Corebridge Financial, Inc. (CRBG) Earnings Call Transcript & Summary

Good afternoon, everyone. I'm Ryan Krueger, life insurance analyst at KBW. It's great to have Corebridge up on stage and Kevin Hogan, the CEO. Also want to acknowledge Elias Habayeb, CFO; Isil Muderrisoglu; and Josh Smith from Investor Relations. I got -- I worked on pronouncing that.

Kevin, so it's been about 3 years since the IPO of Corebridge. Can you discuss the progress that the company has made over that time frame and how you feel the company's position going forward?

Yes, absolutely. Thanks. And first of all, I appreciate the opportunity to be here. Nice to see everyone. It's hard to believe, in 2 weeks, we'll celebrate the 3-year anniversary of our IPO. And I'm very proud of and very pleased with the performance of our team, our partners and our business since that time. We're executing on all of the strategies necessary to deliver on the targets that we set at the time of the IPO. We said we would deliver a 12% to 14% ROE. In 2024, we delivered that. We said we'd achieve a 60% to 65% payout ratio, excluding transactions. And we've been able to be delivering on that. And we indicated we would maintain the strength of our balance sheet at a 400% RBC ratio. And we've been able to grow the business while doing that. The 4 levers that we're pulling, the 4 elements of the strategy start with organic growth. And since the time of the IPO, we've been able to increase our sales -- annual sales volume on average around 30%, just as an example. The second element is balance sheet optimization. And through a number of transactions, including most recently our variable annuity reinsurance transaction, we've demonstrated a lot of optimization of our liability portfolio. But through the course of the last couple of years, we've also engaged in some attractive asset repositioning. We said that we would focus on expense efficiencies. And since the time of the IPO, we've reduced our annual run rate expenses by around $400 million, and we indicated we would engage in active capital management. And on top of that 30% growth in our annual sales, we've been able to return $6 billion to our shareholders since the time of the IPO, even before the proceeds from the variable annuity transactions. So we feel good that we're on track and delivering on all of our targets. We've also simplified the company since the time of the IPO. We have divested our international subsidiaries, and then we engaged in the big derisking transaction, generating $2.1 billion in proceeds on the VA sales. So we improved our risk profile, we improved our earnings quality. We are now a pure-play U.S.-focused retirement and life insurance provider. We go to market with 4 market-leading businesses. And each of those businesses are in a very strong position, and they're all supported by the same macro tailwinds that really drives the opportunity for our industry and for our company. And that's the aging of America, the fact that people realize they need to look after themselves and a very supportive adviser community. So with the economic conditions where they are, we very much expect to deliver on that 10% to 15% per year growth in earnings per share over time. And ultimately, we're 3 years old. Like many start-ups, we feel like we're just getting started.

Great. Well, you mentioned the variable annuity transaction a couple of times, I wanted to dig into that a little bit. There's a very large transaction you are doing with Venerable where you're exiting your entire variable annuity business on the retail side. Can you talk more about why you decided to do that, both strategically and financially?

Absolutely. So look, variable annuity was an important growth engine for us for many years. And the reality is, is that customer interest, adviser interest started moving away from the traditional VA business quite a while ago. And this portfolio has been in decline and negative outflows for 8 years. So it's ultimately a kind of a declining asset, and we saw the opportunity to monetize that declining asset, and we're able to achieve a transaction that we believe has been very, very attractive for our shareholders. With the reality is that this type of business is not very well valued by our investors, it's not appreciated by our investors. So the multiple that investors attribute to it versus what we could achieve in a transaction were at very different areas. And that's why we believe this is the single biggest source of value creation we've achieved since the IPO itself. So ultimately, financially, it was very attractive with the proceeds of $2.1 billion. That's a multiple around 7x, ultimately, the earnings. I think that, that is really ultimately an attractive transaction, simplify the company, reduce the risk, create great value for shareholders. And with those proceeds, we are allocating the substantial majority of the proceeds to returning capital to shareholders in the form of buybacks, and I'll get back to that in a second. But we also are investing in further organic growth in our business and investing in capabilities to support that organic growth. So in terms of the actual transaction itself, we've closed on 90% of the value of the transaction, which is our legal entity in Texas, AGL. And those proceeds will go through the normal dividend distribution process from the insurance company to the parent. We expect to begin to put those to work in the fourth quarter of this year. And then we will continue the buyback program, and we expect that this whole transaction will be accretive by the second half of next year, and we'll get through the buyback program by then. So ultimately, I think this is a great source of value creation. That's an excellent transaction. We structured it in a way to protect ourselves from the various elements of risk associated with the transaction like that. And it's allowing our company, it's allowing our management to now fully focus on the future opportunities, which are many.

So you did the variable annuity transaction. You also divested your international businesses since the IPO. Is there anything else that could be a potential opportunity from a reinsurance standpoint that could create further value for shareholders? And what are the key criteria you look at when you think about things like that?

Absolutely. We're always looking for opportunities to create shareholder value. Transactions are an additional way for us to do that. And as we look at opportunities, what we're looking for are transactions that are accretive, both in terms of economic value, but also structure. And so to the extent that there are opportunities similar to the transaction that we did on VA, where we can achieve attractive economics where we make the company better, and we're able to structure in a protective way the elements of this transaction, then we'll look at that as part of our available opportunities. And then in terms of how to deploy the capital associated with that, we'll also run that through our disciplined process of thinking about capital management at that time.

Moving to expenses. So you mentioned you've completed the Corebridge Forward program of the $400 million annual expense saves. What were the key things that drove those expense saves? And then do you see further room for more efficiency gains going forward, whether it be in dollars or more like an expense ratio?

Yes, absolutely. So Corebridge Forward was our modernization and efficiency program we launched at the time of the IPO. There were 3 major components to it. The first was increasing our work with outsourcing partners. And ultimately, there's a process called compressed transformation associated with that. That's where we move the middle and back-office activities over to our partner. And then the process after that is to invest in automation and digitization of those underlying processes and then ultimately, to bring in more advanced tools like artificial intelligence to improve the customer distribution partner experience and position ourselves for the long-term future. So that outsourcing is an important contributor to the saves associated with the Forward program. The second element was our IT modernization. We moved all of our IT administration to 1 version of the cloud or another that allowed us to completely exit our data centers, and we sold our data centers. So we're completely out of that and of the infrastructure. And then the third element of Corebridge Forward is what I think of is hygiene. We improved some of our procurement practices. We rationalized our real estate footprint. In many ways, this was the rightsizing of the company for the business that we are, and that's just a jumping off point for us because in looking at the opportunity beyond Corebridge Forward, our intention is to drive down our unit costs. And so we continue to invest in automation and digitization, particularly in the finance and the actuarial areas. We recently completed and are in the process of completing an early retirement program, which start -- further repositions the company for the future. And a part of that will be additional savings that drops to the bottom line. But a part of it, we will use to continue investing in automation and digitization and building new capabilities for the long-term future of the business. All of these things will further improve our operating leverage. But I will add that whilst we've made dramatic improvement in expenses and a lot of progress, it isn't going to be linear all the time. And in fact, as we look at the second half of this year, we would expect that rather than our normal run rate, our compensation expenses are around $25 million higher than what our normal run rate would be because of the fact of our performance relative to our plan. But longer term, we expect to continue to drive our unit costs down, and that's going to happen through further automation, efficiency and organizational design.

Maybe just a quick clarification. Is the $25 million, will that be spread through the 2 quarters or it will be in 1 specific quarter?

Yes.

Spread through the two?

Yes.

Okay. I guess, shifting more to the growth side of the business. Individual annuity sales in the U.S. I think were around $250 billion for 15 straight years, and now they're approaching $450 billion. So they're up significantly. What would you attribute that to for the industry and for Corebridge? And when you look forward, do you think that the industry can continue to maintain that type of higher level of sales or continue to grow it going forward?

Yes, I absolutely do. I think that the trends for the business continue to be very, very strong. Let's start with the macro drivers. So there's 3 main drivers. One is the aging of America. Peak 65, whatever you want to call it, 4 million people turning 65 this year and pretty much every year for the foreseeable future. And even looking beyond Peak 65, if you look at the shape of the demographic pyramid of the country, the shape even looking out to 2050 doesn't necessarily change. There's going to be a continuous recycling from the younger to the older population in a flat demographic pyramid. And that means that this opportunity for the industry is here to stay. The second element that is driving, I think, the conditions for annuities is the fact that people for the first time are finally coming to grips with the fact that they have to look after themselves for their own retirements. They have to look after themselves for that long-term financial planning because many of the available safety nets like defined benefit pensions, et cetera, just aren't there. And so that's driving a lot of the demand side of the equation. And then the third element is the adviser community itself. As the adviser industry continues to professionalize, as there's a new generation, a whole new generation of advisers have discovered the importance, the value of fixed income like investments as part of an asset allocation for a long-term savings plan, that's a third driver of the opportunity for annuities. And so those macro drivers, the tailwinds are there, and they're strong and long term. The second element is the fact that the economic factor most important to pricing annuities at an attractive level is really the 5- to 10-year part of the curve, the belly of the curve. And irrespective of what may happen on the short end, the reality is looking at the forwards for that 5- to 10-year area, it's going to continue to be a very attractive environment for pricing annuities for the medium term. And ultimately, then we look at our own business and the fact that we have a broad range of products and we serve a broad range of channels so that we're able to work through whether they may be competition cycles or market cycles, et cetera, we do expect long-term growth prospects in this business. And irrespective of surrenders, et cetera, with the in-force portfolios, we expect to grow our general accounts and to grow the spread earnings over time. So I don't think that this is a short-term trend with annuities. I think that they have a very important role to play in these long-term financial plans and the conditions are very, very attractive for the business.

I guess one thing that has happened as the growth has picked up and companies like Corebridge and others have had successes, more competitors have entered the space, particularly focused on spread-based annuities. Can you discuss your view of the competitive environment in annuities at this point? Is it causing much of an impact for you? Are you still able to earn the returns that you're targeting with good growth?

Yes. So the way I think about rationality of competition is whether we can achieve our margins on the new business that we want to write. And right now, we are achieving the margins that we're looking for in that business and all of the products in that business. Some products are more subject to market cycles or external events than others, like fixed annuities, there's a little bit more volatile, but the long-term growth trends are there for index annuity and our most recent product, RILA, which is off to a good start, and I'll come back to that in a minute. So we haven't necessarily seen signs of irrational competition. Now we have a broad range of products, and we work through a broad range of distribution partners. And our strategy is to understand our distribution partners and how think about their strategies and to have enough options for them so that for whichever adviser it is working with a customer, one of our solutions make sense. And that's something that allows us to work kind of beyond some of these competitive cycles because from time to time, a particular competitor or another may choose a promotional pricing strategy in 1 particular channel or 1 particular partner, et cetera. We have enough options that we can focus on putting our new business capital to work where the risk-adjusted returns are the most attractive and the customer needs are the greatest at any given point in time. And we really do understand our distribution partners' needs. And this is, I think, an important differentiator. Around 10 years ago, we established a strategy to focus on the top 50 largest independent distribution organizations in the United States and to understand what their strategies are 2, 3, 4 years down the road so that we can build products and services to integrate ourselves with their strategies for the longer term. And that's led us to differentiating features in our products. So if you look at the retail annuities that we sell, around 40% of them have a feature which is proprietary to a single distribution partner. So we have a different access, a different relationship with many of these distribution partners that facilitates us competing through the cycle. And for example, our RILA product really benefited from the insight we gained working with those distribution partners because before even putting pen to paper on the product itself, we spent 8 months with our largest distribution partners, accessing their advisers and getting insight into what are the most attractive features of the products now in the market because it was a pretty robust market. And then what are the features that are not attractive, and then what might be features that are missing. And then we took all of that back. So when we launched our product, we had best-of-breed for all of the features that were attractive and supported by advisers. And then we layered on additional features which are differentiated for our product. And the response has been outstanding. Even though we launched the product in only late October, by the end of the second quarter, we had already done $1 billion worth of sales. And what I feel particularly good about is not only did we have that success in RILA, in the second quarter, we saw record index sales as well. So we're not seeing any kind of cannibalization effect across them. And then of the advisers that produce the RILA for us, 75% of them are advisers that have already produced other products for us, and 25% of them are actually brand new advisers to producing for us. So that's now an expansion of our distribution footprint, and we have the opportunity to work with them with respect to our other products. So this aspect of the relationship with our distribution partners and how that facilitates our product development engine and our field force that supports it is one of the things that facilitates us competing through these various cycles.

Great. Maybe shifting to the Group Retirement business. You've been talking for a while about this gradual shift away from spread-based business towards fee-based business. Can you expand on the dynamics that are going on there and how you feel the business is positioned?