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'Size is not a concern' for life and annuity writer's fledgling M&A pursuits

Now that the ink has dried from a November 2017 transaction that resulted in the formation of FGL Holdings, the Bermuda-based company is targeting growth through both organic means and acquisitions as it sets its sights on higher returns on equity over time.

While the company has prioritized securing upgrades of the B++ financial strength ratings that A.M. Best has assigned to its operating subsidiaries and fully repositioning its investment portfolio in partnership with one of its sponsors, Blackstone Group LP, executives during a recent investor day said they are open to pitches for potential acquisitions in the meantime.

"I don't think we need to wait for the portfolio repositioning or the ratings upgrade for us to exploit any opportunities that we think are accretive and in the best interest of shareholders," President and CEO Christopher Littlefield said.

Co-Chairman Chinh Chu, the co-founder of the special-purpose acquisition company that consummated the acquisition of Fidelity & Guaranty Life and subsequently changed its name to FGL, estimated that the company has excess capital of about $500 million. He does not believe a prospective acquisition would affect the company's path to a ratings upgrade, and he indicated that FGL's sponsors have the ability to facilitate larger transactions. The sponsors include Chu, Blackstone, Fidelity National Financial Inc., and William Foley II, the chairman of Fidelity National and the co-chairman of FGL.

"For a large deal, even a multibillion-dollar deal, we will have the firepower, given the construct of our strategic shareholder base," Chu said.

The company ended 2017 with a risk-based capital ratio of 499%. Management noted that while the ratio would fall by about 40 basis points as a result of federal tax reform legislation, they are comfortable running the business with it in a range of between 450% and 460%.

FGL maintains what the company described as a well-established franchise in fixed indexed annuities, multiyear guaranteed annuities and indexed universal life products, each of which management has targeted for profitable organic growth. Chu said that the company's targets from an M&A perspective would "predominantly" be in the fixed indexed annuity space, and that it would consider other lines as well.

"To be very clear, we will not touch anything that has a significant balance sheet risk like a very volatile [variable annuity] portfolio, or God forbid [long-term care]," he said. "So we're going to stick to our knitting. We're looking at deals that are strategic. We'll look at deals that are accretive. And the size is not a concern."

For illustrative purposes, the company's investor day presentation showed the potential benefits to earnings, book value and other financial metrics from a hypothetical $750 million purchase of a "$10 billion" target. CFO Dennis Vigneau asked the audience to think of the hypothetical transaction as a block reinsurance deal executed through FGL's Front Street Re Ltd. international platform.

After moving the block offshore, taking out fixed costs, generating uplift on the associated investment portfolio, he projected that the combined entity's adjusted operating income EPS would effectively double from FGL's stand-alone 2017 results and its adjusted operating income ROE would rise from about 12% in 2017 to more than 15%.

"Clearly, we didn't do that transaction and we don't yet have benefits of our offshore reinsurance platform, but I want you to think about the possibilities and know when you leave here today that we are working on all of this and we will drive these types of synergies over time," Vigneau said.

M&A represents just one of the levers the company expects to result in enhanced ROEs. The optimization of asset management and the addition of the offshore platform, in combination with prospective deals, could result in a run-rate ROE of between 15% and 20% over time. The CFO cautioned that the ultimate operating structure with respect to the offshore platform remains in flux as FGL and others in the life and annuity space continue to work with the U.S. Treasury Department regarding the implementation of the Base Erosion and Anti-Abuse Tax, which was introduced as part of tax reform.

"M&A is sporadic," Vigneau said. "We're looking at all the transactions out there. There are probably more $2 billion, $3 billion, [or] $4 billion type deals than $10 billion type deals that are out there. But this gives you a flavor as to what it would look like once we get to that $10 billion level."