Q2 2024 Corebridge Financial Inc Earnings Call
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Isil Muderrisoglu: Good morning. Thank you for attending today's Corebridge Financial second quarter 2024 earnings call. My name is Jennifer, and I'll be your moderator today. All lines will be muted during the presentation portion of the call, with an opportunity for questions and answers at the end. If you would like to ask a question, press star one on your telephone keypad. Now, I'd like to pass the conference over to Isil Muderrisoglu with Corebridge Financial. Isil, please proceed.
Jennifer: Good morning. Thank you for attending today's Corebridge Financial second quarter 2024 earnings call. My name is Jennifer and I'll be your moderator today.
Jennifer: All lines will be muted during the presentation portion of the call, with an opportunity for questions and answers at the end. If you would like to ask a question, press star 1 on your telephone keypad. I would now like to pass the conference over to Isil Muderrisoglu with Corebridge Financial.
Isil Muderrisoglu: Good morning, everyone, and welcome to the Corebridge Financial Earnings Update for the second quarter of 2024. Joining me on the call are Kevin Hogan, President and Chief Executive Officer, and Elias Habayeb, Chief Financial Officer. We will begin with prepared remarks by Kevin and Elias, and then we will take your questions.
Jennifer: Isil, please proceed.
Isil Muderrisoglu: Good morning, everyone, and welcome to the Corebridge Financial Earnings Update for the second quarter of 2024. Joining me on the call are Kevin Hogan, President and Chief Executive Officer, and Elias Habayeb, Chief Financial Officer. We will begin with prepared remarks by Kevin and Elias, and then we will take your questions.
Isil Muderrisoglu: Today's comments may contain forward-looking statements, which are subject to risk and uncertainty. These statements are not guarantees of future performance or events and are based upon management's current expectations and assumptions. Corebridge's filings with the SEC provide details on important factors that may cause actual results or events to differ materially from those expressed or implied by such forward-looking statements. Except as required by the applicable securities laws, Corebridge is under no obligation to update any forward-looking statements if circumstances or management's estimates or opinions should change, and you are cautioned not to place and rely on any forward-looking statements.
Speaker Change: Today's comments may contain forward-looking statements, which are subject to risks and uncertainties. These statements are not guarantees of future performance or events and are based upon management's current expectations and assumptions.
Isil Muderrisoglu: Additionally, today's remarks may refer to non-GAAP financial measures. The reconciliation of such measures to the most comparable GAAP figures is included in our earnings release, financial supplement, and earnings presentation, all of which are available on our website at investors.corebridgefinancial.com. With that, I would like to turn the call over to Kevin and Elias for their prepared remarks.
Speaker Change: Corbridge's filings with the SEC provide details on important factors that may cause actual results or events to differ materially from those expressed or implied by such forward-looking statements.
Speaker Change: Except as required by the applicable securities laws, Corebridge is under no obligation to update any forward-looking statements if circumstances or management's estimates or opinions should change, and you are cautioned to not place undue reliance on any forward-looking statements.
Kevin: With that, I would like to turn the call over to Kevin and Elias for their prepared remarks. Kevin? Thank you, Isil, and good morning, everyone. I am pleased to report strong operating results for the second quarter, once again demonstrating the Corbridge financial value proposition.
Kevin Hogan: Thank you, Isil, and good morning, everyone. I am pleased to report strong operating results for the second quarter, once again demonstrating the Corebridge financial value proposition. Our diversified business model, strong balance sheet, and disciplined execution continue to create shareholder value, as demonstrated by the growth in our earnings and cash generation. Through the quarter, our four market-leading businesses capitalized on attractive market conditions and strong customer demand to drive growth and create value. Turning to slide three.
Kevin Hogan: Corebridge reported operating earnings per share of $1.13, a 9% increase year over year; our run rate operating EPS, which adjusts alternative investment returns to our long-term expectations, grew 12% over the same period. Our collective businesses generated $11.7 billion of premiums and deposits, a 17% increase year over year. This is the highest in over a decade for Corebridge, reflecting strong customer demand and the benefit of our broad suite of products and services. Corebridge also delivered 5% growth in aggregate core sources of income.
Kevin Hogan: All three sources, base spread income, fee income, and underwriting margin, each increased, reflecting our ability to deploy resources where customer demand is the greatest and risk-adjusted returns are the most attractive. Our strong balance sheet gives us the flexibility to both invest in our businesses and return capital to shareholders. We proactively manage both sides of the balance sheet to maintain a sound capital and liquidity profile. We are committed to returning capital to shareholders, and in the quarter, we returned $575 million through a combination of dividends and share repurchase.
Kevin: Our diversified business model, strong balance sheet, and disciplined execution continue to create shareholder value as demonstrated by the growth in our earnings and cash generation.
Speaker Change: Through the quarter, our four market leading businesses capitalized on attractive market conditions and strong customer demand to drive growth and create value.
Speaker Change: Turning to slide three.
Speaker Change: Our collective businesses generated $11.7 billion of premiums and deposits, a 17% increase year over year.
Speaker Change: This is the highest in over a decade for Corebridge, reflecting strong customer demand and the benefit of our broad suite of products and services.
Kevin Hogan: Since the IPO, we have consistently demonstrated our ability to support robust sales while delivering attractive returns to our shareholders and maintaining balance sheet metrics in line with our targets. We are also continuing to improve our operating leverage. General operating expenses are lower by 6% year over year after adjusting for the international life divestiture.
Speaker Change: We are also continuing to improve our operating leverage.
Kevin Hogan: This reduction, which is driven by the benefits of Corebridge Forward, our expense and modernization program, has been achieved during a time of record growth for the company. Expense management will continue to be a contributor to financial performance as we develop important capabilities through the execution of Corebridge Forward. We expect to leverage these skills beyond this program and have shifted to a focus on continuous improvement to further enhance operating efficiency. This includes generating a reported ROAE of 12% for the first half of 2024, achieving the lower end of our target.
Speaker Change: This reduction, which is driven by the benefits of CoreBridge Forward, our expense and modernization program, has been achieved during a time of record growth for the company.
Speaker Change: Expense management will continue to be a contributor to financial performance as we develop important capabilities through the execution of Corebridge Forward.
Speaker Change: In the second quarter, individual retirement enjoyed strong demand for its products, in particular fixed and fixed index annuities.
Speaker Change: We have long been a leading participant in these markets, offering a broad range of income and accumulation-oriented solutions through our extensive distribution platform.
Kevin Hogan: Individual retirement produced quarterly sales of $6.8 billion, up 68% year over year, led by our fixed annuity product. This reflects, in part, the success of our automated and accelerated underwriting practice. Also, last month, we announced the name change of our longstanding direct-to-consumer life insurance business to Corebridge Direct. Moving to slide five.
Speaker Change: Individual retirement produced quarterly sales of $6.8 billion, up 68% year-over-year, led by our fixed annuity products.
Speaker Change: In group retirement, we continue to expand our range of offerings to serve the growing demand for in-plan and out-of-plan solutions.
Speaker Change: Additionally, we continue to work through an attractive pipeline of potential pension risk transfer opportunities.
Kevin Hogan: Bermuda provides access to an attractive regulatory capital framework that is aligned with how we approach balance sheet management. Our Bermuda-based entity is one means of optimizing capital efficiency, and we continue to explore others. Our diversified business model, strong balance sheet, and disciplined execution enable our insurance companies to generate significant cash flow. Year-to-date, our insurance subsidiaries have distributed $1.1 billion to the holding company, and Corebridge has returned $961 million to shareholders. This has resulted in a payout ratio of 70%, and we remain firmly on track to meet our full year target.
Speaker Change: Bermuda provides access to an attractive regulatory capital framework that is aligned with how we approach balance sheet management.
Speaker Change: Corebridge has achieved much over the first half of 2024, and we believe our strategy continues to drive an attractive return profile.
Kevin Hogan: Our financial position is strong, and our results reflect the earnings power of our franchise. With positive momentum across our businesses, we are well positioned to further grow earnings and cash flows while maintaining our financial flexibility. We look forward to welcoming Nippon Life as a shareholder following regulatory approval. I will now turn the call over to Elias.
Speaker Change: We will continue to execute on our strategy and optimize our capital to strengthen our franchise and generate long-term growth and shareholder value.
Speaker Change: Thank you Kevin. I will begin my remarks this morning on slide six where I will provide an overview of our key financial results for the quarter.
Elias Habayeb: Our operating earnings per share of $1.13 grew 9% year over year on a per share basis. We delivered run-rate operating EPS of $1.21, a 12% improvement on a year-over-year basis. Year-to-date run rate ROE of 13% has grown over 200 basis points since our initial public offering and is within our target range of 12 to 14%. Moving to slide seven, base portfolio income increased 12% over the prior year as it continued to benefit from growth in general account assets and higher new money yields, which were 130 basis points above roll-off yields in the quarter. Base yield increased 22 basis points year over year to 4.82%.
Speaker Change: We delivered Run Rate Operating EPS of $1.21, a 12% improvement on a year-over-year basis.
Speaker Change: Moving to slide 7. Our assets under management and administration grew 6% year-over-year to $394 billion.
Speaker Change: Base portfolio income increased 12% over the prior year as it continued to benefit from growth in general account assets and higher new money yields, which were 130 basis points above roll-off yields in the quarter.
Speaker Change: Base yield increased 22 basis points year-over-year to 4.82%.
Speaker Change: The Corbridge Investment Portfolio is diversified and high quality with an average rating of single A. From a credit perspective, our portfolio, inclusive of commercial real estate exposure, is performing as expected.
Elias Habayeb: From a credit perspective, our portfolio, inclusive of commercial real estate exposure, is performing as expected. However, variable investment income declined over the prior year, broadly driven by alternative investments. Annualized alternative returns were approximately 4% in the quarter, which is below our long-term expectation of 8% to 9% but better than recent quarters. Base spread income increased largely as a result of general account asset growth driven by strong new business volume. And surrenders are more concentrated in blocks with lower costs of funds, both of which put pressure on the portfolio's overall base net investment spread.
Speaker Change: Given our market outlook, we accelerated the origination of attractive assets in the first half of the year.
Speaker Change: Year-to-date, Corebridge has sold $4 billion of assets. This includes $900 million of below-investment-grade credit without any impact to future earnings.
Speaker Change: Positive returns in traditional private equity and hedge funds were partially offset by mark-to-market losses in real estate equity.
Speaker Change: Looking forward, we believe real estate equity returns may improve from the lows of the first half of 2024.
Speaker Change: Turning to slide 8.
Speaker Change: Our businesses at Corebridge create multiple and complementary sources of income.
Speaker Change: Fee income improved 8% over the prior year, driven by higher account values, along with our growing advisory and brokerage business, which has increased assets under administration by 12% year over year.
Speaker Change: Underwriting margin, excluding variable investment income and the sale of our international life business, improved 4% over the prior year, driven by more favorable mortality experience.
Speaker Change: The combination of our diversified, market-leading businesses working together powers our earnings growth. Here are a few highlights.
Speaker Change: Base spread income increased largely as a result of general account asset growth driven by strong new business volume.
Elias Habayeb: As such, we expect marginal compression in the future. Fee income, which accounts for 30% of individual retirement sources of income, increased 10% year over year. Our financial results for the quarter demonstrate the benefits of our multiple sources of income as well as the ability to improve efficiency while also growing the balance sheet. To that end, general operating expenses for our insurance businesses and parent company were lowered by 6% after excluding the sale of our international life business. Our holding company liquidity remains strong at $1.9 billion, and our live fleet RBC ratio is above target.
Speaker Change: Touching briefly on our other businesses.
Speaker Change: Life insurance benefited from favorable overall mortality experience.
Speaker Change: As a reminder, with the sale of the UK Life business this quarter, Life Insurance's financial results now purely represent our domestic business.
Speaker Change: Institutional markets produces income from spread, fee, and underwriting margin.
Speaker Change: Base spread income increased 8% year over year, due in part to the significant growth in our PRT and GECK portfolios.
Speaker Change: We continue to expect meaningful opportunities to further expand this business, which we believe will lead to ongoing growth of reserves and earnings.
Speaker Change: Our financial results for the quarter demonstrate the benefits from our multiple sources of income as well as the ability to improve efficiency while also growing the balance sheet.
Speaker Change: Moving to slide nine.
Speaker Change: Corbridge continues to maintain a strong balance sheet while our sound financial performance and consistent cash flow generation delivers value to shareholders.
Speaker Change: Our holding company liquidity remains strong at 1.9 billion dollars and our live fleet RBC ratio is above target.
Speaker Change: Distributions from our insurance companies were 500 million dollars in the second quarter, bringing the year-to-date distributions to 1.1 billion dollars, a 10% increase over the prior year.
Speaker Change: As a reminder, in the quarter we received $550 million in net proceeds from the sale of our UK business.
Isil Muderrisoglu: Thank you, Elias. As a reminder, please limit yourself to one question and one follow-up. Operator, we are now ready to begin the Q&A portion of the call.
Isil Muderrisoglu: With that, I'll now turn the call back to Isil. Thank you, Elias. As a reminder, please limit yourself to one question and one follow up. Operator, we are now ready to begin the q&a portion of the call.
Speaker Change: Thank you. We will now begin the question and answer session. If you would like to ask a question, please press star followed by one on your telephone keypad. If your question has been answered or you wish to remove your question, please press star followed by two.
Speaker Change: Our first question comes from the line of Elyse Greenspan with Wells Fargo. Elyse, your line is now open.
Elyse Greenspan: Thanks. Good morning. My first question is just on the, you know, on Bermuda. You know, now that you guys have started seeding business there, can you just, you know, give us kind of the lay of the land, what what you expect to seed and how we could see that transpiring? And then can you help us think through the capital efficiencies that you could see from seeding more business to Bermuda?
Speaker Change: You know, we have several opportunities as we advance with our Bermuda strategy. We can seed flow reinsurance on additional products relative to new business, those that are, you know, attractive in the Bermuda environment.
Kevin Hogan: And then maybe my second question is picking up on that you guys had pretty strong fixed annuity sales in the quarter. Can you just kind of comment on the outlook, you know, that you would expect from here for the balance of the year and into next year as well?
Kevin Hogan: Yeah, sure. So the second quarter conditions were very strong for both fixed and index annuities, in particular fixed annuities. You know, these products are very valuable to customers as part of a long-term savings plan, and we've seen advisors very supportive, both in the bank channel and also the increasingly active broker-dealer channel. And ultimately, customer demand is driven by crediting rates, which reflect where yields and spreads are but also, you know, where customer expectations of the future are. And during the second quarter, the first two months, rates were rising and high, and they started tailing off towards the last month of the quarter.
Speaker Change: These products are very valuable to customers as part of a long-term savings plan.
Speaker Change: the bank channel and also the increasingly active broker-dealer
Kevin Hogan: We were able to, you know, leverage our responsive pricing and the tremendous distribution access that we have and executed effectively in that environment. We benefited from some operational improvements that we made last year to support the volumes, and attractive assets were available. So we feel good about our execution during the quarter. We may not always have quarters in the retail business such as this, but if the customer demands are consistent and markets are supportive, you know, we certainly have the opportunity to be able to participate.
Speaker Change: Certainly, we have the opportunity to be able to participate.
Kevin Hogan: You know, I think you have to look maybe broader than just focusing on one or two products. You know, since the second quarter of last year, we've enjoyed an increase in the overall level of production, but we've been able to support this growth while strengthening the balance sheet and delivering on our capital returns. So we feel good about our execution, and we'll continue to respond as conditions evolve in the future.
Speaker Change: You know, I think you have to look maybe broader than just focusing on one or two products.
Speaker Change: Since the second quarter of last year, we've enjoyed an increase in the overall level of production, but we've been able to support this growth while strengthening the balance sheet and delivering on our capital returns.
Speaker Change: So, we feel good about our execution and will continue to respond as conditions evolve in the future.
Speaker Change: Thank you.
Speaker Change: Thank you. Our next question comes from the line of Ryan Krueger with KBW. Ryan, your line is now open.
unknown: Morning, I had a higher-level question on both Bermuda and your comments on continuing to explore other efficiency options. Should we think of these things as
Ryan Krueger: Good morning. I had a higher level question on both Bermuda and your comments on continuing to explore other efficiency options. Should we think of these things as
Ryan Krueger: Enabling you to grow more while continuing to achieve the targeted 60 to 65 percent payout ratio or is there actual potential upside to the payout ratio because of these actions?
Speaker Change: Hey Ryan, it's Elias. So, as Kevin said, listen, we look at Bermuda as another tool in our capital management strategy.
Ryan Krueger: and what you see the way we used it in the second quarters to fund in an efficient way the higher growth, which is all going to contribute to higher earnings and higher distributable cash flows over time, which is kind of important to how we think about our strategy.
Speaker Change: And we will, as you've seen in the past, we're very active on how we manage our balance sheet. And we see other opportunities to Bermuda, which we got the first one in place and we're now considering what's the next step on how we further optimize our regulatory capital.
Speaker Change: Okay, thanks. And then with Nippon becoming a large shareholder, do you see any strategic opportunities with them beyond them being just a passive shareholder of the company?
Speaker Change: Well, thanks, Ryan. You know, we are looking forward to welcoming welcoming them as a shareholder when the transaction closes subject to the various regulatory environments. I mean, Nippon is
Speaker Change: Tremendously successful in their market and we'll have opportunities to begin to engage, you know, once we have concluded those regulatory approvals.
Speaker Change: They understand the industry. They're very supportive of our strategy. We believe our values are aligned, and we're looking forward to welcoming them, you know, as an investor.
Speaker Change: Okay, thank you.
Speaker Change: Thank you. Our next question comes from the line of John Barnage with Piper Sandler. John, your line is now open.
John Barnage: Good morning. Thank you for the opportunity. Your free cash flow conversion targets. You've got a pretty good job of hitting them with Bermuda. Do you see an opportunity to
John Barnage: Raise those as that entity becomes a bigger portion of the portfolio. You mentioned as long-term extension of the capital management strategy. Thanks.
Speaker Change: And, you know, and they were just started leveraging Brevue that support new business. And we've got some other ideas we're going to pursue over time, that will grow over time distributable cash flows, as well as it's going to grow earnings from our insurance companies.
Speaker Change: If you look at our, what we're doing from a capital management for 2024.
Speaker Change: You know, putting aside the proceeds from the UK, you know, we're focused on delivering 60 to 65% payout ratio. That's what we've done in the first half of the year, and that's our focus for the second half of the year. And the proceeds from the UK would be extra on top.
Speaker Change: Thank you for that. You mentioned, as far as my follow-up, you mentioned other levers...
Speaker Change: to improve capital efficiency beyond Bermuda. Can you maybe hit on those a little bit? Thank you.
John Barnage: Yeah, thanks, John. So So look, I mean, we're always seeking opportunities to increase value and to optimize the portfolio, including exploring, you know, pro forma transactions.
Speaker Change: and any transaction, you know, clearly has to be accretive on a risk adjusted basis. And we look at that from a couple of different lenses, including the, you know, franchise impact, you know, managing credit risk.
Speaker Change: other considerations. And we also look at, you know, the multiple differential as part of that economic equation.
John Barnage: As Elias talked about, we prioritized a few international transactions that were right in front of us.
Elias: generated a lot of shareholder value there. And now we're enabling Bermuda. And so that does
Speaker Change: You know present us the potential and we continue to explore transactions both internally
Speaker Change: As well as potentially externally. We are aware of the markets and have engaged in some discussions go further than others, but we'll continue to evaluate and prioritize all the options. We see Bermuda as an important enhancement to our availability of options.
John Barnage: And to the extent we have anything to disclose, we'll disclose it.
Elias: And John, it's Elias, if I can add to what Kevin has, you know, since the beginning, since the IPO, we've been focused on creating shareholder value.
John Barnage: And capital management has been one of the ways we've done it. But I think you've seen the progress we've made on organic growth where we grew
Elias: You know, our spread income by almost 30% since the IPO.
Elias: you know, we focus on expense management, where we've reduced our expenses by about 11%, as well as the work we've done on the asset side of the balance sheet. So in addition to capital, all those remain levers available to us, and we continue to be focused on them to creating value for our shareholders.
Operator: Thank you. Our next question comes from the line of Suneet Kamath with Jeffreys. Suneet, your line is now open.
Speaker Change: Thank you. Our next question comes from the line of Sunit Kamath with Jeffreys. Sunit, your line is now open.
Speaker Change: Our nominal spreads were essentially flat.
Speaker Change: on a sequential basis. And, you know, we did see very strong growth in the second quarter, the growth in the general account of
Speaker Change: $3 billion. And as the business
Speaker Change: We do expect spread income to continue to grow, albeit at a slower pace.
Speaker Change: You know, we moved quickly at the beginning of the change in the market and we were able to take actions.
Speaker Change: Relative to the in force and repositioning the asset portfolios and what we're seeing is is that the cost of funds on new business is higher than the overall in force portfolio. And what we're seeing in surrenders are the lower cost of fund businesses. So that is creating a creep effect in the cost of funds.
Speaker Change: And so, you know, nominal spreads themselves may have peaked, as we've indicated before, and there may be some marginal spread compression going forward, but the margins are locked in on the in force.
Speaker Change: and we price new business according to what's available now. We expect spread income to continue to grow, even though there may be some marginal spread compression.
Speaker Change: Got it. And I guess on that base spread income growth, I mean, I guess, do you need sales to be sort of at this level, which is a pretty incredible level of sales in order to see that? I'm just trying to think through what the drivers of that growth in base spread income are.
Speaker Change: It's a life that there's two drivers for the growth and spread income. So one is new business. No, we don't need it to be at the level you saw in the second quarter to continue to grow.
Speaker Change: The second thing is on the Enforce portfolio, and we shared with you in our earnings deck
Speaker Change: the kind of the delta between where new money is coming into the portfolio.
Speaker Change: and where money is exiting the portfolio. So we had 130 basis point differential. So that kind of higher reinvestment rate, which still has a healthy cushion relative to what's leaving our portfolio, that's another tailwind for the growth in our spread income.
Speaker Change: So those two will be the tailwinds going forward, and we expect that to continue to drive spread income into the future.
Speaker Change: Okay, thanks.
Speaker Change: Thank you. Our next question comes from the line of Tom Gallagher with Evercore. Tom, your line is now open.
Tom Gallagher: Good morning. First question is just on the spike in fixed annuity sales.
unknown: Was that caused by any new product that was launched, or was that an existing product?
Tom Gallagher: Was that caused by any new product that was launched or was that an existing product?
Speaker Change: that that really accelerated during the quarter and how do you feel about the margins in those because I think whenever you see
Speaker Change: something like a product that's considered somewhat of a commodity like fixed annuities go up so much there's going to be some skepticism that you know it's a good it's a good profit margin but can you talk about you know what how you feel about the profit margin on on those sales
Speaker Change: Yeah, thanks, Tom. We feel good about the profit margin on the sales. We manage the pricing and our fixed annuity business.
Speaker Change: with great discipline. We have the ability to reprice all of our Enforce products. Essentially every day if we had to during the pandemic, we were able to do that and we're very focused on kind of the micro cycles of competition.
Speaker Change: In historically fixed annuities is one of the businesses where our production has varied quarter to quarter according to where a customer demands are At a given time and the second quarter just happens to be a period where the customer demand was very strong Part of that is where crediting rates were part of that I think is where investor expectations were and a lot of it was that advisors both in the bank and the broker-dealer channel
Speaker Change: See the great value of these products as part of a long-term Investment plan so so the the conditions were very attractive in in the second quarter. We didn't change any of our pricing Philosophy and the margins continue to be attractive on new business
Speaker Change: Got it. So no, Kevin, no new, no new product. It was just the product that was on the shelf. And it sounds like you think industry demand really probably picked up and you were just catching your share. Is that a fair way of thinking about it?
Speaker Change: No, I wouldn't necessarily think of it like that, Tom. I think we have a very strong distribution partnership with
Speaker Change: with some significant distribution partners. And we were able to mobilize that capability in the second quarter in response to the demand. So it's not just a matter of where the market was, it's our business model relative to.
Tom Gallagher: You know, having multiple products, having multiple channels.
Tom Gallagher: being able to focus our capital where the risk-adjusted returns are most attractive at any given time, and then having the distribution platform to be able to put that to work.
Tom Gallagher: And just taking a step back from the fixed annuity business for a moment, I mean, our entire business model reflects that opportunity. And so, you know, the fixed annuity sales kind of stood out in the second quarter. But if you look at the previous couple of quarters, we've enjoyed growth from various products and various channels.
Tom Gallagher: in response to that market demand.
Tom Gallagher: And so, you know, that's how we look at it. There was a very strong quarter in fixed annuities. If those conditions were to repeat, you know, we would anticipate being able to deliver a similar performance and we'll be continuing to respond to where the opportunities are the greatest going forward.
Speaker Change: Okay, thanks.
Speaker Change: Thank you. Our next question comes from the line of Wes Carmichael with Autonomous Research. Wes, your line is now open.
Suneet Kamath: Hey, thank you. I had a similar question along the line of Tom's on MIGAs, but Kevin, you mentioned the cost of funds is higher on the overall portfolio versus new business, and I totally get that, but
Suneet Kamath: When we think about new business, are you expecting kind of pressure on the cost of funds going forward, all else equal, including like interest rates? I guess I just think about, you know, new entrants coming into the market, more companies continuing to focus on strategies like Bermuda. So do you expect that would kind of push up the crediting rates on these products going forward?
Elias Habayeb: So Wes, I just want to be clear on something. It's actually the cost of funds on the in-force is lower than the new business. And that reflects the fact that a lot of that in-force was originated in a very different interest rate environment. And so what's causing the creep in the cost of funds is actually the flow of new business. Now, what I'll say is that based on where rates and spreads are, the margins on that new business continue to be very attractive.
Elias Habayeb: So, Wes, I just want to, you know, be clear on something. It's actually the cost of funds on the in-force is lower than the new business.
Elias Habayeb: And that reflects the fact that a lot of that in force was originated at a very different interest rate environment.
Elias Habayeb: And so what's causing the creep in the cost of funds is actually the flowing in of the new business. Now, what I'll say is based on where rates and spreads are, the margins on that new business continue to be very attractive.
Elias Habayeb: But that is what's causing the creep in the cost of funds. As the environment continues, I think even if there are some reductions in base rates, particularly at the front end of the curve, I believe that the demand for fixed and fixed index annuity products is going to continue to be very strong. Because at the nominal crediting rates where products are now, these are something that is very attractive and very important to supporting a long-term savings plan as part of its asset allocation.
Elias Habayeb: But that is what's causing the creep in the cost of funds.
Elias Habayeb: as as the environment continues. I mean, I think even if there are some reductions in base rates, particularly at the front end of the curve, I believe that the demand for the fixed and fixed index annuity products is going to continue to be very strong.
Elias Habayeb: because, you know, at the nominal crediting rates where products are now, these are something that are very attractive and very important to supporting a long term savings plan as part of its asset allocation.
Speaker Change: Got it. And then I think of my follow up just on retail annuities and shelf space, you mentioned strong distribution, but are there any opportunities that you see in the near term to kind of get on the shelf with some warehouses or even some agencies where you expect that could be meaningful in the near term?
Speaker Change: So we are already on the shelf. We believe that every major distribution firm available in the broker dealer channel, in fact, is an area we saw significant strength.
Elias Habayeb: in the recent quarters. And that is an area where there's almost a new generation of advisors that are discovering the value of these products as part of an asset allocation. An important part of our recent growth has been the broker-dealer channel.
unknown: which includes, for us, the Wirehouse. Thank you.
Speaker Change: Thank you.
unknown: which includes for us the wirehouses.
Speaker Change: Thank you. Before our next question, reminder, if you would like to ask a question, press star one on your telephone keypad.
Operator: Our next question comes from the line of Joel Hurwitz with Dowling Partners. Joel, your line is now open.
Speaker Change: Our next question comes from the line of Joel Hurwitz with Dowling Partners. Joel, your line is now open.
Joel Hurwitz: Hey, good morning. Quick one on VII. So you guys only call out the unfavorable alternatives. But it looks like there was further VII pressure in the quarter, including negative call and tender income. Just what was that about what you see in the quarter there and non-alternative VII?
Elias Habayeb: Hey Joel, it's Elias. So yeah, we had a situation where we had a bond that was purchased during the pandemic when rates were really low; we purchased it at a premium. And it had a call event on it in the quarter, hence why we had a loss on the call.
Elias Habayeb: Hey Joel, it's Elias. So yeah, we had a situation where we had a bond that was purchased during the pandemic when rates were really low. We purchased it at a premium and it had a call event on it in the quarter, hence why we had a loss upon the call.
Speaker Change: Okay, so just the one timer there.
Speaker Change: Yeah, I also signaled in my script that, you know, looking at the third quarter, we expect, you know, another one in the third quarter, but I would look at those that are kind of more limited than necessarily a run rate.
Elias Habayeb: Okay.
Speaker Change: And then can you just provide some more color on your PRTO look for the second half and just what are you seeing in the overall competitive environment in that space?
Speaker Change: Yeah, sure. You know, in pension risk transfer, the pipelines continue to be very strong.
Speaker Change: We did not have a transaction in the second quarter, but we focus on the full plan termination space.
Speaker Change: There were no significant sized full plan terminations in our market in the second quarter, but the pipeline continues to be very strong.
Speaker Change: And across the institutional markets business, actually we feel great about our position. The conditions were very good for guaranteed investment contracts in a quarter.
Elias Habayeb: We engaged in some issuance there and we continue to see good
Speaker Change: good growth in the structures as well. So the, you know, pension risk transfer is going to be a little volatile in terms of when we land transactions, we do focus on full plan terms and the 500 million to a billion and a half dollar range. There's plenty in the pipeline, but they don't land every quarter.
Joel: Okay, thank you.
Speaker Change: Thank you. Our next question comes from the line of Mike Ford with Citigroup. Mike, your line is now open.
Speaker Change: Thank you guys. Good morning. I'm just curious with the gears moving in terms of deconsolidation and internally for you guys with the Bermuda arrangement.
Speaker Change: I'm curious how you see your business mix today. Specifically, kind of how do you weigh external risk transfer opportunities or, or, or business mix changes going forward?
Mike: Thanks Mike. We believe we have a very strong position in the businesses that we've chosen. We have four market-leading businesses that are at scale.
Elias Habayeb: and able to perform. We've worked hard to hone that.
Elias Habayeb: portfolio over the year and we're focused upon what's right in front of us.
Elias Habayeb: You know, in terms of opportunities for optimizing the portfolio, whether they're internal solutions or external solutions, we're equally actively exploring where those opportunities may be and
Elias Habayeb: weighing them against other opportunities we have to generate shareholder value.
Speaker Change: You know, we are aware of what the market conditions are, we're aware of what the opportunity is in terms of transaction multiples, and we continue to focus on prioritizing the most important transactions in front of us.
Joel: Thanks, and I'm sorry to keep going back to this annuity sales question.
Speaker Change: Certainly a positive result to see growth, right. But I'm just looking at the the limer data and industry that industry sales actually declined in the quarter. So
Joel: I think we're just kind of trying to square this away. And I noticed in, you know, in an earlier question, you mentioned
Speaker Change: some operational improvements that you made last year to support volumes. So it, you know, was that part of it or whether it was there a new distribution that really contributed to this growth while others, you know, came to see their sales decline?
Elias Habayeb: Look, I can't speak for what others' strategies may be. I can speak for what ours is.
Elias Habayeb: Look, I can't speak for what others' strategies may be.
Elias Habayeb: I can speak for what ours is, and that is to respond to market opportunities, to maintain our pricing discipline, and to maintain a distribution platform that we can flex.
Speaker Change: You know, after the tremendous volumes of the first quarter of last year, you know, we did make operational improvements. We increased our capacity and flexibility, which started coming online in the third quarter of last year. And so we were able to support the volumes of the second quarter without any unusual service issues or backlogs or anything like that. I think that was part of it, but really it's where our distribution partnerships were
Elias Habayeb: And that is to respond to market opportunities, maintain our pricing discipline, and to maintain a distribution platform that we can flex. You know, after the tremendous volumes of the first quarter of last year, we did make operational improvements, we increased our capacity, and flexibility, which started coming online in the third quarter of last year. And so we were able to support the volumes of the second quarter without any unusual service issues or backlogs or anything, or anything like that. I think that was part of it.
Elias Habayeb: And also, you know, you know, we never issue liabilities that don't have an asset strategy to support them. And assets were available and attractive in the, you know, in the second quarter to support that, to support that growth. So, you know, we're pleased with our execution at that time. I wouldn't necessarily look at it as a quarter that you would expect to always repeat. We respond to the opportunities of any given quarter. And if you look back at our production in fixed annuities,
Elias Habayeb: But really, it's where our distribution partnerships are and where the customer demand is. And also, you know, we never issue liabilities that don't have an asset strategy to support them. And assets were available and attractive in the second quarter to support that, to support that growth. So, you know, we're pleased with our execution at that time. I wouldn't necessarily look at it as a quarter that you would expect to always repeat. We respond to the opportunities of any given quarter.
Elias Habayeb: And if you look back at our production and fixed annuities, it's never been linear. It is, you know, a capital markets transaction, and we respond to it, you know, in the form of a capital market.
Elias Habayeb: It's never been linear. It is, you know, it's capital markets transaction and we respond to it, you know, in the form of a capital markets business.
Speaker Change: Okay, thank you.
Speaker Change: Thank you.
Elias Habayeb: That will conclude the question and answer session today. I will now pass the call over to Kevin Hogan, CEO of Corbridge Financial, for closing remarks.
unknown: Okay, thanks, everybody. Thanks for joining us this morning. Thanks for the questions, and have a nice day.
unknown: Okay, thanks, everybody. Thanks for joining us this morning. Thanks for the questions and have a nice day.
Speaker Change: That will conclude today's call. Thank you for your participation. You may now disconnect your line.