F&G Annuities & Life (FG) Q4 2025 earnings review
Record AUM and Sales, But Alts Drag Profits Down
F&G posted a mixed Q4 to close FY25. Top-line metrics were robust: AUM before flow reinsurance hit a record $73.1B (+12% YoY), and gross sales remained resilient at $3.4B despite a tough compare. However, the bottom line deteriorated significantly. Net earnings plunged 62% YoY, and Adjusted Net Earnings fell 14% to $123M. The primary culprit was the alternative investment portfolio, which underperformed long-term return expectations by $65M in the quarter ($278M for the full year). While the strategic pivot to a capital-light, fee-based model is evident in the expense ratio improvement and reinsurance fees, the investment income headwinds are currently masking the underlying operational progress.
🐂 Bull Case
The shift to a capital-light model is gaining traction. Flow reinsurance fee income and owned distribution margin now contribute ~15% of earnings. The new reinsurance sidecar allows F&G to scale FIA sales without straining the balance sheet, supporting a 50% AUM growth target.
Operating leverage is improving significantly. The operating expense to AUM ratio compressed from 60 bps in FY24 to 50 bps in FY25. As the platform scales to $73B+ in assets, margins should naturally expand once investment yields normalize.
🐻 Bear Case
Alternative investments have missed targets for four consecutive quarters, dragging FY25 Adjusted ROA down to 0.87% (vs. 1.06% prior year). If this 'volatility' is structural due to the rate environment or portfolio mix, the medium-term ROA target of 1.33-1.55% remains out of reach.
Cost of funds has risen to 3.20% (up 24 bps YoY) while investment yields on the core fixed income portfolio have stayed relatively flat (4.65% vs 4.59% YoY). This spread compression squeezed product margin from 2.16% in 24Q4 to 1.88% in 25Q4.
⚖️ Verdict: ⚪
Neutral. The operational growth engine (sales/AUM) is firing on all cylinders, and the expense discipline is impressive. However, the repeated and significant drag from alternative investments (-$278M impact FY25) raises questions about earnings visibility. Until the investment portfolio stabilizes, the improved operating leverage will not translate to the bottom line.
Key Themes
Alternative Investment Drag
The alternative investment portfolio continues to be a major headwind. In Q4, returns were $65M below the 10% long-term expectation. For the full year, the miss was $278M ($2.03 per share impact). This variance is the primary reason Adjusted ROE (8.2%) is well below the 13-14% medium-term target.
Operational Efficiency Breakout
F&G achieved a significant improvement in efficiency, reducing its operating expense ratio to 50 basis points in FY25 from 60 basis points in FY24. This 10 bps improvement on a $57B+ retained asset base represents significant structural savings and validates the scalability of the platform.
Capital-Light Pivot
The company is successfully executing its shift to fee-based earnings. Flow reinsurance fee income grew to $56M in FY25 (up 37% YoY), and owned distribution margin contributed $47M. These fee streams are less capital intensive and typically command higher valuation multiples than spread-based earnings.
Core Spread Compression
Net investment spread is tightening. While adjusted investment income yield (excluding alts) ticked up slightly to 4.65%, the cost of funds jumped significantly to 3.20% from 2.96% a year ago. This compression drove Product Margin down to 1.88% in Q4 from 2.16% in 24Q4.
Sales Mix Shift
While gross sales are strong, the mix has shifted. Higher-margin Core sales (FIA, IUL, PRT) were $2.8B in Q4 (flat YoY), while Opportunistic sales (MYGA/Funding Agreements) dropped slightly. The company is reliant on the flow reinsurance markets to manage capital on these sales, which introduces third-party dependency.
Other KPIs
Decelerating. Down 14% from $143M in 24Q4 and down sequentially from $165M in 25Q3. The sequential drop was largely driven by lower significant income items (tax benefits) and continued alts weakness.
Decelerating. Down from 1.06% in 24Q4. This is significantly below the medium-term target of 1.33-1.55%, primarily due to the 45 bps drag from alternative investments underperformance.
Stable. Up slightly from $44.28 in 24Q4 (+0.3%). While net earnings added $3.03 to book value, the Q1 equity offering dilution (-$0.63) and capital returns (-$1.04) muted overall book value growth.
Decelerating. Down 5% from $2.44B in 24Q4. This reflects higher ceded reinsurance as the company prioritizes capital preservation over retained asset growth for certain product lines.
Guidance
Reiterated but distant. Current performance (0.87%) is far below this range. Management assumes a normalization of alternative returns to ~10% to bridge this gap. Without alts recovery, this target is unachievable.
On Track. AUM before flow reinsurance grew 12% YoY to $73.1B. The company is pacing well against this volume target.
Stable. Current ratio (ex-AOCI) is 26.2%, down slightly from 26.8% in 24Q4, showing steady progress toward the leverage target.
Key Questions
Path to ROA Target
With ROA at 0.87% versus a target of ~1.45% (midpoint), almost all the gap is attributed to 'Alts normalization.' If rates stay lower for longer or the private credit cycle turns, what are the structural levers to improve ROA beyond hope for market beta?
Cost of Funds Trajectory
Cost of funds increased 24 bps YoY to 3.20% while yields were flat. Is this the peak cost of funds, or should we expect further compression as the liability portfolio reprices in the current rate environment?
Reinsurance Sidecar Utilization
The sidecar was launched to fuel FIA growth. With Core sales flat YoY in Q4, is the sidecar fully ramped up, and are we seeing the maximum benefit of this fee stream yet?