F&G (FG) Q1 2025: AUM Climbs 17% as Capital Deployment Rebalances Amid Spread Headwinds
F&G’s first quarter revealed a 17% surge in assets under management, but margin compression and sales volatility highlighted the impact of market dislocation and disciplined capital allocation. Management’s narrative focused on temporary headwinds and reinforced confidence in the business model, while new capital deployment and product mix shifts set the stage for a recalibrated growth trajectory in 2025.
Summary
- Margin Pressure Signals Near-Term Volatility: Spread compression and lower surrender income weighed on quarterly profitability.
- Distribution and Product Mix Realignment: Intentional MIGA pullback and owned distribution investments reflect active capital reallocation.
- Forward Capital Deployment in Focus: Raised equity and cash reserves are now being deployed at improved spreads as market conditions stabilize.
Performance Analysis
F&G reported a record $67.4 billion in assets under management (AUM) before flow reinsurance, up 17% year-over-year, reflecting robust net new business flows and asset retention. However, gross sales fell 17% versus Q1 2024, driven by a deliberate reduction in multi-year guaranteed annuity (MIGA) sales amid market volatility. Excluding MIGA, sales grew 5%, underscoring a strategic pivot toward higher-return indexed annuities and pension risk transfer (PRT) products.
Profitability was pressured by margin compression from lower surrender income, excess cash drag, and weaker alternative investment returns, resulting in a $17 million decline in adjusted net earnings year-over-year. Operating expense leverage improved, with expenses as a percentage of AUM dropping to 58 basis points from 63 basis points last year. The cost of funds rose, reflecting both competitive market dynamics and timing effects in asset-liability management.
- Sales Volatility by Product: MIGA volumes dropped sharply, while indexed annuity and PRT sales held steady or rebounded late in the quarter.
- Alternative Investment Drag: Alternative investment income lagged long-term expectations by $63 million, concentrated in private equity limited partnerships.
- Balance Sheet Strength: RBC coverage remained above 400%, and debt to capitalization targets were reiterated, with recent capital raises bolstering flexibility.
Management pointed to April and May sales rebounds, particularly in MIGA and owned distribution, supporting the view that Q1 headwinds are not structural. The operational discipline in product pricing and liability management remains a core lever for margin recovery as market volatility abates.
Executive Commentary
"Our first quarter results reflect near-term headwinds from the volatility of the overall environment, the majority of which we believe to be temporary in nature...while we gave up some spread during the first quarter, we believe much of that was short-term in nature and not indicative of any longer-term challenge to our business model."
Chris Blunt, Chief Executive Officer
"Compared to the first quarter of 2024, adjusted net earnings decreased by $17 million. This was primarily driven by margin compression due to near-term headwinds, lower owned distribution margin, and higher interest expense in line with our capital market activity. These were partially offset by asset growth, higher flow reinsurance fee income, and disciplined expense management."
Connor Murphy, Chief Financial Officer
Strategic Positioning
1. Capital Deployment and Product Mix Discipline
F&G’s capital allocation strategy is actively prioritizing higher-return products over volume growth, as evidenced by intentional pullbacks in MIGA sales and renewed focus on indexed annuities and PRT. Management’s willingness to flex volumes in response to market conditions demonstrates operational discipline and a focus on long-term return on capital, rather than chasing near-term sales at the expense of profitability.
2. Distribution Investments and Fee-Based Diversification
Distribution ownership is emerging as a key strategic pillar, with $680 million invested across majority and minority stakes in distribution partners. These investments, held under the Peak Altitude entity, are expected to deliver double-digit EBITDA growth and provide a growing source of fee-based earnings, reducing reliance on spread-based products and enhancing business resilience.
3. Portfolio Quality and Risk Management
The investment portfolio remains conservatively positioned, with 96% of fixed maturities rated investment grade and minimal office real estate exposure (1.6%). The CLO, collateralized loan obligation, portfolio is highly diversified and seasoned, with most assets predating 2021 and benefiting from Blackstone’s underwriting. Floating rate exposure has been hedged down to 5%, reducing sensitivity to interest rate swings and reinforcing the company’s ability to withstand market shocks.
4. Alternative Investments: Return Expectations and Volatility
Alternative investments, particularly private equity limited partnerships, underperformed expectations this quarter, highlighting the inherent timing risk in realization cycles. Management remains confident in the long-term value of these holdings, citing a young portfolio vintage and historical capital returns, but acknowledges near-term income volatility as a persistent feature.
5. Operating Efficiency and Scale Leverage
Expense management is a controllable lever, and the company continues to drive down operating expenses relative to AUM. This efficiency is expected to support return on equity expansion, even as top-line growth normalizes and investment income fluctuates.
Key Considerations
This quarter’s results underscore the interplay between market volatility, product mix, and capital deployment, with management emphasizing transitory headwinds and a focus on durable earnings quality. Investors should monitor:
- Sales Mix Shifts: The degree to which indexed annuity and PRT growth offsets MIGA lumpiness will shape revenue stability and margin trends.
- Distribution Investment Payback: The speed and scale of EBITDA growth from owned distribution stakes will determine the success of fee-based diversification.
- Alternative Asset Volatility: Performance of private equity and other alternatives remains a swing factor for quarterly earnings, with realization timing outside management’s control.
- Cost of Funds Trajectory: Competitive pressures and surrender activity will influence spread recovery through 2025.
- Capital Deployment Pace: The effectiveness of deploying newly raised equity at attractive spreads as market conditions stabilize.
Risks
Key risks include continued market volatility impacting surrender rates, spread compression from competitive pricing, and the unpredictability of alternative investment returns. Capital markets activity, including recent equity issuance, introduces dilution risk if not matched by accretive deployment. Regulatory or macroeconomic shocks could also challenge the liability management and investment portfolio strategies, despite the current conservative positioning.
Forward Outlook
For the second quarter, F&G expects:
- Sales momentum in MIGA and owned distribution to rebound, with April and May activity already surpassing Q1 levels.
- Continued deployment of cash reserves and new equity at improved spreads as rate volatility moderates.
For full-year 2025, management reiterated its commitment to Investor Day targets, emphasizing expense control, spread discipline, and ongoing diversification of earnings streams.
- Expense ratio improvements are expected to continue.
- Alternative investment returns are projected to normalize over time, though short-term variability remains.
Takeaways
F&G’s Q1 performance was defined by disciplined capital allocation and operational flexibility in the face of market-driven headwinds. The company’s ability to pivot product mix and deploy capital opportunistically will be critical for margin recovery and long-term value creation.
- Margin Compression Was Largely Transitory: Management’s narrative and April/May sales rebound support the view that Q1 headwinds are not structural.
- Distribution Investment Is a Strategic Lever: Fee-based earnings from owned distribution are set to become a more material contributor, reducing spread dependency.
- Spread Recovery and Alternative Returns Are Key Watchpoints: Investors should track the pace of spread normalization and the realization of alternative investment gains as core drivers for the remainder of 2025.
Conclusion
F&G enters the remainder of 2025 with a resilient business model, a strengthened balance sheet, and a clear focus on optimizing return on capital. Execution on capital deployment and product mix discipline will determine the pace of margin recovery and long-term shareholder value creation.
Industry Read-Through
F&G’s results highlight the broader industry trend of prioritizing quality growth over volume, as annuity providers recalibrate product mix and capital allocation in response to volatile rates and competitive pressures. Owned distribution and fee-based diversification strategies are gaining traction across the sector, while alternative investment performance remains a swing factor for reported earnings. Expect continued volatility in MIGA and PRT sales industry-wide, with operational discipline and portfolio quality emerging as key differentiators for sustainable returns.