F&G Annuities & Life, Inc.

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 4/5

F&G Annuities & Life, Inc. is a provider of annuities and life insurance products, offering retirement and protection solutions to individuals, with a focus on capital preservation and long-term growth.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview:

F&G operates within the insurance industry, primarily offering fixed annuities, fixed indexed annuities, and life insurance. They focus on providing retirement and protection solutions to individuals, and their revenues are generated through premiums collected from the insurance policies and fees associated with policy administration. The company’s business is heavily influenced by fluctuations in interest rates, economic downturns, and changes in regulatory policies, all of which have the potential to affect profitability and future revenue projections.

F&G is expanding their business model into more capital-intensive products such as pension risk transfer and commercial mortgage lending.

Revenues: F&G’s revenues are primarily driven by: 1. Life insurance premiums. 2. Annuity premiums. 3. Fees for policy administration. 4. Investment returns on premiums collected. The revenues are sensitive to interest rate fluctuations, which can effect profits by an offset in price of investments.

Industry Trends and Competitive Landscape:

The insurance industry is competitive, with a range of established players and new entrants. Key differentiators include product design, financial strength, and distribution capabilities.
Interest rate sensitivity is a major factor for all players within the industry. When interest rates fall, they reduce both earnings and overall returns that the insurance companies can generate.
Regulatory changes can have a big impact on the profitability and financial strength of a business.
Consolidation in the insurance industry is ongoing, as large players seek to strengthen their market positions and expand their scale and scope.
There’s been a focus on capital-intensive products and lower-rated investments to boost profitability.

Competitive Advantages (Moat Analysis):

The company’s reliance on relationships with distributors, like insurance brokers, is a double edged sword. While they facilitate sales, these partnerships don’t form moats because those brokers may sell other firms.

F&G has a narrow moat based on its scale and established sales network.
F&G utilizes its relationship with third parties that sell their insurance products, this decreases the cost of sales, as it has to pay commissions rather than have its own employees.
A potential strength to a narrow moat is its established reinsurance agreements, which can reduce its volatility, but it may still be a double edged sword by creating a risk to outside companies.

However, these are considered a narrow moat, because other similar insurance companies do the same thing. Overall Moat Rating: 2 / 5.

Risks to the Moat and Business Resilience:

Interest rate risk: A big risk to F&G is sensitivity to interest rate fluctuations, especially given that they sell interest rate products.
Credit risk: They have exposure to mortgages and lower rated debt which has some risk.
Regulatory risk: Changing regulations (or more regulations) could create uncertainty and limit opportunities.
Competition: New firms entering can impact future growth of the business and returns.
Geopolitical risk: F&G is also exposed to international markets, which may bring risk of different political or economic crisis.
Liquidity risk: A substantial amount of the company’s liabilities are longer duration than the assets, which exposes the company to liquidity risks.
Operational risk: There’s always a risk that technology, system or process errors can cause disruptions or losses.

F&G is vulnerable to economic downturns, because when economies turn down, the risk of policies default rise, leading to less profits.

Financial Analysis:

Revenues: The company has demonstrated good growth in premiums, but has had volatile investment performance that is affecting their returns.

In Q2 2023: Net premiums increased 68% year over year and net investment income increased 12% year-over-year.

In Q3 2023: F&G generated an annualized 13% growth in premiums.
In Q1 2023, F&G generated $1.3 billion in gross premiums.
Profitability: The company had inconsistent profitability, with returns on equity declining over the last few years. This has been improved recently, where their return on equity has reached double digits.

In Q2 2023: Net income was $322 million, a vast improvement over $29 million in net income in Q2 2022. In Q3 2023: The profits were impacted by a market volatility. The returns on assets for the nine month was 0.8% and return on equity 11.3%.
Margins: The company had a net income margin of 12%, but there’s a strong dependence on interest rates, which leads to unstable margins. In addition, the margins are susceptible to the market cycles as investors seek alternative investments when interest rates are low.
Capital structure: F&G uses a substantial amount of debt on its balance sheets to invest and finance its operations.
The most recent available quarterly report shows that debt comprises 43% of the companies total capital, with shareholder’s equity making 57%.
In 2023 the company issued $850 million in senior notes, which would be used for funding purposes. The risk is that interest rates may rise and their cost to repay could be higher.
Liquidity: The cash reserves are adequate at approximately $2 billion, but given the high-debt loads, liquidity risk would be a concern.
Solvency: The company continues to grow and build capital, but given the nature of their products they need to have a robust risk management process and enough capital on hand at all times.
F&G’s solvency seems relatively strong given its investment-grade ratings from external institutions, but this could be affected by outside factors.

Management outlook:

Management mentioned in their earnings call that they’re focused on growing their business at a good and steady pace, which leads to organic growth in sales.
They have a goal of increasing their investment return to increase shareholder value.
They have been focusing on expanding the distribution model to make sales easier.
They aim to continue a conservative capital approach, even after recent changes.

Balance Sheet Health Rating: 4/5. The balance sheet is relatively healthy, but it needs more attention to liquidity risks.

Understandability:

The business model is of average complexity, with products that are fairly easy to understand, but with complex financial terms. Understanding the insurance space may require knowledge of the financial industry.
The impact of interest rates on their business model is a little hard to predict.
Understanding all the details of their derivatives and hedges may be hard for an average investor. Overall Understandability Rating: 3/5.

Concerns/Controversies:

Debt Load: High levels of debt have been a constant topic of concern. F&G has to show its lenders it can comfortably meet its debt obligations and any inability to do so will trigger a downgrade in credit rating.
Market Volatility: F&G is vulnerable to the market volatility. The company has a large investment arm, whose profits can fluctuate by the movement of rates, and the investment returns can be low in a bad market, affecting the overall bottom line.
Pension Shortfalls: Like many companies, the company has underfunded pensions and postretirement liabilities which can reduce profitability.