Good afternoon everyone. I'm Ryan Kruger, Life Insurance Analyst at KBW. It's great to have Corbridge up on stage and Kevin Hogan, the CEO. I also want to acknowledge Elias Hebeyeb, CFO, Isshul Mudrasolu, and Josh Smith from Investor Relations. I worked on those names on pronouncing that. Kevin, so it's been about three years since the IPO of CoreBridge. Can you discuss the progress that the company has made over that time frame and how you feel the company's position going forward?
Yeah, absolutely. Thanks. And first of all, appreciate the opportunity to be here. Nice to see everyone. You know, it's hard to believe in two weeks we'll celebrate the three-year anniversary of our IPO, and I'm very proud of and very pleased with the performance of our team, our partners, and our business since that time. We're executing on all of the strategies necessary to deliver on the targets that we set at the time of the IPO. We said we would deliver a 12 to 14 percent roe in 2024 we delivered that we said we deceive us achieve a 60 to 65 percent payout ratio excluding transactions and we've been able to be delivering on that and we indicated we would maintain the strength of our balance sheet at a fort you know 400 rbc ratio and we've been able to grow the business while doing that the four levers that we're pulling the four elements of the strategy start with organic growth and since the time of the IPO we've been able to increase our sales you know annual sales volume on average around 30 percent uh you know just as an example uh the second element is balance sheet optimization and through a number of transactions including most recently our variable annuity reinsurance transaction you know we've demonstrated a lot of optimization of our liability portfolio. But through the course of the last couple of years, we've also engaged in some attractive asset repositioning. We said that we would focus on expense efficiencies, and since the time of the IPO, we've reduced our annual run rate expenses by around $400 million, and we indicated we would engage in active capital management. And on top of that 30% growth in our annual sales, we've been able to return $6 billion to our shareholders since the time of the IPO, even before the proceeds from the variable annuity transactions. So we feel good that we're on track and delivering on all of our targets. We've also simplified the company since the time of the IPO. We have divested our international subsidiaries, and then we engaged in a big de-risking transaction, generating $2.1 billion in proceeds on the VA sale. So we improved our risk profile. We improved our earnings quality. We are now a pure play U.S.-focused retirement and life insurance provider. We go to market with four market-leading businesses, and each of those businesses are in a very strong position, and they're all supported by the same macro tailwinds that really drive the opportunity for our industry and for our company. And that's the aging of America, the fact that people realize they need to look after themselves, and a very supportive advisor community. So, you know, with the economic conditions where they are, we very much expect to deliver on that 10% to 15% per year growth in earnings per share over time. and ultimately, you know, we're three years old. Like many startups, we feel like we're just getting started.
Great, thanks. Well, you mentioned the variable annuity transaction a couple times. I wanted to dig into that a little bit. It was a very large transaction you are doing with Venerable where you're exiting your entire variable annuity business in the retail side. Can you talk more about why you decided to do that, both strategically and financially?
Absolutely. Absolutely. So variable annuity was an important growth engine for us for many years. And the reality is that customer interest, advisor interest, started moving away from the traditional VA business quite a while ago. And this portfolio has been in decline and negative outflows for eight years. so you know it's ultimately a kind of a declining asset and we saw the opportunity to monetize that declining asset and we're able to achieve a transaction that you know we believe has been very very attractive for our shareholders with the reality is is that this type of business is not very well valued by our investors it's not appreciated by our investors so the multiple that investors attribute to it versus what we could achieve in a transaction where you know at very different areas and that's why we believe this is you know the single biggest source of value creation we've achieved since the IPO itself so you know ultimately financially it was very attractive with the proceeds of 2.1 you know billion dollars that's multiple around seven times ultimately the you know the earnings uh you know i think that that is really ultimately an attractive transaction simplify the company reduce the risk create great value for shareholders and with those proceeds you know we are allocating the substantial majority of the proceeds to uh returning capital to shareholders in the form of buybacks and i'll get back to that in a second but we also are investing in further organic growth in our business and investing in capabilities to support that organic growth. So, you know, in terms of the actual, you know, transaction itself, we've closed on 90% of the value of the transaction, which is our legal entity in Texas, AGL, and those proceeds will go through the normal dividend distribution process from the insurance company to the parent. We expect to begin to put those to work in the fourth quarter of this year and then we will continue the buyback program and we expect that this whole transaction will be accreted by the second half of next year and we'll get through the buyback program by then so ultimately I think this is a great source of value creation that's an excellent transaction we structured it in a way to protect ourselves from the various elements of risk associated with the transaction like that and it's allowing our company it's allowing our management to now fully focus on the future opportunities, which are many.
So you did the variable annuity transaction. You also divested your international businesses since the IPO. Is there anything else that could be a potential opportunity from a reinsurance standpoint that could create further value for shareholders? And what are the key criteria you look at when you think about things like that?
Absolutely. We're always looking for opportunities to create shareholder value. Transactions are an additional way for us to do that. And as we look at opportunities, what we're looking for are transactions that are accretive, both in terms of economic value, but also structure. And so to the extent that there are opportunities similar to the transaction that we did on VA, where we can achieve attractive economics, where we make the company better and we're able to structure in a protective way the elements of this transaction then we'll look at that as part of our available opportunities and then in terms of how to deploy the capital associated with that we'll also run that through our disciplined process of thinking about capital management at the time moving to expenses so you mentioned you you've completed the core bridge forward program of the 400 million annual expense saves.
What were the key things that drove those expense saves? And then do you see further room for more efficiency gains going forward, whether it be in dollars or more like an expense ratio?
Yeah, absolutely. So, you know, Corbridge Forward was our modernization and efficiency program we launched at the time of the IPO. There were three major components to it. The first was increasing our work with outsourcing partners and ultimately there's you know a process called compressed transformation associated with that that's where we move the middle and back office activities over to our partner and then the process after that is to invest in automation and digitization of those underlying processes and then ultimately to bring in more advanced tools like artificial intelligence to improve the customer distribution partner experience and position ourselves for the long-term future. So, you know, that outsourcing, you know, is an important contributor to the saves associated with the forward program. The second element was our IT modernization. We moved all of our IT administration to one version of the cloud or another. That allowed us to completely exit our data centers, and we sold our data centers. So So we're completely out of that end of the infrastructure. And then the third element of Corbridge Forward is what I think of as hygiene. We improved some of our procurement practices. We rationalized our real estate footprint. In many ways, this was the right sizing of the company for the business that we are. And that's just a jumping off point for us. Because in looking at, you know, the opportunity beyond CoreBridge forward, you know, our intention is to drive down our unit costs. And so we continue to invest in automation and digitization, particularly in the finance and the actuarial areas. We recently completed and are in the process of completing an early retirement program, which start, you know, further repositions the company for the future. and a part of that will be additional savings that drops to the bottom line but a part of it we will use to continue investing in automation and digitization and building new capabilities for the long-term future of the business you know all of these things will further improve our operating leverage but but I will you know add that whilst we've made dramatic improvement in expenses and a lot of progress it isn't going to be linear all the time and in fact as we look at the second half of this year we would expect that you know rather than our normal run rate our compensation expenses are around 25 million higher than what our normal run rate would be because of the fact of our performance relative to our plan but longer term we expect to continue to drive our unit costs down and that's going to happen through further automation efficiency and organizational design maybe just quick clarification is the 25 million will that be spread through the two quarters, or will it be in one specific quarter?
Spread through the two? I guess shifting more to the growth side of the business, individual annuity sales in the U.S. were around $250 billion for 15 straight years, and now they're approaching $450 billion, so they're up significantly. What would you attribute that to for the industry and for Corbridge, and when you look forward, Or do you think that the industry can continue to maintain that type of higher level of sales or continue to grow it going forward?
Yeah, I absolutely do. You know, I think that the trends for the business continue to be very, very strong. Let's start with the macro drivers. So there's three main drivers. One is the aging of America. You know, peak 65, whatever you want to call it, 4 million people turning 65 this year and pretty much every year for the foreseeable future. And even looking beyond peak 65, if you look at the shape of the demographic pyramid of the country, the shape, even looking out to 2050, doesn't necessarily change. There's going to be a continuous recycling from the younger to the older population in a flat demographic pyramid. And that means that this opportunity for the industry is here to stay. The second element that is driving, I think, the conditions for annuities is the fact that people, for the first time, are finally coming to grips with the fact that they have to look after themselves for their own retirements. They have to look after themselves for that long-term financial planning because many of the available safety nets, like defined benefit pensions, etc., just aren't there. And so that's driving, you know, a lot of the demand side of the equation. And then the third element is the advisor community itself. As the advisor industry continues to professionalize, as there's a new generation, a whole new generation of advisors have discovered the importance, the value of fixed income-like investments as part of an asset allocation for a long-term savings plan. You know, that's a third driver of the opportunity for annuities. And so those macro drivers, the tailwinds are there, and they're strong and long-term. The second element is the fact that the economic factor most important to pricing annuities at an attractive level is really the 5- to 10-year part of the curve, the belly of the curve. And irrespective of what may happen on the short end, the reality is looking at the forwards for that 5- to 10-year area, it's going to continue to be a very attractive environment for pricing annuities for, you know, the medium term. And ultimately, then we look at our own business and the fact that we have a broad range of products and we serve a broad range of channels so that we're able to work through whether they may be competition cycles or market cycles, etc. We do expect long-term growth prospects in this business. And irrespective of surrenders, et cetera, with the enforced portfolios, we expect to, you know, grow our general account and to grow the spread earnings over time. So I don't think that this is a short-term trend with annuities. I think that they have a very important role to play in these long-term financial plans, and the conditions are very, very attractive for the business.
Thanks. I guess one thing that has happened as the growth has picked up and companies like Corbidge and others have had success is more competitors have entered the space, particularly focused on spread-based annuities. Can you discuss your view of the competitive environment in annuities at this point? Is it causing much of an impact for you, or are you still able to earn the returns that you're targeting with good growth?
Yes. Yes. So the way I think about rationality of competition is whether we can achieve our margins on the new business that we want to write. And right now we are achieving the margins that we're looking for in that business, in all of the products in that business. Some products are more subject to market cycles or external events than others, like fixed annuities is a little bit more volatile. but the long-term growth trends are there for indexed annuity and our most recent product, Ryla, which is off to a good start, and I'll come back to that in a minute. So we haven't necessarily seen signs of irrational competition. Now, we have a broad range of products, and we work through a broad range of distribution partners. And our strategy is to understand our distribution partners and how to think about their strategies and to have enough options for them so that for whichever advisor it is working with a customer, one of our solutions makes sense. And that's something that allows us to, you know, work kind of beyond some of these competitive cycles because from time to time, you know, a particular competitor or another may choose a promotional pricing strategy in one particular channel or one particular partner, et cetera. We have enough options that we can focus on putting our new business capital to work where the risk adjusted returns are the most attractive and the customer needs are the greatest at any given point in time. And we really do understand, you know, our distribution partners needs. And this is, I think, an important differentiator. You know, around 10 years ago, we established, you know, a strategy to focus on the top 50 largest independent distribution organizations in the United States. And to understand what their strategies are two, three, four years down the road so that we can build products and services to integrate ourselves with their strategies for the longer term. And that's led us to differentiating features in our products. So if you look at the retail annuities that we sell, around 40% of them have a feature which is proprietary to a single distribution partner. So we have a different access, a different relationship with many of these distribution partners that facilitates us competing through the cycle. And for example, our Ryla product really benefited from the insight we gain working with those distribution partners. Because before even putting pen to paper on the product itself, you know, we spent eight months with our largest distribution partners accessing their advisors and getting insight into what are the most attractive features of the products now in the market, because it was a pretty robust market. it? And then what are the features that are not attractive? And then what might be features that are missing? And then we took all of that back. So when we launched our product, we had best of breed for all of the features that were attractive and supported by advisors. And then we layered on additional features which are differentiated for our product. And the response has been outstanding. Even though we launched the product in only late October, by the end of the second quarter, we had already done a billion dollars worth of sales. And what I feel particularly good about is not only did we have that success in RILA, in the second quarter we saw record index sales as well. So we're not seeing any kind of cannibalization effect across them. And then of the advisors that produce the RILA for us, 75% of them are advisors that have already produced other products for us, and 25% of them are actually brand-new advisors to producing for us. So that's now an expansion of our distribution footprint, and we have the opportunity to work with them with respect to our other products. So this aspect of the relationship with our distribution partners and how that facilitates our product development engine and our field force that supports it is one of the things that facilitates us competing through these various cycles.
Great. Maybe shifting to the group retirement business, you've been talking for a while about this gradual shift away from spread-based business towards fee-based business. Can you expand on the dynamics that are going on there and how you feel the business is positioned?
Absolutely. Well, I feel the business is positioned extremely well. And the dynamic that's going on is in the 403B, 457 business, if you go back maybe 15 years ago, New teachers or healthcare workers, when they were enrolling in plans, were almost always enrolling and putting their money in the fixed account element of the 403B structure. You know, conservative investors, etc. And gradually what happened is that the industry moved to an open mutual fund platform. And so the initial investments starting about 10, 15 years ago were going into the open mutual fund platform. Now, the fixed account in the 403B is essentially a spread business, whereas the mutual fund platform is more of a fee business. And so that is kind of the beginning of the transition. You can imagine people that started when they were younger contributing to the fixed deposits continued to do so, and then now there were younger participants in a group mutual fund or more recently an advisory platform. And so the gradual shift that's taking place is is that with the aging of the customer base because we've been in this business for decades right are the people that really represent the spread business and as they're utilizing you know their accounts that we see that spread business decline and we're growing the fee income part of the business and there's three parts to the the fee income right there's the mutual fund platform in-plan advisory and the out-of-plan advisory between those three sources of fee income the asset base is already over a hundred billion dollars and the trend that we've seen is is that the majority of the earnings now comes from fee income in that business and we're reinforcing our value proposition in that business because what happens is you know we're really the secret to this business is valid financial advisors the 1100 field force of professionals that we have in place that work with plan sponsors to ensure they have the right options available. They work with enrollees in the plans to make sure they're making smart investment decisions and investing what they should be at the right time. And then they have an opportunity to build that relationship over 20 years or 30 years to the point where that individual may retire and then engage in household asset consolidation. And that's where our advisors really become wealth managers for the upper end of the customer base that's there. And so that, you know, we have a career opportunity for advisors that includes all of those phases. And the part of the business that really is, I think, the most strategic is those 1.6 million customers that we have that have yet to retire. So we're investing in the advisor base itself. We're growing the advisor footprint for both the in-plan and the out-of-plan slash wealth management part of the business, we're also investing in the digital tools necessary to improve the productivity and efficiency of those advisors. So yes, there's going to be a shift in the business from spread to fee income, but this is really a distribution opportunity and a wealth management opportunity as we enhance the tools that we have available to serve those participants in the plans as they age and retire.
I guess going back the other direction to spread again, one area that started to emerge, it may take time, but is in-plan annuities in 401k plans. I know you don't have a 401k business, but could there be an opportunity to partner with someone else and where Corbridge could be a provider of an in-plan annuity to be another avenue to grow guaranteed income?
Absolutely. We've actually been actively exploring options for in-plan income for, I think it's over four years now. And we have a small team dedicated to that. I believe it's going to be a huge opportunity one day. But it's early in the manifestation of that opportunity. And there's different strategies that are being tried. In-plan annuities is one potential approach to it that's been maybe the more common one stripping out elements of benefits or guarantees and incorporating those into plans there's a variety of different ideas as to how to structure an income benefit into uh you know a plan like that and there's similar opportunities even in ria platforms and other areas to unbundle the product uh in in certain ways and so we have a number of efforts going on where we're looking to test and learn about where the ultimate success is going to come from and the ultimate success will come but I think we're in early stages and and the opportunity is is very significant you just look at the total of the defined contribution asset pool it's absolutely enormous and when you add on top of that the macro trends the aging and that people are aware they have to look after themselves even the younger generations below the baby boomers are already aware of the fact that they have to look after themselves for that long term. And so I think that's going to continue to drive the need for things like in-plan annuities or unbundled products as part of investment platforms.
In the institutional markets business, one of the product areas is pension risk transfer in the US. The market's been a little bit slower, at least so far this year. What do you think is causing that, and how does the pipeline look going forward?
Look, the pipeline for the U.S. pension risk transfer business continues to look very attractive. And I'll add that it does for the U.K. as well, and we participate in the U.K. as a reinsurer. And the reality is that the fundamentals of the reasons why pension risk transfer is attractive for plan sponsors to engage in are still intact, which is that plans are fully funded and their investors would like to see them out of the business of managing a large financial balance sheet exposure and in our experience once a company makes a decision to engage in a transaction they very rarely reverse that decision and there's lots of companies out there that have made that decision and are working their way through the process because these can be sophisticated transactions they're complex and they do take time to manifest and develop and that's why you know you don't necessarily see one every quarter or every two quarters, whatever it may be. The pipeline in the U.S. is as strong as we've seen it. Now, you know, one thing that can defer action is extreme volatility. So a sponsor that may have made a decision may make a decision to execute later when there's underlying volatility. We saw a little bit of that in the first half. But, you know, we continue to see, you know, an attractive position in this business. Now, we focus on full plan terminations, which is a subset of that market. We made that decision over 10 years ago, and we invested in the administrative capabilities to support the optionality of full plan terminations. And, you know, our average transactions are, say, between, you know, half a billion and a billion and a half dollars. You know, we find the economics and the full plan terminations more attractive because there are fewer companies that have built that administrative capability to support those underlying options. So we feel great about our position in the U.S. and the U.K. I think that the reason why it was maybe a little slow in the first half is because of the external sort of volatility and there's no structural change in the underlying opportunity for pension risk transfer.
Got it. You know, you've also become a more larger and more regular issuer of GICs. Are there any practical limits to how big you could grow that business? And then are there any other similar spread lending type of products that you don't offer currently that you could offer?
Look, we're very pleased with our performance in the GIC business. Before the IPO, this is one of the things that we indicated that we could do more with than before the IPO, and we promised to become a more regular issuer, and we have. We relaunched our FABN program, and as of the second quarter, we've issued over a billion dollars for five quarters in a row, so we've really reestablished ourselves there. But we see opportunities beyond FABNs in the U.S. I'll quickly add that the gig business is a very financially attractive business. It's a little bit opportunistic, but we definitely transact GICs when we see margins in the mid-teens, and that's what we continue to look for as we incrementally grow that portfolio. We have more room in the balance sheet for GICs than what we've exercised on so far, but don't look to see us shoot to the top of the leaderboard. Like with everything, we will incrementally grow the GIC portfolio with discipline when we see the opportunities. Our liabilities do not include a lot of optionality, so this is a low-risk business, the way that we've managed it. But we do see opportunities beyond the U.S. FABNs, including international issuance, potentially, and then areas such as private placements, etc. But there's a lot of different manifestations for spread businesses beyond, you know, GICs, FABNs, etc., and we're always open-minded to new opportunities.
In the life insurance business, can you talk about how it's performing and also what differentiates it from some of your peers that have generally been seeing more challenges in that business?
Look, I think our success in the life business goes back over 10 years ago when we invested in our data infrastructure and started building our automated underwriting capabilities. And then a couple of years later, we made the decision to reposition our product suite to move away from interest-sensitive products, to focus on more middle-market products, and to build our digital end-to-end capability to simplify transactions in that part of the business. And we've really benefited from that. You know, we've outgrown the market eight of the last nine quarters. Our mortality has continued to be better than our pricing expectation more often than not. and we're seeing tremendous growth in that middle market digital platform. So, you know, we believe we have built a sustainable competitive advantage there. You know, our automated underwriting, 80% of our transactions go through without touching a human hand for those eligible transactions. So all of those things are contributing to the success in our life insurance business and the fact that we've been disciplined in risk management for many years in that underlying portfolio. So, you know, there's a huge opportunity in life. There's a tremendous amount of under-insurance. There's an awareness of that under-insurance. And I think as technology makes it easier for people to say, yes, we will continue to see incremental growth in the life insurance business. And that's very valuable to us because aside from, you know, the actual earnings that it generates, it's a tremendous source of cash flow. And so, you know, the cash flows, as well as the earnings and incrementally growing those are extremely attractive relative to our position in the life insurance business.
Great. Nippon Life became a 20% shareholder in December. Other than their ownership stake, do you see any business-related synergies with Nippon as you work together going forward?
Yeah, absolutely. You know, in the public domain that, you know, we've committed to each other to explore mutual commercial opportunities as part of their original investment in the company. And there's a number of areas we can do that. Nippon Life is a tremendous company. I actually was visiting them just a few weeks ago. And, you know, the amount of modernization they've engaged in since the pandemic is really quite something to see. And I think that there's a number of areas that we have opportunities to work with them. One is potentially in the product area. The products in our market, the products in their market are quite different. And the environment's changing in those markets. So there are things that, you know, we can learn from each other there. There's opportunities relative to investments and asset management that we have opportunities to explore. and then there's actual digital technologies and operational strategies and things like that relative to their modernization that we're exploring. So we have a structured process in place to evaluate these opportunities, decide which ones to prioritize, and at an appropriate time we'll be happy to be more public about what some of those might be.
Now that we're a couple of months into the quarter, I'll ask one on variable investment income, do you have any, I guess, more insight at this point into what either the third quarter may look like or the back half of the year?
Yeah, absolutely. So look, alternatives are an important asset class to us, especially relative to some of our longer dated liabilities and their illiquid periods. And, you know, we continue to believe that alternatives will deliver that eight to nine percent over time. We haven't necessarily seen that more recently, but if you look at over the last five years we've regularly outperformed that that benchmark and you know we did have a strong second quarter we explained during the earnings call why that was as we look at the back half of the year we've already indicated that we don't expect it to be consistent with that eight to nine percent part of that's you know the real estate equity market where there's lots of green shoots but not so much activity right now and so where we are in the third quarter you know right now based on what we've seen we would expect around 50 million dollars in alternatives which is below that eight to nine percent target but I'll also quickly add the quarter is not over yet and so you know by the end of the quarter it could be a different number but that's based on everything we've seen so far that's where we are got it thanks then my last one was just on capital deployment.
You've talked a lot about the 60 to 65% capital return ratio. One thing I guess we haven't really talked about much is M&A, both on M&A. Is that something that interests you at all or you really focus mostly on just organic growth, dividends, buybacks?
Look, we're focused on creating shareholder value. And so we explore all options for the creation of shareholder value and then we work things through our capital management tiering and priorities. We don't see any glaring holes in the portfolio at this point in time. We worked hard in the last 10 years, well before the IPO, in honing our business into the four U.S. market-leading businesses that we are. And so far, based on where our share price has been and where opportunities have been, and it's been extremely accretive for us to engage in the capital management that we've been engaging in. And so, you know, we're not ruling out M&A. We don't see any necessary immediate opportunities, but we'll continue to be disciplined about our capital management.
Great. We're just about out of time, so I think we're going to wrap it up there. Thank you very much, Kevin and the Corbridge team.
Thank you. Thank you.