Entering RILA Market And PRT Expansion Will Drive Future Success

Key Takeaways

• Launching the RILA product and strong PRT sales position F&G for substantial revenue growth in emerging and large markets.
  
• Strategic investment portfolio repositioning and owned distribution expansion improve profit margins and earnings stability, enhancing shareholder value and capital efficiency.
  
• Prioritizing capital shifts and regulatory changes could affect consistency, margins, and future growth amid market and legal risks.

Catalysts

Provides annuity and life insurance products in the United States.

• F&G has launched a Registered Index-Linked Annuity (RILA) product, gaining entry into the fast-growing RILA market. The company is onboarding new distribution partners and expects medium-term RILA sales to reach billions, which could significantly boost future revenue.
  
• The company reports strong pension risk transfer (PRT) sales, surpassing $6.5 billion in the in-force block, with potential market opportunities estimated at $3.8 trillion. This consistent demand for PRT could drive long-term revenue and income growth.
  
• Growth in owned distribution companies is expected to yield $90 million in EBITDA in 2025, demonstrating double-digit annual growth. This expansion into owned distribution enhances profit margins and earnings through fee-based income.
  
• F&G has actively repositioned its investment portfolio, enhancing credit quality and hedging interest rate risks, which could improve net margins and earnings stability, particularly during economic downturns.
  
• The company is targeting a 13-14% adjusted ROE over the medium-term, reflecting efforts to optimize capital allocation and drive shareholder value, which could support higher future earnings and valuation multiples.

F&G Annuities & Life Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming F&G Annuities & Life's revenue will grow by 4.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 10.8% today to 12.7% in 3 years time.
• Analysts expect earnings to reach $839.8 million (and earnings per share of $6.22) by about April 2028, up from $622.0 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 8.3x on those 2028 earnings, up from 7.5x today. This future PE is lower than the current PE for the US Insurance industry at 13.4x.
• Analysts expect the number of shares outstanding to grow by 0.5% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.4%, as per the Simply Wall St company report.

F&G Annuities & Life Future Earnings Per Share Growth

Risks

• The slowdown in the MYGA sales, partially due to volatility in interest rates and prioritizing capital for other high-return products like fixed index annuities, may impact revenue consistency.
  
• The competitive fixed portfolio environment and sequential ROA compression indicate possible margin pressure, potentially affecting net margins.
  
• Concentrated bets on pension risk transfer and flow reinsurance, despite industry litigation concerns, could expose earnings to legal and market risks.
  
• Alternative investment returns below long-term expectations by $145 million highlight potential volatility in earnings from non-core revenue sources.
  
• The transition of critical executive roles, amid regulatory changes, could pose execution risks impacting financial strategy and future growth projections.

Valuation

• The analysts have a consensus price target of $42.333 for F&G Annuities & Life based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $47.0, and the most bearish reporting a price target of just $39.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $6.6 billion, earnings will come to $839.8 million, and it would be trading on a PE ratio of 8.3x, assuming you use a discount rate of 6.4%.
• Given the current share price of $34.46, the analyst price target of $42.33 is 18.6% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.