F&G Annuities & Life: Solid Q2 Should Calm Investment Portfolio Fears

Core Viewpoint - F&G Annuities & Life has shown strong performance over the past year with a 34% increase, but has recently experienced a nearly 20% decline from its peak due to broader market pullbacks, leading to a recommendation to buy the stock despite recent challenges [1][10]. Financial Performance - In Q2, F&G reported earnings of $1.10, surpassing consensus estimates by $0.02, with gross sales rising 47% to $4.4 billion, marking a record level of sales driven by strong demand for annuity products [2]. - Net sales reached $3.4 billion, reflecting a 30% increase year-over-year, with total annuity sales up 36% from the previous year [2]. Sales and Product Mix - F&G has significantly increased sales of funding agreements, which are bonds backed by insurance policies, allowing the company to earn net investment income without material underwriting risk [3]. - Annuities constitute approximately 75% of F&G's sales, with indexed annuities leading the sales mix, followed by guaranteed annuities [3]. Surrender Activity and AUM - Despite strong gross sales, there has been increased surrender activity, with net fixed index annuity flows decreasing to $578 million from $628 million last year, attributed to higher terminations as policyholders seek better rates [4]. - F&G's assets under management (AUM) grew to $52.2 billion, a 13% increase from the previous year, supported by higher interest rates and a growing portfolio [4]. Investment Income and Portfolio Performance - F&G earned $684 million in investment income, up from $252 million last year, with $145 million coming from alternative investments, although this underperformed expectations by $20 million [4]. - The company targets a 10% return on alternatives but has generated 8.1% this year, with a historical average return of 13% on this allocation [4]. Risk and Portfolio Composition - 96% of F&G's fixed income portfolio is investment grade, but it includes exposures to less liquid markets, which can be more volatile during market stress [4][5]. - The portfolio has 23% in structured securities and 15% in private debt, which may face pressure during economic downturns, but F&G's long-term investment strategy mitigates forced selling risks [5][7]. Future Outlook - F&G anticipates an increase in the cost of funds as it sells more annuities in the current rate environment, while investment yields are expected to rise [9]. - Key focus areas include maintaining low credit losses, monitoring alternative investment returns, and managing actuarial model update costs, which were $16 million in the last quarter [9]. Valuation and Market Position - F&G's shares are expected to trade around book value of approximately $42.50, offering about 15% upside potential alongside a 2% dividend [10]. - The company maintains a solid balance sheet with a debt to capital ratio of 26.4%, which adjusts to 23.5% when accounting for a funded maturity, below its 25% target [9].