F&G Annuities Life Stock

All right. We will go ahead and get started here. So I've got F&G Annuities for you all. And first, I'd like to thank Conor Murphy, CEO and President; Mike Bailey, CFO; and Leena...

Punjabi.

Punjabi. My apologies. CIO. So we've got the whole crew here. It should be a good session. I wanted to kick it off with more of a broad question about the strategy. So starting off with the big picture. You've laid out intentions to align the business model to be less capital intensive and more fee-based over time. Can you frame where you are in that transition today and some of the things that you're leaning into to further the shift?

Yes. Absolutely. Look -- and first of all, just thank you for having us. Thank you for the support.

Yes. So while F&G has been around for a long time, F&G been around since the 1950s, in many respects, the F&G that exists today had about an 8- or 9-year journey. In that time, we've grown very significantly from being predominantly a fixed indexed annuity distributed through independent distribution to being much more multifaceted across life and annuities. But I would argue that we were -- yes, we were largely a spread business. We hadn't evolved to where we were doing segment reporting. But this year-end, we did at least take a step in that direction by highlighting that, for example, back in 2022, we were virtually all spread.

By 2025, 15% of our earnings had come from fee businesses on the life side, on the reinsurance side and on our own distribution ownership business. And just by virtue of the 3-year plan, 2025 by 2028, we expect it to be at 25%, which I think is very achievable. Obviously, the other levers where you can make that number bigger or smaller as you see fit. So at the same time, it's been a pretty fast growing over the last handful of years, we've gone from like $25 billion of gross AUM to $75 billion and $55 billion of that retained. So yes, so it's been fast growth. It's been an AUM focus with an ROA expansion story that we largely achieved and an ROE story that's continuing to evolve.

Got it. Okay. Very helpful. Next one on competition. Can you talk about the competitive environment a bit and specifically for some of the spread products, how do you balance the discipline versus profitable growth? And what are the things we should be focused on?

So it differs at the moment by product to some extent, by distribution opportunity as well. So just maybe running through them. The FIA space, I would argue, remains very healthy. We had a particularly strong first half of the year. We were up about 4%. I think the industry was down 5%. But I would say that broadly speaking, it's an area of the market that has done well pretty consistently. And perhaps in any individual quarter, you might see a bit of a change in the tables about how somebody or even over the course of the year, how it may have moved around. But we just had this conversation with the Board actually, and we were looking back over 5 years, 70% of the business is written by 10 companies, and it's basically everybody is -- it all shakes out. Everybody has basically done the same over the last 5 years.

I would say everybody is up 15% to 20%. The -- it's a little tight. I would say that 2025 was a little less profitable than 2024. I would say '26 so far has been somewhere in the middle.

Switching over to RILAs, we were newer to the buffered annuity space. For us, it's been a great growth but off a small base. So we're very, very happy with everything in that space right now. In fact, we've written as much RILA already this year that we wrote all of last year. So that's -- but off admittedly off a smaller base. So that's been pretty good.

Switching over -- well, maybe staying within on the MYGA space, we have deemphasized that pretty significantly for us. And that's just been a capital allocation return trade for us. We -- it ebbs and flows. Second quarter of last year, we wrote a lot because we had -- it was a great spread opportunity and a great reinsurance opportunity. We reinsured 90% of our MYGAs. But at the moment, we're seeing better opportunities elsewhere. And in fact, as you know, we did a probably an outsized level of buybacks for our company in the second quarter, and it was capital that we would -- that we didn't use on MYGAs that we used on the buybacks. So we see the MYGA space as remaining very competitive. So we're just not seeing the returns there to write very much of it at the moment. We're still writing some. We're still in the space, and we'll move that. We'll ratchet that up and down as the opportunities arise.

On the life side, still seeing a lot of attractiveness with the IUL space. Again, a lot of how we distribute through the independent distribution organizations, we're really focused on middle America and multicultural America. So that's been strong. I would -- we're the #6 -- so we're #6 in FIA, #6 in IUL, but that's on premium dollars. We're actually #3 on policies. So we're selling on average smaller face amount policies, probably a little under $250,000. So that's maybe $1,200 to $1,500 a year in annual premium. We're seeing smaller dollars from a premium point of view. So Middle America is less able to afford a policy in 2026 than they could in 2025. So that's interesting. So similar policy count, but dollars are down a little bit.

On the pension side, the PRT space is interesting. It tends -- you tend to see less in the first half of the year. You see more in the third quarter, more again in the fourth. And we wrote $500 million or $600 million in the first half of the year, which was probably about what we thought we would do. I'd say we kind of got our fair share. We end up writing about 1 in every 4 or 5 of the opportunities we bid on. But that was pretty modest, maybe from an overall industry. I think we see some of the bigger carriers coming down market a little bit. We don't participate in the above $1 billion space. We're more in the $100 million to $600 million, $700 million. So certainly, some of that competitiveness, I would say we've seen more -- we've seen some of the big mutuals come back to that space that we haven't seen for a while. Good space, but yes, definitely increased competition there. We'll see how the second half of the year plays out.

These pension plans are much more well funded than they have been previously as well. So it might be quite as robust as it's been in the last couple of years. And that's -- it's core for us, but we also -- we're not trying to grow that the way that we are. On life and FIA, we'd like to write at least as much as we did in the equivalent quarter of the prior year. On PRT, we're trying to write roughly the same, call it, $1 billion, $1.5 billion a year given the size of our balance sheet.

And then the last piece, just FABN type stuff that was very good late last year and the beginning of '26, just private credit concerns and other things have capped that out. So we've stayed on the sidelines there a little bit.

Makes sense. Next topic, we've seen a couple of your larger competitors that have merged your prior firm even. And so I wanted to ask about that and just how important is operational scale in this industry? Do you all feel like you're positioned well to compete just with the backdrop of some of the peers becoming much more consolidated.

All right. Maybe I'll go first, but then we'll bring in Mike in here as well. It's very important, but I think it's not just about scale. So we are very much in a relationship business. And for us, too, because so much of our business is in the independent distribution space, those are not contractual relationships. They might have been decades ago, but they're really an earned relationship that your -- how well you show up for your -- both of your clients, both the, call it, the advisory client and the consumer client is really, really important. You clearly, from a, call it, a pure operational service perspective, we're very focused on that.

But also remember, when the FIA and IUL space, those are policies that get repriced every year. So we talk about being in the spread margin, but I would -- you heard me say people really in the spread maintenance business. And that's a bouncing act. You've got to do the right thing in terms of the company and the invest -- sorry, the company, the adviser and the shareholder. So I think we showed up very well there, and we focus very hard on that. Lots of these companies have a choice -- they all have a choice who they do business with. Everybody does business with multiple carriers. I don't think anybody has a monopoly, but we have to manage that pretty carefully. At the same time, we have -- we've grown very quickly.

So we did look to improve our expense base from a ratio perspective. So we've gone from 60 basis points at the beginning of '25. We have a target of getting down to 45 basis points as an expense ratio by the end of next year. We went 60 to 50 last year. We were at 47 in the middle of the year. So I would say that's ahead of plan. It won't necessarily keep going quite so consistently, but we will get there. And I think that's helpful from all sorts of reasons, including the ROA side. So I think for us, it's about doing your business right well, spending your dollars well because the competitiveness -- don't get me wrong, the competitiveness is tough, and you have to have that lever as well. It would be hard without it.

So you're balancing the, call it, the investing opportunity with the expense part of it and then just being able to maintain that core spread, I think, is really important. But broadly in the industry, obviously, we've got something very big happening with Equitable and Corebridge, but maybe not a lot outside of that.

I'll just add. I mean, I think I'll echo some of Conor's comments. I think that it's a competitive space, and so efficiency is critically important. Some -- my former employer included. There -- and I say this fully respectfully of both sides. They've decided to look for those efficiencies in the form of scale in terms of an acquisition. And I'm sure they will deliver on that. For us, we're a smaller and more nimble organization. And as such, we have the ability to execute on efficiency initiatives and automation initiatives at a rapid pace and in an efficient manner. So I think that there's -- those are just kind of given the position of 2 Corebridge and Equitable, those larger firms, they took a particular approach. We took a particular approach that we take a particular approach, which we feel confident in. I guess it's a different way of saying there are different ways to achieve that operating efficiency.

And I think just to underscore one thing that Mike said, we are a great sized company, right? So we're big enough to matter. We're -- as I mentioned, top 6 in FIA, IUL, PRT. I think we're the only top 10 FIA writer that doesn't own or isn't owned by an asset manager. We sort of joke and tell we're all refugees from bigger companies. So it feels great because we can be very reactive. It's not cumbersome for us to move quickly in the marketplace. And I think that's important as well, right? Everything happens so quickly in terms of just -- I mean, half the annuity products sold out there are replacement products, too. So you just -- you've got to be in lockstep with everybody else. Having said that, if you go out and do something incredibly unique, it gets copied very, very quickly. So good balancing act.

Yes. Okay. Next topic was on the ROA. If I rewind back to the Investor Day you guys did some time ago, there's a medium-term range that was put out. I think it was 133 to 155, if I'm not mistaken. Can you talk a bit about how you're tracking? I think you made some comments earlier on this as well. But -- what are the different things that are sort of moving the ROA around? How do you think it's tracking relative to that? And do you have any kind of update to that range?

So I'll team up here a little bit. Going back to -- that was from our Investor Day metrics a few years ago and ROA expansion that was partly coming from the investment side, partly coming from the scale side. We've talked a little bit about -- and definitely ROA, ROE, AUM, I think, were the key metrics from that time. I would argue AUM maintains a very key metric, both gross and net. On the ROA, we talked about it being a little more corridor. We're probably closer to that 120 range at the moment. I think we've been 119 over the last trailing 12 months.

One of the elements that had contributed on the positive side, but may not necessarily stay at the high is just the level of surrenders in the industry which is an important one to call out because we're agnostic about surrenders. We're just as happy to keep the business on the books. We wrote -- again, back to being able to maintain the spread. And if it -- as happens, if the business is surrendered, we can take that capital and reinvest it on a very similar basis. But it's hard to imagine the level of surrenders and therefore, the level of surrender fee income will stay this hard for very long. It may for several quarters. I'm not sure it will for several years, but we'll see. Obviously, it will be an interesting week to see where rates go on.

Prepayments, we probably have seen those we would rather not have because they talk about make-whole provisions, but they're seldom make-whole, they're partial. Those have really dissipated. So that's helpful. We're seeing a very low level of prepayments. You always have a little bit, but we're seeing a low level of prepayments. I think that's a good thing. Scale will continue to be a positive thing. The interesting thing is that the investment opportunities remain, but you really have to look at everything on a capital-adjusted basis. And that, I think, is a constant -- I mean, everything. It seems like there's an awful lot of winds around that as well. So with that, let me just invite Leena into this piece.

Yes. No, Conor, you covered it really well. We've made a lot of progress on the investment portfolio to add margin in the last 3 years. I would say some of it was taken back by the prepayments that Conor referred to because those were spready CLOs that we had acquired back when spreads were pretty high in 2018, specifically. And so as those paid off, we did earn quite a bit of prepayment income, but those have slowed down. So now our efforts to add margin in the portfolio should be more pronounced going forward.

Got it. So one of the other things you've referenced is the focus on ROE as well. And I think things have maybe evolved too since last we had this Investor Day. So I appreciate that maybe ROA is not the only way to look at it, right? It's ROE and you're talking about these fee-based businesses. So are there levers to ROE that go beyond just what we're seeing in the ROA? And what are those?

Well, I think a lot of it will -- so at the core of the shift to being more capital-light, more fee-based is the reinsurance opportunity. So at this stage, we reinsure about 90% of the MYGAs and about 50% of the FIAs. Now within the FIA space, if I -- roughly, we do about as much income as accumulation. On the income side, we have very noteworthy reinsurance partners. We just added a large one in July. On the accumulation side, we have a side relatively -- well, it's about a year old now sidecar with Blackstone. So those, I think, are opportunities -- real expansion opportunities for us as well. So we -- it's relatively new that we've gotten to this, call it, 50% level. There's no limitation on that. I think there's every likelihood we will reinsure more. It's a nice diversifier to Blackstone.

So the Blackstone IMA applies to the retained assets. But the reinsured assets back to the point of being the only one of the top 10 FIA writers that isn't owned by their own asset management firm. The others -- there are companies who want to reinsure that business with us for their own reasons, and that works very well. So the beauty about this is when you write and retain business, I think everybody probably knows this, you've got a pretty high capital charge on the investment side and an annual charge on the capital side, a onetime charge on the insurance side. When you're reinsuring it, you're getting the capital charge refunded. So you just have the insurance charge for the first year. So after year 1, you have an income stream, the fees from the reinsurance with no capital against it. So that's a great piece of ROE expansion.

So an ROE, just to frame it for folks, we're at about 11% to 12% right now with a target of 13% to 14% that we are very focused on, and there should -- we should be able to continue to grow that. So that's a big part of it. And then just to kind of round that out, we don't reinsure the PRT business, for example, and we're up to -- we're almost at $9 billion in assets there. We don't reinsure the life business nor indeed the RILA it isn't big enough. But there are lots of people in the industry who are exploring RILA and PRT reinsurance as well. So we'll -- we watch that kind of interestingly and see what might come with that.

Got it. Okay. That's all very helpful. I'm going to jump around a little bit. I'm going to come back to some of the growth items and questions on the products. But I wanted to go to Leena and ask on private credit. There's a ton of investor focus on this still, as you can imagine. Can you talk just about the importance of it in the new money that you're putting to work and why it's an attractive asset class for F&G?

Yes, absolutely. So just to set the stage, private credit to us is anything that is illiquid. But for the purpose of this discussion, I'll just focus on middle market lending and asset-backed lending. And within those buckets, we think about it in 3 categories. The first one being sort of asset classes that have -- insurance companies have been doing for a long time, like middle market lending. They've been on insurance balance sheet for a long time. And then the middle bucket is asset classes that have been on institutional balance sheets for a long time. So for example, the banking channel, but are new to insurance balance sheet. So like a lot of the collateral that we invest in through asset-backed lending is new to insurance balance sheets.

And then there's a third bucket, which is just new, right? Like I mean, it's not been invested in before, things like buy now, pay later loans. And the reason I break it out this way is that we invest in the first and second bucket, but we stay away from the last bucket because for the first 2 buckets, there is real observable history and data that you can look at and see how those assets have performed during downturns, and you can see what the downside risk is and what you would want to get paid for that. On the third -- in the third bucket, you don't get to do that, so we stay away from it. So I just want to make that distinction.

And then we find it very attractive. So when you diversify your book between public and private assets, you're by design, diversifying across issuers, and so you're taking less idiosyncratic risk. Now yes, there is more complexity with some of these private assets because they are structured. But as long as you have the infrastructure, to understand that complexity and price it, which we do with our asset manager, Blackstone, they manage over $1 trillion of assets. And that entire ecosystem is built to tackle this complexity, understand it, take advantage of it and earn a premium as a result of it. So both we like the complexity premium. We like the illiquidity premium. We do a lot of analysis on the illiquidity side to make sure that even in a stress scenario, we have ample liquidity in our public investment-grade book to meet our liabilities. And so very comfortable with the illiquidity risk we are taking and like to earn the premium over there. So it's important to our book. And with Blackstone as our partner, we do it in a very sensible way in a conservative way.

And then if I may, some of the -- these are not small companies.

Yes. So...

I think that's important.

That's a good point, Conor. With the first quarter earnings disclosures, we have a quarterly investor presentation that we also put out. And with the first quarter one, we added some slides on private credit, basically middle market lending and asset-backed funding and added more disclosures to provide more transparency and more granularity as to what that portfolio is. So if you haven't looked at it, look at it and to Conor's point, within the middle market lending book, which is what most people are concerned about, the vast majority of it is investment grade at 91%. There's only $0.5 billion of it, which is below investment grade. Our experience so far has been really good. We've had more upgrades, pretty much 0 downgrades. Nonaccruals are very minimal. And these are large companies that we are lending to. So with EBITDA around $200 million plus. So very happy with performance there.

Got it. Great. Before we leave investments, I did want to ask about just the regulatory environment. Are there any things we should have top of mind? And I'm just getting the question a lot because of some of the headlines about basketball teams getting sold and so forth. So maybe if you could just make a quick comment on the regulatory environment, how you see that unfolding.

Yes. Yes. I mean you really asked 2 questions that the regulatory environment is different from the basketball environment. But yes, on the regulatory front, there have been some changes, increased capital charges on CLOs, which we put out a disclosure that the impact to us is going to be approximately 10 points of RBC and with more management actions, we hope to drive it down even more, but very manageable even with the 10 points. And there are more sort of initiatives underway, like they're looking at residential mortgage loans and [ RSA ] assets, et cetera. But it doesn't impact us as much on the RSA side because it's only -- they're looking at it from what I understand, only where you're hedging spread risk, credit spread risk. We don't do that. We are more doing it for interest rate risk. So nothing over there.

And then on the RML side, we are looking at RMLs that are more commercial in nature, so similar to CMLs. And that could increase capital charges on the margin for residential mortgage loans. We do have a meaningful allocation there, but it's going to be minor because CMLs are also pretty attractive on a capital-adjusted basis and with RMLs yielding more than CMLs, they are still attractive on a capital-adjusted basis. So on the margin, asset allocation will change as the capital adjusted yields change, the optimizer picks assets differently, but not meaningful or not something we are concerned about.

And then on the basketball environment, I guess you're referring to the whole Guggenheim, Mark Walter, I mean, not to name names. But I just want to clarify that we don't have any asset manager ownership. So Blackstone does not own any part of F&G. So there is 0 affiliation over there. There is robust governance around our asset management, the F&G investment team and risk team set the strategy as well as the risk limits within which Blackstone manager manages the assets. There is a lot of oversight and full transparency around the asset management.

And I just want to go back for a second. The CLO is an interesting example, right? So why did we have CLOs in our portfolio? It's a really good -- it's a really good asset class as an alternative to cash. And when the changes came during the year, they were lower for anything above BBB and starting at BBB and below it got higher. We have a lot of BBB. So that's where the 10 basis points came from. But it made a lot of sense for us. It was a very good asset class for us. So you're also dealing with -- they're great investments. They're fully liquid. There are lots of folks within and external from the insurance space, like the idea of trading out of them and taking off doesn't make a lot of sense because you use them to price your book, et cetera. So we'll navigate that 10 points doesn't really matter to us. But it was an intentional class.

And some of it -- when the NAIC sit down with the Academy of Actuaries and work things out, generally good things happen. Some overspill from that, but maybe was maybe a little -- I don't know, just when the actuaries are involved, I'm looking at Mike, that generally in my head, this will be a good thing. But when is right. I mean, at every stage, even heading into next year's planning, you're looking at a capital adjusted and trying to anticipate where the shifts will be a little bit because competitiveness and pricing is tight and investing -- it's no longer -- and we're limited as to where you can have certain asset classes, obviously, like everybody would be. So when there's a higher capital charge associated, you really have to take that into consideration as well.

Okay. Jumping around a bit here, but I wanted to touch on Peak Altitude. I know you guys are exploring different alternatives for that business potentially -- can you take us through what that could look like? And how do you approach maximizing shareholder value in this?

Okay. That's fair bit to that. So really quickly, Peak Altitude is -- over the last number of years, we've invested in some of our independent distribution partners or we now refer to as own distribution. We've invested about $700 million in 4 entities. We own them at different levels of ownership. We've got 100%, 70%, 49% and 40%. But for the 49% and 40%, a clear path to majority, and it generates about $80 million to $85 million of EBITDA. So we love that business. And what we would like to do ideally, and we'll see how this plays out. But I think the example we've cited is having a partner who would invest alongside us. We would rather own half as much of an entity, twice as big, if you will, just to be simplistic. It has no debt of its own. So someone who would be able to continue to invest alongside us, take on some debt perhaps if they wanted to do that.

Those entities, the opportunity to bring them to larger ownership and they themselves are rolling up entities underneath. So it's not about Peak going from 4 to 5 to 6 to 7. It's really those 4 continuing to grow. There are other structures. We have distribution partners who would buy the business, I think, tomorrow, but we would like to continue to share in the upside. Hence, that sort of idealistic world of 51-49 has some advantages for Mike on the accounting side because we sell about 30% of our life business and 10% of our annuity business through those entities. So some of that gets consolidated away. 49% would clear up. But we're right in the middle of it. If other structures come along that make more economic sense, we'll weigh that up, which is sort of important, and you know this as well as I do.

From a valuation perspective, I can sit here and tell you all the reasons we're a great company. But I think from a stock perspective, I think perhaps the whole industry has is perhaps underperforming, but certainly put us square in that category as well. So roughly speaking, we're trading at about $3 billion. We have a book value of $6-ish billion, and we can debate elements of it. But I think similarly, from our perspective, certainly, if we look at our segments and apply the average multiples that others in the industry would have, I think you would -- we would have a number back in that $6 billion range. If we look at our internal cash flow trend testing and the present value of the distributable earnings across the blocks of business, we get to the same, call it, $6 billion type number. So part of it is just how do we unlock and bring a tangibility to some of that valuation. And Peak is part of it. It's logical to think that if we turn some of that into cash, it's hard to trade cash at $0.50 on the dollar. Maybe not impossible, we'll find out. But that seems to be a good step for us.

Yes. No, that makes sense. I wanted to circle back on sales. FIAs is a place where you guys sound pretty optimistic on the market. Can you talk a bit about that and some of the things you're doing from a distribution standpoint to drive sales?

Yes. So we have -- that's been -- we've had a good start to the year, and that momentum is continuing. So we feel good. I think it's important, pricing has remained, I think, fairly rational. So I should be slightly careful. My crystal ball here is a couple of months, right? I've got a pretty good sense of the next couple of months. It's hard for me to go much beyond that. But it is -- we talk about having core retail products. It's probably the most core because it drives a big part of our stuff. So we continue to feel very good there. But as I mentioned maybe at the outset, it's probably a little tighter in the couple of dozen financial institutions and broker-dealer spaces that we play in.

So that -- yes, that feels like it will hold up -- and I think we touched on some of it. IUL feels like it will as well. PRT remains to be seen. I think the level of -- so RILA remains very robust for everybody. I think I'm sure the big players are jockeying for their own individual relative share. And then we'll see some of the noise in the industry at the moment, if I can go there carefully, will probably create some opportunity. Some folks will be able to sell less and some will pick up on that. I'm not sure it will move the dial notably over the long-term. Back to my comment at the beginning about how top 10 writers write about 70% of this business on average over a longer period anyway. So yes, we feel really good. We feel we're in a good capital position for it. We like the alternative portfolio to do a little better, I'll be honest. I mean that would give us even more capital flexibility, but we'll get there. We have an expectation we'll get there. Did I answer your?

Yes. No, you did. Maybe I want to follow up just on the point you mentioned on disruption in the market. And obviously, there's a big player being acquired. There's a couple of companies that are merging. So it's not any one specifically even you got to comment on, but there's things moving around. I mean, is that -- are you seeing meaningful opportunities? Like are there opportunities to get shelf space or things like that as people look to develop?

So specifically -- so yes. But specifically for us, the one being acquired, I think most of us probably sit here and we hope it closes the industry. Yes, we're all waiting for that. Interestingly, the merger, the Corebridge and Equitable merger doesn't really impact us too much. We don't -- even though they're very -- and we'll be an even bigger player in the space. We don't actually trip over each other too much. So I don't see that as being very meaningful for us. I think -- yes, I mean, if a -- well, I'll be the perspective that a Delaware Life may lose a couple of distribution partners, a couple have said that they are pausing whether it's concerns around Delaware Life or the regulatory or the rating agency perspective on it. Sure, in the near-term, might that make a little bit of a difference? Yes. But I don't -- I think we can write -- honestly, for us, it's a risk-adjusted capital balance.

We can write -- I wouldn't suggest we can write as much IUL or FIA as we want. But at margins we like, we can write plenty. And I don't feel restrained or limited that. And part of that, too, is we're not -- we're not in that very wealthy segment of the population. There's a lot of need in Middle America and multicultural America for IUL and FIA. And that's why RILA is good for us as well. We're not competing with the big players. We're selling a lot people who are buying their first annuity product. That's the beauty of it. It's a great product for that. So we feel pretty partially or quite notably insulated from a lot of that, which is helpful.

Helpful. Look, I wanted to come back to capital management. I know you commented a little bit about it already. You've potentially got flexibility coming in from peak. You mentioned the valuation where it's sitting and makes it fairly attractive. You've also been shifting towards more flow reinsurance and reinsurance in general. So all of that could allow you to ramp it up if you want it is my guess. But what does that look like? How do you decide on the trade-offs between taking advantage of cheap stock versus the long-term growth strategy and so forth?

So I'll separate a little bit, and I'll go deeper into anything that's helpful for you. So in terms of what I would describe as the daily capital match, right? So the in-force produces a lot of capital, which, for the most part, we're using to service debt, pay what is a very healthy dividend relative to the stock price and then continue to write about $12 billion to $13 billion of business a year. Now we did buybacks to some extent this year, and that's always a tool available to us. And I think from a -- I am both optimistic and pessimistic in capital planning, optimistic because of how everything is progressing. I have to be slightly careful of the old portfolio yielding, call it, 7% instead of 12% on $4 billion. That's a couple of hundred billion a year, and we're 3.5 years into subdued returns. So going to have to have a little bit of a lens as to if that continues. So obviously, the old portfolio -- and our longer-term return has been closer to 10%. We have expectations that, that will come through.

But that's a lot of capital or we're waiting for a lot of capital, depending on your perspective on that. I think the piece that gets interesting, though, is there's a lot of capital in the in-force. We've grown from $25 billion to $55 billion retained. So Peak is an example of taking what you might, by comparison, argue is a piece of in-force and turning some of that into capital. So those are the tools that have been available to us, but that we haven't executed on. So that's part of the -- just weighing up what the courses of action are. So we have an awful lot of opportunity that we can avail of back to -- it's hard to -- we can -- trading at $0.50 when it's cash is different. So lots of leverage there. So we'll see where we go.

All right. Maybe we could leave it with your valuation where it is, what do you think is the biggest misconception? Like what would you urge people to consider about your stock that you think is not being perceived correct?

Well, everybody will have their own views. I would start with -- I think the fact that we're such a clean, simple book, that was a big part of what attracted me to the company. So this is a book of very simple FIA, IUL, PRT, 1 million American customers on the insurance side and 150,000 pensioners. It's really simple. There's no legacy VA, ULSG, long-term care disability or anything like that. Like it's -- for a company of our size, and with that type of gross AUM growth, like we don't have the outflows that -- I mean almost every major company has either an underappreciated business or a damaged business, right? We can all argue this, right? And we're in the underappreciated category. There's nothing damaged. So that's part of it.

And at the end of the day, the tangible cash that exists within that in-force, I think, is probably the thing that's the most underappreciated. Like I can sit here and tell how great the team or the culture or anything like that. All of that will help us grow very, very well from here. But in terms of the actual value, so you can talk about this way, we've gone from 25% to 55%. We could go right back down to 25% and do it all over again. There's nothing to prevent us from doing that. So I think that's where the real opportunities potentially lie. But we'll navigate all of that.

Great. Well, thanks very much for being with us today. Thanks, everybody, in the audience.

Thank you.

All right. We are going to get going with our next session. We have F&G up here on stage with me. I'll make introductions. Conor Murphy, directly next to me, CEO and President; Mike Bailey, CFO, who recently joined a few months ago -- 6 weeks ago; and then Leena Punjabi is the Chief Investment Officer.

But I'm going to start with Conor. You recently took over as CEO of the company at the end of June after you had joined F&G as CFO about 18 months ago. So I wanted to just start by having you discuss what your strategic priorities for F&G are moving forward.

All right. Well, thank you, and thanks for having us. Delighted to be here. I had the opportunity to be here with you last year with Chris Blunt, who recently shifted his role. I would say there's a fair amount of continuity to what we're doing. Growth and momentum are a couple of words that come to mind. We have been, I think, a little bit of an exceptional growth story for larger life and annuity companies. We've been able to grow the gross AUM every single quarter. The net AUM every quarter, but last quarter, and that was just because we had sold the Bermuda business. But otherwise, both of those continue to be metrics that we remain focused on. At the same time, we're an ROE expansion story and leveraging reinsurance is helping us do that.

At this stage in our evolution, and we can -- we've been around in one form or another since the 1950s. But really, I'm talking about the F&G that's existed over the last 8 years since FNF and Blackstone and others and Chris Blunt. But in that time, we had evolved. We hadn't quite gotten to the segment reporting part. But at year-end, we talked about the continued shift to being more capital-light, more fee-based and disclosed that the fee composition of earnings had grown from almost nothing a few years ago if you really fully allocated expenses to about 15% year-end '25 with an expectation just by virtue of the 3-year plan that we had done at year-end '25 that it would be at about 25% in 2028. I would view that as a pretty easy 25%, very achievable. And obviously, you can get there faster with more reinsurance or you optimize or you prioritize fee businesses over spread businesses. So that's been a continuation.

I think you've heard us in recent quarters too, a lot of the focus has been on core. Core retail has continued to be -- arguably every quarter is better than the equivalent quarter of the year before. So that's the IUL, the FIA. Those are meaningful businesses for us. RILA is newer for us. FIA and IUL were a top 10 business, probably top 6-ish. We were a later entrant to the RILA space, but that's been noteworthy for us as well. And then PRT, we've been in for about 5 years. That's also become a top -- we're about #7, #8, meaningful for us as well. So call that core institutional. At the same time, we've shied away from the MYGA space, FABN and opportunistic, more so late last year, early this year than perhaps currently. And then I'm sure we'll get into it. We have the owned distribution business with Peak as well.

So yes, a lot of continued momentum. I would say, underneath the covers, it's stability in revenue growth, stability in earnings in so far as you can. The surrenders are obviously a little bit out of our control. The alts portfolio is underperforming, I think, probably in line with pretty much everybody else, if you [indiscernible] that. Everything else is very predictable and hitting our marks. And the last part of it, I would say, is under the covers, too, the core spread, right? You have heard me say we're -- I would argue we're not really in the spread margin business. We're in the spread maintenance business. And that's part of the reason we really favor the FIA and IUL because we're repricing that every year. And that balancing act is a very thorough process within the company and one that we manage well. So pricing, new business, rate setting, rate renewals, all of that, all much of the same. So yes, we're adding good value every day.

I wanted to delve into the reinsurance strategy more, which is part of the way you're increasing fee income and being more capital light. I guess, can you review what products you're reinsuring versus retaining at this point on an ongoing basis? And then like on the reinsured business, just how the economics are actually flowing through for fee income to F&G?

Yes, sure. So it has and continues to be an expansion. So it began mostly with the MYGA products. Those we heavily reinsure up to about 90% with a couple of noteworthy partners that we disclosed that we can talk about. We have expanded the FIA reinsurance. And broadly speaking, we're targeting about 50% on FIA. About half of our FIA is income-based and about half of it is accumulation based. So on the income base, we've got a couple of noteworthy reinsurance partners there as well. So they all pay ceding commissions and cover some expenses. So when we talk about fee businesses, it's the Peak business, that's fee business. It's the flow reinsurance ceding commission business. And then you would bifurcate the life between fee and spread. So those are what we're talking about.

On the accum side of FIA, though, that's where we have the relatively new, it's about a year old now, sidecar with Blackstone. So that's predominantly the, call it, the capital provider there. Yes, but at this point in time, we haven't done more on the FIA. We could. We haven't done anything with PRT. There's obviously been some interest around that. We just haven't felt the need to necessarily, but we would consider that, nor have we done anything with IUL and the RILA is just not big enough yet to consider doing that. So yes, an expansion -- at the same time, even just going back over the last 5 years, I mean, 5 years ago, on a retained basis, so we've grown to $75 billion gross, $55 billion retained. 5 years ago, I think we were at $25 billion. And part of that expansion has come from selling a lot -- other than RILA, similar products, but in narrower scope, own distribution, if you will. So we now have a couple of dozen broker-dealer and financial institution partners as well. So there's an expansion there. So that's where we are. But I think I'd be inclined to think probably more reinsurance from here than less.

Another element that I think is noteworthy of the sizable players, there aren't many that aren't either owned by an asset manager or own an asset manager. I would argue, I think we're a reinsurer of choice for a lot of folks for whom they can then obviously take advantage of their own asset management partnerships or structures to avail of that, whereas we don't. It's a nice diversifier for Blackstone. Obviously, anything that we retain, that's almost all of that, Leena can get into it, the vast majority of that is managed with Blackstone. But anything, obviously, that we reinsure on a flow basis is someone else's, which I think works well for a lot of people as well.

And then on growth, how are you thinking about the growth of your total AUM before reinsurance compared to the growth you'd expect in your retained AUM after reinsurance given the reinsurance strategy you have now?

Yes. So the continued growth momentum, I mean, we probably grow 8-ish percent on a gross basis a year or, call it, $6-ish billion. I would expect that to grow pretty consistently every year -- every quarter and every year. The retained numbers, obviously, if you just take -- well, less of an emphasis on MYGA, but it might be half that. But I would still expect that $2 billion to $3 billion every year on that as well. I think that will likely -- I would expect that, that would continue. And then the ROAs will probably be a bit corridor for all sorts of different reasons. There's so many components to that, but you should see an ROE expansion by virtue of the impact of the flow business coming through. And then we've been focused on the scale optimization as well, bringing down the expense ratio, et cetera. And I think that will be meaningful, too.

Okay. And then Peak Altitude. So you announced a few months ago, you were going to explore strategic alternatives. Chris Blunt is still leading that business. I guess maybe just to start, what was the reason that led to the decision to explore strategic alternatives for this business?

So let me take a step back a little bit and talk about maybe why we were in the Peak Altitude business or how it came to be. While in many ways, we've been in this iteration of F&G might be considered sort of 8-ish years old, the relationships go back decades and more than that. And we have senior employees who've been with us for a quarter of a century or more, one of whom is the President of Peak, John Phelps, who works alongside Chris. The back story would be several of the entities where you have an own distribution business with several founders for whom perhaps the runway has gotten a little short and they're interested or maybe 2 out of 3 are interested in getting out and 1 would like to stay.

And where we get very interested is where we have a founding partner who wants to spend another 5, 7, 10 years in this business. And respectfully, I think their choice -- a choice for them would be to sell to private equity. And I think as a general rule, many of them felt they would rather work with a partner they've known for 25 years. And we were approached a number of times over the last half a dozen years or so to see whether we would take a stake in these entities. We've focused on predominantly 4 of them. Two of them, I would say, are life businesses, 2 are annuity businesses. We own them in various sizes. We have a 100% and a 49% on the life side, 70% and 40% on the annuity side. But importantly, the 49% and 40% have a path to majority.

Those entities collectively -- on that basis, they earn $85 million -- around $80 million, $85 million of EBITDA. But we've also funded -- so we put about $700 million in, but we've funded some of that through debt at the holding company. So Peak itself has no debt. For us, the growth opportunity for those entities, we view it as very significant for what's literally right in front of the face, increasing the investments higher to get bigger stakes in the 4, but they themselves are rolling up businesses underneath. And that's kind of -- that's a playbook that we know well. It's one that the FNF team fully knows well and makes a lot of sense. So it's not about adding other entities. It's about getting the most out of these entities. So from our perspective, yes, we've begun the process. And now it's hard to say for sure. I mean, the entities or the enterprise who show up with interest as we'll find out here in short order, in due course. We've talked about a -- we would certainly appreciate a structure where we could continue to participate in the upside. So something like where somebody might have a 51-49 split. I would rather own half of an entity that was twice as big and have someone partner with deep pockets. It wouldn't probably be typically be another insurance company, it might be just more of an investment entity, continue to invest, grow the EBITDA, grow our share of that, grow with them.

Similarly, we have other distribution partners who might be interested, but they probably wouldn't want us to remain as a minority. And again, I'd rather stay as -- I'd like to continue to participate in the upside of this. And about 30% of our life sales come from these entities, about 10% of our annuity sales, which is noteworthy. So we know the businesses well. We like them. We've known them for a long time. So that's the expectation. Then perhaps the silver lining a little bit is some of those entities, the GAAP accounting isn't wonderful because of the ownership stakes that we have, 49% would just be cleaner. Pound for pound, you'd be reflecting the value ownership in the businesses. So that's all. But it's a balancing act. You have your regular distribution partners and you've got to balance everybody's needs here.

I guess maybe you talked about the path to 25% fee income, I believe. I guess, how does what you end up doing with Peak Altitude affect that? Because I assume if you are going to sell 51% of it, that's going to lower your fee income, but then you're also growing the reinsurance business.

And yes, but I would also expect to -- maybe that's why my preferred path would be to continue to retain roughly half interest, and we would continue to invest. So we might. I wouldn't want to necessarily take on more debt at F&G to do that, but I'd be more than willing to continue to reinvest. Like today, the dividends from Peak that we receive service the debt to some extent. I'd be more than happy to continue to just reinvest in that, have Peak bring on some debt grow that way and just participate in the upside as that. And so you get there in a different way. But you're right, I think the Life business, we're the #6 writer of IUL in terms of premium, but we're actually the #3 in terms of policy count. So we're continuing to see good growth there. So that's an expansion we would expect to continue.

And then like I said, the reinsurance, it's really up to us, okay, we could write more business, reinsure more heavily. I should acknowledge our partners' appetites can change. I mean that's one of the advantages of having the sidecar is it's what you're getting day in, day out. But I would balance that with we have so far had no shortage of noteworthy entities who want to continue to be reinsurance partners with. So yes, maybe more of that. It's a nice position to be in where you can pick and choose.

Maybe shifting to the retail annuity market and competitive conditions. Could you discuss your view of the competitive conditions currently in the market and also differentiate between MYGA, FIA, I guess, maybe mostly those, but you are a newer entrant in RILA, too. So if you want to touch on RILA, but -- and to what extent you've seen changes, I guess, in the environment competitively over the last year or so?

Okay. So it's pretty different in our space in each one. MYGA, almost since I joined, we have talked about calling MYGA -- differentiating between core and opportunistic. And MYGA has stayed very much to the opportunistic. To be clear, we are still in the MYGA space, but we're picking our spots. And in fact, second quarter of last year, we did write a fair amount of MYGA and that made a lot of sense for us at the time. But since then, I think we've now had 4 quarters in a row with a reduced level of MYGA. In the second quarter, for example, we looked at the marketplace and one of the decisions we made is we'll sell less MYGA and we did, for us, a reasonably large amount of buybacks. But that was almost like a straight capital trade. The capital for the buybacks was the capital we didn't spend on MYGA.

And MYGA is interesting, and everybody will give you their own view. From our perspective, I think a lot of the space is maybe the entities that are owned by an asset manager or the mutuals. There aren't too many large-ish or large public life and annuity entities. There are some, and we know them well. He's smiling because he just left one of them. So there's that. But we just -- relatively speaking, we haven't seen the returns to write as much. We're still writing them, but not as much. And obviously, then you've got what's the appetite for your flow partner because sometimes it's a decent MYGA with a great return on the ceding commission. Sometimes one or other, those numbers can go up or down and you play it out. But it's been a relative choice, right? And so I should be careful.

FIA for us -- yes, it has been competitive as well. But honestly, we've been able to write FIA at a consistent return. I would say in '25, it was probably a little tighter than '24. First half of '26 is probably somewhere in between. So is it competitive? Yes. And in any individual quarter or even over 12 months, if you looked at the top 10 writers, the ranking table can shift a lot within a year. But if you look over 5 years, Ryan, it's hardly shifted at all. It's the same 10 folks who've written 70% of the business, and that includes us as well. And I think we would sit here and go, yes, we've written 15% to 20% more in that time frame. I think everybody else when you narrow -- if you really leveled it all, I think we'd all be very similar.

Now we like that space very much. But the other thing for us, too, is I mentioned we do sell in a couple of dozen broker-dealer, financial institutions, but we sell an awful lot in the own distribution space. And it's a different space. Again, it's middle America, it's multicultural America. It's not as competitive. It's more of a relationship business there at the adviser level, at the firm level. So I think that probably dampens the impact of the competitiveness a little bit.

And then shifting to RILA, I personally like the RILA space a lot. I think it's a great first annuity product for a lot of people, certainly the first annuity product I bought. You know where I came from. Obviously, I spent a lot of my career at Brighthouse and familiar with the space. We were later to the party. I think there were probably more than -- maybe 25 players in the space by the time we come in. For us, it is still smaller compared -- it's not the others, as I mentioned, we're top 6-ish in PRT, IUL, FIA. RILA, we're probably -- we're in the teens, probably in the higher teens. Having said that, we've already written more RILA this year than all of last year, not huge numbers yet, but the momentum is wonderful, and we'll continue to focus on that. So I like the product very much. Yes, there's more competitiveness there. But remember, we're not -- we weren't a VA shop. Like one of the nice things about us is we don't have any legacy liabilities that are complicated, right? There's no VA, ULSG, the LTC disability, anything like that. So we're not trying to replace VA business with RILA business. We're just adding RILA to the portfolio. And again, for that middle America, multicultural America for whom they're maybe getting introduced to the product for the first time, I think there's a lot of appetite. So where we compete, I think will grow nicely. It will become -- it's absolutely core for us. It's just not that big yet, but it will get there, I think, probably easier than anything else.

A few different follow-ups on this. So one would just be on MYGA. Given that you reinsure 90% of it to partners, how do you actually -- is the amount of volumes of RILA that you write mostly contingent on the pricing of the reinsurance partners given that you don't retain much of it. So I guess, how do you actually go about that? Are you making the decision first and then you find the partners? Or you kind of -- is it the opposite? The partners tell you what the pricing is and then you decide if you want to write MYGA?

There are 2 parts to that. It is a hand in glove together, literally hand in hand. We know on an ongoing basis, what everybody's appetite, what the rates are, if you will, what the ceding commission. So it's a decision at every stage, knowing what the economic commitment from the other side is. That is part of it. But part of it with MYGA too is some of the places that we sell, you really -- you have to show up with some MYGA as well. I've heard another industry executive refer to it as the gateway drug, right? And I can kind of understand what that means, right? So there is a little bit of -- there are some places where if you're not -- if you're looking to sell FIA, you're selling some MYGA as well. And that's a bit of a balancing act as well.

Then on FIA, so I don't know how many years ago, but you used to almost solely sell through IMOs I think. You've been expanding into financial institutions and other distributors. Like where are you at? And you're also, I think, just talking that in some cases, IMOs are -- but yes, I guess just any context on how the mix of FIAs has evolved with distribution? And is it an ongoing priority to continue to diversify the distribution there?

It is, but the competition is tougher in the financial institutions part. So that's what you have to weigh up. The nice thing first is we're not selling a single FIA product. We have a number of products that -- some that cater more to the own distribution, some to the financial institutions and broker-dealers. And if you bifurcated it, I would say income is probably a little easier at the moment than accumulation and own distribution was a little easier than financial institutions. And having the diversification is helpful. Now that can shift on a dime, but that's probably Q2 2026 is what I would say.

Okay. Yes. And on PRT, so I think for really the whole industry, it's been a bit quieter so far, at least in the first half of the year, I guess, or at least for a lot of the companies. I guess why do you think that is? And then how does your pipeline look as we go forward?

Okay. So that's been interesting. For us, so we write about $1.5 billion to $2 billion a year at this stage, have done over the last couple of years. And on the core retail, like we're always trying to write maybe a little more than we have in the equivalent quarter of the prior year, assuming that the economic environment is there to do that, and there's some flexibility around that. With PRT, we're probably trying to write about the same. We're not really trying to write more PRT business. Given our ratings, the size of our balance sheet, that's probably about a decent amount for us. And we compete largely in the $100 million to $600 million, $700 million, $800 million. So we're not in the big, big league, the $1 billion plus where some of the large players are. I actually like the smaller, but it depends on the business. If it's a nice, clean, easy to operate piece of business, smaller is great. If it's complicated, it's almost not worth it.

So I would say over the last couple of years, we have -- you show up, you bid for this business. And we probably win about 1 in every 4 or 5 bids. In the first half of the year, like I think in Q1, we only saw 3 deals. We wrote one of them. I would say we saw on one -- on the other 2, I would say, a noteworthy name, pretty aggressive and a big name who came down to a lower level. So that's interesting. I think Q2 was also a bit quiet, not a lot of bids. We won our fair share. It was fine. So you see a modest Q1, Q2, you see more in Q3 and even more in Q4. Q3, it's probably a bit less than other Q3s. There's certainly some out there. I noticed more mutual presence. Some of the big mutuals who have been reasonably quiet in the space recently are showing up again. So that's interesting. That will make it -- that will just add to the competitiveness. So I think we'll get our fair share. It might end up being closer to $1 billion and $1.5 billion, something like that.

The nice thing for us, though, is because we're scaled at this stage, we have a number of -- a number of these deals are from big entities that parse them out in individual components. So we're at the stage now where we've maybe -- I can think of at least one large American company where we've done 4 deals with the same company. And we show up well from a, call it, an operational perspective. And again, you're looking after policyholders or pensioners. So we probably punch above our weight there. But occasionally, you'll lose in a tie because a very large, very highly rated entity will be picked ahead of you. So I love the business. I think it's great. It's predictable. I like the mortality level of it. It can bounce around a little bit. I did mention in the second quarter earnings call, we had a little bit of that. But overall, the book, if you look back and go, well, what were your expectations and how is it turning out? It's pretty easy. It's pretty predictable -- I shouldn't say easy. It's pretty predictable. You don't get a lot of surprises. The range of outcomes is pretty narrow, which is a good thing. So it's a comfortable business to write. Maybe that's a better way to say it.

And IUL, it's not discussed as much with your company, but I think it does have strategic importance. So can you talk a little bit about more on how you compete in that market? And how meaningful is it financially to the company?

Well, so it's interesting. You can see this even better than I can. But one of the nuances, if you will, of GAAP accounting is we throw numbers together where we have life premiums and annuity deposits, which makes a little sense, right? When you actually look under the cover, we have about 1 million customers, half of -- roughly in terms of the big businesses, 0.5 million of them are annuities and 0.5 million of them are life IUL. So we have as many -- actually slightly more life customers as we have annuity customers and the economics in terms of returns are comparable. In fact, they're probably better on the life side. So that's a big part of how we look at it. What is interesting in terms of this year -- so I think we're #6 in IUL in dollars, but #3 in policies, back to Middle America and multicultural America. I would say -- because I won't sit here and tell you everything is perfect. I would say our numbers there are down a little. It's not because we're writing fewer policies, it's because those policyholders can't afford the same average premium. So our average policy is about a little under $250,000. So you're talking premiums in the $1,250 to $1,500 range, but we're seeing a bit of a shift in just the affordability for those customers to buy very often the first life policy they buy. So I think we're seeing an economic impact on IUL, not a competitive impact, which is very different from what we just talked about on the FIA side, but it's an interesting one.

And maybe shifting more to profitability. So you laid out some targets towards the end of 2023. I think over the last 12 months, if we normalize for alts and some expense items, your ROA, I believe, is 119 basis points and your ROE, I think, is 11%, both over the trailing 12 months. How are you thinking about the progress towards the medium-term targets that you had laid out? And then what would be the key upside drivers you'd expect from here?

Yes. So it's interesting. So the metrics were laid out a few years ago, as you said, the AUM metric would very much still be intact. We're on a nice path to get to $100 billion here in a few years. So that's noteworthy. The ROA, I've said this over the last few quarters, I think we'll be somewhat corridor bound here. If you get into the components, we definitely benefited from some expansion on the investment portfolio, which Leena can get into. That's real, and that will remain. Surrenders have been higher. Now that's fine. I am agnostic on surrenders. Honestly, like I would like to keep the -- I can replace the business done broadly economic terms as I keep it, right, back to the whole spread maintenance thing. But it's hard to imagine that the level of surrenders will stay this high for several years. It might for several quarters. I don't know if it will for several years. That's okay. That's kind of a watch warning, but it will impact the ROA math.

Balancing that on the other side, we've had our shift in the expense scale. We've gone from an expense ratio of 60 basis points at year-end '24. We brought it down to 50 by year-end '25, and we're on a path to 45. We said we would get to 45 by the end of next year, but we got to 47 already this year. And it can move a little bit, but we're ahead of progress, I would say, on that. So I think that will be a bit more range bound and it's hard to predict exactly spreads and all of the other pieces that go with that.

The ROE, yes, I think the target is 14%. And I think, yes, we bounced around a little bit, we're sort of in that 11% to 12% range. So that is an expectation that you should hold us to task for that we do that. That's a very key focus of ours. I should probably acknowledge there was probably a multiple in those metrics as well that we haven't achieved, and that's moved around a little bit. That's obviously a lot harder to control. So yes, for me, I think that, yes, range bound ROA, expand the ROE, continue the growth momentum. We didn't have a capital-light or fee element. So I would add that. And yes, and underscoring all of that is keep the core retail momentum going, keep -- I mean, I have profitability margins to maintain. That's true, and we will do that. But also, we're capital self-sufficient. And I think that's important. That wasn't maybe a metric 3 years ago, but I think it's a very important one for everybody, probably one for all of us, everyone in this room, they want to know that we can do this. So that's important as well. So I think we have more metrics. They're just not quite the same.

Yes, I guess maybe to summarize it, it sounds like maybe the ROA is more range bound, but you still feel like you'll get ROE expansion from the shift towards more capital-light business.

Absolutely. Absolutely. Yes.

You just mentioned this, so maybe we'll go into capital generation. Just what is your view of organic capital generation for the company after you fund the retained business growth at this point?

Roughly speaking, we spend about $1 billion on writing this level of business, maybe a little less. The debt service is about $150 million. The dividends are about $150 million. I mean the crazy part when the stock gets low is you're comparing yourself with money market funds. I mean it's a heck of a yield. I wish it weren't so, but it is. So as I mentioned, we've made the decision in the second quarter to take some of that capital towards buybacks. I would put that in the opportunistic category as well. So for us, if we want to write a lot more -- and I'm not sure we would like with less MYGA, less opportunity maybe for FABN in the near term. PRT, we may end up writing less just circumstantially. So that gives us maybe arguably more flexibility to do meaningful more RILA, FIA, IUL, then we'd have to weigh up, okay, are we taking from something else? So 2 things. Are we taking for something else? Are you reinsuring more?

But I should also acknowledge, we're doing all of this with -- our alternative portfolio is about $4 billion. It's about 8% of our portfolio. And it's -- for the last 3.5 years, it's probably been yielding 7-ish compared with the long-term expectation of 12%. 5 points on $4 billion, that's $200 million, you're 3.5 years in. And I don't know -- I'm not sure -- those numbers add up as well. So obviously, all of that coming through or coming through, depending on which way you want to look at it, makes a very significant change to the capital. But I have to have a lens of -- but if that takes a while longer, then obviously, I want to keep -- we've got to keep the engine going as well. But that's kind of the unknown. And I have both an optimistic and a conservative lens on that in terms of managing the company.

Maybe Leena can get into this a little bit, but just -- everyone -- pretty much everyone has had somewhat below plan alts for the last few years. But I think you've also talked a little bit about some vintage considerations, too, for your portfolio. Can you touch on that a bit?

Yes. Yes. So like Conor said, the alts portfolio is about $4 billion, $3 billion is LPs and $1 billion -- a little over $1 billion is about residuals. And the structural thing that is impacting our performance is that our LP portfolio is very young. And the returns for a typical asset drawdown portfolio sort of emerge and pick up in the mid- to late stages. So we did analysis earlier this year. So we look back at how equity LPs had done historically. And if you think of the lifetime of an LP fund as 15 years and you break it down into 3, 5-year stages, so early stage, mid-stage and late stage. The way the returns emerge is in the past, first 5 years, it was around 6%. If you expand that to first 10 years, it was around 10%. And then if you extend that to the entire lifetime, 15 years, it was 15%. And so 85% of our portfolio is in the early to mid-stage, and that's really what is [indiscernible] down our returns. It's expected. And then to add to that, there is some macro impact as well as M&A activity has slowed down. So that impacts realizations. But it's really the structural piece that is impacting our performance. We don't own a lot of real estate. It's mostly in equity LPs. And our peers, on the other hand, do own a lot of real estate and real estate has been sort of under pressure for a while. So that's impacting their performance, but that's not what's impacting ours.

If I were to exclude alts, can you also talk about how the rest of the investment portfolio is performing, maybe both credit and returns?

Yes, absolutely. So the portfolio is very well diversified and aligned with our liability profile. About 97% of the retained fixed income portfolio is investment grade. It's done really well. So second quarter, our core fixed income yield was 4.91%, which was 14 basis points above the prior quarter and 8 basis points above the prior year. So the yield is emerging nicely. And then in terms of credit-related impairments, which would tell you how it's performed, the trailing 5 years, it's been 6 basis points, which is half of where the industry average is. So credit-related impairments, which sort of tell you performance has been really, really good for us.

But that's not an accident. I mean, Leena and the team have done a fair amount of weeding and revising the portfolio over the last several years.

Yes. So post-COVID, just given -- and even prior to that, retail real estate was under pressure. Post-COVID, office real estate was under pressure. We had the regional banking crisis. So banking was under pressure. And so through all of this, thankfully, for us, our real estate exposures were more liquid. We had more in CMBS versus CLOs. And so we were able to rotate out of where we thought there was true fundamental deterioration as a result of COVID, and that has really helped us in terms of performance. So we did about over $3 billion of repositionings over the last 5 years, which increased the portfolio quality, which has also meant that our impairments have been much better than the industry.

We've done a lot on the disclosures. We sat down in the early spring with our big credit investors and said, what would you want to see about our portfolio? A lot of it was details on middle market. We've added a whole host of disclosures with that. And I can honestly tell you every single thing they asked for, unless it was nonsensical and I can't even think of any of it was, we were like sure. There was nothing that I would have been uncomfortable or any of us would have been uncomfortable with disclosing, and we've done all of that. So I think that's helped a lot. Obviously, outside factors can raise you concerns. But certainly in terms of private credit or middle market lending or anything like that, we really tried to tackle everything head on. And Blackstone have been -- they've been a great partner for us.

We're almost out of time, but I just want to touch on one final thing I'm sure people are curious about, which is if you do sell part of the stake in the own distribution businesses, what would be your capital priorities as for the freed up capital?

Well, I have to be careful. Obviously, that's a Board decision. I expect -- I think it would be a nice balancing act. You would -- the 3 logical places you would consider, would you pay down a little bit of debt? Maybe. We don't have anything actually coming due for another 18 months or so? Or would you at least maybe align a piece of that? Maybe that's maybe the less attractive of the 3. What do you want to do from an invest -- what are the opportunities to invest the capital right up? And obviously, I expect the Board would weigh up the advantages of, call it, an off-cycle dividend type thing, which sort of makes sense for us. So we have all -- I mean, if I may, I know we're right at the end, but we have a valuable book that I'm not sure is being reflected in company, right? If you -- look, we're trading at half of book value. If you were going to do a sum of the part -- if you did a sum of the parts valuation from our organization or an intrinsic value of cash flows, I think you'd come up with numbers that are broadly close to that book value basis. So then the question is, well, okay, part of this is you can take something that is underappreciated today. If you turn it into cash, it's pretty hard to value it at $0.50 on the dollar when it's cash. So I mean, a lot of food for thought there, but that's part of the logic here.

Excellent. All right. Well, we're out of time. So we're going to wrap it up. But thanks, Conor, and then the F&G team.

Thank you.

Excellent.

Good morning, and welcome to F&G's Second Quarter 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 our new CEO and President, Connor Murphy; and Interim CFO, Mark Wiltse. We're also glad to welcome F&G's incoming CFO, Mike Bailey, who joined the company earlier this week and will listen in on today's call.

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 Conor Murphy.

Good morning, and thanks for joining today's call. I'm very honored to speak with you today on my first earnings call as Chief Executive Officer and President. Since joining the company in April of last year, I have served as CFO, ingraining myself in the financial elements of F&G and President, running the day-to-day insurance company and building relationships with our teams and distribution partners. What drew me to F&G was an appreciation for the business, both in terms of what has been written and the opportunity to expand our services to an increasingly larger customer base as well as the exceptional culture of the team.

I would also like to thank Chris Blunt for bringing me to the company and his partnership over the last year. I have a huge amount of respect for Chris and what he and the team have built here at F&G. I'm very excited to continue the momentum as we expand our retail and institutional franchises and accelerate our move toward a more fee-based, higher-margin and less capital-intensive business, a natural advantage of our position as one of the largest sellers of annuities and life insurance in the industry.

Now I would like to share some highlights of our second quarter results, which were largely in line with our expectations as well as details of our investment portfolio and provide an owned distribution update. Then I'll turn it over to Mark to cover our results in more detail. From a top line perspective, AUM before reinsurance increased to $74.7 billion at June 30, up 8% over the prior year. This includes retained assets under management of $55.9 billion. Retained AUM reflects positive asset flows, offset by the $1.8 billion in-force block ceded with the F&G Life Re sale in the first quarter and a $750 million funding agreement-backed note maturity in the second quarter.

Gross sales were $2.7 billion for the second quarter, comprised of $2 billion of core sales and $700 million of opportunistic sales. As F&G navigates the competitive landscape, we are focused on disciplined sales growth and capital allocation priorities between core and opportunistic sales to power our AUM growth.

Core retail sales of indexed annuities and indexed life reflect strong momentum at $1.8 billion for the second quarter. This is one of our strongest quarters on record for core retail sales and reflects continued momentum for F&G despite another quarter of contraction in industry FIA sales as compared to the prior year quarter.

Core institutional sales of pension risk transfer were $200 million for the second quarter, as expected, ahead of the seasonal increase in PRT sales typically seen in the second half of the year. Opportunistic sales were primarily comprised of $600 million of funding agreements as well as $100 million of multiyear guaranteed annuities, which we have deemphasized due to returns currently below our threshold. F&G's net sales were $1.5 billion in the second quarter. This reflects flow reinsurance in line with capital targets for fixed indexed annuities and multiyear guaranteed annuities. F&G's retained investment portfolio performed very well once again this quarter.

Our portfolio is high quality, with 97% of fixed maturities being investment grade. It is well matched to the liability profile and diversified across asset types. Our fixed income yield was 4.91% in the second quarter, an increase of 14 basis points over the first quarter of 2026 and 8 basis points over the second quarter of 2025.

Credit-related impairments have remained low and stable, averaging 6 basis points over the past 5 years and a modest 2 basis points in the first half of the year. Our alternative investments portfolio was $4 billion or approximately 8% of the total retained portfolio. This includes approximately $3 billion of limited partnerships and $1 billion of other equity interests. Many of these alternative investments are still in the earlier phases of their value creation cycle, so we are not yet fully realizing the long-term expected returns. During the second quarter, we saw our annualized return at approximately 5.9%, down from 8.3% in the first quarter of 2026.

Turning to our own distribution portfolio. As previously announced, Chris Blunt is continuing as a Director of F&G and CEO of Peak Altitude, a business that Chris has been building over time. With approximately $700 million deployed into this business and approximately $80 million in annual EBITDA in 2025, we believe the market is ascribing little to no value in our share price today for the value of Peak.

As a result, Chris has launched a formal process to explore strategic alternatives for Peak Altitude to capture its significant growth opportunities and unlock that intrinsic value for F&G shareholders. We believe that both F&G and subsidiary Peak Altitude have plenty of runway ahead to continue growing AUM, growing earnings and growing shareholder value.

F&G reported GAAP equity, excluding AOCI, of $6 billion at quarter end and has grown its book value per share, excluding AOCI, to $45.93, up 68% since the 2020 FNF acquisition. We believe that the components of our business, our new business platform, our profitable in-force block and our capital-light fee-based strategies represent a distinct and measurable source of value.

Taken together, we believe a sum of the parts framework reveals meaningful value that is not yet fully reflected in F&G's current market valuation, and we remain focused on closing that gap with strategic alternatives for Peak being an important part of this process.

Let me now turn the call over to Mark to provide further details on F&G's second quarter highlights.

Thank you, Conor. Starting with earnings. Overall, second quarter results were largely in line with our expectations and core spread remained consistent as the business maintained disciplined pricing. On a reported basis, adjusted net earnings were $85 million or $0.65 per share in the second quarter. Alternative investment income was $49 million or $0.38 per share, below management's current long-term expected return of 12%, but in line with our post-tax estimate of $51 million preannounced in early July.

Compared to the first quarter of 2026, adjusted net earnings decreased by $25 million. The after-tax impact of lower returns on alternative investments was $21 million. And the after-tax effect of the FG Life Re sale on March 1, 2026, reduced incremental earnings by $8 million in the second quarter as compared to the first quarter. These items were partially offset by consistent core spread, growing fees from accretive flow reinsurance and owned distribution margin and operating expense discipline.

Compared to the second quarter of 2025, adjusted net earnings decreased by $18 million. The after-tax effect of the FG Life Re sale reduced earnings by $12 million in the second quarter as compared to the prior year quarter. Product margin also reflects lower surrender charge fee income and higher other liability costs that include increased amortization expense as expected. These items were partially offset by higher returns on alternative investments, consistent core spread, steady fees from flow reinsurance and owned distribution margin and disciplined expense management.

Next, turning to our scale benefit. As AUM grows and we continue to manage expenses, we are benefiting from increased scale. Our ratio of operating expense to AUM for reinsurance decreased to 47 basis points at the end of the second quarter as compared to 48 basis points in the first quarter of 2026. We have reduced the operating expense ratio from 60 basis points at the end of 2024 to 50 basis points at year-end 2025 and expect further improvement to approximately 45 basis points by year-end 2027 or a cumulative 15 basis point or 25% improvement over the 3-year period.

Now regarding our returns. As reported, adjusted ROE, excluding AOCI, was 8% for the second quarter. And also as reported, adjusted ROA was 68 basis points for the second quarter. Taking into consideration management's long-term expected return for alternative investments would have resulted in 3.1 percentage points of additional ROE and 35 basis points of additional ROA for the quarter.

Turning to our strong capital position. We remain committed to our long-term target of approximately 25% debt to capitalization, excluding AOCI and 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 debt outstanding. We expect to maintain our estimated company action level risk-based capital or RBC ratio above our 400% target.

We view the NAIC's adoption of higher capital charges on CLOs invested in both broadly syndicated loans and middle market loans is very manageable. After properly adjusting for funds withheld reinsurance assets, the estimated effect of the new capital charges for our CLO portfolio at June 30 would translate to a decrease in RBC of approximately 10 points.

Note, this is before any management action to minimize the capital impact ahead of year-end. Importantly, F&G maintains strong capitalization and financial flexibility. We conservatively manage to the most stringent capital requirements of our regulators and 4 rating agencies. We also have multiple reliable sources of capital supporting our business.

Our in-force generates approximately $1 billion from the existing book of business. We expect even stronger capital generation in the future as we rapidly move toward a more fee-based, higher-margin and less capital-intensive business model. Our reinsurance sidecar provides on-demand third-party capital that we can access without diluting shareholders.

Our strategic flow reinsurance partnerships add another layer of flexibility, allowing us to adjust retained sales levels and support cash from operations as we grow. We have added yet another noteworthy flow reinsurance partner in July as we continue to be a partner of choice for the industry. Our statutory excess capital provides additional capital strength in line with our ratings. And as the balance sheet continues to delever, our available debt capacity will only grow over time.

For the first 6 months, our capital self-funded the following: $75 million of common and preferred dividends paid, $80 million of holding company interest expense and $120 million in opportunistic share repurchases as we have bought back 4.5 million shares at an average price of $26.44. We view repurchases as a tool at our disposal that we weigh up against other opportunities. We did all of this while maintaining momentum in our core retail and core institutional businesses and opportunistically taking advantage of attractive market windows for funding agreements, including a FABN issuance earlier this year.

As Conor mentioned, we remain disciplined in allocating capital to our highest return opportunities and have deemphasized MYGA sales at this time due to returns currently below our threshold. Taken together, our capital allocation reflects the financial strength and flexibility we have built and our confidence in the future.

Let me now turn the call over to Conor to wrap up.

Thank you, Mark. I would personally like to thank Mark for stepping in as interim CFO. As expected, he has brought deep financial management and operational expertise to guide our strong finance organization during the leadership transition period. I'm also very excited to officially welcome Mike Bailey to F&G as our next CFO. Mike is an actuary with deep knowledge and extensive experience in the life and annuity sector, having held a variety of executive roles at industry-leading insurance companies.

Most recently, Mike was the retail Chief Financial Officer at Corebridge Financial. Mike joined F&G just a couple of days ago. And while he is in the room with me, we can expect him to formally join the call in Q3. I look forward to partnering with Mike to continue to build an industry-leading business. We believe F&G is well positioned to grow assets under management aligned with disciplined sales and capital allocation to the highest return opportunities, expand return on equity through strong high-quality earnings generation and create long-term shareholder value.

This concludes our prepared remarks. Let me now turn the call back to our operator for questions. Operator?

[Operator Instructions] Our first question will hear from Wilma Burdis with Raymond James.

Some of the spread-based competitors have seen spreads stabilize a little bit this quarter. And maybe you can give us a little bit of color on what you're seeing based on FG's book and the prevailing interest rate environment. And along those lines, maybe just talk a little bit about what you saw with the spread in this Q2.

Wilma, thank you very much. Okay. There's quite a lot to that. So let me break it down into a few different components. If I start with the core fixed income, that was very much in line with our expectations. It was higher than Q1. In Q1, we had a few things that we mentioned that we believe were temporary and would resolve themselves in Q2, and indeed, that is the fact. Then if we look at -- maybe I could separate cost of crediting from surrender charges and the acquisition costs, I would say on the cost of crediting, that is also almost exactly where we expected it to be, very consistent with both Q1 and Q4 of last year.

But it's a little higher than a year ago, but I want to be careful to explain why. With FIA and IUL, those are annual reset products, and we price them and then we focus on maintaining the spread, maintaining the corridor. And we do that very well and very successfully. So those are exactly where we thought very consistent. But also remember, with PRT or funding agreements, we were putting them on this year at a rate higher than, for example, 12 months ago.

So those will tick up. But again, very much exactly where we thought that they would be. Surrender charges, they're still, I would say, reasonably elevated in the industry, but that was very consistent, Q3 as well. We saw 58% compared with 56% last quarter, 57% the quarter before, lower than a year ago. I think we had 70-ish. And then within the acquisition costs, I would say there's probably 2 things that are maybe on the margin throwing some analyst models off a little bit.

One is we do a third quarter assumption review every year. And last year's third quarter assumption review saw an increase in DAC amortization because of the increase in surrenders in the industry. It ticked up, I think, probably about $10 million in each of the subsequent quarters. And then the last part I would point to is mortality is pretty consistent for us, but it can move a little bit. And in this quarter, we did have a little softness in mortality on the PRT book that I would refer to as timing. I expect that will resolve itself in the second half of the year. So hopefully, that helps tie it all together for you.

Yes. And you guys have pretty strong buybacks this quarter, but could you just talk about the appetite going forward given the limited float? Just give us a little bit of color on where you stand with that.

Yes. Thank you. It's a good question and an important one. For us, big capital return quarter, we reviewed buybacks in Q2 as an opportunity to deploy capital in the optimum way. So I would start carefully by saying you should not assume that we'll necessarily continue to do that. That was we took advantage of the stock being down, and I think that has worked out very well for us. But it's not a primary expenditure capital going forward. And I think it's a bouncing act becuase it was a lower amount of opportunistic sales in the quarter between MYGAs and FABNs. MYGAs, we've been deemphasized. We talked about it. FABNs, I think a lot of the industry of the life company saw a gapping out in credit. So we saw it as a better opportunity in Q2. But again, not a tool to retain for when it makes sense, but not one that would be a primary source of deploying capital necessarily going forward.

And next, we'll hear from Alex Scott with Barclays.

This is Anling on for Alex. Connor, congratulations first on the new role. First question for you. As you think about the business from a longer-term perspective, are there any strategic areas that you're particularly focused on today?

Thank you. As I alluded to in the opening remarks, I'd say there's a lot of consistency with what we've been doing. We're going to focus on some of the key things. So one momentum, we've had -- we're very pleased with the business that we've put on the books at the core business, particularly core retail. As I mentioned, it was one of our best core retail quarters. And it was a challenging enough quarter in the industry in the FIA space. As we mentioned, it was a 5% decline in the first half of the year, and we were up 4%.

That momentum is carrying into the third quarter as well. So you should expect that we will continue the focus on the core retail side. I would also -- we've been focused on expanding fee compared with spread. We've made a lot of progress in that over the last couple of years. You should expect a continuation of that. That's a combination of optimizing Peak, the life business, which is also performing very well and the reinsurance opportunities. I would -- we disclosed our top reinsurers in the QFS, but I would acknowledge we added another noteworthy reinsurance partner on July 1. So another tool in the toolbox there as well.

So really continued momentum on those areas of focus that we think will help unlock some of the value that hasn't been ascribed to us. I think you might acknowledge that we have been viewed largely as a spread business. So I would argue that there's more value that hasn't been appreciated, not just in Peak, which I mentioned on the call, but in the life business, the PRT business, et cetera. So we'll do our best to unlock that by delivering consistent growing core earnings here in the coming quarters.

Got it. That's helpful. Second, maybe an update on Peak. Can you help us understand how it fits within your broader capital deployment framework and the factors that you're weighing as you evaluate those strategic alternatives for the business?

Yes. Great. Thank you. So we're getting going there. I have nothing declarative to say, but maybe I can frame what it is that we would like to optimally achieve. But the primary intention would be to bring in a strategic partner that would acquire slightly over half of Peak. So call it, a 51-49 or something along those lines, where we would retain our ability to grow our half as well because we believe there's great growth opportunities within Peak in the 4 entities that are already there. They themselves can continue to expand and grow their business. And we think that the increase in value in even half of that business could be very meaningful for us. But it also -- Peak itself does not have any debt.

So I think in a future view, Peak could likely take on debt and fund much of its growth from that. Obviously, we can continue to reinvest even just the dividends. That would be optimal as well. And today, we -- it doesn't -- it's a bit challenging from an accounting perspective, if you will. You don't get to really reflect the value of all of the business in Peak. We're writing own probably about 30% of our life business and at least 10% of our annuity business in Peak, and we end up consolidating some of that away. So from my perspective, certainly, I would prefer to have the cleaner accounting that would end up with something like a 49% shareholding. So there's been a lot of interest, but it's early days, and we'll certainly update you as soon as we have something meaningful or tangible with respect to a resolution there.

All right. Operator, do we have any other questions?

[Technical Difficulty]

I'm sorry -- perfect. I couldn't hear the operator. I was worried for a second.

No, I couldn't either. Yes, this is Max on for Mark Hughes from Truist. Are you seeing any incremental competition in the RILA market? Or what are your general observations around competition there?

Yes. So thank you. So for us, within our core retail, our 3 key areas are the RILA and FIA on the annuity side and the IUL and the life side. So there's certainly -- we are a comparatively smaller competitor. We're probably a top 20 without necessarily being a top 10. We're probably about a top 5 or 6 on the FIA space. So there's definitely increased competition. I would argue we're one of them. For us, we continue to gain really positive traction on our side. So we're not -- I would say we're not feeling a lot of competitive pressure there because the RILA space in general has been performing well. It's probably been just about the best performing subset in the space. So we're doing great in the areas that we compete in and expect to continue to expand there.

And then I guess moving to MYGAs. Can you give us an update on what you're seeing in that market? I assume with the volume in the quarter, returns maybe are still more attractive elsewhere, but an update on the MYGAs would be great.

Yes. Yes, that's true as well. And we -- that's -- we sort of increase or decrease that faucet, if you will, or that flow periodically. A year ago, we saw a lot of opportunity and wrote quite a lot of MYGA. We haven't -- we've been, I would say, quite modest in the first couple of quarters in 2026. Again, it's a relative return. We are still writing MYGA business, and we look for the opportunity to do that. And we have reinsurance partners. So to some extent, it can be the -- yes, it can be a little bit their appetite as well because we're reinsuring 90% of the MYGA business.

But having said that, I would -- we'll see. I mean, as I look very near term in the third quarter, yes, we will be in the MYGA space in the third quarter, but I would expect that we'll probably stay reasonably consistent in our focus on the core retail over MYGA in the near term as well. But as those economics change, we're very comfortable and happy to pivot there as well.

And then last one for me on the alts portfolio, what sort of returns are you expecting for the full year? Or I guess, said differently, how do you see returns shaping up in the back half?

Okay. So I'm going to be careful here. The first thing, though, I would like to point out, there's a new disclosure in the summer investor presentation on Page 38, that I think people will find interesting because what we've done now is we've disclosed our -- well, it's a $4 billion alts portfolio made up of $3 billion of limited partnerships and $1 billion of equity residuals. But for the $3 billion of limited partnerships, we've broken out the vintages for our book, how much has been in early stage, less than 5 years, mid-stage 6 to 10 and late stage 11 to 15. And we've included an industry view, third-party industry view. It's not ours, it's not Blackstone's on what expectations would be for historical returns based on life cycle.

And you can see from that, we are -- I think we're 84% within the first 10 years. And that would suggest a blended return of about 10%. And that's probably roughly where we've been on a historical basis. But I think you're getting a little bit more to near term. So we have a long-term expected return of 12%. We had 8s in the first quarter and 6s in the second. So I think we're on a 1 quarter lag. It was a bit of a difficult quarter across the industry. I think we actually had one of the better alts returns across the peer group. I think there was enough external geopolitical stuff, et cetera, that probably impacted a little.

So to get to the answer to your question, near term, and I'm not even going to go to the second half of the year. If you said near term Q3, I would say I don't see a compelling argument for being very different from that sort of 7% or 8% that we've seen in the first half of the year. So I'd like to leave it at that, if that would be okay.

[Operator Instructions] The next question is coming from the line of Oscar Nieves with Stephens.

I would like to double-click on that last part on the alts investment shortfall. If I look at it, narrow both in dollar terms and per share this quarter versus last year. Is that an early sign that the realization environment is turning? Or is it too soon to call that a trend? And you kind of mentioned this earlier, but just to make sure, practically speaking, what would need to happen for you to revisit that 12% long-term return assumption?

Okay. So on your first question, I couldn't quite tell if you meant turning in a positive way. But again, I would say in a quarter lag in the second quarter, if you look across how the banking industry is doing, if you look at larger companies from a revenue and earnings perspective, it seems to have been a pretty decent quarter. I want to be careful that -- so that's pretty good. I think the -- sorry, the second part of your question, if I may, was on the...

What would need to happen for management to revisit the long-term assumption?

I apologize. Thank you. Well, we actually do -- we do a very detailed investment by investment security-by-security review. Well, we do it as part of the annual planning process, but we also revisit it in frequently quarterly or at least semiannually in detail security by security with our partners at Blackstone. So we will -- I would expect that our assumption -- our long-term assumption of 12% would be what we would keep for the remainder of this year. We'll revisit it at the end of the year. But I don't see a compelling reason to change that either at this stage. It will depend on what has happened in the broader market over the next 6 months. So we're not locked into the 12. We do constantly consistently review it.

The other thing I might mention, too, is we -- one of the other things that we disclosed in the new page was that over 60% of our capital has already been paid back to us from these securities. The other thing that is probably worth mentioning is these securities tend to have a much higher return at the end. They aren't flatlined through. So as they mature, we would have an expectation of an increased return in those later cycle stages.

So all in all, we feel -- I mean I think we're in line with many of our peers here as well given the composition of our portfolio and not everybody's composition is the same. We're pretty light on real estate intentionally, for example. But given everything that we understand about the portfolio, everything that's been happening and how it's been performing, I think we remain consistent in what our long-term expectation is. And then as I said in answering the prior question, we just have a near-term view that probably feels more comparable to where we are right now, maybe a modest -- slight modest bias near term, but it's modest.

Yes. That's super helpful. And my second one is, if I strip out the Bermuda session and the funding room and maturity, what would you say the underlying organic growth rate in retained AUM looks like right now?

Okay. That's a good question. I would say -- I mean, it can move around a little bit because of the items that you mentioned. On a normal basis, we talked about an 8% gross number, and we also reinsure 90% of our MYGAs and about half of our FIAs. So I would say you should have an expectation that, that gross number would continue to grow in that high single digits. It will go up meaningfully. I think you might have an expectation of it going up, I don't know, something in the region of $5 billion or $6 billion per year. But then you would be taking that percentage and cutting it in half or even slightly more depending on where the volume falls. So we don't reinsure the life business or the PRT business. But I think you would have an expectation that's probably closer to maybe 3% on an apples-to-apples basis on the net basis.

Again, something like an FABN, we wrote a large one in the first quarter, we matured one in the second quarter. So it can move around a little bit quarter-to-quarter. The other thing just to underscore is that we intentionally -- the ability to flow business to our partners or avail of our sidecar is very attractive for us. It's a really good lever from an ROE perspective. I mentioned that we've added another noteworthy reinsurance partner, and we are an attractive reinsurance partner.

Remember, we're not owned by an asset manager. So there are a lot of noteworthy companies out there who want to reinsure MYGs and fixed index annuities. And I think we're a great partner for those, and we're seeing that increasingly as well. So we will continue to avail of the reinsurance, and we may even expand the amount to which we continue to avail. So that won't necessarily drive the net AUM up as fast, but it will drive the ROE up faster.

Yes. Super helpful. And just a really quick one. You mentioned -- you talked earlier about the current thinking around the buybacks. But can you remind us how much capacity is left under the current authorization?

Yes. I think there's not a ton of capacity at the moment. I think it's about $12 million to $15 million under the current authorization. I'm just double checking there. Okay, just double checking if that was correct.

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

I jumped on late. I just had one quick one. The PRT business, I think you emphasized that's kind of a second half business. How is that pipeline shaping up?

Mark, thank you. Yes, that's exactly right. We tend to see more business in the second half of the year. That's historically normally what we've seen. So what I would say so far, it's been a little muted in the first half of the year. I think we've written maybe 4 deals of modest size. We've been very happy with those deals. And some of that has been with people that we've written business with before.

So I'd say we've gotten our fair share. But I'm not sure all of our peers or competitors feel that they've gotten enough so far. So the second half, yes, you would expect it to be higher in Q3 than the first half of the year and probably higher again in Q4. We're targeting -- this is a bucket that for us, we're targeting something in the kind of $1.5 billion to $2 billion range. We're not necessarily -- actually, we're not trying to grow it each year bigger than the year before. I would say we're trying to write about the same amount of business. It fits very well from a profile perspective at that level, and it suits the size of our balance sheet.

So we'll -- I think we'll see plenty of opportunities to do that. I'm not sure it will be a bigger year than last year, but it's a little hard to predict. I mean the underlying funds are pretty well -- sorry, the underlying plans are pretty well funded right now. So there's less -- I would say, less pressure on the underlying companies to go ahead and seek an external solution than there might have been over the last couple of years. So that might lead to, I wouldn't say softness in the market, but maybe a little less volume in the market.

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

This is Videep. Just with a quick follow-up for Wilma. You talked about $12 million or $15 million remaining on the current buyback authorization. Is there any chance FG will increase that authorization given a lot of it was used up this quarter?

Well, I won't -- that's up to the Board. So I won't comment on that. Fair question, but I'm going to leave it at that.

We have reached the end of our question-and-answer session. So I'd like to turn the floor back over to Conor Murphy for concluding remarks.

Okay. Thank you. And thanks again to everyone for joining us this morning. We've delivered a solid first half of 2026 with record gross AUM, disciplined capital allocation and an increased capital return to shareholders. And our high-quality investment portfolio continues to perform very well, and we expect continued momentum heading into the second half of the year. And we really appreciate your continued interest in F&G. We're going to remain focused on delivering long-term shareholder value for you. So we look forward to updating you on our progress on the third quarter earnings call. Thank you.

Thank you. Ladies and gentlemen, this does conclude today's teleconference. Once again, we thank you for your participation, and you may disconnect your lines at this time.

Good morning and welcome to the F&G's First Quarter 2026 Earnings Call.

[Operator Instructions]

I would now like to turn the call over to Lisa Foxworthy-Parker, SVP, 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. The first quarter was a solid start to the year and in line with our expectations. Today, I'll share some highlights of the business as well as details of our investment portfolio and capital allocation. Then I'll turn it over to Conor to cover results in more detail.

Starting with business highlights. From a top line perspective, F&G has consistently grown AUM in recent years. We have generated strong free cash flow and reinvested it back into the business, driving our diversification and accelerating our growth that has brought AUM before reinsurance to nearly $75 billion at the end of the first quarter, an 18% compound annual growth rate since 2019.

Today, F&G is a recognized market leader across multiple products and distribution channels with a strong strategic foothold in large and growing markets. The retirement landscape is creating a powerful and lasting demand for our business. The peak 65 retirement wave is driving unprecedented demand for guaranteed income and growth solutions. With more than 4 million Americans turning age 65 every year through 2027 at a rate of 11,000 people per day, this structural tailwind is fueling industry sales in the U.S. across retail indexed annuities, index universal life and pension risk transfer, which are our core product lines.

Industry results are more mixed for our opportunistic products. Funding agreement-backed notes reached record industry issuance last year, while the multiyear guaranteed annuity market began to normalize in the fourth quarter as consumers felt less urgency to lock in rates following the interest rate movements earlier last year.

As F&G navigates the competitive landscape, we are focused on disciplined sales growth and capital allocation priorities between core and opportunistic sales to power our AUM growth. We view AUM as our primary metric to track the top line growth of our business as sales volumes may fluctuate year to year depending on opportunities and returns.

Having reached a meaningful level of scale, our focus has shifted to continuing to improve margins and expand ROE. We are intentionally shaping our product mix, managing our sales volumes and utilizing flow reinsurance to capture the highest return opportunities and deliver sustainable long-term value while growing AUM.

From a bottom line perspective, we have intentionally diversified our business over the last 5 years across our spread and fee-based strategies. This diversification further reinforces the durability of our business model, and it supports a more predictable and higher quality earnings as well as expanded returns over time.

For our spread-based business, we have a long and proven track record across varying interest rate environments, including the current landscape, where credit spreads remain near historical lows despite recent volatility. Our approach is straightforward and disciplined. We source attractive, stable and surrender-charge-protected liabilities. We source high-quality assets with a deep understanding of our liabilities to achieve well-matched asset and liability cash flows, and we have a clear line of sight to investment returns, actively managing our new business pricing and in-force renewals to maintain spreads.

The result is a stable cost of crediting aligned to our expanding in-force book that generates steady long-term growth in spread-based earnings over time. This is complemented by the increased earnings contribution from our fee-based strategies, including flow reinsurance, owned distribution and middle market life insurance. These strategies are higher margin, less capital-intensive and positioned to generate higher returns and valuation over time.

In 2025, fee-based strategies represented approximately 15% of our adjusted net earnings, excluding significant items, and we expect that mix to grow to approximately 25% by year-end 2028. As the mix shifts, we believe ROE will become the most important return measure for our business, reflecting the higher quality and capital efficiency of our growing earnings base.

Next, shifting to our investment portfolio. Our $53 billion retained investment portfolio is well-diversified and performing very well. The retained portfolio is high quality with 97% of fixed maturities being investment grade. I'll walk through some highlights of our 5 primary asset classes as shown on Slide 26 in our spring investor presentation, including fixed income, public structured, private origination, mortgage loans and alternative investments.

First, our traditional liquid fixed income portfolio is $18 billion or 34% of the total retained portfolio. This portfolio is anchored in high-grade public bonds and traditional 144A private placement securities. Next, our public structured portfolio is $11 billion or 21% of the total retained portfolio and provides access to well-diversified and high-quality assets across 3 categories, including $5 billion in CMBS and non-Agency RMBS focused on stable property types with built-in structural protections. $5 billion in CLOs that are well-diversified across industries, issuers and managers with a focus on investment-grade tranches and ample par subordination and $1 billion in high-quality ABS that is well diversified by collateral type.

As an aside, we view the NAIC's proposal for higher capital charges on CLOs invested in broadly syndicated loans is very manageable. After properly adjusting for funds withheld reinsurance assets, the effect of the proposal for our CLO portfolio would translate to a decrease in RBC of 5 points or less as a conservative estimate.

Next, our private origination portfolio is $11 billion or 21% of the total retained portfolio. Private origination is a key component of our investment strategy. It provides enhanced yield while limiting additional credit risk as well as diversification and strong covenant protection. Our private origination portfolio is well diversified and includes corporate and commercial lending, consumer loans, real estate and other real asset exposures.

From a ratings perspective, approximately 90% 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. Nearly 90% of the private origination debt portfolio and 94% of the rated assets in our total fixed income portfolio are rated by at least one of the top 5 rating agencies.

Further, 64% of our total fixed income portfolio is dual rated by 2 rating agencies with at least one being one of the big 3. Egan-Jones ratings are de minimis at less than 1% of our total retained portfolio. And private-letter ratings account for approximately 18% of our total retained portfolio and undergo the same analytical rigor as public ratings.

When it comes to private asset origination, most of these are directly-originated asset classes that have historically been underwritten by commercial banks and have a long performance history over multiple market cycles, providing observable data for thorough underwriting.

Here, we utilize Blackstone's best-in-class origination, underwriting and structuring teams to source high-quality pools of physical and financial assets. The combination of Blackstone's 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.

Recent headlines have been focused on middle-market lending to midsized corporations.

I'd like to provide further details on this subset of our private origination portfolio. Middle market corporate lending is nearly $5 billion or 9% of the total retained portfolio. 89% of our middle market lending positions are investment grade. We have low loan-to-value ratios and strong structural subordination. We are lending to sizable, high-quality companies with average annual EBITDA over $200 million. We have a track record of near 0 credit losses and the upgrade to downgrade ratio is positive for our private origination corporate exposure.

Next, our mortgage loan portfolio is $7 billion or 13% of the total retained portfolio. It is weighted toward defensive sectors with 2/3 in residential loans and the remainder in commercial loans concentrated in multifamily and industrial properties, 2 segments that have demonstrated resilience across varying economic conditions.

Finally, our alternatives portfolio is $4 billion or approximately 7% of the total retained portfolio. This includes approximately $3 billion of limited partnerships and $1 billion of other equity interest. Under our updated definition of alternative assets discussed last quarter, we have reclassified approximately $6 billion of lower-yielding debt-like assets into our fixed income portfolio. As a result of this updated definition, we have revised our long-term expected return assumption from 10% to a range of 12% to 14% for the remaining LP and equities portfolio. Many of these alternative investments are still in the earlier phases of their value creation cycle, so we are not yet fully realizing the long-term expected returns. During the first quarter, we saw improvement in our annualized return at 8.3%, up from 7.8% in the sequential quarter.

Next, with regard to our overall portfolio, our fixed income yield was 4.77% in the first quarter, in line with the first quarter of 2025. Relative to the fourth quarter of 2025, our yield decreased 16 basis points as a result of 4 items in the first quarter: The removal of the assets associated with our sale of F&G Life Re, lower yields on floating rate assets, lower preferred stock dividends due to seasonality and an investment expense true-up adjustment. These were largely one-time items or due to timing. Excluding these items, we maintained our core spread in line with the fourth quarter. As a reminder, our fixed income yield excludes alternative investment income as well as variable investment income, which we define as prepayment fees.

Software exposure across the total retained portfolio is below 5% and relatively short-duration. The vast majority of our software positions are protected by high switching costs, large competitive moats, regulatory barriers and/or embedded in workflows that are difficult to disrupt. We believe this exposure is very manageable.

Credit-related impairments have remained low and stable, averaging 6 basis points over the past 5 years. Through the first quarter, credit-related impairments were a modest 3 basis points. Portfolio credit quality has improved over time through implementation of derisking programs. Since 2020, we have selectively repositioned over $2 billion of assets to optimize, derisk and position the portfolio to perform in varying market conditions while also improving credit quality. We believe our portfolio is performing exceptionally well as expected and conservatively positioned to withstand economic downturns.

Now turning to the liability side of our balance sheet and how we think about the intrinsic value of our business. F&G reported GAAP equity, excluding AOCI, of $6.2 billion at quarter end and has grown its book value per share, excluding AOCI to $46.51, up 70% since the 2020 FNF acquisition. We think about our business as 3 distinct and complementary value-creating components: our new business platform, our profitable in-force block and our capital-light fee-based strategies. Each contributes meaningfully to earnings and together, they support a compelling sum of the parts valuation.

At the core of our business is a high-quality and profitable in-force book that delivers steady spread income on a growing AUM base. We do not have any problematic legacy blocks of business. Our GAAP net reserves of $55 billion are diversified across $37 billion of retail fixed annuities, $8 billion of pension risk transfer liabilities and $7 billion of funding agreements. In addition, our $3 billion index universal life in-force book is less capital intensive than our annuity business and generates significant recurring product fee income annually. This is a top 10 IUL franchise with strong positioning in the cultural middle market that has demonstrated above-average growth rates.

F&G is also uniquely positioned to provide flow reinsurance to third parties and through our sidecar, a capital-efficient strategy that generates fee-based returns. Demand for reinsurance capacity has greatly increased in recent years, and we have reinsured over $15 billion of cumulative annuity new business. Our own distribution franchise, Peak Altitude, rounds out the picture. With approximately $700 million deployed into this business and approximately $80 million in annual EBITDA, we believe the value of Peak is not fully appreciated by the market or reflected in our current share price. As a result, we have initiated a formal process to explore strategic alternatives for Peak to capture its significant growth opportunities and unlock that value for our shareholders.

Importantly, each of these components, our new business platform, our profitable in-force block and our capital-light fee-based strategies represent a distinct and measurable source of value. Taken together, we believe the sum-of-the-parts framework reveals meaningful value that is not yet fully reflected in F&G's current market valuation, and we remain focused on closing that gap.

Next, turning to capital allocation. During the first quarter, F&G returned $67 million of capital to shareholders through $38 million of common and preferred dividends and $29 million to repurchase approximately 1.2 million shares of common stock at an average price of $24.14. The company's existing stock repurchase authorization permits aggregate repurchases of up to $50 million, of which approximately $3 million remained available as of March 31, 2026.

Effective March 13, 2026, our Board of Directors authorized an additional new 3-year share repurchase program under which F&G may repurchase up to $100 million of common stock. Our Board views repurchasing shares at current levels as a compelling use of capital. Despite the progress we have made to increase our outstanding float through the stock distribution at year-end, buying back shares at current prices reflects our confidence in the results we have delivered and our conviction in the significant long-term opportunities ahead.

Let me now turn the call over to Conor to provide further details on F&G's first quarter highlights.

Thank you, Chris. This morning, I will provide some additional details of our earnings, asset growth and other performance drivers as well as our strong capital position. Starting with earnings. On a reported basis, adjusted net earnings were $110 million or $0.82 per share in the first quarter. Alternative investment income was $44 million or $0.32 per share below management's long-term expected return for the quarter. Adjusted net earnings included an unfavorable significant item totaling $5 million or $0.03 per share from investment and other income true-up adjustments.

As Chris mentioned, effective January 1, 2026, our presentation of investment income for alternative investments does not include fixed income assets. Prior periods are presented on a comparable basis to reflect the new definition. We believe this updated definition more appropriately delineates between the fixed income portfolio and alternative investments while also improving comparability to others in the industry. Importantly, this updated definition does not have any impact to adjusted net earnings on an as-reported basis. Please see Page 42 in our spring investor presentation for further details.

Overall, as compared to the prior year, adjusted net earnings reflect retained asset growth, growing fees from accretive flow reinsurance, steady owned distribution margin and operating expense discipline driving scale benefit. First quarter results were in line with our expectation and our core spread remained consistent with the fourth quarter of 2025.

With regard to asset growth, we achieved record gross AUM of nearly $75 billion, up 11% over $67 billion for the first quarter of 2025. Retained AUM was $56 billion for the first quarter, up 3% over $55 billion for the prior year quarter. The current period excludes a $1.8 billion in-force block reinsured with the sale of the F&G Life Re legal entity effective March 1, 2026.

F&G reported gross sales of $3.2 billion for the first quarter, up 10% over $2.9 billion for the first quarter of 2025. This includes core sales of $2 billion for the first quarter, up 11% over the first quarter of 2025. This reflects higher core retail indexed annuity and indexed universal life sales and pension risk transfer sales. This also includes $1.2 billion of opportunistic sales for the first quarter, up 9% over the first quarter of 2025. This reflects $1 billion of funding agreements in line with the prior year and $200 million of multiyear guaranteed annuities, which we intentionally moderated to allocate capital to the highest-return opportunities.

F&G's net sales were $2.2 billion in the first quarter. This reflects flow reinsurance in line with capital targets for multiyear guaranteed annuities and fixed indexed annuities. The first quarter showcased the diversity of our new business engine, allowing us to flex across our products and channels to source the most attractive liabilities in the current environment to grow AUM.

Next, turning to fee-based earnings. Our fee income from accretive flow reinsurance was $16 million for the first quarter as compared with $13 million in the first quarter of 2025. Our fee income from owned distribution margin contributed $9 million for the first quarter as compared with $7 million in the first quarter of 2025.

Next, turning to scale benefit. As F&G grows, we are benefiting from increased scale as our ratio of operating expense to AUM before reinsurance decreased to 48 basis points at quarter end, benefiting from higher AUM and due in part to favorable timing of expenses. This compares with 50 basis points at year-end 2025 and 60 basis points at the end of 2024. 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 point or 25% improvement over the 3-year period.

From a return perspective, our reported results include short-term fluctuations from alternative investment income. As reported adjusted ROE, excluding AOCI, was 8.4% for the first quarter. As-reported adjusted ROA was 76 basis points for the quarter and 87 basis points on a last-12-month basis, which was in line with full year 2025. Taking into consideration management's long-term expected return for alternative investments and the unfavorable significant item would have resulted in 3.4% of additional ROE and 34 basis points of additional ROA for the quarter.

Turning to our strong capital position. We remain committed to our long-term target of approximately 25% debt to capitalization, excluding AOCI and 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 expect to maintain our estimated company action level risk-based capital or RBC ratio above our 400% target.

Importantly, F&G maintains strong capitalization and financial flexibility. We conservatively manage to the most stringent capital requirements of our regulators and 4 rating agencies. 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. Our majority shareholder is FNF, a U.S. domiciled business regulated by Florida and is also a full U.S. taxpayer.

To build on Chris' earlier comments, I'd like to provide some added perspective on capital allocation. Our business is built around a diversified and self-funding capital model designed to support growth and reward shareholders without relying on any single source. This is an important part of our story, and I want to take a moment to walk through both where our capital comes from and how we put it to work.

We have multiple reliable sources of capital supporting our business. Our in-force generates approximately $1 billion from the existing book of business. We expect even stronger capital generation in the future as we rapidly move toward a more fee-based, higher margin and less capital-intensive business model. Our reinsurance sidecar provides approximately $1 billion of on-demand third-party capital that we can access without diluting shareholders.

Our strategic flow reinsurance partnerships add another layer of flexibility, allowing us to adjust retained sales levels and support cash from operations as we grow. Our statutory excess capital provides additional capital strength in line with our ratings. And as the balance sheet continues to delever, our available debt capacity will only grow over time. We deploy capital across top priorities.

Starting with interest and dividends, we fund our $165 million of annual interest expense and are committed to our $135 million of annual common-stock dividend that we have consistently increased over time as well as our $17 million of annual preferred stock dividend. We also invest for strategic growth. That means reinvesting in our core business to drive continued AUM expansion and selectively pursuing acquisitions to strengthen our own distribution strategy.

And finally, as Chris discussed earlier, we launched opportunistic share repurchases during the first quarter and have over $100 million of authorization remaining at March 31. Taken together, our capital allocation reflects the financial strength and flexibility we have built and our confidence in the future.

To bring it all together, as I look ahead to the remainder of the year, our focus is clear: grow our core revenues and earnings, expand ROE and create long-term shareholder value. On the top line, we are focused on growing assets under management with an optimized sales mix that maximizes return on capital. For our core retail products, we expect indexed annuity and indexed universal life sales growth to track in line with the strong industry trends Chris outlined earlier.

In pension risk transfer, the pipeline remains strong, and we expect annual sales between $1.5 billion to $2 billion. For our opportunistic products, we are pleased to have completed a $750 million funding-agreement-backed note issuance in early January when market conditions were particularly attractive, and we will continue to monitor that market closely. We expect multiyear guaranteed annuity sales to continue moderating given the current rate environment.

Beyond AUM growth, we remain focused on 3 additional priorities: First, generating additional scale benefits as our business continues to grow; second, expanding returns on equity, excluding significant items, while maintaining our return on assets, excluding significant items in a corridor around our current level. And third, continuing our evolution toward a more fee-based, higher-margin and less capital-intensive business model, a natural advantage of our position as one of the largest sellers of annuities and life insurance in the industry.

This concludes our prepared remarks, and let me now turn the call back to our operator for questions.

[Operator Instructions] Our first question is from Wilma Burdis with Raymond James.

Excited to be covering you guys. This is a bit of a housekeeping item, but do you consider 1Q '26 EPS a good intermediate-term run rate of which you can continue to grow? And should we largely expect EPS to grow along with AUM over time given share repurchases are a relatively small part of the equation?

Yes. Wilma, thank you for your coverage and your interest. I would say broadly speaking, if I think about near term, I'm just talking about the next few quarters here. But broadly speaking, I think that's true. If I break it down, if we get into maybe the core fixed income yield, it's probably down a few basis points from things that are actual rate related and so on in the market. And we'll manage that core spread maintenance. There'll be maybe a tiny bit of a lag effect there. But we also saw some green shoots on the upside.

So my view on the sort of fixed income or core spread is, timing aside, it will be pretty close. It might -- maybe it will tick down a little bit. We'll see how surrenders will be in the industry. They're staying relatively close to where they have been. So that should probably be there or thereabouts. It could be a little bit lighter. We'll see.

The core reinsurance and distributions should continue to move along nicely and grow up a little bit. The expense number, we're very focused on getting that full 25% reduction from where we started a little over a year ago. I would argue that's maybe a little too good this quarter. Some of that is timing. But all in all, I think, yes, broadly speaking, this is around the range with the big unknown being how will the alts portfolio do.

Right now, we've been assuming a longer-term return in this new definition with the LP and equity portfolio of kind of 12% to 14%. We've been planning on a number below that for capital purposes, et cetera, just so that if that doesn't happen quite so soon, we're not in a hole of that. So hopefully, that answers your question. I'm very happy to clarify any component of that you'd like me to.

And Wilma, this is Chris. The only thing I would add to what Conor said is because I do think what you said is broadly true. Obviously, we see opportunity to expand ROE over time due to, I would say, own distribution as we continue to move down this capital-light path and reinsure more assets, that obviously has a very positive and accretive impact on ROE. So yes, I would say, historically, it would track AUM very tightly. It will diverge, I would think, positively as we go forward because of those other 2 sources of fee-based income.

Great. That was helpful. Where do you guys see opportunities to take advantage on the asset side? Spreads have widened in some asset classes, but just are you still kind of remaining conservative given spreads are still overall tight?

Yes, we have been. There are pockets. Mortgages is a good example, particularly on the residential side are still attractive on a return on capital basis. So that's an area. You have seen opportunities in some of the asset-backed lending area, but those are much more, I would say, opportunistic and idiosyncratic as opposed to something that you've got a steady flow pipeline into. But I think as a general rule, this feels like a good environment to keep a little dry powder and stay a bit conservative.

And I would add, we do remain thoughtful and active in the portfolio. So we'll take advantage. Again, that's something that will lead to a higher yield, but it takes a little time. Obviously, before that you get the full benefit of that through the portfolio. The other thing I would say we're constantly monitoring is how the capital charges might be changing on the margin for different asset classes and because that's just a constant, I would say, capital pressure that you weigh up. So marginally, we'll do some -- probably do some rotating here and there to just help balance that factor as well.

If I can sneak one more in. It seems surrender charge income remains similar to last quarter or recent quarters. Has the environment remained similar? And what are you seeing from policyholders in terms of surrender behavior?

Yes. I think there's a little bit of seasonality that we've seen. This is maybe the third year in a row where first quarter is a little weak because keep in mind, the policies that get processed in the first quarter is activity from the fourth quarter. So as you get into the holidays, not most clients' preference to spend their holidays with their insurance agent, talking about moving policies. So, so far, it's followed us a fairly similar pattern. Then you get into the nuances of which policies are being surrendered early, what's the surrender charge income. But yes, I would say pretty consistent.

Yes. And just mathematically from sort of a modeling perspective, it is actually -- it's remarkably consistent perhaps when you compare this quarter with both last quarter and the first quarter of last year. Yes, I would -- I don't expect it to necessarily go up from here. I think it's possible that it could move down. We have fewer surrenders in the industry. But what it's worth, April, I would say, has been a consistent month as well. So it hasn't shifted. I might be mildly surprised by that, but not much.

Our next question comes from Mark Hughes with Truist Securities.

Yes. Just following up on Wilma's question. When we look at the adjusted ROA, the 80 bps in the quarter, obviously, substantially impacted by the return on the alts. Was your suggestion there that, kind of, the run rate, the starting point on a go-forward basis ought to be the 80 bps. And then over time, perhaps the alts performance as it matures, you would see improvement. But for the near term, kind of stick with the 80 basis points. Is that fair?

Yes. I think if I look at the yield in the quarter, and it ticked down about 16 basis points. We had about probably $4 million of that roughly being, call it, market-related changes in things like SOFR and floating assets, et cetera. A couple of it is because we had assets that were tied to the Bermuda entity that we don't have anymore.

So I'd call that kind of a permanent difference as well. But about $10 million of it is largely timing related. It's -- it was a combination of fewer preferred stock elements coming in, in the quarter, just a fewer days, if you will, in the quarter. We had a little bit maybe of, I would say, investment expense cleanup in the quarter as well. So maybe 1/3 roughly of the decline we saw in the quarter will likely be permanent and the other 2/3 likely kind of one-time for now.

Yes. And there, you're talking about sequentially, is that?

Yes.

[ 87 to 76. ] Okay. And then is there -- when we think about the return on the alts portfolio, that's dampening your adjusted ROE kind of the 8% -- 8% to 9% here lately. Is that something that needs to be factored in, in terms of the product pricing if the alts portfolio is uncertain. I know you're going to be shifting more fee income and more of a capital-light model, and that will help returns. But is there anything in terms of the pricing that is relevant?

And maybe I'll ask in the context because I think this is -- the investment in alts is a competitive dynamic. Do you think others are maybe too dependent on better alts performance? Just trying to think through this, how it interacts with ROE and ROA.

Yes. I would say the pricing dynamic is a lot more complicated, right, because it depends on duration of the liability. We're looking at this. We're not repricing daily, but we're repricing frequently, and we're going through the calculations of exactly where we are on a real-time basis.

So I think in terms of the long-term assumption that we guided to, the purpose of it is literally to just try to help you all think about how to forecast our earnings going forward. And the reason we give a range is we're just in an environment where you could make a compelling argument for the lower end of the range. You can make a compelling argument for the higher end of the range. As Conor said, most importantly, from a capital perspective, we take a very pessimistic view because you don't want to get that one wrong. So there's probably more upside than downside from a capital perspective.

And then on a pricing basis, yes, we're modeling all real-time inputs, and it's done not just on a deterministic basis, but on a stochastic basis of various environments, what's the range of returns? Is the lower end of that band acceptable to us? So I know that was a complicated answer.

In terms of us versus competition, I don't know that we're an outlier in either direction. I think most of the folks in our space are in and around the 5% or 6% alts allocation within their portfolios. I think everybody tries to look at it long term. Now there could be big mix differences if you have -- if you're skewed towards credit, we tend to be skewed towards PE and real estate. And within real estate, you've got the classic Blackstone themes of infrastructure, multifamily housing as opposed to office. So I realize, again, long-term answer, hopefully, that got to some of what you're looking for.

And then the -- you're going through a process to look at your alternatives. Was that for the owned distribution that you're talking about, the $80 million in EBITDA? Could you talk a little bit more about that, what you might be looking to do, how that would -- to the extent that you have some alternatives, how would that impact the go-forward business model?

Yes, absolutely. Thanks for bringing that up. I would say the good news is this is driven by -- we realize we're on to something really substantial here. So what started as trying to help a handful of long-term distribution clients who are looking for growth capital and wanting an alternative to the PE model has become a real business and a real business that's growing nicely. We really like the platforms that we own. We see opportunities to acquire more platforms.

And really, the exercise we're going through now is where is the best optimal place to hold this business? Is it underneath the carrier? Would it be beneficial to deconsolidate it from F&G? What's the best way to fund it? So that's the exercise that we're going through. Everything is technically on the table. I would say it's pretty unlikely that we would sell the whole business at this juncture, just given where we are on the inflection curve for the business. But it's something that we're super excited about.

And so presumably, you'd keep the same distribution relationships, your own distribution, your own sales on a go-forward basis would not be influenced by that transaction.

Yes, correct. Because keep in mind, this was never about forcing market share because it is independent distribution that name has -- that label has meaning. You can't force. You have to earn it and they're separate teams. So yes, we don't see that impacting the deep relationships that we have today.

Our next question comes from Alex Scott with Barclays.

Follow-up on the conversation you're just having there on the IMO and the potential. Would you expect that, that would raise some amount of capital that the holdco has available for deployment, whether -- I guess, whether it's putting it down into the operating companies or selling it to a third party or deconsolidating? I mean, will that generate cash for the holdco if you pursue one of those avenues? And if so, what would you look to do in terms of deployment?

Yes. Alex, it's Conor. The simple answer is yes. Obviously, it depends a little bit on how exactly we do it. But in a scenario where someone joins us in that ownership of Peak and bring some capital in, one of the things I would mention or highlight would be right now, the debt -- all of our debt is at the holdco, not at the peak level.

So I would expect some element of the proceeds we would likely use to pay down some debt because perhaps going forward, like right now, the dividends that we earn from the peak entities, obviously service that debt coming through. So we would want to balance that. But aside or outside of that, yes, we would have capital available to -- for call it, for general business purposes or continue to grow AUM, et cetera.

But I guess, are you thinking of it from the standpoint of this would help you fund growth down in the opco? Or is this -- because you mentioned some of the parts. And like that sort of suggests that you're frustrated with the sum-of-the-parts discount, and that would cause me to believe maybe you'd take proceeds and buy back stock. But which would you favor?

Yes, Alex, this is Chris. I would say -- I mean, obviously, a little premature. It's not that we haven't thought about this question. But yes, I don't think it would be to then convert that capital into additional spread earnings since our goal is to grow the fee portion of the earnings. And so yes, once it's there, it's like any other holdco cash, all the various options are on the table of dividends, share buybacks, other things that we could do with that capital. Hopefully, that...

Yes. No, that is helpful.

Sorry, the other thing I would squeeze in is there is a very tangible benefit of deconsolidating which is obviously you would pick up some leverage capacity on the business itself that we cannot do today. So you would pick up a pretty attractive funding source to do more deals if, in fact, you deconsolidate it from F&G.

Yes. And I might add, I mean, our expectation would be having someone alongside us to continue -- there's -- as Chris is saying, there's great opportunity for continued momentum and growth in the entities as well. We would very much expect to continue to participate in that going forward. So we have that advantage as well of continuing perhaps accelerating the growth of the peak entities alongside a partner.

Got it. Okay. Next one I had for you is on the investment portfolio. I really appreciate enhanced disclosure, of course. One thing I realized, though, you guys shifted some AUM out of what we were calling alternative investments. The private origination fixed income that you guys kind of disclosed more on in the presentation this quarter, it looked like I think it was still around the same level at $11 billion from like the last time you talked about it.

So where is this AUM that, I guess, is no longer considered alternatives, more fixed income like? Like does that have private credit like features? Like I would have guessed that, that would have been considered private credit and didn't see anything specifically on that. So I was hoping maybe you could dimension that for us a bit too, so we could just understand that alongside the private origination that you've got in the deck here.

Yes. So I'll maybe do it in reverse order. If you say what's in -- what we actually consider alternatives because part of what we found is peers were defining it differently. And so we look like an outlier when we knew that we were not in terms of the size of "alts," but of the $4 billion sitting in alts, I think it's about $3 billion in traditional LPs. That's overwhelmingly private equity, private equity real estate with the themes, the classic Blackstone themes that we've talked about.

There's $1 billion that says other equity interest. It's not exclusively, but the bulk of that is what we would just say credit residuals, so equity tranches, but on the credit side. So what people think of as the longer-term higher returning, but therefore, more volatile, that's why that sits there. The reason we moved the credit over is those properties are going to look very, very similar to a high-quality CLO tranche or any other investment-grade piece of paper.

So again, it was really a bucketing thing. I think we were defining it for a while based on where it sat on the schedule as opposed to what the underlying characteristics will look like. So hopefully, that helps.

And yes, on the disclosure side, we feel like we're -- we've been through all of our peers. We feel like we're giving as much, if not more disclosure than anybody because we feel good about the portfolio, and you can see that in the credit losses, upgrades versus downgrades, percentage of first lien, LTVs, you just across the board. So I'm not sure what more we can do at this point [indiscernible] some concerns.

Well, just to be clear, so the CLO-like assets that you moved out of the definition of non-fixed income alternative, that is or isn't in the $11 billion that you gave more disclosure on? And if it's not, could you just help us think through that piece of it a little more? Like what's the size of it even? I mean, I just want to understand it a little better.

Sure. Yes. So again, if you go back to what used to be $11 billion, and we now define as $4 billion, the remaining $7 billion is largely that. It is investment-grade tranches of fixed income coupon clipping securities. So yes, it would look a lot like CLO or CMBS type structure.

And that's not in the $11 billion that you've got in your slides or it is?

It is.

It is in that $11 billion. Got it. All right. That was the piece I was missing.

And I think Chris carved out the, hey, there's $18 billion of kind of core fixed income, $11 billion of origination, $11 billion of structured, $7 billion of mortgage loans and now $4 billion of alts. So all of that should add up to the whole portfolio.

Got it. All right. That's all clear now. Just on -- sticking with this, of that $11 billion, like can you talk about software? Because I know you mentioned 5% for the broad portfolio. Can you tell us about, like, just the private origination because I think that's sort of the area of software people are a little more concerned about. Like do you know what that number is for just as a percentage of private origination?

Yes, I have to confirm this, but I want to say it is about 20%. And then within that, the reason we've given the kind of the piece that's at risk, and I know because you've written on this, I know you get it, software comes in so many different flavors. So I would say the vast, vast majority of this, we do not think is at high risk of AI disruption, particularly in the near term because keep in mind, a lot of these loans are pretty short duration. I mean these are like 2-, 3-year loans, not -- these are not 20-year loans to these companies. But yes, I think based on what we've seen from some of our competitors, I don't know that we're necessarily an outlier in terms of software exposure.

Got it. Okay. That's helpful. And maybe one last one, if you'll entertain it on the investments. A lot of peers are defining it in different ways. So like some peers are including like 144A private placements. And I'm sort of looking at it both ways. So I just wanted to see if you could opine on that piece of it. Like how much 144A private placement do you have? We can obviously see in the scheduled disclosures, but I know there's funds-withheld consideration. So I just wanted to check if you have that number handy.

I do not, but we can certainly dig that out and follow up for you.

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

Thanks again to everyone for joining us this morning. We delivered a solid start to 2026 with record gross AUM, disciplined capital allocation with an increased capital return to shareholders and a high-quality investment portfolio that continues to perform well. We continue to execute on our strategy toward a more fee-based, higher margin and less capital-intensive business model.

Underpinned by our diversified new business engine and the structural tailwind of the peak 65 retirement wave, we remain confident in our ability to grow AUM and expand return on equity. We appreciate your continued interest in F&G as we remain focused on delivering long-term shareholder value, and we look forward to updating you on our second quarter earnings call.

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

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 [ company offer ] 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. [ ERT ] 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 [ forego ] 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 REIT'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? If you're underexposed to that area -- [ where ] 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, [ that should be all ]-- 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 [ area ] 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 [ a better ] 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 into the sand ] 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 [ piece ] is 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 ] range. I think last year, we were the sort of [ 410 ]. So we don't obviously expect to continue to run the company at a 430 range, so that's in capital flexibility. Remaining therefore, just automatically 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 [ our own ] 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 plato. 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 [ like that ]. [ So it's ] , 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 billion -- [ 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 rise was ] AUM expenses. But essentially, what I would say in is that we will keep our overall expenses about [ all 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 [ full 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 just 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 month ] 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. So at this stage, we have essentially the mall. 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 till 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 rider in all of these in FIA, in IUL in PRT and in MYGA. We'll move up and done 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 -- that [ CII ] 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 in a time I feel that there's kind of a lowest common denominator were [ reviewed pops ] 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 I guess, [ Christie ], 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.

[ Smith ], 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 drives the business. And that's not the case. And we've done everything we can to lay 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 on ] 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 [ the ] -- 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.

Good morning, and welcome to F&G's Third Quarter 2025 Earnings Call. [Operator Instructions] 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 own 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 9 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 9 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 of more debt-like in nature.

Next, turning to variable investment income. We reported $24 million of pretax, prepaid 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 8 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 9 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 9 months, up 46% over $28 million in the first 9 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 which 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 towards 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.

[Operator Instructions] And our first question comes from the line of 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, 10-ish 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, maybe to in reverse order. I think, look, everyone is concerned about the same things in the private credit space. So there's been some kind of big, I would say, bold statements made on both sides of the argument here. I think the only thing we can speak to specifically is our own portfolio, which we're feeling quite comfortable with. With respect to Egan Jones, yes, I think like a lot of firms, we're increasingly utilizing two different agencies. Are -- the number of securities or loans that we have that are rated by Egan Jones is quite small, like quite small.

And we're trying as a general rule to get two agencies and wherever possible, one of what you would call the big 3 to rate every single deal, not just because of the backdrop or concerns about any one rate -- one rating reliable, so to speak, but also you have turnover. We have an analyst on leave. And so it's always better to have two where you can have that. So I think we've made a ton of progress there.

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 give you a sense. I'm not sure we give a complete and full breakdown, but I kind of know what you're going after. And I would say this from an expectation of where we came out, we were pretty close on the whole loan and direct lending parts. And I think we talk about a $10 billion portfolio in total, of which about $3 billion of it is the LP. So the LPs had a stronger performance. And I would -- yes, I would say that the increased performance was broadly there as well, but they are also in the main, the area that are still falling short of the long-term expectation. We were pretty much there or thereabouts on the whole loans and on the direct lending side.

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 it's -- there isn't 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?

Yes. I'm not sure if it was 10 basis points, I thought it was probably closer to $10 million and maybe 3 or 4 basis points in terms of the, what I would call, core fixed income impact. But yes, we did have a little bit of a change. We had a change. We were solely using the forward curve, and now we have sort of a decision tree methodology where anything that's like a placeholder or if it's not hedged or if it's an FP -- an FABN, et cetera, it's short, it's spot right, anything that's longer term is forward.

So we were really calling out the fact that it was suggesting that the fixed income yield had ticked up a few points. Honestly, I think the fixed income yield in the quarter -- actually, no, I apologize I think it was 10 basis points. I think the fixed income yield in the quarter was pretty flat quarter-over-quarter if you really drilled into the core components.

[Operator Instructions] 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 -- that's -- on an adjusted basis, we've been in the like kind of high 120s right around that lower end. Remember, we had this -- the target that we put out a couple of years ago at the Investor Day to get into the 130s to 150 range. And we're right around that bottom end of that range currently. So over the last 12 months, adjusted basis, yes, I think we're probably around that 129, 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 product, markets have obviously been outperforming quite well, equity markets. And so yes, you're always going to see everyone's well some 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. So the EBITDA number, I think, a couple of quarters ago, we were maybe projecting about $85 million. I'd say it's down a little bit. But honestly, every single month, it's going to bounce around by a little bit. I would just say the portfolio is performing really well, like ahead of our expectations. So we feel great about that in terms of the growth rate going forward. So that's been, I would say, pretty terrific.

In terms of activity, I would say it's the same as it has been. There's -- every platform that we purchased, there was private equity competition, either they had turned down one of the roll-up players or had offers from the roll-up players. So I don't think our competitive positioning and how we position ourselves relative to them has changed. So yes, we're still quite optimistic about it.

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 on the liability side. Again, back to the core versus the opportunistic. I think we're feeling comfortable near term and by near term, I'm kind of giving you -- we get out of a few months out as we kind of look into momentum heading into Q4 and where the markets are currently. I'd say it is okay in the FIA space. It's definitely competitive, but it's -- I think it's also reasonable. That's true of RILA and IUL as well. From a PRT perspective, I would say that's still -- it's fairly active. There generally is a fair amount of activity in the fourth quarter of every year. And I think the environment is still conducive to that. A little hard to predict that too far out.

I think in terms of the volume and the pricing in the PRT space currently and that space that we play in the sort of $100 million to $600 million upwards to $1 billion space is pretty good as well. I think near term, from a MYGA point of view, and I alluded to this on an earlier answer as well. That's tighter. I would think that this is, again, back to the opportunistic element of it, I would say, near term, the appetite for that probably wanes a little bit compared with the other opportunities that we're seeing out there.

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.

Got it. All helpful. Second one I have to you is just on the hedging and short-term interest rates. Could you help us think through like how that actually flows through earnings? Like is there a lag? Is it amortized? I mean was there an outsized impact maybe this quarter from rates coming down at the short out of the curve? I just -- I'm not as familiar with how that would flow into adjusted earnings.

Yes. I don't know that there's anything really significant. I mean I think you know the overarching perspective really for us, it's just we have a floating rate component of the portfolio that's not on to -- and I think it's under -- less than $2.5 million or 5% of the portfolio, but...

Yes. And you always want some floaters in there, right? Because when great opportunities come up, this is stuff that's often easiest to move and reposition into something better. And yes, I'm not -- we'll follow up with you on that one, but I don't think there's any meaningful timing lags due to the hedging.

Okay. And nothing -- like nothing notable in this quarter in terms of [indiscernible] gain flow through or something like that?

No. And again, the methodology change was really just trying to be more precise, right? Because we use floaters in different ways, right? There are some that are defeating a longer term, maybe call it a 5-year liability. There are some that are really placeholder assets as a cash surrogate. And so that -- it was just really trying to make sure that when people looked at movements in interest rates are tied to the portfolio results that we're seeing a little bit better.

That's exactly right. I mean, yes, just to underscore that, it's really just -- it's tied to the purpose of the use of the asset. So it really was -- it was modest. The reason we highlighted it at all is we were really looking to illustrate that the -- from a core fixed income perspective because there's so much focus on the ROA that it was -- I mean it was positive, but it was a flat quarter. It remains the same. We weren't trying to suggest that it had gone higher because of anything we had done 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 think it's the latter. Thank you, and I made some of these comments earlier as well. From our perspective, bringing the cost basis as a percentage of AUM down from 60 to 50 basis points. So that is essentially we -- we got to that track with the efforts in the second quarter. My expectation is that it will take down from 50 to 46 roughly over the course of next year. But I would say that's by maintaining, broadly speaking, in sort of inflation side, maintaining where we are now and continuing to grow. I think after that, it will continue to come down, but I think the pace will be more modest. I'm guessing maybe like 0.5 basis point a quarter. So 2027 maybe another 2 basis points after 4 this year. But that's -- so you could view it as an impact of continuously improving expense ratio rather than a declining level of 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 5 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 basis, 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.

All right. So we will go ahead and kick off the next session. First, I'd like to say thank you, everybody, for joining us. Chris Blunt, CEO of F&G Annuities; Conor Murphy, CFO. I really appreciate you all being here. We're looking forward to the conversation.

To kick it off, I wanted to start with a higher-level discussion of your strategy you've talked about to transform F&G into a more fee-based capital-light business over time. And I just wanted to get a feel for what are some of the key things you're working on? What will that mix look like over time?

Sure. Yes, I'll start. I'm sure Conor is going to want to jump in here. So good to see everybody. Yes, I would say, traditionally, the bulk of the growth of the last 6 years for F&G, where we've kind of more than doubled AUM and our earnings has come by making annuity sales and retaining them on our books, right, holding those assets. And now with the launch of the sidecar with Blackstone, some of the reinsurance deals that we have put forth, we are moving towards a more capital-light model, and that's simply because the return on equity is meaningfully higher to write a piece of business and be more of a distribution company.

We have also invested about $700 million in actually owning some distribution channels. So we have bought a number of properties. Those are performing really well. It's already throwing off about $85 million of EBITDA. And then lastly, we've got a middle market life insurance business, which is growing quite well. It's one of our more profitable lines of business. So yes, I would say a bit of an evolution for us as we've come along this journey, but the sidecar, $1 billion of committed capital, it seems an appropriate time to really be more clear about what our intentions are as a company.

Maybe we could dig a little more into the reinsurance and how are you using the flow reinsurance to improve the capital efficiency, capital requirements for your growth? Can you just kind of walk us through what it is that actually alleviate some of that capital heavy nature of the business and so forth.

Yes. I'll just do the quick math. Conor can walk through the strategy and the different relationships we have in place. But right now, when we write a piece of business, keep it on our own balance sheet, you put up approximately 15% capital in year 1, that drops down to 7.5% in the remaining years of the contract. In a reinsured sale, that's 7.5% upfront dropping down to 0. So technically, return on capital is unlimited years 2 through 5 or 7 or depending on the tenure of the contract. So it's meaningfully accretive for us to be a distributor of premiums versus holding them on our balance sheet. Now having said that, it's not all or none. We'll continue to hold assets on our balance sheet. We will retain some portion of the business. And then Conor, you probably talk about some of the other flow related.

Well, I think for us, too, if we think about it perhaps in terms of product priority, we have our core products, of which the most noteworthy on the annuity side is the fixed indexed annuities, where we had a reinsurance arrangement in place but it wasn't a comprehensive one like what we've just added with the sidecar. Another core product for us is on the life side, our IUL product. We have our PRT product, which we don't reinsure. And we have RILA, which is just emerging. So it's core, but it's small.

And then on the more opportunistic side, we have the MYGA and the FABN. So in 4 of those products, we're a top 10 seller IUL, FIA, PRT, MYGA. But we had comprehensive reinsurance available on the MYGA side, less so as I said, on the FIA. And when we think about what we want to do, we would like to continue to write -- to grow our FIA business day in, day out. We'd like to do the same with our IUL business. We'll grow our PRT business, but that it will be lumpier.

As I said, RILA is quite small. So this gives us the ability now to really do as much FIA as we want or as we're comfortable with. And at the same time, we'll probably have a trade-off with the MYGA side because we're probably seeing -- while we have a diverse and very well-established set of reinsurance partners, their own dynamics are changing. We have less certainty and clarity as to whether we're going to get the returns we want in that space. We feel very comfortable that we can write the business at the spreads we want on the FIA space.

And then the last thought, which may provoke another question is on the FIA and the IUL, that's business we get to reprice. So we're in the spread margin business. I would also argue we're in the spread maintenance business. We get to do that with IUL. We get to do that with FIA. On the MYGA side, you're writing mostly a 3- or 5, some 7-year product. You got to get it right at the start. You're not repricing that along the way.

Yes. And then I would just say the last -- I think you mentioned, but the last source of liabilities would be funding agreement-backed notes. And as we said the other day, we were active in the market and did about $800 million of funding agreement-backed notes last week. So...

Yes. That's been a market that's been pretty active. So I definitely want to come back to that. While we're still on the topic of being more capitalized, more fee-based, I wanted to come back to the capital raise earlier in the year. I think from what I can tell, it confused people a little bit from the standpoint of you have a company that's talking about becoming more capital efficient, more capital light, but yet you raised capital. So could you help us think through how that is going to be additive to what you're doing, the ways you'll deploy it to clear some of that up?

Sure. I would say the biggest driver of that is, as you may have recalled, earlier, I think it was maybe a year prior or so, FNF had put $250 million into F&G in the form of a preferred investment. And so we always have opportunities to grow. So it was less a we need capital as much as it was, hey, if we had even more capital, we could grow even faster. We were hopeful that we could do the sidecar, but there were no guarantees that you're going to be able to pull that off. They are complex things to do. It have been in the works for about 18 months.

The decision was made to extend it to third-party investors to sort of help with the float and a little more float at the margin. I would say the lesson learned from that is, yes, no, it didn't go over well. I think folks were surprised by the raise. Terms of execution weren't what we were hoping to get out of that. Now having said that, we were able to deploy it and deploy it at good returns. So we still feel good about that. But yes, part of the sidecar announcement was to take a little bit of that risk off the table and say to folks, no, we're -- we've got plenty of sources of capital now. You shouldn't expect us to be out in the capital markets raising money again anytime soon.

And you may have this perspective. I think there was a fear maybe that we said we were doing it for capital raising purposes, but was there a challenge of capital which there wasn't, but I think you can only allay those fears when you can actually replace them with a permanent solution or a more permanent solution like we did with the sidecar. So hopefully, that's been put to rest.

Yes. Understood. And as we think about capital redeployment, whether it's capital that was raised or the capital you're generating every day, what are your priorities for putting that to work? Is there enough organic growth, enough opportunity in your markets right now that you'll be putting that to work organically?

Yes. I would say from a pecking order of returns, obviously, we love our own distribution business. Those returns are terrific. Those platforms that we already own are performing quite well. We do think over time, there's an opportunity to buy additional platforms. The bigger immediate opportunity is probably to roll up some sub-agencies underneath where you can buy some smaller players at very attractive multiples and consolidate them up into a bigger. So that's quite high on the list. With the sidecar, I would now say writing an FIA through the sidecar is extremely high return business for us, IUL, which Conor mentioned, is quite strong. So we have a lot of places to deploy capital right now.

Speaker 2.

Yes. And maybe just to play that a little further behind that, even retained FIA because we will do that and then PRT. PRT probably ahead of MYGA. That's probably the order.

Okay. I wanted to dig into the owned distribution next. I think it's something that's pretty unique about what you've done, and it's different. So I want to make sure we dig into that a bit. There's only so much disclosure that we get on it. Can you help us maybe think through some of the things that if we're analyzing the value of that business stand-alone, the people we care about, right? Like I think the organic growth of that business, what do the margins look like? And what does the trajectory of it look like? When you're doing new buy -- new purchases and bringing it together, what is the compound of the integration look like? And what does that all look like over time?

Yes, 100%. So I'll start. We have 4 platforms today, 2 are in the middle market/cultural market, life distribution space, and we just love that. They're recruiting machines, great growth rates. Super high-margin business, clean business. So that's fantastic. So that we want to continue to scale. We own what you might consider a traditional annuity IMO, but one that we think has some really unique competitive advantages and that would do well in even a pure fiduciary world. They have opportunities to grow and are growing at a really rapid clip.

And then we own one that is more of an annuity expert where they are mostly wholesaling and providing expertise to larger financial services firms, but firms whose primary focused product is not annuities. It might be life insurance or something else. So all a bit different, but all we think really, really fantastic businesses. I'll start with what it's not. It's not -- oh, if we buy distribution, we can force F&G product down their throats. It doesn't work that way. They're totally separate teams. We want them to be successful. And if the best way for them to be successful is to sell some annuities of a competitor of ours, that's great. That just means my competitor is paying commission income to me, and that's kind of a beautiful thing. So those businesses, we like a great deal.

When we underwrite them, the returns are fantastic, high teens, if not greater, on those acquisitions. And that is without operational improvement. We have seen some operational improvements of getting some of the businesses to work together. If someone's life focused, we plug them into our annuity expert. We get higher annuity sales, and we're effectively paying ourselves. So a lot of the classic things you would get from a private equity firm, but what we're differentiating ourselves with is time line and relationships. So these are, in every case, firms who've been working with F&G for, in some cases, 20-plus years. So they know us. We're not strangers to them. We've got a longer-term time horizon there. So yes, very high growth rates, high margins, private markets, these businesses have been trading at 14x EBITDA. So we feel good about what we own already. As I said, we've put in $700 million. It's already throwing off about $85 million of EBITDA.

Got it. That's all really helpful. Can you remind us just on the ownership you have in some of those distributors and any potential opportunities to increase those stakes over the next few years?

Yes. So 2 are majority. One, we actually own 100% with an incentive plan for the management team. Another is 70%. One is 49%, but with a contractual right to take control in the future. And then the last is a 40% stake with more of a right of first offer. So I would say they're either controlling stakes or a relatively clear path to control. So yes, I think there is an opportunity to take a bigger stake. And as I said, an even bigger opportunity to provide capital for them to roll up some players underneath them.

Next, I wanted to dive into retail annuities a bit more. One of the things that I guess we're beginning to hear more consistently is just that the environment is becoming a bit more competitive. I think some of the private equity-backed funds have talked about it recently. And so what are you seeing in your markets? Are you able to still get the kind of IRRs you're looking for when we think through the different products like FIAs and MYGAs in particular?

I would say from where we compete on the FIA space, it's still very consistent, very strong and it remains at the top of the list. I think the -- which was why it was important, even retained FIA, we would value very highly. The reinsurance opportunity just helps to improve that even more so. Yes, I would say so just from our own perspective, we wrote -- we didn't do a lot of MYGA in the first quarter. We actually did -- I would say that we were kind of at the low end of our range in the first quarter and the high end of our range in the second quarter.

And maybe those are kind of near-term bookends for us. I think that's tougher definitely at the moment. It's just there are more entrants, there's more competition. And as I said to the reinsurance partners that we have where they themselves, I think, are weighing out the relative opportunities there as well. So I think that's probably where we're seeing the most -- that is where we're seeing the most competition. The rest of it, IUL, FIA less. So PRT, we probably end up winning about 1 in 4 of our PRT bids. That will probably stay. The volume may change. Very often, fourth quarter are just bigger volumes, for example. But I will be there or thereabouts. It's not always price there, too. It's a little bit of ratings and so on.

Yes. The only thing I'd add is we're really a distributor of MYGA, right? So we need reinsured demand to do that. So a base MYGA return is not bad. It's just we have better things to do with our capital. But if a reinsurer wants it and wants to pay us an attractive ceding commission to source it, then it goes from like okay to good, and we like allocating capital there. And so yes, it's also the easiest place for competitors to break into because it's yield times ratings and brand name doesn't really matter. FIAs are a completely different business, right? It's the ultimate Trust Me product.

We -- someone buys one of our contracts, they're locked up for 5, 7, maybe even 10 years, and we can change the terms every single year. So your reputation matters, like you get grilled on every in-force crediting decision you've made. Were you taking advantage of policyholders? Were you doing the old bait and switch. So that stuff matters. Service matters, not screwing up the admin, paying your producers on time, relationships actually matter. So that is a lot tougher. And that's why I think you've seen a lot of new entrants will come in, they'll sell MYGA at sort of the low end of the independent producer channel, but it's hard for them. It's a long slog to get from that to selling FIAs to the top distributors.

I would say, too, on MYGA, we're kind of free agents, right? We don't -- it's away from Blackstone. We can do it with whoever we want. We don't have -- we're not captive. We don't have our own asset manager or are owned by an asset manager. So we can do it with whomever we want. So I will say that there is no shortage of potential partners all the time. There's a constant number of folks showing up at the door going, hey, can we have a conversation about doing some flow business with you. So that is encouraging. But having said that, I'd say there's a little tightening.

Got it. Any views on RILA's in particular? I mean it's just been such a booming part of annuities for the last handful of years. I'd be interested there, too.

I joke that we're a bit player, and I'm like the biggest cheerleader for RILA, but we've just started. It's taken a long time to sort of get ourselves on platforms. I think we're on 7 platforms now. So that we clearly misestimated how long it would take to get on these platforms. Once we're on, the product is getting traction. So we have producers who sell our FIAs who want to sell our RILA. We just have to get approved on their broker-dealers. So it's not a product competitiveness issue. And I think the category over time is going to be massive. I mean now you are squarely competing in the world of mutual funds, right, in terms of the risk/reward trade-off. It's a younger demographic generally that's buying a RILA. So yes, we're quite bullish on it.

So one of the other dynamics I wanted to ask about is just the massive amount of AUM and 401(k)s that sort of concentrated in the older cohorts and whether Peak 65 or whatever you want to call it, as that is occurring, what do you see unfolding here from like a growth trajectory standpoint? And how do we think about that relative to, I think, maybe uniquely strong growth that we've seen recently because rates came up? And what will that trajectory look like in your view?

I was going to say you're maybe the target audience. It's not that...

Well, no, look, it's massive. I say this all the time. I'm a baby boomer, my friends are baby boomers. I mean if I -- if you were all being honest and I polled you in the audience, you all have at least one 401(k) you forgot about sitting somewhere that you don't pay a lot of attention to. So the rollover business is just going to continue to boom for another 20 years. I mean that's just going to be -- it's massive. So that's a big opportunity.

In-plan annuities, it's going to take a while. I still think that's more of an advice sale. I think most people are going to choose to roll their money and deal with whoever their favorite financial adviser is versus trying to bundle it into some combined solution in a plan. But if a small percentage of that happens, it will still be big numbers given the trillions that are sitting in unqualified plans. So yes, it's -- we haven't come close. I've said this before, like there's going to be more demand for these products than global capital to source at all in the next 10 years. I really believe that. I think you're going to have mediocre companies will do quite fine.

The implant thing is interesting, and I had a bit of a front row view of the BlackRock Equitable Brighthouse exercised. At a minimum, I think it will raise awareness. I think it will be good for the industry overall. I think it remains to be seen how that will compare with just the ability to buy an annuity when you're ready to do so. So I'm sure we have slightly different views on this. But as a whole, I think it's -- I think it's a great addition. We'll see how meaningful it becomes.

So next, let's go back to the pension risk transfer market. I think it started off maybe a little slower for the industry. You guys, I think, actually had a decent sized transaction this last quarter. But how is that market responding to some of this litigation that's out there? Is that having any impact, the volatility? I mean, would you expect a normal 3Q, 4Q seasonality to unfold here with more transactions?

Well, so where we compete is in the $100 million to the $1 billion stage. So we're -- that's not where Athene, MET and PRU are. We're more where PacLife, Principal, EA interestingly and some others. But within that space, first of all, we haven't felt that kind of the regulatory external loss pressure that others have had. I think it's been very -- it's been a sensible market. It hasn't changed very much. I would say that the pricing exercises that we were going through a year ago and what we're doing today are very consistent.

The same number of players, ratings matter, reputation matters. We have some old souls in this space. We don't have a big PRT team, but they've been around a long time. And I think that's important. They're well trusted. They've been in the industry a long time before they came to us. So there's that, call it, that reputation of the team and the corporate. And as I said, if we're -- if we continue to do in that, we'll always be 1 in 4 as competition increases, but I think we'll get our fair share of that.

The returns are good. But yes, we -- and honestly, there may be quarters where we just don't write something and there will be others. I think the high watermark was fourth quarter of last year. I think we did maybe $2.25 billion roughly last year. I think we're at sort of $750 million or something so far this year. I don't think we'll go from $2 billion to $4 billion in it anytime soon, but would I like to stay in this sort of range? For the -- at least for the near term and maybe grow a bit more from there, absolutely.

And I think competitive set has been really consistent. And your best competitors are also your most rational competitors. So you just don't see stupid stuff in PRT, meaning these are more -- they tend to be more established companies. And it's not that, hey, someone hasn't won a deal in 3 quarters. You know they're going to go in aggressively. And sometimes we just let that deal go by the wayside. But you don't -- at least we don't see like stupid pricing. We are like how is someone making money doing that, which is good.

I guess along the same line, for a while, you guys were working towards like better ratings with some of the agencies and so forth to get you into certain markets. I mean, is that done at this point? Do you have access to all of the areas of the markets that you'd like to be involved in? Is there anything left to do there?

Yes. I can't say it constrains us, but it still pisses me off that we're not -- sorry, I'm not allowed to say that. We think we're a notch -- we're rated a notch lower than we should be. We think our clear peer group is one notch higher. All we can do is make our case the rating agencies. They have to agree with us, and they have to go through their process. We run the business at the level we think we should be at, not where we're being rated today. If you think about it, since we were last upgraded by a couple of the rating agencies, we've doubled our business. We've doubled our -- the cash that comes off our block every year.

And our sales capacity went from $3 billion to $15 billion. So you tell me, if there's a stronger case for an upgrade, I'm not sure what it is, but I understand it. They have a process that they need to go through. Does it constrain us? I don't think that constrain us.

Well, but to echo that, as I kind of looked over the fence myself before coming in on April 1 is when you look around, I don't know that there's another growth story like ours. I don't know that there's another positive flow story like ours. I don't know if there's a cleaner set of liabilities than ours as well. There really isn't anything that would make somebody go, yes, there's some good stuff. There's some gemstones here, but there's a few [ dogs ] as well. I don't -- that's not the case. So we will continue. We're heading into rating agency season later this week actually. So we'll find that drum as hard as we dare.

But again, to be honest, if you said if we were upgraded tomorrow, would we double our sales plan or increase it by 20? Not really. It would be most helpful probably in PRT.

We win a few markets.

There are in the market...

Is where maybe we've been in a relative tie with somebody who had a notch higher rating, they're going to get that. Or maybe even had a slightly outside price, but they'll take it. And that's understandable.

Got it. Really helpful. Next topic, alternative investments. I just wanted to touch on this, in particular, the allocation to alternatives. So on one hand, I know that the returns speak for themselves over a longer period of time. On the other hand, the volatility of earnings caused by having a higher allocation of alternatives relative to many of the companies I cover, maybe undermines some of the potential unlock of value associated with becoming fee-based and more capital light, right? So -- how do you think about that trade-off? And how should we expect that allocation to trend over time?

Yes, it's tricky. So if you look at, I think the scheduled BA assets, it's a big number, but there's a lot of like credit residuals that sit on that. So our LP interest is 6% of the portfolio right now, roughly half of that, a little over half of that is PE. And so that is simply a -- yes, we haven't -- it hasn't been a good environment for realizations, right? So I joked in an earlier meeting, John Gray is excited, so I guess I'm excited. But I hope we are starting to see a change. We'll see more IPOs, more M&A activity. That would be a huge tailwind for us. We don't plan on it. We run the business assuming that it could still be somewhat mediocre. That's probably the biggest wildcard. The rest of it is real estate.

And if you look at the themes from Blackstone, it's been warehouses, data centers, multifamily housing, like these are good bets. It's not the stuff that maybe people are more concerned about there, but you've got the same issue, like assets need to trade for value to get realized. So we go through a pretty laborious process every quarter where -- and we have like risk folks, we have folks outside of investments to try to get at is the long-term assumption, which we target 10% on a huge broad pool of alts, if you will. Is that still valid? And we still feel that it is. So we don't have a vintage issue. We don't have huge pockets within alts. So where it would probably benefit us the most, frankly, is not earnings, it would be capital, right? Because if you start doing 10s versus 6s, that's a positive contribution from a capital perspective.

One quick follow-up I had. You guys break out the fixed income, and I know you have sort of this bucket that has the alts and I think you mentioned credit residuals. I just want to see if you could give a little bit more on what's that portfolio? Because I think the longer-term assumption on that is close to a 10, 2 maybe or somewhere maybe not quite that high. But I think sometimes I get questions on it, I'm not always as well versed in what's in there.

Yes, we probably should because if you take that of the $10 billion -- it's getting close to $10 billion, about $6 billion of it is debt like. And then I think maybe $3 billion is LPs and then the residuals are probably another one. So yes, we probably, a good takeaway. We probably could do a job of maybe helping understand that the fair amount of this is more predictable and might have there's probably a bunch of stuff in there that has maybe more of a 7-ish expectation that would maybe alleviate some of the concerns.

Is that equity risk some kind of...

Not the way you think of equity risk, right? So it's a tranched up loan that might have a blended return of, to Conor's point, 6.5% or 7%. But yes, the equity residual piece could have a double-digit return associated with it, but it's a very -- it's a smaller piece of that. And then obviously, most of these things are amortizing. So it's not a 0 to 10 lottery at the end of 6 years or something like that.

But it's a good takeaway. I agree. We could provide more detail on what's in there.

So next, I wanted to get into some of the spread dynamics of your business as we think through that. And we've heard, I think, some companies begin to talk more about, well, maybe the IRRs aren't quite as good on new business as what we were getting during COVID or before COVID and so forth and that there's some spread compression out there associated with that. What are you seeing in your own business on that front?

I'll start. I would say retained business, we've seen some spread compression. It hasn't been huge, but there's been some spread compression. In our case, it has been more than offset by the accretion we get from reinsurance. So again, if you're retaining every dollar, like if you're owned by an asset manager, you're not doing flow deals with your competitors, right? You're keeping it all yourself. It's also been offset by own distribution margin because some of the expense actions that we've taken. So yes, I think there's a little bit of pressure at the core level, but we just -- we have some levers that perhaps some of our other competitors don't have to offset that.

Yes. And I would add -- and we certainly are finding plenty of opportunity to write business at spreads that, again, we get to maintain on the IUL and the FIA because we have the ability to reprice the book every year. So that's again, you kind of abuse it, you have to be a good partner and a good manager and a good customer manager, but that gives us a lot of flexibility as well.

Got it. Okay. That's helpful. And just to give you guys a heads up, I will open it up in a minute for questions. I'll ask one more of my own, and then I'll open it up to see if there's any questions out there. Just to follow up on the spreads. I know there's different dynamics out there. I think I can think of one company that maybe has called out market value adjustments is something that's kind of moving the crediting rates around a little bit. I think you all actually give probably the best disclosure around surrender fees and how that kind of influences things a little bit. I mean is there any lagged nature to the crediting rate that we need to be aware of as we think through where you're at today and sort of that trajectory to where you all have outlined you'll get in your medium-term plan?

I'll start. I don't think so. I mean if you go back to -- we talked -- just go back to the first quarter a little bit, part of the conversation was, hey, your surrender income is down and actually so is your prepay income. I would view both of those as a positive, actually, right? But I would rather retain the assets, I'd rather retain the book. Now it's probably a little harder to get those assets again. But on the business, yes, it obviously view it as a make-whole provision, if you will. Our ability to take that and take the surrender charge, be made whole and go write the business again tomorrow, that's pretty strong for us. So we feel pretty good there.

Having said that, the level of -- so we got into the second quarter where we had a level of surrender fees more consistent with fourth quarter and third quarter of last year. That will likely come down. And again, I would view that positively. I would like -- I would like to have fewer surrenders. It's just going to be something that's going to move things around a little bit. I think in a quarter where it happens in isolation, and it's expected, that's probably fine. I think in the first quarter, it happened alongside the prepay, alongside own distribution who had invested more, alongside having a cash problem of having too much cash, which isn't the worst cash problem to have, but there you go. So we'll see.

So I don't think we'll have this level -- I wouldn't project this level of surrender income for us for 2026 or 2025. Don't ask me when. It's -- we might stay here for another 3 or 4 quarters. But beyond that, it's hard to imagine we'll stay quite at that level. But that's okay. It's just one level in this. We still have an expanding ROA journey. We've been on that since the Investor Day a couple of years ago. That is an element, taking our expense ratio from 60% to 50% this year, there's a pretty good offset right there. And by the way, we're not -- we won't stop at 50%. We will continue to bring that down. I would like to bring it down at least a basis point every quarter from here.

And I would say, if you go back and look at that 5-year Investor Day target, which was not even 2 years ago, not quite 2 years ago, October of '23. We said we're going to increase AUM by 50%. We're going to beat that handily. We said that we had upside from flow reinsurance. We're already running ahead of that. Upside from owned distribution, we're going to beat that number. Expenses, we're going to obliterate that number in terms of progress on expense.

Portfolio uplift, I think we will meet or beat that number from a spread perspective. So yes, a little bit of spread compression in the core base spreads. I think we've more than offset from some of these other levers. So if you go back to grow AUM by 50%, take spread from 110% to 133% to 155%, I think we're tracking really nicely on that. And then the last one was ROE, and I think that's moving in the right direction as well.

Great. I'll pass it to the audience. Is there anybody that would like to ask one? All right. We have a couple -- let's go first.

You want me to go first?

Please.

I'm not the insurance expert in my group. I'm just auditing this presentation, but we do own the name. Just a question about this idea that you're going more asset-light, more fee dependent. Given you don't -- you're not going to own those assets on the balance sheet, does that mean that you are more cyclical as a result of that because you're more dependent on flow and fee generation on a year-by-year basis?

Yes, it's a great question. So it would depend on where that dependency is. So in own distribution, the answer is no. You wouldn't necessarily be more -- any more or less cyclical, I guess, than you are today because that's commission income, commission revenue that's coming in through fees. Same thing for life insurance, middle market life insurance, most of our margin there is admin fees. So I'd give you the same answer, no.

Pure flow reinsurance, yes, appetite for flow reinsurance. I don't know if I would call that cyclical. I think that's going to be driven by a lot of things as to what drives flow reinsurance. And then the sidecar, the beauty of the sidecar, what differentiates it from traditional flow reinsurance is committed capital. So it's a $1 billion pot of capital as long as we're hitting our minimum return targets, we can take business, put it into the sidecar with a predetermined return for us as a carrier. So I think you would say of the 4 levers, maybe one could make you a little more cyclical, but maybe not in the way that we're thinking about it. Can you give it a touch...

That's fair.

And then you mentioned that there were in your competitors, not you, some bad assets or bad liabilities. Can you identify like what are the bad assets and bad liabilities from our -- my group, from my limited knowledge of the insurance business, annuities is a bad business and has a bad reputation, particularly from the fixed annuities business and some promises that were made that were overextended or a little too high for what they can actually achieve and ended in tears. So I don't think everyone's gotten over that, but is that something that you have seen in other competitors? Or is that something that you have taken actions to prevent in your own business?

Let me be very careful here. What I -- Well, what I would say is from the perspective of understanding a liability book, the hardest part to understand or predict the emergence of really would be the VA book, which we don't have. We don't have any VAs. I think variable annuities yet. I think within that space, there are disparate stories, but the products became more and more complicated. And there were really sort of 2 theses, one of which I think, hasn't held out and one has. I think there was the -- will consumers really take advantage of all the bells and whistles.

I think that's not really the case. There might be a few people on the planet who know how to do that. But the actual -- the consumer behavior has been pretty much exactly what was expected. I think they've just proven to be very expensive to hedge and very difficult to hedge, and that's just been the challenge. And therefore, across the, I would say, the life and annuity industry or the annuity industry, those entities that are heavy variable annuity just have a -- they're just -- it's a tougher valuation. It's viewed as, let's call them, capital heavy, if you will. I think those that are less so enjoy better and then you get into more fees and more asset management and other things that move away from that.

Yes. And I would just say, in general, there aren't a lot of critics of fixed annuities. I mean, honestly, even the government and the Department of Labor loves income annuities in particular. Where annuities get a bad wrap or you get the [ Suzi Orman ] and I would never own an annuity or whatever, generally directed to variable annuities as to where their IR is, and it's usually -- it's always about expense, and I'm not here to defend or a sale whether variable annuities are a good product. But generally, fixed annuities are not in that category. They're pretty straightforward in terms of the value proposition. And actually, income annuities, even the Department of Labor through 3 or 4 different administrations are big fans that people should be annuitizing some portion of their retirement assets.

But you mentioned that you can change the terms of contracts and things. Isn't that something reputationally that the industry has suffered from -- you have guaranteed 5% loan, maybe not 5%? Or is this not really enforceable because Sally was named a different name than you thought they should be, that kind of thing.

Yes. The quick answer is 100% if it's abused. So one, it's always disclosed like you can't buy one of these contracts without it being disclosed in 9 different places that those terms can change every year. And you need a business rationale to change them. But also keep in mind, we're not talking about like, oh, you thought you were going to get 9% and now you're going to get 0, right? It might be, hey, you thought your S&P return was capped at 9% and this year, it's 8.5% or 8% because there's not enough option budget to buy you that, but exchange for that, you've got a floor for 0. So it's not generally a source of angry consumers calling in. And now if you were to try to abuse that, if you did the teaser rate and dropped it down to 5, your distributors would eat you alive and you get thrown out that platform pretty quickly. So I don't -- no, I don't walk around feeling like that's an industry reputational.

To that end, I'm assuming fixed index annuities have to be hedged because you give them downside protection in those. I mean is that something that is at risk in terms of volumes or volatility? And also just generally, with interest rates falling, is that a risk for the business in terms of getting to the types of returns you need to?

Yes. Great question. So really, if you think about what we're doing, we're buying a collar option on the investor's behalf. So a traditional fixed annuity, you give us $100,000, we say you're tied up for 5 years, we'll pay 5% tax deferred. 5 years from now, we're going to give you your money back.

Indexed annuities, same drill. Instead of you paying 5% in cash, we're going to take that 5% and we're going to go buy a collar option on your behalf with a floor of 0. A participation in the S&P capped at 8.5%. I'm making it up right now. I don't know what it would be today. I should know that. So the answer is no. It's -- we're doing for you which you can't do on your -- which you could do on your own. If you had a margin account and you were sophisticated enough to do options, you could put $95,000 in a bond portfolio and take $5,000 and buy a collar custom option. but we're doing it for you in a contract. And because it's an annuity contract, you get tax deferral.

So it's pretty straightforward from a hedging perspective, very different than what Conor mentioned with a variable annuity where you're trying to both dynamically and statically hedge the S&P 500. Yes. But again, that's going to be at the point of sale. In other words, once we get premiums in, we get it invested, we don't really care what happened to interest rates, like -- but -- and then if they come down, yes, a new contract wouldn't have a cap at 9%. It might have a cap at 7%, but the policyholder can either decide I'd rather do that than be in a money market at 2% or not.

It depends on what the alternative returns are. We killed it when money market rates were 20 basis points, and we were offering 2.5%. The actual -- the relative extra value is greater than it is today. We like a steep yield curve because our competition is savings accounts and CDs. The fact that the industry has toned it with an inverted yield curve that then became flat that then became slightly steep, a steepening yield curve would actually be really good for us.

All right. Well, I think I have to take the rest of the questions offline. Thank you all for being here. Thanks to the audience, too.

Awesome.

Thank you.