Strategic Moves And Market Adaptations Set To Boost Margins And Diversify Earnings

Key Takeaways

• Strategic investments and growth in own distribution channels are set to significantly boost sales and diversify earnings.
  
• Efforts towards margin expansion and asset growth, particularly in retail and Pension Risk Transfer sales, aim to increase revenue and improve returns on equity.
  
• F&G's financial narrative highlights risks related to economic dependency, strategic investments, interest rate assumptions, market expansion strategies, and liquidity, impacting profitability and revenue.

Catalysts

Provides fixed annuities and life insurance products in the United States.

• Continued execution of growth strategies and disciplined expense management are expected to sustain and expand margins, positively impacting net margins and earnings.
  
• The strategic investment in own distribution channels, like the increased ownership stake in Freedom Equity Group, is anticipated to contribute significantly to sales growth and diversify earnings sources, affecting revenue and net margins.
  
• Adaptation to changing market conditions, such as entering the registered index-linked annuities (RILA) market and hedging strategies against interest rate fluctuations, is likely to protect and enhance investment income, impacting revenue and margins.
  
• The focus on asset growth, notably in retail and Pension Risk Transfer (PRT) sales, supported by a strong pipeline and demographic tailwinds, is expected to drive substantial increases in Assets Under Management (AUM), impacting revenue growth.
  
• Margin expansion efforts, including through accretive flow reinsurance and enhanced earnings power from owned distribution, aim at achieving targeted returns on equity, suggesting improvements in net margins and earnings over time.

Assumptions

• Analysts are assuming F&G Annuities & Life's revenue will decrease by -0.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 6.0% today to 22.2% in 3 years time.
• Analysts expect earnings to reach $1.2 billion (and earnings per share of $8.49) by about September 2027, up from $316.0 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 5.5x on those 2027 earnings, down from 16.1x today. This future PE is lower than the current PE for the US Insurance industry at 13.8x.
• Analysts expect the number of shares outstanding to grow by 0.47% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 5.8%, as per the Simply Wall St company report.

Risks

• A significant reliance on favorable economic conditions for annuity sales could impact revenue and profitability if there is a turn in the economic environment.
  
• The growth strategy includes a hefty investment in owned distribution channels (such as the full acquisition of Freedom Equity Group), which poses execution risk and could affect net margins if the anticipated synergies and sales growth do not materialize.
  
• The strategy to hedge two-thirds of the floating rate asset exposure to make investment income less susceptible to lower rates introduces risk if interest rates do not move as expected, potentially impacting earnings.
  
• The focus on expanding the registered index-linked annuities (RILA) market, targeting a relatively younger demographic, introduces product and market risk, which could affect profitability if the products do not gain the anticipated traction or if market conditions change unfavorably.
  
• Entry into markets with significant capital held in money market funds, with an expectation that investors will shift towards fixed annuities as rates decline, involves liquidity risk and market timing risk, potentially impacting revenue if these market movements do not align with F&G's projections.

Valuation

• The analysts have a consensus price target of $42.67 for F&G Annuities & Life based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $5.2 billion, earnings will come to $1.2 billion, and it would be trading on a PE ratio of 5.5x, assuming you use a discount rate of 5.8%.
• Given the current share price of $40.3, the analyst's price target of $42.67 is 5.5% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• 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.