We are selling Fidelity National Financial, FNF, from portfolios, which may take a few days to complete trades. On 2/6/20, FNF announced an acquisition of F&G holdings, symbol FG, an insurance company that sells annuities. We do not like this merger for two reasons: 1) FNF’s business of title insurance does well when interest rates fall as mortgage refinancings increase. This success is opposite of most finance companies who earn less on spread income when rates fall. The purchase of FG will dilute this counter interest rate property which has been attractive. 2) FG has some concerns primarily their investment portfolio is too aggressively invested in lower quality bonds. I am concerned that a disruption in the BBB debt market would impair this company’s balance sheet and ability to conduct business. The BBB debt market has seen significant growth through this market cycle and appears frothy. FNF stock has fallen -13% since announcing the merger.
Even though FG’s sales will be only a quarter of the sales of the pro-forma company, the balance sheet for FG is 3x the size of FNF’s balance sheet. The larger balance sheet shows that the annuity business is a balance sheet heavy business versus title insurance. Title insurance claims are rare, so reserves as small compared to revenues. The investment portfolio of FG is almost 80% of total assets for FG, so it is important to be comfortable with the investment strategy. A good indicator of the risk in the portfolio is seen looking at q4 2018 when the stock market fell sharply and high yield spreads widen. FG lost $-1.5b (gross losses, net losses $-.6b) during this quarter, which is crazy because the firm’s total equity was only $1.9b on 12/31/17. FG’s stock lost -33% during 2018. We do not want to own a company with this type of balance sheet volatility.
Attached is the presentation providing details for this sale. Please let me know if you have any questions.
Thanks,
John
John R. Ingram CFA
Chief Investment Officer
Partner
Direct: 617.226.0021
Fax: 617.523.8118
Crestwood Advisors
One Liberty Square
Suite 500
Boston, MA 02109