Corebridge Financial, Inc. (NYSE:CRBG) Q4 2022 Earnings Call Transcript

Corebridge Financial, Inc. (NYSE:CRBG) Q4 2022 Earnings Call Transcript February 22, 2023

Operator: Good morning, everyone, and welcome to the Corebridge Financial Incorporated Fourth Quarter 2022 Earnings Call. My name is Emily, and I’ll be coordinating your call today. . I will now hand you over to our host, Josh Smith, Head of Investor Relations to begin. Josh, please go ahead.

Josh Smith: Good morning, everyone, and welcome to Corebridge Financial’s fourth quarter earnings update. 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 remarks 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. Corebridge’s filings with the SEC provide details on important factors that may cause actual results or events to differ materially. 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 www.corebridgefinancial.com. With that, I would now like to turn the call over to Kevin.

Kevin Hogan: Thank you, Josh, and good morning to everyone. During our call today, we will present our fourth quarter and full year 2022 results. I will speak to the competitive landscape, review the progress we are making on our core strategies, reinforce our commitment to our financial goals and discuss how Corebridge is well positioned to create long-term value for shareholders and other stakeholders. Elias will then deliver additional details on our financial results, offer a few comments on LDTI and provide some guidance for 2023. Corebridge Financial had a strong debut in 2022, notwithstanding external conditions. We delivered operating earnings per share of $0.88 in the fourth quarter and $2.87 for the year. Our results for the fourth quarter and the full year demonstrate the resilience of our franchise and the competitive strengths of our businesses.

Our diverse sources of earnings, our broad product platform and our unrivaled network of distribution partners remain strategic advantages for Corebridge, and position us to perform well in different market environments. Our businesses grew in 2022 as we expanded our product range, enhanced customer solutions, advanced strategic initiatives and began to implement a leaner operating model, all while completing our initial public offering last September. We are well on the way toward creating sustainable, profitable and incremental growth while delivering on the strategies and financial goals we’ve previously outlined. Adjusting for earnings volatility related to market conditions, such as from variable investment income, the earnings power of our core insurance businesses improved, aided by tailwinds from higher interest rates, wider credit spreads and favorable mortality, which more than offset headwinds from equity market performance.

New money rates more than doubled this year, climbing to 7% in the fourth quarter, an increase of approximately 400 basis points. Over the last 12 months, base net investment spread expanded during the second half of the year, contributing to a healthy level of organic growth. Looking at individual retirement, we delivered balanced sales with healthy margins and strong general account cash flows across our spread-based products. The breadth of our portfolio and the strength of our distribution partnerships helped us generate premiums and deposits of $3.8 billion in the fourth quarter contributing to $15.1 billion of new deposits over the course of 2022, with positive net flows of $2.4 billion, reflecting nearly 200% growth in net flows year-over-year.

In fixed annuity, we saw some of the best conditions in recent memory. At the same time, we remain disciplined, effectively balancing competitiveness and margin growth. We delivered sales of more than $1.3 billion in each quarter of 2022, contributing to $5.7 billion in premiums and deposits for full year 2022, an 89% increase year-over-year. This extraordinary level of new business reflects a strong appetite for fixed annuity products in the marketplace, combined with the strength of our bank distribution relationships. Fixed index annuity also benefited from a very attractive landscape with $1.7 billion of premiums and deposits in the fourth quarter and over $6.3 billion for the full year. Full year net inflows were $4.5 billion. The strong position of this business is supported by our income and accumulation products, which we distribute across a broad range of channels.

In Group Retirement, premiums and deposits were also strong at nearly $2.2 billion for the fourth quarter or approximately $8 billion for the full year, supported by new planned acquisitions and growth of out-of-plan deposits, in particular, in fixed annuities. These out-of-plan deposits reflect one part of our broader strategy for this business, which includes serving individuals outside of their traditional employer-sponsored retirement plans. And as a reminder, large new plant acquisitions or surrenders are nonlinear. Thinking about retirement across group and individual, we were pleased the U.S. Congress was able to pass SECURE 2.0. This federal legislation is another important step in building a stronger retirement system and improving retirement outcomes for all Americans.

We anticipate a positive impact from SECURE 2.0 across both our individual and group retirement businesses as this legislation should result in increased contributions, larger account balances and delayed withdrawals from retirement accounts. Life Insurance generated stable premiums and deposits year-over-year as we continue to transform this business. Sales over the last year reflect our efforts to improve the mix of business in the U.S. and to grow the business in the UK. And in institutional markets, we closed pension risk transfer transactions totaling $1.3 billion in the fourth quarter. While premiums and deposits were lower in the fourth quarter and full year versus 2021, we continue to see a robust pipeline for full plan terminations in the U.S. and the UK.

We also remain confident in our ability to become a more consistent issuer of GICs in the future, subject to market conditions. Overall, I am very pleased with the performance of our businesses and the levels of organic growth we produced in spite of challenging market and industry conditions. We have a lot of momentum particularly since completing our IPO and we are well positioned to grow and continue to strengthen our relationships with distribution partners in the coming year. Next, I will discuss the progress we are making to advance our investment partnerships and our efficiency strategies that I outlined during our third quarter earnings call. Our partnerships with Blackstone and BlackRock continued to benefit us as they each bring considerable resources to bear in support of our strategic initiatives.

Looking at Blackstone first, we continue to see great value from our growing relationship. Blackstone’s asset sourcing capabilities have aided our product competitiveness as they are able to originate attractive assets at volumes we could not previously achieved. These assets are successfully supporting all four of our businesses. For the full year, Blackstone executed approximately $8 billion of new transactions across a variety of asset classes, including private and structured credit at an average gross yield of just over 6.5% and an average credit quality of single A. The purchase yield on assets originated during the fourth quarter was 7.2%. We’ve been putting more money to work in private credit as we believe this asset class will generally perform better during a downturn due to the structural protections that are built into these transactions.

With respect to BlackRock, they are now managing approximately $83 billion of our invested assets, primarily focused on the public liquid credit portfolio. We also continue to make strides in our migration to BlackRock’s Aladdin platform, which will further modernize our infrastructure and provide us with expanded analytics and accounting capabilities. We expect to be live on this platform in 2024. Partnering with these world class asset managers greatly enhances our access to attractive assets but does not reflect the change to our investment strategy, risk appetite or asset allocation process. We own the balance sheet, and we will continue to direct asset allocation regardless of the source of origination. Our investment strategy has always been and will remain liability driven.

Our diversified and high-quality investment portfolio is well matched to our liability profile. Our risk appetite remains unchanged relative to our liabilities. We continue to actively manage both the performance and the risk of the entire portfolio, irrespective of origination and we are proactive in taking action on individual assets when appropriate. We believe we will be able to respond effectively to any changes in the credit cycle. Now turning to Corebridge Forward, our modernization program that will deliver both expense reduction and increased efficiency. We have contracted on $232 million of exit run rate savings. This equates to more than 50% of our stated goal of $400 million of run rate savings over the next three years. Much of the exit run rate savings to date represent refinements to our operating model, enhanced outsourcing with existing partners, real estate consolidation opportunities and the early stages of our IT modernization, which will eventually lead to our ability to exit our data centers.

We continue to expect the majority of the run rate savings to earn in within 24 months of our IPO. Elias will provide more information in his remarks. Turning to our financial goals, we remain focused on achieving each of the targets we outlined on our last earnings call as we continue to maintain a strong balance sheet, deliver disciplined growth and provide an attractive return to shareholders. We maintain a clear line of sight toward achieving an ROE of 12% to 14%, and we remain committed to delivering capital to our shareholders through a combination of $600 million in annual dividends along with share repurchases, resulting in a 60% to 65% payout ratio on adjusted after-tax operating income. We are on target to achieve these goals within 24 months of our IPO.

Before turning the call over to Elias, I would like to add a few comments about our commitment to creating shareholder and broader stakeholder value. As I look back on 2022, market conditions were challenging. Our team demonstrated an ability to respond, leveraging our unique platform to maximize opportunities as they arose. While 2023 remains uncertain and volatile, we are well positioned to deliver to customers, shareholders and our other stakeholders. Our broad diversification across products and channels continues to serve us well as we are not dependent upon a single product or distribution channel. We remain nimble and we’ll pursue profitable growth by focusing on areas where risk-adjusted returns are the most attractive in our new business growth as this is most accretive to our operating earnings.

While we have recently been emphasizing capital deployment to our spread-based businesses, our fee-based business remains healthy and is poised to benefit when asset values recover and investor appetite rebounds. To summarize, the core strengths of Corebridge, coupled with changes to our operating model and the execution of our strategic initiatives position us to continue to generate attractive financial results under various scenarios. This, in combination with our active capital management strategy puts us in a position to create long-term shareholder value. I will now turn the call over to Elias.

Elias Habayeb: Thank you, Kevin, and good morning. I’ll provide additional information about our financial results and key performance metrics as well as a few updates on LDTI and some high level guidance for 2023. We reported fourth quarter results and full year results this morning, boosted by improving base spread income and favorable mortality experience, notwithstanding recent market conditions. And we continue to make meaningful progress on our strategic initiatives to improve profitability. Fourth quarter adjusted ROE was 10.6%, operating EPS was $0.88, and adjusted pretax operating income, or APTOI, was $639 million. Our results included several notable items that contributed $0.16 to our operating EPS. These were offset by alternative returns below long term expectations of $0.12 and COVID mortality losses of $0.03.

Adjusting for these items, our operating EPS would have been $0.87 for the quarter. With respect to APTOI, our results were 31% or $287 million below the prior year quarter. Approximately $635 million of this decline was driven by the impact of market conditions and structural changes associated with debt capitalization of Corebridge as well as divestitures completed in 2021. The principal headwind was variable investment income, which accounted for nearly $490 million of the decline. Excluding variable investment income, APTOI was 48% higher than the fourth quarter of 2021, largely due to increasing base spread income and improving mortality experience. Assets under management and administration was $357 billion as of December 31, up 3% sequentially, reflecting both market conditions and new business growth.

The strength and diversification of our core earnings power is evident when you look at our sources of income for the fourth quarter, which, in aggregate, were up 15% year-over-year, excluding variable investment income. Base spread income, which is our largest source of earnings, grew 25% compared to the fourth quarter of 2021 due to higher new money rates coupled with strong growth in our spread-based products. Fee income, our second largest source of earnings declined 20% versus the prior year quarter partially a function of underlying asset valuations. Underwriting margin, which is primarily derived from our life business, rose 91% year-over-year, excluding variable investment income, mainly due to improving mortality experience. Shifting to net investment income, base yield was 4.42% in the fourth quarter.

This was the second quarter in a row where we saw significant growth with a base yield up 34 basis points sequentially and 54 basis points year-over-year. This growth was driven by a combination of reinvestment activity at higher new money rates, resets on floating rate assets and growth of the overall portfolio as well as a onetime notable item. This notable item contributed 15 basis points to the base yield, most of which benefited our Life Insurance segment. To reiterate my comments during last quarter’s call, we expect the benefit of higher new money rates and our partnership with Blackstone to continue to emerge during future quarters as more of the investment portfolio is reinvested at higher yields and earns in. Thus far, the improvement in base yield has outweighed any increases in policyholder crediting rates.

Moving on to expenses, total operating expenses increased sequentially on a net basis. While our fixed cost benefits from Corebridge Forward activity, they were more than offset by incremental costs that kicked in with our IPO, continued establishment of standalone capabilities as well as a onetime item. Following up on Kevin’s earlier comments about Corebridge Forward, we have a roadmap for $400 million of expense savings, and we have acted upon or contracted approximately $232 million of exit run rate savings as of the end of 2022. Only a small percentage of these savings have earned into our results thus far. We expect that approximately $130 million will earn in, in 2023, with an offset from the full year earn-in effect from incremental costs that we picked up during 2022 to operate a standalone public company, which we estimate at $75 million to $100 million.

We continue to estimate the cost to achieve will approximate $300 million over the life of the initiative, with this onetime investment delivering $400 million in annual run rate savings. So far, the cost to achieve has been $84 million. We continue to expect the implementation of a leaner operating model will contribute approximately one point to ROE growth by 2024. We also made significant strides separating Corebridge from AIG. To-date, we’ve incurred about $180 million of the $350 million to $450 million estimated cost to achieve. The bulk of the remaining work is centered around separating shared applications which should largely be completed by the end of 2023 or early ’24. Next, I will speak to segment results, beginning with Individual Retirement, our largest business.

Individual Retirement reported APTOI of $436 million, benefiting from strong growth in base spread income as well as overall lower expenses, partially offset by lower fee income. Base spread income for the quarter was up 35% over the prior year quarter, driven by spread expansion. Base net investment spreads increased 54 basis points year-over-year and 27 basis points sequentially. Fee income declined 21% due to lower asset valuations and net outflows in our variable annuity portfolio. Our hedging programs continued to perform as expected despite volatile market conditions. The higher rates that have been driving our strong sales at attractive margins are as expected, also leading to higher surrenders. That being said, our surrender rate remains below our expectation and net inflows in the general account were quite strong at $740 million in the fourth quarter and over $4 billion for all of 2022.

In addition, we maintained strong liquidity in the general account, well positioning us to cover surrenders which we expect will remain elevated in 2023 relative to historical levels due to the materially higher interest rate and credit spread environment. Group Retirement has been influenced by many of the same trends impacting Individual Retirement. Group Retirement reported APTOI of $177 million, benefiting from strong growth in base spread income, offset by lower fee income. Base spread income grew 13% versus the fourth quarter of 2021 due to spread expansion. Base net investment spread increased 17 basis points year-over-year but was flat sequentially. Fee income declined 20% year-over-year due to lower asset valuations and net outflows.

While net flows remain negative, we continue to see outflows concentrated in the higher GMIR bucket with inflows in the lower GMIR buckets. This trend is expected to improve the spread profile for the business over time. We expect continued growth of our advisory and brokerage fee revenue, which reflects our strategy to pivot the business into a platform which provides for a higher stream of less captive incentive cash flows over time. Life Insurance reported APTOI of $97 million in the fourth quarter inclusive of $22 million of notable items. Core underwriting margin, excluding notable items, improved 78% year-over-year due to improved mortality experience. Our fourth quarter mortality experience was favorable to expectation, inclusive of $21 million of COVID losses.

Notable items in Life Insurance included approximately $64 million of a onetime item in net investment income, offset by $42 million related to the positive resolution of certain legal matters. The legal matters included a recapture of certain YRT treaties that were subject to arbitration as well as the resolution of an unrelated litigation matter. We have now resolved a majority of our YRT disputes. Considering this business more broadly and looking forward, we expect continued growth of base portfolio income and a reversion to historical mortality levels as COVID moves into an endemic phase. Institutional markets reported APTOI of $64 million in the fourth quarter with stable core sources of income as compared to the prior year quarter. The year-over-year decline in APTOI was largely driven by lower variable investment income.

Total insurance reserves grew 8% year-over-year, reflecting the growth of our PRT business and gate portfolio. We’re encouraged by the progression of the institutional markets business, reflecting consistent revenue growth — sorry, reserve growth, strong new business margins and expanding spreads, which we expect will continue to improve profitability in 2023. And lastly, losses in our Corporate and Other segment increased sequentially due to higher interest expense, resulting from a full quarter of debt service on hybrid securities and the delayed draw term loan, which was drawn down in the third quarter 2022. Turning to our balance sheet, we assess the strength of our balance sheet through different lenses including, but not limited to liquidity levels, capital ratios, financial leverage and our risk profile.

Our balance sheet remains healthy with strong liquidity and capital as well as a balanced diversified investment portfolio and reasonable financial leverage as of December 31. Adjusted book value was $21.4 billion or $33.10 per share, up 9% year-over-year, but down 2% from the third quarter. The sequential decline was due to derivative and foreign exchange mark-to-market losses in the fourth quarter that partially reversed gains from the first nine months of the year. Our financial leverage ratio was 29.6%, within our target range. We continue to expect that our balance sheet will naturally delever over time as a result of book value growth. Our Life Fleet RBC ratio remained strong and was above target of 400%, largely aligned with the prior year quarter estimate — prior quarter estimate.

Recognizing there’s a lot of uncertainty in the macro environment, we feel we’re starting 2023 in a strong position. We ended the year with ample holding company liquidity of $1.5 billion. Our insurance companies returned $2.2 billion of normalized distribution during 2022 on par with the distributions made in each of the preceding three years. We paid dividends to our shareholders of approximately $300 million since the IPO. We declared our dividend for the first quarter of 2023, which will be paid on March 31. This represents a dividend yield over 4% based upon our recent stock price. As Kevin previously indicated, we remain focused on delivering on our financial goals, including achieving a total payout ratio of 60% to 65% by 2024. Pivoting to LDTI, it’s important to remember that LTI does not impact our economic returns, statutory results or insurance company cash flows.

When we begin reporting under LDTI in 2023, we expect to see reduced volatility in our operating results given changes to the accounting for market risk benefits impact. The impact to our operating earnings run rate should be neutral to modestly favorable over time. We expect continued volatility in our GAAP earnings due to the requirement to fair value market risk benefits in our GAAP results. We also expect an increase in adjusted book value which we currently estimate to approximate $1.5 billion as of September 30, 2022. In terms of the initial transition adjustment as of January 1, 2021, we currently estimate an approximate $1 billion to $1.5 billion reduction in GAAP shareholders’ equity resulting from a decline in other comprehensive income, offset by an increase in retained earnings.

We further estimate the overall impact to GAAP shareholders’ equity as of September 30, 2022, is an increase of approximately $1 billion. This favorable impact to book value reflects the benefit of Corporate having a diversified balance sheet, including both life and annuity products. In terms of sensitivities to macro factors, our preliminary estimate of the APTOI impact from movements in equities and interest rates post LDTI are as follows. First, an immediate 10% reduction in equities is expected to reduce fee income net of advisory fee expense by approximately $85 million over a 12 month period. And second, an immediate upward parallel shift of 100 basis points across the treasury curve is expected to raise APTOI by approximately $165 million, $265 million and $365 million for each of the first, second and third years following the rate increase.

Now I would like to conclude with a commentary on our outlook for 2023. Looking ahead, we expect to achieve EPS growth resulting from our initiatives involving expense savings, investments, organic growth and capital management. As to our sources of income over the next 12 months, we expect to see incremental growth in base spread income and underwriting margins, while fee income will depend on the extent of a recovery in asset valuations. We continue to expect long-term return assumptions for our alternative investments will range between 8% and 9%. And finally, we expect our effective tax rate will approximate 21% in 2023 before discrete items. In summary, we remain focused on executing our strategies and deploying capital in a way that aids our efforts to create sustainable and profitable long-term growth.

We have a strong balance sheet, and we remain focused on delivering on our financial goals. I will now hand it back to Kevin.

Kevin Hogan: Thank you, Elias. Operator, we are now ready to take questions.

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Q&A Session

Operator: Thank you. We will now begin the question-and-answer session. Our first question today comes from Ryan Krueger with KBW. Ryan, please go ahead. Your line is open.

Ryan Krueger : Hi, thanks good morning. Yesterday, on the AIG call, they indicated a possible secondary offering before the end of the first quarter. I just wanted — was hoping for updated commentary on, if you think you would be in a position to commence the buyback program around that same time to be able to participate if that occurs?

Kevin Hogan : Yes. Thanks, Ryan. Our focus is on delivering on our strategies and having the financial flexibility. And we feel really good about where we ended the year. Our capital position at the end of the year was consistent with our strategy. Our RBC in the 410% to 420% range, similar to the third quarter. And that’s, as Elias pointed out in his prepared remarks, after paying $2.2 billion in distributions. And we also made a provision for some modest cash flow testing reserves in New York. And our parent liquidity is where we expect it to be. It’s within our target of being able to pay for our corporate expenses and to have the financial flexibility to invest in attractive new business as well as to complement our committed dividend with additional repurchases.

And our leverage is in the range that we intend, in the 25 to 30, at the higher end of the range based on where we are. So we feel good about where we are. We can’t comment further on AIG’s plans relative to its strategy, but we have the financial flexibility that we intended.

Ryan Krueger : Great. Thanks. And then follow-up on the expense commentary. I just want to make sure I understood it correctly. Were your comments that you expect $130 million of incremental expense saves to earn in, in 2023 and that $75 million to $100 million of incrementally higher standalone company expenses. I just want to make sure that are those incremental or are they more total amounts? And if any of that was already incorporated into the 2022 results?

Kevin Hogan : Thanks, Ryan. There’s a lot of moving parts. I’ll ask Elias to sort of unpack all the pieces.

Elias Habayeb: Yes. So Ryan, we’ve acted or contracted about $232 million in savings related to — exit run rate savings associated with Corebridge Forward. A little of that has earned in, in 2022. The incremental portion related to the $232 million that we estimate will earn in, in ’23 is $130 million. But offsetting it, as you know, we have been — if you look at over the course of the year, our expense has been coming up as we build up the capabilities to be a standalone public company. That has not fully earned into our results in ’22. So there’s an offset of about $75 million to $100 million that we’ll earn in next year.

Ryan Krueger : Great, thanks a lot.

Operator: The next question comes from Elyse Greenspan with Wells Fargo. Elyse, please go ahead.

Elyse Greenspan : Hi, thanks. My first question was on the elevated fixed annuity surrender activity in the quarter. I was just hoping to get more color on how customers are behaving given the rising interest rate environment? And what protections do you guys have in place against disintermediation on that product?