest, and F&G was listed on the New York Stock Exchange. Since then, our first year as a public company has been a very successful one. I'd like to start by recognizing our employees for their hard work and achievements over the last year. Thank you as well to our many partners and to our customers whose feedback resulted in F&G being ranked #1 for highest customer satisfaction among annuity providers in the U.S. by J.D. Power.

And lastly, I'd like to express my appreciation to our parent company, FNF, for all of their support throughout the year. In short, 2023 was one of our best years with numerous accomplishments worth highlighting. First, our retail and pension risk transfer businesses continue to generate sustainable asset growth. We reported record gross sales of $13.2 billion in 2023, which exceeded the top end of the $12 billion to $13 billion range we provided at our Investor Day in October and were up 17% over the prior year, well in line with our goal of growing annual gross sales of a double-digit clip.

This demonstrates the strength of our multichannel distribution platform that is hitting on all cylinders and generated $10 billion of retail gross sales through our agent, bank and broker-dealer channels. $2 billion of pension risk transfer sales and $1 billion of FHLB funding agreements.

We also had record net sales of $9.2 billion in 2023, well above the threshold of $6 billion to $7 billion of annual net sales needed to grow our retained AUM and managed in line with our capital targets. Net sales reflect third-party flow reinsurance, which has increased from 50% to 90% of MYGA sales during 2023 as expected.

F&G has successfully expanded from 1 to 3 high-quality and established flow reinsurance partners, which provides counterparty diversification and additional capacity. The higher percentage of flow reinsurance provides a lower capital requirement of the ceded new business while allocating capital to the highest returning retained business, enhances cash flow and generates fee-based earnings resulting in accretive returns to F&G.

We've profitably grown retained assets under management to a record $49.5 billion at December 31. This is an increase of 14% over the prior year and was driven by net new business flows, stable in-force retention and net debt proceeds over the last 12 months. AUM before flow reinsurance was $56.3 billion, adjusting for the approximately $7 billion of cumulative new business ceded.

A second area to highlight has been the steady and predictable performance of our profitable in-force book. While markets were volatile through 2023, we benefited from the superior foundation that our in-force book provides. Importantly, our book has no legacy liability issues. Our funding agreements, pension risk transfer and immediate annuities are nonsurrenderable, and our retail fixed annuities are 92% surrender charge protected, was 75% also subject to market value adjustments.

We generated very positive and strong net inflows in 2023 and Wendy will provide further insights to our surrender trends in the current market environment in a few minutes.

A third area of achievement over the last 12 months has been the outstanding performance of our investment portfolio that is well matched to our clean and stable liability profile. We continually evaluate opportunities for upside, risk-adjusted returns and downside protection in our investment portfolio. In 2023, we enhanced the return while improving the credit quality of our portfolio by executing on our dynamic portfolio allocation and continuing to derisk in light of market dislocations and ongoing macro environment uncertainty. We also successfully negotiated a new fee agreement with our partner, Blackstone.

During 2023, our fixed income yield, excluding alternative investment volatility and variable investment income has expanded to 4.45% in the fourth quarter as compared to 4.37% in the fourth quarter of 2022. This reflects upside from higher yields on new investments and floating rate assets.

At year-end 2023, the portfolio is high quality, with 95% of fixed maturities being investment grade. We hold significantly lower exposure to the commercial real estate and office sectors in our CML portfolio. Credit-related impairments remained low, averaging 5 basis points over the past 3 years, well below our pricing assumptions.

Given the potential for an economic slowdown and lower interest rates in the years ahead, we took some downside risk off the table by hedging approximately $5 billion of our $10 billion floating rate asset portfolio, locking in about 190 basis points of incremental yield beyond what was originally priced in. This translates to approximately 12 basis points of annual incremental investment margin above our pricing over the next 3 to 5 years. We expect to continue to evaluate hedging additional floating rate assets where beneficial and possible.

Also, we've refreshed our annual portfolio stress test, which is conservative and assumes no management action and is once again confirmed that our portfolio is well positioned to withstand a sharp downturn in the economy.

A fourth area to highlight in 2023 centers on our balance sheet strength and capital allocation given we were well prepared to drive growth and capture the market opportunity. In our first year as a public company, F&G has self-funded its growth through our in-force capital generation, reinsurance programs and the planned issuance of senior debt. And we have increased our annual common dividend to $105 million, a 5% increase to $0.21 from $0.20 per share and allocated capital to launch our new share repurchase program to take advantage of [indiscernible] locations.

Our commitment to strong ratings and achieving ratings upgrades over time was recognized through 2 rating upgrades to A or excellent by A.M. Best last month and to A3 by Moody's in July. These upgrades provide third-party recognition of our progress, support further organic growth and give us greater strategic flexibility.

Another vote of confidence came from FNF's $250 million mandatory convertible preferred stock investment in F&G last month to further grow retained assets under management, given the compelling market opportunity that exists.

A final area that I'd like to highlight is our own distribution strategy. As we said at our Investor Day, F&G is uniquely positioned to be a capital provider to key distribution partners. In January of 2024, F&G acquired a 70% majority ownership stake in a wholesaler of life and annuity products to financial institutions and the broker-dealer community for approximately $270 million. This is our fifth and largest transaction to date and brings our cumulative deployed capital above $500 million.

Own distribution further strengthens our relationships with key partners as well as providing us with an earnings stream from our ownership stakes, providing for higher margins and a lower marginal cost of capital, which is expected to be accretive to ROE.

Overall, 2023 was a big year for us in terms of execution in our first year as a public company. For the full year and excluding significant items, we delivered A&E of $539 million, which generated an adjusted ROA of 117 basis points, and we reported an adjusted ROE in excess of 10%. We continue to execute on the plans we outlined during our Investor Day and are pleased to see investors recognize F&G's success, utilization has more than doubled from $2.4 billion at the time of the partial spin-off in December 2022 to approximately $5.8 billion at the end of 2023.

Looking ahead to 2024, we have plenty of momentum to continue to deliver sustainable asset growth from our retail, in pension risk transfer growth strategies and ongoing margin expansion from enhanced investment margin opportunities, operational scale benefits and fee-based earnings from accretive flow reinsurance. We are also well positioned to diversify our earnings given the strong growth of our middle market life insurance business and owned distribution strategies.

I'm very proud of our accomplishments and confident that F&G will continue to generate shareholder value through continued execution of our strategic priorities and because of the strong culture that we've created, which has allowed us to recruit and develop exceptional talent.

Let me now turn the call over to Wendy to provide further details on F&G's full year and fourth quarter financial highlights.

[Wendy Young, executive]

Thanks, Chris. We are pleased with F&G's overall financial performance for the full year, and we continue to maintain strong capitalization and financial flexibility to successfully execute our growth strategy. Adjusted net earnings for the full year 2023 were $335 million or $2.68 per share and included $405 million or $3.24 per share of investment income from alternative investments and $51 million or $0.41 per share of other significant expense items. Alternative investments, investment income based on management's long-term expected return of approximately 10% was $558 million or $4.46 per share.

Adjusted net earnings for the full year 2022 were $353 million or $3.07 per share and included $202 million or $1.75 per share of investment income from alternative investments and $99 million or $0.86 per share of other significant income items. Alternative investments, investment income based on management's long-term expected return of approximately 10% was $419 million or $3.64 per share.

For comparison, adjusting for these significant items in both periods, adjusted net earnings were $539 million in full year 2023, up 14% from $471 million in full year 2022 and reflect asset growth, product margin expansion and accretive flow reinsurance fees partially offset by an increase in interest expense due to planned capital market activity and higher operating costs in line with our growth in sales and assets and continued investments in our operating platform.

Adjusted return on assets was 117 basis points in full year 2023, above our 110 basis point forecast and in line with 118 basis points in the prior year. Excluding significant items, adjusted return on equity, excluding AOCI, was 10.4% in 2023 as compared to approximately 9.6% in 2022.

Next, turning to the results for the quarter. Adjusted net earnings for the fourth quarter of 2023 were $75 million or $0.60 per share and included $110 million or $0.88 per share of investment income from alternative investments and $19 million or $0.15 per share of other significant expense items comprised of $9 million unfavorable actuarial industry assumption update and $10 million onetime fixed asset impairment charge. Alternative investment income based on management's long-term expected return of approximately 10% and was $147 million or $1.18 per share.

Adjusted net earnings for the fourth quarter of 2022 were $130 million or $1.04 per share and included $41 million or $0.32 per share of investment income from alternative investments and $58 million or $0.46 per share of significant income for a onetime tax benefit from carryback of capital losses. Alternative investments, investment income based on management's long-term expected return of approximately 10% was $113 million or $0.90 per share.

For comparison, adjusting for these significant items in both periods, adjusted net earnings were $131 million in the fourth quarter 2023, down 9% from $144 million in fourth quarter of 2022 and reflect modest product margin expansion due to inherent timing lag between the precipitous decline in rates and our pricing actions in the fourth quarter of 2023 and accretive flow reinsurance fees, which were more than offset by higher interest expense due to planned capital market activity and higher operating costs in line with our growth in sales and assets and continued investments in our operating platform.

Turning to reported net income on a GAAP basis. We reported $299 million net loss in the fourth quarter of 2023 and a $58 million net loss in 2023 for full year. This result is primarily driven by unfavorable mark-to-market movement, which is excluded from adjusted net earnings. We view the short-term mark-to-market movements as point in time, accounting-driven and not economic. Given adequate liquidity levers, we do not expect to sell securities and realize losses to meet corporate liquidity needs.

To recap, despite some volatility in our earnings in the fourth quarter, our full year performance, nonetheless, builds on our proven track record over successive years and demonstrates progress towards our targeted value creation levers of asset growth, margin expansion and enhanced earnings from flow reinsurance.

I'd now like to provide additional perspective on the volatility that we encountered this past year. From a retention perspective in 2023, we saw predictable outflows from our MYGA fixed rate annuities, which are aligned to the contractual maturity date set at origination.

For fixed indexed annuities, we have seen elevated surrenders this year, although offset by higher inflows. This was expected given the spike in new money rates that the industry hasn't seen in over a decade, which can spur consumer demand to surrender their annuities for new policies under 1035 exchanges. We generated very strong positive net inflows in 2023, given our record new business volumes, which restart the surrender charge period, further improving liability profile. And our in-force annuity account balance continues to steadily grow on both a quarterly and annual basis.

As a reminder, for insurance companies like F&G, surrenders typically provide a boost to earnings from the higher surrender charge fees and freed up capital from the policy lapse. Importantly, our new business and in-force are actively managed to maintain pricing targets over time. That being said, we can expect pockets of market volatility. During the fourth quarter, we saw some margin compression from the interest rate volatility that the annuities industry experienced as rates fell dramatically through the end of the year and consumers rush to lock in rates, creating a dynamic environment for crediting rates and strategy.

We were disciplined and actively managed to maintain new business pricing targets. However, there are expected timing lags between precipitous rate movements and our pricing actions for both new business pricing and annual in-force renewal rate setting. This is not the first time we have navigated these issues. And in our experience, we view the resulting quarterly volatility as a blip given the rapid movement in rates. There is no change in our economics or expectation for 2024 margins. And the long-term outlook for our business remains unchanged.

We are positioned to sustain our product margin in a variety of interest rate and economic environments. Our proven track record in recent years demonstrates that we can profitably grow the business and maintain consistent pricing in any rate and spread environment, whether peak or trough.

Next, I'd like to provide an update on our own distribution strategy. During 2023, our own distribution stakes increased throughout the year from approximately $20 million to $260 million. Notably, this excludes the majority ownership stake in a life and annuity wholesaler that we closed in January of 2024 for approximately $270 million that Chris mentioned earlier.

We are working on enhancements to our financial supplement for the first quarter 2024 to reflect the emerging performance of owned distribution on a GAAP reporting basis, which we expect to provide fee-based earnings and higher returns over time.

Now turning to our balance sheet. We ended the year with a GAAP book value, excluding AOCI, of $5.1 billion or $40.42 per share, with 126 million common shares outstanding as of December 31. There is a page in our investor presentation providing an analysis of book value per share.

F&G's debt-to-capitalization ratio, excluding AOCI, was 25.7% as of December 31. This is in line with our long-term target of 25% and excludes the $250 million preferred stock issuance in January 2024. During 2023, we successfully executed on 2 senior note issuances, including a $345 million issuance in December and $500 million issuance in January 2023, with proceeds used to support AUM growth and a revolver partial paydown. On February 16, 2024, we entered into an amended and restated credit agreement, which included an increase to the size of the facility commitments to $750 million from $665 million and extended the maturity of the facility by 2 years to November of 2027, thereby enhancing our liquidity profile and financial flexibility. The outstanding balance is $365 million, which reflects a $150 million pay down in the fourth quarter.

In 2023, our interest expense was $97 million or 21 basis points of adjusted ROA as compared to $29 million or 7 basis points of adjusted ROA in 2022, as expected and in line with our capital markets activity over the last 12 months. Our annualized interest expense is approximately $120 million or roughly 6.8% blended yield on the $1.8 billion of total debt outstanding. We continue to target holding company cash and invested assets at 2x fixed charge coverage.

Our strong capitalization supports both growth and distributable cash. During 2023, F&G returned $119 million of capital to shareholders, including $101 million of common dividends and $18 million of share repurchases. During the year, we repurchased approximately 870,000 shares at an average cost per share of $21.07. On November 7, we expanded the capacity of the share repurchase program from $25 million to $50 million. The remaining authorization yet to be purchased under the program was $32 million as of December 31 to take advantage of future market dislocation. On February 15, 2024, we declared a $0.21 per share dividend payable on March 29 to the stockholders of record as of March 15.

As Chris mentioned earlier, FNF's recent investment in F&G will accelerate the growth of our retained AUM, given the current market opportunity. Here's a few points. On January 16, 2024, FNF and F&G announced the closing of a $250 million mandatory convertible preferred stock investment issued by F&G Annuities & Life, our top holding company to FNF.

F&G intends to use net proceeds from the investment to support growth of its assets under management. A portion of the proceeds will be held to fund the 6-7/8% preferred dividend, which is subject to declaration by the Board of Directors. The preferred dividends can be paid in either cash or common shares. If dividends are deferred until the mandatory conversion date in 2027, the cumulative payment of dividends will be converted into common shares.

On February 15, 2024, we declared a quarterly cash dividend of $0.8976 per share on its preferred stock held by FNF. On a pro forma basis, our year-end 2023 debt to capitalization ratio, excluding AOCI, would be 24.8% based on current debt outstanding, including the new preferred stock as equity.

Going forward, we would expect to conform our earnings presentation to report net earnings available to common shareholders and adjusted net earnings available to common shareholders.

Now moving on to our strong statutory capital position. As expected, we ended the year with a strong and stable capital position, having an estimated company action level, risk-based capital or RBC ratio of approximately 440% for our primary operating subsidiary in line with the prior year and providing a buffer well above our 400% target Notably, our RBC ratio as of December 31 excludes net proceeds of the $250 million preferred stock investment from FNF in January of 2024.

F&G is well positioned to self-fund its continued growth with positive and growing in-force capital generation, available debt capacity as our balance sheet delevers with book value growth over time and ample opportunity for future reinsurance programs. We expect to be active in the capital markets in 2024 to fund our growth, to pay down our revolver and debt maturities. We also expect our stable profitable in-force to generate more than $1 billion in capital.

Let me now turn the call over to Chris to wrap up.

[Christopher Blunt, executive]

Thanks, Wendy. To conclude, we have real momentum across our platform as we enter 2024 that positions us to deliver sustainable asset growth, ongoing margin expansion and improved returns as well as enhanced earnings power as we strive to build upon this past year's many successes.

Importantly, I remain optimistic that we can continue to deliver double-digit gross sales growth in 2024, driven by our retail and pension risk transfer growth strategies. The launch of our RILA product earlier this month will be a nice tailwind to our sales growth as we enter a large and fast-growing market. In fact, industry RILA sales are forecasted to be between $44 billion and $48 billion this past year, which is a record level. We believe our product offering is differentiated in the market and we uniquely meet customers' needs, though it will obviously take some time to gain traction and ramp up.

We also expect to deliver ongoing margin expansion from enhanced investment margin opportunities, effectively managing our operating expenses while scaling our organization over time and driving fee-based earnings from accretive flow reinsurance. We have historically spoken of a goal of delivering an adjusted ROA, excluding significant items of 100 basis points, which we have been exceeding and, therefore, reset to 110 basis points as the new baseline during our Investor Day. We expect to deliver 15 to 30 basis points of core margin expansion and an additional 8 to 15 basis points of own distribution margin expansion to increase our baseline adjusted ROA, excluding significant items over the medium term.

We also expect to achieve 300 to 400 basis points of expansion to adjusted ROE, excluding AOCI, and significant items over that same time horizon.

Lastly, we continue to diversify and enhance our earnings power as we execute on our own distribution strategy. Our ownership stakes generate a higher margin earnings stream at a lower cost of capital, which we expect to be accretive to our returns over time. As you can tell, I could not be more excited with the opportunities we have in front of us as we entered 2024.

This concludes our prepared remarks. So let me now turn the call back to our operator for questions.

[Operator]

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

[John Barnidge, analyst]

The new RILA product, can you talk about how you view the ramp, maybe total addressable market and needed costs and then distributions positioning for that?

[Christopher Blunt, executive]

Yes, happy to. John, this is Chris. So yes, we're really, really excited about this. So just to put it in perspective, RILA is the fastest-growing category in annuities or one of the fastest-growing categories since about, I think, $47 billion of RILA sales last year. But as you probably heard me say before, I think it's just scratching the surface.

I think this is a product that now starts to compete very actively with mutual funds, which, as you know, is a $1 trillion marketplace. So we're really psyched about it. In fact, we got our first few RILA contracts in this week. So it's really a big milestone for us. We think we're well positioned. Obviously, it'll take time to get approved on various broker-dealer shelves, but this is something we're really excited about and, frankly, our clients on the distribution side that individual agents have been asking for. So we're pretty pumped.

[John Barnidge, analyst]

The actuarial charge, is there any impact to go-forward earnings out of that?

[Christopher Blunt, executive]

Wendy, do you want to take that one?

[Wendy Young, executive]

Sure. Thanks, John. No, this is -- this will happen every year around the same where the actuarial tables get updated for the guaranteed withdrawal benefit so that impacts the MRB. But I don't expect any significant changes to how the MRB changes over time. Again, that reserve will fluctuate a little bit more than the old reserve regime, but I don't expect that this current charge will impact it significantly.

[Operator]

The next question comes from Jon Bass with Stephens.

[Jonathan Bass, analyst]

Maybe could we get your latest thoughts on capital allocation? I know there are a few moving parts, considering the common and now preferred dividend. You also have a lot of authorization remaining on our buyback. And you've also talked to, you've been active in recent quarters with the own distribution strategy. So maybe if you guys could just give your view on all of it?

[Christopher Blunt, executive]

Yes, I'll start. I'm sure Wendy is going to want to chime in as well. But #1 priority right now is retained assets under management. I mean we're in just a fantastic environment for our products. Demand is quite robust. I think first priority would be to continue to fund new sales. We're really pleased with the returns we're getting on new business right now. Having flow reinsurance in place just allows us to expand gross sales overall and is accretive to the returns that we're getting. So I would say that is priority #1.

For us, obviously, we want to continue to pay a strong and growing common dividend and we've been able to do that. I think there will be opportunistically some own distribution acquisition opportunities for us. You saw that we just did our largest deal, which brings us to about $500 million of assets under management or invested capital in the own distribution space.

Obviously, Wendy can speak to what the annual debt cost is now and the cost of the preferred dividend, but I don't think that's going to dramatically change how we think about allocating capital. Fortunately, the stock has been doing well. So we have a buyback authorization, but I think that's really in place should there be some pretty dramatic market disruptions.

I don't know, Wendy, if there's anything you want to add to that.

[Wendy Young, executive]

No, you hit on all the key points.

[Jonathan Bass, analyst]

Okay. And then maybe could you give us some commentary on the reinsurance market as you guys see it? Are there any significant changes to reinsurance economics or maybe the outlook you're anticipating for 2024?

[Christopher Blunt, executive]

Wendy, why don't you start?

[Wendy Young, executive]

Sure. Thanks. I don't see any significant changes in outlook. We continue to get approached by potential partners. But as Chris said, we want to grow that retained sales and AUM. So I'm not expecting us to expand too much in '24. But as we head into '25, we could see differences in the market depending on where the interest rates go and go from there.

[Operator]

[Operator Instructions] Our next question comes from Mark Hughes with Truist Securities.

[Mark Hughes, analyst]

Where do you think assets under management will end the year? You've given a lot of guidance on new sales up double digits. You've got $1 billion in capital generation internally. You've got, obviously, a lot in terms of debt capital. I think you mentioned you need $6 billion to $7 billion of net sales to grow assets under management. Any just kind of rough thoughts about where you think, given the opportunity here, given your balance sheet where you anticipate AUM will end up?

[Christopher Blunt, executive]

Sure. I'll maybe drop some bread crumbs and Wendy could provide probably maybe a little more specifics around that. But yes, I think the top line environment is fantastic. So you saw this past year, we did $13 billion of gross sales. I want to say, $9-and-change billion in net sales. So obviously, the capital infusion from FNF is helpful. So we've said publicly, we still think we can continue to grow top line at a healthy double-digit pace.

We've obviously done better than that in years past. I think now we can retain a higher level given what's there. I think if you look at our traditional growth in net sales, my guess is that's still a pretty decent barometer for what we can add despite the fact that we've doubled the assets in the last 3 years. So yes, we feel really good about it. There's been a lot of hoopla about, well, surrenders are up, but inflows are way up. And so I know it sounds odd, but unlike a bank, someone surrendering a very old contract with a small surrender charge, but then bringing in a brand-new contract with a brand-new surrender charge.

Ironically, we're actually improving the risk profile of our liabilities. And generally, we're booking a profit when someone's paying a surrender charge. So it's an unusual scenario. Yes, surrenders are up a little bit, but I don't think it changes materially kind of our pattern of net sales.

I don't know, Wendy, if there's any more precise you can give there.

[Wendy Young, executive]

Yes. So Mark, if you think about what we said in the past, every billion dollars of retained business cost us about $150 million. So you can do the math on what that $250 million can possibly do to increasing our net retained.

[Mark Hughes, analyst]

Okay. The assumption about the 10% return, is that still a good return assumption? It seems like obviously, there's been a lot of market volatility lately that's been challenging with the better equity markets. Are you more likely to hit that bogey? How should we think about that?

[Christopher Blunt, executive]

Yes. I mean this is something we look at on a very regular basis. We had a lot of robust debate on what is the right return expectation. But I would say we're still very comfortable with that number. Obviously, there's a lot sitting in dry powder in terms of opportunities. We've done traditionally comfortably better than that.

I do think you're going to see more volatility just because of realizations are down. But again, it could be a very attractive opportunity going forward, particularly in private equity and probably selectively in real estate, I would think the same way. But yes, I don't think anything has happened to cause us to want to move off that long-term number.

[Mark Hughes, analyst]

And then anything you can share in terms of valuation parameters around the $270 million deal you did in January, PE EBITDA, expected earnings contribution. I think you've touched on some of that, but if you could expand, that would be great.

[Christopher Blunt, executive]

Yes. Yes, sure. So I'll start at the highest level, which is, one, it has to come with at least an equal, if not better return expectation than just running our daily playbook, which is using it to retain assets under management. And so yes, when we look at all of these acquisitions with that one, in particular, we're looking at high teens, if not north of 20% IRRs or expectations.

These are businesses which are generally not capital intensive, right? If they're heavy cash flow businesses, so that's helpful as well. And then most importantly, they're not ongoing capital intensive. So there's a hope, which I believe that over time, we will get rewarded in our multiple for the consistency of those earnings, the diversification of those earnings. But most importantly, we're making investments in businesses that we know well. Management teams, we have a lot of confidence in and ones that we think are going to give us an even higher return than we could get by putting it into a new AUM.

And then obviously, there is some just long-term strategic benefit. I mean many of these are relationships that the company has had for 20 years. And so just further cementing that relationship is something we think has a lot of strategic benefit.

[Operator]

Our next question is a follow-up by John Barnidge with Piper Sandler.

[John Barnidge, analyst]

You talked about hedging your floating portion of the portfolio and considering to evaluate other options for the remainder of that. What's the line of sight into that? And can you talk about that a little bit more, the sensitivity to the short end of the curve that remains?

[Christopher Blunt, executive]

Yes, 100%. So maybe start by saying what it's not. We don't fancy ourselves as rate traders or having deep insights about where interest rates are going, but I think our Chief Investment Officer had a very good insight, which was given where we put a lot of that floating rate exposure on. We had an ability to lock in some excess profitability and just take some variability off the table.

So we had a pretty substantial position in floating rate assets. We've effectively now cut that by more than half by doing some hedging. I think you saw in the commentary we locked in approximately 190 basis points of outperformance. So I would say, it's just consistent with how we think about the world, which is don't be greedy, and when you have opportunities to take some risk off the table.

So look, at some point, nobody knows exactly when. We're going to see rates march back down, and this was a choice on our part of let's go for stability there. How much more you do going forward is kind of an open question of what's the ultimate landing spot for your floating rate exposure. But I would expect in the near term, it's going to come down. It's going to continue to come down a bit more.

[Operator]

Thank you, and this will conclude our question-and-answer session. Thank you for attending today's presentation, and the conference call has concluded. You may now disconnect your lines.