Corebridge Financial Inc. Q1 2023 Earnings Call
Because of our financial position as we balance investments in long term growth, while maintaining a strong balance sheet with ample levels of liquidity and capital.
It is an important step towards our ultimate goal of providing an attractive return for shareholders.
Now turning to our results we delivered earnings per share of <unk> 97.
With adjusted return on average equity of 10, 8% and adjusted pre tax operating income of $724 million.
<unk> business is positioned to perform across various market cycles.
This quarter demonstrates once more that we can consistently deliver strong results across our diversified businesses.
Adjusting for variable investment income, which was impacted by capital markets dislocation the earnings power of our insurance businesses improved year over year.
Tailwind from higher interest rates wider credit spreads and favorable mortality experience more than offset headwinds from equity market performance.
This was the second consecutive quarter, our aggregate core sources of income grew by 15% on a year over year basis.
Base spread income grew 38% compared to the prior year due in part to higher new money rates and continuing growth and spread based products.
This quarter, we delivered very strong sales with attractive margins generating higher general account cash flows.
Across our four lines of business, we generated total premiums and deposits of $10 3 billion.
Up 45% compared to the prior year.
The largest drivers of new deposits in the current quarter were $2 2 billion of fixed annuity sales and $2 1 billion of fixed index annuity sales in individual retirement.
In addition, we delivered $1 5 billion in pension risk transfer and $500 million and kick issuance both in institutional markets.
The higher interest rates that have been driving our strong retail spread based products over the last few quarters are as expected also leading to higher levels of fixed annuity surrenders.
That said sales growth continues to outpace surrenders in our individual retirement business.
For the quarter General account net flows from individual retirement were positive at nearly $1 3 billion.
Up from approximately $700 million last quarter, despite an increase in surrender rates.
In addition liquidity in our insurance companies remains strong and we continue to maintain a tight ALM profile.
While delivering these excellent business results. We also advanced our key strategic initiatives, namely investment partnerships corbridge forward and operational separation from AIG.
Let me spend a moment on all three.
We continue to see great value from our growing relationships with Blackstone and Blackrock.
Our partnership with Blackstone is delivering for our company our partners and our customers.
In the first quarter Blackstone executed approximately $3 billion of new investments across a variety of asset classes at an average gross yield of six 5% and average credit quality of double a.
Since the beginning of our partnership Blackstone has invested approximately $11 billion on our behalf, giving us greater access to certain asset classes that are well matched to the insurance liabilities we originate.
With respect to black rock they executed on nearly $1 billion of new investments during the first quarter, some of which supported our institutional markets businesses.
Turning to corbridge forward, our modernization program that will deliver both expense reduction and increased efficiency. We continue to advance this strategic initiative, having achieved or contracted on 70% of our exit run rate savings goal of $400 million.
And lastly, we remain on track with our operational separation from AIG given.
Given the progress we have made in establishing our capabilities as a publicly traded company. The bulk of what remains is focused on the separation of shared it applications, which we expect will be mostly complete in 2023.
To date, we have incurred approximately $230 million of costs associated with our separation efforts.
In addition to these initiatives, we continually assess our business portfolio as we position corbridge for the future as a fully Standalone company.
After a comprehensive review as announced last week on Aig's earnings call, we decided to evaluate strategic alternatives and a potential sale of our health insurance business in Ireland, which is distributed through the layer healthcare MGA and underwritten by a third party.
We believe this will help streamline the corporate portfolio and allow us to focus on life and retirement products and solutions.
Before I address our investment portfolio I want to begin with a few words on risk management, which is integral to how we manage corbridge.
We have a disciplined risk management framework focused on both sides of the balance sheet.
This prepares us for a range of environments, including periods of market dislocation like we saw in the first quarter.
We are heavily focused on AUM, which is embedded in how we manage the balance sheet and our broad enterprise wide thinking around risk includes liquidity credit risk and capital management as well as periodic stress testing.
On the liability side risk management involves our broad product portfolio intelligent product design and dynamic product management.
On the asset side risk management includes an investment portfolio that is aligned with our risk appetite and well matched to our liabilities.
Elias will speak in more detail on our investment portfolio, but I want to share a few highlights.
We have a high quality and well diversified investment portfolio that is predominantly concentrated in investment grade fixed income assets.
We strive to achieve strong risk adjusted returns, while matching the duration and liquidity needs of our liabilities.
We derisked the portfolio over the last several years and we are comfortable with our exposure to commercial real estate.
Our commercial mortgage loans are senior secured on high quality properties that are well diversified by type and geography with strong debt service coverage and LTV ratios. In addition to adequate reserves.
As a long term investor with a strong balance sheet corbridge is not only well positioned to weather periods of market dislocation, but also able to capture new opportunities as they arise all while maintaining our disciplined approach to <unk> and credit risk management.
We proactively manage risk in the portfolio based on our expectations of the future compared to market opportunities.
As an example, with the relative strength of the capital markets early in the year, we took further action to Derisk our portfolio.
We intentionally reduced our exposure to below investment grade corporate bonds and as a result upgraded the quality of the portfolio improved yield and increased liquidity, all with immaterial impact to our interest maintenance reserve.
Our positive IRR remains a very healthy $2 billion, even after these trades.
In addition, during the first quarter, we sold our CLO manager further simplifying our exposures.
In summary, we take great pride in our disciplined risk management, which has safeguarded our operations over time and prepares us to weather many different economic cycles.
We remain steadfast on our course in the face of recent events and general market uncertainty.
As we look ahead, we remain focused on pursuing our strategic initiatives and financial goals fulfilling the commitments, we made in connection with our IPO and creating sustainable long term value for all our stakeholders.
I will now turn the call over to Elias.
Thank you Kevin I will provide additional information on our financial results and key performance metrics.
As well as comment on our investment portfolio, including office exposure within the commercial mortgage loan portfolio.
But first I'd like to make a couple of comments on the LD Ti.
Last week, we released our restated 2021, and 2022 results for <unk>.
We've previously said, we expect <unk> to reduce volatility in our operating results by minimizing the impact from variability in market conditions and mortality experience at the same time L. DTI increased our adjusted book value as of December 31, 2000.
22 by approximately $2 billion to $23 4 billion.
That being said L. DTI does not impact the economics of our business, nor our statutory capital and cash flows.
Turning to our financial results.
As Kevin noted, we had strong first quarter results driven by growing base spread income our operating EPS was <unk> 97.
Our adjusted ROE was 10, 8% and our adjusted pretax operating income was $724 million.
This includes a notable item that contributed <unk> <unk> to EPS and was offset by alternative investment returns below our long term expectations by 14th.
Adjusting for these items, our operating EPS for the quarter would have been $1 <unk>.
In addition, our adjusted ROE, we would've exceeded 11% even with the higher adjusted book value from L. DTI.
Demonstrates the progress, we're making tower to achieving our target of 12% to 14% in 2024.
With respect to adjusted pre tax operating income our results were $185 million below the prior year due to lower variable investment income, which accounted for over $270 million of the decline as well as $70 million of additional interest expense, resulting.
From a financial debt issued in the second and third quarters of 2022.
Excluding variable investment income adjusted pretax operating income was 14% higher than the first quarter of 2022, largely due to increasing rate spreads income and improved mortality experience.
Sequentially, our reported adjusted pre tax operating income was $20 million higher than the fourth quarter, excluding variable investment income adjusted pretax operating income was 2% higher largely due to increasing base spread income partially offset by 40.
$3 million of favorable nonrecurring items in the fourth quarter.
Our core sources of income in aggregate increased by 15% driven by growth in base spread income and improvement in underwriting margins, partially offset by lower fee income.
Shifting to net investment income.
Base yield was 442% in the fourth quarter up 60 basis points year on year.
This was the third consecutive quarter of significant growth driven by a combination of reinvestment activity at higher new money rates and resets on floating rate assets as well as an increase in total invested assets.
Average new money yields were six 5% in the fourth quarter, which was approximately 230 basis points higher than the average yield on assets rolling out of our portfolio.
Stripping out the notable item and base net investment income from last quarter base yields improved 15 basis points on a sequential basis.
In aggregate this improvement far outweighed any increase in policy holder crediting rates.
Moving to expenses.
Our <unk> declined 2% sequentially the benefits of the corbridge forward savings, earning in were offset by incremental costs related to the establishment of our standalone capabilities as well as regular first quarter seasonality and compensation expense.
Next I will speak briefly about our segment results.
Individual retirement to report the adjusted pretax operating income of $534 million for the quarter, an increase of 14% year over year or an increase of 55% after excluding variable investment income.
Base spreads income rose, 49% over the prior year, driven by spread expansion and growth in general account products.
Base net investment spreads increased 71 basis points year over year, and 17 basis points sequentially.
Fee income declined by 10% due to lower asset valuations and net outflows in our variable annuity portfolio.
Fee income was flat relative to the fourth quarter, reflecting stabilization in asset values.
As Kevin mentioned General account net flows were positive at nearly $1 3 billion up from approximately 700 million last quarter. Despite an increase in surrender rates.
Group retirement reported adjusted pre tax operating income of $186 million for the quarter, a decrease of 23% year over year or an increase of 7% after excluding variable investment income.
Base spreads income grew 20% from the first quarter of 2022 due to spread expansion, while fee income declined 12% year over year due to lower asset valuations and net outflows.
Base net investment spread increased 24 basis points year over year, but decreased seven basis points sequentially. The sequential quarter decline is driven by a 10 basis points rise in cost of funds largely attributed to auto plant fixed annuity product growth.
And higher crediting rates based on annual resets to certain enforced products.
This more than offset the sequential increase in base yield.
Consistent with previous quarters, we continue to see outflows concentrated in the higher GMI. Our buckets. We expect this trend to improve the profitability of the business over time.
Looking at projections for next quarter, we expect net flows will net outflows will increase due to additional plant losses, but with limited impact to the general account as a reminder, planned acquisitions on losses are not linear and vary from quarter to quarter also.
So we're seeing a general pick up in plant activity, both acquisitions and losses as Covid moves from pandemic to endemic and plan sponsors are more willing to put plans out to bid.
Life insurance reported adjusted pre tax operating income of $82 million for the quarter, a decrease of 2% year over year or an increase of 148% after excluding variable investment income.
Underwriting margin, excluding variable investment income improved 11% year over year due to improved mortality experience and higher base portfolio income.
With the adoption of L. Dci variability in operating earnings for traditional life products like term is muted given that actual mortality experience will be largely offset by reserve releases in any single period. However, that's not the case for universal life as the.
Accounting is not impacted by L DTI and where our experience was favorable in the first quarter.
Institutional markets reported adjusted pretax operating income of $85 million for the quarter, a decrease of 26% year over year or an increase of 3% after excluding variable investment income.
Our sources of income expanded 7% over the prior year largely due to base spreads income wild reserves for our pension risk transfer business grew 33% year over year on an original discount basis.
And lastly, our corporate and other segment reported a loss of $163 million for the quarter. This loss is largely consistent with our expectations given new parent company expenses as well as our Standalone capital structure.
I will now provide some comments about our balance sheet liquidity and capital.
We assess our balance sheet through different lenses, including but not limited to financial leverage liquidity capital and the overall risk profile by each of these measures our balance sheet is very healthy and strong.
Adjusted book value was $23 3 billion or $35 88 per share up 4% year over year, but down 1% from the fourth quarter.
The sequential decline was due to nonoperating mark to market losses.
Our financial leverage ratio was 27, 9%, which is well within our target range. We continue to expect that our balance sheet will naturally delever over time as a result of book value growth and as a reminder, the next debt maturity is in 2025.
We ended the quarter with holding company liquidity of $1 8 billion, an increase from one five in the fourth quarter.
Our insurance company's distributed $500 million during the first quarter and as Kevin noted, we paid dividends to our shareholders of approximately $150 million, bringing the total pay to shareholders since the IPO to approximately $450 million.
We declared our dividend for the second quarter of 2023, which will be paid on June 30th.
Our light sleep RBC ratio remains very strong we estimate our first quarter life fleet RBC ratio to be in the range of 410% to 420% and exceeding our year end RBC ratio of 411%.
Next I will spend a few minutes talking about our investment portfolio.
Corporate has a high quality well diversified investment portfolio that is actively manage portfolio construction is backed by rigorous underwriting monitoring and credit risk management processes designed to protect and optimize the balance sheet. The.
The GAAP carrying value of our general account investment portfolio was 193 billion as of March 31 2023.
Approximately 94% of our fixed income investments were rated investment grade.
Our NTIC three to six investments were $8 4 billion a figure that's approximately $600 million lower than the end of 2022 in part due to the Derisking actions that Kevin described earlier.
Now turning to commercial mortgage loans.
Like our brother investment strategy, our commercial mortgage loan portfolio is high quality, well diversified and actively managed to support our insurance liabilities.
It's backed by a disciplined and rigorous approach to underwriting and risk management.
In addition, the valuations of the underlying properties are updated on an annual basis.
As of March 31, our portfolio was 13 3 billion, making up 16% of total invested assets.
These loans are primarily highly rated longer dated fixed rate first lien loans with low ltvs and strong debt service coverage ratios.
Each loan is carefully underwritten with embedded covenant protections.
Our portfolio is diversified by both geography and sector with nearly 60% of the portfolio comprised of multifamily and industrial property, reflecting our strong bias to these sectors over the last decade.
Commercial mortgage loans secured by office properties were $7 7 billion or 4% of total invested assets as of March 31st. These loans are also high quality carefully underwritten and covenant heavy with strong credit characteristics.
Over the past several years, we've been actively reducing our exposure to office and emphasizing multifamily industrial and other non traditional office sectors as well as properties in Europe .
As part of this evolving view our exposure to traditional U S office is down from its peak.
The traditional U S office portfolio component was $4 5 billion as of March 31st which is approximately 2% of our total invested assets. The remainder of the portfolio is in life Sciences mixed use properties in ground leases as well as into.
The National office properties, where the fundamentals are stronger than in the U S.
Our office portfolio enjoy strong credit metrics, which are as follows.
It is highly rated with 94% of our loans designated C M, one or see them too.
Its high quality with almost 80% of the property consisting of class a properties in major metropolitan areas and concentrated in central business districts.
The weighted average loan to value of 63% and the weighted average debt service coverage ratios over two times.
It has strong occupancy ratios in the mid eighties.
80% of the fixed LOE of the loans are fixed rate it has longer dated loans with a weighted average remaining term of seven and a half years and only two loans are delinquent together carrying an outstanding balance of $8 million.
Over our history, we have from time to time originated large loans, where we felt very comfortable with the fundamentals sponsor and location within our traditional U S office portfolio, we have three loans in excess of $200 million all originated prior to.
2019.
Office properties are very building specific so it's crucial to evaluate each property casualty carefully no matter the size of the loan.
We have approximately $1 2 billion of loans secured by traditional U S office properties with final maturity dates in 2023 and 2024. It figured this represents less than 1% of our total invested assets.
Of that $1 2 billion approximately $870 million have a final maturity dates in 2023 as.
As of May 4th we have resolved almost half of the 2023 maturities through either payoffs or expansions.
Our traditional U S office exposure within New York City, where we have longer dated longer tenor loans with solid debt service coverage ratios and strong occupancies is about 1% of total invested assets.
Of the 870 million maturities for 2023, approximately $600 million are in New York City.
One third of these have already been resolved through either pay us or extension and the remaining properties underlying the 223.
Maturities have extremely strong fundamentals and occupancy rates over 90%.
As part of our standard monitoring process for any commercial mortgage loans, we proactively engaged with borrowers regarding the refinancing plans well in advance of maturity.
As a result before this quarter began we were already conducting routine surveillance on our upcoming maturities.
On the extensions we've agreed to so far we've been successful in getting a combination of various structural and capital enhancements.
We our lead lender and approximately 87% of our office originations, which affords us control over negotiations with borrowers regarding any amendments or restructuring.
Furthermore, without real estate equity team, we have the expertise in managing these types of properties and can take over in a workout situation if financially prudent.
The current Cecil allowance for our office portfolio is 3.5% of GAAP carrying value and slightly over 5% for our traditional U S office properties. We believe we have one of the most conservative allowances in the industry and we are adequately reserved for potential.
Credit losses.
We believe our balance sheet is strong and our investment portfolio are resilient and we are well positioned we regularly stress test our balance sheet for various potential risks and thats informs our decisions about capital management and allocation.
For illustrative purposes on the traditional U S office portfolio, if we were to assume a 30% instantaneous reduction and Karen property valuations.
Which already reflect a reduction from the peak.
Which already reflect a reduction from the peak.
And we work to further assume that any loan with an LTV ratio in excess of 100%. After the shock is foreclosed upon the incremental reduction in our life fleet RBC ratio would be approximately 11 RBC points, our life fleet RBC.
As you would have remained above target in this illustration had this scenario occurred as of the end of March.
While this illustration assumes an instantaneous shock it's important to remember that any deterioration in the traditional U S office sector will more likely play out over a longer time period. At this time, we expect it to be an earnings event and not a capital event finally, a real.
Estate investment team is very experienced and has navigated challenging markets before we continue to believe our traditional U S office exposure, which is only 2% of total investment as invested assets, it's manageable and any developments are likely to emerge over time.
Now I'll hand, the call back to Kevin Thanks Elias.
We're very pleased with the solid progress, we're making across corbridge, our balance sheet is very strong our profitability levels continue to improve and we are confident that our well managed investment portfolio is positioned to withstand near term pressures operator, we're now ready to take questions.
Thank you.
If you would like to ask a question Keith.
I'll Miss one please thank you.
Todd.
If you change your mind.
Please go ahead.
Okay.
Your question. Please pickup your handset ensure that you are on mute lately.
As a reminder, Pete Wilson and limit yourself to one question and one follow up.
Our first question comes from Elyse Greenspan from <unk> Okay.
Got it.
Hi, Thanks, Good morning, My first question.
Capital you guys can put in place a $1 billion buyback plan I was hoping you could just give us some color around the pizza buyback and when do you guys think.
Alright.
No it's not repurchasing your shares.
Yeah. Thanks, Lisa.
Since the IPO, we've been very focused on executing all the strategies to deliver our medium term financial targets. One of those is the march towards the 12% to 14% Roe.
And we feel we're making excellent progress there.
One of them was our annual dividend of 600 million, which we've now delivered on three quarters in a row and then one of them was to have the financial.
Flexibility to complement the dividend program with buybacks within six to nine months from the IPO and we have that financial flexibility.
And see the authorization as a strong.
A strong vote of confidence from the board and it's not a time limited authorization.
Clearly committed to active capital management, and we believe that alignment with our secondary as is our most preferred path.
And in the meantime, we are focused on executing all of the strategies necessary for us to maintain and grow this financial flexibility.
Yeah.
And then my second question was on the higher surrender rates in the quarter.
Surrender rate went up.
And I know you guys had said that.
Within normal expectations. So what would you consider elevated first around horizon.
Scott.
So roger activity to trend from here.
Yeah, Thanks, Lisa surrenders.
Aviary generally reflect crediting rates and where our crediting rates are which are influenced by both where base yields are and also where credit spreads are and and so you know in the first part of the first quarter.
Crediting rates were quite high reflecting sort of the conditions late in the year earlier in the year and our dynamic lapse models really are driven by where those crediting rates are although although surrender rates did increase again, a little in the in the first quarter not as much as new business.
Because new business sales also reflect the impact of where crediting rates are and.
And so the surrender levels still well within our expectations based on where our crediting rates were and what I would say is is that towards the latter part of the quarter.
<unk> of where yields and spreads were in the market we saw some.
Relief in crediting rates and <unk> and.
And so we continue to be within our expectations as to where surrenders would be relative to where market conditions are.
Thank you.
Thank you.
Next question comes from John Barnidge from Piper Sandler. Please go ahead.
Yeah.
Thank you very much and good morning.
Your T cells step function higher this first quarter first quarters typically.
Our lower and build throughout the year, but this first quarter cross industry has been remarkably strong can you talk about your outlook for this market and where you see geographically as well. Thank you.
Yeah. Thanks, John since 2016, we've been very much focused on full plan terminations.
And the market for full plan terminations, both in the U S and the UK are sort of comparable size and we've developed both the underwriting and the administrative capabilities to support that business. We see very strong pipeline both in the U S and the U K and in fact, where funding levels are plans are right now.
We're seeing larger and larger full plan terminations.
These transactions are large we underwrite them as as almost many M&A transactions and and the conditions were very good in the in the first quarter both for the U K, where we act as a reinsurer as well as the U S. The activity in the first quarter primarily.
<unk> success in U K transactions, but the pipeline looks very strong both for the U S and the U K and full plan terminations and the reason we focus on full plan terminations as there are fewer providers that are able to support the complexity of full plan terminations and we find the economics on those.
<unk> actions are more attractive than commodity longevity transactions.
Okay.
Thank you very much and my follow up while surrender activity was definitely higher and individual.
It seemed to sequentially decline in the group.
Can you maybe talk about those dynamics as well thank you.
Sure so the.
The surrenders in our group business.
Also reflect a larger plan behavior or plan behavior and what we are seeing is that during the.
Pandemic.
There was a reduction in the kind of amount of group activity.
Because plans werent necessarily I'm confident in going out to bid when the conditions were a little bit restrictive. We are seeing more plan based activity now as more plans are are going out for rfps.
So that's one aspect is the plan acquisition piece in terms of the overall surrender rate.
I think that some of the out of plan options are very attractive for investors right now, particularly fixed annuities were seeing strong growth in out of planned fixed annuities and the investment options that we're making available to customers I think are what's helping bring that surrender rate them.
Yeah.
Thank you.
Yeah.
Thank you.
Next question comes from Alex Scott from Goldman Sachs.
Go ahead.
Hi, good morning.
First one I had is on the offense mortgages. Thanks, thanks for all the new disclosure.
One of the things we've looked at is just the valuation allowance is not only that you have on GAAP that you talked about earlier, but also the statutory valuation allowance. So I had just a couple of quick questions on that.
Having a higher statutory valuation allowances that a nuance to the way you approach assessing that or is it specifically related to loans that have some issues.
And then maybe separately when you gave the RBC sensitivity.
Net of the statutory valuation allowance.
Yeah, Hey.
Hey, Alex it's Elias So let me tackle both of your question.
With respect to our allowances whether for stats or gap, we've historically had been more conservative than others and you see that going back into the AIG results. So it's not specific corbridge. We just continue the method. The same methodology forward, where we are leveraging kind of see MBS data in Nevada estimate.
Our expected losses, and but it's kind of historically as you know the C. M B S.
Loss experience has been worse than what's happened and commercial mortgage loans on life companies, which have performed much better than that there is a level of conservatism built into how we approach allowances.
And so both from a stat on a GAAP perspective, we tend to carry higher allowances as a result, and I don't believe that's a reflection that our portfolio is any risk here.
Your second question was related to the sensitivity on the RBC, yes that is net of the statutory allowance.
Got it thank you.
A follow up question I had.
It was related to some of the commentary on the AIG call. I think it was mentioned that health care was going to go through a sale process.
My question for you all as.
Are there other actions, whether it's the sale of reinsurance and so forth that you would potentially pursue to increase capital capacity to help speed up.
Separation of your business from AIG.
Yeah. Thanks, Alex look there the decision.
Relative to layer itself, it's a very good business. It has a strong.
Management team, but the health insurance.
History is not core to life and retirement and are our other expertise and this is very early in the process. So I can't really say much more about that.
Matt at this at this time, we generally don't talk about you know kind of live transactions, but we understand our responsibility is to optimize the portfolio and we have.
We have continuously looked at those opportunities and the creation of fortitude re some four or five years ago. I think it was a great example of how we are conscious of those opportunities.
We continuously look at various portfolios and we are aware of what market conditions are.
And so far we haven't seen anything that makes economic sense relative to the overall portfolio will continue to stay current.
Relative to that but I.
I do see the optimization strategy versus having financial flexibility rather to the relative to the buybacks as you know.
Two different areas of our responsibility and relative to the buybacks we have the financial flexibility we have our board support.
There are different paths to the proceeds but everything is also dependent on market conditions at a given at a given time.
Got it thank you.
Okay.
Thank you.
Next question comes from Erik bass from Autonomous. Please go ahead.
Hi, Thank you and I appreciate the additional color and disclosure on the investment portfolio is zoom.
Zooming back you mentioned doing stress test analysis, and factoring that into your capital plan. So I was hoping you could give us some color on how you're thinking about potential capital impacts and a broader stress scenario for credit or CRE. So moving outside of just stopped.
Yeah, Hey, Eric it's Elias so as part of a kind of regular process, we run a bunch of different stress tests honest looking at different variables and not focusing on.
And individual variable and that kind of all informs kind of what's our capital plans and what we're comfortable with and you know and in the base case, we generally assume some level.
Rating negative rating migration as well as some level of downside credit protection and our base case, but we do stress it beyond that and with respect to rating migration to one thing I would say.
If you look at 2022 as well as separately the first quarter of 2023, while in our base case, we did assume some level of.
Downward rating migration, what we've experience has been positive rating migration when looking at the portfolio as a whole.
Got it, but I guess thinking I don't know.
Youre willing to disclose the number but is there.
You'd think of as the stress scenario impact for capital.
So we don't focus on it.
So we don't focus on a single scenario, we look at the variety of scenarios and we don't just look at credit. We also look at what the market factors could do like what happens with rates what happens with equities.
On the portfolio and so we look at it from a totality to decide what we're comfortable with we don't focus on one scenario or the other.
Got it okay.
And then.
Separately the cost of funds it looks like it's starting to increase in individual retirement.
Hoping you could talk a little bit about do you still see room to improve spreads from higher interest rates are we getting to the point where more of the benefit it is getting pass through to policyholders.
Thanks, Eric.
No I don't think characterizing it as passing more of the benefit to.
Policyholders as appropriate we continued to see growth in our net spreads both sequentially as well as year over year across individual retirement, there's still 44 basis point increase in sequential spreads.
In terms of where our rates and credit spreads or the pace at which spreads will expand I think we will.
I think Elias had it in his prepared remarks right. The trajectory is not necessarily going to stay the same.
But we have not seen a growth in the cost of funds impacting our ability to expand the spreads still in the individual business.
Yeah, Eric if I can add to what Kevin said, so our base spreads are strong.
Spreads have continued to expand if you look at index annuities and fixed annuities.
Despite what's happening on the cost of funds side. If you look at the index annuities. The cost of funds has been sequentially, increasing as has the base yield increase and the growth of the base yield that's outpaced the growth and the cost of funds and what youre seeing on fixed annuities, it's part driven by new business, where you.
Seeing a step up in the cost of funds. Just you know just the weighted average mix of the portfolio, but even with that the base yield is still growing faster. The other thing on the former trajectory listen when we buy a bond with a five or 6% handle that doesn't change tomorrow if market rates change so we.
To expect strong.
Spread income from the portfolio as well as strong base spreads going forward now the given where the markets are outlook is today that growth trajectory will slow down over time, but.
But we continue to expect.
Strong base spread income from the book.
Thank you that's helpful. Appreciate it.
Thank you.
Our next question comes from Brian Creek.
Brian . Please go ahead.
Yeah.
Thanks, Good morning.
The $1 8 billion of holding company liquidity.
How much of that is earmarked on a cash basis for remaining separation costs.
Other one time costs related to the cost savings plan.
So hey, Ryan it's alive. So the way we look at our liquidity as we look at kind of what's the remaining 12.
12 months needs and we kind of reserve for it and our liquidity today and when we're sitting now at the end of March we're sitting with liquidity in excess of the next 12 months.
If you go back to the buckets of one time expenses, we were covering one was on separation. Our estimate was $3 50 to $4 50, and we've already incurred based on our disclosures around $230 million against that.
And with respect to Corbridge forward you know our estimate for one time expenses is about $300 million, we've incurred about $100 million now not all of the 300 million is cash we do expect the bulk of that to play out over the next 12 months, but there might be a bit longer tail on the smaller.
A month.
Yeah.
Thanks, I guess, maybe asked differently could you just tell us how much in excess of the next 12 months needs. The current cash position is at the holding company.
Yeah. So that's a number that's variable.
But I think you can look at where we were at the end of last year as an example.
Got it and then.
I may have missed this but did you give us an update on the on the allowances for loan losses.
The first quarter on a statutory basis.
So the allowance we have not I have not given the number but I'm happy to.
Our estimate is still around $400 million on the kind of the overall commercial mortgage loan portfolio as of the end of the first quarter.
Okay, great. Thank you.
Thank you.
Next question comes from Michael <unk> from Citi.
Michael Please go ahead.
Thanks, guys good morning.
<unk>.
Thank you.
The investment portfolio color.
I was just thinking through the office exposure I'm curious about the <unk> component.
Think about a third of your <unk> office or a little over $3 billion of par. So I'm. Just wondering if you could maybe confirm that and then if you have any similar color on the occupancy MBS in terms of loan metrics and how you feel about that exposure.
Hey, Matt.
I'm happy to do that so you know our <unk> bookings.
<unk> diversified portfolio, it's about.
5% of our total invested assets that includes both agency and non agency and if I look at the non agency piece you know it is broken down between conduit and SaaS fees. The conduit piece, while it has some level of.
Our office exposure, but given the mixture of the pool we've got.
More than sufficient subordination in those deal since we invest in the top part of the capital structure and virtually everything we hold is NTIC one when.
When we look at the SaaS portfolio.
And you know a fraction less than 40% has office exposure, we underwrite those deals very similar to how we underwrite to commercial mortgage loans, when we make a decision to invest or not invest.
It's primarily it's all.
It's all investment grade, it's primarily NTIC, one and does continue to have low ltvs and high debt service coverage ratios and high occupancies within them. So we're comfortable with the with that portfolio and a lot of it are either you know trophy buildings or a property in premier locations.
Okay. Thanks very much.
And then maybe I was just hoping you could provide some more color on the sale of the CLO manager cure.
Curious if you retain any equity.
Maybe the motivation behind that.
I would have I think the asset classes, it's been attractive for like codes.
Happy so with respect to the CLO manager the decision to sell it was more about kind of our forward operating model for how we wanted to manage our investments.
And with the focus on having our investment team focused on managing the corporate balance sheet working with now two external managers it didn't make sense for us to continue to own the CLO manager, while we do still have some of the residuals on the deals that were sponsored or <unk>.
Managed by the CLO.
One of the things Thats happened with the sale is we'd be consolidated most of the CMO that were on our balance sheet. So when you look at our balance sheet and for example, a good area to look at that from consolidated investment entities. There was a material drop in the first quarter and Thats tied to the consolidated CLO with the <unk>.
Phil.
Okay.
Were you able to quantify the equity that you might still hold.
It's not a big number that we still hold.
Okay. Thank you guys.
Thank you.
Next question comes from Jamie.
P. Morgan Jimmy Please go ahead.
Hi, Good morning. So first just had a question on your commercial mortgage loan book.
I think you mentioned that the.
There were two loans that are 90 days or less delinquent.
And the amount seems fairly large $276 million of apartment buildings can you discuss what that is and what your.
That exposure was overall.
So I'm the two loans that I hadn't mentioned $8 million in the office space, we have about two loans in the office space that were delinquent.
By like 90 days, plus we don't have anything else in Lincoln to office space. The one I mentioned less than 90 days.
To do that with less than 90 days.
Yeah, that's on the office space.
We will have to come back to you, but I'm not aware of anything specific or concerning about those property it might be an operator, but will come back from Jimmy yes, those and those were in the apartment a classification not office, but.
Alright, and then.
And then just on the.
The fixed annuity market and index annuity your sales have grown a lot of other companies are trying to grow in that business as well as they are building out of variable annuities.
Just wondering how you see competition in those two product lines with higher interest rates are.
Better still being disciplined or are you seeing some companies sort of be aggressive on terms and conditions. It was better to wait for it to grow.
So yeah, thanks, Jimmy I think that our ability to move on the scales reflects the tremendous distribution access that we have that we've built up over over many years and we work on a truly strategic relationship with many of our distribution partners. So we.
Understand.
Maybe a little bit in advance what we need to do to be prepared to support their strategies.
That allows us to get beyond just talking about what might be on the shelf in the next quarter or two quarters in and really think about longer term planning, but we feel good about the fact that we were able to pivot quickly we were able to scale.
I think our relationship with Blackstone was helpful. In terms of their ability to scale asset origination and that's what's really been behind the growth. We do not we have not seen anything to suggest.
Margin compression.
We continue to see very attractive new business margins.
That are north of what our medium term return profile expectations would be so.
How I would summarize our ability to grow more rapidly in the in the fixed annuity business is I would get back to our distribution platform.
Thank you.
Yeah.
Thank you.
Our final question comes from Sumit Kumar from Jefferies. Please go ahead.
Great. Thanks, just me.
Two quick ones first on the buyback I just wanted to be clear in terms of the messaging or are you, saying that your buyback would be essentially tied to an AIG secondary or would you be open to repurchasing shares from the open market. Even if there is no secondary.
There's no limitation as we see it.
It will completely depend on sort of market conditions and other considerations at the time I think the important takeaways are bad.
We said that we would have the financial flexibility within six to nine months from the IPO and we have it.
That our board is confident in our financial strength and position.
And has supported it it is not a time limited authorization, which gives us a lot of flexibilities and and there are.
<unk> passed the proceeds some are more obvious than others, but we're.
We're not limiting in any way our options.
At this time, we are focusing on executing our strategies and increasing our financial flexibility.
Okay got it and then I guess on the surrenders in fixed annuities is there a way of tracking.
Tracking if that money is essentially going into a new corbridge annuity because my my thought is if these contracts are outside of surrender charge theres, probably some limitations in terms of how long you can invest the underlying funds, but if it gets recycled into new product and perhaps that's good for spreads. So I just wanted to see.
If there's any way to think through that issue.
Yes so.
There are obviously exchange.
Possibilities and we monitor the impact net of the exchanges.
But we also I think important relative to the surrenders is is that.
We do have the option of increasing crediting rates should we decide that that was more economically attractive.
And then otherwise.
And and so far we haven't necessarily seen that to be economically attractive.
So I kind of separate those two things in our minds, we have options. If we felt that there were more value in limiting the surrenders I don't know if there's anything you wanted to add Alaska.
And what I would add just echoing what something Kevin said and I said earlier is yes, the surrenders are increasing.
Increasing as you would expect them to react to what's going on the rate environment. The despite the increase the net flows into the general account are positive and if you look sequentially have almost doubled and beyond that you know, while we do that math economically the liquidity and the insurance companies as <unk>.
Very strong we've got very strong cash flows coming off the investment portfolio, we've got a sizeable liquid portfolio.
Liquid fixed income portfolio, if we ever need to do anything with it we haven't had to do anything with it there and we've got options beyond selling assets. If we need to raise short term liquidity none of that that have we had to do so far.
Okay. Thanks.
Yeah.
Thank you.
There will be and to the Q&A session I'll now hand, you back to Kevin Hagan for closing remarks.
Okay. Thanks, everybody I appreciate the questions Hope you have a good day.
Yes.
This concludes today's call. Thank you for joining you may now disconnect your lines.
[music].
Okay.