Corebridge Financial Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 3, 2023

There are 11 speakers on the call.

Operator

Everyone, and welcome to the CallBridge Financial Third Quarter 2023 Earnings Call. My name is Charlie, and I'll be coordinating the call today. You will have the opportunity to ask a question at the end of the presentation. I will now hand over to our host, Ishiel Muthuisoglu to begin. Ishiel, please go ahead.

Speaker 1

Good morning, everyone, and welcome to Corbridge Financial's earnings update for the Q3 of 2023. Joining me on the call are Kevin Hogan, President and Chief Executive Officer and Elias Habayev, 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.

Speaker 1

Corporates' 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, Corbridge 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.corbridgefinancial.com. With that, I would like to now turn the call over to Kevin and Elias for their prepared Remark.

Speaker 1

Kevin?

Speaker 2

Thank you, Ashil, and hello, everyone. This morning, we present our Q3 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 3 months, I want to share with you the outstanding progress we have made over the last year. On September 15, 2022, Cordridge had its initial public offering and was listed on the New York Stock Exchange.

Speaker 2

Since then, our 1st 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.

Speaker 2

I am 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.

Speaker 2

Our ability to capitalize on this moment speaks to a broader theme about Corbridge. We are at our core a fundamentally nimble company. Our strong balance sheet, our broad and well designed product suite And our long standing 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.

Speaker 2

The earnings power of our core insurance businesses is improving, aided by tailwinds from interest rates and credit spreads. Another hallmark for Corbridge during our 1st 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 $1,400,000,000 to corporate shareholders since the IPO through a combination of dividends and share repurchases.

Speaker 2

This includes over $1,100,000,000 of dividends And $246,000,000 of share repurchases. And yesterday, we declared our 6th consecutive quarterly dividend of $0.23 In the Q3, 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 $102,000,000 of corporate stock. In another important accomplishment for our company, We continue to streamline our business portfolio through the sale of our international operations.

Speaker 2

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 Leah Healthcare, the 2nd largest private health insurance provider in Ireland. We also declared a special dividend in the amount of approximately $730,000,000 to be paid in November as we look to distribute proceeds from this sale. And we recently announced the sale of our U. K.

Speaker 2

Life insurance business to AVEVA for £460,000,000 which is expected to close in the first half of twenty twenty four, 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 $1,200,000,000 of value, enabling corporates to deliver additional significant return of capital to shareholders. Moving on to other areas of accomplishment over the past year.

Speaker 2

We have achieved or contracted on 81% of our exit run rate savings goal of $400,000,000 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 continued to achieve consistent progress with Corbridge'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 $350,000,000 to $450,000,000 And to date, we have incurred $366,000,000 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.

Speaker 2

These investment partnerships benefit Corbridge 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 1, 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 A plus 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, In total, with all of these accomplishments since the IPO, it has been a very successful 1st year for Corbridge. 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.

Speaker 2

As an example, our run rate return on average equity for the 1st 9 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 Corbridge. Pivoting to the Q3, we delivered another strong financial performance over the last 3 months, extending the positive momentum that we have been building with the IPO. Elias will provide more detail during his remarks, but I will briefly touch on 4 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 2.30 basis points, both on a year over year basis.

Speaker 2

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. 2nd, 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. 3rd, our diversified businesses grew aggregate core sources of By 11% year over year, benefiting from the cumulative effect of strong organic growth and improving base spread income. And 4th, we delivered $9,100,000,000 of premiums and deposits this quarter, reflecting strong customer demand for our spread based products and the ongoing expansion of our business.

Speaker 2

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 am confident Corbridge 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 Q3 results in more detail.

Speaker 3

Thank you, Kevin. As you just heard, Corbridge 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 3rd quarter adjusted pretax operating income of $813,000,000 or earnings per share of $1.05 an increase of 28% from the prior year quarter on a per share basis.

Speaker 3

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 2 components, base portfolio income and variable investment income. Our base portfolio income grew 22% over the prior year quarter to $2,400,000,000 Additionally, the base yield increased 62 basis points to 4.7%. This improvement was driven by our ability to reinvest at higher new money yields, resets on floating rate assets And an increase of total invested asset by approximately $11,000,000,000 Importantly, Our base yield growth has more than outweighed any increases in policyholder crediting rates.

Speaker 3

We expect base yield will continue to grow, albeit at the slower pace, as we discussed during our Q2'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 to you on our segment results in combination with stability and short term interest rates. While the short end of the curve did not Materially changed 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 matured or were sold in our general account.

Speaker 3

This is the 5th consecutive quarter where our new money yields have exceeded 6%. Year to date, First shift yields exceeded our base yield by over 200 basis points. Our general accounts investment portfolio 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 Given the recent focus on commercial real estate, the credit metrics in our commercial mortgage loan portfolio are holding up well and remain strong.

Speaker 3

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 $900,000,000 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 maturity of which traditional U.

Speaker 3

S. Office comprises only about $350,000,000 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 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.

Speaker 3

Our alternative investments, which represent only 3% Our total invested assets delivered $18,000,000 of income in the quarter. Traditional private equity gains were partially 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 investments Returns to be below our long term expectations in the 4th quarter. Shifting to GOE.

Speaker 3

Operating expenses for our insurance businesses and parent company were approximately $418,000,000 Better by $10,000,000 10 percent on a year to date basis or 6% sequentially. This was driven by expense efficiencies from corporate Forward, earning into our results, partially offset by incremental costs related to the establishment of our stand alone public company capabilities. Looking to the Q4, we expect some seasonality in expenses. Now I'd like to take a moment to walk through our annual assumption update process as we're reporting this for the first time under LDTI. Once a year, principally in Q3, we review and update our actuarial assumptions for all lines of business.

Speaker 3

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, Corporate reported a nominal $22,000,000 net positive impact to adjusted pretax operating income, mostly related to our Life Insurance segment. As Kevin stated, we had no significant reserve adjustments. Within our Life Insurance segment, the updates 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 retirements DAC amortization run rate will increase by $11,000,000 per quarter due to the higher interest rate environment as reflected in our Q3 results.

Speaker 3

Turning to our balance sheet. Our Q3 LifeFleet RBC ratio remains above target, which we estimate to be in the range of 410% to 4 20%. Our subsidiaries distributed $527,000,000 during the quarter, bringing year to date distributions to $1,500,000,000 evidencing the strong cash flow generation from our insurance As a result, we ended the quarter with $1,700,000,000 of holding company liquidity, exceeding our next 12 month needs and demonstrating our financial flexibility for returning capital to shareholders. We also issued $500,000,000 of senior debt in September using the proceeds to partially repay our $1,500,000,000 Delayed raw term loan facility. Now pivoting to our business segments, which continued their strong performance during the Q3.

Speaker 3

Individual Retirement reported adjusted pretax operating income of $576,000,000 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 3 consecutive quarters of sales in excess of $2,000,000,000 We had another quarter of positive general accounts net flows even with an increase in the fixed annuity surrender rate. Our Q3 surrender rate was elevated due to rising long term interest rates as well as the processing of an operational backlog resulting from our Q1 record sales.

Speaker 3

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 This has come online and is able to support sales volumes even exceeding that of our Q1. Group Retirement reported adjusted pretax operating income of $192,000,000 up 1% year over year. This includes lower base spread income, reflecting a non recurring gain in the Q3 of 2022.

Speaker 3

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 Q3, this was mainly driven by 1 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 planned departures, our surrender rates have declined from 11% at the beginning of the year to roughly 10% now. Consistent with industry experience, many of our plant participants have been entering retirement and therefore transitioning from accumulating assets to withdrawing funds for their retirement.

Speaker 3

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 pretax operating income of $136,000,000 Inclusive of reserve adjustments, it remains consistent with our year to date experience and favorable to expectations. With respect to our sale of FLAYA, we expect this business to contribute approximately $30,000,000 per year to corporate's pretax operating income.

Speaker 3

Results from this business are only included in our results through October 31st. Institutional Markets reported adjusted pretax operating income of $75,000,000 Down $8,000,000 year over year, primarily driven by less favorable mortality experience in our Corporate Markets business. Our reserves have grown $7,000,000,000 or 23% year over year, driven by expansion of our pension risk transfer and GIC We issued a company record level of $1,900,000,000 of GICS in the 3rd quarter as part of our strategy to become a more regular issuer of GICS. And lastly, our Corporate and Other segments reported an adjusted pretax operating loss of $166,000,000 primarily the result of our standalone capital structure and new parent company expenses since the IPO. Wrapping up, we continue to have the confidence in the strength of our balance sheet and the power of our franchise.

Speaker 3

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 It's 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.

Speaker 3

This concludes my remarks. So I'll now turn it back to Kevin. Thank you, Elias. And operator, we're now prepared for questions.

Operator

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

Speaker 4

Good morning. Thank you for the opportunity. You talked about 1 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 On normal years?

Speaker 4

Thank

Speaker 2

you. Yes. Thanks, John. So the reality is, is that during the pandemic, I think with The kind of restricted access and some of the kind of intense focus on operations, etcetera, 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.

Speaker 2

And so there are some episodic activities in the large accounts. We did have a particularly large account surrender in the Q3, 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 and A activities, sometimes regular remarketing.

Speaker 2

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 Now down closer to 2% to 10%. And we need to unpack those flows a little bit. We have an aging portfolio. And Those are coming from in our portfolio are 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.

Speaker 2

And so we believe that for the implant 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 from 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.

Speaker 2

It's It's important not to be distracted by net flows.

Speaker 4

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.

Speaker 3

Yes, Elias. Hey John, it's Elias. Hope all is well. So John, listen, we as you've seen, we've generated the capacity We started in the Q3 doing open market purchases. But given the average Traded volumes we have, there's so much we could do in the open market.

Speaker 3

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 markets, but we're going to see what the best

Speaker 4

Thank you. Appreciate the answers.

Operator

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

Speaker 5

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.

Speaker 2

Thanks, Lise. So look, one thing I'd say is we live in a very complex world, complex And part of our responsibility is to be able to master the complexity of that environment. And this DOL ruling It is just the most recent ruling that we're in the process of interpreting and understanding. What I would say is that the words may be different, But the concepts many of the concepts in this ruling are similar to the fiduciary rule of 2016 and even some DOL activity earlier in the decade. And as a reminder, both our company as well as the industry actually implemented those regulations until they were overturned by The courts.

Speaker 2

And so this is territory that is reasonably familiar. It looks like that this ruling is really trying to And ERISA type obligations to all retirement related advice or recommendations, etcetera. And I'll remind you that our company kind of grew up in the registered world, whether it's on the individual retirement side, where we primarily We're through registered reps of broker dealers or banks or in the retirement services side where our originations are Through Valid Financial Advisors, which is a dually registered RIA broker dealer, that is the primary source of business that we have. And this We are familiar and our distribution channels are familiar with the advisory framework that I think is being reflected in the intention of this DOL ruling. So a very high percentage, probably 90 percentage plus of our individual retirement sales and 100% of the DFA sales are already subject to a high level standard of duty of care.

Speaker 2

And although it's a big act, there's a lot of filings around it, It's in early stages. There will be a public comment period, etcetera. We're not anticipating it's going to have a significant impact on our business.

Speaker 5

Thanks. And then my second question, you mentioned, right, that

Speaker 1

you have

Speaker 5

$1,700,000,000 at the HoldCo, which exceeds next 12 months needs. Is that what you guys are targeting, especially, I guess, when we get through some of the separation costs and the costs Associated with your savings program?

Speaker 3

Hey, Reese, it's Elias. Our target for the parent liquidity is to cover the next 12 month needs. And right now, it's less than $1,700,000,000 and that should come down as we complete the one time spend on the Initiatives we've talked about, which were relating to Corporate Forward and the separation from AIG, The first one is $300,000,000 the second one is $350,000,000 to $450,000,000 And we'd expect that will be mostly done by the end of this year associated with it. And so we will kind of what our need is will be coming down. But The position we are in right now is we are in excess of what our need is, and that kind of demonstrates the financial flexibility And the strength of our insurance company cash flows.

Speaker 3

Our insurance companies have delivered $1,500,000,000 this year, which is in line with what they've distributed in the prior years. And that should be sufficient to get us to the 60% to 65% payout ratio, which we would expect to achieve in 2024 and we feel comfortable we're on track getting there.

Speaker 5

Thank you.

Speaker 2

Thank you.

Operator

Our next question comes from Alex Scott of Goldman Sachs. Alex, your line is open. Please proceed.

Speaker 6

Hi, good morning. First one I have for you is Just on potential further strategic action on the business, certainly, I appreciate the 2 transactions you already did were Quite attractive and interesting, so I hate to ask you so quickly about what next, but I'm going to do it anyway. What is the opportunity out there? What are you seeing in the market around private equity interest, some of the blocks of business you have around fixed and fixed annuities? Do you think there's an opportunity there?

Speaker 2

Yes. Thanks, Alex. So look, I mean, we know our responsibility is To regularly review opportunities to increase shareholder value and to optimize the portfolio, I think we've demonstrated that. We did prioritize the disposition of the international businesses because, one, it allows us to focus on the huge U. S.

Speaker 2

Market, but Also, too, we saw an opportunity to generate significant value. We're still working through the U. K. Close. That will take a little bit longer.

Speaker 2

It's a More complex environment. When it comes down to other types of transactions, look, we have demonstrated the willingness And the ability to execute on transactions, you just have to go back and look at our creation of what became Fortitude Re. And so we're familiar with the market, the opportunities, and we To evaluate the portfolio, now as a result of the creation of Fortitude Re, we have a high quality in force. But as you pointed out, We are current on what transaction terms are available in the market right now. We're conscious of where our share prices, and we are continuing to evaluate options whether in terms of enhancing the in force or The efficiency of new business.

Speaker 2

So we don't have anything to update right now as and when we have something to update and I'll provide more information at that time.

Speaker 6

Very helpful. Second one I have for you is Just going back to the comments made on DAC amortization in life insurance, I just wanted to check, I mean, is that higher Run rate on DAC amortization, does that fall to the bottom line? And is that reflected in sort of the run rate That we're looking at from this quarter already or do we need to think about reducing by that amount looking forward?

Speaker 3

Thanks, Alex, it's Elias. The $11,000,000 DAC the increase in the DAC run rate is 11,000,000 That's for individual retirement, not in life, and that's already in the 3rd quarter numbers we published.

Speaker 6

Got it. Okay. Thank you for the clarification.

Speaker 3

Yes. And it's across all it's coming across all three products, Fixed index and variable, so the impact is $11,000,000 on a quarterly basis, and it's kicked in as of July 1.

Speaker 6

Thank you.

Speaker 2

Thank you.

Operator

Our next question comes from Tom Gallagher of Evercore. Tom, your line is open. Please go ahead.

Speaker 7

Good morning. Elias, the comment you made about the processing of backlog of surrenders that created Higher fixed annuity outflows this quarter. And I think you also mentioned you're starting to see some acceleration of fixed annuity sales. Would you Taking that together, would you expect 4Q and beyond to get a bit better from a net flow perspective For overall individual retirement and fixed annuities in particular.

Speaker 2

Yes. Tom, it's Kevin. I think I'm going to field this I'll start with the surrenders. Look, the 3rd quarter surrenders were nominally high, but I think it's really important to unpack The behavior throughout the quarter because the trend did change. And essentially what happened is That the surrender levels did peak early in the quarter, which I think reflected some of the processing of the backlog that was there.

Speaker 2

And then we saw the opportunity based on what sales were in the first half, we saw the opportunity and how attractive these products were for our customers. So we brought on some additional operational capacity, which came online through the Q3. And we did see the surrender rates successively come down from sort of the beginning of the quarter through the end, and we've seen that trend continuing through October. But at the same time, as this new operational capacity came online, We started to see the pace of the fixed annuity sales increase incrementally through the quarter to the point where coming into October, The new sales levels are something comparable to what we saw in the very strong Q1. And so we had overall net positive flows across I are in the Q3 despite that sort of trend.

Speaker 2

And if you look at the back half of the quarter as opposed to the front half of the quarter, And if that continues through the rest of the year, we would see some very attractive numbers coming out of fixed annuities. Index annuities And we would expect growth in the overall general account. And I would also add that The margins continue to be extremely attractive for this business.

Speaker 7

Interesting. Thank you. And then Kevin, just on your Comment to in response to Alex's question on potential risk transfer. The point you made on Efficiency of new business, should we take that to mean you're considering flow reinsurance as one potential option?

Speaker 2

Well, that's one potential option. There are a lot of ways to enhance efficiency of new business, and we're in the process of reviewing those. Our responsibility is to evaluate all options, to understand what transaction terms are And to make the make a decision that is most attractive for shareholder return opportunities as well as the success of the business.

Speaker 7

Got you. And if I could just sneak in one more. They Elias, you mentioned you're done with the you resolved office Maturities for 2023. Can you just remind us what was the total size of the maturities for 2023? And do you have a split of how much got paid off versus extended?

Speaker 7

And then when I heard you say Only $350,000,000 of office maturities in 2024, which sounds pretty low. That implies to me you didn't do any 1 year extensions On the 23 maturity wall.

Speaker 3

So yes, so Tom, so let me take. So we had about $900,000,000 Of maturities in traditional office, all the material loans are done. So from the ones who are done, that was a total of 9 loans, 5 got paid off, 4 got extended. The Ford extended tend to be bigger dollar amounts. And you're right, we did not have 1 year extensions.

Speaker 3

Basically, there were longer term extensions and what was involved were sometimes partial paydowns as well as credit enhancements for our positions in there. When you look at 2024 in traditional office, we have 5 loans that come down to about You know, dollars 350,000,000 in principle.

Speaker 2

Okay. Thank you.

Operator

Thank you. Our next question comes from Jimmy Bhullar of JPMorgan. Jimmy, your line is open. Please go ahead.

Speaker 8

Thanks. Good morning. So Kevin, on your comments on flows, if I look at the index annuity business, that's showing nice Growth both in terms of sales and flows, but the traditional fixed business seems weaker than what your commentary would suggest. So if you look at Sales, they have grown. 1Q was very good.

Speaker 8

2Q was actually weaker than last year and 3Q is almost flat. And then if we look at flows, Whether by each quarter or in totality, this year's earnings worse than last year. So I'm just trying to see what sort of I would have expected with rates Going up, fixed annuity sales would be traditional fixed would be doing a lot better and many of your peers are doing better than what your numbers would suggest So just trying to see why that business isn't picking up more and why withdrawals are actually up even more this year than sales are up even if you look at them on a year to date basis.

Speaker 2

Yes. What I would say, Jimmy, is that I just described the trend throughout the Q3. Obviously, it was very strong earlier in the year that created some kind of processing issues, I think, for the whole industry because for the whole industry, the second quarter was lower than the Q1. And through the Q3, we actually have seen strength in the fixed annuity business. And we do expect that, that will continue assuming conditions stay roughly where they are through the 4th As we've talked about before, we look at the economic value of the surrender versus the economic value of new business.

Speaker 2

And to the extent that, it's not the right thing necessarily to increase crediting rates and accept the surrenders, We look at each of those decisions kind of separately. And we also look at the entire general account and the growth in the general account The growth in spreads in the general accounts. So we have the benefit of having multiple products. We feel very comfortable with where Fixed annuity business is right now. The spreads are very attractive, and we'll continue to respond to where the market opportunities are.

Speaker 8

And on spreads, your spreads both in individual and group retirement are at very good levels already. With rates going up even more, should we assume that spreads will improve further or Because the competition or whatever, they'll I'm assuming they'll be stable at the very least. But are you assuming further improvement in spreads? Or is competition taking over to where More of the increase is going to fall to the crediting rate.

Speaker 3

Hey, Jimmy, it's Elias. So on base spread income, We expect our income to continue to grow from here given what we're seeing in our outlook. With respect to base spreads, Base spreads are already at a very attractive level. There's still room for them to continue to expand more from where we're here, But we're expecting at some stage you're going to taper off. And as you've seen the trajectory of improvement has slowed down, but it's still at very attractive levels.

Speaker 8

Okay. And is competition in the fixed and indexed and OD markets with rates going up, would you characterize that as being Rational or are you seeing a pickup in competition?

Speaker 2

For the distribution channels that we work with, the way I would Fine is the rationality of competition is what we're seeing is margins on new business, and we continue to see very attractive Margins on the new business.

Speaker 8

Okay. Thank you.

Speaker 2

Just as a reminder, folks, one question and one follow-up, please.

Operator

Thank you. Our next question comes from Ryan Krueger of KBW. Ryan, your line is open. Please go ahead.

Speaker 9

Hey, guys. Good morning. Many of your competitors in the annuity space as well as an increasing amount in The institutional market space utilized, Bermuda to for increased capital efficiency. Is that something that you would consider At Corbridge, on a go forward basis.

Speaker 2

So we're very familiar with the Bermuda environment. So I point to the creation of Fortitude Re, which we engaged in a number of years ago. That was a transaction really specifically designed to access the best benefit of the environment there. And it's long been an element of our operating strategy as Part of AIG. So we do have a Bermuda entity.

Speaker 2

We are familiar with it. And one of the options that we're evaluating Amongst many others in terms of where are the next opportunities to create value or optimize the portfolio would include potential offshore solutions.

Speaker 9

Great. And then I think Elias you mentioned some seasonality in 4th quarter expenses. Can you give any color on the magnitude there?

Speaker 3

So there's a couple of drivers that impact our expenses 4th quarter. We do have some seasonality around some of our IT related spend that's maybe $10,000,000 $15,000,000 And then obviously year end, there's always the bonus accrual true ups depending where we end the year.

Speaker 8

Thank you.

Speaker 2

Thank you.

Operator

Our next question comes from Mike Ward of Citi. Mike, your line is open. Please go ahead.

Speaker 4

Thanks guys. Good morning. Maybe just Standing on the questions around 3rd party risk transfer, I think flow reinsurance historically has been focused more on the fixed annuity side for new business at least rather than variable. So just wondering if there's like a specific product line that you might be considering more than others?

Speaker 2

We're always looking for opportunities to optimize the whole portfolio. We're not going to talk about any particular product line.

Speaker 4

Okay. And then on institutional retirement, Pension deal activity was kind of muted. So just curious if you could sort of comment on that slowdown from a Sponsors' perspective and how they're feeling about the market?

Speaker 2

Yes. Thanks, Mike. Look, these are very large, complex Transactions, and it is unpredictable when a particular program is going to land. You think of them as miniature M and A transactions because a great deal of work has to be done on the sponsor side of assembling the asset portfolio and understanding the asset portfolio and then working with the consultant understanding the liability portfolio. And I wouldn't read anything into the relatively modest activity in the Q3 because the pipeline For transactions, it continues to grow and is very strong.

Speaker 2

And our focus, I'll remind you, is on full plan terminations. Historically, we have not really participated in the commodity retiree longevity type deals And full plan terminations because of the external market conditions that exist, many plans are fully funded And are anxious to move to a full plan termination. So we're seeing more full plan terminations and we're seeing larger full plan terminations. And that's true both in the U. S.

Speaker 2

And in the U. K. And we're in extremely strong position in both markets, and the pipeline is very strong. And so I think we will continue to see robust opportunities in the Institutional Markets business.

Speaker 4

Okay. Thanks, guys.

Operator

Thank you. Our next question comes from Suneet Kamath of Jefferies. Suneet, your line is open. Please go ahead.

Speaker 10

Thanks. Good morning. I guess to start with Elias, the $2,000,000,000 of annual distributions that you are sort of guiding to out of The insurance subsidiary, should we expect that to increase as some of these one time costs are behind you?

Speaker 2

It's a nice to

Speaker 3

meet you, Talai. So the one time costs we're paying out of the parent, we're not paying out of the insurance companies. But right now, our the insurance company's Run rate is about $2,000,000,000 What we expect over time as the profitability of the insurance companies improves, there'll be more distributable earnings To maintain our 60% to 65% payout ratio over time.

Speaker 10

Okay, got it. And then I guess for Kevin, sort of interested in your comment about it being the best environment for the life space in some time. Can you just talk about How that impacts your decisions on capital allocation maybe across businesses or in total?

Speaker 2

Sure. So, I think that we have demonstrated over the last 10 years, frankly, that our business model can be successful, whether it is a high rate environment or a lower rate environment. And right now, in the higher rate environment, we're certainly deploying capital into the spread businesses, Whereas maybe some of those businesses may not have been as attractive 5 years or so ago based on the environment At that time, and I think one of the great things about our business model is we can deploy capital where the risk adjusted returns are the highest. And if we are not able to make the hurdles, then we won't necessarily deploy the capital into the new business. And so our strategy is to have a very Strong balance sheet, a strong liquidity position, the appropriate leverage profile and allocate an appropriate amount of capital to new business, which is very attractive at this time and still have the financial flexibility to return additional capital to shareholders.

Speaker 2

So right now, the environment is very attractive. We expect it will continue to. And what I feel really good about is we've been able to grow the business, the new business significantly in the last three quarters And continue to grow the balance sheet, strengthen the balance sheet and enhance our liquidity position and improve our leverage position.

Speaker 8

Okay. Thanks.

Operator

Thank you. This is all the time

Speaker 10

we have questions for today.

Operator

So I'll hand back over to Kevin Hogan, CEO, for any closing remarks.

Speaker 2

Okay, thanks. Look, it's been a year since our initial public offering, and our results, both for this quarter and since the IPO, I think demonstrate the competitive strengths of our businesses as well as the resilience of our franchise. Our financial position is strong And our opportunities are robust. We're well positioned to continue creating value for and returning capital to Our shareholders building on the outstanding progress we've already achieved in our 1st year as a public company. Thank you for joining us.

Speaker 2

Have a good day.

Operator

Ladies and gentlemen, this concludes today's call. Thank you for joining. You may now disconnect your line.

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Earnings Conference Call
Corebridge Financial Q3 2023
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