Q3 2022 Corebridge Financial Inc Earnings Call
Bill Officer.
Over the last two years, a great number of people from our own team our parent company AIG and our various partners work diligently to position corbridge financial to become a successful Standalone public company.
This culminated with our September 15th listing on the New York Stock Exchange.
I would like to start by thanking all of those that were involved for their contributions in reaching this milestone.
During today's call I will focus on our financial performance and current market conditions reinforce our commitment to our stated financial targets provide an update on recent strategic progress and review our strong financial position.
Elias will provide additional detail on our financial results and then we will take questions.
The third quarter was a very good quarter for Corbridge financial I'm, both pleased with our results and confident in our future.
We delivered solid sales and the dynamic market we.
We made significant progress on our core strategies, our balance sheet remains strong and we are on pace to deliver an attractive return of capital to shareholders.
<unk> reported operating earnings per share of <unk> 57 for the third quarter with an adjusted return on average equity or adjusted ROE AE of six 8%.
This reflects strong results from our core businesses in the face of a challenging macroeconomic environment that was felt across our industry.
Recent market dynamics, such as the pullback in equity markets increased interest rates and widening credit spreads and resulting asset value reductions affected each of our businesses to different degrees in the quarter.
However, I want to emphasize that we expect that short term market related impacts should be more than offset over time by the long term upside we experienced from rising interest rates and the impact that has on driving sales and margin growth.
The benefits from these conditions began to emerge last quarter supporting strong new business generation and leading to an inflection point, where historical year over year, 8% to 16 basis points of base net investment spread compression finally turn from a headwind to a tailwind we are now seeing spread expansion for the first time.
In years.
<unk> will provide more details on this important emerging development.
Turning to the financial targets, we disclosed as part of the IPO, we remain confident in achieving each of them as we maintain a strong balance sheet and delivered disciplined growth.
We have a clear line of sight on achieving an adjusted ROE of 12% to 14% and delivering a $60 to 65% payout ratio on adjusted after tax operating income within 24 months from the IPO.
We expect to deliver capital to our shareholders through a combination of $600 million in annual dividends along with share repurchases. We have committed to an annual dividend payable quarterly and have already paid our first and declared our second quarterly dividend.
And we expect to have the financial flexibility to complement our dividend with additional return of capital to shareholders as early as the second quarter of 2023.
Our ability to execute our capital management strategy is based on the strength of our balance sheet. The consistency of our current insurance company cash flows and the diversification in our businesses and earnings sources.
During the third quarter, we also made significant progress on organic growth investment partnerships and efficiency strategies.
As to organic growth, we delivered a strong quarter with robust sales and deposit flows.
All four of our businesses delivered year over year growth in the quarter and all four were supported by assets originated by Blackstone.
Our multiple sources of earnings diversified product platform and network of distribution partners represent a strategic advantage.
We are able to pursue profitable organic growth opportunities by focusing where risk adjusted returns are the most attractive and customer needs the greatest under various market conditions.
The third quarter once again demonstrated our ability to remain nimble and to pivot between spread based and fee based products as capital markets evolve driving more attractive opportunities for policy holders and for our business and our spread based products such as both our fixed and fixed indexed annuities.
Fixed index annuity conditions were very appealing across our broad range of channels supported by our income and accumulation products.
We set a company record for sales this quarter with deposits of over $1 7 billion.
And we delivered positive net flows of $1 3 billion.
The strong position and consistent performance of our fixed indexed annuity business a core product for us in individual retirement has yielded over $4 billion of positive net flows over the last 12 months.
Fixed annuity conditions also remain attractive where we continued to mobilize our strong position in back distribution and were further supported by blackstone's ability to originate attractive assets, leading to fixed annuity sales of approximately $1 3 billion for the third consecutive quarter.
Overall individual retirement delivered deposits of $3 8 billion for the quarter, reflecting 17% growth year over year and positive net flows of nearly $700 million over the three month period.
In group retirement deposits were also strong at $2 billion.
11% higher than the prior year quarter supported in part by new plant acquisitions and growth of out of planned deposits in particular in fixed annuities.
Turning to life insurance, while premiums and deposits were consistent year over year, they reflect an improving mix of business in the U S and a continuing growth trend in the U K, where we remain optimistic about our international growth prospects.
And lastly in institutional markets, we had strong issuance of $1 billion.
Originated $760 million of pension risk transfer transactions and saw inflows to stable value wraps in the face of market uncertainty.
We remain focused on full plan terminations in the U S and UK with attractive funding levels for many plans our pension risk transfer pipeline remains robust.
We also remain confident in our ability to become a more consistent issuer of <unk> in the future.
Our broad position across products and channels has been especially advantageous as we have been able to respond effectively to rapidly changing market conditions and investor appetites.
We are also making good progress in implementing our investment partnerships with both Blackstone and Blackrock.
First Blackstone continues to originate attractive assets across the duration spectrum and volumes that we could not previously achieve supporting our product competitiveness and recent growth.
The partnership is running well with Blackstone managing $50 billion of assets that we transferred at the end of 2021 and reinvesting proceeds from those assets.
To date Blackstone has originated approximately $5 billion of private and structured credit at an average gross yield of 6% and an average credit quality of Triple B plus.
This new origination as part of the asset mix that has supported growth in our shorter dated annuities and is positioned to support our strong pipeline of pension risk transfer opportunities.
With respect to Black rock, we are well ahead of the original schedule to transfer our public liquid assets and some private securities representing $90 billion in amortized cost and <unk> $76 billion in market value.
As of today, we have substantially completed these asset transfers. We are also in the product project planning stages of the Aladdin platform, which will further modernize our infrastructure and provide us with expanded analytics and accounting capabilities.
In addition to modernizing our business. We are also driving towards a leaner operating model.
Our expense reduction and productivity program known as Corbridge forward includes various initiatives such as leveraging our current outsourcing partnerships refining our target operating model modernizing our it infrastructure and rationalizing our real estate footprint.
It is expected to generate approximately $400 million of savings on a run rate basis with the majority achieved within the next two years.
We have already made meaningful progress and have achieved just over $100 million of run rate savings year to date ahead of the original plan to achieve the initial $100 million of savings by the end of the year.
<unk> will provide more information on our corbridge forward program.
Turning to the balance sheet, our capital liquidity and leverage positions remained strong despite recent market conditions.
Year to date, our insurance companies have distributed $2 billion of dividends and tax sharing payments tied to tax strategies are.
Our strong position gives us confidence that we are on the path to deliver on our stated financial commitments.
We are excited about our current opportunities and what the future holds for corbridge.
We are gaining momentum from some of the most attractive pricing conditions in recent memory as well as strong tailwind is generated by the rising interest rate environment.
We are well positioned to take advantage of these opportunities moving forward while at the same time delivering on our capital commitments to shareholders I will now turn the call over to Elias.
Thank you Kevin and good morning, I will provide more details about our financial results and key performance metrics as well as a few updates on the fourth quarter.
<unk> performance during the third quarter demonstrates the power of our franchise and the competitive strength of our businesses.
We delivered strong growth in our diversified product offerings with premiums and deposits, increasing 23% year over year.
In addition, and for the first time in many years, the base yield and our insurance companies as well as the base net investment spread in both of our retirement businesses expanded on a sequential basis as well as on a year over year basis. We believe this represents a new trend.
<unk> towards further growth in our base spread income.
Our balance sheet continues to maintain a healthy buffer to our target RBC ratio and the cash flows distributed by our insurance companies in the first nine months of this year approximate the total distributions made in the entire prior year.
This morning, we reported third quarter adjusted ROE.
Six 8%.
And operating EPS of <unk> 57.
Which includes notable items that lowered our operating EPS by <unk> <unk>.
In addition, alternative investment returns were below long term expectations by approximately 16.
And COVID-19 mortality losses in the quarter amounted to three <unk>.
Details are provided on page five of the earnings presentation available on our website.
Adjusted pre tax operating income or <unk> was 423 million <unk>.
Approximately $449 million below a year ago.
The decrease in <unk> was driven by approximately a $785 million reduction due to the impact of market conditions on variable investment income DAC amortization, <unk> reserves and fee income as well.
Well as structural changes associated with the debt capitalization of core bridge and divestitures completed in 2021.
This was offset in part by increasing base spread income improving overall mortality experience.
Lower expenses and a comparatively better impact from the annual actuarial assumption review.
Turning to earnings the strength and diversification of our core earnings power is readily apparent when you breakdown our sources of earnings which are up 4% year over year after excluding variable investment income.
Base spread income, which is our largest source of earnings grew 7% year over year.
The longer lasting benefits of higher new money rates and our partnership with Blackstone continue to emerge with more to earn in during future quarters as more of the investment portfolio is reinvested at higher yields.
Since the beginning of this year, we've seen new money rates increased by approximately 300 basis points presenting a strong tailwind for our base spread income.
Fee income our second largest source of earnings is partially a function of underlying asset valuations VA.
<unk> declined 18% versus the prior year quarter due to recent declines in fixed income and equity asset valuations and fee income is expected to recover as the asset valuations increase.
Underwriting margin, excluding variable investment income, which is primarily derived from our life business rose, 62% year over year due to improving mortality experience.
With respect to net investment income I would like to focus on our base yield which was four point to 8% for the quarter.
The base yield was up five basis points year over year and was up 24 basis points sequentially. The base yield improvement was driven by a combination of factors that includes reinvestment activities at higher rates reset on floating rate positions and growth of AUM.
<unk> of the overall portfolio.
New money rates in the quarter were approximately 6%, having increased 300 basis points since the beginning of the year and now exceed base yields by approximately 200 basis points.
Accordingly, we have achieved year over year spread expansion for the first time in many years.
Looking forward, while we expect our base yield to continue to benefit from the higher new money rates and floating rate resets. The quantum of the sequential increase will depend on a number of variables including rates and spreads.
Next.
I want to provide you an update on corbridge forward, our expense reduction and productivity programs.
As Kevin indicated as of September 30th we've already achieved over $100 million of the nearly 400 million of run rate savings from corporate forward that we disclosed as part of our IPO.
The majority of the savings achieved to date represent head count reductions against our expense baseline, which includes the incremental costs of approximately 300 million to be a separate company.
We continue to estimate the one time cost to achieve the total 400 million run rate savings program to be in the $300 million range to date, we've incurred $66 million in cost, which is reported as a component of restructuring and other costs below the line.
I would note that while we've been able to eliminate some of the expected increase in corporate expenses, we still expect our corporate expenses to increase to approximately $60 million in the fourth quarter as certain expenses kicked in with the IPO.
In terms of our separation efforts from AIG, we continue to estimate that the total investment to complete separation will be in the $350 million to $450 million range. In addition to the 300 million onetime cost to achieve estimate for corporate forward year.
To date, we've incurred about $120 million of separation costs, which are reported as a component of separation costs below the line.
Turning to page nine in our presentation. The annual actuarial assumption review lowered adjusted pretax operating income by $57 million in the third quarter as compared to a $226 million reduction in the prior year and had de Minimis impact.
Two pre tax income in the third quarter versus $144 million reduction in the prior year quarter.
There were no significant reserve adjustments this quarter spin.
Specifically.
There were no reserve changes to Universal life with secondary guarantees, which is a small portfolio for us representing less than 2% of our net liabilities. We continue to believe our lapse rate assumptions for universal life with secondary guarantees a reasonable and supportable.
For U S. GAAP, we assume ultimate lapse rates of approximately 1%, while we assumed zero percent lapses for statutory purposes.
The results of the annual assumption review performed in the third quarter, principally reflects the impact of the significant rise in interest rates over a relatively short period of time driving up expected fixed annuity lapsed rates, resulting in a modest acceleration of back.
Amortization.
I would also note that the annual actuarial assumption review does not reflect the potential positive impact of rising interest rates on new business margins.
Moving onto our businesses I'll begin with our largest segment individual retirement.
In terms of core earnings sources base spread income was up nearly 8% over the last year driven by spread expansion, while fee income declined 19% year over year due to lower asset valuations.
Base net investment spreads increased by 28 basis points sequentially and eight basis points on a year over year basis.
We are encouraged by the operating environment for individual retirement, and the collective growth of our fixed and fixed indexed annuity books are positive net flows strong new business margins and expanding spreads continue to improve portfolio profitability.
As Kevin noted our ability to pivot between spread based and fee based products. In this segment is a strategic advantage.
Similar to individual retirement group retirement base spreads.
<unk> rose, 4% over the last year due to spread expansion.
<unk> income declined 18% year over year due to lower asset valuation.
Base net investment spreads increased by approximately 25 basis points sequentially and seven basis points on a year over year basis.
In terms of underwriting margin in our life insurance business third quarter results, excluding variable investment income improved 64% year on year.
This significant increase in underwriting margin was driven by improved mortality experience on both the COVID-19 and non COVID-19 basis.
Our third quarter Covid losses of $28 million were largely consistent with the second quarter and in line with our previously provided sensitivity, while our non COVID-19 mortality emerged favorable to expectations.
In terms of earnings sources for our institutional markets business base spread income increased 11% versus a year ago due to growth in the pension risk transfer portfolio as well as spread expansion.
Income and underwriting margin were relatively stable we're.
We're encouraged by the growth of institutional markets, reflecting consistent reserve growth strong new business margins and expanding spreads.
Which we expect will continue to improve profitability.
I would now like to provide some comments about our capital and liquidity.
Our adjusted book value as of September 30th was $21 9 billion or $33 $9 per share up 4% from the second quarter.
This growth reflects our earnings as well as not net realized gains reported below the line.
Our third quarter light fleet RBC.
It remains above our target of 400%.
We estimate the third quarter to be in the range of 410% to 420% reflecting adjustments for certain timing items. This is generally in line with the previous quarter.
The life fleet RPC is down from year end 2021, principally because of our decision to accelerate cash distributions made by our insurance subsidiaries to establish core bridges holding company liquidity.
For the nine months of 2022, our insurance companies have distributed approximately $2 billion, which is comparable to the normalized distributions for the full 12 months of 2021, which were $2 2 billion.
In total the accelerated insurance company distributions accounted for a decline of 51 RBC points, where the life fleet since the beginning of the year, which compares to an actual decline of 21 to 37 points. This demonstrates we had.
Positive capital generation during a period of significant market volatility and increasing sales activity.
Our holding company liquidity was $2 billion and our financial leverage was 29, 2% both as of September 30.
We roughly 80 basis points increase in the leverage ratio comes as we've taken steps towards finalizing corporate just capital structure.
We continue to expect that our balance sheet will naturally delever as a result of book value growth and our next debt maturity is not until 2025.
We paid 148 million dividends in October our first public company quarterly dividend and we declared our fourth quarter dividend yesterday, which will be paid on December 30th this translates into a dividend yield over 4% based upon the IPO.
Rice.
We intend to continue paying a quarterly dividend of approximately $150 million, our shareholders aggregating to approximately $600 million per year.
Recent market conditions do not alter our ability to deliver that dividend nor do they change our capital management plans, including returning capital to shareholders beyond dividends beginning in 2023.
With respect to <unk>, our estimate of the initial transition adjustment to adopt <unk> as of January one 2021, it's closer to the bottom end of the range of our previously disclosed pre tax range of 1 billion to 3 billion net reduction to GAAP.
Shareholders' equity.
This represents a reduction in OCI that is partially offset by an increase in retained earnings. This limited book value impact reflects the benefit of having a diversified balance sheet.
In addition, we expect <unk> to reduce the current volatility in our operating results given changes to accounting for market risk benefits back and life insurance products, while we will provide additional information in advance of the first time we report.
On an LPTA basis for the first quarter of 2023. It's also remember its also important to remember that L. DTI does not impact our statutory results nor our insurance company cash flows.
As we look to the fourth quarter. We expect continued pressure on variable investment income as our alternative investments are mostly reported on a one quarter lag and have a high correlation to equity markets. At the same time, we expect continued depressed levels of Collins tender income.
As well as commercial mortgage loan prepayment activity.
Also keep in mind that our fourth quarter EPS will include the full impact of our employee stock based compensation, which we estimate will result in fully diluted shares of approximately $653 million.
To wrap up we're pleased with the progress we're making on our strategies to improve profitability in the context of the current market environment Corbridge produced a very good third quarter earnings as evidenced by our robust sales increasing base spread income and favorable mortality experience.
We remain confident in the strength and resiliency of our capital liquidity and balance sheet and now I will hand, it back to Kevin.
Thank you and operator, we're now prepared for questions.
Thank you.
Excuse me can I ask a question. Please press star one on your kind of thank you Pat.
Thank you mind, please carstarphen each bacci.
You are using a speakerphone please pick up Johan.
Can you question. Please ensure that you are on mute.
Please limit.
A limit yourself to one question and one follow up question. Thank you.
Our first question comes from John Barnidge from Piper Sandler. Please go ahead.
Thank you very much for the opportunity you talked about an improvement in life insurance mortality experience can you maybe talk about non COVID-19 mortality.
When did the normal seasonality of the business return, where <unk> is in a pre COVID-19 world, where the best quarter for mortality experience at least domestically.
Yeah. Thanks, John I appreciate it so.
Now when it comes to opt mortality and first of all the whole Covid event for US has been an earnings not a capital event.
From the beginning of the pandemic, our projected sensitivity of $65 million to $75 million of Covid losses for every 100000 population deaths has has held up.
And indeed in the third quarter, we were once again within that sensitivity range.
And so noting the COVID-19 activity in the third quarter mortality, all in including Covid was better than our <unk>.
<unk> pricing levels. So the non Covid mortality also continued to perform well and that's the second quarter in a row that we've had all in mortality better than our pricing expectations.
And as we look at mortality as part of the third quarter review the data that we've seen suggests no need to change our long term assumptions. So we do consider that the COVID-19 event was the exception.
<unk>.
We expect our sensitivity to continue to hold up what the future holds for Covid remains unpredictable, we would expect our sensitivity to remain valid and in the event that there is some kind of resurgence in activity then we'll be prepared to serve our customers as we always have.
Thank you very much and for my follow up question can.
Can you talk about back to school season for valid from a distribution perspective it.
It seems like this was the first normal back to school year two.
2019, thank you.
So our.
Our group retirement business is.
Is extremely well positioned are.
We have been investing in this platform as you know for the last.
Five years, and we've dramatically upgraded both our plan sponsor and plan participant experience as has been noted by some of the external surveys that are done relative to our capabilities there.
<unk>.
We had very strong growth in deposits and valid 11% year over year.
And field.
Great about where the business is positioned as you know.
No we really emphasized the role of the value of the advisor and we focus on those plans that values the role of the advisor and.
We're on on track.
Track for a strong year in new plan acquisition as well as increasing periodic deposits. So we feel great about the start to the school season for valid and the business is very well positioned strategically in terms of Alex I just wanted to comment on the flow of strike because we get questions on those not every.
Dollar flow is equal and.
First thing I would say is that all of our outflows and valid or in guaranteed minimum interest rate business above 2% most of it above 3%, whereas all of the inflows are actually GMI ours below 2% or our very attractive advisory and brokerage platform.
And as we stated in the Q right. Our net flow definition doesn't include net new assets in the advisory and brokerage platform, which amounted to $500 million in the third quarter and $1 six year to date so.
The fact that the report inflows or outflows the economic quality of the overall in force is improving.
Yeah.
Thank you very much.
Yeah.
Thank you Tom.
Question comes from Jimmy <unk> from J P. Morgan Jimmy Please go ahead.
Okay.
Hi, good morning.
So Kevin I think you mentioned that you might start buyback sometime middle of next year.
What is it that you're watching or what is it that needs to happen in terms of either separation from AIG or the overall environment or capital levels or otherwise.
That would that youre watching after but you'll resume buybacks or stock buybacks.
Yeah. Thanks, Jamie So we're off to what we think is a very good start as a public company and we're confident in achieving.
Our financial targets, 12% to 14% ROE in 24 months.
Executing on the underlying strategies to achieve that and making significant progress.
Our diversified business model shows great value and it's this the multiple products multiple channels and sources of earnings that we have have facilitated for us to pivot to our spread businesses, which we have a long history in managing and which are demonstrating some of the most attractive margins that we've seen in <unk>.
In years, but we have many levers to pull in order to achieve our targets are part of that is obviously our participation in this upside rate environment part of that is the expense reduction plan, which our lives touched on a little bit.
Part of it is our overall investment strategy and part of it is our active capital management.
And we're making excellent progress against all of these levers we don't need for every single lever to be successful in order for us to have the financial flexibility by the second quarter of next year to engage in share repurchases beyond our dividend commitment.
And we have every confidence in doing so.
Okay, and then in terms of your <unk>.
Individual retirement flows obviously, the interest rate environment benefiting that'd be buddy.
As competition in the market because a lot of companies have reported very strong fixed annuity flows with just the benefit of higher interest rates. So is the market still rational or are you seeing some companies get.
Get more aggressive with terms and conditions given higher new money yields.
So we're very comfortable with our position in fixed annuity as you know, it's one of our competitive strengths and.
We've long been a participant in this business. So we have a deep level of expertise and experience, but we feel good about our position because in order to be successful managing our fixed annuity portfolio over time, and that's really for important components first you have to have the products and the distribution relationships in order to be able to respond to market needs.
The second is really have to understand policyholder behavior, including surrenders, especially in the face of changing interest rates and credit spreads.
First our appetites.
The third is very important to proactively manage crediting rates and understand the underlying economics and.
Especially at a time like this when rates are rising lapses are expected to rise and making the right economic choice as to accepting a lapse as opposed to changing our crediting rate.
It's a very important element of the strategy and then the fourth is managing the asset portfolio to be in position to support the crediting rate activities that are are appropriate.
And and we are well prepared relative to liquidity.
Relative to the increasing lapse rates and frankly, the margins that we're seeing right now are the most attractive that we've seen in many years. So we haven't seen a.
Irrational competition to date the margins are very attractive we have the ability to rapidly change our crediting rates. So we can compete in the micro cycles that exist and to the extent that conditions continue.
As they are now we still see attractive margins in this business.
Okay. Thank you if I could just ask one other quick one you had a $41 million impact from the unwind of securitization.
Is that all done or could there be more.
Similar items in future period.
Oh, Hey, Jimmy to the life's good morning, So there is going to be a trailing impact into the fourth quarter, but thats. It.
A similar amount is mostly market.
It could be a small gain but we have to see where the quarter ends in the fourth quarter its mark to market.
From there we are unwinding will be done in the fourth quarter with it.
Thank you.
Youre welcome.
Thank you Jamie our next question comes from Nigel Dally from Morgan Stanley . Please go ahead.
Great Thanks, and good morning.
Question on your investment portfolio repositioning.
That you're ahead of plan with regards to transferring assets to Blackstone. So just wanted to clarify is it benefit already in your base you'd always see additional incremental upside to the spreads at which you would expect.
So look our relationship with Blackstone is is excellent. The partnership is off to a really strong start in and working well.
And the assets that they're originating are an important part of our asset mix needed to support our our new business.
I would say, what we've transferred the $50 billion to them and they're reinvesting.
The $50 billion and.
And are doing a great job.
For us so far so.
Maybe you can just unpack a little bit where we're seeing this and where we see this call. Yeah. Good morning, Nigel So yeah. As you know we transferred 50 billion to Blackstone on the original 50 billion. They are reinvesting the principal pay downs and.
Year to date <unk> invested about $5 billion for us through the end of September . So I look at it. This is the beginning of a longer partnership and there is more value to come in but if you look at the original 50 billion. They invested for us on a year to date basis. The gross yield its been about 6%. So that component is starting to earn.
But I do expect more as time comes by I think it's also on the subject base yields you know we have a significant increase from the second quarter into the third quarter to unpack it and that's a combination.
I would put it reinvesting maturing money at higher yields right now, it's a floating rate resets as well as new money, that's coming into the portfolio, that's coming from growth and.
The Blackstone the value that Blackstone brings and is being picked up in that math, but it's still at the infant stage come November we would start.
Allocating to Blackstone, the first annual $8 5 billion, which would be allocated over the course of the next 12 months and so that what their impact on our portfolio is just going to increase from here.
Got it.
Just wanted to follow up on expense reduction of 110 out of the 400 million, it's been achieved timing for the remainder of relatively linear.
Backend loaded just any additional color there as well.
So we're ahead of schedule from where we expect it to be just a few months ago, our target was to get to a $100 million of the 400 by the end of this year and we got there by the end of September and we're actually a little ahead of the $100 million.
We continue to expect that the majority of the $400 million will be done in the next 24 months from the IPO, which is similar to the timeline we provided before.
And that would be on a run rate basis.
And today, we're always looking for opportunities to accelerate the programs. So we can get the benefits of the efficiencies sooner.
That's great. Thanks.
Thank you Joe.
Next question comes from Eric thoughts on the MS Research Eric. Please go ahead.
Hi, Thank you so it's certainly nice to see the inflection.
Base spreads this quarter I was just hoping you could give some color around what you would expect for the magnitude of spread.
Spread improvement over the next.
12 months I guess.
Interest rates hold here.
Yes sure Eric.
Eric Thanks, So look I mean, the diversification of our business model, where we have choices as to where to pivot where the risk. Adjusted returns are most attractive is definitely paying off for us right now.
And the upside from the rate environment net of crediting net of a reduced call tender and prepay activity and net of reductions in fees is more than enough to offset any of the impact on fees from the the equity markets.
The sensitivity of the 100 basis, the 100 basis points, yielding a $165 million uplift in year, one and $365 million in year three.
As a linear sensitivity that.
That you can point to.
And.
Yes, what we're seeing right now.
<unk> externally.
The margins are very attractive.
We have multiple levers to pull in the event that the external environment were to change we don't need an environment like this in which to be successful.
But we were certainly seeing very attractive conditions now's last pointed out our new money rates are 6% on average thats up 200 basis points.
Over the base yield.
We're up 300 basis points since the beginning of the year and we're now seeing it start to come into our into the base spreads now the change in the base spreads is not going to be linear.
And as Elias pointed out there is some floating rate resets and things like that included in the change in the base spreads, but we certainly expect an upward direction.
Yeah, I would echo that.
Our expectation with the current market environment as our spread based spread income will continue to increase our base net spreads will continue to benefit from this environment now.
Want them in.
The improvement from this point is going to depend on a number of variables.
But I think looking at the sensitivities as a good proxy.
Got it. Thank you and then can you just talk about how youre thinking about kind of the current level of excess capital that you're carrying and how that positions you for capital return in 2020.
Yes.
We're in a strong capital position.
Our strong liquidity position have RBC above our target.
And we created these strong positions, while supporting significant growth in our.
And our spread businesses.
And we're very intentional about our capital management philosophy.
We're committed to our dividend $600 million year payable quarterly and we've already begun to deliver on that.
We expect to have the financial flexibility to engage in.
Share repurchases by the second quarter of next year, especially in the event that.
AIG where to engage in any secondary activity and we also have the financial flexibility to attract to invest in this very attractive new business.
And focus on where the risk adjusted returns are are the highest and so.
That's our philosophy.
No.
Last if you want to add anything.
I think you've covered the kind of our philosophy of real world, we feel very comfortable with our capital position today and when we think of capital Eric We look at where we are relative to our target, but as well as words the parent liquidity stand in our leverage profile. So collectively we feel good in a strong position.
And given the diversified nature of our balance sheet and earnings sources, which have helped us over time.
And when the market goes sideways.
We kind of feel comfortable about it going into 'twenty three.
Thank you and just one quick technical follow up you mentioned <unk> 23 for buybacks is there something technical that would prohibit you from doing it.
Being in the market prior to that.
So we're working through our position to be there you know as Peter said on the AIG earnings calls. The next Windows are either March or May and from our perspective, we're working to be in a position to participate if AIG chooses to go with.
To do a secondary and one of those two windows, but for US all options are on the table beyond that but there is nothing technical other than just prioritizing the capital.
Got it thank you.
Yeah.
Okay.
Thank you Eric.
Question comes from Amit Kumar from Jefferies. Please go ahead.
Thank you I just wanted to ask on the $2 billion of distributions that you made from your subsidiaries year to date being sort of in line with last year was there anything unusual on the year to date basis that caused that number to be higher and are you anticipating taking another distribution out in the fourth quarter.
So.
Good morning, so the distributions for 'twenty two was done by design.
Given we knew we needed to establish a strong parent liquidity and we knew we had one time expenses with separation and our expense program. So we front loaded it and given where we ended up with an RBC at 2000 end of 'twenty, one we felt comfortable with that and Thats kind of it. So it's by design why we frontloaded it.
We do expect another distribution in the fourth quarter, but we're pretty close to what we did for the entire year of 2021 that was about $2 2 billion. So.
We're pretty close and the ZIP code. So it may not be a big distribution.
Got it and then in terms of your assumption review is there anything that youre doing on a statutory basis that could impact year end capital and any thoughts on.
Maybe you can just remind us.
What level of.
AAP reserves did you guys put up last year, because I'm, assuming that could be a tailwind as we get into fourth quarter.
So let me take that so we've done most of their songs for GAAP. We're done in the third quarter. What we have left is the standard year end actuarial stuff, we do for staff and so that gets done in the fourth quarter there.
I don't have the number for we put up for cash flow testing last year, but we could follow up on that.
Okay. Thank you.
Okay.
Thank you Sydney.
Question comes from Michael <unk> from Citi. Please go ahead.
Thanks. Good morning, I was wondering if you could comment on how you see the ownership of your parent company trending over the next several years I guess like in your plan do you have any kind of ultimate ownership level or involvement over time incorporate it as you think.
About it.
Well I mean, that's a question not so much for us I think that Peter's comments in AIG.
Aig's public disclosures are pretty clear in terms of their intentions.
And I'd refer to those.
And the other thing I would add as I've referred to the S. One whereby aig's rights and how they evolve over different ownership levels are pretty we are disclosed in the S. One.
Okay. Thanks.
Maybe on pension risk transfer.
Just curious about the level of competition in that market I think it's been a bright spot for the industry recently.
And I was wondering if theres any kind of.
Not targets, but like sensitivity accretion.
Dollars of operating earnings per $1 billion of PRT business for example.
I can ROA or so I'm, sorry, if you could help us understand the financials behind PRT.
Sure well I like all of our business.
Michael we look at multiple lenses, we look at an economic lens, we look at our stat lens, we look at a GAAP lens and in some cases, we look at our tax lens as well.
And each business has.
Preet hurdles relative to.
To those and they're all consistent with our medium term return targets pension.
Pension risk transfer is a very attractive business for us and some.
Some five plus years ago, we decided to focus on full plan terminations.
We built a specific proprietary administrative capability to focus on our full plan terminations and.
These are more complex there are fewer participants there is less competition and so we found that they have more attractive margins than the more commodity longevity.
<unk> oriented.
Programs and the reality is with the current circumstances, we're finding more and more plans being fully funded and so with the urgency that companies have to de risk. Our full plan terminations are getting larger both in the U S and the U K.
Marketplaces, and so we're seeing a very strong pipeline and a full plan terminations.
We take a look at the jumbo commodity longevity deals, but we haven't found the.
The economics are attractive and and frankly, our partnership with Blackstone also is going to be helpful to us because they are expanding they are tremendous origination capabilities across the duration spectrum, which will also help us support our pension risk transfer business.
Thanks, guys congrats on the first public quarter.
Thank you.
Thank you Michael our next question comes from Ryan Krueger <unk>.
Brian . Please go ahead.
Hi, Thanks. Good morning. My first question is on the base yield can you help us understand how much of the 25 basis points sequential improvement was driven by floaters relative to the other impact.
Hey, Ryan its Elias.
The floaters in the quarter with roughly half of the pick up and that was driven by the significant increase in rates in such a short period of time.
That being said, we overall when we look at the our portfolio yield and base NII, we look at it as being pretty sustainable give.
Given all the different factors that are playing into it not just the floating rate reset, but also the reinvestment at higher rates as well as the what's being driven by new business growth. Our general account overall had positive inflows in the quarter.
North of $1 billion, even though we saw a pickup in surrenders in fixed annuities, both in group and individual retirement.
Great. Thanks, and then you didn't call anything out but were there any negative impacts in individual retirement.
Outside of the assumption review that was related to the equity market weakness in the quarter.
Yeah. So you've got if you if you want to unpack individual retirement you've got.
The impact of the annual actuarial review that was like an 80, something 80 $586 million impact.
Also.
Variable investment income so Pete.
<unk> for us are primarily pay in equity real estate they were down because they are on a one quarter lag and reflect whats happened last quarter and there was hardly any call and tender activity in the quarter. So that's also down and then with respect to equity markets.
And <unk> won those.
Are sensitive to where equity markets close at the end of the quarter. So they were down this quarter relative to the prior year. They werent as impacted as much in Q3 as much as Q2, but they are below expectation now the accounting for <unk>. Three one is going to change come January and will be reached.
<unk>.
'twenty, one and 'twenty two to be on an LPTA basis.
So there are a number of things that impacted this quarter from there, but the core if you look at the business more than 60% of the earnings comes through spread income and if you look at the base spread the experiences and meaningful improvement in part driven by the growth Youre seeing in the book and then part of that is driven by the higher new money yields were experienced.
Being in the market.
Yeah.
Can you can you quantify the <unk> impact relative to what you'd normally expect.
I would.
I would put it in about roughly $50 million for the segment.
We'll be doing it.
Stable markets, we would have had $50 million higher earnings because of backend SVP of three one.
Okay perfect. Thank you.
Okay.
Thank you and then.
Ryan restaurants are going to add on top we have a smaller impact on backend S&P and group and that's about I'd say relative to stable markets would be about $10 million. There. Those are the two segments that are impacted in that manner.
Yeah.
Thank you.
Question comes from Elyse Greenspan from Wells Fargo. Please go ahead.
Hi, Thanks, Good morning, My first question.
On pension risk transfer on can you just talk to how you think about the capital requirements for new business.
Upside in sales how much capital would you think about allocating towards PRT deals.
Yeah.
So the.
The capital intensity of our businesses.
Across the various portfolios is roughly comparable.
And.
In terms of our capital management strategy leaves as I pointed out I mean, our priorities are making sure that we found the dividend that.
We're in a position to.
Engaging the repurchases and then.
The amount of capital we can have the flexibility to invest in new business, we will optimize that based on where the risk adjusted returns are the highest and where the customer needs are the greatest now right now spread businesses have very attractive margins and so we see great opportunities in fixed annuities index annuities and also.
Pension risk transfers.
But we will be very thoughtful about how much marginal capital, we allocate to new business and ensure that we're optimizing rather than over allocating.
Okay, and then on the cost saving program should the majority come through corporate.
In terms of the phase in the near term.
I kind of call out where that falls into by segment on a quarterly basis.
So the air lease it for life.
The savings is across the board, it's not just targeting to the corporate center.
Both the insurance companies as well as the corporate center will benefit for example parts of where the savings is coming from is we're expanding our outsourcing relationships.
With Accenture and one of it is in our insurance company.
Company operations, where we're seeing kind of so some savings will come through that.
We will take it under consideration kind of as to how much transparency, we can given the future, but we did provide something already in the earnings deck.
On the savings so far.
Okay and then one last one you guys have 2 billion at the Holdco.
What level that you'd like to have a.
In normal times or something that you're pointing to.
Once you start buying.
Buying back your shares.
Yeah, So our philosophy around the parent liquidity as we want to hold enough liquidity to cover one year's worth of expenses those are higher on the at the beginning given some of the onetime expenses I referenced in my prepared remarks, and I expect that as we were.
Through these expenses the run rate from a parent's liquidity would be more in line to cover the parent's fixed cost and I consider the dividend to external shareholders as part of that so if you think about it is going to be primarily our debt service cost and our dividend.
The dividend is what we will get to once we're done with the onetime expenses. So the balance of the parent I would expect as a result will come down over time, but we're going to what we plan to do and we know we can.
As our insurance companies, if you look historically at their distributions and they've been pretty consistent we expect that trend line to continue and may improve over time as we improve profitability inside the insurance company and Thats excesses, what we will use to return back to shareholders.
In the form of share repurchases.
Great. Thanks for the color.
So we have one more question I have for one more question operator.
Our final question is from Tom Gallagher from Evercore, Tom. Please go ahead.
Good morning.
Just a follow up on that question on the amount of holding company liquidity you would expect to maintain let's say in the first year and then what it would look like beyond that.
Finally, if I do the math.
Are we talking about what one two to $1 5 billion.
Kind of a target in a range.
For year, one grading down to closer to $1 billion in year, two is that directionally the way to think about.
Levels of Holdco liquidity that you'd be targeting.
So.
The way I think about it Tom is.
Our debt service cost would be about $4 million to $500 million a year, our distribute dividends to shareholders 600, So let's say that's one one that's sort of the go forward run rate that I would expect us to be holding.
Between now and then.
I referenced in my.
Comments, we had about $350 million to $450 million of costs to complete the separation from AIG and we have about 300 million.
Cost to affect our share repurchase IR site, our expense reduction program. So we have to fund that right now the plans to fund it from the parent. So I think if you take that and we expect the onetime costs to be largely done by the end of 2023.
So if you factor that in I think that should give you the building blocks of what's the right number to be thinking about.
That's that's great. Yes that gives me what I need my follow up is.
On the individual fixed annuity block spreads are very wide there, but your lapse rate moved up to it looks like nine 6%. This quarter do you need to start becoming more competitive on the cost of fund side. As these lapses were moving up how do you see that trade off going forward.
Yes, Thanks, Tom.
Pointed out we have a lot of experience in this business and one of the important things is understanding policyholder behavior.
We do have a dynamic lapse model that.
We model based on changes in interest rates and credit spreads.
What we believe.
<unk> results will be and we can make economic decisions around the relative benefit of changing crediting rates as opposed to accepting the lapses. So far what we've seen is.
As behavior that is within the expectations of our model for which we are well prepared and we will continue to monitor the environment and and actively manage our crediting rate strategy relative to.
Where the economics make sense, but right now we're <unk>.
Seeing behaviors that are well within our expectations in many cases below our expectations. So we continue to have flexibility there irrespective of the lapse rate I think what's important is that because of our ability to originate new business and the tremendous distribution relationships that we have.
We also have a strong position of inflows and maybe Elias you can just.
Unpack a little bit.
Beyond the lapse rate, where we're seeing the actual overall flows in the general account, yes. If you look at the general account and if you look at individual retirement alone forget the other businesses.
The index annuity and a fixed annuity products are both general account product largely between the two we had over $1 billion of inflows into the account. So we're not worried from a liquidity perspective on the account or disintermediation, because we still have net inflows we are growing the business plus we've got strong lit.
Quiddity in the insurance companies.
And because we are well positioned relative to our liquidity.
Liquidity since we'd anticipate environments like this we're not having to engage in anything like asset sales or whatnot to support the lapses.
Okay. Thank you.
Thank you.
Thank you Tom Kevin how you can for closing remarks.
Okay. Thank you for sharing part of your morning with us.
Third quarter was the first step in our journey as corporates financial and I could not be more pleased as corporates works hard each day to make it possible for more people to take action towards their future goals supported by our broad suite of retirement solutions and insurance products. Thank you.
Yeah.
This concludes today's call. Thank you for joining you may now disconnect your lines.