Corebridge Financial, Inc. (NYSE:CRBG) Q3 2023 Earnings Call Transcript

Corebridge Financial, Inc. (NYSE:CRBG) Q3 2023 Earnings Call Transcript November 3, 2023

Corebridge Financial, Inc. beats earnings expectations. Reported EPS is $3.28, expectations were $1.06.

Operator: Hello, everyone, and welcome to the Corebridge Financial Third Quarter 2023 Earnings Call. My name is Charlie, and I’ll be coordinating the call today. [Operator Instructions] I will now hand over to our host, Işıl Müderrisoğlu to begin. Işıl, please go ahead.

Işıl Müderrisoğlu: Good morning, everyone, and welcome to Corebridge Financial’s earnings update for the third quarter of 2023. Joining me on the call are Kevin Hogan, President and Chief Executive Officer; and Elias Habayeb, Chief Financial Officer. We will begin with prepared remarks by Kevin and Elias, and then we will take your questions. Today’s comments may contain forward-looking statements, which are subject to risks and uncertainties. These statements are not guarantees of future performance or events and are based upon management’s current expectations and assumptions. Corebridge’s filings with the SEC provide details on important factors that may cause actual results or events to differ materially from those expressed or implied by such forward-looking statements.

Except as required by the applicable securities laws, Corebridge is under no obligation to update any forward-looking statements if circumstances or management’s estimates or opinions should change. Additionally, today’s remarks may refer to non-GAAP financial measures. The reconciliation of such measures to the most comparable GAAP figures is included in our earnings release, financial supplement and earnings presentation, all of which are available on our website at investors.corebridgefinancial.com. With that, I would like to now turn the call over to Kevin and Elias for their prepared remarks. Kevin?

Kevin Hogan: Thank you, Işıl, and hello, everyone. This morning, we present our third quarter 2023 results. We delivered another strong quarter and executed with focus and precision across our strategic and operational priorities. Before reviewing our performance for the last three months, I want to share with you the outstanding progress we have made over the last year. On September 15, 2022, Corebridge had its initial public offering and was listed on the New York Stock Exchange. Since then, our first year as a public company has been a very successful one. Allow me a moment to offer my gratitude to everyone involved. Thank you to our many partners across the industry. Thank you to our customers and clients. And, of course, thank you to our employees.

I’m so very proud of our people for their dedication to our company and customers and for their commitment, focus, and professionalism. And lastly, much appreciation to our parent company AIG. It has been an extraordinary 12 months. We are experiencing one of the best markets for life insurers in recent memory, with interest rates at levels not seen in well over a decade, supporting our ability to manufacture products that are very attractive to our customers. We are making the most of these favorable conditions, notably delivering healthy organic growth in our spread-based products, and we have a constructive outlook for all of our businesses. Our ability to capitalize on this moment speaks to a broader theme about Corebridge. We are, at our core, a fundamentally nimble company.

Our strong balance sheet, our broad and well-designed product suite, and our longstanding distribution relationships allow us to execute swiftly and position us to perform across a variety of market environments, ultimately benefiting both customers and shareholders. The advantages of our nimble approach are clear in our results. Premiums and deposits have grown by 28% this year, and base spread income has grown by 34% over the same period. The earnings power of our core insurance businesses is improving, aided by tailwinds from interest rates and credit spreads. Another hallmark for Corebridge during our first year has been our focused execution. This, combined with the strength of our business, have produced some exceptional accomplishments and continue to drive shareholder value.

One important outcome of our focused execution has been our robust return of capital to shareholders. We have returned $1.4 billion to Corebridge shareholders since the IPO through a combination of dividends and share repurchases. This includes over $1.1 billion of dividends and $246 million of share repurchases. And yesterday, we declared our sixth consecutive quarterly dividend of $0.23 per share. In the third quarter, we achieved another significant milestone in our capital management program. We began open market buybacks, taking advantage of market conditions, and as of October 31, we have repurchased approximately $102 million of Corebridge stock. In another important accomplishment for our company, we continue to streamline our business portfolio through the sale of our international operations.

This strategic initiative will allow us to focus on life and retirement products and solutions in the United States, the world’s largest market, as well as unlock significant value for shareholders. Earlier this week, we announced that we closed the sale to AXA of Laya Healthcare, the second largest private health insurance provider in Ireland. We also declared a special dividend in the amount of approximately $730 million to be paid in November as we look to distribute proceeds from this sale. And we recently announced the sale of our UK life insurance business to Aviva for £460 million, which is expected to close in the first half of 2024, subject to regulatory approvals. This transaction is highly accretive and will have a negligible impact on future earnings.

As noted yesterday on AIG’s earnings call, we expect proceeds from this transaction largely will be used for share repurchases subject to market conditions. Together, the sale of these two businesses unlocks over $1.2 billion of value, enabling Corebridge to deliver additional significant return of capital to shareholders. Moving on to other areas of accomplishments over the past year. We have achieved or contracted on 81% of our exit run rate savings goal of $400 million from Corebridge Forward, our modernization program that is delivering both expense reduction and increased efficiency. We remain confident this program will be completed on time. We also continue to achieve consistent progress with Corebridge’s operational separation from AIG, having exited 69% of the transition services agreements that were put in place at the time of our IPO.

We now expect our cost to achieve will come in at the higher end of our range of $350 million to $450 million. And to date, we have incurred $366 million of the cost to complete our separation. Another area of achievement over the last 12 months has been the expansion of our strategic investment partnerships. These investment partnerships benefit Corebridge as well as our customers. By leveraging our relationship with Blackstone, we have increased our access to unique and attractive assets, enhancing the competitiveness of our products and our long-term growth profile. Since day one, Blackstone has been investing in assets with very attractive risk-adjusted returns, generating an average yield of 6.6% in an average credit quality of single A+.

This investment activity has supported growth across all four of our business segments. With respect to BlackRock, we have fully integrated them in our day-to-day portfolio management, and we continue to make strides with our migration to their Aladdin platform, which will further modernize our infrastructure and provide us with expanded analytics and accounting capabilities. In total, with all of these accomplishments since the IPO, it has been a very successful first year for Corebridge. What’s more is that our focused execution, combined with our stable high-quality business mix are contributing to steady improvements in our key financial metrics. As an example, our run rate return on average equity for the first nine months of 2023 was 12%, an improvement of 190 basis points since our IPO.

We remain on a firm trajectory to achieve a 12% to 14% ROAE in 2024, one of the key financial targets we laid out when we launched Corebridge. Pivoting to the third quarter, we delivered another strong financial performance over the last three months extending the positive momentum that we have been building since the IPO. Elias will provide more detail during his remarks, but I will briefly touch on four important highlights. First, we have been able to grow our non-GAAP operating earnings per share by 28% and our adjusted return on average equity by 230 basis points, both on a year-over-year basis. This strong performance reflects the scale and depth of our spread-based business and our ability to operate across product lines to pursue profitable organic growth where the risk-adjusted returns are the greatest.

Second, our earnings this quarter benefited from a slight net favorable impact arising from our annual assumption review. We had no significant reserve adjustments, an important detail that validates our sound governance and reserving framework as well as demonstrates the ongoing stability of our balance sheet. Third, our diversified businesses grew aggregate core sources of income by 11% year-over-year, benefiting from the cumulative effect of strong organic growth and improving base spread income. And fourth, we delivered $9.1 billion of premiums and deposits this quarter, reflecting strong customer demand for our spread-based products and the ongoing expansion of our business. Although we did not execute any significant pension risk transfer transactions during the quarter, the pipeline remains robust.

Our consistent organic growth is supported by the strength of our leading distribution platform as well as our diverse suite of products that are attractive to customers and deliver strong return profiles. I began my remarks with a brief reflection on our performance since our initial public offering, and this is where I would like to end. I am proud of all that we have accomplished over the last year and I’m confident Corebridge will continue to generate shareholder value through focused execution, a strong balance sheet in our diverse and attractive businesses. I will now turn the call over to Elias to walk you through our third quarter results in more detail.

Elias Habayeb: Thank you, Kevin. As you just heard, Corebridge delivered another quarter of strong financial performance. Our profitability continues to improve and we remain on track to achieve our target ROE of 12% to 14% in 2024, driven by our capital return growth in our core sources of income and expense efficiencies. We continue to successfully manage our capital liquidity, balancing organic growth and shareholder return, while maintaining a healthy balance sheet. We reported third quarter adjusted pre-tax operating income of $813 million, or earnings per share of $1.05, an increase of 28% from the prior year quarter on a per share basis. Our operating EPS included a $0.03 impact from our positive actuarial assumption update, offset by a $0.12 impact from alternative investment returns below our long-term expectations.

Now starting with net investment income. Net investment income for our insurance companies on an APTOI basis improved 28% year-over-year and is comprised of two components: base portfolio income and variable investment income. Our base portfolio income grew 22% over the prior year quarter to $2.4 billion. Additionally, the base yield increased 62 basis points to 4.7%. This improvement was driven by our ability to reinvest the entire new money yields, resets on floating rate assets, and an increase of total invested asset by approximately $11 billion. Importantly, our base yield growth has more than outweighed any increases in policyholder crediting rates. We expect base yields will continue to grow, albeit at the slower pace as we discussed during our second quarter’s earnings call.

The sequential rate of improvement was 10 basis points due to lower net inflows into the general account, which I will discuss during our segment results in combination with stability and short-term interest rates. While the short end of the curve did not materially change this quarter, we saw a substantial increase in medium and long-term rates, which will have a positive impact on our business. During the quarter, we remain focused on directing new investments towards higher credit quality assets with new money yields at very attractive levels. On average, this quarter’s new money yields were approximately 6.6%, or 150 basis points above the assets that’s matured or were sold in our general account. This is the fifth consecutive quarter where our new money yields have exceeded 6%.

Year-to-date, first, interest yield exceeded our base yield by over 200 basis points. Our general account investment portfolio is resilient and positioned to perform well under various market conditions. The portfolio is well diversified, actively managed and remains high -quality with an average credit rating of single A flat. Furthermore, the portfolio continues to experience net positive ratings migrations without upgrades outpacing downgrades. Given the recent focus on commercial real estate, the credit metrics in our commercial mortgage loan portfolio are holding up well and remain strong. Our team has deep expertise in commercial real estate, and we have a history of actively managing the portfolio across different cycles. With respect to our $900 million of 2023 maturities in U.S. traditional office, I’m pleased to report that we have successfully resolved all material maturities through extension or repayment.

Now our team is working to address our 2024 maturities, of which traditional U.S. office comprises only about $350 million. We regularly stress and assess the portfolio, ensuring we maintain a robust loan loss allowance to mitigate potential credit losses. As a long-term investor with a strong balance sheet and resilient investment portfolio, we continue to seek select opportunities for value creation within the commercial real estate sector. Our exposure is manageable and we remain of the belief that dislocation in this market will play out over time. Moving to variable investment income. Our alternative investments, which represent only 3% of our total invested assets, delivered $18 million of income in the quarter. Traditional private equity gains were partially offset by real estate mark-to-market losses.

Real estate equity comprises approximately 25% of our alternative investment portfolio. Given equity market and interest rate performance, we expect alternative investment returns to be below our long-term expectations in the fourth quarter. Shifting to GOE. Operating expenses for our insurance businesses and parent company were approximately $418 million, better by $10 million – 10% on a year-to-date basis or 6% sequentially. This was driven by expense efficiencies from Corebridge Forward earning into our results, partially offset by incremental costs related to the establishment of our standalone public company capabilities. Looking to the fourth quarter, we expect some seasonality in expenses. Now I’d like to take a moment to walk through our annual assumption update process as we are reporting this for the first time under LDTI.

Once a year, principally in the third quarter, we review and update our actuarial assumptions for all lines of business. Our disciplined and consistent review covers economic, policyholder behavior, and mortality assumptions, which are based on our emerging experience, industry data, and other key factors. This year, Corebridge reported a nominal $22 million net positive impact to adjusted pre-tax operating income, mostly related to our Life Insurance segment. As Kevin stated, we had no significant reserve adjustments. Within our Life Insurance segment, the update included adjustments to our earned rate assumptions resulting from a higher interest rate environment as well as adjustments to policyholder and mortality assumptions for certain blocks of business.

Looking ahead, we expect individual retirement DAC amortization run rate will increase by $11 million per quarter due to the higher interest rate environment as reflected in our third quarter results. Turning to our balance sheet. Our third quarter Life Fleet RBC ratio remains above target, which we estimate to be in the range of 410% to 420%. Our subsidiaries distributed $527 million during the quarter, bringing year-to-date distributions to $1.5 billion, evidencing the strong cash flow generation from our insurance businesses. As a result, we ended the quarter with $1.7 billion of holding company liquidity, exceeding our next 12-month needs and demonstrating our financial flexibility for returning capital to shareholders. We also issued $500 million of senior debt in September using the proceeds to partially repay our $1.5 billion delay-draw term loan facility.

Now pivoting to our business segments, which continued their strong performance during the third quarter. Individual retirement reported adjusted pre-tax operating income of $576 million, up 54% year-over-year, primarily driven by higher base spread income, resulting from strong general account product growth and base spread expansion. Base net investment spread rose 62 basis points from the prior year quarter and 6 basis points sequentially. The strong value proposition of our spread-based products continues to drive robust demand for our fixed index and fixed annuities with our fixed index annuity business achieving three consecutive quarters of sales in excess of $2 billion. We had another quarter of positive general accounts net flows even with an increase in the fixed annuity surrender rate.

Our third quarter surrender rate was elevated due to rising long-term interest rates, as well as the processing of an operational backlog resulting from our first quarter record sales. Our surrender rate peaked early in the quarter, but steadily trended lower and continued into October. At the same time, we saw an increase in our monthly sales of fixed annuities with September volumes approaching record levels. This is facilitated by our planned operational capacity expansion that has come online and is able to support sales volumes even exceeding that of our first quarter. Group retirement reported adjusted pre-tax operating income of $192 million, up 1% year-over-year. This includes lower base spread income reflecting a non-recurring gain in the third quarter of 2022.

Excluding this item, base net investment spread rose 6 basis points from the prior year quarter while it fell 3 basis points sequentially. This decline was primarily due to higher policyholder crediting rates attributed to our group mutual fund product, which more than offset the increase in base yield. While we saw elevated surrender rates in the third quarter, this was mainly driven by one large group plan exit, which was predominantly invested in our group mutual fund product, thus having limited impact to earnings. Excluding the impact of large plan departures, our surrender rate has declined from the 11% at the beginning of the year to roughly 10% now. Consistent with industry experience, many of our plan participants have been entering retirement and therefore transitioning from accumulating assets to withdrawing funds for their retirement.

As a result, net outflows are typically driven by plan participants ages 59.5 or older and tend to have a higher guaranteed minimum interest rate. Concurrently, net inflows are dominated by our younger age cohorts with lower guaranteed minimum interest rates as well as out of plan fixed and fixed index annuity sales and advisory and brokerage deposits. We expect the combination of those two trends will improve the economic return profile over time. Life insurance reported adjusted pre-tax operating income of $136 million, up 10% year-over-year, mainly driven by net investment income and expense efficiencies. Mortality experience, inclusive of reserve adjustments, remains consistent with our year-to-date experience and favorable to expectations.

With respect to our sale of Laya, we expect this business to contribute approximately $30 million per year to Corebridge’s pre-tax operating income. Results from this business are only included in our results through October 31. Institutional markets reported adjusted pre-tax operating income of $75 million, down $8 million year-over-year, primarily driven by less favorable mortality experience in our corporate markets business. Our reserves have grown $7 billion, or 23% year-over-year, driven by expansion of our pension risk transfer in GIC businesses. We issued a company record level of $1.9 billion of GICs in the third quarter as part of our strategy to become a more regular issuer of GICs. And lastly, our corporate and other segments reported an adjusted pre-tax operating loss of $166 million, primarily the result of our standalone capital structure and new parent company expenses since the IPO.

Wrapping up, we continue to have the confidence and the strength of our balance sheet and the power of our franchise. Our liquidity and capital positions remain strong. We maintain a stable, diversified, and attractive liability portfolio that’s optimized for risk-adjusted returns. We have minimal legacy liability risk, and then our investment portfolio is high-quality and well diversified. In addition, we maintain a very disciplined risk management framework focused on both sides of the balance sheet. Starting from this position of strength, we remain committed to returning attractive levels of capital beyond regular quarterly dividends and have the financial flexibility to do so. This concludes my remarks. So I’ll now turn it back to Kevin.

Kevin Hogan: Thank you, Elias. And operator, we’re now prepared for questions.

Operator: Thank you. [Operator Instructions] Our first question comes from John Barnidge of Piper Sandler. John, your line is open. Please go ahead.

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Q&A Session

John Barnidge: Good morning. Thank you for the opportunity. You talked about one large group plan departure. Can you talk about visibility near-term and into 2024 on that? It feels like this is similar commentary seen elsewhere. Is there just more activity now than the last few normal years? Thank you.

Kevin Hogan: Yes. Thanks, John. So the reality is that during the pandemic, I think, with the kind of restricted access and some of the kind of intense focus on operations, that’s true, we did see a slowdown in remarketing of group plans. And so after the pandemic, the level of group plan marketing has kind of returned to what we would have expected before the pandemic. And so there are some episodic activities in the large accounts. We did have a particularly large accounts surrender in the third quarter, but I think what’s important to point out is that particular plan, by far the majority of the assets, over 90% of the assets were actually in the group mutual fund platform. So whilst it shows up in the flows and in the assets the impact on earnings is extremely modest.

And so we do – we monitor where the large account losses and wins are coming from. Sometimes they’re associated with consolidations, M&A activities, sometimes regular remarketing. But what’s important is if we look at the underlying numbers, taking out the large plan sort of wins or losses, what we’re seeing is that the surrender rate is actually coming down from close to 11% earlier in the year to now down closer to 10%. And we need to unpack those flows a little bit. We have an aging portfolio, and for those customers that are 59.5 years or older, right, they’re in the utilization stage. And this is where the primary outflows are coming from in our portfolio or in those older ages. And those are also associated with the higher guaranteed minimum interest rate products because those customers have been around for some time.

And what we are seeing is actually inflows, positive flows in the younger ages at lower guaranteed minimum interest rates, and then also investing in the advisory and brokerage platforms, which have become more popular in the last 10 years. And so we believe that for the in-plan business, the economic profile of the portfolio is improving. And then on top of that, we’re seeing very robust sales in the out of plan annuities, particularly fixed annuities and we just launched an index annuities. For many of the same reasons we’re seeing those products be very popular in the individual retirement side and we’re seeing positive flows in the advisory and brokerage platform outside of the plan and those are not recorded in net flows. So we’re very comfortable with where we are strategically in the retirement services business.

We think that the economic profile of the portfolio is improving and not every dollar of net flows is equal. It’s important not to be distracted by net flows.

John Barnidge: Thank you for that. My follow-up, you began open market repurchases in September. Can you talk about the activity in October? And is that a reasonable run rate? Thanks for the answers.

Kevin Hogan: Yes. Elias, please.

Elias Habayeb: Hey John, it’s Elias. Hope all is well. So John, listen, as you’ve seen, we generate the capacity to continue to buy shares. We started in the third quarter doing open market purchases, but given the average traded volumes we have, there’s so much we could do in the open market. And so we have more capacity to buy shares beyond the open market. So to answer your question is we want to be a regular purchaser in the open market. But we’re going to see what the best options are and how we purchase shares back and that’s what we will pursue.

John Barnidge: Thank you. Appreciate the answers.

Operator: Our next question comes from Elyse Greenspan of Wells Fargo. Elyse, your line is open. Please go ahead.

Elyse Greenspan: Hi, thanks. Good morning. My first question, I was hoping to get some of your initial thoughts on the impact of the new DOL rule and how you guys see that potentially impacting Corebridge?