Ladies and gentlemen, please welcome Chris Littlefield, President and CEO, FGL Holdings.
Well, good afternoon and welcome everyone. It's great to have you here for our inaugural Investor Day, and we really appreciate your interest and investment in our company. We have a really good program for you this afternoon. I think it's going to last about one and a half hours, followed by a Q&A session after the presentations are completed. I'm not going to spend a lot of time on the legal disclosures, but the agenda here, after the welcome, Chinh Chu and Bill Foley, our co-chairmen, will come up and talk about the CF Corp deal and the investment thesis behind the investment in FGL Holdings. I'll come up and give some background about our business, about the business model and our path forward.
We're fortunate to have Bennett Goodman here, Senior Managing Director of GSO Capital Partners. He and Raj Krishnan, who is Executive Vice President at Blackstone Insurance Solutions, will come up and talk about the partnership that we have with Blackstone that's fully aligned to our shareholders' interests and I think is going to be a real powerful driver for our performance over the next several years and create long-term growth. Dennis Vigneau, our Chief Financial Officer, will also join us and talk about some more of the numbers and some of the details about the business. Before I turn it over to Chinh and Bill, though, I want to recognize a couple of people in the audience. First, we have with us one of our board members, in addition to Bill and Chinh, and that's Menes Chee, who's a Senior Managing Director with Blackstone Tactical Ops.
We're also joined by Chris Blunt. If Chris raise his hand, with Senior Managing Director and CEO of Blackstone Insurance Solutions. Also David Blitzer as Senior Managing Director and the Head of Blackstone Tactical Opportunities Fund. That's the agenda for today. Again, about an hour and a half, about 90 minutes, followed by Q&A at the end of the session. With that, I'm going to go ahead and turn it over to Chinh to start, Chinh and Bill.
Good morning. It's a pleasure for Bill and I to be here today. If we're still with the history of the company, as you know, Bill and I raised a SPAC of CF Corp, the largest of its kind at the time in the U.S. market with $1.2 billion of capital. Our goal was to pursue and invest in a company that had long-term value creation potential of 15%-20% per year, but has an immediate value creation right away that has a big opportunity for us day one. We looked at a number of sectors, including financial services, technology, software, fintech, and insurance, and we ended up investing in FGL.
We believe that FGL, as we'll explain the story, has a very strong franchise with a terrific management team that has the potential of compounding 15%-20% per year, that has an immediate value creation over the next two years of nearly doubling its net income. We'll go through the investment thesis with you in a few minutes. Also like to introduce Bill, who has created a number of companies. He is known for efficiency in his companies. He is known for accelerating revenue growth in his companies, and he's created over $60 billion of shareholder value in his various platforms. Would like Bill to go over the investment thesis, and then I will pick up from there.
Yeah. Thanks, Chinh. I'm all mic'd up.
Yep.
Well, interesting being here. I was in New Zealand on Sunday, so I'm a little whacked out on my time changes. New Zealand, it was 70 degrees Fahrenheit, and I got to Vegas yesterday or Sunday night, and it was 70 degrees. I showed up here in a T-shirt and Levi's. A little chilly. I guess I forgot because I went to school up 50 miles north of here.
In terms of our board of directors, I'll let Chinh speak to the Blackstone guys, but myself, a couple of other people that we've brought on, Tom Sanzone, who's formerly the CEO of Black Knight, and he has now moved on, and he's going to be helping Chinh and myself with a number of different transactions, and he's going to help in terms of evaluating some of the efficiencies that might be available at FGL Corporation. He just joined the board. Rick Massey from Little Rock, who has been on the FNF board and the Cannae board, and was on FIS, and he's on Black Knight. He and I both have removed ourselves from the FIS board, again, to give us time to focus on Fidelity & Guaranty. Chinh, did you want to say anything about any of the other board members?
I think the board is a very strong board, comprising of, as you can see there, a number of Blackstone individuals, including James Quella, former head of Blackstone's operations group, and Keith Bell. We have a very strong board.
Investment thesis. Obviously, Chinh is a financial genius, and the background he developed with Blackstone and being at Blackstone all those years, I viewed as would make a great partnership with me being more on the operations side and also in terms of identifying companies, doing turnaround situations or increasing efficiencies within an organization and then growing the business. That's kind of been my history throughout my business career, is to take an organization, really improve the culture if possible
Grow the business, make sure we do it in a very efficient fashion. All of the businesses I'm involved in operate at the top of their industries. Fidelity National Financial has margins about 50% better than any of its competitors. Black Knight is presently operating margins of around 47%, EBITDA margins. Obviously those are not going to necessarily be available at Fidelity & Guaranty, but we want to be efficient. We want to grow the business, we want to be efficient, and we want to be intelligent about the way we do business. Our interest in F&G is really based on several different factors, I'm going to hit a couple of them. One is demographics.
The baby boomers and the millennials as they move up, and the next group, the Gen X, they're all looking for the product that is going to be a safe product, that their capital is protected, but they have a chance to benefit on the upside. That's really what this business does, what FGL does. FGL presently is not investment grade, but it's on its way to being investment grade in terms of moving toward an A-minus rating. Once we do that, the platform changes. We can do a good deal better in terms of our scalability and our sale of our product. Again, we have a scalable platform. We don't have a lot of overhead in terms of generating business. We really outsource that. It's a very efficient operation.
We think we have a great investment thesis, Chin has a couple things he wanted to cover as well.
One of the key investment thesis is a partnership with Blackstone. There's a $23 billion balance sheet that the company has managed. Under the previous ownership, it was designed to be conservative. It was designed to have optionality for the new purchaser. We are using Blackstone as a partner to manage the balance sheet, we have estimated, as you've seen from the documents, that there'll be a 50 to 60 basis points increase in the yield. This is a very significant number that results from moving a number of buckets. Number 1 is that we're going to have upgrading from the low yielding corporates today into higher yielding corporates. We did block trade recently that netted $40 million of incremental net income, investment income for the company. This represents about 20% of the total that will be upgraded from the portfolio.
We'll also be moving into more structured products. We're underweight in that. The third bucket will be the alternatives bucket, whereby the company has a minimal, less than 1% today, we'll be moving into alternatives with about 5%. If we add all those together, that is the 60 basis points increase that we would derive for the portfolio. Dennis and Chris will talk more about that. The tangible result of that is already beginning to form as the $40 million net earnings has already been achieved with the block trade. We're also very pleased that we have seven-year very attractive long-term liabilities with a very low cost of capital, less than 2.4%. We are positioned well for interest rate increases. We actually like the fact that interest rates will rise. Each 25 basis points, we will earn an additional $5 million from that.
As I said, we believe the management team here has done a terrific job. It's had its hands tied behind its back under the old regime, focused on closing a deal. Right now, the management team is incentivized to grow the business, to achieve the A-minus rating, and to improve the operations of the company. As Bill said, with the A-minus rating, the company already has a better balance sheet than some of the competitors that have an A-minus rating today. The reason the company doesn't have an A-minus rating today is because it was under the ownership of HRG, which has a very poor balance sheet. We believe that the recent upgrade is tangible proof that we'll migrate to an A-minus rating.
To take a step back, this is a company that's in an attractive industry, a company with a good management team, a company that already has very strong momentum. The company has been growing at 8% per year prior to our investment. We will accelerate that growth because we will get an A-minus rating, which will get you into new markets that the company's not in today. We'll improve the asset management yield of the company over 60 basis points with the Blackstone partnership. We will benefit from the taxes that's been lowered from the 37.5% the company had previously to 20% this year, then going forward to 15% the following year. Then going forward, we will also be pursuing acquisitions to continue to grow the company. Our focus will be on organic growth, organic growth, and organic growth.
Having said that, there'll be ample acquisition opportunities that will be very accretive to the company, whether it's done in blocks or buying a mid-size company or a large-size company. In any one of those scenarios, we benefit from the cost structure of the company, given that we have the overhead necessary to expand the business and we don't need to add on a lot more cost. We'll also add the asset management uplift from Blackstone that the companies don't have today. We're very excited about this investment. As I said, that this is a stable industry with long-term demographic trends. We have a terrific company. We have the potential to potentially double net income over the next few years with those moves and longer term, 15%-20% growth. With that, I would like to hand over to Chris for discussion of the business model.
Great. Thanks, Chin. Thank you, Bill, very much for your leadership and sponsorship of this transaction. Let me add a little bit more about the transaction because the transaction really did transform our company in very significant ways. In one transaction, we took a lot of the obstacles out of our way to future growth, as Chin has said, with both hands tied behind our back, those have really been unleashed. First of all, if you followed our company, we've been in this sort of uncertain future for about two and a half years with the whole Anbang transaction and really didn't have a lot of clarity and certainty. We had a parent that wasn't heavily invested or interested in insurance and wanted to divest itself from that. Now we have a very clear direction for growth.
We've got Strategic Partners where insurance is core to what they're trying to achieve and core to their strategies. We have really exceptional clarity and sponsorship for the company. We have a clear path to ratings, which we haven't had before. You've seen that within 3 months after the closing, we've already had AM Best raise our outlook from B++ stable to B++ positive, and we believe that there's a clear path to an upgrade to A- in the near term, within the next 12 months, if not sooner. That's going to be really significant for our company because as a B++ company, we really have some limitations in terms of our strategy and what we could pursue. There's a large portion of the advisors in the independent space that won't sell a company unless it has at least an A- rating.
A lot of BDs and banks won't put you on the shelf unless you have at least an A- rating from AM Best. That will also be a very significant accelerant for our growth in that we will attract more producers that are willing to sell in the existing channels in which we're in, and will also open up our strategic flexibility to allow us to enter into initially regional banks, independent BD channels with a view towards higher ratings over time to access even deeper pools in the national banks and BD channels. We got an enhanced financial strength and flexibility.
Obviously, a lot of fresh capital, a lot of blue-chip investors that are very interested in this space and willing to back us with a very significant amount of capital and flexibility that we have to grow organically and pursue any disciplined acquisitions that we might take on. We've got world-class asset management. If you think about our business, this really is a very simple and scalable business. It's a spread business, and it all starts with net investment income. We can't think of a better engine to have and a partner to have in terms of Blackstone to be able to really help us drive net investment income, really change the portfolio, reposition the portfolio in the ways that Chin said. We've already made progress on that. If you saw our earnings release, we had a $2.7 billion block trade in one day.
As Chin said, gave us an annualized $40 million lift. Now we're moving into structures and alternatives, which are real sweet spots with our partner in Blackstone. Just a really, really strong engine that we believe is going to allow us to compete with anybody out there in terms of what we'll be able to do with our product competitively and the opportunities that we'll have to diversify our business. Then finally, we also got a new reinsurance platform. We have a Bermuda reinsurance platform that is going to be significant value driver over time as well. While tax reform may have put a bit of a crimp on the affiliated reinsurance business, with respect to third-party reinsurance business, those benefits still exist and are still going to be significant because there'll be significant tax efficiency from third-party reinsurance deals.
That's what will help drive our effective tax rate from the 20%-21% down to 15% over time as we layer on additional reinsurance business with our Bermuda reinsurance company. Again, just a completely different company from where we were just 3 months ago, just based on the sponsorship we have and the partners that we've been able to attract to our company. Now, FGL Holdings. What's FGL Holdings? For those of you who aren't as familiar with us, the parent company, FGL Holdings, is a company that's domiciled in the Cayman Islands with 3 primary operating companies. We have an Iowa-domiciled insurance company that handles all 49 states other than New York. We have a New York-specific insurance company, and then we have the Bermuda reinsurance company as well. Those are our 3 primary operating companies.
We have a well-established franchise in fixed index annuities, in index universal life, and in multi-year guaranteed annuities, or what we'll call MYGA. We've been in these markets since the index product started in the late 1990s and early 2000s. We have a reputation for working with distribution partners to create products that meet their clients' needs, and we've done several of those deals over the years with our distribution partners to really grow our business. We have a very well-known and established presence in the spaces in which we currently operate. Our index value proposition is right in the sweet spot of where the retirement consumer is, and that is, as Bill mentioned, they want principal protection with the opportunity to keep up with or slightly beat inflation over time with their retirement dollars, with their safe money dollars.
We don't advocate that people put 100% of their assets into this kind of a product. This is a safe money alternative that is very compelling. We believe over the past several years and for a long period to come, we think those demographics are going to be very powerful and that the demand for a principal protected product with the ability for interest crediting based on how markets perform, that demand for that product will outstrip supply over the long period of time. We think that's another really compelling reason that this index value proposition is really core to where we are. Those of you who follow the industry, index used to be sort of that niche product off to the side. If you've watched, what we said would happen has happened over the last several years. It has become the mainstream product.
It has become the go-to insurance product, and we believe that growth is going to continue to accelerate. Our products are sold primarily today through independent agent distribution. It's been a great distribution channel for us. We've had long-standing relationships. There's a group of about 15, what we'll call power partners, that do a significant portion of our business, and the average duration of the relationship with them is over 16 years. These relationships are long-term, they're durable, they've gone through various economic cycles, and they've also gone through all the certainty that we've dealt with over the last several years. People have continued to sell our product, and we have continued to maintain a very strong position in the markets in which we compete, despite all the things that we had going on over the last couple of years.
To have all that taken off and have the arms untied and the shackles off, it's a very exciting time with our distribution partners and what we can do in the markets in which we currently compete. We have, as Bill mentioned, an outsourced variable cost structure. We only have 300 employees. That's all. That's all we have. Everything else is outsourced. We want to own some of the touch points with the agents. We want to own the key value drivers in actuarial and finance and sales and marketing. With respect to the business processing, we do outsource that with a couple of different third-party providers.
That gives us a nice mix of fixed versus variable cost and efficient structure that again, we believe is very scalable without a significant incremental cost as we grow the business or look at adding to the different lines of business. Finally, we've had very sustained financial performance through. If you follow the company over the last several years, we've been able to compete, and we've been able to deliver very strong performance on the bottom line as we've managed through all the uncertainty and all the things that we've managed through. That's despite our ratings, despite the lack of access to capital markets, despite all of that, we were able to carve out a very significant position, deliver good numbers over time. Now we believe, again, you're going to see a lot of that accelerate as we continue to rev our engine for growth.
A little bit about the liabilities. We've got about $24 billion in GAAP reserves. You'll see that it's heavily fixed indexed annuities, followed by fixed annuities, and then the immediate annuity block and indexed universal life. That indexed universal life as a percent of reserves will continue to grow. Back when the company changed ownership in 2010, there was a reinsurance transaction. A lot of that IUL reserves you're seeing now is just business that's been written since 2013, 2014. We expect to see that grow over time. Then Front Street Re was a sister company, was independently owned by HRG. It's an offshore reinsurance platform that is also now part of FGL Holdings. That's what that reference is to Front Street Re. $24 billion reserves, heavily fixed indexed annuity as of today. It's a young block. It's a very young block.
You'll see that it has a very significant surrender charge protection. The average surrender charge on our in-force book is 8%. A lot of protection against disintermediation as interest rates rise. It has a very stable cost of capital. You'll see the cost of funds there and the cost of interest crediting fixed annuities averaging about 2.2%. The average duration on the FIA block is about seven years, and we have significant room to still continue to manage from the minimum guarantee perspective. It's a young book, a lot of surrender charge protection that we'll be able to continue to protect us as interest rates rise. As I've teed up, it's a safe money product that wins across the various options that you have for safe money products. It gives you annual principal protection. Your account value for the consumer never goes down.
It's not like a variable annuity where the account value changes. You have a very stable principal protected product. It's very safe. It gives the opportunity to certainly outperform what's being offered by banks in the form of a CD or other safe money options. It gives the consumer flexibility on payouts if they want to annuitize, if they needed accelerated payment for a terminal illness or other situation or circumstance that arises in their life. They have various liquidity options that aren't available. Just across the board, it continues to win, and that's why you'll continue to see people put money into something that's principal protected but can get some upside depending on market performance. They also have a compelling advantage against our main comparator, which is the variable annuity product. Again, it's better for the consumer in that the account value doesn't fluctuate.
If a consumer needs to access the money, it's available at 100%. If you think about the variable annuities, particularly during the crisis when people needed the money, their account values were down 40%. It's really a very fundamental shift that happened during that 2009, 2010 period where consumers just want to know that the money that they've worked hard for and put in a safe money product is available for them if they need it. They have various payout options. From the company perspective, it's very simple to hedge. This isn't like we're trying to hedge equity markets. This is an over-the-counter option, very simple, very clean. We don't try to dynamically hedge a big part of the book. It's a very simple liability hedge and provides us a very stable in-force book of profits that we'll continue to generate for the time to come.
On the annuity sales trends, VAs have been down significantly over the last five years. As of the latest LIMRA report, they were under $100 billion for the first time in over a decade, while the fixed index annuity space continues to increase. Again, we believe and have believed for a long time that the fixed index annuity product was a better product, and I think the market is showing that to be the case. It is definitely moving from a variable annuity to a fixed indexed annuity product. Fixed indexed annuities represent about 28% of all annuities sold. There was a dip in 2017 last year. That dip was caused by two primary things. First is the DOL rule on the fiduciary, the best interest rule.
That had a lot of the distribution focused on how were they going to manage through the disruption that might come if that went into effect. You may remember it was supposed to go into effect in April. It got postponed to July, got postponed from July to January, then got postponed finally to July of 2019. As currently scheduled, the DOL rule is not scheduled to go into effect in full until July of 2019. We think that there's a lot of reason to believe that there will be significant changes made to the DOL rule between now and then. There may be some overhang, but a lot of that is what we felt in 2017.
In addition to the DOL rule, a lot of times, as you know consumer behavior, when you have very well-performing equity markets, everybody starts investing, and puts risk on at about the wrong time. It's harder to sell safe money products when you have the S&P index going up significant double digits over time. That has also been, as you've heard a lot of the companies report, another reason why distribution's having a harder time, and it impacted sales a little bit in 2017. Again, the long-term projections hold in terms of the appetite for this product. By distribution channel, you'll see that the market in which we compete is about 60%, 55%-60% independent agent drive those sales. Independent agent has declined a bit over time, while banks and BD channels have increased slightly over time.
The vast majority of the products are still sold through independent agents. It's a big market for us. As we think about our ratings upgrade and now have the flexibility to get into new channels, that's where we see some of the growth coming from, in the regional banks, IBD chains, and also in the national banks and national brokerage channels as well. We'll see that growth continue. Again, the rating is really significant, and we expect to have that before the end of this year. In the IMO channel, in the areas which we compete, we're number 5. The latest data we have is as of September, so the year-end numbers haven't been released yet. We've been consistently in that four or five position, despite everything that's going on and despite the lower ratings profile.
You'll see there's a pretty significant drop after you get past the top 5. Drops well below $1 billion. We've got a very nice position, and we think, again, as the clarity has become about the future, as people understand the strategic importance of insurance to our partners and the sponsorship that we have, and they get confidence in the ratings profile coming up, our partners are willing to invest more in recruiting agents, training agents behind our products to help sell our products. Again, we do feel like we really have some wind that is beginning to fill the sails for our distribution. In addition to the fixed index business, we sell multi-year guaranteed annuity business. We're the number 1 position in independent space for MYGA sales. MYGA sales are heavily sold through banks. That's the dominant channel for MYGA sales as a CD alternative.
Again, getting that rating up, allowing us to access those bank channels will help us drive MYGA. We really do think that this can be a $1 billion-plus business, primarily because this is very dependent upon the assets that you have to back that liability. It's generally what we sell is a 5-year duration. We look for shorter duration, higher spread type assets, and that's exactly the sweet spot of what we believe that Blackstone can help bring to us to help back that liability and really drive some additional MYGA sales in that channel. It's a nice size market, about a $17 billion market. We try to be a consistent provider based on the assets availability that we have.
The nice thing that MYGA brings to us is that when we have a MYGA special or when we're trying to emphasize some MYGA sales, what it does is it gives the producer and the distribution partner a reason to start calling their clients and a reason to call. What we generally see is when we have a good MYGA special on and we have a good asset that backs it, we do generally see an uptick in our fixed indexed annuity business as well because it's giving them a reason to get their clients on the phone and talk to them about different opportunities for them, including fixed index annuities. We think it plays a really nice role for us. The other thing that's interesting about this business is we only take it electronically. We don't take it any other way.
We will only accept this business fully electronic, straight through processing. We get 98% of that business placed, very efficient, very clean liability, and it's really nice business for us. We really do think there's an opportunity for us to do more. We've been constrained on this in the past for two reasons. One was asset availability, and two was capital. We were really trying to preserve our capital for the FIA business since we didn't have access to the capital markets as the deals were pending. We think we'll have a real opportunity here to grow this business. On IUL, we do like the Index Universal Life business. We've had a nice position in Index Universal Life over the years. There's a couple things to know about Index Universal Life. It's very flexible. Again, the client has a lot of choices.
A lot of people are using it for retirement savings as well and retirement income because you can take loans and withdrawals from an IUL policy as it accumulates tax-free. It's an efficient way to collect retirement savings as well. From our perspective, it gives us a number of benefits. It gives us a diversification beyond credit risk. Instead of just being solely credit risk in the portfolio, brings us some additional risk mortality that we can add to the overall risks of our in-force book. It gives us significant renewal premiums as a hedge against rising interest rates. There's significant renewal premiums that come along with an Index Universal Life product.
It's got longer duration, so it can help increase the overall duration of our portfolio, and the earnings diversification will really help as we think about taking our rating from an A- to a solid A over time. That really is going to require some shift in our business model so we don't have so much of our profit concentrated in the FIA business. It's a really good diversifier for us on the IUL business. It is also more rating sensitive than annuities. This ratings to an A- will really significantly help us really grow the IUL business as well. The way to think about the IUL business is that it's on an economic equivalent basis. It's equal to about seven to eight times an annuity sale.
Because of renewal premiums, $50 million or $60 million of IUL target premium is worth about $450 million of an annuity business on a like-for-like basis. You hear the numbers of $60 million in target premium, it doesn't sound like much. Put it in the context of about another $450 million of annuity business, it starts helping you see the importance that IUL can play in our growth over time. The IUL market, we're the number 19 player. If you look, there's nobody above us. We're the only player in the top 20 with less than an A- rating. It's definitely been ratings constrained. Again, as we get that going forward, the ratings going forward will help. The index space is where all the growth has been on both the indexed on the life side and the annuity side, we're well-positioned for that.
I talked a bit about our power partners. We have about 15 groups that do over 90% of our business. We have deep relationships with them. I was with half of them last week in person, where we can really have a high-touch relationship, understand what we can do to help invest together and drive our business. We have every distribution group in the industry that sells over $1 billion of product contracted with us. Again, they've really been sort of waiting to see what would happen before they really want to put a lot of investment in recruiting and developing a distribution channel behind the F&G story because they weren't sure what was going to happen with F&G. Again, we really think that's going to be very powerful for us.
Again, the relationships average over 16 years through multiple economic cycles, we fundamentally have helped a lot of these groups get into business. We helped start a lot of them. There's a lot of loyalty from a lot of these partners with the company that they've worked with for several years, and with the same people for several years. Below our power partner groups are our power producer groups, that's about 250-300 writing advisors that do about 35% of our business. That's been very consistent over time. We know who they are. We work closely with them, it's a very concentrated group that we can get a big share of their business by working very closely with the power producers. About 600 of our top agents do about 50% of our business. Again, we like the concentrated model.
We think it gives us a lot of benefit to really work closely with the groups to grow the business and also understand the risks and how they're doing business as well. They do a lot of business with us because they know us. We've been an index leader for a long time. There's a long history of relationship there. We've worked with many of them collaboratively on product development deals and trying to find products that work for their clients and do something that's a little different and compelling for their clients. We have good transparency. I know all of those principals very well. I've known them for over a decade. We have a very high-touch model with those relationships where we know them well, we work with them closely, that's the power of our distribution footprint.
That's why we've been able to maintain a very nice business despite some of the challenges that we've had over time. That's the background on our business. What are we focused on going forward? You've heard a lot of this already. In 2018, which we really view as a foundational year, this is really focused on some really fundamental blocking and tackling. First of all, we got to secure the ratings upgrade to improve our strategic flexibility. We've got a lot of effort going into that. Dennis and his team have worked closely with the rating agencies. You would have seen at closing, we got a double notch upgrade immediately from S&P. We got an upgrade from Fitch.
We got the positive outlook from AM Best after just three months post-closing, and we're hoping to have that full upgrade to A- by the end of the year if things go well. We need to complete the portfolio repositioning. We got a big part of it done already, again, within three months after the closing with the big block trade. We're now on to improving the different areas that Bennett and Raj will talk on in terms of where can we go to continue to improve the risk-adjusted returns on our portfolio. We're going to drive organic growth. As Chinh said, organic growth, organic growth, organic growth are our top three priorities.
We're going to be focusing on really growing our independent distribution in the FIA sales, particularly now that they have confidence in our future, understand that we actually have a path to a ratings upgrade, and it's tangible that AM Best has put us on a positive outlook. We're going to begin to prepare to go beyond the independent channel. We do need to have a presence in the regional bank and the independent broker-dealer as a first step. We are going to prepare to expand outside of just independent agent distributions. We think that's another growth opportunity for us. I've already mentioned we're going to grow our MYGA business behind the power of the Blackstone partnership to really get the asset sourcing that we need to back those liabilities. The ratings are going to complement our IUL sales.
We do think that can be a $75 million to $100 million target business over the next several years through the power of expanded distribution. We're going to take a disciplined approach in looking at acquisition opportunities. I put it last because we are going to look, but we are going to be very disciplined in what we take a look at in terms of the acquisition opportunities that come up from time to time from here on out. The one thing that isn't on the slide that I would mention as well is we are working very closely with Treasury on tax reform to make sure we get a clear understanding of how the outcome of tax reform will be. For now, we haven't baked in any potential upside from tax reform. We're assuming a 21% ETR.
There is a lot of work going on with Treasury because the base erosion alternative tax is very draconian. I think there is some understanding in the administration that it probably doesn't make a lot of sense, but it's also going to take some time to get through the regulatory process to see if there can be any relief on that end or not. That's where we're focused. That's what our focus is for 2018. Again, we couldn't be more excited about how this has transformed our company and given us new air, new space, a new lease to go really go out and really grow our business and build on the strengths that we already have, which are considerable. With that, I'm going to turn it over to Bennett Goodman to talk about the Blackstone partnership that we have.
Thank you, Chris. I'm delighted to be here today. I think my role in the presentation this afternoon is to explain how Blackstone is going to help FGL accomplish all those different objectives and priorities that Chris laid out. We're also highly motivated to make this happen. As you'll learn later in the presentation, Blackstone has about $600 million of capital invested in FGL. I'm a big alignment of interest guy, and I think having that kind of mutual interest across all the different shareholders puts a lot of conviction behind the ability for us to not just deliver from an investment point of view, but to be aligned with shareholders to participate in the upside that Chin and Bill laid out in terms of what they think can happen with the stock price. Let me begin by talking a little bit about Blackstone.
We are the largest alternative investment manager in the world. We oversee approximately $434 billion of assets. The family of investment strategies that we oversee are highlighted here on this page. I'm not going to go into each and every one of them, but I do think you are familiar with, or somewhat familiar with our private equity and real estate investment activities. The firm has a very large group who invest in hedge funds, and we think there's some potential to collaborate with our hedge fund group and to design products that can be important to FG&L and some of our other insurance company clients. I'm the co-founder of GSO Capital, which is the credit business of Blackstone. Blackstone acquired our group about 10 years ago, and at the time, we had about $8 billion worth of assets under management. Today, we have in excess of $100 billion.
A lot of those strategies are particularly relevant to Raj Krishnan and his investment group, and I'll spend a little bit more time talking about that. Our Tactical Opportunities business is a relatively new activity with respect to Blackstone. It's headed up by David Blitzer, who is sitting in the back of the room. David's group, along with Menes Chee, created this investment opportunity for the firm, and they've been the ones who have been the architects of trying to drive the synergistic effect of not just an investment, but how do we harness the power and capabilities of our firm to help FGL. Finally, Strategic Partners is another business that I do think can play a role here in that they buy secondary interests of other private equity firms.
Relatively low-risk way of investing in private equity. I'll elaborate a little bit more on track records in just a minute. What's unique here on this page is not just that we're the largest alternative investment manager in the world, but each and every one of these strategies are industry-leading franchises. They are absolutely the best in their category. We're able to have one common denominator across all these businesses, which we are all committed to investment excellence, to delivering to our LPs what we say we're going to do. That is an objective and a mandate that we take pretty seriously at the firm. This slide here does show you a little bit about if you deliver that mandate to the firm, good things tend to happen.
The firm's been around for over 30 years. You'll see here the acceleration of our growth really happened post the financial crisis. What we have experienced is a similar phenomenon that the insurance industry has faced, and that is just the compression of return, whether it be in the public equity markets or in the fixed income world. Whether you're a pension plan, a sovereign wealth fund, an endowment, a foundation, one way to effectively enhance your portfolio returns is to allocate a larger percentage of your assets into alternatives. As a firm, we've clearly have been a big beneficiary of all that. In our business, it's a very simple model. If you deliver superior, consistent risk-adjusted returns to your LPs, they reward you with more capital. Not more complicated than that. That's all that you need to do.
As our franchise has grown in each and every one of our strategies, we've developed a new competitive advantage, which is scale. Scale matters in the investment world. We can do things across any one of these businesses that our principal competitors just can't do. If you're in the investment world, if you're one of 100 guys competing for investment, or you're one of three or four guys competing for investment, there's a direct correlation between your success in terms of driving return by having a unique value proposition. That's what we really strive to do across all the different activities of the firm. This creates a virtual cycle. As we're able to build more scale, we have more information. We become more global. We have more investment professionals focused on specialty investment activities, which create yet other investments, which then further drive our return.
That's the model that has enabled us to perform as a firm. Across this $400-plus billion pool of investment activity, we generate a lot of fixed income and credit-oriented products. On average, over the last four years, we've created over $10 billion of investment-grade products, and we conservatively create well over $20 billion of non-investment-grade product. To date, we've just used Wall Street to distribute much of that, or we put a lot of the non-investment-grade product into existing portfolios. Our affiliation with FGL now creates a new pocket where we can redesign our capital structures, we can reorient how we finance our activities to create products that are relevant to Raj and his team. These products are powerful in terms of their ability to create incremental return. This page just highlights each group's inception-to-date net returns to our investors.
When Chris and Raj talk about taking the investment portfolio from 1% of alternatives up to potentially 5%, these are the kinds of funds that they will be considering for the portfolio. Our private equity business, which is our longest-running investment activity, has been up for over 30 years, compounding returns at 15% net. I mentioned Tactical Opportunities. It's a lower-risk approach to private equity investing. They tend to invest more as a minority investor as opposed to a control investor, which is what private equity funds tend to do. They can adapt pretty quickly to investment opportunities that are not within the mandate of private equity or real estate business. It's very nimble, very responsive. Since 2012, their net returns have been 11%. I mentioned the secondary fund. That's that Strategic Partners.
Our real estate group is, I think, without peer and to compound in real estate at 16% net over the last 25 years is pretty impressive. I don't want to be too bashful about my group in credit. We're kind of the sissies among the Blackstone businesses. We're not buying equity, we're buying debt, and we've been able to compound at a double-digit return since our inception as well. We created a new division, which we call Blackstone Insurance Solutions, to better serve FGL and potentially other insurance clients that we hope to attract and to create value for from our Blackstone activities.
The mission of this initiative for FGL and our other clients is to direct that prodigious origination of fixed income and credit products into more capital-efficient sources of investment income that are either less correlated or offer incremental return than what can otherwise be found in the public markets. That's really the secret sauce that we're after and what we want to create. To do all that, we need to take the DNA that's resonant in Raj and his team's mind and infiltrate all the different deal structurers and capital markets people at Blackstone. To do that, we created a global products committee that meets once a week across all the different businesses.
Raj will attend that meeting, and our goal is to take all of our activities as a firm and think about how we can redesign what we're doing from a financing point of view to better fit the needs of clients like FGL. We are very excited about this. When we think about the priorities of the firm, this is among the highest that we have. It gets a lot of senior-level focus. We've just scratched the surface of what we're potentially able to do, and I think with each successive quarter, we'll get better and better at mining Blackstone and all of its potential to help FG&L transition its portfolio into higher returning risk-adjusted investments consistent with its needs for diversity, its needs for asset liability matching, its needs for duration, its particular credit rating requirements, and we look forward to making all that happen.
To help us effectuate all that, we did take a couple of pretty important steps. First, we integrated Raj and his team into this Blackstone Insurance Solutions group. It's been three months, probably feels like three years to you. It's been great learning more about the world of insurance. There are lots of new terms for us. We're not accustomed to this statutory accounting stuff. NAIC ratings now is all we talk about. Forget S&P, forget Moody's. NAIC one, that's where we want to operate. I think we're getting better and better at this. In January, we were very fortunate to attract a CEO to lead this Blackstone Insurance Solutions business, Chris Blunt. He's in the back of the room. Chris is the former president of New York Life's Investment Group. He is out building a team.
We took one of our most senior trusted partners at the firm, Martin Alderson-Smith, who I'm not sure Martin is here today. He was here over lunch. He's really the COO of the business. Between Chris and Martin, full blitz to put this team in place. I think we will have a world-class group of investment professionals to help originate these kinds of products. I spoke about this product origination committee that's now up and running. Between those three very tangible steps, we feel pretty confident that we'll be able to make an impact. Finally, I just wanted to add this whole notion of alignment. We're pretty good stewards of capital, and I think we're very good at what we do from an investment perspective.
You do have the added alignment of a pretty substantial investment that sits in David Blitzer's portfolios and some of my portfolios. This does get our attention. We wake up every day. We're thinking about how can we add value to FG&L because we know that will only benefit our equity investment. That alignment with the shareholders of FGL, that alignment with RLPs is exactly what we're trying to do in terms of linkage, I think we'll drive a lot of positive results. With that, I'd like to turn it over to Raj and let him explain exactly how he plans to execute this plan.
Good afternoon, everybody. It's great to be here. I think I've met a lot of you earlier when we took the company public. In many ways, what we are trying to accomplish here is the continuation of a trend that began a long time ago. With our partnership with Blackstone, with me and the team being embedded in Blackstone, with the scale, the scope, the resources that are available to us by Blackstone, this is really the continuation of a trend that began and just absolutely thrilled about the opportunity to execute. First, Bennett mentioned scale and scope. The capital market access that is provided to us as a Blackstone portfolio company is unprecedented. There are very clear tangible benefits that have already begun to be executed. You're aware of the block trade that was completed a couple of weeks ago.
That was a $2.7 billion block trade that occurred in one day. I can speak as a former F&G employee, where we had to scrape and scrap for mind share with the street. People were beating down our door to get the trade done. Took one day on their balance sheet, we could deliver that value to F&G. That would not have occurred if we were not part of the Blackstone organization. Second, in terms of the scarce and attractive credit opportunities, I'm just absolutely thrilled about the ability to begin to source investment-grade assets that can really make this portfolio sing. Bennett talked about $10 billion to $20 billion of credit-oriented investments that are originated as ordinary course of business in Blackstone's fund operations.
We now have a balance sheet at F&G represented by Blackstone that can figure out ways to structure these assets in a capital-efficient manner to work well with the company's liabilities, to work well with the various regulatory bodies that govern our business. If you think about insurance capital and you think about investing from the perspective as an insurance investor, an extra 50, 75, 100 basis points you can pick up above very overfished public corporate bond markets is hugely incremental to the value that you can create for F&G and companies like it. Last, in terms of alternatives, this probably provides for us the greatest optionality for the business plan going forward.
For the last several years, as I've demonstrated and communicated to former boards and the current board, F&G and companies who are net spread investors really need to reduce their dependence on the public corporate bond market to protect and enhance net spread. The only way you do that is sourcing, underwriting, and investing in private assets. F&G currently has less than 1% of its portfolio in alternatives. The peer group, anywhere from 5% to 10%. As we think about gradually scaling this up to about a 5% weighting in the business plan, it's wonderful to do that as part of the world's largest alternative manager. Ben talked about best-in-class performance. That is the type of performance that we can begin to attach to the F&G balance sheet too, as you begin to build this portfolio over time.
Thinking about the key takeaways for the investment program going forward, there's really three things you should take away from today, is that we're underway, we're executing, and a lot of this is very much within our control. The first, in terms of capital market access, we completed the block trade, that managed to accrete $40 million of net investment income for the company in one day. That was done. It's completed. We estimate that it would provide approximately 20 basis points of portfolio lift for the aggregate portfolio. The second is really beginning to rotate out of relatively low-yielding public corporates into structured bespoke assets that will come from the Blackstone platform.
The rough math around this is if I look at the portfolio today from the PGAAP date, there is about $4 billion of NAIC I and II rated securities that have a GAAP book yield of less than 4%. This is very actionable. The challenge and the opportunity is beginning to figure out ways where we can infiltrate, I think is a great word, begin to infiltrate the Blackstone organization to figure out how do we get these bespoke NAIC I and II rated securities to begin to be actionable for the F&G balance sheet. We believe we will be able to execute that between 2018 and 2019. That rotation from fixed-rate assets to LIBOR-based assets at a time when LIBOR is beginning to rise will accrete another 20 or so basis points for the overall portfolio yield. The last phase, as I mentioned, alternatives.
We will continue to drive the alternative exposure up to about a 5% weighting. This is achievable between 2018 and 2019. The rough math, you saw the long-term track record of the various flagship funds. We believe that we can achieve approximately 30 basis points of portfolio lift as we begin to rotate the portfolio to 5% weighting alternatives. In terms of the snapshot of the portfolio and how we think about managing the portfolio, we manage it with an insurance lens. We are really thinking about picking assets that can support and drive the lifetime IRR of the products that F&G writes. What does that mean? Capital efficiency. It also means being conscious of your ALM profile. It means conscious of being not too concentrated in one particular asset class or having too much in less liquid assets.
When we did the block trade, for example, we managed to rotate that portion of the portfolio from lower yielding corporates into higher yielding corporates, but still keep it within the targeted ALM band. I will get to that in a moment in the next slide. As a result of that, you really began to sort of see that rotation away from corporates into other asset classes. The portfolio yield is approximately 4.9% from the pre-merger date. Dennis will walk through the PGAAP impact in his section later. I will also note the portfolio is 93% investment grade rated. It is a very high-quality portfolio, and this is a wonderful starting point for this business going forward.
As we begin to rotate away from corporates into structured assets, as we begin to connect with the various sources of private credit within Blackstone, as we begin to allocate towards alternatives, you should begin to see the GAAP yield mark its way back up towards the statutory yield. In terms of the ALM profile, we have long managed this portfolio with sort of two lenses in mind, being ± a year asset duration versus liability duration and ensuring that we are cash flow match relative to the near-term liabilities. That is very important. When we did the block trade, $2.7 billion is rotated out of lower yielding corporates into higher yielding corporates. The aggregate asset duration of the portfolio was extended by half a year. We are about +1 year versus the liability duration.
In the trade, we left alone those near-term maturities that really are around the MYGA assets. We want to make sure there is no situation where policyholders can put liabilities back to us and we find ourselves upside down. We really sort of think about the ALM profile in every single action that we make. We have about a 13% exposure to floating rate assets. If you've heard me speak before under prior management, this was as much as 30%. As we begin to rotate the portfolio away from corporates into structured assets, we'll begin to rebuild that floating rate exposure, and there's no better time to do it than right now, given the support we're getting from LIBOR. For a long time, when this portfolio was about a 25% weight in floating rate assets, it was very expensive insurance for the company to own.
What I'd like to be able to do as we rotate out of corporates into structures is to think about doing that in ways that are very accretive to the portfolio's earned rate, given the support that we have in LIBOR, I think that possibility is clearly there. Last, in terms of asset liability monitoring, the company, the Chief Risk Officer, the Investment Risk Officer, the CEO, and the CFO on a monthly basis review our performance as an investment manager and grade us to see how we are doing against those liability benchmarks. Quite honestly, new business layers every single month.
A way to think about it, each month when premium comes in, we invest the premium against a liability target, we have to grade that performance on a capital consumption basis, on a liability duration basis, and did we or did we not make our targeted IRR for that month? It's pretty simple. Every single month money comes in, we try to manage to kill the liability the company's writing, there's no better gut check than that than these monthly investment committees that the company holds. In terms of the core portfolio, and there'll be two slides I'll go over the next couple of pages. It's really sort of the big four blocks of risk assets in the portfolio. On the far left, you can see the core bond portfolio, which is what I consider portfolio excluding structured assets.
The core focus for me and my team within Blackstone will remain high-grade public and private securities. This portfolio will remain investment-grade rated. Quite honestly, given the origination platform that we see within Blackstone, I'm thrilled to be able to find high-grade assets that will give us that incremental spread against what you find in the public bond market. The block trade, it added incremental high-grade exposure. That slice of teal that you see there really didn't change. We sold one and bought another within the same asset class. Structured assets on the right-hand side of the page is predominantly LIBOR-based with a focus on CLO debt. Structured assets will be a focus of core repositioning going forward. If I had a crystal ball to think about what this right-side pie chart will look like over the next year or so, our exposure to ABS will grow.
Our exposure to CLO debt will grow. There's no better CLO manager in the world than GSO, so we're thrilled to sort of figure out ways that we can work together to make that portfolio work even harder than it's currently working now. The allocations to alternatives on non-investment grade-rated assets and structured securities will be sources of incremental growth and yield for the portfolio. The alternatives portfolio you can see on the far left there, and it's a very busy chart. It all adds up to about $200 million. When I think about the broad spectrum of where this portfolio is today versus the peer group and versus sort of things at the margin, I really think about this as an opportunity to add incremental yield in a very risk-adjusted manner to begin to work our way up to the 5% exposure.
We'll be investing alongside other LPs in that same collection of flagship funds that Blackstone is well known for. The opportunity to add value for this organization as part of Blackstone, I think about this left-hand chart as being one of the key value enhancers in the business going forward. The last is our real estate-related assets. Real estate is approximately half a billion dollars for the company. This is predominantly in first mortgage loans. When I joined the company, as I like to joke, there were two first mortgage loans in the portfolio, two funeral homes in Kansas, and that's about it. We have the opportunity now to be aligned with the world's largest manager of real estate assets.
When I think about the levers that we pull for this company going forward, we'll begin to grow our structured exposure in a very measured and risk-adjusted way, and we'll figure out smart ways to begin to grow our real estate exposure. Again, to frame the context, typical life and annuity companies have up to 10% of their portfolio in real estate-related assets. We've only begun to scratch the surface of what we can do for this particular allocation for the company. That concludes my presentation on the investment portfolio, and I'll turn it over to my colleague, Dennis, to walk us through the financials.
Thanks, Raj. Good afternoon, and thank you again for coming out. Let me bring this together with some numbers here. You're going to hear some very consistent themes, I hope, as we go through the numbers and bring it all together. As we look forward and think about what's it going to take to drive financial performance, we've talked quite a bit about growth, diversification. At the end of the day, it really matters what hits the bottom line and when does that profit emerge. Here are our themes. We need to, first among them, and Raj just covered what we've already accomplished. We need to get and secure the benefits of that Blackstone partnership. That's real money to the bottom line, and we are laser-focused on that. Ratings upgrade.
Chris mentioned that we've spent a lot of time there, I would say in an inordinate amount of time over the last few years, not just managing through the transition period that we've been in, but managing them very purposefully such that when we closed the deal, we were as best positioned as we could for upgrades. I think you're seeing the results of that come through already in the ratings upgrades that we've achieved. I am confident that we will achieve that A-minus rating. I don't have the date we're going to get that, but I think it's much more near-term given that AM Best has now gone positive on the outlook than if you had asked me that a few months ago. Leverage the reinsurance platform.
Look, Christmas came early in the form of tax reform, that threw us a little bit of a zinger in how we were approaching capturing the benefits of that offshore platform. Although on our in-force book that we have reinsured about 60% of offshore currently, we're not going to immediately get the tax benefits for that. The power of that platform remains. To the extent we do third-party deals and we drive profits into Bermuda, we will achieve tax efficiency at the zero rate, but for the excise rate in Bermuda. I'll talk a little bit more about that, but we are very focused on clawing back some of that opportunity that's been delayed as of tax reform.
Really, today and the efforts that we put forth with all of you in follow-up conversations, meetings, it's important to get the story of who we are out to all of you so you can better understand our priorities and where we are looking to take the business. Here's a quick snapshot of the operating structure. The new public Cayman company, we've got a couple of holding company structures. The U.S. holding companies in the U.S., that's where we hold our current debt, our credit facility. I'll talk more about where we're taking that debt and the credit facility in a moment. Our Bermuda holding company is a co-borrower and a guarantor on that, on the outstanding debt. We have Front Street Re Bermuda. We're going to be using that entity as our primary platform as we look out for international business. We do have FG Re Limited.
That's where we did our ModCo transaction. In light of tax reform, as we work through this interim period with Treasury until we get the final outcome of where we'll be with the BEAT tax, we are sort of hiving off that ModCo deal in that FG Re Limited company. We're keeping it sort of preserved in a potential 953, which depending upon where tax reform goes, if we don't have it in our favor, we will turn that entity into a U.S. taxpayer, we'll recapture that business, then we will do other opportunities with third parties to get that tax benefit. I'll talk more about that in a moment. We just went through purchase accounting, you'll hear me hit on a few slides where I think the key impacts of that are.
Purchase accounting, as all of you know, is simply just taking your balance sheet as of the date of the transaction, taking your purchase price, and allocating and fair valuing all of the assets and liabilities on your balance sheet. As a result of that, we did mark our portfolio up $1.2 billion, and we'll have to amortize that premium through net investment income over time. All of that's non-cash. It's non-economic. The really good way to think about it is on a statutory basis, which is unimpacted by purchase accounting, economics stayed the course, and you'll see that in our yields. The yields dropped on a GAAP basis, but on a statutory basis, I think Raj had it in his section, right around 5.1%. There was no change. We wrote off our DAC and reestablished another intangible asset known as VOBA, or the value of business acquired.
We amortize that over time, similar to how DAC is dealt with. We strengthened reserves across a few of our product lines as we review future expected benefits. We did strengthen reserves in a few. That'll change the historical pattern of earnings on a very modest basis on some of our traditional insurance lines, the SPIA block, the single premium immediate annuity block, and we have a small block of traditional life. We established a $470 million goodwill asset. What that asset represents, and that's non-amortizing. What that asset represents is all the value and synergy that are buyer specific. That is the net measure of what we think that value is. Goodwill, to a large degree, is the plug as part of your purchase accounting once you evaluate everything else.
The fact that we have a substantial goodwill asset is indicative of the value we expect to get through these new partnerships and through the reinsurance platform on a longer-term basis. Here's where we just wrapped up earnings about 10 days ago. We landed the year at an adjusted operating income basis of $182 million. We had some one-timers or infrequent items. There's always a little bit of noise here on insurance company balance sheets and earnings. Underlying that was $167 million, up nicely from last year of $141 million, 20-plus % growth on that core basis, 6% overall. What you're seeing there, very consistent core earnings growth from average assets under management growing, very stable expenses, and Raj as well continuing to squeeze additional spread out of his investment activities. All of that's just going to get ramped up as we look forward.
Important to note here, the underlying GAAP ETR here was about 33% for 2017. In 2016, we would've been a little bit higher as well, 35%, 36%, 37%. Here's where we're going for 2018. The way I'd ask you to think about 2018 is it's a foundational year for the company for all the reasons that we've talked about. We've just gone through, and particularly from a financial perspective, we've gone through this purchase accounting. We've revalued every asset and liability on the balance sheet. The rates of amortization on our balance sheet will be different from before. The spreads will be different. We'll get to that in a moment. The business strategy is expanding. Ratings will bring further expansion of that.
It's also, I suggest, it's a foundational year for all of you as you learn about how to think about FGL, how our earnings will emerge. That's why you see us trying to give you as much clarity as we can and give you some indicative outlook here for 2018. I would suggest that going forward, we'll update this as appropriate and as needed should there be big shifts in what this looks like. I would say once we get beyond 2018, we're probably not going to be in the business of providing annual outlook. I just don't think that's helpful from our perspective, and I don't think it necessarily continues to align with all of your models. We want to give you this insight so that you can have some sort of a goal marker to go for.
This is how we're thinking about the business, and we'll talk more about that throughout the year. We see it shaping up from a $0.85 per share in 2017 to about $1.10-$1.15 in 2018 or $235 million-$245 million. How we get there, the speed of the portfolio reposition, whether or not there's any accretive M&A, the core growth that comes out of the business. Some of that will shift as we get ratings upgrade. There's a lot of moving pieces here as we go through 2018. We think in the aggregate this is the appropriate guidepost to give you for 2018. You can see some of the key drivers there. We're assuming a 21% tax rate in a partial portfolio reposition. This assumes sales growth of low double-digit, 10%-12%.
For 2019, things you should start thinking about now are these additional upside opportunities. We'll get the rest of that portfolio uplift at least 50%, if not more percent. We should expect to see accelerating sales growth as we get that A-minus upgrade. As well as potentially early 21% down to 15% by leveraging that offshore platform I mentioned a moment ago. From an NII or net investment income perspective, we're going to see healthy growth here. You can see the range there. There are a bunch of moving pieces. We've got a premium amortization from that mark-to-market on the PGAAP portfolio. That's just going to come through. That's non-cash. I'll just point out there on the box below the waterfall, our pre-merger yield was 490 basis points on our GAAP basis all-in. Statutory was a little bit higher.
We've got some IMR amort that comes through on a statutory basis, probably about 5.1%. After PGAAP, because at the end of 2017 we just had a big boost in our assets with the acquisition of FSR and the increase of the portfolio with the mark-to-market, yet we didn't have a full year's worth of income associated with those assets. You see the yield drop on a non-economic basis to that 417 basis points. That'll climb back naturally as we get income from FSR, for example, and the premium amortization. As that tapers off, you'll see those come back through the yield. We've got a partial year of the investment management fees. That will have a full complement. We only have about 20 basis points of investment management fees from Blackstone in 2018. We'll have a full complement around 30 basis points as we previously discussed in 2019.
Of course we've got core asset growth that we expect with it will bring a gross yield. Think of it as that 490 plus all the positive things that Raj and his team in Blackstone are going to do to lift that portfolio yield. We've got the reposition as well. That gets you a baseline at 112.5 basis points to 113.2 basis points . 113 basis points is the midpoint. We'll see where it shakes out. There's a fair number of moving pieces in here. Prime among them are the premium amortization, which will depend on what assets we reposition. To the extent we roll some of those assets out of the portfolio, that premium amortization will be eliminated quicker. Of course the reposition will go at its own speed. Here we are from a net investment spread.
I just want to point out where we were pre-PGAAP and post-PGAAP because they're important metrics. If you look in the upper right, all products 2017 post PGAAP were at 201. That would have been historically in the 240, 250 range on a pre-merger basis for all products. We expect to see that be pretty well in that range, 195 to 200 in 2018. The reason there's a slight downtick there as well as in our FIA product is you're going to see that premium amortization start to kick in. That's, again, it's just non-economic. The speed at which we do the reposition as well as more layers of new business at a higher yield will eventually eat through that.
What you see in those other years by the end of 2019 and 2020, we are going to get back to our historical yields on a reported basis. On an economic basis that'll be even higher because of the reposition. Just something to bear in mind. As well, in 2019 we'll have the full complement of management fees on the portfolio. Here's a quick snapshot on the expenses, give you a little more color. Chris mentioned this. We have about 300 employees. They're about split 50/50 between Des Moines and Baltimore. We do have a small but growing offshore team to work our initiatives to leverage that offshore platform. The employees are focused in these following areas, sales, pricing, marketing, finance, all the areas where we think we can add the most value.
We leave the policy, new business issue, and the policy enforce management to the third-party vendors that we get at a very, I think, attractive and reasonable variable cost. Expenses at this point are managed very tightly, and our goal is to capture operating leverage as we add AUM at a faster pace over the next few years. Just on an organic basis, we expect to take that 49 basis points of average AUM on the asset expenses relative to assets. We expect to take that down to about 45 over just the next couple of years from organic growth. That benefit will fall through to the bottom line.
To the extent we do M&A, those benefits, and potentially more, depending upon the nature of how that M&A is done and the level of efficiencies we get, that will only accelerate our downward decline of expenses relative to average AUM. Stay tuned, we'll keep you updated on that. Here we are on tax reform. Starting at the 33% last year, we're assuming 21% for 2018, and we're driving to get to 15% sometime by the end of 2019 or as we turn the corner into 2020. The way we're going to do that is we're going to continue in the background working with Treasury, trying to educate them further. There's been a handful of productive meetings with a number of carriers, FGL included, with Treasury to just help them better understand what the impacts are and how we view the appropriate tax application.
I'd say they've been open-minded to this point, we are not weeks away or even just a few months away from clarity. I think the soonest that would come would be in the fourth quarter of this year. If that plays out to our benefit, I think we migrate back to that original assumption we had in the deal, which is going to be in that 10%-12% effective tax rate. All that business that we put offshore, that 60% ModCo, will release the tax reserves from that, and we'll go back to the 10%-12%. If it doesn't go our way, then in parallel, we're going to be working on third-party opportunities to take this profitable business that we have upon recapture. These are very attractive liabilities for all the reasons that we went through earlier, the stable nature of them.
We will risk diversify our balance sheet using those very profitable liabilities with some third parties, and we'll take different risks from those third parties into our reinsurance platform. I've made an assumption here just to give you some context around what it takes to get to a 15% tax rate. That would take about $7 billion or $8 billion of comparably margined products to what we're earning today into that Bermuda platform. We'll have to see how that plays out, and that may be one, two, three different deals that we may do over the course of some time to get the advantages of profits in that Bermuda platform. We're working that in parallel, and I think we will get there over time. There was another ancillary impact from tax reform as it relates to RBC.
With a lower tax rate, the required capital under RBC actually goes up. We closed out last year at about 500%. That's probably about a 40-point impact to our RBC. I'm still very comfortable managing not only the business and supporting growth at 450%-460%. I think it's right in line with what we need on the capital front to keep our A- ratings upgrade on track with AM Best. As many of you may know, AM Best has a new model that's not affected by tax reform, other capital actions that we're managing to will preserve all that trajectory and momentum for that upgrade. The capital base is in great shape. You can see the component pieces there between equity, the pref that we have, as well as debt. We are going to be refinancing our debt in the first half of 2018.
We've got $300 million outstanding, plus $105 million on the revolver. That's a new revolver, three-year. It's got a $250 million limit. We're going to refinance that. We're going to upsize that. You should think about $550 million of total debt outstanding once we complete that. We'll pay down the revolver. We're going to term out the debt, which matures in 2021, probably somewhere in the seven, eight-year time frame. We'll take that excess capital, about $150 million, we're going to put it down in the operating companies to overcapitalize our operating companies under the new AM Best model to accelerate that A-minus upgrade. We already think we are meeting the current capital requirements for that A-minus upgrade. I think that's indicative of why you just saw the outlook go from stable to positive. This is a doubling down to further accelerate the speed of that upgrade.
I feel very confident that we're going to get this done over the next couple of months. As well, it'll also improve RBC. Long term, think of us as 25% debt to capital. We're at about 28% once we do this refi, but that de-levers fairly quickly. At this point, we don't have a common dividend. We'll evaluate that over time. Currently we think that there are higher returns to deploy that capital into new business and into growth. Here's a quick snapshot of our ratings in the RBC. We've got roughly $400 million of deployable capital available in 2018. $500 million we just talked about. This $400 million is after the capital raise and after just pushing up the capital a bit under that AM Best model, it's still $400 million. Great progress on the other rating agencies as well.
I actually feel pretty good within another rating cycle or two that on our debt, we're going to be back to investment grade with S&P. I think all the building blocks are there. It's only a matter of time before our issuer credit rating goes back to investment grade. Let me talk through a couple of sensitivities here, there's a lot on this page. You can read it in your leisure, I'll leave you a couple of points about how we think about navigating a rising interest rate environment. If there's one question we get consistently, it's, well, what do you think about rising rates? It's either because someone's looking for upside to the portfolio or they want to know how bad can things get. I'm going to try and answer both of those questions today.
Let me preface this by saying, we view the interest rate environment looking out as modestly rising but multiple increases over the next 12 to 24 months. We think it's going to be pretty well-behaved. We're not envisioning any economic drivers or macroeconomic drivers that are going to spike interest rates 100 to 200 basis points due to some meltdown or financial crisis. We are assuming rising rates, those are going to come in 25 to 50 basis point increments, which that's the environment that we really thrive in, right? That all insurance companies do. It allows us to pick up a little bit more spread on the in-force book. It makes selling new product more attractive. We can offer higher caps on our index products.
On the structured book, the floating rate portfolio that Raj talked about, every 25 basis points is going to be worth about $5 million of after-tax operating income for us. Depending upon where that allocation goes, that could improve as well. To the downside, what happens when things really go wrong and rates really spike up? What that does or can drive is excess surrenders. You can do all the stress testing. I'm sure you've done it in many of your own models where excess surrenders cause you to then sell assets because you have a liquidity need, and you take losses on the asset sales to meet your liability withdrawals, and you sort of start that downward spiral. That's why managing our liquidity is something we take very closely. We match within a very tight band, ± a year, the ALM durations.
We match the underlying liquidity aspects of the portfolio so that we have a good mix of readily salable securities that can generate liquidity. To give you some historical context, F&G, during the financial crisis, we did see lapses go 2x normal in 2010. The important thing to realize here is we never sold an asset to cover a surrender during that period. Not one. We never took a loss. I should say we never took a loss on an asset sale to meet a policyholder surrender during that period. If you look back over the last, you pick the time period, that really was the most severe liquidity crisis that we've seen. We feel pretty good about the underlying stability of the book and our ability to manage it. We regularly stress test, not just for 2x, but 3x, and the book performs exceptionally well.
I want to leave you with some comfort that we think about this. We think it's going to be a fairly and gently upward-sloping interest rate environment. If it turns negative, we're prepared for it and the book will perform quite well. Here's a page to give you an illustrative view of an M&A transaction. I've made some assumptions here, so let me just ground you there before I hit the numbers and the results. We took F&G as it existed at 2017, and we said, what if we did a transaction right at the point of closing and we had $10 billion more that we could leverage? Think of this as a block reinsurance deal in our international platform.
If we had been able to do that, we think that core business would have had earnings at a 10% ROE and a comparable tax rate of 33% of about $80 million. We then take it offshore, that $10 billion. We get 75% fixed cost takeouts because we can just manage that block very efficiently as I previously discussed. On the whole portfolio, we put 50 basis points of net after fees uplift on the portfolio. We had zero tax rate on that $10 billion acquisition in Bermuda. What you end up with there in that combined 400 to 425 basis points is a 15% tax rate. Again, that's more liabilities than I mentioned previously, the seven to eight. This is lower margin business at just 10%. Bear that in mind. You get a doubling of EPS.
You get an ROE that's 15+, I think there's a lot more plus on that. It's much closer to more than that than it is 15. You see more than $2 of book value per share accretion. Clearly, we didn't do that transaction, and we don't yet have benefits of our offshore reinsurance platform. 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. Let me wrap this up with the ROE bridge. You may have seen this in previous presentations. I've talked about the benefits of our reinsurance platform. What you see there, 2%-3%, that's just getting our core business, getting some of those liabilities into Bermuda, the $7 billion-$8 billion.
We think that's going to give us 200-300 basis points of ROE expansion once we crack that code. Asset management, we've spent a lot of time talking today about that. By the time that's completed and we get that alternative portfolio built out, we think that's 400-500 basis points of ROE expansion. Additional acquisitions. I've included the $10 billion here. In all likelihood, that could come in two or three chunks. M&A is sporadic. We're looking at all the transactions out there. There are probably more $2 billion, $3 billion, $4 billion type deals than $10 billion type deals that are out there. This gives you a flavor as to what it would look like once we get to that $10 billion level, and just give you something to think about. We're very excited about the story here.
Hopefully, this gives you a better insight into how to think about the company from a financial perspective, our strategic and growth perspectives. I'll turn it over here to Chris to kick us off into Q&A.
Great. A little bit longer than 90 minutes, pretty close. Hopefully, we've laid out a pretty good case for you today for FGL Holdings. Really what we want to do with this period of time is open up to questions. It is being webcast. If you could wait for a microphone, state your name and the firm that you're with, then ask your question. That would be helpful for us and for those that are listening on the webcast. Obviously, anybody's available to answer questions. Yeah.
All right. Thank you. Erik Bass with Autonomous Research. I had a couple of questions for you on M&A, which I guess ties into the ratings upgrades a little bit as well, which is first, do you think you're in a position to look at block acquisitions at this point, or do you need to get the ratings upgrade and the portfolio repositioning first? Secondly, you talked about a range of things that you might look at, whether it's block deals or things that are more sizable that may have platform capabilities and distribution. I guess, could you talk about the different things that you might be interested in looking at, and would it all be fixed and fixed index annuities, or is it something more broad?
Yeah. 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. That wouldn't keep us from evaluating opportunities at this point in time. With respect to what we might look at, I think we're having a pretty broad funnel. We're not focused just on FIAs. In fact, we'd like something that diversifies the business model a bit, which is why we're focused a lot on what kind of blocks are out there that we can put into our reinsurance platform that, one, diversify our business model, but also give us additional tax efficiency. Go ahead.
I would say that the company has excess capital today of approximately $500 million. That if we were to pursue an M&A deal of that amount or less, it would not affect our path to an A- rating. Point 1. Point 2 is that we have very large strategic shareholders, including FNF, Bill, me, Blackstone, that can fund some of our anchor investors, some of the investors in the room here, that can fund acquisitions of much, much larger amounts than that. We're looking at block trades. We're looking at small blocks. We're looking at medium-sized blocks. We're looking at medium-sized companies. We would not also be adverse to large companies where additional equity capital would be raised.
The two-part answer to the capital question is that $500 million internally, for a large deal, even a multi-billion dollar deal, we will have the firepower given the construct of our strategic shareholder base. I would agree with Chris that we would acquire companies not predominantly in the FIA, but we would consider other asset lines as well. Having said that, though, just to be very clear, we will not touch anything that has a significant balance sheet risk, like a very volatile VA portfolio or, God forbid, LTC.
Yeah.
Just to be very clear. We're going to stick to our knitting. We're going to look at deals that are strategic. We'll look at deals that are accretive, and the size is not a concern given our shareholder base. Does that answer your question?
Yes. Thank you.
Yeah.
Thanks. Ryan Krueger, KBW. I guess just first, as a follow-up to that, would you be open to things in the traditional life insurance side for M&A, or are you really more focused on spread-based?
I think we would look at life blocks as well. Obviously, spread is where we have a lot of strength in, but we would absolutely look at some traditional life blocks. Term is a little bit more tough because the refinancing risk. Principle-Based Reserving may help some of that, but the returns on that business have not been particularly attractive. Other life blocks, I think we would take a real hard look at.
Thanks. A couple on taxes. I guess just on the $7 billion-$8 billion example you used, I am assuming that you would swap business with another third-party company, and that would avoid the affiliate detax. Is that the right interpretation?
To be clear, I am not envisioning swapping FIA for FIA. I think that clearly Treasury would surround that pretty quickly. Other comparable spread-based products.
Thanks.
Yeah.
Lastly, under the new tax reform regime and the way you are organized, would you be subject to the reserve and DAC tax items when you think about new business pricing on U.S. business?
We are. We write our business here in the U.S. We think both of those are pretty manageable for us.
Thanks.
You bet.
Hi, Jimmy Bhullar from JPMorgan. I had a couple of questions. First, a lot of companies seem very optimistic on growth in the index annuity market. Can you talk about what you're seeing in terms of competitor behavior on terms, conditions? Have you seen any change post-tax reform, since many of your domestic competitors are obviously in a much better place from a tax standpoint? Are they giving up the tax benefit in the form of new pricing, or do you expect that to happen?
Yeah, no. We have not seen that yet to date. The competition has always been pretty robust in this space, but rational. At this point in time, we haven't seen anybody spending the tax savings. I think a lot of people are trying to reshore up the balance sheets as well to the extent that they've had DAC write-offs and the like. I do think there is this debate about whether it'll all get priced away or whether there'll be some of it that is saved by the insurance companies. We probably fall in the camp that we believe, at least for now and at least what we're seeing so far is, it's not getting priced away today.
Just in terms of the competitive environment for deals, how is it now in the type of properties you're looking at versus maybe a year ago or before when you were actually looking for FGL?
The deal environment's about the same. As you know, the deal business is very sporadic and episodic. The deals come in three different flavors. There are the small blocks, the medium-sized blocks, there's the large company deals and medium company deals, and maybe a fourth one, which is the complex deals like what Apollo did, Athene, Apollo did with Voya, whereby the goal of Athene was to acquire the index annuity business, but it had to put together a very complex deal to also buy the variable annuity business. I would say that given the existence of Blackstone and Bill Foley on FNF, we also have ability to do deals in the fourth bucket as well, which is a complex deal.
I think there'll be competition out there for deals, obviously, but we're in a pretty unique position given our strategic partnerships, our capital base, and our ability and desire to do deals.
Just lastly, given your desire for M&A, is it reasonable to assume that dividends are unlikely in the next couple of years?
What we believe, at least at this point in time, I can't speak for a couple of years, but as of right now, we think there's a better use of capital to support growth than in dividends for now.
Thank you. John Barnidge, Sandler O'Neill. How much do you think ownership uncertainty of the last few years held back sales?
Yeah, I think it held it back fairly considerably, because people just weren't willing to recruit and invest in recruiting to a company that they didn't know was going to be around. There were different opinions about the domiciliary nature of the potential acquirer and whether that was going to be a positive for clients or not. Again, I think it impacted the ability and the willingness and the energy of the story to market and recruit behind our story. I think it's hard to quantify, but it definitely had an impact.
During due diligence, we were very surprised that the company still grew at 8%, 9%, despite the fact that it was under this M&A cloud with Anbang for the last 2 years. That's a testament to the foundation of the relationships with the distribution system that Chris and the company have built. We think as management projects, this stuff will accelerate. The management's expecting 10%-12% this year, we think that the big mover in that will be the A-minus rating, which hopefully you get at the end of the year. You get exposed to 40% of the market, which is a faster-growing portion of the market that we're not in right now. 2-part answer is yes, it has held back sales, I think, pretty significantly.
We're projecting growth going forward, the next lever will be the A-minus rating, which exposes a new market, 40%, which is a faster-growth portion.
Has tax reform changed at all your outlook on potential new private equity-backed entrants into the fixed index annuity marketplace?
Private equity has always been interested in this space. The issue is that it's exceedingly tough to enter. For a private equity firm to look at a new acquisition target, it's going to have significant disadvantages. One of which is that there are strategic buyers such as Athene/Apollo, and now FGL/Blackstone. For that target company, we can derive, we think, significant synergies, where the new entrant cannot. I don't think the interest has waned. I don't think the interest has accelerated. The issue is that the entrance point is very difficult. We're now a strategic, obviously.
Andrew Kligerman, Credit Suisse. Two questions. One, back on the M&A. Clearly, you've had success despite the B++ rating in organic sales. Is there an impediment to you being able to do a big deal where the seller wants to go with a highly rated company?
I don't think ratings have been. With us having positive outlook from AM Best, obviously any deal that we would go through would go through the pre-clearance with the ratings. I don't think where we're at today provides any obstacle to being able to do a deal just because of our rating profile.
Even an A-? Wouldn't a seller want an A++ type company that's going to be there for the next 100 years?
No, I don't think so at all. There's a lot of non-A++ companies that have been very successful in going ahead and being able to consolidate and find opportunities.
Okay.
I think they're focused on being able to get the best value for their shareholders. We think based on the engine that we have and the benefits we derive, we think we can be pretty competitive, albeit take a disciplined approach and not overpay.
Got it.
I think it's a good question. The case study, however, is Athene. Athene has done a ton of acquisitions without an A rating. Only recently got an A- to an A rating, and most of those acquisitions were done before it achieved the A- rating. We think that with Blackstone's expertise, our expertise, we can accomplish those acquisitions. I don't think an A- rating or even an A or A+ are required, evidenced by Athene's prolific acquisition track record.
Got it. Just lastly, you mentioned LIBOR. Where would you like LIBOR and other floating rate-oriented products to settle as a % of the portfolio? What % would you like it to ultimately be?
We've been as high as 30%. You probably remember about 2 years ago, we shaved off a lot of our non-agency RMBS exposure. That market was really hot. There wasn't a whole lot of new origination. It's kind of like owning a vintage car. You stick it in the garage, you never drive it. We're happy to sell it to somebody who wants to buy it at a time when actually LIBOR was pretty low. To kind of put a band on it, 30% would be about as much as we've historically been. If LIBOR provides us more upside, we may take it even higher. Floating rate assets are really good for us for cash flow matching and cash flow testing. I think it gives us a lot of flexibility to manage a portfolio irrespective of the rate environment.
It gives us a lot of flexibility to kind of manage around potential surrender behavior. Where possible, I'll look to Bennett, being able to structure high spread floating rate assets that are not available to the broad market, I think is where we're really advantaged going forward.
Yep. Thanks.
Thank you. Michelle Giordano with Neuberger Berman. I had two questions. First, on the S&P upgrade, you seem pretty confident in your ability to get that this year. Can you talk about what S&P wants to see in order to give you that upgrade? Secondly, when you get that upgrade, would you be interested in entering the funding agreement market or the pension risk transfer market?
Yep. For S&P, what we're looking for from an issuer credit perspective is fungibility of capital flows between onshore and offshore. Essentially split the business. They just want to see how the business settles in, are we able to move capital freely around where it needs to be. I think we either have or we'll have further structures in place by the end of the year that will demonstrate that pretty well for them. In terms of additional lines of business, as ratings come, you'll see our horizon widen, we will get into additional lines of business that offer attractive returns at that time.
Yeah. Maybe just to add on that, maybe this closes the loop back to Andrew's original question. That PRT market does really require a solid A, it's hard to access that market at an A-. This is a progression. A- isn't the end. A- is our first step with a longer-term view towards the A to continue to provide strategic flexibility. Once we have the solid A, we absolutely would be interested in other lines of business beyond what we're currently in.
Humphrey Lee from Dowling & Partners. Regarding the Front Street restructure, so you mentioned that it's for international opportunities. Can you talk about your appetite for business outside of the U.S., like for example, in U.K. or generally in Europe?
Yeah. We haven't really spent much time looking at opportunities in the U.K. or Europe. Again, we think that there's plenty of opportunities closer in to us. We'll look at opportunities for flow relationship business or flow reinsurance partners that are U.S. dollar denominated, but that's a much smaller opportunity for us for now than that third party
reinsurance business that we're going out and trying to find. May look at that over time, but it hasn't been something that we've historically spent a lot of time on looking at the U.K. or the European market.
My second question is regarding the complex transactions that you mentioned about. What is Blackstone's appetite for VA assets in general, and how likely that you would pursue something similar to Apollo and Athene did with Voya?
It's transaction specific. It's impossible to comment on the transaction unless we analyze it. I think overall, it's broader than Blackstone. It's Blackstone, FNF, and the strategic investors that we have. It's not possible to comment on an unidentified VA transaction. I would say overall, Blackstone can handle complex transactions. FNF can handle complex transactions, we're open-minded regarding that.
I guess if on a scale of one to five you have to put how open to VA transactions, where would you put that to, Seth?
I think we're open between one to five.
All right.
Great.
Thank you. David Sokol, Teton Capital. In terms of using the Blackstone organization to create capital and liquidity and regulatory and tax efficient investment securities, it just wasn't clear to me how that would happen. Let's say Blackstone is buying, I don't know, industrial warehouse portfolio or specialty chemicals company. How do you get to buy the securities and what conflicts, if any, exist in that process, and how does it all work?
Sure. I'll talk about the nuts and bolts of how we do this. I'm not going to name any specific securities, but I'll give you sort of broad strokes about what we've done so far. There are several Blackstone companies, whether in Tactical Opportunities or PE or real estate, that in the course of what they do, they create senior strips, senior financing strips. In many cases, we're able to go to those companies and participate in a very narrowly syndicated securitization where we'll take a single A piece of paper. There may be another insurance company investing alongside of us. There may be two insurance companies investing alongside of us. That trade typically will not go out in the broad market. In a situation like that, what we're attaching to is something senior to what Blackstone is originating for fund business.
We've had several trade bumps that actually begin to bear fruit for the next part of the portfolio. Typically, what's happening is these senior strips are created in the ordinary course of business of Blackstone going about its business as the preeminent manager of alternative private assets. If you talk about a single A piece of paper that has a 4.5% or 4.75% yield, I'm not too sure if it actually carries its weight in PE funds. For a capital sensitive ALM oriented insurance manager, that's absolute rocket fuel. Those are the types of things that we're trying to do within the Blackstone organization.
Because it's securitized, is that why there's not a conflict of interest?
Well, I consider it actually alignment of interest. From where I sit at the top of the capital structure, I'm encouraged that my partners are underwriting the underlying equity risk. It's not necessarily the rating of the instrument. There are several trades where we've passed on them because the rates are too tight, and they'll just go out in the broad market. The way we think about what we're trying to do on the behalf of F&G is find really good assets. We think we've got a fantastic mousetrap at Blackstone, but there are some situations where the rate on that particular instrument is just too low to actually meet the IRRs of what the company's looking for.
If I may just embellish a little bit, there's a fundamental separation of church and state. Raj represents the interests of FGL. We may manufacture a single A security in one of our CLO transactions. He has to decide whether or not it goes in the portfolio. Blackstone does not decide that. We have other insurance company clients. We have to keep them happy, too. Our goal really is to find a deeper pool of capital per unit of risk, and it allows all of our structurers to design financing capabilities for our various portfolios. I would say one of the challenges Blackstone has is finding enough lenders to support our origination capabilities.
Having FGL, for example, go out and acquire other companies and have a bigger than $24 billion portfolio actually benefits our deal-doing capability because now we have more capital at different levels of the rating structure. That as a deal guide just gives you more levers to pull to win the particular transaction at hand.
In addition to that separation of church and state, I think if Blackstone's the church, Raj is the state. Bill Foley and I are part of the state as well, along with Chris. We are incentivized to bring the best Blackstone product to FGL. In fact, we don't only look at Blackstone, we look at and we invest in Raj, and we have in a number of other managers as well. We're very focused on the value creation for FGL. The combined Blackstone, Bill Foley, myself, and FNF have invested over $900 million into this deal. It's a lot of money. We're very motivated to maximize the value and look out for the interest of FGL. Just to be very clear, we view Blackstone as a huge uplift, and strategic partner raises the halo of the company.
When we compete for something that Guggenheim has put out, in the past, we would get a very small smidgen of that if we won a piece. Now with Blackstone sitting at the table, I think we can get all you can eat, whatever you want from the street, from Guggenheim, from Goldman Sachs, that's huge in terms of our ability to pick the deals or cherry-pick the deal with Blackstone's name associated with it.
Thanks. Ryan Krueger, KBW. Just two quick questions on capital. One, in the $500 million excess capital you discussed, did that contemplate consuming capital as you move more of the portfolio into alternatives that have higher risk charges?
That's correct. It's fully baked for the portfolio reposition and new business growth.
Thanks. Then, yeah, actually just on new business, how much is the rough amount of new business that you can write in a year without consuming excess capital at this point?
We're going to grow 10%-12%. I think we can take that to 15% and not dip down into that $500 million threshold.
Thank you.
Without raising additional capital.
John Barnidge, Sandler O'Neill. I just wanted to confirm, your earnings guidance for 2018 does not assume any M&A, correct?
Correct.
Correct.
Okay. Then back to Humphrey's question, if the deal had closed November 30th of 2016, on a scale of one to five, how competitive do you think you would've been for the Voya transaction?
Once again, I want to repeat this. While M&A is certainly a focus for us, and we have the expertise for an activist doing M&A, it's going to be organic growth. Because the company has been under the shackles of a very unnatural ownership structure, and we can unlock the potential by focusing on management organic growth, incentivize management the right way, building up distributions, getting the A-minus structure to unlock that, and accelerating the growth, which is already 8%. I want to make sure that we repeat that. On the Voya transaction, I cannot answer that because we have not been, quote-unquote, inside the tent to take a look at the VA block. We have had conversations with Voya management in the past. Obviously, we were tied up with this transaction, and it was something that was done between signing and closing.
The structure and the attractiveness of the FIA block that we rate very high. The purported returns on the VA block, what was represented to us by various bankers and investors seem attractive to me. What we don't know is that what's the underlying due diligence, how the hedging was done. As you know, when you do VA, it's a lot of hedging. How much you can hedge on day one. Obviously, it's a very complicated structure that Apollo and Athene did. Unfortunately, I can't answer that question.
After you get the AM Best upgrade, can you just walk through sort of the steps once you're introduced to that 40% of the market you're not addressing, what the ramp period is, what you need to do to sort of get customer acceptance within that marketplace?
It's a lot of working through the distribution partners and going out and telling our story again and having them understand that the rating's there. It'll be a few months build up once it happens, but it'll pick up steam pretty significantly because again, if they have a ratings bar, they just have never looked at us again. It'll take some time. We'll go out, tell our story to those producers, talk to them about the story of the company, talk to them about the power of what we're trying to do, talk to them about how we've been a big champion for independent agent distribution. I mean, a lot of them have written with us in the past. The company did have an A-minus rating in the past. It's just reigniting a lot of the relationships that we've had in the past.
A lot of them are looking for different partners. They see what other people are doing that might be going around independent distribution. We do think there's an opportunity for us to be somewhat different.
Yes.
Question for Chin Chu. It's been almost a year since you initially started looking at this deal. Wanted to get your thoughts on 12 months now into the deal. What aspects of the transaction or the company has progressed better than your expectations? What is in line, and what is probably progressing less good compared to your expectations?
It's a good question. Just note that although we've been looking at this for a year, the deal has only closed recently. In terms of our ability, in terms of our ownership, it's only been a few months, but your question will remain. We continue to remain impressed with the foundation blocks of the company. That hasn't changed. Probably slightly positive on that. The industry trends of moving from VA to FIA, one of the longer-term trends that we talked about with the aging demographics, the right product for today's time, as Bill has indicated, we think that's the same. We're slightly better. I think DOL is better compared to about a year ago. Certainly given the deferral of DOL, and it may actually change again. We think that's a positive.
The tax is a negative. We originally thought we are going to have 10%-12% tax. We are going to end up with probably about 15% tax by the end of next year. That's a negative. Not only do you have a higher tax rate if we end up with 15%, but the arbitrage between our 10%-12% previously and the ordinary tax rate of 30-something% is now narrow. We still have an outside shot of getting 10%-12%, but we are going to be conservative and not project that. The tax is negative. I think M&A is actually, the potential for M&A is a slight positive. I think there's going to be acceleration, it seems like, in the M&A activity, as we've seen with these complex deals.
Once people figure out how to do some of these complex deals, you can unlock more of the bigger trades. The interest rate environment is about the same. When you take a look at our investment thesis, we have a lot of confidence in our ability to get ROE from 10%-11% today to the mid-teens ROE in the short to medium term, and then high teens to 20. That hasn't changed. The tax is the only negative, everything else is positive.
Right. Erik Bass from Autonomous Research again. Just one follow-up on tax. I guess as you think about on new business, I understand how you can get the rate down to 15% overall. On new business, how do you think you line up versus the onshore competitors, and do you have a price advantage there? I guess over time, would you have the ability to reinsure some of your new sales and do swaps to get the tax rate on that down from the 21%?
Great question. I think the migration from 21% to 15% will come from a couple of different flavors. Some of it will be the in-force book and maybe reinsuring that through some third parties, as we talked earlier. New business, there's no reason why if we establish a relationship with a third party on the in-force business that we can't then also have them share in some flow deals and sort of just create this virtual cycle of reinsurance into Bermuda. That will all play out over time. I feel pretty good that between block reinsurance into the Bermuda platform or our existing in-force and going through a third party for some diversified liability, a combination of those will get us to that 15%.
You still think you have a competitive advantage there?
I still think we will. Yeah, assuming that others don't develop their own advantages, I think we'll have a competitive advantage.
Thanks.
A question on slide 49, the net investment spreads, this is for Dennis. You have this going back to 250 on the all products spread. Does that assume any rising rates, or is that just purely with the portfolio reposition?
Good question. Great question. No rising rate assumption in that. That's just the burn-off of the amortization that we've got to take on the existing in-force and then the reposition.
Okay. Are you assuming any liability cost changes within that?
Steady liability cost.
You're given a rate sensitivity, I think it's $5 million for every 25 basis points. That's based on the current 13% floating rate portfolio, is that right?
That's correct. As we migrate, we don't quite know the timing of that, but as Raj migrates, that number should improve.
I also had a question on the ROE walk on 57. If I add up those bars, I'm getting something that's 20%-23%, not 15%-20%. Am I missing something there?
No, you're pretty good at addition. Look, the emergence of these opportunities will take time. There will be progress in some or all of them in bits and pieces as we migrate over the next couple of years. We're very confident that the combination of those opportunities as they play out, as we see the landscape will comfortably get us in that 15%-20% range.
I think it's just due to conservatism. I think it was negotiated amongst the whole group that 15%-20% is more reasonable.
Over 20% is possible over time?
Time will tell.
Great. Excellent. All right, I'll make a few remarks and let Chin go ahead and close. Really, thank you for your engagement, your interest in our company, your investment for those of you who are existing investors. We really feel, I hope you've gotten a good sense today about we really do see significant value drivers here over the next several years, considering 2018 as a foundational year. We have our marching orders in front of us in terms of the things, the blocking and tackling we need to do for 2018 to continue to position ourselves for accelerated value growth beyond 2018. Thank you very much for that. Chin, if you want to say a few words.
Sure. Once again, thank you for your support. Our investment thesis remains the 4 things that we've articulated. One is that we think this is a very attractive industry with the right demographics. We're in very early innings of both the company and the industry and our ability to create value. Number 2, we have invested in a company that's strong from the start with 8% organic growth and a pristine balance sheet that we're able to shape and change and create value over time. Number 3, we have strategic partners that are world-class and will add immensely to the value of the company in the form of Bill Foley and Blackstone. Number 4, we believe that this is a long-term 15%-20% value accretion story, but with immediate value uplift that's tremendous given the factors we talked about. Those factors are 5 things, right?
You have the asset management uplift from Blackstone. That's 50, 60, 70 basis points, depending on what year you're talking about. We already started that with a $40 million in the first quarter tangible evidence of that. That's 1 factor. Second factor is the tax. Although we may not get down to 10%-12%, going down to 15% from 33% what the company paid before creates significant value, and that should show up over the next year. Certainly, we're at 21% today. Number 3 is that the A-minus rating we believe that we'll get by the end of the year. You already see tangible proof of that the upgrades that we're getting right now, and that results in the 4th thing, which is an acceleration of growth for the company in its base business and also new channels. The 5th thing is M&A.
Once again, we put that fifth, not first, second, or third, or fourth. M&A will create tremendous value over the investment period. All those five factors will create that earnings lift that I talked about in the near term, and then you'll have 15%-20% after that. That near-term five points will create a lot of earnings lift over the near term, and that will hopefully result in a also ratings, not ratings, but multiple re-rating of the company as well. That's our story, and we thank you very much for your support