FGL Holdings (FG) Q1 2019 Earnings Call Transcript

FGL Holdings (FG)
Q1 2019 Earnings Call
May. 08, 2019, 9:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning, and welcome to the FGL Holdings first-quarter 2019 earnings conference call and webcast. [Operator instructions] Please note, this event is being recorded. I would now like to turn the conference over to Jamie Hart, assistant vice president, investor relations. Please go ahead.

Jamie Hart -- Assistant Vice President, Investor Relations

Thank you, Operator, and good morning, everyone. We appreciate your joining our earnings call. Today, we will discuss our financial results of the first quarter of 2019 which ended on March 31. You can find the information for FGL Holdings on the Investor section of our Website, fglife.bm.

Today's presenters include Chris Blunt, president and chief executive officer; Dennis Vigneau, executive vice president and chief financial officer; and Raj Krishnan, executive vice president and chief investment officer. 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 2018 10-K that we filed with the SEC on March 1 of this year. During this conference call, we may refer to non-GAAP financial measures that we believe may be meaningful to investors. Please refer to our first-quarter earnings release, financial supplements, and investor presentation that we posted to our website. These documents contain a reconciliation of the non-GAAP financial measures to GAAP.

And finally, all comparison comments today will be made to first quarter of 2018 unless we state otherwise. I will now turn the call over to Chris.

Chris Blunt -- President and Chief Executive Officer

Thank you, Jamie, and good morning, everyone. I am very pleased with our first-quarter results. We generated record levels of sales, earnings, and ROE, which clearly demonstrate the momentum we're seeing in the business. Now, Dennis is going to go through the details shortly, but I want to mention a few highlights at the outset and then provide an update on the business.

Our adjusted operating earnings increased 34% to $82 million, or $0.37 per share. Total annuity sales grew by 35% to $1.53 billion, with FIA growth particularly strong at 53%. Our FIA net spread margins held constant over last quarter and are up slightly over last year, demonstrating our commitment to maintaining our pricing discipline in the current environment. The company's adjusted operating ROE increased to 17.9%.

And finally, we continue to maintain strong capital levels, with RBC at 450%. Now turning to the business, I want to make a few additional comments. We're very pleased with our sales growth, which is a continuation of a trend in recent quarters. And this growth is a function of our core markets growing, as well as F&G taking market share.

Our ability to generate outsized growth speaks to the quality of our franchise. Our long-standing relationships in the independent channel and value-added product development capabilities are true differentiators for F&G in the marketplace. I recently spent several days with our top agents at our annual Power Producer Retreat. I've got to tell you, the enthusiasm of this group was palpable, and there's mutual enthusiasm around ways we can continue to grow both our annuity and life businesses.

And regarding product breadth, we have a robust and competitive portfolio of annuity and life products that span income, accumulation and protection, as well as living benefit designs. And we've proven that we can be a true value-added partner to our distributors and our agents. In addition to our existing traditional annuity channels, we have a number of other opportunities to diversify and further enhance our distribution footprint. As discussed in the past, we believe we have significant upside potential with broker-dealers.

This is an avenue that's opening up for us following the A-minus rating late in 2018. And the team is preparing to execute on this strategy, and we expect to launch in early 2020. Now the other area where we're driving growth is through our offshore third-party reinsurance business, F&G Re. This channel represents an important growth engine for both block and flow reinsurance transactions, where we can leverage our investment management edge and unique product development capabilities.

We did $60 million of flow in Q1, nearly double that of Q1 2018, and our pipeline of potential new clients continues to build. With our recent upgrade to A-minus and our talented team on the ground, our Bermuda operation is successfully expanding, and this will allow us to lower overall effective tax rate over time. Moving from new business, I want to spend a few minutes on our strategic partnership with Blackstone, which is a sustainable, competitive advantage for F&G. As many of you know, we held an Investor Event in New York City on April 5, where we presented with the Blackstone team a review of our investment portfolio.

During that meeting, Blackstone shared their impressive long-term track record and performance in fixed-income investment management. Now if you were unable to attend the meeting, the materials remain available in the Investor section of our website. Our differentiated approach to investments is possible because of our stable liability profile. Given the predictable nature of our book, we can prudently assume more liquidity risk; importantly, not credit risk, in our investment portfolio at higher yields relative to our peers.

Now to supplement our disclosures on the investment portfolio, we've also completed a robust stress test analysis on the portfolio that Raj will be sharing in a few minutes. And beyond investment management, our core shareholders, Blackstone, CC Capital, and F&F, have been tremendously supportive in the development of our company. They continue to provide strategic oversight and are helping to drive potential M&A activity. Finally, a brief note on our team.

Since joining the company at the start of the year, I've been impressed by the breadth of talent across the organization. While we continue to focus on retaining and developing great talent, we're also investing for growth. F&G is actively recruiting, given our momentum in the marketplace, our strong sponsorship, and, most importantly, our reputation as a great place to work. In short, F&G presents an exciting growth opportunity for the industry's top talent.

So with that, I'm going to turn the call over to Dennis to discuss our results in more detail.

Dennis Vigneau -- Executive Vice President and Chief Financial Officer

Thanks, Chris, and good morning. Today, I'll focus my comments on the following: the earnings and performance trends across the business, results in our investment portfolio; and, lastly, I'll wrap up with where we stand on capital heading into the remainder of 2019. Overall, we delivered solid performance in the quarter. Top-line annuity sales growth is up 35% year over year and ahead of the overall market.

The portfolio reposition is delivering tangible lift. Q1 earnings are up 8% sequentially and up 34% year over year. The return on equity is about 18%, benefiting from solid fundamentals, along with favorable mortality experience. And lastly, AUM continues to drive earnings growth, reflecting net new business asset flows and stable investment spreads.

With those highlights as a backdrop, let me get into more specifics in several areas. We reported adjusted operating income available to common shareholders of $82 million, or $0.37 per share compared to $61 million, or $0.28 per share last year, an increase of 34%. I'll note the current period had some lift from favorable items that, while core to our overall operating performance, are not consistent period to period. More specifically, the current period AOI had $17 million of net favorability, or about $0.08 per share, primarily from the following operating items: $14 million of favorable mortality experience and other reserve adjustments in our single premium immediate annuity line, reflecting higher deaths than expected, including some large cases on a small block of policyholders where the majority of policyholders are over 90 years of age.

The current period also included $5 million of favorable market movements on future contracts that we use to manage policyholder behavior in our FIA product line. This is a reversal of the $9 million unfavorable impact adjustment seen in the fourth quarter. On a sequential basis, last year's first-quarter AOI of $61 million also included a net $8 million of favorable items. Even adjusting for these lumpy operating items in both periods, we had very strong software AOI increasing $12 million, or 23% over the prior year.

This uplift in AOI continues to be driven by ongoing invested asset growth, the benefits of the portfolio reposition lift, disciplined expense management, and improving underlying trends in net spreads. Turning to reported net income on a GAAP basis. During the first quarter, we reported net income available to common shareholders of $163 million, or $0.74 per share. This GAAP result reflects a reversal of some fluctuation we experienced last quarter and was primarily driven by favorable mark-to-market movements on our preferred equity securities, FIA-embedded derivatives, and fair-value FX related to our international subsidiaries, all of which are non-economic and excluded from AOI.

We ended the quarter at a book value per share of $7.15, which represents an 11% growth over the $6.43 reported last quarter, and was driven by $0.38 per share rebound on mark-to-market-related movement, $0.37 per share, as I mentioned, from our strong earnings performance. This was partially offset by $0.03 of unfavorable impact from the additional share repurchases, which we expect will be accretive to book value per share over time. Turning to the investment portfolio. Overall, it is performing well, given the significant repositiong activities throughout 2018 and the continued build-out of our alternative asset portfolio.

Let's walk through the results and then how we are positioned. Starting with a few details on where we're putting money to work. Fixed income asset purchases during the quarter totaled nearly $650 million at a weighted average NAIC rating of 1.5 and an average net yield of 4.93%. Those purchases were primarily in structured securities, such as CLOs, mortgage-backed securities, and ABS, as well as investment-grade corporates, and represent both new money flows and some repositioning.

As far as our progress on repositioning, that has been executing in several phases. Phase 1 and 2 were completed last year and rotated around $7 billion of the portfolio into those targeted assets mix repositioning toward structured products from investment-grade corporates. This achieved 43 basis point net book yield uplift on repositioned assets during the year from 4.21% to 4.64% while maintaining credit quality and, importantly, reducing the risk profile of the overall portfolio in line with our original expectations. Our Phase 3 efforts have been focused on building an allocation to alternative assets.

This program is well under way, and we have approximately $650 million, or 2.5% of the portfolio in funded alternative assets as of the end of Q1, and $1.7 billion of total commitments diversified across asset classes that we'll fund over time. We expect alternative to be about 3.5% of the portfolio by the end of 2019. Ultimately, we'll build to an overall 5% allocation of the policy forum with future economy 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, with returns lower than that in the early years and higher in the later years.

As previously mentioned, we've been working on some additional optimization actions to expand the reposition scope to other operating subsidiaries, which we expect will achieve $15 million lift overall once completed. As I mentioned in our recent investor update in April 5, we identified a further opportunity to de-risk a portion of our triple-B portfolio. As equities rallied and interest rates and spreads narrowed in the first quarter, we took advantage of market conditions to sell approximately $500 million of securities, with a focus on reducing financial services and energy names. Due to the nature of our liabilities, we have the flexibility to reinvest proceeds in less liquid securities within the overall asset allocation mix while maintaining capital and ALM targets.

We expect the reinvestment of proceeds from triple-B sales in Q1 to be fully redeployed in Q2. We will continue to evaluate additional opportunities to de-risk the portfolio based on market conditions. Next, turning to net investment income and yield. Compared to the fourth quarter of 2018, net investment income was $280 million in the quarter, a decrease of $6 million.

This reflects $9 million lower volume from the Q4 reinsurance transaction we discussed, $3 million higher average cash balance from the reposition, which was partially offset by $6 million reposition list and asset growth. As a result, GAAP earn yield was 4.4% in the quarter. As I mentioned at the event in April, we expect the annual run rate net investment yield for the full year 2019 to be about 4.75%, reflecting more than 40 basis points of improvement since the merger. We expect to grade into this run rate yield over the next couple of quarters as cash is reinvested and additional lift from the alternative assets and merges, as well as the additional optimization actions I spoke of earlier.

Most importantly, net investment spread for all products is up, and in our core product line, FIAs is stable at 254 basis points. The stability here is a function of our core FIA product characteristics, whereby we can regularly adjust crediting rates to manage across any rate environment. This quarter's a great example, as we were able to maintain stable spreads amid a declining interest rate environment and temporarily higher cash balances. Page 9 in the earnings presentation lays out the trend in net investment spread since the transaction closed in 2017.

A quick look compared to last year, net investment income, as I mentioned, was $289 million this quarter compared to $263 million last year, up $26 million, or 10%. GAAP earn yield is 26 basis points higher than the 4.21% yield reported in the first quarter of '18. And as I mentioned, it's expected to increase to 4.75% overall for the full year. Average assets under management totaled $25.9 billion at March 31, reflecting an increase of $1.9 billion net asset flows year over year and core growth of 8%, partially offset by the impacts from the Q4 reinsurance transaction.

Let me wrap up with a few thoughts on capital and liquidity. We finished the first quarter in a strong capital position, with an estimated risk-based capital, or RBC ratio, of about 450% on a consolidated basis, reflecting Q1 growth and the portfolio mix. Next, with regard to deployable capital, at the end of the quarter we had about $250 million comprised of insurance company surplus, available debt capacity, and holding company assets. Furthermore, we have another $200 million of readily available capital through established reinsurance relationships, and our $250 million revolver remained undrawn at the end of the quarter.

During quarter, we deployed capital to repurchase an additional 3.7 million common shares at a cost of $30 million. Since the repurchase program was announced in December, we've purchased 4.3 million shares for a total cost of $34 million at an average cost of $7.79 per share. In summary, we've got great momentum in executing on our strategy and delivered a terrific first quarter. Let me turn the call over to Raj to walk through the portfolio stress test.

Raj Krishnan -- Executive Vice President and Chief Investment Officer

Thank you, Dennis, and good morning. As Chris mentioned earlier, we have completed a robust stress analysis on the portfolio and would like to share that with you today. Last month, we provided a deep dive into our portfolio with the help of the sector specialists at Blackstone responsible for these parts of the portfolio. We have gained comfort from the quality of underwriting and long-term track record of these managers, factors that have underscored our rotation from corporate assets to structured assets.

This month, we are providing more color around our investment portfolio by sharing some of our stress test results. The risk teams at F&G and Blackstone have collaborated to analyze the performance of the portfolio in a variety of economic scenarios. This is information we typically use in our internal monitoring of the portfolio and also share with our Board. In a recessionary environment, which we have defined as an equity market correction of down 25%, a narrowing of Treasury yields of 100 basis points [Inaudible] safety and a widening of credit spreads of anywhere from 150 to 400 basis points depending on the asset class, high-grade and high-yield credit respectively, we view the impact of book value and earnings as manageable, and our company remains well-capitalized.

We have provided the background analysis in the earnings presentation on Pages 15 through 17. The conclusions of the analysis indicate that the 1-year forecasted impairments on corporate and structured holdings in this recessionary environment is an $80 million after-tax loss. There is another $170 million estimated impact coming from mark-to-market movements on our alternative and preferred stock holdings. Unlike true impairments, these mark-to-market impacts for alternatives and preferred stocks typically recover over time.

In total, we estimate approximately $250 million of after-tax earnings impact in a recessionary environment, with more than half of this coming from assets that are mark-to-market as opposed to being permanently impaired. To put this in context, $250 million of after-tax impact on the portfolio is less than the trailing 12-month earnings of this company. We view these results as manageable within our capital and liquidity framework, particularly given the stable characteristics of the liabilities that we write. Keep in mind, we have $13 billion of highly liquid securities, $250 million of excess capital, an undrawn revolver of $250 million, and $1 billion of FHLB capacity, more than enough to cover a $250 million impact in this scenario.

With that, we'll now turn the call back to the operator for questions.

Questions & Answers:

Operator

[Operator instructions] The first question comes from John Barnridge of Sandler O'Neill. Please go ahead.

John Barnidge -- Sandler O'Neill -- Analyst

Thanks. Congrats on the quarter. First question. Given where shares are trading now, above book value and book value ex- the ACI, along with the strong sales, can you talk about how you weigh buybacks relative to other areas of capital deployment?

Dennis Vigneau -- Executive Vice President and Chief Financial Officer

This is Dennis. I would say, given our organic growth opportunities and other opportunities to deploy capital, I think consistent with what we've done thus far, which has been pretty measured, I think is going to remain a pretty measured approach to share buybacks. It's one option in the toolkit to deploy capital, and we'll certainly consider it as we do, going forward.

John Barnidge -- Sandler O'Neill -- Analyst

And surrender activity the last couple quarters has been elevated relative to earlier in 2018. How long do you think this elevation remains?

Dennis Vigneau -- Executive Vice President and Chief Financial Officer

Great question. You might recall last quarter, and we saw more of it this quarter, we had elevated surrenders. And what's driving that, as we put on a really big block, about $700 million in late 2013 in the first quarter of 2014 in the MYGA business, they have just come up on their shop, end of the surrender period, and we've seen, as we expected, [Inaudible] there in line with our pricing expectation. Overall, out of that roughly $700 million in the last two quarter, we've seen $500 million of that roll off, right in line with expectations and in light of the current rate environment.

So I'd say at this point, going forward, to be more specific, we tended to, after that big chunk, put on MYGA at a more quarterly, steady pace. I think you'll see that the spike in those surrenders diminish and remediate.

John Barnidge -- Sandler O'Neill -- Analyst

And my last question, sales have been really strong. Can you talk about how consumer behavior has changed this year from maybe where we sat a year ago? I know there have been a lot of changes from a ratings perspective, management, but just how has the consumer changed over the last year? Thank you.

Chris Blunt -- President and Chief Executive Officer

It's Chris. I would say a few things. One, in this product line, a little bit of occasional market volatility is usually a good thing, given the nature of the product and how it works. So I think you're seeing a couple things.

You're seeing FIAs in particular go from many years ago kind of a niche product sold exclusively through certain distribution channels to being broadly accepted, and you're seeing that in the overall industry growth rates. I'd say specific to us, we're just finding that the story is really, really resonating. I reference the fact that I was with all of our top agents last week, and it was just the enthusiasm there is fantastic, right? So you've got a product with inherent guarantees, some participation in market movement. So I think some of this is the consumer demand has always been there.

I think advisors, some are increasingly waking up to how appealing this is to consumers. And so, yes, I think we feel really, really good, and I don't see anything that's going to stop this trend for a while in terms of the overall demand for FIAs in particular.

John Barnidge -- Sandler O'Neill -- Analyst

Great. Thanks for the answers.

Operator

The next question comes from John Nadel of UBS. Please go ahead.

John Nadel -- UBS -- Analyst

Good morning, everybody. So a question on the portfolio yield. I think it was 4.47% this quarter annualized. And if I think back to the fourth quarter conference call a couple of months ago, it sounded like the run rate on the portfolio at that time was already 4.75%. And I may have that wrong.

Maybe it was an expectation that you'd get to that point by the end of the year. But if I've got that right, what was the shortfall? Why did the portfolio yield decline so much over the last couple of months? And what is going to cause it over the next several quarters to rise to that 4.75% rate?

Dennis Vigneau -- Executive Vice President and Chief Financial Officer

This is Dennis. Yes, as we came out of last year and as we mentioned during the investor events in early April, the 4.75% was the yield we were expecting for the full year, not just coming out of 2019 but for the full year 2019. What's driving the shift from last quarter to this quarter is you might recall we did $750 million session of a deferred annuity book late in the fourth quarter. So we had the benefits of that block and its net investment income for the full quarter.

This quarter, it's out. That alone is $9 million or $10 million. We also have a little bit of drag from the repositioning we did on the triple-B portfolio. We like the trade there, and certainly don't view some immaterial cash drag as an ongoing issue.

And then, all of that was offset by growth that otherwise is coming through from the portfolio reposition lift. So we feel very good about the 4.75%, and what I would say is going to drive that is asset growth, investing at or above the [Inaudible] portfolio yield, and the continued earnings on an expanded funded alternative asset portfolio that, although early in its lifecycle is maturing nicely and earning a yield that's nicely above the current overall blended portfolio rate on fixed income. So there's a lot of good factors here that gives us confidence that, for the full year '19, we'll be at that 4.75% yield and outperforming at that rate as we exit into 2020.

Chris Blunt -- President and Chief Executive Officer

This is Chris. The only thing I'd add to that, John -- I think Dennis nailed it -- is that we had said we will continue to be opportunistic with the portfolio. And the reality is it was a great environment to sell triple-B corporates. And we jumped on it, and we did that, selling about $500 million or so of those securities.

It won't always perfectly line up with being able to deploy that, so we're quite confident that we have enough sources of assets, given the Blackstone partnership. So yes, very much I think short-term noise and not something we're overly concerned about.

John Nadel -- UBS -- Analyst

And listen, I'm totally on board with the idea of some risk management of the portfolio, particularly in triple-B corporates as we get toward the end of the cycle here. So if you had to peg how we should be thinking about the portfolio yield for 2Q at this point, I mean, it sounds like your expectation is that it's considerably above the 4.47% we saw in 1Q if you're laying out a high level of confidence in 4.75% for the full year. Is that a fair assessment?

Chris Blunt -- President and Chief Executive Officer

Yes. The yields will definitely be higher in Q2 and, like I said, continued to build. The one other thing -- two other points that I'll make here. We also, in addition to the other items I mentioned we're going to drive the improvement, is we do have that ancillary portfolio set of actions that we expect will get us to about $15 million of overall lift on the portfolio that Raj is in the midst of, and probably gotten about -- during the first quarter probably gotten about two-thirds of that completed.

So we'll start to see the benefits of that come through in Q2. And then, most importantly, I just want to stress that what really matters, the NII matters. But at the end of the day, equally important to that, and depending upon where you are and which product line we're talking about, the management down to the net spread and the overall interest credit in an option cost is equally important, right? I mean, we're a net spread lender. At the end of the day, what comes out of the faucet is what makes it to the bottom line, and we manage both very proactively.

And I think it is worth noting that we achieved our spreads in FIA. Guess that was nice and stable, and that was through active interest credit and spread management. And we feel pretty good about it.

John Nadel -- UBS -- Analyst

And that was going to be my next question, because clearly there was some active manage -- or maybe active management of the cost of crediting or the cost of crediting on the liability side. I'm just curious, how much of that decline quarter-over-quarter in the credited rate was the continued run-off of some of these older MYGAs that reached expiration, that have jumped to surrender it? I'm guessing that's some of it. Is that fair?

Chris Blunt -- President and Chief Executive Officer

Interestingly, the reduction you see in the overall net spreads in the cost of insurance, interest credited, what's in there is the session for the MYGA, and there are -- there's an embedded derivative. You're seeing the deferred amortization come through, just some related embedded derivative, DIG B36 noise in there, but largely driven and all centered around that MYGA block.

John Nadel -- UBS -- Analyst

My last real quick one, I just wanted to follow up, Raj, the stress test scenario that you laid out, I believe the $80 million of impairment component, is that a one-year or is that a three-year cumulative under your analysis?

Raj Krishnan -- Executive Vice President and Chief Investment Officer

It's a one-year impact. So we take it all in the first year, yes.

John Nadel -- UBS -- Analyst

Understood. Thank you so much.

Operator

The next question comes from Dan Bergman of Citi. Please go ahead.

Dan Bergman -- Citi -- Analyst

Hi. Good morning. I guess to start, SPIA mortality gains have been favorable now for a couple of consecutive quarters. And while I believe you cite the full amount as a source of favorability, I wanted to see if there's a base level of SPIA mortality gains we should be expecting in a given quarter, going forward, or would your based expectation really be that there'd be no gains in any given quarters? And any thoughts around how to think about that and what it means for run rate earnings power, going forward, would be helpful.

Chris Blunt -- President and Chief Executive Officer

Thanks for the question. We do have a large SPIA block, but within that block we've got a couple hundred million dollars of impaired risk annuities that were underwritten years ago, where the average age is above -- actually approaching 95 years of age. Throughout the life of this block, clearly we lift the mortality at the original underwriting. The block was strengthened along the way a couple times at the points of acquisition.

And in past years, we've had significant unfavorable mortality experience in that block. As that block has aged now, mortality is inevitably taking over. It is a bit hard to predict the mortality in that. Although they are older, we have a mix of both small and large cases in that block.

What we saw this quarter were a few higher deaths, but actually a lot of upside variability in the size of the case related to that mortality. Going forward, for the overall SPIA block, including this impaired risk sub-block, we expect for the full year no gain or loss on overall mortality. As it relates to this block, I won't get into trying to predict what's going to happen quarter-by-quarter, but what I would say is, given the high age on that smaller block, I wouldn't expect there to be any negative favorability coming out of that block. It should all be positive at this point, and we'll just have to wait and see how that develops.

But it will be lumpy. And as I've said in the past, it was core when we took the charges earlier on and had unfavorable, and we do view it as core earnings and real accretion to book value per share as we continue to let that block season off.

Dan Bergman -- Citi -- Analyst

Separately, a couple competitors now have recently announced or set up Sidecar vehicles with the goal of using third-party capital to fund block acquisition. I wanted to see if you had any thoughts on whether this type of structure would have appealed to you. And if so, is that something that you would want to put in place before agreeing to a larger block acquisition to have more dry powder, or maybe something you'd prefer to wait until any specific larger deals in place before exploring something like that? Any thoughts would be helpful.

Dennis Vigneau -- Executive Vice President and Chief Financial Officer

This is Dennis, and then certainly Chris will have the view on this. I would say at this point, we're in a pretty good capital position, 450% RBC. We've got excess capital. We've got reinsurance capacity.

We've got an undrawn revolver. And we've got a sponsor and investor group that we believe is ready to help us raise capital should the right opportunity arise. Raising capital for opportunistic M&A, whether a platform or blocks, it's not a concern at this point. We feel pretty confident that, when capital is needed, we can raise it.

And there's a cost to setting up vehicles ahead of that that we just, at this point, wouldn't deem to be most efficient. And so, I think for now, we probably -- and you probably won't see us set up any vehicle like that near-term.

Chris Blunt -- President and Chief Executive Officer

Yes, that was well-said. This is Chris. The only thing I'd add to that is there are big size differences here, right? So at $25 billion, our ability to source high spread assets at the margin makes a huge impact, but the same thing. There's a lot of really attractive small, mid-size deals, and that pipeline continues to build in terms of opportunities for us.

So I feel like we can make a lot of hay doing that. But as Dennis has said, we have, I think, a just unparalleled sponsor group. And they've proven time and time again that they are supportive. They're ready.

Their access to capital I can't imagine anybody could touch that group in aggregate. And so at the moment, I don't think we see a need for that. But if we did, I'm sure our sponsors would be happy to help put something together.

Dan Bergman -- Citi -- Analyst

Great. Thanks so much.

Operator

The next question comes from Pablo Singzon of JP Morgan. Please go ahead.

Pablo Singzon -- J.P. Morgan -- Analyst

Hi, Dennis. So you had referenced the deferred reinsurance gain earlier to the [Inaudible] in 4Q '18. Can you talk about the nature of that deferred gain, the earnings benefit this quarter, and how the accounting would work, going forward? In particular, where this show up in the P&L? Is it in fee revenues, cost of money, and so forth?

Dennis Vigneau -- Executive Vice President and Chief Financial Officer

Good question. There's several aspects there. There's a baseline deferred amortization piece that comes through in the quarter. On a gross basis, that was $13 million, which is higher than that sort of steady-state amort would be.

What drives that up is the change in the rate environment and the embedded DIG B36 derivative in that reinsurance contract because, I'll remind you, this is on a funds-withheld basis. Accelerate further amortization on a growth basis, and that's what took it up to $13 million. What we then do is, similar to other market movement in the AOI adjustment, we pull out those market movements related to the DIG B36 embedded derivative, and we net down to about $3 million or $4 million of deferred reinsurance gain amortization in the quarter.

Pablo Singzon -- J.P. Morgan -- Analyst

And that shows up in multiple lines, or just one line? I guess if your side, I'm showing up in multiple lines.

Dennis Vigneau -- Executive Vice President and Chief Financial Officer

Yes, so it comes in, and there was $13 million in the other product and fee income line. There's an embedded derivative that shows up in the realized gain line, investment gains and losses line due to the change in the market [Inaudible] of the portfolio on a funds-withheld basis. Part of that gain, similar to like when you take a realized gain on your investment portfolio, it accelerates the DAC amortization. That embedded derivative gain also accelerates further amortization of the deferred gain.

The gain gets taken out like a realized gain would below the line, but then we also remove the accelerated amortization related to that gain, similar to removing the DAC when you take an investment portfolio realized gain out of AOI, as well. So there's multiple lines, and on a net basis, although the numbers are big on a growth basis, bottom line is, like, $3 million or $4 million.

Pablo Singzon -- J.P. Morgan -- Analyst

Second question, was there anything unusual the tax rate this quarter? It came in at about I think 17% on an operating basis versus what you had said before of 19% to 21%.

Dennis Vigneau -- Executive Vice President and Chief Financial Officer

Yes, great question. The only thing going on this quarter is there's a little bit of income mix differential relative to what we expect for the full year between onshore and offshore. For the full year, we'd still expect to be in the 19%, 20% range.

Pablo Singzon -- J.P. Morgan -- Analyst

And then, just a last question, Dennis, to follow up on the previous question about the portfolio yield and investment income. I was wondering if you could quantify the investment income from alts this quarter, if they were meaningful at all, and how do you see that ramping up for the remainder of the year? Thank you.

Dennis Vigneau -- Executive Vice President and Chief Financial Officer

So as I mentioned in my comments, we have about $650 million of funded alternative assets currently at the end of the first quarter, and that's about 2.5%. we expect that to grade to about 3.5% by the end of the year. I'd say right now the earn rate on that is it's probably in that 5.5% to 6% range, overall, above the fixed income portfolio. So it's progressing nicely, but it's a pretty young book, and it's going to continue to season.

At this point, I'd want to give it a couple more quarters to see how things emerge. And then, I think we can give you a better sense for where we might land at the end of the year on an overall return for the portfolio as well as give you a sense for what 2020 might look like.

Pablo Singzon -- J.P. Morgan -- Analyst

Thanks for your answers.

Operator

The next question comes from Andrew Kligerman of Credit Suisse. Excuse me. The next question is from Alex Scott of Goldman Sachs. Please go ahead.

Alex Scott -- Goldman Sachs -- Analyst

Hi. Some of the question I had have been answered, but I guess maybe just going back to the NII yield, I mean, could you help us think about three months LIBOR? Are we going to see a step-down associated with that, or is the cash drag in incremental alt balance going to more than offset that as we just think about the next couple quarters as some of these 3-month LIBOR resets come in?

Raj Krishnan -- Executive Vice President and Chief Investment Officer

Sure. I think maybe to look at LIBOR on a year-to-date basis, so down probably about 20 basis points or so. Obviously, that has some impact on the first-quarter numbers. We haven't gone back and sort of looked at the reset.

In terms of the cash drag for NII, I think it was the first part of your question? Yes. I think on balance, neither the excess cash we had during the quarter from the BBB reposition, nor where LIBOR sits today is going to be meaningful or material driver to the overall 4.75% yield we have expected for the year.

Alex Scott -- Goldman Sachs -- Analyst

Second question was just if you guys have any update on your thinking in terms of the impact of the long duration accounting, and just if you have any kind of view of sort of what your more risk-neutral liability would look like for the riders that you've provided on the FIAs, or any strategies that you may have around looking at reinsurance for that piece of the product, or any color would be great.

Chris Blunt -- President and Chief Executive Officer

Yes, I would say two things here. One, we're still going through the analysis, so we don't have any formal guidance on what the impact is there, other than nothing in our analysis to date suggests that it's going to be a material impact for us. It's not something we're concerned about. We're just purposely working through it, making sure that we get it right, and we'll provide an update when we have that final view.

In terms of how that lands, I'd say, given our expectation that it's not going to be a big deal for us, going forward, I wouldn't expect any shift in how we manage that business or deploying incremental reinsurance strategies, again because we just don't think it's going to be a big deal.

Alex Scott -- Goldman Sachs -- Analyst

Got it. Thank you.

Operator

We have a follow-up question from Pablo Singzon of JP Morgan. Please go ahead.

Pablo Singzon -- J.P. Morgan -- Analyst

Hi. Thanks for taking my questions again. So Dennis, I realize that there are a lot of non-economic impacts that flow through [Inaudible]. I'm noticing in one-off items, like the asset repositioning or maybe even like the [Warren tender] last year, but I was wondering if you expect growth in book value per share to be closer to your [Inaudible] ROE over time.

Dennis Vigneau -- Executive Vice President and Chief Financial Officer

Pablo, you broke up a little bit there. Could you repeat the question?

Pablo Singzon -- J.P. Morgan -- Analyst

So I realize there are a lot of non-economic impacts that affect equity ex-AOCI, and also one-off items like asset repositioning and the Warren tender last year. But I was wondering if your longer-term expectation is that growth in book value per share will move closer to your pretty high ROE, which is 15% to 20%.

Dennis Vigneau -- Executive Vice President and Chief Financial Officer

Yes. We would expect, as we go forward, from a repositioning perspective, it's pretty much done. All we're doing is building the alternative asset portfolio out and rolling that forward and watching that book season with higher earnings. I think what you're going to see is positive earnings trends as we look forward, growth in book value per share, and the growth in that book value per share will trend up and, as you say, get closer to the overall return on equity.

Pablo Singzon -- J.P. Morgan -- Analyst

And then my last question is for Chris. I just wondered about your thoughts on the Secure Act making its way through Congress right now, specifically as it relates to the Safe Harbor provision for annuities with lifetime options and 401(k) plans. How do you see that affecting your business over time, if at all? Thanks.

Chris Blunt -- President and Chief Executive Officer

Yes. I'm quite familiar with that from prior years. And I would say I think it would be quite positive. I mean, this has been an issue for plan sponsors for quite a while, looking for that Safe Harbor.

So it's absolutely on our radar screen. And again, thinking about who our sponsor group is in terms of access, that's not an issue. So that's absolutely something -- it's not a 2020 event for us, but as we explore different partnerships, that could be attractive to us. Obviously that is absolutely on the radar, so I think it'd be quite positive and good public policy.

Pablo Singzon -- J.P. Morgan -- Analyst

OK. Thank you.

Operator

And ladies and gentlemen, this will conclude our question-and-answer session. I will now turn the conference back over to CEO, Chris Blunt, for closing remarks.

Chris Blunt -- President and Chief Executive Officer

Great, thank you. So, in closing, I would say the first quarter of 2019 was a record for F&G, earnings up a strong 34%. We were able to produce stable net spreads despite a declining rate environment, and our return on equity came in just shy of 18%. We continue to deliver on our strategic objectives, and we're building our future through our focus on distribution, enhancing the franchise, acquisitions, and our strategic partnerships.

So thank you. We appreciate your interest and investment in F&G, and look forward to updating you again on our progress in our second quarter call. Thank you.

Operator

[Operator signoff]

Duration: 51 minutes

Call participants:

Jamie Hart -- Assistant Vice President, Investor Relations

Chris Blunt -- President and Chief Executive Officer

Dennis Vigneau -- Executive Vice President and Chief Financial Officer

Raj Krishnan -- Executive Vice President and Chief Investment Officer

John Barnidge -- Sandler O'Neill -- Analyst

John Nadel -- UBS -- Analyst

Dan Bergman -- Citi -- Analyst

Pablo Singzon -- J.P. Morgan -- Analyst

Alex Scott -- Goldman Sachs -- Analyst

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