F&G Annuities & Life ($FG)

Introduction

1F&G Annuities & Life, Inc. (FG) provides fixed annuities and life insurance products. The company is majority owned by with 85% ownership, while the remaining 15% is publicly traded. 

The company’s business model is simple and lucrative: premiums are deposited with FG, which get invested within a high quality portfolio. The yield generated by the company exceeds the cost of funds and expense, which allows for the company to earn on the spread.  

After June 1, 2025 (five years of ownership), FNF will be able to spin off the rest of FG to its shareholders tax free. This move is expected to make FG an attractive acquisition target, as it would be the last pure-play fixed annuity provider in the market. 

FG is profitable because it makes high returns in excess of what it pays out on annuities. This success can largely be given to its strategic partnership with Blackstone which manages the funds on behalf of FG.

2The underlying thesis of this investment revolves around FG’s rapid growth, making it an appealing stock. Moreover, it holds an unique position as the sole pure-play fixed annuity provider, something which is highly regarded by asset management companies (Brookfield, Apollo). Considering the valuation given to AEL ( the most recent sale in a similar category), it is expected that FG’s stock should consistently command a premium in its pricing. 

This company could be viewed similar to Athene, an insurance company that is now a crucial part of

Financial Performance

• YTD gross sales in 3Q23 were $9.1B, representing a 7% year-over-year increase. This leads to forecasted gross sales of $12-13 billion for FY2023. Since 2020, growth has been driven by diversification from agent sales, to sales from broker-dealers, banks, funding agreements, and pension risk transfers. Pension risk transfer and banks are the fastest growing source of sales.

• In 2023, assets under management have grown to a record $47.4B, which is a 13% increase in year-over-year growth. This allows it to capitalize on its strategic advantage of having Blackstone investing their assets for excess return.

• YTD adjusted return on equity (ex significant items) in 3Q23 was 10.5%, while their book value per share was  $43.30, which compares favorably to their latest (12/15/23) stock price of $44.24 per share.

• YTD capital return to shareholders in 3Q23 was $68M, consisting of dividends and repurchases.

Investment Portfolio

FG’s portfolio strategy focuses on maximizing shareholder value while maintaining a conservative risk portfolio. 

Over 95% of their fixed income investments are investment grade, with a large focus on corporate bonds (75%), with a large allocation to municipal bonds and treasuries ( over 10%). Valued at $17bn, this portion generates excellent returns at a good risk level. 

The company has also diversified into Collateralized Loan Obligations (CLOs) and Commercial Mortgage backed securities (CBMS), mainly in residential backed securities (RMBS) and multifamily assets. This is possible due to their ability to leverage Blackstone’s expertise. 60% of their $4B CLO exposure is rated “A” or above and 90% is considered investment grade. These loans are low risk, low levered and generate a high return.

Competitive Advantages

With majority ownership by FNF, FG is strategically positioned to leverage growth opportunities at the right moments. Recently, FNF injected $250M into FG to bolster its assets under management. This infusion of capital positions FG to accelerate its growth, particularly during a period when interest rates are elevated, and ripe opportunities exist in areas such as the credit market.

The company is also willing to buy back shares at attractive prices. Since the inception of the program, they have bought over 850,000 shares for $18M at an average price of $21.07 per share. Recently, they have increased the authorization by $25M to a total of $50M. 

In terms of market position, the company has significantly grown over the past few years. Highlighted by these slides, between 2018 and 2022, the company went from outside the top players, to being right with the largest in the industry. An increase in their assets under management, from a significantly lower base in 2018 to $47.4B by 2022, highlights their rapid market penetration.

• FG is poised to capitalize on higher interest rates and its increase in assets under management by issuing more annuities. Since the bulk of their annuities are fixed (offering a guaranteed minimum return in exchange for a capped maximum), FG benefits during periods of higher returns. 

• FG's strategies for sustaining and expanding its market presence include leveraging its long standing relationships to keep increasing sales through its multiple distribution channels (independent agents, banks, broker-dealers, and pensions wanting to transfer defined-benefits risk).

• FG maintains a clean and profitable inforce book. 73% of what they hold are fixed Annuities, while the rest is mostly made up of Pension Risk and Life. The average time remaining in the surrender charge period is 7 years, with 91% of its annuities are surrender protected, and their liability cash flows are well matched to their asset cash flows.

• FG is shareholder friendly, and committed to return value to shareholders through dividends and buybacks. FG recently increased its dividend by 5%. It is also increasing its program of stock buybacks.

Conclusion

FG is well positioned for further growth and strong financial performance:

• Gross sales on track for $12-13B in 2023.

• Record assets under management.

• Diversified investment portfolio well matched to liabilities.

• Strong balance sheet.

• Capital allocation that supports growth and return of capital to shareholders.

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  FG’s parent company, FNF, will be able to spin off, tax free, the remaining 85% of FG that it owns to its shareholders. Should this happen, FG will be an attractive target for acquisition. It’s attractive due to the fact that it’s a pure-play fixed annuity provider, with a low risk, high return profile, compared to other insurance companies.