Prepared remarks
Good morning, and welcome to F&G's Third Quarter 2025 Earnings Call. I would now like to turn the call over to Lisa Foxworthy-Parker, Senior Vice President, Investor Relations, and External Relations. Please go ahead.
Thanks, operator, and welcome, everyone. I'm joined today by Chris Blunt, Chief Executive Officer; and Conor Murphy, President and Chief Financial Officer. Today's earnings call may include forward-looking statements and projections under the Private Securities Litigation Reform Act, which do not guarantee future events or performance. We do not undertake any duty to revise or update such statements to reflect new information, subsequent events or changes in strategy. Please refer to our most recent quarterly and annual reports and other SEC filings for details on important factors that could cause actual results to differ materially from those expressed or implied. This morning's discussion also includes non-GAAP measures, which management believes are relevant in assessing the financial performance of the business. Non-GAAP measures have been reconciled to GAAP where required and in accordance with SEC rules within our earnings materials available on the company's investor website. Please note that today's call is being recorded and will be available for a webcast replay. And with that, I'll hand the call over to Chris Blunt.
Good morning, everyone, and thanks for joining our call. We delivered strong third quarter results with record AUM before flow reinsurance, fueled by one of our best sales quarters in history, the launch of our new reinsurance sidecar, and strong performance across the business as we execute on our strategy and make continued progress toward our 2023 Investor Day targets. F&G is uniquely positioned in the industry with a profitable and growing $56 billion in-force block. We generate spread-based earnings from fixed annuities and pension risk transfer, and we have multiple sources of fee-based earnings with the sidecar in place alongside our flow reinsurance, middle-market life insurance, and well-performing owned distribution portfolio. As our business grows, we're becoming a more fee-based, higher-margin and capital-light business, leveraging our position as one of the industry's largest sellers of annuities and life insurance.
We are balancing this with continuing to grow our spread-based business prioritizing pricing discipline and allocating capital to the highest return opportunities. As we execute on our strategy, we expect both gross and net AUM to continue to grow. F&G reported a record $71.4 billion of AUM before flow reinsurance at the end of the third quarter, including retained assets under management of $56.6 billion. Compared to the third quarter of 2024, AUM increased 14% and 8%, respectively, driven by net new business flows. For the first nine months of the year, we generated $11 billion of gross sales. This reflects $6 billion of core sales, which include index annuities, index life, and pension risk transfer, and $5 billion of opportunistic sales, including MYGA and funding agreements. Looking at the third quarter, we delivered one of our best sales quarters with $4.2 billion of gross sales and strength across all products and distribution channels.
Core sales were half of the total at $2.2 billion, modestly above both the second quarter of 2025 and the third quarter of 2024. Highlights for our core sales include indexed annuities of $1.7 billion in the quarter and $4.8 billion year-to-date. FIA is our largest contributor to index annuity sales, and with the launch of the reinsurance sidecar in August, we have started flowing a portion of our accumulation-focused FIA sales during the quarter. RILA continues to be a modest but growing contributor to our sales as we are gaining momentum. IUL sales were over $40 million in the quarter and $137 million year-to-date, up 10% over the prior year-to-date period as our life insurance solutions are meeting the needs of the underserved multicultural middle market. And PRT sales were more than $500 million in the quarter, including a multiple repeat client and $1.3 billion year-to-date, in line with the prior year-to-date period.
The PRT market continues to see a robust pipeline for midsized deals between $100 million to $500 million where F&G competes well, and we're on track to achieve our targeted $1.5 billion to $2.5 billion of PRT sales for the full year. Opportunistic sales were $2 billion in the third quarter with over $1 billion of funding agreements and nearly $1 billion of MYGA sales. Opportunistic sales volumes will fluctuate quarter-to-quarter depending on economics and market opportunity. Here's a few details. We took advantage of an attractive market window and executed a record $800 million FABN issuance in the third quarter and expanded our high-quality investor base, bringing our third quarter and year-to-date funding agreement placements to $1 billion and $1.6 billion, respectively. Coming off a record second quarter, MYGA sales were nearly $1 billion in the third quarter and $3.4 billion year-to-date.
We optimize our level of flow reinsurance in line with our capital targets by dynamically adjusting MYGA volumes up and down as market economics change. While short-term interest rates declined following the recent Fed cuts, the shape of the yield curve has a bigger impact on our business. We do not have significant exposure to changes in short-term interest rates as we have hedged the majority of our floating rate portfolio to lock in higher rates over the past couple of years. Our floating rate assets are now only $2.4 billion or 5% of our total portfolio, net of hedging. We expect continued strong demand for retirement savings products, including a growing demand for annuities by consumers and financial advisors for retirement security. Demographic trends remain a powerful secular driver as the growing retirement population seeks guaranteed lifetime income streams. And the continued macroeconomic volatility increases the relative attractiveness of fixed annuity products for consumers that want guaranteed tax deferred growth and principal protection.
Next, turning to the investment portfolio. Our portfolio is diversified, well positioned, and high quality with 96% of fixed maturities being investment grade. Credit-related impairments have remained low and stable, averaging 6 basis points over the past 5 years. Through the first nine months of the year, credit-related impairments remained below our pricing. Given broader market concerns around credit exposure to bank loans, we don't have any direct holdings in First Brands, Tricolor, or PrimaLend, and our exposure to the subprime auto and regional bank sectors was a modest $20 million and $13 million, respectively, as of September 30. Our fixed income yield of 4.68% increased 10 basis points over the sequential quarter, primarily driven by a prospective floating rate asset model refinement. As a reminder, our fixed income yield excludes alternative investment income as well as variable investment income.
Looking at our alternative investment portfolio, we saw improvement in our annualized return at 7% in the quarter, up from 6% in the sequential quarter and as compared to our 10% long-term expected return. Our alternative investment portfolios comprise 30% of all LPs, with the remainder more debt-like in nature. Next, turning to variable investment income. We reported $24 million of pretax income in the quarter, which was above our run rate expectation as compared to $26 million in the prior year quarter and $6 million in the sequential quarter. As far as asset managers go, we really think we have the best of both worlds in terms of our competitive positioning and flexibility. This month marks that we are eight years into our strong and seasoned relationship with a world-class manager in Blackstone. And we have the flexibility to work with other asset managers, whether for flow reinsurance or specialty asset classes that complement Blackstone's capabilities.
In summary, F&G's results for the first nine months of the year have positioned us well for a strong finish for the remainder of 2025. We are executing on our strategy, leveraging the strength of our distribution partners to continue to grow our spread-based business alongside our growing sources of fee-based, higher-margin, and capital-light earnings through our flow reinsurance, middle-market life insurance, and own distribution strategies. I'm excited about the future and our ability to continue to further expand our return on equity to deliver long-term shareholder value. Let me now turn the call over to Conor to provide further details on F&G's third quarter highlights.
Thank you, Chris. I'd like to start by thanking our employees for their efforts in delivering an all-around strong quarter. Our solid foundation and focused execution continue to drive results across the business. Looking at our third quarter results more closely. On a reported basis, adjusted net earnings were $165 million or $1.22 per share in the third quarter. Alternative investment income was $67 million or $0.48 per share below management's long-term expected return for the quarter. Adjusted net earnings included two significant items, a $10 million or $0.07 per share benefit from a tax valuation allowance release as well as $4 million or $0.03 per share from an actuarial reserve release. Additionally, our third quarter adjusted net earnings benefited by approximately $25 million as a result of two other items in the quarter, strong prepayment fees as well as a lower effective tax rate.
We completed our annual actuarial assumption review in the third quarter. As a result, amortization expense was approximately $6 million after-tax higher in the third quarter, and we expect higher amortization over the next year with approximately $5 million after-tax in the fourth quarter, incrementally diminishing through the first half of 2026. Overall, as compared to the prior year quarter, third quarter adjusted net earnings reflect asset growth, growing fees from accretive flow reinsurance, steady own distribution margin, and operating expense discipline driving scale benefit. Our results have generated sustainable returns. As reported, adjusted ROA on a last 12-month basis was 92 basis points, including short-term fluctuations from alternative investment income. This is stable and in line with the last 12-month period for the prior year and sequential quarters of 95 and 92 basis points, respectively.
All else equal, we expect this is indicative of our current run rate for adjusted ROA on a reported basis. Our adjusted ROA reflects meaningful contributions from our fee-based flow reinsurance and own distribution strategies. As reported, our adjusted return on equity, excluding AOCI, was 8.8%, in line with the sequential quarter. Our fee income from accretive flow reinsurance has grown to $41 million in the first nine months, up 46% over $28 million in the first nine months of 2024. F&G launched its flow reinsurance strategy in 2020, which builds on our core competencies, enables us to scale in an accretive and capital-efficient manner, and produces diversifying fee income that generates strong cash flows. Our flow reinsurance strategy, augmented by the new reinsurance sidecar effective August 1, provides third-party capital for a portion of F&G's FIA and MYGA sales. Today, we expect to reinsure the vast majority of MYGA sales depending on economics.
As discussed on last quarter's call, the economics for FIA sales are relatively more attractive with the sidecar, and we expect we will evolve toward 50-50 retained versus flow for FIA sales. Importantly, we will continue to grow retained AUM as we balance retaining business versus optimizing flow reinsurance and preserving capital flexibility. Our own distribution portfolio is performing well and creating value. We have invested nearly $700 million in our four own distribution investments and expect to generate over $80 million of EBITDA for the full year 2025. Our holdings are diversified by product and market and reflect growing businesses with strong leadership. Two of our holdings are life IMOs that produce about 50% of F&G's IUL sales as the majority of their sales mix. The other two holdings are annuity IMOs that produce approximately 15% of F&G's annuity sales as the minority of their sales mix.
In the future, we have plenty of opportunity to expand the value of own distribution through our existing holdings. And as independent agent distribution continues to consolidate in the industry, we expect to be selective in expanding to additional strategic partners, being thoughtful about where it makes sense and where it's the right fit with our long-standing relationships. We are benefiting from increased scale as our ratio of operating expense to AUM before flow reinsurance has decreased to 52 basis points in the quarter, down from 62 basis points in the third quarter of 2024. We expect continued improvement in our operating expense ratio as a result of the expense actions we took earlier this year, moving from 60 basis points at year-end 2024 to approximately 50 basis points by year-end 2025. Further, we see the potential to decrease by an additional 1 basis point per quarter on average in 2026.
Two years in, and we have made significant progress toward the medium-term financial targets we laid out at our October '23 Investor Day to grow AUM by 50%, expand adjusted ROA, excluding significant items to 133 to 155 basis points, increase adjusted ROE, excluding AOCI and significant items, to 13% to 14%, and expand our multiple. We are well positioned to deliver on our targets as we move further toward a more fee-based, higher-margin, and less capital-intensive business model, leveraging our position as one of the industry's largest distributors of annuities and life insurance. This concludes our prepared remarks, and let me now turn the call back to our operator for questions.
Before opening for questions, I'd like to turn it back over to Chris Blunt for some additional remarks.
Thanks, operator. Early this morning, we issued a press release with FNF, our majority owner, announcing the FNF Board of Directors has approved a change in FNF's equity ownership stake in F&G. FNF plans to distribute approximately 12% of the outstanding shares of F&G's common stock to FNF shareholders. Following the distribution, FNF will retain control and majority ownership of approximately 70% of the outstanding shares of F&G. This will increase F&G's public float from approximately 18% today to approximately 30% after the distribution, strengthening our positioning within the equity markets and facilitating greater institutional ownership. Operator, please open the call now for questions.
Questions and answers
And our first question comes from Wes Carmichael with Autonomous Research.
First question I had, maybe it's a bit broader of a question on capital allocation. But as I think about the stock, it's been under a little bit of pressure this year year-to-date. And I know you raised some growth equity earlier in the year. Now you have the sidecar. So I'm just wondering how you're thinking about prioritizing capital deployment and how are you thinking about share buybacks relative to things like allocation to own distribution or even just faster organic growth?
Sure. Thanks, Wes. It's Chris. I'll start. I know Conor will have some views here as well. I would say right now, obviously, we want to continue to grow our fixed index annuity business that's core for us. And so that's always going to be fairly high on the list. Own distribution is attractive and where we've got opportunities to either potentially add a platform, although we want to be selective there or add some capital to help some of our existing ownership stake scale, that's very high on the list. Index Universal Life is a high priority for us and continuing to grow that, although it's not a large consumer of capital right now. You probably also noticed, we increased the dividend by 13.6%. So we're trying to share some of the new capital-light model with our shareholders right away. I would say right now, buybacks would probably be a pretty low priority for us just because, obviously, the distribution of shares by FNF is to try to help us increase our float, not take float out of the market. But I don't know Conor...
It's a little bit of a reiteration Thanks, Wes. We're seeing very attractive opportunities for our core products. Again, IUL, the FIA, the RILA, and the PRT, we've continued to be active in the PRT market as well and expect that momentum across all of that to continue in the near term. So we're very comfortable. We've plenty of capacity from a capital perspective to continue to focus on those. The opportunistic will be just that. It was a pretty active quarter this quarter, but we're watching where MYGA returns are in the near term and we will write as much or as little there depending on the economic opportunity. And yet, we continue to really, really like the own distribution expansion opportunity as well.
It makes sense on the float comments, Chris. Second question I had, I guess, on variable investment income outside of the alternatives portfolio. I think that was pretty strong in the quarter, but I imagine that will bounce around a little bit quarter-to-quarter. But just maybe if you could think about a run rate level of non-alt VII going forward. Is there any help you can give us on that?
Yes, I'll give you a sense. So you're right. We were higher this quarter. I think we were in the $24 million pretax range and like our expectation near term. You're always going to have an element of this. Our expectation is probably at the high single digits, 10ish roughly, maybe a little less, but it will move around a little bit, and that's fine, but they were certainly a little bit higher, which is why we called them out in the quarter.
That's helpful from a modeling perspective. And just maybe one final one. Just on the investment portfolio. I guess in recent weeks, there's been more focus on, I guess, private letter rated assets and these private structures, particularly those that are rated by Egan Jones, I'm just wondering if there's any color you can provide on that exposure for F&G maybe as a percentage of the portfolio? And maybe if you would disagree with the spirit of these recent articles in the media on private credit?
Yes, I can answer that in reverse order. There is a shared concern among everyone regarding the private credit space. There have been some strong statements made on both sides of the discussion. We can specifically speak to our own portfolio, which we feel quite comfortable with. Regarding Egan Jones, like many firms, we are increasingly using two different rating agencies. The number of securities or loans rated by Egan Jones in our portfolio is quite small. Generally, we aim to have two agencies rate every deal, ideally including one of the major three, not only due to concerns about the reliability of any single rating but also because of analyst turnover. We currently have an analyst on leave, so having two ratings is beneficial. We believe we've made significant progress on this front.
The next question comes from the line of Joel Hurwitz with Dowling & Partners.
A couple of questions on the alternatives performance. First, can you provide some color on the moving pieces of the $67 million of unfavorable alts in the quarter? And I guess how much of that was just the LPs versus that direct lending? And then what are the targeted returns on the different pieces that fall in that $10.5 billion bucket of alternative assets?
Yes, I'll provide some insight. While I may not have a complete breakdown, I understand what you're asking. Overall, our expectations were pretty close regarding the whole loan and direct lending segments. We have a total portfolio of around $10 billion, with approximately $3 billion in LPs, which performed better. I would say the improved performance was generally present, but these areas are primarily the ones still not meeting long-term expectations. We were essentially on target with both the whole loans and the direct lending.
And Joel, as you know, some of the LPs, particularly on the PE funds, you get a lot of that information comes with a lag. So that's part of the issue, too. So obviously, the sense is that activity is picking up. Hopefully, that's true and that persists.
Okay. I guess any color on what the targeted return is on the LPs? I guessing it's higher than the 10%, but can you...
Yes. I mean, look, to get to an average of 10%, yes, I would say that's the case modestly, but there's not a wide range when you consider all of the components, but on the margin, not on the statement, correct.
Okay. And then, Conor, just on the base yield jump of 10 basis points. You guys mentioned a floating rate refinement. Just what exactly was that? And how much of the basis point quarter-over-quarter increase was that?
I'm not certain if it was exactly 10 basis points; I believed it was likely closer to $10 million and perhaps 3 or 4 basis points regarding what I would describe as the core fixed income impact. We did experience a slight change. Initially, we relied solely on the forward curve, but now we have implemented a decision tree methodology. For anything that serves as a placeholder, isn't hedged, or if it's an FP or an FABN, we treat it as short and spot, while longer-term items are managed as forward. We aimed to highlight that the fixed income yield had increased by a few points. Honestly, I think the fixed income yield this quarter was actually, no, I apologize; I think it was around 10 basis points. If you examine the core components, the fixed income yield in this quarter remained relatively flat compared to the previous quarter.
And the next question comes from the line of Mark Hughes with Truist Securities.
Conor, I think you had talked about kind of all else equal, a good run rate ROA for the business. On an adjusted basis, what would that number look like?
We've been on an adjusted basis in the high 120s, right around the lower end. Remember, we had set a target a couple of years ago at the Investor Day to reach the 130s to 150 range, and we're currently near the bottom end of that range. So over the last 12 months, on an adjusted basis, I think we're probably around the 129 or 130 mark.
Okay. And then maybe a two-part question on RILA. Just looking at the Q3 stats out of LIMRA, says that RILA is up 20%, FIAs down a little bit. Just sort of curious, any observations on that dynamic? What's causing it? Is that likely to persist? And then just any update on your progress in the RILA product?
Yes, Mark, this is Chris. I'd say a couple of things. I think what's driving it, probably a little bit as rates has come down a bit and cap rates lower on fixed products, markets have obviously been outperforming quite well, equity markets. And so yes, you're always going to see someone's sentiment shift between RILAs and FIAs, which is why we like the product; we want to have it in our portfolio. I would say, as we've acknowledged before, it's taken longer to get on platforms. So once we're on platforms, we're getting good flows and good adoption from advisors. So yes, it's continuing to grow. It's continuing to grow at a healthy clip just off of a small base. And again, given the number of opportunities that we have in FIAs, particularly FIAs that we can utilize the sidecar for, that's been pretty high on our list. So we haven't felt particularly constrained by the growth of it, but it's a strategic product for us, and we want to continue to grow it over time.
Very good. Maybe another two-parter. The $80 million in EBITDA and own distribution, how does that compare to the prior year? And then you're seeing much private equity activity there. Competition for other deals, how does that stand now?
Yes. A couple of quarters ago, we projected EBITDA to be around $85 million, but it has decreased slightly. However, it will likely fluctuate a bit each month. Overall, the portfolio is performing very well, even exceeding our expectations, which is encouraging for future growth. The activity level remains consistent with what we've seen before. Every platform we acquired faced private equity competition, as they were either looking to partner with roll-up players or had received offers from them. Our competitive position hasn't changed, and we remain optimistic about our prospects.
The next question comes from the line of Alex Scott with Barclays.
First one for you is just more of a broad question around the competitive landscape. And maybe if you could comment both on the liability side but also even on the asset side and just how you're viewing competition for loan origination and so forth.
Let me start by discussing the liability side. Focusing on our core positioning versus opportunistic strategies, we feel comfortable in the near term, which I define as looking a few months ahead as we anticipate momentum heading into Q4 and assess current market conditions. In the FIA space, the situation is competitive but reasonable. This applies to RILA and IUL as well. From the PRT perspective, activity remains fairly robust, especially in the fourth quarter, which typically sees increased transactions. The environment is still favorable for this. While predicting too far ahead is challenging, I can say that the volume and pricing in the PRT sector, particularly in the range of $100 million to $600 million and up to $1 billion, is promising. However, regarding MYGA, which I touched on earlier, the situation is tighter. In the near term, the demand for MYGA may decline slightly compared to other opportunities we are currently exploring.
Yes. And on the sort of credit origination side, which is an important engine, right, from a competitiveness standpoint, obviously, that is tighter. There's more competition for deals for sure, but the market is just huge and continues to expand in terms of opportunities. So we've been able to find our spots. Probably takes a little bit longer to get some premiums invested, particularly in the private credit area. But yes, I would agree with Conor's assessment, tighter in spots, but overall, still pretty attractive.
I appreciate your insights. My next question relates to hedging and short-term interest rates. Can you clarify how these factors affect earnings? Is there a delay or amortization involved? Did the recent decline in short-term rates significantly impact our results this quarter? I'm not very familiar with how this affects adjusted earnings.
Yes. I don't believe there's anything particularly significant. The main point for us is that we have a floating rate component in the portfolio that is relatively small, less than $2.5 million or 5% of the portfolio, but...
Yes. It's important to have some flexibility in the portfolio because when great opportunities arise, these assets are often the easiest to move and reposition. We'll follow up with you regarding the timing, but I don't believe there are any significant delays due to hedging.
Okay. Is there anything notable in this quarter regarding gain flow?
No, the methodology change was really about being more precise. We use floaters in various ways; some are meant for longer-term obligations, like a five-year liability, while others serve as temporary assets or cash equivalents. It was primarily about ensuring that when people observed the movements in interest rates, they were better aligned with the portfolio results we were experiencing.
That's exactly right. To emphasize, it's really tied to the purpose of the use of the asset. It was modest. The reason we highlighted it is to illustrate that from a core fixed income perspective, due to the focus on the ROA, it was positive, but it was a flat quarter. It remains the same. We weren't suggesting that it had gone higher because of anything we did in the portfolio. That's why we called it out.
The next question will come again from the line of Wes Carmichael with Autonomous Research.
I just had a couple more for you. But one on operating leverage. If I look at the operating expense line, that's declined over the past couple of quarters, and I think that's a good development. I imagine part of that's related to the actions you took earlier in the year. But how are you thinking about that going forward? Is there more opportunity for reducing costs? Or should we just think about the spend is going to increase less than the pace of AUM going forward?
Yes, I believe it's the latter. Thank you, and I previously mentioned some of these points. From our perspective, we aim to reduce the cost basis as a percentage of assets under management from 60 to 50 basis points. We have made progress towards this in the second quarter. I anticipate that we will decrease from 50 to approximately 46 basis points over the next year. However, I would suggest that we will maintain our current position regarding inflation while continuing to grow. After that, I expect the decline to continue, but at a more modest pace—perhaps around 0.5 basis points per quarter. By 2027, we might see another two basis points reduction after four this year. Therefore, this should be seen as a result of an improving expense ratio rather than a reduction in core expenses.
Got it. That's helpful. And just last one, I guess, on the press release with FNF spinning some of the F&G stock to FNF shareholders. I guess my reaction and maybe some of the investors was it's a pretty modest number relative to maybe actions they could have taken. But I just wondered if you had any comments on that from your perspective.
Yes. I mean, I guess it is and it isn't, in the sense that if you looked at the amount of free float, it's a very meaningful increase in free float. And I think from a dollar perspective, don't quote me, but I think this gets us over $1 billion now of free float. So we've heard from a number of particularly long-only investors that said, 'boy, if you had a bit more float, we'd really like to take a position'. So I think over time, it's going to prove to be quite meaningful for us from that perspective. And as to the amount, it was as simple as FNF really likes F&G, sees a lot of promise in our long-term future. And so there was a lot of speculation of, 'oh, it's been five years; they're going to spin the whole thing out', and they clearly didn't want to do that. And so it was really how much can we spin out to help with the FG float while retaining a large percentage. So we took it as a great vote of confidence in where we are, our capital light strategy and the earnings we can drive going forward. So I think it's a really positive development, I think, for both shareholder bases, frankly.
This will conclude our question-and-answer session. And I'd like to turn the call back to Chris Blunt for closing remarks.
Thanks again, everyone, for joining our call this morning. We had a really strong third quarter and have good momentum heading into the end of the year. I'm excited about the future and our ability to deliver strong returns for the shareholders of F&G in the years ahead. We appreciate your interest in F&G and look forward to updating you on our fourth quarter earnings call.
Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.