F&G Annuities & Life, Inc. (FG) Q4 FY2025 Earnings Call Transcript & Summary

Good morning. Welcome to F&G's Fourth Quarter and Full Year 2025 Earnings Call. [Operator Instructions] I would now like to turn the call over to Lisa Foxworthy-Parker, Senior Vice President, Investor 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 webcast replay. And with that, I'll hand the call over to Chris Blunt.

Good morning, and thanks for joining today's call. We delivered a strong finish to an outstanding year through disciplined growth and the proven ability and flexibility of our business model, as we transition to be more fee-based, higher margin and less capital intensive, and we remain focused on creating long-term shareholder value. We are executing on our strategy and made further progress toward our 2023 Investor Day targets as we achieved record AUM before flow reinsurance, fueled by one of our best years of sales. excellent performance in our high-quality diversified investment portfolio, strong performance across our business balanced with diligent expense management and a healthy financial and capital position. I'd especially like to thank our employees. Their hard work and dedication are truly the foundation of everything we achieve for our business and for our customers. Now looking at our results more closely. We achieved record AUM before flow reinsurance of $73.1 billion, up 12% over year-end 2024 and as well as record retained AUM of $57.6 billion, up 7% over year-end 2024. This record AUM was driven by $14.6 billion of gross sales, our second highest year on record. 2025 demonstrated our commitment to manage growth for the long term as we prioritize pricing discipline and capital allocation to the highest return opportunities. For the full year, we delivered $9 billion of core sales, including indexed annuities, indexed universal life and pension risk transfer and $5.6 billion of opportunistic sales, including MYGA and funding agreements. Conor will provide more details on sales later in the call. Next, turning to the investment portfolio. Our high-quality diversified portfolio is performing very well. The retained portfolio is high quality with 97% of fixed maturities being investment grade at year-end. Since 2020, we have selectively repositioned over $2 billion of assets to optimize, de-risk and position the portfolio to perform in varying market conditions while also improving credit quality. Credit related impairments have remained stable at 8 basis points in 2025 and well below our pricing assumption. This brings our 5-year average, since 2021, to 6 basis points, which is exceptionally low. Our fixed income yield was 4.65% in the fourth quarter, up 6 basis points over the fourth quarter of 2024. As a reminder, our fixed income yield excludes alternative investment income as well as variable investment income, which we define as prepayment fees. Looking at our alternative investment portfolio, our annualized return was approximately 7% in the fourth quarter as compared to our 10% long-term expected return. At year-end, approximately 40% or $4 billion of our $11 billion alternative investment portfolio was comprised of equity interest, including limited partnerships with the remaining 60% being investment-grade fixed income debt with more predictable levels of investment income. Starting in the first quarter of 2026, we are updating our long-term expected return for alternative investments to reflect only the 40% or $4 billion of equity interest. We will reclassify the remaining 60% or nearly $7 billion into our fixed income yield and an as shown in the investment income and yield table on Page 8 in our financial supplement. We believe this will more appropriately delineate between the fixed income portfolio and alternative investments while also improving comparability to others in the industry. This disclosure refinement will not have any impact to adjusted net earnings on an as-reported basis. We're often asked about the effect of short-term interest rates on our business following the recent Fed rate cuts. Given the nature of our spread-based business, longer-term rates and the shape of the yield curve are more significant to us than short-term interest rates. 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 exposure is now only $2.8 billion or approximately 5% of our total portfolio net of hedging. Another consideration is variable investment income. We reported $7 million of pretax prepayment fees in the fourth quarter. This brought the full year to $56 million, in line with full year 2024. As a reminder, prepayments fluctuate quarter-to-quarter and could present a headwind in 2026 if bond prepayments vary from 2025 levels depending on market conditions. As far as our asset managers go, we really think we have the best of both worlds in terms of our competitive positioning and flexibility. We are now in the 9th year of 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. Blackstone employs a robust and thorough underwriting approach by developing its own forecast based on conservative macroeconomic views and historical sector performance. Next, turning to private asset origination, which is a key component of our investment strategy. and represents 20% or $11 billion of our retained portfolio. Here, we utilized Blackstone's best-in-class origination, underwriting and structuring teams to source high-quality pools of physical and financial assets. These include corporate and commercial lending, consumer loans, real estate and other real asset exposures. When it comes to private asset origination, most of these directly originated asset classes have been in existence for decades within the bank channel and have long performance histories over multiple market cycles, providing observable data for thorough underwriting. Private asset originations allow us to mitigate our credit risk in a couple of ways. They provide diversification to investments that we can access through public markets and the bilateral nature of these private origination transactions allow us to perform comprehensive analysis on an asset-by-asset basis and incorporate stronger covenant protections relative to the public markets. From a ratings perspective, our private asset origination portfolio has a strong credit profile. Approximately 92% of the private origination debt portfolio is investment grade and included within the 97% investment grade for our total fixed income portfolio. We primarily use the top 5 nationally recognized statistical rating organizations. Approximately 90% of the private origination debt portfolio and 94% of our total fixed income portfolio are rated by a combination of the top 5 agencies, including Moody's, S&P, Fitch, Kroll and DBRS. Egan-Jones Ratings are de minimis at less than 1% of our total retained portfolio. And private letter ratings account for approximately 17% of our total retained portfolio and undergo the same analytical rigor as public ratings. The combination of Blackstone structuring talent, our ability to complement Blackstone's ability with other asset managers, the track record of these assets and our thorough due diligence has helped generate attractive risk-adjusted returns for F&G that have performed very well to date and through stress environments like the COVID pandemic. We have refreshed our annual portfolio stress test, which is conservative and assumes no management action. Once again, the stress test has confirmed that our portfolio is well positioned to withstand a sharp downturn in the economy. In summary, we feel comfortable and confident in the credit soundness of our investment portfolio. Please see our winter 2025 investor presentation for further details on our stress test. Next, I'd like to provide an update on our strong progress toward our 2023 Investor Day medium-term financial targets now that we are at the midpoint of our 5-year horizon. We have grown AUM before for reinsurance from the $51 billion baseline to $73 billion at year-end 2025, a 44% increase at the midpoint mark as compared to our target of 50% in 5 years. We have expanded ROA, excluding significant items from the 110 basis point baseline and made significant progress toward the lower end of the 133 to 155 basis point targeted range. And we have increased ROE, excluding AOCI and significant items from the 10% baseline and are closing in on the lower end of the 13% to 14% targeted range. The preferred stock investment from FNF in 2024, combined with our own internal capital generation, enable us to grow significantly faster than originally projected when we set our Investor Day targets. On December 31, FNF completed the distribution of approximately 12% of the outstanding shares of F&G's common stock to FNF shareholders. Following the distribution, FNF retains control and a majority of ownership with approximately 70% of the outstanding shares in F&G. This has increased F&G's public float from approximately 18% to approximately 30% after the distribution, strengthening F&G's positioning within the equity markets, and facilitating greater institutional ownership. This distribution reflects FNF's confidence in F&G's long-term prospects and is intended to unlock shareholder value by enhancing market liquidity and broadening investor access to F&G's shares. On a stand-alone basis, we reported GAAP common equity excluding AOCI of $6 billion at year-end, and we have grown book value per share, excluding AOCI, to $44.43, up 62% since the 2020 acquisition. In summary, F&G finished the year strong. I'm excited about the future and our ability to continue to deliver long-term shareholder value. Looking ahead, F&G has differentiated capabilities and is uniquely positioned in the industry. We have made significant progress 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 less capital-intensive earnings through our flow reinsurance, middle market life insurance and own distribution strategies, all of which is showing up in our results as expected. Let me now turn the call over to Conor to provide further details on F&G's fourth quarter and full year highlights.

Thank you, Chris. This morning, I will provide some additional details of our sales fourth quarter and full year earnings and performance drivers and our strong capital position. Starting with sales, as Chris mentioned at the beginning of the call, we generated $14.6 billion of gross sales for the full year, including $3.4 billion in the fourth quarter. We had $9 billion of gross sales of our core products, including indexed annuities, indexed universal life and pension risk transfer. For the full year, this was our second year of more than $9 billion in core sales. This includes $2.8 billion of core sales in the quarter in line with the fourth quarter of 2024 and up 27% over the sequential third quarter. To provide a few highlights of our core sales. Indexed annuities were $6.7 billion for the full year which was in line with full year 2024 and included $1.9 billion of indexed annuities in the quarter, up 12% over the fourth quarter of 2024. This is a strong result in a competitive environment, and coming off a record 2024 for fixed indexed annuity sales for both F&G and the industry. FIA is our largest contributor to index annuity sales and progressively increased during 2025. With modest but increasing RILA sales throughout the year. IUL sales were $190 million for the full year, including over $50 million in the quarter and reflect a 14% increase over full year 2024. Our life insurance solutions are meeting the needs of the underserved multicultural middle market, which is driving continued steady growth. PRT sales were $2.1 billion for the full year, including over $800 million in the quarter. This result marks our third consecutive year attaining $2 billion or more in PRT sales and landed squarely in our $1.5 billion to $2.5 billion targeted annual range. We continue to see a robust PRT pipeline for midsized deals up to $500 million, where F&G competes well. Gross sales of our opportunistic products, including funding agreements and multiyear guaranteed annuities were $5.6 billion for the full year, including over $600 million in the fourth quarter. Opportunistic sales volumes fluctuate quarter-to-quarter depending on economics and market opportunity. To provide a few highlights, funding agreements were $1.8 billion for the full year, up nearly 80% over the $1 billion in full year 2024. This included nearly $300 million of funding agreements in the quarter as compared to no funding agreements in the fourth quarter of 2024. As we enter 2026, we took advantage of an attractive market window and successfully executed a $750 million FABN issuance in early January as we continue to expand our high-quality investor base. MYGA sales were $3.8 billion for the full year, including over $350 million in the quarter as compared to $5.1 billion in 2024, including nearly $650 million in the fourth quarter of 2024. We have intentionally moderated MYGA volumes from the prior year levels, given market conditions, competitive dynamics and flow reinsurance optimization as we continued pricing discipline and allocating capital to the highest return opportunities throughout the year. F&G's net sales retained were $10 billion for the full year 2025, and as compared to $10.6 billion in full year 2024. This included $2.3 billion of net sales in the quarter, down slightly from the fourth quarter of 2024. Stepping back, 2025 showcased the diversity of our new business engine, allowing us to flex across our products and channels to source the most attractive liabilities in a given environment. We are also uniquely positioned with our third-party MYGA flow reinsurance partners to dynamically adjust volumes up and down as the market economics change. This is not supplemented by our reinsurance sidecar and we expect our mix of sales to shift more toward FIA over time. As one of the industry's largest sellers of annuities and life insurance, our model is sustainable and allows us to optimize and position the business for long-term success. This aligns our interest well with the continued strong secular demand by consumers and financial advisers for retirement saving solutions, including our core indexed annuity and index life products. Turning to earnings. On a reported basis, adjusted net earnings were $123 million or $0.91 per share in the fourth quarter. Alternative investment income was $65 million or $0.47 per share below management's long-term expected return for the quarter. For the full year, on a reported basis, adjusted net earnings were $482 million or $3.64 per share. Alternative investment income was $278 million or $2.03 per share below management's long-term expected return for the year. Full year adjusted net earnings included 3 favorable significant items totaling $30 million or $0.22 per share, which are detailed in our financial supplement. Overall, as compared to the prior year, adjusted net earnings reflects asset growth, growing fees from accretive flow reinsurance, steady owned distribution margin and operating expense discipline driving scale benefit. As Chris mentioned, our results have generated sustainable returns. Our fee income from accretive flow reinsurance has grown to $56 million for the full year 2025 up 37% over $41 million in 2024. Our fee income from owned distribution margin contributed $47 million for the full year 2025, up 2% over $46 million in 2024. Our fee-based strategies, including flow reinsurance fee income and owned distribution margin, together with steadily growing IUL product fees have contributed approximately 15% of F&G's adjusted net earnings, excluding significant items for the full year 2025. As we continue to execute on our strategy, we expect our share of fee-based earnings to grow to approximately 25% of our total earnings by year-end 2028. From a flow reinsurance perspective, we continue to expect to reinsure the vast majority of MYGA sales depending on economics and as discussed on last quarter's call, with the reinsurance sidecar, we expect to evolve towards 50-50 retained versus flow for FIA sales. Importantly, we will continue to grow retained AUM and 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 owned distribution investments and generated $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 produced about 30% of F&G's IUL sales in full year 2025, the other 2 holdings are annuity IMOs that produced approximately 10% of F&G's total annuity sales for the full year. In the future, we have opportunities to expand the value of own distribution through our existing holdings. As F&G grows, we are benefiting from increased scale as our ratio of operating expense to AUM before flow reinsurance has decreased to 50 basis points at year-end 2025 and down from 60 basis points at the end of 2024, meeting our target through a combination of growth in AUM and expense actions we've taken. As AUM grows and we continue to manage expenses, we expect the operating expense ratio to improve to approximately 45 basis points by year-end 2027 for a cumulative 15 basis points or 25% improvement over the 3-year period. F&G is uniquely positioned in the industry with a profitable and growing $57 billion in-force block that does not contain any problematic legacy business. Our asset and liability cash flows are well matched, our retail fixed annuities are 92% surrender protected and nonsurrenderable liabilities include funding agreements, pension risk transfer and immediate annuities. Over the past couple of years, both F&G and the industry have seen elevated terminations on annuity, which provide a boost to earnings from higher surrender charge fees when they occur. Beyond that initial benefit, terminations can temporarily pressure near-term spreads. As we move into 2026, this is a potential source of quarterly variability, and we feel that we benefit either way over the long term. If termination flows from the current pace, we forgo the incremental surrender charge fee income but benefit from retention of the underlying retained assets and profitable in-force liability. If terminations hold at the current level, we continue to benefit from higher surrender charge fee income and freed up capital to deploy to new business with renewed surrender charges and longer surrender periods, resulting in stickier in-force liabilities that generate significant margins over time. Next, I want to spend a few moments highlighting a capital transaction. We are on track to close the transaction during the first quarter with an investment firm, Ancient Financial Holdings LP, to sell F&G Life Re Limited, our Bermuda-based legal entity with affiliate only reinsurance effective March 1. In preparation for the sale, our Iowa operating company recaptured approximately $900 million or 1/3 of F&G Life Re's affiliated statutory liabilities at year-end. Approximately $600 million of this was ceded to an existing third-party reinsurance partner at year-end. We expect to receive net proceeds of approximately $300 million from the sale of the legal entity and the remaining runoff in-force block, including a return of capital in the form of a $200 million dividend of assets at year-end 2025 from our Bermuda entity to our Iowa operating company. Blackstone will retain asset management for the in-force assets and Ancient will manage assets under a new flow reinsurance treaty for MYGA new business. After the transaction closes in the quarter, we expect AUM to decrease by $1.9 billion. The foregone annual adjusted net earnings are expected to be approximately $10 million per quarter before deployment of proceeds on future flow reinsurance fee income. The transaction provides a number of benefits to F&G, including the transfer of capital through the dividend at year-end, and the opportunity through F&G's disciplined execution of risk transfer options to dispose of a valuable assets that we no longer need to support our reinsurance strategy. The transaction also provides counterparty diversification for MYGA flow reinsurance in the future as we are always looking to expand with high-quality partners. As a reminder, F&G remains a U.S. domiciled company we are a full U.S. taxpayer, and all new business is originated in our U.S. subsidiaries. Turning now to our strong capital position. We remain committed to our long-term target of approximately 25% debt to capitalization, excluding AOCI, and we expect that our balance sheet will naturally delever over time. We continue to target holding company cash and invested assets at 2x interest coverage. Our annualized interest expense is approximately $165 million or roughly a 7% blended yield on the $2.3 billion of total debt outstanding. We ended the year with an estimated company action level risk-based capital or RBC ratio of approximately 430% for our primary operating subsidiary above our 400% target and boosted by the year-end recapture from the Bermuda legal entity. Importantly, F&G maintained strong capitalization and financial flexibility across all of our statutory balance sheets including our offshore entities, which we conservatively manage to the most stringent capital requirements of our regulators and 4 rating agencies. From a capital allocation perspective, during 2025, our capitalization supported sustained asset growth, and we returned $137 million of capital to shareholders through common and preferred dividends. Notably, we increased our quarterly common stock dividend by 14% in the fourth quarter as supported by our strong cash generation. To wrap up, as I reflect on the past year, we have extended our proven track record and positioned F&G for long-term growth. To recap some highlights, we have executed on our strategy as we made continued progress toward our 2023 Investor Day targets and improved our operating expense ratio by 10 basis points, maintained a disciplined focus on our core products, including indexed annuities, indexed universal life and pension risk transfer allocating capital to the highest return opportunities, significantly expanded in the earnings contribution of our fee-based flow reinsurance, middle-market life insurance and owned distribution strategy, alongside continued growth in our spread-based businesses, enhanced our strong capital position to fund our organic growth, not supplemented by the launch of our sidecar that provides long-term on-demand capital, create a flexibility to monetize the intrinsic value and our own distribution strategy in the future, and we expanded our public float from 18% to 30%, enhancing market liquidity and broadening investor access to F&G shares. As I look ahead to 2026, we remain focused on growing our core business and delivering long-term shareholder value by continuing to increase our assets under management, primarily through our core products, generating additional incremental scale benefits, expanding ROE, excluding significant items and moving further toward a more fee-based, higher-margin and less capital-intensive business model leveraging our position as one of the industry's largest sellers of annuities and life insurance. This concludes our prepared remarks. And now let me turn the call back to our operator for questions.

[Operator Instructions] The first question comes from the line of John Barnidge with Piper Sandler.

My first question, can you talk about software exposure in the investment portfolio? And if you're underexposed to that area, where is some overexposure where you believe there is a strength?

John, it's Chris. Happy to start with that. Yes. So software exposure for us is quite manageable. It's less than 5% of the total portfolio. If you break that down further, obviously, that's a huge category, we think it's less than 1% that has some potential for disruption or disintermediation risk. Obviously, underwriting for AI risk is not a new topic for Blackstone. They've been on this theme for probably a decade now and really been focused on companies with durable use cases, high switching costs, structural moats, et cetera. So we feel really good about that exposure. Same thing on commercial real estate, where we have, I guess, tenants that you would loosely call software tend to be the hyperscalers, and these are long-term leases with cash flows and low LTVs, et cetera. So we think we're in really good shape there. I do think there's tremendous upside in the private equity portfolio because, again, this is not a new theme. So disruption cuts both ways. But I would say, manageable on the credit side with some pockets of upside in the private equity portfolio.

My next question, can you maybe talk about your near-term outlook for variable investment income? Given it kind of underperformed in the quarter?

Yes. So John, at this point, I would say it's the same. We have a blended return on the current basis of approximately 10%. As we mentioned in, I think Chris's prepared remarks, we were in that sort of 7% and change, 7%, 7.5% type range for the quarter, 7% blended for the year. So it remains the same. We feel very confident in what's in our portfolio. We -- I don't expect -- we did talk about we're going to do a geographic shift, if you will, in Q1, but I do not anticipate that there would be a commensurate change in the outlook, and that should be -- that should net out to the same overall blended return. So no real change. And I think there's I think there's probably an era of optimism relative to where we are, but we're trying to be a little careful on that. I think others had maybe similar perspective with their fourth quarter returns and as they look into the beginning of 2026.

Yes. I think Conor hit it. The only thing I'd add, John, is that from a planning perspective, we plan for, I would say, continued mediocre returns because I think that's the prudent thing for us to do. but there are some encouraging signs. We're starting to see more IPOs, more transaction activity. So hopefully, that continues, but our job is to not build a business plan around that.

And probably I would also mention, I think as you know, obviously, Blackstone are our partner for us. They have a good history of being a little on the conservative side, too, and having an increased value upon realization. So as this continues, we still very -- still feel very good about our portfolio.

I could ask one more. As I look at your supplement, you have a list of a number of your reinsurance partners. And I see Somerset Re in there who has a relationship with the entity that's acquiring Brighthouse. Can you talk about your diversified panel your outlook for continued participation there by the existing partners and general demand in the market?

Yes, sure, John. Thank you. Well, let me first of all say, yes, I acknowledge obviously the relationship between Somerset and Acquarian, no indication of any kind from Somerset or Acquarian that anything would change with that relationship. So let me be clear on that. But we have a suite of partners here, in addition, obviously, to the sidecar with Blackstone. We've got another one that we just told you about today with Ancient. So pleased about that. There are others. We have a lot of people who show about our doorstep who want to be our reinsurance partners. And honestly, individual appetites at these companies ebb and flow. So you have to be prepared with a nice suite of partners. So no concerns at all. In fact, we probably have more partners than we can handle at the moment or could have more partners than we could handle. So feeling very good about that. And obviously, happy to have another significant partner join us here on March 1.

The next question is from the line of Alex Scott with Barclays.

But the first one, I was hoping you could talk a little bit more about the transaction you mentioned and I think it sounded like you'd already gotten $200 million into the entity from that and maybe another $100 million coming. So I just wanted to check to make sure I have that right. And also just get your thoughts on sort of uses of that capital?

Alex, this is Chris. I'm just going to start with a little history of -- we set this up, I want to say, 6, 7 years ago. And at the time, we thought we might have a path to be flow reinsurer ourselves. And so there were some advantages having a Bermuda operation. Our strategy is our organic business took off. Our PRT business took off we just didn't see that in our future. So it had effectively become just a runoff block of assets, yet we knew it was a pretty valuable entity, had a multiyear track record audited financials team, et cetera. So yes, being approached by the folks at Ancient who we thought were very credible potential partners. This looks like it's just a good opportunity to [ jettison ] an operation that really wasn't part of our go-forward strategic plans and pick up another partner, but I'll let Conor talk about some of the details behind it.

Yes, just the pieces building towards your question. So as we mentioned, we recaptured 1/3 of it, reinsured $600 million of that $900 million. We've got $1.9 billion of AUM moving across. So proceeds of $300 million, of which $200 million in essentially have already been included in that RBC number at the end of the year. So part of why the RBC number is in the $430 million range. I think last year, we were the sort of $410 million. So we don't obviously expect to continue to run the company at a $430 million range, so that's in capital flexibility. Remaining therefore, just mathematically proceeds of $300 million or $200 million already. So there's another $100 million to come. I would describe that towards general uses, sales growing the business, very focused on growing AUM, but I would also take the chance to reiterate. We're going to stay very disciplined. So as we will write great business when the opportunity arises, if the margins are not there, we'll be a little patient. And if that means we have more cash and more capital along the way, then I think that's probably a good thing as well.

All right. That's helpful. I wanted to also circle back on the crediting rate -- or sorry, the surrender fees and how they're contributing to the crediting rate and just think through that a little. We've seen this at some other spread-based companies where there's been some very drag of sorts that surprised people. Where are the surrender fees? Like where do you expect them to go to? I just want to make sure I'm understanding and incorporated into my estimates enough ROE pressure because we're forecasting your ROE going up because you have this plan to send it up. I just want to understand if that's going to take a little more time because of this dynamic. Can you help us understand that?

Yes, yes, sure. So there's quite a number of pieces to that. But if I maybe put it into an ROA context or the surrender fee income, we mentioned a little bit of this coming into the call. Obviously, it's been contributing to ROA. But specifically to your question, we would expect that the volume of surrenders and therefore, the related surrender fee income to be lower in '26 than 2025. Now from an ROA perspective, there are other components as well. We've highlighted the fact that we expected the investment ratio will continue to improve. So I think all in all, I would imagine in the very near term, that's maybe, we might be kind of around where we are. We may be in some element of a plateau. But I think you're thinking about it the right way, right? With -- if surrenders come down when we have more assets. And honestly, I think we would rather have the assets and if that meant a less muted expansion of ROA, but higher AUM, we would be good with that. But I think, yes, I mean, I would argue, I think that both the -- I would say the prepayment number probably a little higher in '25 than we might see in '26, that's pretty modest. But I wouldn't be surprised if we saw surrender-related fees gone 20% roughly from where they are, would be would be kind of where my head of thinking. But obviously, a lot of that depends on external factors and interest rates and suitability rules at other companies and everything of that. So it's hard to tell, but that frames the way we're thinking about it.

Yes. Alex, the only thing I'd add to that, what Conor said, is just to link a couple of things because it's hard to isolate just one metric. So there's no doubt ROA has been pumped up a little bit through excess surrender fees, but the same phenomenon that has caused that has also caused muted realizations in the PE portfolio. And that means that we've had to operate with significantly less capital, getting 7% versus 10% on $10 billion of AUM that goes directly to capital. So seen surrender fee income drop off a cliff would probably be driven by a pretty sharp move down in interest rates, which I think would have some offsetting positives for us. So obviously, it's all linked. So another way, ROA would undoubtedly be lower, if not for all the excess surrender fees, but my guess is AUM would be significantly higher than it is at this point, too.

Our next question is from the line of Mark Hughes with Truist Securities.

Yes. Conor, the 15 basis points of improvement over 3 years, could you refresh us on how that's going to break out. What are those specific big pieces that are going to contribute to that?

Well, really, it's expense. So obviously, the ratio was AUM expenses. But essentially, what I would say in is that we will keep our overall expenses -- we actually aim to keep our expenses entirely flat year-over-year, '25 into '26. If you were going to peel into that a little bit between kind of the fixed and variable, I would say that while we continue to grow, we'll pull our fixed costs down a few percent in order to fund the variable -- the offsetting few percent on the other side. So I want to make sure I'm answering your question, but that's really the overarching way is that we'll continue to grow but we won't grow expenses. We mentioned getting another -- so it's going to be another 10% another 5 basis points and we'll do everything we can to do that as quickly as we can.

Very good. And then what's the latest thoughts on terms of the trajectory on RILA sales. I think you're describing a steady improvement still off of a small base. How do you see that over the next couple of years?

Yes. We feel very good. We combine our RILA -- so far we still combine our RILA with our FIA, but that's -- we talk about a lot of core products, but that might be the most core, if you will, the combination of FIA and RILA. So we're very pleased with RILA it's off a small base, right? We haven't been in the space that long. And as you know, from everybody else, it takes a little while to get going but we're really, really happy with where the RILA's going. And I would maybe just also echo really happy with where FIA and IUL are going. PRT, obviously, a bit seasonal. That's the other core one. You tend to do a lot more in the back half of the year than the front half, and then we'll remain opportunistic on FABN and MYGA.

The next question is coming from the line of Wilma Burdis with Raymond James.

You saw a little bit lower FABs quarter-over-quarter in 4Q, that was pretty similar to other issuers. Maybe just talk a little bit about any causes of a slowdown in the quarter. And what is causing the bounce back in demand so far in 1Q '26?

Honestly, I think for us, too, that's -- that is to repeat myself a little bit, it's opportunistic for us. So we were very happy with what we wrote in terms of just deploying capital and find that really just the balance in total between volume and return, and in the third quarter, we had the opportunity to write an FABN where we had, I would say, an increased interest from the big, big asset managers, which helped pull in our credit spread. Were many, many times oversubscribed. And I think it's been a good market in fairness for others as well. We came into the new year with a view of, well, let's see if that's still good or perhaps even better. And honestly, it's just it was. It was a really good time. We keep it right at the end at the beginning of the year, January 6. It was a really good time to come into the market. It felt like a nice amount to put to work. We could have written more than the $750 million, but you're trying to do the balancing act of getting the price where you want as well. So you want to pull in your spreads, you want to be oversubscribed and you want even more of the big asset managers at this stage, we have essentially them all. So really very pleased with that. And now we sit back -- I think you're probably aware at this stage now, we have to wait until after all the statutory filings and stuff are done. So we won't even have an opportunity until late in the second quarter. But we won't -- [ F&G ] are not something we'll do every quarter. We'll come in an eye just as we see the prevailing trade wins being very effective. So I would have a reasonable expectation, we'll do more during the year. But as to exactly which quarter will fall into, we'll be very much market dependent.

And then maybe you could talk a little bit about MYGA sales. It seems like there's been a bit of a pivot towards the index products. Is that something you expect to continue to see given the interest rate environment is changing a little bit. Maybe just give us a little color there?

Yes. I'll be careful here because each entity, each company has maybe a slightly different view here, and I'll speak specifically about ours. We are seeing better relative returns elsewhere, meaning across the other of the core products. So look, we will -- we're still in the MYGA business. We will continue to write MYGA, but we'll be a little more selective about it. So we are entirely prepared to write less here and deploy that capital in other places. And that's right now like we are there are times -- even last year, there was quite, I think, a significant fluctuation between Q1 and Q2 with a quiet first quarter, a big second quarter and I think the rest of the year, we're kind of in between those bookends. But yes, to be even more specific, we continue to view the opportunities as being better in other products even as we head into early 2026 here as well.

It's Chris. The only thing I would add to what Conor said is I wouldn't call it a pivot. I think for 7 years now, our #1 priority has always been grow FIAs, right? Then we added RILA, PRT. And if the returns are there, MYGA, we reinsure the vast majority of our MYGA out. So if the returns and the demand for the reinsurers are there, we will certainly write it if they're more attractive places to put capital, we will do that. So it just happened to be that I think FABN, in particular, was more attractive from a return perspective than writing extra MYGA at the margin. Hopefully, that helps.

That's very good. I mean we have been seeing over the last few years a top 10 writer in all of these in FIA, in IUL in PRT and in MYGA. So we'll move up and down that scoreboard a little bit or that leaderboard a little bit as the opportunity shift.

[Operator Instructions] The next question is a follow-up from the line of Alex Scott with Barclays.

I wanted to ask you a bit about just sort of high-level view on valuation. I heard you on derisking some of the fixed income. I thought that was interesting. I think one of the things that maybe holds people back from giving you credit for the fee-based business you have is just the sheer magnitude of the net investment income that comes from your alternative investments and like the other parts of the non-fixed income portfolio. Is there anything you can do there to sort of use some of the tension there with shareholders, the way investors are viewing it? I mean is that something that you guys contemplate?

Yes, this is Chris. I'll start and just say from a valuation standpoint, we're trading at $0.62 of book value. So you tell me, like, historically, that is associated with companies with massively toxic liabilities, not a pristine fixed book of surrender charge-protected FIAs and nonsurrendable liabilities. So yes, it's extreme, the valuation difference right now. We tried to give a lot more disclosure this quarter around credit and specifically what's in the private credit portfolio. So hopefully, that helps, including refreshed stress test numbers. So yes, the stock is trading as though there are billions and billions of credit losses coming. It's pretty inexplicable to me, to be quite honest. I would say we have 2 other assets that are quite undervalued. One is our middle market -- cultural market life insurance business, which is a quite valuable asset. And then the other is on distribution, which we spent quite a bit of time on, which I think we have multiple avenues to monetize that business over time. So yes, I think it is extreme. I will defer to Conor on alternatives. It's 1 of the reasons we have split out the equity component because we were sort of capturing and defining alternatives as anything that showed up on a certain schedule. It's not the right way to think about it. The majority of that portfolio is investment grade and in most cases, in the vast majority of cases, investment-grade fixed income. But Conor, I'll defer to you if there's more you want to add to the NII discussion.

Yes, I'll say a couple of things. I mean, broadly speaking across the portfolio. I mean it's been pretty pristine. I heard others be very proud of their low double-digit impairment-related numbers over the last few years. And we're half of that. So I get why people have concerns, but in terms of what's in our portfolio and how well it's been performing. It has been very noteworthy for us. We did -- there's definitely an attempt. I mean I feel that there's kind of a lowest common denominator. We're viewed perhaps as a single business that's heavily spread rather than kind of component parts like life or own distribution, et cetera, as Chris alluded to. And that was why this was -- there was a significant attempt to help rectify that with this new disclosure around the fee versus spread because we wanted to demonstrate that we have actively made a very significant shift here. And we've talked about an expansion from -- I think in the disclosures, we talked about going from less than 5% to 15%, I would actually argue, it's probably closer to like 0% to 15% because if you did a full attribution of expenses and debt so that what was essentially the life business like 3 years ago, it would have been very small. So now that 15% of our earnings are coming from the fee business. And you can see that we have an expectation that, that will grow to 25% just organically without anything else over the next 3 years, over the 3 years of the plan cycle. So that's definitely a step in that direction. We're going to continue to talk about it, we'll increase our exposures and perhaps even related education around those businesses, the own distribution business, the life business as we go here. And hopefully, that will help. Obviously, we need the old portfolio I think the disclosure changes we'll make next quarter will help as well. But at the end of the day, obviously, we -- as Chris said, we have an expectation -- near-term expectation that we're not quite at that -- we're not going to get to that 10% quite yet. But obviously, that will help a lot. And again, absolutely, pristine set of liabilities. I mean there's nothing. It's a young, clean book of business. So there's really nothing to be concerned if there very well surrounded protected performing very much in line with our expectations. So we'll see.

Maybe a follow-up to that is when I think about the last couple of years, even the nonfixed income just being closer to 7% to hit the funding requirements for your growth, I think in both the last 2 years, things that happened, right? Like there was an equity raise one of the years. And then this year, there's the selling of legal entity, which is -- it's good you that tool this year for sure. But the private equity returns have to be 10% plus for you guys to be self-funding. Is that an incorrect takeaway from that -- how would you describe it?

I'm going to start with thank you. I'm actually really glad you asked the question that way. No. So you're right. I mean the -- you tell me, but I have a sense that the equity raise perhaps raised concerns that we either needed to continue to rely on FNF or the equity markets who have the capital to write the business. And that's not the case. And we've done everything we can to allay those fears in the quarter since then. And I will reiterate today that we are not -- we are capital independent. We have the capital we need to continue to grow AUM continue to write business, et cetera. So I mean, at this stage, the book is essentially throwing off all of the capital that we would need to write all the business that we would want to write. So that is not the case. And I would also suggest to that, yes, I mean, we would like on average, over the long term, we expect these returns if they are delayed in coming. We have been measured in our expectations through the -- even in our plan cycle as well. So in a scenario like -- if the scenario is that it remains it's more of a 7-ish range, we're absolutely fine. We might ride at the lower end of our sales target volumes. But again, I think our sales volumes are going to be tied more to market opportunity and the best uses of capital. So I do not feel that capital is a constraint sitting here with my CFO hat on, I think the constraint a little bit is just what will the earnings opportunity be in the marketplace, and therefore, we'll decide how much we want to write and where we want to put them. But absolutely, from a capital point of view, we are capital self-sufficient, capital independent. We're all good.

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

Great. Thanks again, everyone, for joining the call this morning. We delivered a strong finish to an outstanding year and continue to execute on our strategy toward a more fee-based, higher-margin and less capital-intensive business model. Looking ahead to 2026, we remain focused on continuing to grow our core business and delivering long-term shareholder value. We appreciate your interest in F&G and look forward to updating you on our first quarter earnings call.

Thank you for attending today's presentation. The conference call has concluded. You may now disconnect.