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Fidelity & Guaranty Life Holdings, Inc. (NYSE:FGL)

F1Q 2014 Earnings Conference Call

February 10, 2014 08:00 AM ET

Executives

Paul Tyler – SVP, Strategy and Business Development

Lee Launer – President and CEO

Wendy JB Young – SVP and CFO

Raj Krishnan – EVP and CIO

Operator

Good morning. Thank you for standing by and welcome to today’s conference call. (Operator Instructions) The conference is being recorded. If you have any discrepancies, you may disconnect at this time. I would now like to turn the conference over to your host, Mr. Paul Tyler. Sir, you may proceed.

Paul Tyler

Good morning. I’m Paul Tyler, and I manage Investor Relations for Fidelity & Guaranty Life. Welcome to our Bondholder Call for Fidelity & Guaranty Life’s Holdings Inc’s first quarter of fiscal 2014 which ended on December 31, 2013.

Before I begin our call, I’d like to take this opportunity to discuss our bondholder relations plan going forward, now the Fidelity & Guaranty Life, the parent of Fidelity & Guaranty Life Holdings Inc, your obligor, is a public entity. Starting with next quarter’s call, we will combine the bondholder call with the public quarterly equity investor call for Fidelity & Guaranty Life.

Financial information for Fidelity & Guaranty Life Holdings Inc or FGLH will be regularly posted to our public website at www.fglife.com. At that point in time, we will discontinue the use with the private website originally established for bondholders. As with prior bondholder calls, we can’t take the questions on the call at this time. Please e-mail them to us, and we’ll answer as promptly as possible. So today here with me are Lee Launer, our CEO, Wendy Young, CFO and Raj Krishnan, our Chief Investment Officer.

Now, I will turn it over to Lee Launer.

Lee Launer

Thanks Paul. On today’s call we wanted to cover our recent events and FGLH’s results for the quarter ended, or our first fiscal quarter 2014 which ended December 31, 2013.

The results are very strong for the quarter in terms of sales and earnings for FGLH. We recorded the strongest sales within the last seven quarters this period, annuity sales of $541 million and FGLH’s first quarter of fiscal 2014 represented a 119% increase over the $247 million of annuity sales in the prior first year quarter, and 119% increase coincidentally, the same 119% increase from prior sequential quarter.

And Wendy Young is going to follow up and provide you details about the sales, pretax, adjusted operating income and non-GAAP measure of $46 million for the quarter represented an increase of 40% compared to the $33 million in the prior year first quarter. Our core business continues to perform well. And again, Wendy is going to fill you in on some of the details later in the call.

Our distribution partners continue to bring FGL, us a number of very interesting new product areas to target the middle-market. The capital raised from FGL’s IPO ensures that we have the ability to pursue these concepts and gives us the opportunity to continue to grow our sales.

Next, we are very pleased with the warm reception of FGL’s IPO received from the investment community. This is a very important step as it gives FGL, us, the ability to tap both the debt and equity markets for future capital.

Next, in January we officially opened our office in Des Moines. We believe Des Moines will be an ideal location for us to grow, and pursue our business goals well into the future. Iowa as you know, is very attractive to us because of its well established insurance infrastructure, talented workforce and strong business climate. This is another step in building our world-class brand.

Lastly, since I spoke to you, we announced organizational changes. Dennis Vigneau has joined the Company as Senior Vice President, and will assume the position of CFO effective February 12, 2014. At that time Wendy Young, currently our CFO will become Chief Risk Officer assuming that role from John O’Shaughnessy. John will continue to serve in his capacity as Senior Vice President and Chief Actuary. We are pleased to welcome Dennis who brings a wealth of experience as a public CFO in the insurance section to our firm. It in addition, further reinforces our executive team.

So with that, let me turn it over to Wendy Young, our CFO.

Wendy JB Young

Thanks Lee. FGLH reported strong results for fiscal Q1 2014, which ended December 31, 2013. We will post complete FGLH results to the bondholder relations tab in the investors section of our website at www.fglife.com in the next few days. Additionally, FGL’s SEC filings may be accessed at the SEC filings tab in the same website. The additional level of transparency should add to your understanding of FGLH.

As Lee mentioned, we had strong quarter for sales. The Company reported the highest annuity sales within the past seven quarters, reflecting strong sales of core fixed indexed annuities. FGLH also generated strong customer demand in a higher interest rate environment with a multi-year guaranteed annuity or MYGA. Indexed universal life sales grew by 7% on a sequential basis, reflecting consistent expansion of the product portfolio and continued marketing efforts.

Moving on to our GAAP results. FGLH reported net income of $45 million for Q1 2014, compared to $106 million for Q1 2013. Pretax operating income for the Q1 2014 was $72 million compared to $165 million for Q1 2013. Sales of bonds to reposition the duration of our portfolio in the prior year, generated higher realized investment gains. Our core annuity business continued to deliver strong results. Pretax AOI was $46 million for the Q1 2014, an increase of $13 million from $33 million for Q1 2013. This increase is due to higher fee income on policyholder account value, as well as higher net investment spread quarter-over-quarter.

GAAP book value was $1.1 billion as of December 31, 2013, excluding accumulated other comprehensive income, AOCI. The projected interest coverage ratio using the last 12 months of AOI and $20 million of interest expense is 10.4 times. This ratio is higher due to strong AOI in the last two quarters. You will notice that our net investment income was higher for Q1 2014 compared to Q1 2013, primarily as a result of our higher cash and short-term treasury position in Q1 2013. As we reinvested these funds in longer duration assets, net investment income steadily increased on a sequential quarterly basis during 2013 and Q1 2014.

Turning to statutory or stat account, Fidelity & Guaranty Life Insurance Company’s risk-based capital ratio or RBC as of December 31, 2013 is estimated to be in excess of 400%. With the IPO proceeds in the $64 million of cash held by Fullco or contributed to Fidelity & Guaranty Life Insurance Company or FGLIC, FGLIC’s RBC would be in excess of 500%.

As mentioned, FGLH had $64 million in cash as of December 31, 2013. This balance along with future dividends from FGLIC and surplus note interest can be used to fund FGLH’s debt expense. Dividend capacity for a given year is based on the statutory results from the prior calendar year. FGLIC’s total dividend capacity for 2013 was $106 million, of which it paid $40 million to FGLH in its calendar 12 months ended September 30, 2013.

Based on preliminary statutory results for 2013 calendar year, the dividend capacity for 2014 is estimated to be $124 million.

Raj Krishnan

Thanks Wendy. FGLH’s investment portfolio continued to perform well in the first quarter of fiscal 2014. Earned yield on our investment portfolio, defined as GAAP gross investment income over the prior time period, divided by average GAAP assets under management was 4.8% for the first quarter of 2014. This is up from 4.27% for the first quarter of 2013.

Earned yields increased in the first quarter of 2014, compared to the fourth quarter of 2013. The spread over treasuries and new business purchases was approximately 269 basis points for the first quarter of 2014, and the average quality on new business purchases for our first quarter was NAIC 1.43.

As of December 31, 2013, the overall portfolio had an average NAIC rating of 1.40, a slight increase from the prior quarter, reflecting our reinvestment of short-dated treasuries in the market, but still ahead of our targeted average portfolio NAIC range of 1.5.

In terms of our rate strategy, we retained a well-matched asset liability profile in the first quarter 2014, with an asset duration including cash and cash equivalents of 5.2 years, versus liability duration of 5.7 years as of December 31, 2013. We maintained a quarter with a portfolio and less rate-sensitive securities. Our credit profile remained conservatively positioned with below investment grade holdings, those rated in the NAIC 3 to 6 category representing less than 5% of our overall portfolio as of December 31, 2013.

This concludes my remarks. And I will now turn the call back over to Paul.

Paul Tyler

Thanks Raj. This concludes our call. If you have questions based on information provided during today’s call, please e-mail them to us at investor.relations@fglife.com. We will do our best to respond in a timely manner. This call has been recorded, and will be made available on our website.

Operator

That does conclude today’s conference call. All participants may disconnect at this time.

Question-and-Answer Session

[No Q&A session for this event]

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