2022 | 2023 | ||||||
Price: | 21.98 | EPS | 2.67 | 3.82 | |||
Shares Out. (in M): | 645 | P/E | 8.0 | 5.75 | |||
Market Cap (in $M): | 14,164 | P/FCF | n/a | n/a | |||
Net Debt (in $M): | 9,848 | EBIT | 0 | 0 | |||
TEV (in $M): | 24,012 | TEV/EBIT | n/a | n/a |
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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
Risks
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:
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