Description

Corebridge Financial (NYSE:CRBG) is a recent spin-off from parent company AIG focused on life insurance and retirement services trading at a ~40-50% discount to their peers/market, depending on the measure.  CRGB is a high-quality life insurance/retirement services franchise not fully appreciated by the market.  CRBG businesses are market leaders run by an experienced management team and is a life insurer that earns near or above their cost of capital (10-12%) with run-rate 12-14% ROEs expected post-separation.  Factoring in a 4% dividend yield, market-expected double-digit earnings growth and closing the valuation discount, it is possible to see CRBG to trade above $30/share in the medium term.  Approaching these levels by 2024 would result in a ~16% CAGR, in a stable, downside protected company.

Merits

1. Among market leaders in major lines of business

• Within Individual annuities (53% of earnings) CRBG is one of a few insurers with the scale and distribution to compete across all major product lines (top 5 in fixed and indexed annuities, top 10 in VA)
• Group Retirement business (25% of earnings) is a leader in the 403(b) teachers’ market, has a large, affiliated distribution network (VALIC Financial Advisors) and generates higher margins (20%+ ROEs) than similar platforms
• Other smaller businesses (individual life, institutional markets, international) are not quite as scaled but institutional markets and international have delivered above market growth in recent history

2. Less risky liability profile relative to peers

• Corebridge has a more diversified business mix (53% of earnings are from individual annuities versus 90% of BHF and JXN, more than 60% for LNC). CRBG is less exposed to products with tail risk, especially variable annuities with living benefits (40% of annuity earnings versus 70% for BHF, 80% for LNC, 100% for JXN)
• Corebridge has more modest exposure to problematic legacy blocks in other product lines. The company’s long-term care (LTC) exposure has been fully reinsured (about $400 million in statutory reserves; 100% reinsured with Fortitude), while its individual life book is more skewed to term insurance and universal life without secondary guarantees
• Universal life with secondary guarantees, a product that has driven charges at other insurers, is a relatively modest portion of CRBG’s individual life book and assumptions embedded in the company’s reserves are more conservative
• In the institutional markets business, CRBG’s lower margin PRT, structured settlement, and institutional annuity blocks (pre-2012) were reinsured with Fortitude Re prior to the IPO

3. Multiple levers for ROE expansion and EPS growth

• ROE will likely expand 100-200bps by 2024-25 from ~11% levels today as spread margins improve with higher rates (~$400mm incremental by 2024 or 100bps/7% EPS growth), expense savings (~$400mm annually, or ~20% of its current general overhead expenses, after ~$750mm of one-time expenses associated with new public costs and costs to achieve), and organic growth/share repurchases
• Underlying organic growth will likely contribute ~5%+ to earnings growth

4. Above market exposure to higher rates and below-market exposure to equity market

• CRBG has benefitted from rising rate environment as spreads on products have expanded, and has disclosed that a 100bps move in rates adds a net ~$225mm (~8%) to pre-tax earnings by 2025 (or a gross $365mm / ~13% excluding impacts from GAAP reserve accounting changes in 2023)
• A 3% move in first year is above the sector average of 2%
• A 10% increase in the S&P 500 is expected to generate an additional $115mm in fee earnings, net of expenses
• A 4% move in the first year is below the sector average of 5%
• CRBG will benefit as rates remain higher and equity valuations depressed, but also should see offset as Fed normalizes rates in future years and the equity market recovers.  Through the current decline, CRBG results should hold up better than peers’ given the company’s business mix

5. Top quartile capital return program, including 4% dividend yield

• ~5% dividend ($0.23 quarterly) declared for 4Q 2022, implying an annualized 5% yield vs sector of ~3%.  ~$600mm is expected to be spent in dividends in 2024+, implying a 4.4% yield
• Share repurchases of ~$380mm in 2023 and $1.2bn in 2024 are expected in 2024, and will likely run-rate at this level
• Total payout of 13% of market cap in 2024 is above the sector average of ~10% and management expects to spend 60-65% of operating income on dividends and buybacks in 2024+
• CRBG may participate in AIG secondary sell-downs in the 2023-2025 period similar to VOYA and EQH following IPOs
• The Company is expected to run fleet RBC in the 415-425% range, with 400% as a floor – 20 RBC points would represent ~$800mm of excess capital that could be deployed in future, but additional flexibility here likely limited

6. Investment management partnerships with Blackstone and Blackrock

• CRBG has outsourced nearly $200bn of assets (>85%) to Blackrock ($90bn of liquid fixed income) and Blackstone ($50bn today growing to $92.5bn in 2027 in privates, structured credit and alternatives)
• New money yields should experience a lift, and provide enhanced competitive positioning in spread-based products
• Allocations to private market investments should increase to pick up incremental yield with two high quality managers

7. Valuation is interesting at 0.6x BV ex AOCI and ~5x 2023E EPS

• CRBG is trading at a discount to the sector at 1.2x BV ex AOCI and 7x EPS
• The Company is trading at in line with annuity peers AEL, BHF, EQH, JXN, LNC on a BV ex AOCI basis, despite annuities representing only ~50% of earnings
• Other, more diversified or mortality focused life peers trade in the 1.0-1.2x BV ex AOCI
• Retirement peers (AMP, PFG and VOYA) trade at premium multiples, at around 2.5x BV ex AOCI
• Assuming CRBG executes and market recognizes the other 50% of the business that is not annuity focused, it appears there is room to run the valuation closer to 1.0x BV ex AOCI

8. Experienced, tenured management team

• Most of Corebridge’s key executives have been with AIG for an extended period, having held various roles across the organization. Kevin Hogan (CEO) has been with AIG for over 33 years and became the CEO of the life & retirement business in 2014.  Elias Habayeb was appointed CFO of Corebridge in 2021 but has been with AIG for 12 years.
• Most of the leaders of CRBG’s business units have been with AIG for 10+ years. Terri Fiedler (President of Financial Distribution) has been with AIG since 2012 and at CRBG since 2019, while Jonathan Novak joined the firm in 2012 as President of Institutional Markets.  Robert Scheinerman joined AIG in 2003 and has worked in the retirement business (both individual and group) since. Todd Solash (Head of Individual Retirement and Life Insurance) has been with the company since 2017, having previously served as AXA Equitable’s Head of Individual Annuity, while Katherine Anderson (Chief Risk Officer) joined AIG in 2014.
• Management is focused on fully separating the company, and is highly incentivized to hit growth, margin and capital return goals.  Using the improved investment strategy, flows from spread-based products should improve. Growth strategies in international life, simplified issue whole life in U.S., and out-of-plan/advisory assets in group retirement could provide upside to street consensus earnings estimates 

Risks

1. Weak organic growth and flows across major businesses

• Organic growth in CRBG’s major businesses have been poor/lackluster.  Net flows in fixed and variable annuities have been negative (individual annuities have been positive) for most of the past decade.  Group retirement flows have been negative for several years, giving rise to management’s pursuit of fee-driven advisory assets.  Individual life sales in the higher-growth international business has not been enough to offset sluggish results in the domestic block.  Institutional markets sales have been sufficient, but CRBG has been a smaller issuer of PRT and GICs.
• Higher yields should help improve trends in these businesses moving forward.   Institutional markets and other spread products should benefit from the adjusted investment strategy and general yield pickup from rates.  Individual annuity sales will likely be stagnant for the industry around $200bn (where they have been since 2006). The group retirement 403(b) business should grow but trail the 401(k) market.

2. Poor conversion of operating to net income driven by AIG separation

• Net to operating income is ~72% in 2H2022, improving to 86% in 2023 and >95% in 2024 once the separation is fully complete.  Separation expenses will be ~9% of pre-tax operating income in this period
• Primarily driven by ~$750mm CRBG will need to spend to achieve cost savings described above through 2024 (including $350-450mm for systems and the remaining will be used to fund the cost reduction program)
• Historically in the life insurance sector, these expenses can linger and may become recurring in nature which could result in a lower multiple to EPS in this case

3. Controlled company and AIG overhang could weigh on multiple in near term

• CRBG is a controlled company, owned by AIG (78%) and Blackstone (10%).  AIG Chairman and CEO Peter Zaffino is the Chairman of Corebridge until AIG’s ownership falls below 50% and has consent rights for certain actions including share repurchases
• AIG will sell down opportunistically in the next 18-36 months following the expiry of the standard 180 IPO lockup, either in secondary sales or directly to CRBG, which will be a technical headwind for the stock through at least 2024.  Any accelerated sell-down may be viewed negatively by investors
• BX will likely maintain some or all of its 10% stake given the asset management contract in the intermediate term.  BX is allowed to sell 25%, 67%, 75% and 100% after one, two three and five years, except in cases where ownership exceeds 10% as a result of buybacks. Further into the future, BX may become a seller as well

4. Credit risk event in market driven by macro slowdown in near term

• Life insurance stocks historically trade lower during periods that credit risk is a concern, particularly during a recession
• CRBG’s updated investment strategy will generate incremental risk in its asset portfolio, which in turn exposes it to potentially higher investment losses if the credit market deteriorates
• Realized credit losses will likely be manageable, but investors’ perception of risk to increase in such an environment, will likely weigh on the multiple

5. Fees compress in defined contribution market and/or labor market deteriorates

• Group retirement business is attractive given its strong returns (20%+ ROEs in some cases) and relatively low risk profile
• Greater competition in the business as well as increased DOL regulatory scrutiny could crimp margins/returns
• Any protracted labor market deterioration arising from Fed policy or associated recession could pressure already slower historical growth in the core retirement business

Business Overview

Corebridge Financial (CRBG) is a leading life and retirement solutions company that comprises the life & retirement division of American International Group (AIG). The company was spun out of AIG, and the former parent maintains a majority stake (78%) in the business, which it intends to divest over time. AIG acquired the business as part of its acquisitions of American General (2001) and Eli Broad’s SunAmerica Financial Group (1998), two high quality life (AmGen) and retirement (SAFG) franchises.  CRBG has four major operating segments: individual retirement (53% of 2023E earnings), group retirement (25%), life insurance (10%), and institutional markets (11%). The company is among the market leaders in its key business lines. It generates earnings through a combination of spread income, fee income, and underwriting margins. In 2021, AIG received $2.2 billion from Blackstone for a 9.9% stake in the life & retirement business and an agreement to allocate $50 billion of CRBG’s assets (expected to grow to over $90 billion by 2027) to BX. Corebridge began trading as a public company on September 14, 2022 (JPM was lead-left book runner on the IPO). As of 6/30/22, CRBG had total assets of $368 billion, and is expected to generate operating income of $2.5 billion in 2023.

CRBG is a leading competitor in individual retirement (annuity) and group retirement (specifically 403b or teachers’ retirement plans through its subsidiary VALIC), which together generate over three-fourths of its earnings. The company also operates in the individual life market and has a fast-growing institutional markets (stable value, GICs, personal closeouts) business. In our view, scalable market positions and a lower risk in-force block are the two key distinguishing aspects of CRBG’s business. Relative to peers, CRBG has less exposure to problematic products such as VAs with living benefits, UL with secondary guarantees, and LTC. Furthermore, the company’s business mix is levered to rising interest rates, which should drive expansion in investment income and spread margins in most businesses. This, coupled with cost savings, should drive robust growth in the company’s earnings over the next few years. On the other hand, except for institutional markets, organic growth in the company’s businesses is likely to be modest, especially in the group and individual retirement businesses.

Individual Retirement

Individual retirement comprises individual annuity offerings, with the company having leading positions in fixed, fixed indexed and variable annuity (VA) offerings (per LIMRA, CRBG was a top-three operator in terms of sales in all three products in 2021).  As of 2Q 2022, 42% of assets under management and administration (AUMA) were in Vas, 37% in fixed annuities and 21% in fixed indexed annuities.

In terms of VA, 77% of the in-force had a guaranteed minimum withdrawal benefit (GMWB), but only 5% was written prior to 2009 (the time period when the most problematic VAs were written).  The company has embedded risk mitigation features on a significant portion of its VA exposure, including (a) 90% of the GMWB having VIX-indexed rider fees, (b) 90% of GMWB having required fixed account allocations, (c) 67% of the GMWB having volatility-controlled supported limited GMWB net amount of risk of $242mm, or 40bps of total VA AUMA as of 6/30/2022.  Total living benefit amount at risk for Individual retirement is 60bps as of 6/30/2022, the lowest amongst its peer group (ranging from 1.8% MET to 19.3% JXN).

The business has seen consistent strong growth in fixed indexed annuities, and a resurgence of fixed annuity sales in 1H22, supported by the BX asset management partnership.  VA sales have been lackluster and affected by the overall industry reduction in sales, and the entrance of registered indexed linked annuity (RILA) offerings which Corebridge does not offer.  Individual retirement should see solid fixed indexed annuity sales and inflows.  LIMRA projects ~7% industry growth through 2024.  Fixed annuity sales will continue to be aided by yield enhancing activities by BX.  Growth in these areas, as well as spread expansion driven by rates, increased allocation to alternatives and expense discipline should support earnings growth in the 2H2022-2024 timeframe.

Group Retirement

The group retirement business largely comprises CRBG’s VALIC legal entity.  VALIC is a leading provider of defined contribution plans, largely in the 403(b) space.  Group retirement as of 6/30/2022 has ~$115bn of AUMA, spread across in-plan, out-of-plan and advisory and brokerage assets.  While nearly $60bn of AUMA is in Vas, only $2bn has living benefits and the living benefit net amount at risk is a de minimus $12mm.  The segment has faced flow challenges (~$6.5bn of net outflows in 2019-2021) given its market focus and scale of the in-force.  Net flow challenges will likely continue, but the business will be a significant beneficiary of the improved interest rate environment (base yields were up 4bps QoQ) which should support mid to high single-digit earnings growth.

Institutional Markets

The business has grown rapidly, with ~$30bn in reserves at 6/30/2022, and includes Corebridge’s fee-based stable value wrap offering constituting $45bn of AUMA.  The segment’s growth has largely been driven by its pension risk transfer (PRT) business with reserves growing from $1.6bn in 2016 to $11.6bn currently.  Strong outlook for PRT plus the outlook/benefits from the BX partnership on other institutional offerings (GICs and FAs) likely drives earnings to the high-single to low-double digit growth range through 2024.

Individual Life

Business is a top 10 U.S. writer of term life, indexed universal life and smaller face whole life.  Universal life with secondary guarantees is smaller block (~$3bn).  Earnings have been affected by COVID-19 with ~$550mm of impact in 2021 and 1H2022, but is expected to abate and the segment will return to solid profitability.  Earnings should also be improved by new money yields.  International life business (AIG Life UK and Laya Healthcare) continues to provide a growing, stable stream of income.  Premiums have triped to ~$675mm in 2021 since 2017 and is the fourth-ranked provider of individual life in the UK and second largest private medical insurance distributor (fee-only) in Ireland.

Key counterparties

Blackstone

In November 2021, AIG and Blackstone (BX) announced an agreement for BX to manage $50bn of CRBG’s general account by year-end 2021, increasing to $92.5bn by 3Q27. As part of the agreement, BX paid AIG $2.2bn for a 9.9% ownership stake in Corebridge, which it maintains currently. As part of the deal, CRBG has agreed to transfer a minimum amount of assets to BX in each quarter for the next five years, beginning in 4Q22. As such, BX is expected to receive $8.5 billion of assets each year for a total of $92.5 billion by 3Q27. In terms of fees, BX earns an annual management fee of 30 bps on the initial $50 billion of assets transferred to the asset manager, increasing to 45 bps on any additional assets. The 45bps fee will also apply to any portion of the $50 billion of initial assets that are re-invested with BX. Furthermore, if Corebridge does not deliver the agreed upon assets to BX, it is still obligated to pay the management fee on the full amount of assets.

The investment management partnership has a six-year term (from December 2021), with two-year automatic extensions unless terminated. Meanwhile, the Stockholders’ Agreement stipulates certain scenarios where BX is able to sell shares of CRBG’s common stock, including: (i) BX may sell any shares of CRBG common stock after the fifth anniversary of CRBG’s IPO; (ii) if an affiliate of BX is a purchaser of BX’s common stock and becomes bound by the Stockholders’ Agreement; (iii) BX may sell up to 25% of its original investment after the first anniversary of IPO, 65% after the second anniversary, and 75% after the third; (iv) if a share repurchase by CRBG or AIG causes Blackstone’s ownership stake to increase above 9.9%; (5) in case of a change in control; and (6) if CRBG (or AIG, if it remains a 50% or greater shareholder) consents to such sale.

BX’s payment for the 9.9% stake is not as generous as it appears. At first glance, it seems that BX overpaid for its stake in CRBG (roughly a $22.2 billion valuation versus the IPO market cap of $13.8 billion), but this does not consider the value of the asset management agreement. Assigning a reasonable value to fees that BX will earn from managing CRBG assets implies that it acquired the 9.9% stake at a substantial discount. Basic assumptions/market checks corroborate this idea, including (i) typical trading multiples of asset managers on fees (even without assigning a premium for the sticky nature of insurance assets), (ii) multiples paid by asset managers to acquire AUM, and (iii) present value of income on CRBG fees based on normal margins for such assets.

Fortitude Re

In 2018, AIG established a Bermuda-domiciled reinsurance company named Fortitude Re to reinsure parts of the company’s life insurance run-off blocks (including certain annuities written prior to April 2012, whole life, long-term care, and exited accident & health product lines). In November 2018, AIG sold a 19.9% ownership stake in Fortitude to Caryle. In June 2020, the company sold an additional 51.6% to Carlyle and 25% to T&D Holdings. These transactions reduced AIG’s stake in Fortitude to 3.5%, which was contributed to Corebridge in 2021. Given subsequent equity financing by third party investors, CRBG’s ownership of Fortitude has declined further, to roughly 2.5%. The reinsurance transactions with Fortitude were structured as modified coinsurance (or modco) with funds withheld agreements, so assets supporting the agreements remain on CRBG’s balance sheet. These assets reflect a significant proportion of the consideration from CRBG to Fortitude to assume the risk of the ceded liabilities.

Since the assets are on CRBG's balance sheet, it established a funds withheld payable to Fortitude and created a reinsurance asset that represents reserves on the applicable Fortitude business. The reinsurance contract is deemed to contain an embedded derivative as Fortitude is assuming reserves from CRBG but is exposed to credit risk of the issuers of modco assets. The investment assets that support the reinsurance agreements are mostly available for sale securities. Overall, Fortitude is Corebridge’s largest reinsurance relationship.

Valuation

If Corebridge is successful on the following items:

• Management achieves stated cost savings (~$400mm), expanding ROE to 12%+ and growing EPS in the 10-12% range per annum
• CRBG is successful in reviving sales and net flows using its more competitive investment strategy to grow spread-based products, as well as individual life and group retirement to organically grow ~5% (mid-single digits),
• Share repurchases and capital return programs commence as expected and are not delayed, and
• Interest rates rise more than expected as the Fed continues to battle persistent inflation

It would not be unreasonable for the CRBG shares to re-rate closer at or above the peer median, suggesting a $30-32 share price for CRBG.

A severe downside scenario, where none of these goals are met, the equity market further declines another 15% from current 52-week lows, interest rates fall and credit losses impact CRBG’s ability to conduct share repurchases, resulting in 2024 ROEs well below the 12-14% target would likely send the stock into the $18-20 area, assuming earnings declines and multiple compression to ~0.5x BV ex AOCI.  The appears to be highly unlikely given the Fed’s stated path, managements experience and focus, and the underlying quality of the CRBG franchise.

Appendix

Individual Retirement

Group Retirement

Individual Life

Institutional Markets

Life spin-off post-IPO performance

Peers PFG, AFL, LNC, MET, PRU

Secondary sell-down analysis

Sum-of-parts analysis

Catalyst

Management's successful completion of separation and delivery on financial goals

ROE expansion and earnings growth via cost savings, improved flows and higher new money yields

Commencement of capital return program