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Corebridge Financial, Inc. (NYSE:CRBG) Q4 2023 Earnings Call Transcript February 15, 2024
Corebridge Financial, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Hello, everyone, and welcome to the Corebridge Financial, Inc. Fourth Quarter 2023 Earnings Call. My name is Seth, and I will be the operator for your call today. [Operator Instructions] I will now hand the floor over to Isil Muderrisoglu to begin the call. Please go ahead.
Isil Muderrisoglu: Good morning, everyone, and welcome to Corebridge Financials’ earnings update for the fourth quarter and full year of 2023. Joining me on the call are Kevin Hogan, President and Chief Executive Officer; and Elias Habayeb, Chief Financial Officer. We will begin with prepared remarks by Kevin and Elias, and then we will take your questions. Today’s comments may contain forward-looking statements, which are subject to risks and uncertainties. These statements are not guarantees of future performance or events and are based upon management’s current expectations and assumptions. Corebridge’s filings with the SEC provide details on important factors that may cause actual results or events to differ materially from those expressed or implied by such forward-looking statements.
Except as required by the applicable securities law, Corebridge 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 investor.corebridgefinancial.com. With that, I would like to now turn the call over to Kevin and Elias for their prepared remarks. Kevin?
Kevin Hogan: Thank you, Isil, and good morning. 2023 was both an important year for Corebridge and a successful one. We executed with focus and determination, capitalized on attractive market opportunities, made tremendous progress on our strategic and operational priorities. And in each and every quarter, we delivered quality financial results. This morning, I will review the first full calendar year for Corebridge through five different lenses: profitability, sales, sources of income, operating expenses and capital return. Elias will then provide details on our fourth quarter results and offer some guidance for the year ahead. But first, I want to remind you of the value proposition we laid out at our IPO. Corebridge operates four market-leading businesses that provide a broad set of protection and retirement solutions to individuals and institutions.
We manufacture a wide range of products that appeal to different market segments, while also designed to generate attractive returns. We have a high-quality in-force portfolio and have managed it carefully. The diversity in our product suite and the breadth of our distribution strategy allow us to be nimble and react to evolving market conditions. We have the ability to dial up and dial down product sales based on changes in customer demand and where risk-adjusted returns are the most attractive, as evidenced by our recent emphasis on spread-based products, such as fixed annuities, which has grown over 200% since 2020 and, pension risk transfer, which has grown 130% over the same period. Our leading distribution platform is also a significant contributor to our agility, with over 1,200 distribution relationships with banks, broker-dealers, wirehouses, independent marketing organizations and general and independent agencies, as well as our own financial adviser and our direct channel.
We continue to invest in our platforms to improve efficiency, scalability and productivity, such as we have been undertaking with Corebridge Forward, our modernization program. Our competitiveness is further supported by our asset origination capabilities that have been enhanced by our investment partnerships with Blackstone and BlackRock. Our strategy is to grow our company in a way that creates value for both our customers and our shareholders. Collectively, our diversified businesses and dynamic business model have a long track record of delivering attractive financial results and consistent cash flows under different macro environments. Together with our strong balance sheet, we are well positioned to deliver long-term value to our shareholders by remaining focused on improving profitability and returning a meaningful amount of capital.
With that as background, I would like to review our 2023 financial results. Corebridge is pleased to report very strong results not only for the fourth quarter, but also for the full year. We grew 2023 adjusted after-tax operating income to $2.6 billion, a 12% increase year-over-year. Our full year non-GAAP operating earnings per share also rose by 12% to $4.10, and our 2023 adjusted return on average equity increased on a run rate basis to 12.2%, an improvement of over 200 basis points from the prior year. Corebridge drove profitability through strong top line growth, margin expansion and expense efficiency. We benefited from the investments we have made in our operating model, which positioned us to capitalize on historic market opportunities.
In 2023, we grew premiums and deposits across our broad portfolio of spread-based products by 60%. These products are particularly attractive now, producing strong margins with double-digit IRRs. Looking across the entire Corebridge portfolio, premiums and deposits were $10.5 billion for the fourth quarter and $39.9 billion for the year. The full year volume of almost $40 billion is a new record for us and one of several high watermarks for 2023, including fixed annuities, fixed index annuities, guaranteed investment contracts and pension risk transfer sales. Complementing this growth, we leveraged our unique investment platform to scale the origination of attractive assets that are well matched to our liabilities and to opportunistically lock in favorable yields from which we expect to see benefits for years to come.
Our new operating model enabled us to rapidly expand capacity to support record sales volumes, especially in the latter part of the year. We also grew our aggregate core sources of income, which increased 12% for the full year to $7.1 billion. Our four established businesses generate an attractive mix of spread income, fee income and underwriting margin. We enjoyed meaningful growth of spread income supported by market conditions, while at the same time, fee income stabilized with improved asset valuations and the expansion of our advisory and brokerage business and Group Retirement. And we continue to generate a solid underwriting margin from improved full year mortality experience. Taking a look at our spread businesses, we increased full year base spread income by nearly $900 million or 30% to $3.7 billion.
We were able to serve our customers and distribution partners’ needs with attractive products reflecting some of the most supportive market conditions in recent memory. With interest rates at levels not seen in over a decade, we seized the opportunity. As we look ahead to 2024, the environment remains attractive for new business, and we remain well positioned to serve our markets. Although we invested as appropriate to increase our capacity in both sales and operations to support this unique growth opportunity, we also remain steadfastly focused on expenses. Between the fourth quarter of 2022 and the fourth quarter of 2023, we reduced our operating expenses by 14%. A key contributor has been Corebridge Forward. We have achieved or contracted on 88% of our exit run rate savings goal of $400 million, and we expect the vast majority to earn into our results by the end of 2024.
This program is near its completion as we transition to a focus on continuous improvement. Turning to capital management. We have been clear since the outside of Corebridge that we are committed to deploying capital to create value for shareholders. In 2023, we demonstrated our ability to do this, with strong cash flows from our insurance companies, supported by important strategic transactions. We closed the sale of Laya Healthcare in Ireland and remain on track to close the sale of our U.K. life business in the second quarter of 2024 as we streamline our portfolio with a continuing focus on life and retirement solutions in the United States. Collectively, the sale of our international life operations will generate over $1 billion of value.
Corebridge returned over $2.2 billion to shareholders in our first full calendar year as a public company, including special dividends, and we remain committed to delivering a 60% to 65% payout ratio in 2024. Our delivery of these attractive levels of shareholder return reflects the confidence we have in our financial position. We entered 2024 with a strong balance sheet and ample levels of liquidity and capital, representing enhanced financial flexibility. For over a decade and across various economic cycles, we have consistently maintained a Life Fleet RBC ratio above our target. At the same time, our insurance companies have distributed over $2 billion annually to our holding company. We are routinely able to maintain healthy capital levels regardless of the macro environment while simultaneously supporting new business volume and robust capital return.
Finally, I want to turn to the operational separation from AIG. This has been a complex program demanding considerable expertise and coordination, and we are nearing the end of our work. We established the capabilities required of a stand-alone public company, implemented our own capital structure, created and brought to life a new brand and disentangled functions, systems and infrastructure. On the IT side, just as one example, we migrated nearly 700 physical applications, hundreds of operating platforms and thousands of end users. These efforts did not distract us from continuing to serve our customers and distribution partners. At the end of 2023, our total spend on operational separation was $425 million. As we said before, some work has indeed extended into 2024, along with a handful of transition services agreements.
All of this required an extraordinary effort. For our employees, you have my gratitude. We ask a lot of all of you, and you delivered. I also want to thank our partners and AIG for helping to make our operational separation of success. Returning to where I began my remarks, 2023 was our first full calendar year as a public company, and it was a very productive one. The fourth quarter was a strong conclusion to what was a very good year. I will now turn the call over to Elias who will go into more detail on the results for the quarter.
Elias Habayeb: Thank you, Kevin. Corebridge delivered excellent results, both in the fourth quarter as well as the full year of 2023 while improving our financial position. We executed across strategic and operational priorities and made significant progress on the financial goals we established at the time of the IPO. Corebridge increased profitability by capitalizing on market opportunities while reducing our operating expenses. We strengthened our core businesses and enhanced our financial flexibility while returning significant capital to shareholders. Corebridge reported fourth quarter adjusted pretax operating income of $820 million or earnings per share of $1.04, an increase of 12% year-over-year on a per share basis.
Operating EPS included a $0.06 impact from nonrecurring items in our investment portfolio related to a prior period true-up on certain investments. This was offset by a $0.17 impact from alternative investment returns below our long-term expectations. Adjusting for these two items, our operating EPS would have been $1.15. This is a 25% improvement year-over-year on a comparative basis. Our aggregate core sources of income, which excludes variable investment income, improved year-over-year driven by growth in base spread income and in fee income, partially offset by a reduction in underwriting margin. The increase in base spread income, our largest source of earnings, was driven by higher new money yields and growth of our broad portfolio of spread-based products.
On average, new money yields were 7% in the fourth quarter or 190 basis points above yields on assets that matured or were sold in our general accounts. Total invested assets grew by approximately $11 billion. The increase in fee income, our second largest source of earnings, reflected the improvements in underlying asset valuations and the expansion of advisory and brokerage services in our Group Retirement segment. The decline in underwriting margin was the result of a higher frequency of smaller claims in our universal life book this quarter and net favorable nonrecurring items impacting our Life Insurance segment in the prior year quarter. Pivoting to net investment income. Net investment income for our insurance companies on an APTOI basis improved 16% year-over-year.
Base portfolio income grew 17% over the prior year quarter to nearly $2.6 billion. Reported base yields increased 45 basis points year-over-year to 4.87%. Excluding the impact from the aforementioned nonrecurring items, base yields increased 51 basis points over the prior year quarter. Based on our current interest rate and net flows outlook for 2024, we expect base portfolio income, along with associated base yield, will continue to grow, albeit at a slower pace. Corebridge improved base yield this quarter while also moving up in credit quality. Our general account investment portfolio is well positioned to perform under various market conditions. It is diversified, actively managed and remains high quality, with an average credit rating of A flat.
95% of fixed maturities were rated in investment grade as of December 31. The credit metrics in our Corebridge fixed income portfolio remained strong, and for the full year, the portfolio experienced net positive rating migrations, with upgrades outpacing downgrades. The credit fundamentals in our commercial mortgage loan portfolio remained resilient and are evolving as expected. LTV and debt service coverage ratios remain strong. Less than 1.5% of our loans have an LTV greater than 80% with a debt service coverage ratio below 1x. Our team is now focused on resolving 2024 maturities, of which office maturities are only $240 million or approximately 3% of the office portfolio. Corebridge remains proactive in reserving for potential losses in the portfolio and continues to maintain a robust loan loss allowance, which is reassessed on a quarterly basis.
As of December 31, our allowance is equal to 1.8% of the total CMO book, unchanged from the prior quarter. We also continue to hold an allowance in excess of 5% for our traditional office portfolio. We continue to believe our exposure to the office sector is manageable and remain convinced that the dislocation in this sector will play out over time. Now moving to variable investment income. Alternative investments, which represent only 3% of our total invested assets or $5.5 billion, delivered a $23 million loss in the quarter. Positive returns in traditional private equity were offset by losses in real estate equity and hedge funds. During 2023, we reduced our hedge fund holdings by over 70%, ending the year with a portfolio of approximately $200 million.
Alternative investments continue to be an important asset class as part of our strategic asset allocation. Over the last 5 years, these investments have returned an average of 14%, and we continue to have a long-term performance expectation of 8% to 9% for the asset class. Given the increases in cap rates during the fourth quarter, we are expecting further mark-to-market losses on our real estate equity investments in the first quarter of 2024. Real estate equity constitutes approximately 25% of our alternative investments or less than 1% of our total invested assets. Despite these valuation impacts, the portfolio continues to perform well, with strong cash flows at the property level. Pivoting to the business segments, which continued their strong performance during the fourth quarter.
Individual Retirement reported adjusted pretax operating income of $628 million, a 35% increase year-over-year, primarily driven by higher base spread income resulting from general account product growth and base spread expansion. Over the last 12 months, this business has contributed approximately 60% Corebridge’s insurance segment operating results. The compelling value proposition of our fixed and fixed index annuities has been responsible for approximately 51% of our earnings. Variable annuities have contributed only 9% to our adjusted pretax operating income. Base net investment spread for Individual Retirement rose 37 basis points from the prior year quarter and 4 basis points sequentially. We expect base spread income will continue to grow over the coming year.
However, base net investment spread expansion likely has peaked. That being said, base spread on the overall portfolio remain at very attractive levels. The operational capacity expansion we discussed during last quarter’s earnings call allowed us to deliver over $3 billion of fixed annuity sales during the third — during the last three months of the year. This along with persistently strong fixed index annuity sales helped Individual Retirement delivered positive general account net flows of roughly $1.7 billion. Our fourth quarter fixed annuity surrender rate declined 80 basis points sequentially. While we expect surrender rates largely to track changes in interest rates, periodically, we may see movements in the surrender rate as blocks of business exit their surrender charge protection.
For instance, in the first quarter of 2024 we expect a higher volume of annuities exiting the surrender charge protection, which should result in an elevated surrender rate. That being said, we continue to project general account net flows will remain positive. Group Retirement reported adjusted pretax operating income of $179 million, a 4% increase year-over-year. This includes higher fee income and lower expenses, partially offset by lower base spread income. Over the last 12 months, the business has contributed approximately 20% to Corebridge’s insurance segment operating results. Group Retirement is a consistent performer. Excluding variable investment income, it has steadily delivered an average of $179 million of earnings per quarter over the last 16 quarters.
Importantly, it is less capital-intensive than our other businesses, with an even split between spread and fee income. As with others in the industry and broader demographic trends in the country, our net outflows are typically driven by customers at or near retirement and transitioning from asset accumulation to asset distribution. These older-age cohorts tend to have higher guaranteed minimum interest rates and larger account values. Concurrently, our net inflows are dominated by our younger-age cohorts with lower guaranteed minimum interest rates. Additionally, we’re seeing inflows from auto plan fixed and fixed index annuity sales and our broader offering of advisory and brokerage services, which collectively grew in excess of 40% year-over-year.
Finally, I would remind you that there is seasonality in our net flows resulting from required minimum distributions by plan participants. We typically see raised levels of outflows at the end of the year, which we saw again in the fourth quarter. The impact was approximately $400 million. Life Insurance reported adjusted pretax operating income of $79 million, a 44% decrease year-over-year, mainly driven by mortality experience in our universal life book this quarter and $22 million of net favorable nonrecurring items from the fourth quarter of 2022. Our traditional mortality experience, which is primarily comprised of churn, was favorable this quarter, and overall mortality experience for the full year, inclusive of reserve impact, was consistent with our expectations.
As a reminder, our sale of Laya Healthcare closed on October 31. So results from this business were only included in our financials for 1 month of the fourth quarter. As we have demonstrated, we’re always looking for ways to optimize our portfolio, both in-force and new business. We will continue to regularly review opportunities to increase shareholder value. Institutional Markets reported adjusted pretax operating income of $93 million, a 55% increase year-over-year, primarily driven by higher base spread income. Our reserves have grown $8 billion or 26% year-over-year, with the expansion of our PRT and GIC businesses. Looking forward, we continue to expect meaningful opportunities to further expand both businesses at attractive margins, which should lead to ongoing growth of base spread income and distributable cash flows.
Corporate & Other reported an adjusted pretax operating loss of $159 million, primarily the result of our stand-alone capital structure and new parent companies since the IPO. Wrapping up, Corebridge continues to maintain strong capital and liquidity positions. We ended the year with $1.6 billion of holding company liquidity exceeding our next 12-month needs. In the fourth quarter, Corebridge delivered a run rate payout ratio of 60%, excluding special dividends. We returned $1.1 billion to shareholders, comprised of $250 million of share repurchases, approximately $145 million of regular quarterly dividends, and a $730 million special dividend that distributed the proceeds from our sale of Laya Healthcare. We estimate our Life Fleet RBC ratio to be in the range of 400% to 430% as of the end of the year.
This was after distributing $2 billion from our insurance companies, which translates into approximately 50 RBC points. Corebridge is starting 2024 in a strong position with enhanced financial flexibility, and we believe we’re on track to deliver on our goals, including a payout ratio of 60% to 65%. Consistent with our approach of creating value and enhancing financial flexibility, we’re working to have our Bermuda entity support further business development activities. This will provide Corebridge with additional capacity to grow while optimizing our capital. We’re working through the necessary regulatory approvals, which we expect to complete in 2024. In conclusion, 2023 was a very successful year for Corebridge, with the fourth quarter an excellent capstone.
We’ve made tremendous progress, and we remain focused on delivering on our financial goals in 2024. I will now turn the call back to Isil.
Isil Muderrisoglu: Thanks, Elias. As a reminder, please limit yourself to one question and one follow-up. Operator, we are ready to begin the Q&A portion of our call.
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