Corebridge Financial Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
August 1, 2024

There are 13 speakers on the call.

Operator

Good morning. Thank you for attending today's Corbridge Financial Second Quarter 2024 Earnings Call. My name is Jennifer, and I'll be your moderator today. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. I would now like to pass the conference over to Ishol Mudaresola with Corbridge Financial.

Operator

Ishol, please proceed.

Speaker 1

Good morning, everyone, and welcome to the Corbridge Financial earnings update for the Q2 of 2024. 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.

Speaker 1

Corbridge'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, Corbridge is under no obligation to update any forward looking statements if circumstances or management's estimates or opinions should change, and you are cautioned to not place undue reliance on any forward looking statements. 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 turn the call over to Kevin and Elias for their prepared remarks.

Speaker 1

Kevin?

Speaker 2

Thank you, Ishol, and good morning, everyone. I am pleased to report strong operating results for the Q2, once again demonstrating the Corbridge financial value proposition. Our diversified business model, strong balance sheet and disciplined execution continue to create shareholder value as demonstrated by the growth in our earnings and cash generation. Through the quarter, our 4 market leading businesses capitalized on attractive market conditions and strong customer demand to drive growth and create value. Turning to Slide 3.

Speaker 2

Corporates reported operating earnings per share of $1.13 a 9% increase year over year. Our run rate operating EPS, which adjusts alternative investment returns to our long term expectations, grew 12% over the same period. Our collective businesses generated $11,700,000,000 of premiums and deposits, a 17% increase year over year. This is the highest in over a decade for CoreBridge, reflecting strong customer demand and the benefit of our broad suite of products and services. CoreBridge also delivered 5% growth in aggregate core sources of income.

Speaker 2

All three sources base spread income, fee income and underwriting margin, each increased reflecting our ability deploy resources where customer demand is the greatest and risk adjusted returns are the most attractive. Our strong balance sheet gives us the flexibility to both invest in our businesses and return capital to shareholders. We proactively manage both sides of the balance sheet to maintain a sound capital and liquidity profile. We are committed to returning capital to shareholders. And in the quarter, we returned $575,000,000 through a combination of dividends and share repurchases.

Speaker 2

Since the IPO, we have consistently demonstrated our ability to support robust sales while delivering attractive returns to our shareholders and maintaining balance sheet metrics in line with our targets. We are also continuing to improve our operating leverage. General operating expenses are lower by 6% year over year after adjusting for the international life divestitures. This reduction, which is driven by the benefits of Corbridge Forward, our expense and modernization program, has been achieved during a time of record growth for the company. Expense management will continue to be a contributor to financial performance as we developed important capabilities through the execution of CoreBridge Forward.

Speaker 2

We expect to leverage these skills beyond this program and have shifted to a focus on continuous improvement to further enhance operating efficiency. Additionally, I am pleased to share that we began ceding premiums to our affiliated Bermuda reinsurer in July, having received all the required approvals. Corbridge is firing on all cylinders and executing on the plans necessary to deliver on the commitments that we made at the time of the IPO. This includes generating a reported ROAE of 12% for the first half of twenty twenty four, achieving the lower end of our target. Moving to Slide 4.

Speaker 2

CoreBridge is dedicated to helping individuals take action to plan, save for and achieve secure financial futures. Through this purpose, our 4 market leading businesses drive long term growth and value creation. Our addressable markets are significant and each benefit from strong tailwinds given a large and growing retirement aged U. S. Population, the life insurance protection gap and growing need for retirement solutions.

Speaker 2

In the Q2, individual retirement enjoyed strong demand for its products, in particular fixed and fixed index annuities. We have long been a leading participant in these markets, offering a broad range of income and accumulation oriented solutions through our extensive distribution platform. We continued to enjoy strong growth in the bank channel, but also significant growth in our broker dealer channel, reflecting the success of our strategy to support the unique needs of each major distribution partner. Individual retirement produced quarterly sales of $6,800,000,000 up 68% year over year, led by our fixed annuity products. Fixed annuity sales were $4,100,000,000 significantly higher than any quarter in recent history.

Speaker 2

Concurrently, we saw the fixed annuity surrender rate decline to the lowest level in 5 quarters. The combination of these two trends contributed to general account net flows in the quarter of $3,000,000,000 Year to date, individual retirement general account net flows of $3,600,000,000 have already exceeded all of the individual retirement general account net flows produced in 2023. Touching briefly on our other businesses. In Group Retirement, we continue to expand our range of offerings to serve the growing demand for in plan and out of plan solutions. We are optimistic about the potential for our out of plan business, which reflects the increasing need for advice in response to the aging of the population at a time of unprecedented generational wealth transfer.

Speaker 2

Capitalizing on this opportunity, we once again increased out of plan sales, which now comprise 37% of total premiums and deposits and expanded advisory and brokerage assets under administration by 12%. In life insurance, recently we have been outpacing the market and in the Q2 we delivered sales growth of 13% over the prior year. This reflects in part the success of our automated and accelerated underwriting practices. Also, last month, we announced the name change of our long standing direct to consumer life insurance business to Corbridge Direct. We are proud to have put the Corbridge name on this business.

Speaker 2

In institutional markets, starting with GICS, conditions were favorable in the quarter and so we issued $1,800,000,000 demonstrating our strategy of being a more regular issuer following the IPO. Additionally, we continue to work through an attractive pipeline of potential pension risk transfer opportunities. Moving to Slide 5. Across Corbridge, execution continues to be a priority and I am happy to announce that we received approvals from our regulators during the Q2 to begin to seek new business to our Bermuda entity. Bermuda provides access to an attractive regulatory capital framework that is aligned with how we approach balance sheet management.

Speaker 2

Utilizing our Bermuda based entity presents opportunities for us to leverage our new business origination capabilities more effectively and deploy capital more efficiently, both creating value for shareholders. In July, we initiated our 1st flow reinsurance facility focusing on fixed and fixed index annuities written through our individual retirement business. Our Bermuda based entity is one means of optimizing capital efficiency and we continue to explore others. CoreBridge has achieved much over the first half of twenty twenty four and we believe our strategy continues to drive an attractive return profile. Our diversified business model, strong balance sheet and disciplined execution enable our insurance companies to generate significant cash flows.

Speaker 2

Year to date, our insurance subsidiaries distributed $1,100,000,000 to the holding company and CoreBridge has returned $961,000,000 to shareholders. This has resulted in a payout ratio of 70% and we remain firmly on track to meet our full year target. Our financial position is strong and our results reflect the earnings power of our franchise. With positive momentum across our businesses, we are well positioned to further grow earnings and cash flows while maintaining our financial flexibility. We will continue to execute on our strategy and optimize our capital to strengthen our franchise and generate long term growth and shareholder value.

Speaker 2

We are pleased with the results we have achieved to date and remain excited about the opportunities for the future. We look forward to welcoming Nippon Life as a shareholder following regulatory approval. To our colleagues at Corbridge, thank you for your commitment and professionalism. I am so proud of what you have accomplished and your ability to consistently execute. I will now turn the call over to Elias.

Speaker 3

Thank you, Kevin. I will begin my remarks this morning on Slide 6, where I will provide an overview of our key financial results for the quarter. Corbridge reported 2nd quarter adjusted pretax operating income of $859,000,000 Our operating earnings per share of $1.13 grew 9% year over year on a

Speaker 4

per share

Speaker 3

basis. We delivered run rate operating EPS of $1.21 a 12% improvement on a year over year basis. This includes an $0.08 increase from aligning alternative investment return to our long term expectations. Year to date run rate ROE of 13% has grown over 200 basis points since our initial public offering and is within our target range of 12% to 14%. The strength of our financial results for the quarter was driven by growing diverse sources of income, asset optimization, expense efficiencies and capital management.

Speaker 3

Moving to Slide 7. Our assets under management and administration grew 6% year over year to $394,000,000,000 General account assets grew 8% over the prior year as a result of higher new business volume and at the same time separate account assets and assets under administration grew 4% benefiting from improved account values. The investment portfolio of our insurance companies delivered net investment income of $2,700,000,000 a 10% improvement year over year. Base portfolio income increased 12% over the prior year as it continued to benefit from growth in general account assets and higher new money yields, which were 130 basis points above roll off yields in the quarter. Base yield increased 22 basis points year over year to 4.82%.

Speaker 3

The core bridge investment portfolio is diversified and high quality with an average rating of A. From a credit perspective, our portfolio inclusive of commercial real estate exposure is performing as expected. Asset originations continue to benefit from our internal origination capabilities as well as our partnerships with BlackRock and Blackstone. Given our market outlook, we accelerated the origination of attractive assets in the first half of the year. We originated approximately $19,000,000,000 of high quality assets for the general account, roughly 58% more than this time a year ago, demonstrating the capabilities of our asset origination model.

Speaker 3

As part of our active management, we continue to reposition the portfolio to better align our ALM profile, improve return on capital and enhance credit quality. Year to date, Corbridge has sold $4,000,000,000 of assets. This includes $900,000,000 of below investment grade credit without any impact to future earnings. Variable investment income declined over the prior year broadly driven by alternative investments. Positive returns in traditional private equity and hedge funds were partially offset by mark to market losses in real estate equity.

Speaker 3

Annualized alternative returns were approximately 4% in the quarter, which is below our long term expectation of 8% to 9%, but better than recent quarters. Looking forward, we believe real estate equity returns may improve from the lows of the first half of twenty twenty four, while initial information for the 3rd quarter indicates some potential losses in our hedge fund portfolio as well as on call and tender activity. Turning to Slide 8. Our businesses at Corbridge create multiple and complementary sources of income. Our aggregate core sources of income grew 5% year over year driven by an increase in each of the three sources.

Speaker 3

Base spread income grew 3% over the prior year, driven by general account portfolio growth and sustained higher new money yields, partially offset by higher average cost of funds as a result of surrender activity. Fee income improved 8% over the prior year driven by higher account values along with our growing advisory and brokerage business, which has increased assets under administration by 12% year over year. Underwriting margin, excluding variable investment income and the sale of our International Life business, improved 4% over the prior year, driven by more favorable mortality experience. The combination of our diversified market leading businesses working together powers our earnings growth. Here are a few highlights.

Speaker 3

Individual retirement grew its sources of income by 7% year over year through a combination of spread and fee income. Base spread income increased largely as a result of general account asset growth driven by strong new business volume. Spreads on the new business continues to be attractive, but are tighter than the spreads on the in force. And surrenders are more concentrated in blocks with lower cost of funds, both of which put pressure on the portfolio's overall base net investment spread. As such, we expect marginal compression in the future.

Speaker 3

That said, base net investment spread was flat on a sequential basis after adjusting for notable items in the Q1. As we discussed during our February 2024 earnings call, we expect base spread income on a dollar basis will continue to grow notwithstanding some spread compression. Fee income, which accounts for 30% of individual retirement sources of income increased 10% year over year. Touching briefly on our other businesses, group retirement generated consistent earnings benefiting from the balance between spread and fee income. Fee income grew by 7% year over year, while base spread income declined driven by the impact from net outflows as our older age customers transition from asset accumulation to asset distribution.

Speaker 3

Life insurance benefited from favorable overall mortality experience with our domestic business reporting an underwriting margin ratio of 36.5 percent for the Q2 of 2024, up 130 basis 4, up 130 basis points over the prior year. As a reminder, with the sale of the U. K. Life business this quarter, Life Insurance's financial results now purely represent our domestic business. Institutional Markets produces income from spreads, fee and underwriting margin.

Speaker 3

Base spread income increased 8% year over year due in part to the significant growth in our PRT and GEC portfolios. We continue to expect meaningful opportunities to further expand this business, which we believe will lead to ongoing growth of reserves and earnings. Our financial results for the quarter demonstrate the benefits from our multiple sources of income as well as the ability to improve efficiency while also growing the balance sheet. On that point, general operating expenses for our insurance businesses and parent company were lower by 6% after excluding the sale of our International Life business. To date, more than $280,000,000 of savings from Corbridge Forward have earned into our results.

Speaker 3

Moving to Slide 9. Corbridge continues to maintain a strong balance sheet, while our sound financial performance and consistent cash flow generation delivers value to shareholders. Our holding company liquidity remains strong at $1,900,000,000 and our LifeFleet RBC ratio is above target. Distributions from our insurance companies were $500,000,000 in the 2nd quarter, bringing the year to date distributions to $1,100,000,000 a 10% increase over the prior year. As a reminder, in the quarter, we received $550,000,000 in net proceeds from the sale of our U.

Speaker 3

K. Business. Corbridge delivered $139,000,000 of dividends and $436,000,000 of share repurchases to shareholders in the quarter, bringing the year to date payout ratio to 70%. As of July 31, we repurchased over $250,000,000 worth of shares, bringing our share repurchases to approximately $940,000,000 over the 1st 7 months of the year. We're disciplined with our capital management and expect to distribute the remaining proceeds from the sale of our UK Life business to shareholders during the second half of the year.

Speaker 3

In conclusion, our diversified business model, strong balance sheet and disciplined execution continue to create shareholder value as demonstrated by the growth in our earnings and cash generation. With that, I'll now turn the call back to Isha.

Speaker 1

Thank you, Elias. As a reminder, please limit yourself to one question and one follow-up. Operator, we are now ready to begin the Q and A portion of the call.

Operator

Thank you. We will now begin the question and answer Our first question comes from the line of Elyse Greenspan with Wells Fargo. Elyse, your line is now open.

Speaker 5

Thanks. Good morning. My first question is just on the on Bermuda. Now that you guys have started seeding business there, could you just give us kind of the lay of the land, what you expect to seed and how we could see that transpiring? And then can you help us think through the capital efficiencies that you could see from seeding more business to Bermuda?

Speaker 2

Yes. Thanks, Elyse. Good morning. Look, we think of Bermuda as an extension of our capital management toolkit. We have an existing entity that has capital and we did begin seeding part of our very robust fixed annuity and indexed annuity new sales.

Speaker 2

We have several opportunities as we advance with our Bermuda strategy. We can seed flow reinsurance on additional products relative to new business, those that are attractive in the Bermuda environment. And ultimately, we can also create in force transactions in terms of portfolio reinsurance opportunities. And so right now with the robust fixed and indexed annuity sales, it's helped us support those sales, but we see Bermuda as a long term extension of our capital management strategy.

Speaker 5

And then maybe my second question is picking up on that. You guys had pretty strong fixed annuity sales in the quarter. Can you just kind of comment on the outlook that you would expect from here over the balance of the year and into next year as well?

Speaker 2

Yes, sure. So the 2nd quarter conditions were very strong for both fixed and indexed annuities, in particular fixed annuities. These products are very valuable to customers as part of a long term savings plan, and we've seen advisors very supportive both in the bank channel and also the increasingly active broker dealer channel. And ultimately, customer demand is driven by crediting rates, which reflects where yields and spreads are, but also where customer expectations of the future are. And during the Q2, the 1st 2 months, rates were rising and high.

Speaker 2

That started tailing off towards the last month of the quarter. We were able to leverage our responsive pricing and the tremendous distribution access that we have and executed effectively in that environment. We benefited from some operational improvements that we made last year to support the volumes and attractive assets were available. So we feel good about our execution during the quarter. We may not always have quarters in the retail business such as that, but if the customer demands are consistent and markets are supportive, certainly, we have the opportunity to be able to participate.

Speaker 2

I think you have to look maybe broader than just focusing on 1 or 2 products. Since the Q2 of last year, we've enjoyed increase in the overall level of production, but we've been able to support this growth while strengthening the balance sheet and delivering on our capital returns. So we feel good about our execution and we'll continue to respond as conditions evolve in the future.

Speaker 5

Thank you.

Operator

Thank you. Our next question comes from the line of Ryan Krueger with KBW. Ryan, your line is now open.

Speaker 6

Good morning. I had a higher level question on both Bermuda and your comments on continuing to explore other efficiency options. Should we think of these things as enabling you to grow more while continuing to achieve the targeted 60% to 65% payout ratio? Or is there actual potential upside to the payout ratio because of these actions?

Speaker 3

Hey, Ryan, it's Elias. So as Kevin said, listen, we look at Bermuda as another tool in our capital management strategy. And what you see the way we used it in the 2nd quarter is to fund in an efficient way the higher growth, which is all going to contribute to higher earnings and higher distributable cash flows over time, which is kind of important to how we think about our strategy. And we will as you've seen in the past, we're very active on how we manage our balance sheet and we see other opportunities to Bermuda, which we're we got the first one in place, and we're now considering what's the next step on how we further optimize our regulatory capital.

Speaker 6

Okay, thanks. And then with Nippon becoming a large shareholder, do you see any strategic opportunities with them beyond them being just a passive shareholder of the company?

Speaker 2

Well, thanks, Ryan. We are looking forward to welcoming them as a shareholder when the transaction closes subject to the various regulatory environments. I mean, Nippon is tremendously successful in their market, and we'll have opportunities to begin to engage once we have concluded those regulatory approvals. They understand the industry. They're very supportive of our strategy.

Speaker 2

We believe our values are aligned, and we're looking forward to welcoming them as an investor.

Speaker 6

Okay. Thank

Operator

you. Thank you. Our next question comes from the line of John Barnidge with Piper Sandler. John, your line is now open.

Speaker 7

Good morning. Thank you for the opportunity. Your free cash flow conversion targets, you've done a pretty good job at hitting them. With Bermuda,

Speaker 8

do you see an opportunity to

Speaker 7

raise those as that entity becomes a bigger portion of the portfolio? You mentioned it was long term extension of the capital management strategy. Thanks.

Speaker 3

So hey, John, it's Elias. So listen, the way we look at it is, as I said earlier, we see it as another tool in our capital management strategy that enhances our financial flexibility. And then we just started leveraging Berview that support new business and we've got some other ideas we're going to pursue over time. That will grow over time distributable cash flows as well as it's going to grow earnings from our insurance companies. If you look at our what we're doing from a capital management for 2024, putting aside the proceeds from the UK, we're focused on delivering 60% to 65% payout ratio.

Speaker 3

That's what we've done in the first half of the year and that's our focus for the second half of the year and the proceeds from the UK would be extra on top.

Speaker 7

Thank you for that. You mentioned as far as my follow-up, you mentioned other levers to improve capital efficiency beyond Bermuda.

Speaker 4

Can you maybe hit on those

Speaker 7

a little bit? Thank you.

Speaker 2

Yes. Thanks, John. So look, I mean, we're always seeking opportunities to increase value and to optimize the portfolio, including exploring pro form a transactions. And any transaction clearly has to be accretive on a risk adjusted basis. And we look at that from a managing credit risk, other considerations.

Speaker 2

And we also look at the multiple differential as part of that economic equation. As Lars talked about, we prioritized a few international transactions that were right in front of us, generated a lot of shareholder value there. And now we're enabling Bermuda. And so that does present us the potential and we continue to explore transactions both internally as well as potentially externally. We are aware of the markets and have engaged in some discussions go further than others, but we'll continue to evaluate and prioritize all the options.

Speaker 2

We see Bermuda as an important enhancement to our availability of options. And to the extent we have anything to disclose, we'll disclose it.

Speaker 3

And John, it's Elias. If I can add to what Kevin is. Since the beginning, since the IPO, we've been focused on creating shareholder value. And capital management has been one of the ways we've done it. But I think you've seen the progress we've made on organic growth where we grew our spread income by almost 30% since the IPO.

Speaker 3

We focus on expense management where we've reduced our expenses by about 11% as well as the work we've done on the asset side of the balance sheet. So in addition to capital,

Operator

Thank you. Our next question comes from the line of Suneet Kamath with Jefferies. Suneet, your line is now open.

Speaker 9

Great. Thanks. We noticed that the sequential change in the fixed annuity crediting rate was up pretty dramatically. I guess how much of that was the roll off of, I guess, old business versus just competitive pressures in terms of new business?

Speaker 2

Yes. Thanks, Suneet. I think a couple of things relative to the fixed business. First of all, we did disclose some one timers in the Q1 and in the Q4 of last year. And when we look beyond the impact of those, our nominal spreads were essentially flat on a sequential basis.

Speaker 2

And we did see very strong growth in the Q2, the growth in the general account of $3,000,000,000 And as the business earns in, we do expect spread income to continue to grow, albeit at a slower pace. We moved quickly at the beginning of the change in the market, and we were able to take actions relative to the in force and repositioning the asset portfolios. And what we're seeing is that the cost of funds on new business is higher than the overall in force portfolio. And what we're seeing in surrenders are the lower cost of fund businesses. So that is creating a creep effect in the cost of funds.

Speaker 2

And so nominal spreads themselves may have peaked as we've indicated before and there may be some marginal spread compression going forward, but the margins are locked in on the in force and we price new business according to what's available now. We expect spread income to continue to grow even though there may be some marginal spread compression.

Speaker 9

Got it. And I guess on that base spread income growth, I guess do you need sales to be sort of at this level, which is a pretty incredible level of sales in order to see that? I'm just trying to think through what the drivers of that growth in base spread income are.

Speaker 3

So, same to life. There's 2 drivers for the growth in spread income. So one is new business. No, we don't need it to be at the level you saw in the Q2 to continue to grow. The second thing is on the in force portfolio.

Speaker 3

And we shared with you in our earnings deck the kind of the delta between where new money is coming into the portfolio and where money is exiting the portfolio. So we had 130 basis point differential. So that kind of higher reinvestment rate, which still has a healthy cushion relative to what's leaving our portfolio, that's another tailwind for the growth in our spread income. So those 2 will be the tailwinds going forward, and we expect that to continue to driving spread income into the future.

Speaker 9

Okay, thanks.

Operator

Thank you. Our next question comes from the line of Tom Gallagher with Evercore. Tom, your line is now open.

Speaker 10

Good morning. First question is just on the spike in fixed annuity sales. Was that caused by any new product that was launched or was that an existing product that really accelerated during the quarter? And how do you feel about the margins in those? Because I think whenever you see something like a product that's considered somewhat of a commodity like fixed annuities go up so much, there's going to be some skepticism that it's a good profit margin.

Speaker 10

But can you talk about how you feel about the profit margin on those sales?

Speaker 2

Yes. Thanks, Tom. We feel good about the profit margin on the sales. We manage the pricing in our fixed annuity business with great discipline. We have the ability to reprice all of our in force products essentially every day if we had to during the pandemic.

Speaker 2

We were able to do that and we're very focused on kind of the micro cycles of competition. And historically, fixed annuities is one of the businesses where our production has varied quarter to quarter according to where customer demands are at a given time. And the second quarter just happens to be a period where the customer demand was very strong. Part of that is where crediting rates were. Part of that I think is where investor expectations were.

Speaker 2

And a lot of it was that advisors both in the bank and the broker dealer channel see the great value of these products as part of a long term investment plan. So the conditions were very attractive in the second quarter. We change any of our pricing philosophy and the margins continue to be attractive on new business.

Speaker 10

Got it. So no, Kevin, no new product. It was just the product that was on the shelf and it sounds like you think industry demand really probably picked up and you were just catching your share. Is that a fair way of thinking about it?

Speaker 2

No, I wouldn't necessarily think of it like that, Tom. I think we have a very strong distribution partnership with some significant distribution partners, and we were able to mobilize that capability in the Q2 in response to the demand. So it's not just a matter of where the market was. It's our business model relative to having multiple products, having multiple channels, being able to focus our capital where the risk adjusted returns are most attractive at any given time and then having the distribution platform to be able to put that to work. And just taking a step back from the fixed annuity business for a moment, I mean, our entire business model reflects that opportunity.

Speaker 2

And so the fixed annuity sales kind of stood out in the Q2. But if you look at the previous couple of quarters, we've enjoyed growth from various products and various channels in response to that market demand. And so that's how we look at it. There was a very strong quarter in fixed annuities. If those conditions were to repeat, we would anticipate being able to deliver a similar performance, and we'll be continuing to respond to where the opportunities are the greatest going forward.

Speaker 3

Okay. Thanks.

Operator

Thank you. Our next question comes from the line of Wes Carmichael with Autonomous Research. Wes, your line is now open.

Speaker 4

Hey, thank you. I had a similar question along the line of Tom's on MYGA's. But Kevin, you mentioned that cost of funds is higher on the overall portfolio versus new business and I totally get that. But when we think about new business, are you expecting kind of pressure on the cost of funds going forward all else equal, including like interest rates? I guess I just think about new entrants coming into the market, more companies continuing to focus on strategies like Bermuda.

Speaker 4

So do you expect that would kind of push up the crediting rates on these products going forward?

Speaker 2

So Wes, I just want to be clear on something. It's actually the cost of funds on the in force is lower than the new business. And that reflects the fact that a lot of that in force was originated at a very different interest rate environment. And so what's causing the creep in the cost of funds is actually the flowing in of the new business. Now what I'll say is based on where rates and spreads are, the margins on that new business continue to be very attractive.

Speaker 2

But that is what's causing the creep in the cost of funds. As the environment continues, I mean, I think even if there are some reductions in base rates, particularly at the front end of the curve, I believe that the demand for the fixed and fixed index annuity products is going to continue to be very strong because at the nominal crediting rates where products are now, these are something that are very attractive and very important to supporting a long term savings plan as part of its asset allocation.

Speaker 4

Got it. And then I think on my follow-up, just on retail annuities and shelf space, you mentioned strong distribution, but are there any opportunities that you see in the near term to kind of get on the shelf with some warehouses or even some agencies where you expect that could be meaningful in the near term?

Speaker 2

So we are already on the shelf. We believe that every major distribution firm available in the broker dealer channel, in fact, is an area we saw significant strength in the recent quarters. And that is an area where there's almost a new generation of advisers that are discovering the value of these products as part of an asset allocation. An important part of our recent growth has been the broker dealer channel.

Speaker 4

Thank you.

Speaker 2

Which includes for us the wirehouses.

Operator

Thank you. Our next question comes from the line of Joel Herwitz with Dowling Partners. Joel, your line is now open.

Speaker 11

Hey, good morning. A quick one on VII. So you guys only call out the unfavorable alternatives, but it looks like there was further VII pressure in the quarter, including negative call and tender income. Just what was that about what you see in the quarter there in non alternative VII?

Speaker 3

Hey, Joel, it's Elias. So yes, we had a situation where we had a bond that was purchased during the pandemic when rates were really low, we purchased it at a premium and it had a call event on it in the quarter, hence why we had a loss upon the call.

Speaker 11

Okay. So just a one timer there?

Speaker 3

Yes. I also signaled in my script that looking at the Q3, we expect another one in the Q3. But I would look at those as kind of more limited than necessarily a run rate.

Speaker 4

Okay.

Speaker 11

And then can you just provide some more color on your PRT outlook for the second half and just what are you seeing in the overall competitive environment in that space?

Speaker 2

Yes, sure. In pension risk transfer, the pipelines continue to be very strong. We did not have a transaction in the Q2, but we focus on the full plan termination space and there were no significant sized full plan terminations in our market in the Q2, but the pipeline continues to be very strong. And across the institutional markets business, actually, we feel great about our position. The conditions were very good for guaranteed investment contracts in the quarter.

Speaker 2

We engaged in some issuance there and we continue to see good growth in the structures as well. So the pension risk transfer is going to be a little volatile in terms of when we land transactions. Do focus on full plan terms in the $500,000,000 to $1,500,000,000 range. There's plenty in the pipeline, but they don't land every quarter.

Speaker 11

Okay. Thank you.

Operator

Thank you. Our next question comes from the line of Mike Ward with Citigroup. Mike, your line is now open.

Speaker 12

Thank you, guys. Good morning. Just curious with the gears moving in terms of deconsolidation and internally for you guys with the Bermuda arrangements. Curious how you see your business mix today specifically kind of how do you weigh external risk transfer opportunities or business mix changes going forward?

Speaker 2

So thanks, Mike. We believe we have a very strong position in the businesses that we've chosen. We have 4 market leading businesses that are at scale and able to perform. We've worked hard to hone that portfolio over the year and we're focusing on what's right in front of us. In terms of opportunities for optimizing the portfolio, whether they're internal solutions or external solutions, we're equally actively exploring where those opportunities may be and weighing them against other opportunities we have to generate shareholder value.

Speaker 2

We are aware of what the market conditions are. We're aware of what the opportunity is in terms of transaction multiples, and we continue to focus on prioritizing the most important transactions in front of us.

Speaker 11

Us.

Speaker 12

Thanks. And I'm sorry to keep going back to this annuity sales question. It's certainly a positive result to see growth, right? But just looking at the LIMRA data and fixed industry sales actually declined in the quarter. So I think we're just kind of trying to square this away.

Speaker 12

And I noticed in an earlier question, you mentioned some operational improvements that you made last year to support volumes. So was that a part of it or was there a new distribution that really contributed to this growth while others seem to see their sales decline?

Speaker 2

Look, I can't speak for what others' strategies may be. I can speak for what ours is and that is to respond to market opportunities to maintain our pricing discipline and to maintain a distribution platform that we can flex. After the tremendous volumes of the Q1 of last year, we did make operational improvements. We increased our capacity and flexibility, which started coming online in the Q3 of last year. And so we were able to support the volumes of the Q2 without any unusual service issues or backlogs or anything like that.

Speaker 2

I think that was part of it, but really it's where our distribution partnerships were and where the customer demand was. And also, we never issue liabilities that don't have an asset strategy to support them and assets were available and attractive in the Q2 to support that growth. So we're pleased with our execution at that time. I wouldn't necessarily look at it as a quarter that you would expect to always repeat. We respond to the opportunities of any given quarter.

Speaker 2

And if you look back at our production in fixed annuities, it's never been linear. It's capital markets transaction and we respond to it in the form of a capital markets business.

Speaker 7

Okay. Thank you.

Operator

Thank you. That will conclude the question and answer session today. I will now pass the call over to Kevin Hogan, CEO of Corbridge Financial for closing remarks.

Speaker 2

Okay. Thanks everybody. Thanks for joining us this morning. Thanks for the questions and have a nice day.

Operator

That will conclude today's call. Thank you for your participation. You may now disconnect your lines.

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Earnings Conference Call
Corebridge Financial Q2 2024
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