Corebridge Financial Inc

NYSE:CRBG

Earnings Call Transcript 2023-Q1

[Operator]

Hello, and welcome to the Corebridge Financial First Quarter 2023 Earnings Call. My name is Lauren, and I will be coordinating your call today. [Operator Instructions]

I will now hand you over to your host, Josh Smith, Head of Investor Relations, to begin. Please go ahead.

[Josh Smith, Head of Investor Relations]

Good morning, everyone, and welcome to Corebridge Financial’s earnings update for the first quarter of 2023. 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.

As a reminder, our financial results reflect the implementation of long-duration targeted improvement accounting guidance or LDTI. Historical results for 2021 and 2022 have been restated and are available in our recast financial supplement posted to our website at investors.corebridgefinancial.com.

Today’s remarks 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. Corebridge’s filings with the SEC provide details on important factors that may cause actual results or events to differ materially. Except as required by the applicable securities laws, Corebridge is under no obligation to update any forward-looking statements and circumstances or management’s estimates or opinions should change.

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.

With that, I would now like to turn the call over to Kevin.

[Kevin Hogan, President and Chief Executive Officer]

Thank you, Josh, and good morning, everyone. Corebridge is off to a very good start in 2023, having delivered another excellent quarter. Our businesses generated great results, and we continue to make advances on our strategic initiatives.

Today, I will update you on the progress we are making towards our financial goals, including an important development in our capital management program. I will also speak to our business performance and strategic initiatives, concluding with comments on our disciplined approach to risk management and high-quality investment portfolio. Elias will then provide additional detail on our financial results and a deep dive into our commercial real estate portfolio.

As we have said before, Corebridge Financial is committed to deploying capital to create value for our shareholders. Since our IPO, we have returned approximately $450 million in dividends to our shareholders. And today, we announced our fourth consecutive quarterly dividend of $0.23 per share, totaling approximately $150 million.

We have been working to complement our dividend program with additional return of capital. And last week, our Board of Directors authorized a share repurchase program of up to $1 billion. This share repurchase program is a reflection of our confidence in the strength of our financial position as we balance investments in long-term growth while maintaining a strong balance sheet with ample levels of liquidity and capital. It is an important step towards our ultimate goal of providing an attractive return for shareholders.

Now turning to our results. We delivered earnings per share of $0.97 with adjusted return on average equity of 10.8% and adjusted pre-tax operating income of $724 million. Corebridge’s business is positioned to perform across various market cycles. This quarter demonstrates once more that we can consistently deliver strong results across our diversified businesses.

Adjusting for variable investment income, which was impacted by capital markets dislocation, the earnings power of our insurance businesses improved year-over-year. Tailwinds from higher interest rates, wider credit spreads and favorable mortality experience more than offset headwinds from equity market performance. This was the second consecutive quarter, our aggregate core sources of income grew by 15% on a year-over-year basis.

Base spread income grew 38% compared to the prior year, due in part to higher new money rates and continuing growth in spread-based products. This quarter, we delivered very strong sales with attractive margins, generating higher general account cash flows. Across our four lines of business, we generated total premiums and deposits of $10.3 billion, up 45% compared to the prior year. The largest drivers of new deposits in the current quarter were $2.2 billion of fixed annuity sales and $2.1 billion of fixed index annuity sales and individual retirement.

In addition, we delivered $1.5 billion in Pension Risk Transfer and $500 million in GIC issuance, both in Institutional Markets. The higher interest rates that have been driving our strong retail spread-based products over the last few quarters are as expected, also leading to higher levels of fixed annuity surrenders. That said, sales growth continues to outpace surrenders in our Individual Retirement business.

For the quarter, general account net flows from Individual Retirement were positive at nearly $1.3 billion, up from approximately $700 million last quarter, despite an increase in surrender rates. In addition, liquidity in our insurance companies remain strong, and we continue to maintain a tight ALM profile. While delivering these excellent business results, we also advanced our key strategic initiatives, namely investment partnerships, Corebridge Forward and operational separation from AIG.

Let me spend a moment on all three. We continue to see great value from our growing relationships with Blackstone and BlackRock. Our partnership with Blackstone is delivering for our company, our partners and our customers.

In the first quarter, Blackstone executed approximately $3 billion of new investments across a variety of asset classes at an average gross yield of 6.5% and average credit quality of AA. Since the beginning of our partnership, Blackstone has invested approximately $11 billion on our behalf, giving us greater access to certain asset classes that are well matched to the insurance liabilities we originate. With respect to BlackRock, they executed on nearly $1 billion in new investments during the first quarter, some of which supported our Institutional Markets businesses.

Turning to Corebridge Forward, our modernization program that will deliver both expense reduction and increased efficiency, we continue to advance this strategic initiative, having achieved or contracted on 70% of our exit run rate savings goal of $400 million.

And lastly, we remain on track with our operational separation from AIG. Given the progress we have made in establishing our capabilities as a publicly traded company, the bulk of what remains is focused on the separation of shared IT applications, which we expect will be mostly complete in 2023. To date, we have incurred approximately $230 million of costs associated with our separation efforts.

In addition to these initiatives, we continually assess our business portfolio as we position Corebridge for the future as a fully standalone company. After a comprehensive review, as announced last week on AIG’s earnings call, we decided to evaluate strategic alternatives and a potential sale of our health insurance business in Ireland, which is distributed through the Laya Healthcare MGA and underwritten by a third-party. We believe this will help streamline the Corebridge portfolio and allow us to focus on Life & Retirement products and solutions.

Before I address our investment portfolio, I want to begin with a few words on risk management, which is integral to how we manage Corebridge. We have a disciplined risk management framework focused on both sides of the balance sheet. This prepares us for a range of environments, including periods of market dislocation like we saw in the first quarter. We are heavily focused on ALM, which is embedded in how we manage the balance sheet. And our broad enterprise-wide thinking around risk includes liquidity, credit risk and capital management as well as periodic stress testing.

On the liability side, risk management involves our broad product portfolio, intelligent product design and dynamic product management. On the asset side, risk management includes an investment portfolio that is aligned with our risk appetite and well matched to our liabilities.

Elias will speak in more detail on our investment portfolio, but I want to share a few highlights. We have a high-quality and well-diversified investment portfolio that is predominantly concentrated in investment-grade fixed income assets. We strive to achieve strong risk-adjusted returns while matching the duration and liquidity needs of our liabilities.

We derisked the portfolio over the last several years and we are comfortable with our exposure to commercial real estate. Our commercial mortgage loans are senior-secured on high-quality properties that are well diversified by type and geography with strong debt service coverage and LTV ratios in addition to adequate reserves.

As a long-term investor with a strong balance sheet, Corebridge is not only well positioned to weather periods of market dislocation, but also able to capture new opportunities as they arise, all while maintaining our disciplined approach to ALM and credit risk management.

We proactively manage risk in the portfolio based on our expectations of the future compared to market opportunities. As an example, with the relative strength of the capital markets early in the year, we took further action to derisk our portfolio. We intentionally reduced our exposure to below investment-grade corporate bonds and as a result, upgraded the quality of the portfolio, improved yields and increased liquidity, all with immaterial impact to our interest maintenance reserve. Our positive IMR remains a very healthy $2 billion even after these trades. In addition, during the first quarter, we sold our CLO manager, further simplifying our exposures.

In summary, we take great pride in our disciplined risk management, which has safeguarded our operations over time and prepares us to weather many different economic cycles. We remain steadfast on our course in the face of recent events and general market uncertainty.

As we look ahead, we remain focused on pursuing our strategic initiatives and financial goals, fulfilling the commitments we made in connection with our IPO and creating sustainable long-term value for all our stakeholders.

I will now turn the call over to Elias.

[Elias Habayeb, Chief Financial Officer]

Thank you, Kevin. I will provide additional information on our financial results and key performance metrics as well as comment on our investment portfolio, including office exposure within the commercial mortgage loan portfolio. But first, I’d like to make a couple of comments on LDTI.

Last week, we released our restated 2021 and 2022 results for LDTI. As we previously said, we expect LDTI to reduce volatility in our operating results by minimizing the impact from variability in market conditions and mortality experience. At the same time, LDTI increased our adjusted book value as of December 31, 2022 by approximately $2 billion to $23.4 billion. That being said, LDTI does not impact the economics of our business nor our statutory capital and cash flows.

Turning to our financial results. As Kevin noted, we had strong first quarter results driven by growing base spread income. Our operating EPS was $0.97, our adjusted ROE was 10.8%, and our adjusted pre-tax operating income was $724 million. This includes a notable item that contributed $0.06 to EPS and was offset by alternative investment returns below our long-term expectations by $0.14.

Adjusting for these items, our operating EPS for the quarter would have been $1.05. In addition, our adjusted ROE would have exceeded 11% even with the higher adjusted book value from LDTI. This demonstrates the progress we’re making towards achieving our target of 12% to 14% in 2024.

With respect to adjusted pre-tax operating income, our results were $185 million below the prior year due to lower variable investment income, which accounted for over $270 million of the decline as well as $70 million of additional interest expense resulting from financial debt issued in the second and third quarters of 2022.

Excluding variable investment income, adjusted pre-tax operating income was 14% higher than the first quarter of 2022, largely due to increasing base spread income and improved mortality experience.

Sequentially, our reported adjusted pre-tax operating income was $20 million higher than the fourth quarter. Excluding variable investment income, adjusted pre-tax operating income was 2% higher, largely due to increasing base spread income, partially offset by $43 million of favorable non-recurring items in the fourth quarter.

Our core sources of income in aggregate increased by 15%, driven by growth in base spread income and improvement in underwriting margins, partially offset by lower fee income.

Shifting to net investment income. Base yield was 4.42% in the fourth quarter, up 60 basis points year-on-year. This was the third consecutive quarter of significant growth, driven by a combination of reinvestment activity at higher new money rates and resets on floating rate assets as well as an increase in total invested assets.

Average new money yields were 6.5% in the fourth quarter, which was approximately 230 basis points higher than the average yield on assets rolling out of our portfolio. Stripping out the notable item in base net investment income from last quarter, base yields improved 15 basis points on a sequential basis. In aggregate, this improvement far outweighed any increase in policyholder crediting rates.

Moving to expenses. Our GOE declined 2% sequentially. The benefits of the Corebridge Forward savings earning in were offset by incremental costs related to our establishment of our standalone capabilities as well as regular first quarter seasonality and compensation expense.

Next, I will speak briefly about our segment results. Individual Retirement reported adjusted pre-tax operating income of $534 million for the quarter, an increase of 14% year-over-year or an increase of 55% after excluding variable investment income. Base spread income rose 49% over the prior year, driven by spread expansion and growth in general account products, while base net investment spreads increased 71 basis points year-over-year and 17 basis points sequentially.

Fee income declined by 10% due to lower asset valuations and net outflows in our variable annuity portfolio. Fee income was flat relative to the fourth quarter, reflecting stabilization in asset values.

As Kevin mentioned, general account net flows were positive at nearly $1.3 billion, up from approximately $700 million last quarter, despite an increase in surrender rates. Group Retirement reported adjusted pre-tax operating income of $186 million for the quarter, a decrease of 23% year-over-year or an increase of 7% after excluding variable investment income.

Base spread income grew 20% from the first quarter of 2022 due to spread expansion, while fee income declined 12% year-over-year due to lower asset valuations and net outflows.

Base net investment spread increased 24 basis points year-over-year, but decreased 7 basis points sequentially. The sequential quarter decline is driven by 10 basis points rise in cost of funds, largely attributed to out-of-plan fixed annuity product growth and higher crediting rates based on annual resets to certain in-force products. This more than offset the sequential increase in base yield.

Consistent with previous quarters, we continue to see outflows concentrated in the higher GMIR buckets. We expect this trend to improve the profitability of the business over time.

Looking at projections for next quarter, we expect net flows will – net outflows will increase due to additional planned losses, but with limited impact to the general account. As a reminder, plan acquisitions and losses are nonlinear and vary from quarter-to-quarter. Also, we’re seeing a general pickup in plan activity, both acquisitions and losses as COVID moves from pandemic to endemic and plan sponsors are more willing to put plans out a bit.

Life Insurance reported adjusted pre-tax operating income of $82 million for the quarter, a decrease of 2% year-over-year or an increase of 148% after excluding variable investment income. Underwriting margin, excluding variable investment income, improved 11% year-over-year due to improved mortality experience and higher base portfolio income.

With the adoption of LDTI, variability in operating earnings for traditional life products like term is muted given that actual mortality experience will be largely offset by reserve releases in any single period. However, that’s not the case for universal life as the accounting is not impacted by LDTI and where our experience was favorable in the first quarter.

Institutional Markets reported adjusted pre-tax operating income of $85 million for the quarter, a decrease of 26% year-over-year or an increase of 3% after excluding variable investment income.

Core sources of income expanded 7% over the prior year, largely due to base spread income, while reserves for our Pension Risk Transfer business grew 33% year-over-year on an original discount basis.

And lastly, our Corporate and Other segment reported a loss of $163 million for the quarter. This loss is largely consistent with our expectations given new parent company expenses as well as our standalone capital structure.

I will now provide some comments about our balance sheet, liquidity and capital. We assess our balance sheet through different lenses, including but not limited to, financial leverage, liquidity, capital and the overall risk profile. By each of these measures, our balance sheet is very healthy and strong.

Adjusted book value was $23.3 billion or $35.88 per share, up 4% year-over-year, but down 1% from the fourth quarter. The sequential decline was due to non-operating mark-to-market losses.

Our financial leverage ratio was 27.9%, which is well within our target range. We continue to expect that our balance sheet will naturally delever over time as a result of book value growth. And as a reminder, the next debt maturity is in 2025. We ended the quarter with holding company liquidity of $1.8 billion, an increase from $1.5 billion in the fourth quarter.

Our insurance companies distributed $500 million during the first quarter. And as Kevin noted, we paid dividends to our shareholders of approximately $150 million, bringing the total paid to shareholders since the IPO to approximately $450 million. We declared our dividend for the second quarter of 2023, which will be paid on June 30.

Our Life Fleet RBC ratio remains very strong. We estimate our first quarter Life Fleet RBC ratio to be in the range of 410% to 420% and exceeding our year-end RBC ratio of 411%.

Next, I will spend a few minutes talking about our investment portfolio. Corebridge has a high-quality, well-diversified investment portfolio that’s actively managed. Portfolio construction is backed by rigorous underwriting, monitoring and credit risk management processes designed to protect and optimize the balance sheet.

The GAAP-carrying value of our general account investment portfolio was $193 billion as of March 31, 2023. Approximately 94% of our fixed income investments were rated investment grade. Our NAIC 3 to 6 investments were $8.4 billion, a figure that’s approximately $600 million lower than the end of 2022, in part due to the derisking actions that Kevin described earlier.

Now turning to commercial mortgage loans. Like our broader investment strategy, our commercial mortgage loan portfolio is high-quality, well-diversified and actively managed to support our insurance liabilities. It’s backed by a disciplined and rigorous approach to underwriting and risk management. In addition, the valuations of the underlying properties are updated on an annual basis.

As of March 31, our portfolio was $30.3 billion, making up 16% of total invested assets. These loans are primarily highly rated, longer-dated, fixed-rate first-lien loans with low LTVs and strong debt service coverage ratios. Each loan is carefully underwritten with embedded covenant protections.

Our portfolio is diversified by both geography and sector, with nearly 60% of the portfolio comprised of multifamily and industrial property, reflecting our strong bias to these sectors over the last decade.

Commercial mortgage loans secured by office properties were $7.7 billion or 4% of total invested assets as of March 31. These loans are also high-quality, carefully underwritten and covenant-heavy with strong credit characteristics.

Over the past several years, we’ve been actively reducing our exposure to office and emphasizing multifamily, industrial and other nontraditional office sectors as well as properties in Europe. As part of this evolving view, our exposure to traditional U.S. office is down from its peak.

The traditional U.S. office portfolio component was $4.5 billion as of March 31, which is approximately 2% of our total invested assets. The remainder of the portfolio is in life sciences, mixed-use properties and ground leases as well as international office properties where the fundamentals are stronger than in the U.S.

Our office portfolio enjoys strong credit metrics, which are as follows: it’s highly rated with 94% of our loans designated CM1 or CM2. It’s high-quality with almost 80% of the property consisting of Class A properties in major metropolitan areas and concentrated in central business districts. The weighted average loan-to-value is 63% and the weighted average debt service coverage ratio is over 2 times. It has strong occupancy ratios in the mid-80s. 80% of the fixed loan – of the loans are fixed rate. It has longer-dated loans with a weighted average remaining term of 7.5 years and only two loans are delinquent together carrying an outstanding balance of $8 million.

Over our history, we have from time to time originated large loans where we felt very comfortable with the fundamentals, sponsor and location. Within our traditional U.S. office portfolio, we have three loans in excess of $200 million, all originated prior to 2019.

The office properties are very building-specific, so it’s crucial to evaluate each property carefully, no matter the size of the loan. We have approximately $1.2 billion of loans secured by traditional U.S. office properties with final maturity dates in 2023 and 2024, a figure that represents less than 1% of our total invested assets. Of that $1.2 billion, approximately $870 million have a final maturity date in 2023.

As of May 4, we have resolved almost half of the 2023 maturities through either payoffs or extensions. Our traditional U.S. office exposure within New York City, where we have longer dated – longer tenure loans with solid debt service coverage ratios and strong occupancies is about 1% of total invested assets. Of the $870 million maturities for 2023, approximately $600 million are in New York City. One-third of these have already been resolved through either payoffs or extensions and the remaining properties underlying the [2023] maturities have extremely strong fundamentals and occupancy rates over 90%.

As part of our standard monitoring process for any commercial mortgage loans, we proactively engage with borrowers regarding their refinancing plans well in advance of maturity. As a result, before this quarter began, we were already conducting routine surveillance on our upcoming maturities.

On the extensions we’ve agreed to so far, we’ve been successful in getting a combination of various structural and capital enhancements. We are a lead lender in approximately 87% of our office originations, which affords us control over negotiations with borrowers regarding any amendments or restructuring.

Furthermore, with our real estate equity team, we have the expertise in managing these types of properties and can take over in a workout situation if financially prudent. The current CECL allowance for our office portfolio is 3.5% of GAAP-carrying value and slightly over 5% for our traditional U.S. office properties. We believe we have one of the most conservative allowances in the industry and we’re adequately reserved for potential credit losses.

We believe our balance sheet is strong and our investment portfolio is resilient, and we are well positioned. We regularly stress-test our balance sheet for various potential risks, and that informs our decisions about capital management and allocation. For illustrative purposes, on the traditional U.S. office portfolio, if we were to assume a 30% instantaneous reduction in current property valuations, which already reflect a reduction from the peak and we were to further assume that any loan with an LTV ratio in excess of 100% after the shock is foreclosed upon.

The incremental reduction in our Life Fleet RBC ratio would be approximately 11 RBC points. Our Life Fleet RBC ratio would have remained above target in this illustration had this scenario occurred as of the end of March. While this illustration assumes an instantaneous shock, it’s important to remember that any deterioration in the traditional U.S. office sector will more likely play out over a longer time period. At this time, we expect it to be an earnings event and not a capital event.

Finally, our real estate investment team is very experienced and has navigated challenging markets before. We continue to believe our traditional U.S. office exposure, which is only 2% of total investment – invested assets is manageable and any developments are likely to emerge over time.

Now I’ll hand the call back to Kevin.

[Kevin Hogan, President and Chief Executive Officer]

Thanks, Elias. We’re very pleased with the solid progress we’re making across Corebridge. Our balance sheet is very strong. Our profitability levels continue to improve, and we are confident that our well-managed investment portfolio is positioned to withstand near-term pressures.

Operator, we are now ready to take questions.

[Operator]

Thank you. [Operator Instructions] Our first question comes from Elyse Greenspan from Wells Fargo. Please go ahead.

[Elyse Greenspan, Wells Fargo Securities]

Hi, thanks. Good morning. My first question is on capital. You guys just put in place a $1 billion buyback plan. I was hoping you could just give us some color around the pace of buyback and when you guys think you might start repurchasing your shares?

[Kevin Hogan, President and Chief Executive Officer]

Yes. Thanks, Elyse. Since the IPO, we’ve been very focused on executing all the strategies to deliver our medium-term financial targets. One of those is the march towards a 12% to 14% ROE, and we feel we’re making excellent progress there. One of them was our annual dividend of $600 million, which we’ve now delivered on three quarters in a row.

And then one of them was to have the financial flexibility to complement the dividend program with buybacks within six to nine months from the IPO. And we have that financial flexibility and see the authorization as a strong vote of confidence from the Board. And it’s not a time-limited authorization. We’re clearly committed to active capital management. And we believe that alignment with secondary is our most preferred path. And in the meantime, we’re focused on executing all of the strategies necessary for us to maintain and grow this financial flexibility.

[Elyse Greenspan, Wells Fargo Securities]

Thanks. And then my second question was on the higher surrender rates in the quarter. So the fixed annuity surrender rate went up to 15%. But I know you guys have said that’s within normal expectations. So I guess, what would you consider elevated for surrenders? And how would you expect to run your activity to trend from here?

[Kevin Hogan, President and Chief Executive Officer]

Yes. Thanks, Elyse. Surrenders’ behaviors generally reflect crediting rates and where crediting rates are, which are influenced by both where base yields are and also where credit spreads are. And so in the first part of the first quarter, crediting rates were quite high, reflecting sort of the conditions late in the year, earlier in the year. And our dynamic lapse models really are driven by where those crediting rates are.

Although surrender rates did increase again a little in the first quarter, not as much as new business sales because new business sales also reflect the impact of where crediting rates are. And so the surrender levels still were within our expectations based on where crediting rates were.

And what I would say is that towards the latter part of the quarter, reflective of where yields and spreads were in the market, we saw some relief in crediting rates. And so we’re – we continue to be within our expectations as to where surrenders would be relative to where market conditions are.

[Elyse Greenspan, Wells Fargo Securities]

Thank you.

[Operator]

Thank you. Our next question comes from John Barnidge from Piper Sandler. Please go ahead.

[John Barnidge, Piper Sandler]

Thank you very much, and good morning. PRT sales step functioned higher this first quarter. First quarter is typically are lower and build throughout the year, but this first quarter across industry has been remarkably strong. Can you talk about your outlook for this market and where you see it geographically as well? Thank you.

[Kevin Hogan, President and Chief Executive Officer]

Yes. Thanks, John. Since 2016, we’ve been very much focused on full plan terminations. And the market for full plan terminations, both in the U.S. and the UK are sort of a comparable size. And we’ve developed both the underwriting and the administrative capabilities to support that business.

We see a very strong pipeline both in the U.S. and the UK. And in fact, where funding levels of plans are right now, we’re seeing larger and larger full plan terminations. These transactions are large. We underwrite them as almost many M&A transactions and the conditions were very good in the first quarter, both for the UK where we act as a reinsurer as well as the U.S.

The activity in the first quarter primarily reflected success in UK transactions, but the pipeline looks very strong, both for the U.S. and the UK and full plan terminations. And the reason we focus on full plan terminations is there are fewer providers that are able to support the complexity of full plan terminations. And we find the economics on those transactions more attractive than commodity longevity transactions.

[John Barnidge, Piper Sandler]

Thank you very much. My follow-up, while surrender activity was definitely higher in individual, it seemed to sequentially decline in the Group business. Can you maybe talk about those dynamics as well? Thank you.

[Kevin Hogan, President and Chief Executive Officer]

Sure. So the surrenders in the Group business also reflect larger planned behavior or planned behavior. And what we are seeing is that during the pandemic, there was a reduction in the kind of amount of group activity because plans weren’t necessarily confident in going out to bid when the conditions were a little bit restrictive. We are seeing more plan-based activity now as more plans are going out for RFPs. So that’s one aspect is the planned acquisition piece.

In terms of the overall surrender rate, I think that some of the out-of-plan options are very attractive for investors right now, particularly fixed annuities. We’re seeing strong growth in out-of-plan fixed annuities and the investment options that we’re making available to customers, I think, are what’s helping bring that surrender rate down.

[John Barnidge, Piper Sandler]

Thank you.

[Operator]

Thank you. Our next question comes from Alex Scott from Goldman Sachs. Alex, please go ahead.

[Alex Scott, Goldman Sachs]

The first one I had is on the office mortgages. Thanks for all the new disclosure. One of the things we’ve looked at is just the valuation allowances, not only that you have on GAAP that you talked about earlier, but also the statutory valuation allowance. And so I had just a couple of quick questions on that.

Having a higher statutory valuation allowance, is that a nuance to the way you approach assessing that? Or is it specifically related to loans that have some issues? And then maybe separately, when you gave the RBC sensitivity, it was that net of the statutory valuation allowance.

[Elias Habayeb, Chief Financial Officer]

Hey, Alex, it’s Elias. So on both – let me tackle both of your questions. With respect to our allowances, whether for stat or GAAP, we’ve historically been more conservative than others, and you see that going back into the AIG results. So it’s not specific Corebridge. We just continue the same methodology forward, where we are leveraging kind of CMBS data and about estimating our expected losses. And – but it’s kind of historical, as you know, the CMBS last experience has been worse than what’s happened in commercial mortgage loans on Life companies, which have performed much better than that.

So there’s a level of conservatism built into how we approach allowances. And so both from a stat and GAAP perspective, we tend to carry higher allowances as a result. And I don’t believe that’s a reflection that our portfolio is any riskier. On your second question related to the sensitivity on RBC, yes, that is net of the statutory allowance.

[Alex Scott, Goldman Sachs]

Got it. And a follow-up question I had. It was related to some of the commentary on the AIG call. I think it was mentioned that Laya Healthcare was going to go through a sale process. And my question for you all is, are there other actions, whether it’s a sale, reinsurance and so forth that you would potentially pursue to increase capital capacity to help speed up a separation of your business from AIG?

[Kevin Hogan, President and Chief Executive Officer]

Yes. Thanks, Alex. Look, the decision relative to Laya, it’s a very good business. It has a strong management team, but the health insurance industry is not core to Life & Retirement and our other expertise. And this – it’s very early in the process. So I can’t really say much more about that at this time. We generally don’t talk about kind of live transactions. But we understand how our responsibility is to optimize the portfolio, and we have continually looked at those opportunities.

And the creation of Fortitude Re some four or five years ago, I think, was a great example of how we are conscious of those opportunities. We continuously look at various portfolios, and we are aware of what market conditions are. And so far, we haven’t seen anything that makes economic sense relative to the overall portfolio. We’ll continue to stay current relative to that.

But I do see the optimization strategy versus having financial flexibility rather to the – relative to the buybacks as two different areas of our responsibility. And relative to the buybacks, we have the financial flexibility. We have our Board’s support. There are different paths to the proceeds, but everything is also dependent on market conditions at a given time.

[Alex Scott, Goldman Sachs]

Got it. Thank you.

[Operator]

Thank you. Our next question comes from Erik Bass from Autonomous. Erik, please go ahead.

[Erik Bass, Autonomous]

Hi. Thank you, and I appreciate the additional color and disclosure on the investment portfolio. Maybe zooming back, you mentioned doing stress test analysis and factoring that into your capital plans. So I was hoping you could give us some color on how you’re thinking about potential capital impacts in a broader stress scenario for credit or CRE, so moving outside of just office?

[Elias Habayeb, Chief Financial Officer]

Hey, Erik, it’s Elias. So as part of kind of regular process, we run a bunch of different stress tests on us looking at different variables and not focusing on an individual variable. And that kind of all informs kind of what’s our capital plans and what we’re comfortable with. And in the base case, we generally assume some level of rating like – negative rating migration as well as some level of downside credit protection in our base case, but we do strength it beyond that.

And with respect to rating migration, the one thing I would say is if you look at 2022 as well as separately the first quarter of 2023, while in our base case, we did assume some level of downward rating migration, what we’ve experienced has been positive rating migration when looking at the portfolio as a whole.

[Erik Bass, Autonomous]

Got it. But I guess thinking – I don’t know if you’re willing to disclose the number, but is there something you think of as a stress scenario impact for capital?

[Elias Habayeb, Chief Financial Officer]

So we don’t focus it on – so we don’t focus on a single scenario. We look at a variety of scenarios. And we don’t just look at credit. We also look at what market factors could do like what happens with rates, what happens with equities on the portfolio. And so we look at it from a totality to decide what we’re comfortable with. We don’t focus on one scenario or the other.

[Erik Bass, Autonomous]

Got it. Okay. And then separately, the cost of funds looks like it’s starting to increase in Individual Retirement. I’m hoping you could talk a little bit about, do you still see room to improve spreads from higher interest rates? Are we getting to the point where more of the benefit is getting passed through to policyholders?

[Kevin Hogan, President and Chief Executive Officer]

Thanks, Erik. I don’t think characterizing it as passing more of the benefit to policyholders as appropriate. We continue to see growth in our net spreads, both sequentially as well as year-over-year across Individual Retirement, there’s still a 44 basis point increase in sequential spreads.

In terms of where rates and credit spreads are, the pace at which spreads will expand, I think we’ll – and I think Elias had it in his prepared remarks, right, the trajectory is not necessarily going to stay the same. But we have not seen growth in the cost of funds impacting our ability to expand the spreads still in the Individual business.

[Elias Habayeb, Chief Financial Officer]

So Erik, if I can add to what Kevin said. So our base spreads are strong. Our base spreads have continued to expand, if you look at index annuities and fixed annuities, despite what’s happening on the cost of fund side, if you look at index annuities, the cost of fund has been sequentially increasing as has the base yield increase and the growth in the base yield that’s outpaced the growth in the cost of funds.

And what you’re seeing on fixed annuities, it’s part driven by new business. We’re seeing a step up in the cost of funds, just the weighted average mix of the portfolio. But even with that, the base yield is still growing faster.

The other thing on the forward trajectory, listen, when we buy a bond with a 5% or 6% handle, that doesn’t change tomorrow if market rates change. So we continue to expect strong base spread income from the portfolio as well as strong base spreads going forward. Now the – given where the market’s outlook is today, that growth trajectory will slow down over time, but we continue to expect a strong base spread income from the book.

[Erik Bass, Autonomous]

Thank you. That’s helpful. Appreciate it.

[Operator]

Thank you. Our next question comes from Ryan Krueger from KBW. Ryan, please go ahead.

[Ryan Krueger, Keefe, Bruyette & Woods]

Thanks. Good morning. On the $1.8 billion of holding company liquidity, how much of that is earmarked on a cash basis for remaining separation costs and other one-time costs related to the cost savings plan?

[Elias Habayeb, Chief Financial Officer]

So Ryan, it’s Elias. So the way we look at our liquidity is we look at kind of for what’s the remaining 12-month needs, and we kind of reserve for it in our liquidity today. And when we’re sitting now at the end of March, we’re sitting with liquidity in excess of the next 12-month needs. If you go back to the buckets of one-time expenses we were covering, one was on separation. Our estimate was $350 million to $450 million. And we’ve already incurred based on our disclosures around $230 million against it.

And with respect to Corebridge Forward, our estimate for one-time expenses is about $300 million. We’ve incurred about $100 million. Now not all the $300 million is cash. We do expect the bulk of that to play out over the next 12 months, but there might be a bit longer tail on the smaller amount.

[Ryan Krueger, Keefe, Bruyette & Woods]

I guess maybe to ask differently, could you just tell us how much in excess of the next 12 months needs the current cash position is at the holding company?

[Elias Habayeb, Chief Financial Officer]

Yes. So that’s the number that’s variable. But I think you could look at where we were at the end of last year as an example.

[Ryan Krueger, Keefe, Bruyette & Woods]

Got it. And then I may have missed this, but did you give us an update on the allowances for loan losses as of the first quarter on a statutory basis?

[Elias Habayeb, Chief Financial Officer]

So the allowances, we have not – I have not given the number, but I’m happy to. Our estimate is still around $400 million on the kind of the overall commercial mortgage loan portfolio as of the end of the first quarter.

[Ryan Krueger, Keefe, Bruyette & Woods]

Okay, great. Thank you.

[Operator]

Thank you. Our next question comes from Michael Ward from Citi. Michael, please go ahead.

[Michael Ward, Citi]

Thanks guys. Good morning. Thank you for all the investment portfolio color. I was just thinking through the office exposure. I’m curious about the CMBS component. I think about one-third of your CMBS is office or a little over $3 billion of par. So I’m just wondering if you could maybe confirm that. And then if you have any similar color on the office CMBS in terms of loan metrics and how you feel about that exposure?

[Elias Habayeb, Chief Financial Officer]

Hey, I’m happy to do that. So our CMBS book is a pretty diversified portfolio. It’s about 5% of our total invested assets. That includes both agency and non-agency. And if I look at the non-agency piece, it’s broken down between conduit and SASB base. The conduit piece, while it has some level of office exposure, given the mix of the pool, we’ve got more than sufficient subordination in those deals since we invest in the top part of the capital structure and virtually everything we hold is NAIC-1. When we look at the SASB portfolio, a fraction of less than 40% has office exposure.

We underwrite those deals very similar to how we underwrite the commercial mortgage loan when we make a decision to invest or not invest. It’s primarily – it’s all investment grade. It’s primarily NAIC-1 and those continue to have low LTVs and high debt service coverage ratios and high occupancies within them. So we’re comfortable with that portfolio. And a lot of it are either trophy buildings or property in premier locations.

[Michael Ward, Citi]

Okay. Thanks very much. And then maybe I was just hoping you could provide some more color on the sale of the CLO manager. Curious if you retain any equity and maybe the motivation behind that sale. I would have – I think the asset class has been attractive for Lifecos.

[Elias Habayeb, Chief Financial Officer]

Happy to. With respect to the CLO manager, the decision to sell it was more about kind of our forward operating model for how we want to manage our investments. And with the focus on having our investment team focused on managing the Corebridge balance sheet, working with now two external managers, it didn’t make sense for us to continue to own the CLO manager.

While we do still have some of the residuals on the deals that were sponsored or managed by the CLO, one of the things that’s happened with the sale is we’ve deconsolidated most of the CLOs that were on our balance sheet. So when you look at our balance sheet, and for example, a good area, look at debt from consolidated investment entities, there was a material drop in the first quarter, and that’s tied to deconsolidating CLOs with the sale.

[Michael Ward, Citi]

Okay. Are you able to quantify the equity that you might still hold?

[Elias Habayeb, Chief Financial Officer]

It’s not a big number that we still hold.

[Michael Ward, Citi]

Okay. Thank you. Thank you, guys.

[Operator]

Thank you. Our next question comes from Jimmy Bhullar from JPMorgan. Jimmy, please go ahead.

[Jimmy Bhullar, JPMorgan]

Hi, good morning. So first, I just had a question on your commercial mortgage loan book. I think you mentioned that there are two loans that are 90 days or less delinquent. And the amount seems fairly large $276 million of apartment buildings. Can you discuss what that is and what your view of that exposure is overall?

[Elias Habayeb, Chief Financial Officer]

So on the two loans I had mentioned, $8 million is in the office space. We have about two loans in the office space that were delinquent by like 90 days-plus. We don’t have anything else like in the office space.

[Jimmy Bhullar, JPMorgan]

No, I mentioned less than 90 days that’s [the twos] that were delinquent less than 90 days.

[Elias Habayeb, Chief Financial Officer]

Yes. Those – that’s on the office space. We will have to come back to you, but I’m not aware of anything specific or concerning about those properties. It might be an operating thing, but we’ll come back to it, Jimmy.

[Jimmy Bhullar, JPMorgan]

Yes. Those – and those were in the apartment classification, not office, but – and then just on the fixed annuity market and index annuity, your sales have grown a lot of other companies are trying to grow in that business as well as they’re pulling out of variable annuities. Just wondering how you see competition in those two product lines with higher interest rates? Are competitors still being disciplined? Or are you seeing some companies sort of be aggressive on terms and conditions or crediting rates just in an effort to grow?

[Kevin Hogan, President and Chief Executive Officer]

So yes, thanks, Jimmy. I think that our ability to move on the scales reflects the tremendous distribution access that we have that we’ve built up over many years. And we work on a truly strategic relationship with many of our distribution partners. So we understand maybe a little bit in advance what we need to do to be prepared to support their strategies. And that allows us to get beyond just talking about what might be on the shelf in the next quarter or two quarters and really think about longer-term planning.

But we feel good about the fact that we were able to pivot quickly. We were able to scale quickly. I think our relationship with Blackstone was helpful in terms of their ability to scale asset origination. And that’s what’s really been behind the growth. We do not – we have not seen anything to suggest margin compression. We continue to see very attractive new business margins that are north of what our medium-term return profile expectations would be. So that’s how I would summarize our ability to grow more rapidly in the fixed annuity business as I would get back to our distribution platform.

[Jimmy Bhullar, JPMorgan]

Thank you.

[Operator]

Thank you. Our final question comes from Suneet Kamath from Jefferies. Suneet, please go ahead.

[Suneet Kamath, Jefferies]

Great. Thanks. Just maybe two quick ones. First, on the buyback, I just want to be clear in terms of the messaging. Are you saying that your buyback would be essentially tied to an AIG secondary? Or would you be open to repurchasing shares from the open market even if there is no secondary?

[Kevin Hogan, President and Chief Executive Officer]

No, there’s no limitation as we see it. It will completely depend on sort of market conditions and other considerations at the time. I think the important takeaways are that we said that we would have the financial flexibility within six to nine months from the IPO, and we have it, that our Board is confident in our financial strength and position and has supported it. It is not a time-limited authorization, which gives us a lot of flexibilities. And there are different paths to proceeds. Some are more obvious than others. But we’re not limiting in any way our options at this time. We are focusing on executing our strategies and increasing our financial flexibility.

[Suneet Kamath, Jefferies]

Okay. Got it. And then I guess on the surrenders in fixed annuities, is there a way of tracking if that money is essentially going into a new Corebridge annuity? Because my thought is, if these contracts are outside of surrender charge, there’s probably some limitations in terms of how long you can invest the underlying funds. But if it gets recycled into a new product, then perhaps that’s good for spreads. So I just wanted to see if there’s any way to think through that issue.

[Kevin Hogan, President and Chief Executive Officer]

Yes. So there are, obviously, exchange possibilities, and we monitor the impact net of the exchanges. But we also – I think important relative to the surrenders is that we do have the option of increasing crediting rates. Should we decide that, that was more economically attractive than otherwise.

And so far, we haven’t necessarily seen that to be economically attractive. And so I kind of separate those two things in our minds. We have options if we felt that there were more value in limiting the surrenders. I don’t know if there’s anything you wanted to add, Elias.

[Elias Habayeb, Chief Financial Officer]

And what I would add, just echoing what something Kevin said and I said earlier is yes, the surrenders are increasing, it’s increasing as you would expect in the rate – what’s going on in the rate environment. Despite the increase, the net flows into the general account are positive and if you look sequentially, have almost doubled.

And beyond that, while we do that math economically, the liquidity in the insurance companies is very strong. We’ve got very strong capital coming off the investment portfolio. We’ve got a sizable liquid portfolio – liquid fixed income portfolio if we ever need to do anything with it. We haven’t had to do anything with it there. And we’ve got options beyond selling assets if we need to raise short-term liquidity. None of that have we had to do so far.

[Suneet Kamath, Jefferies]

Okay. Thanks.

[Operator]

Thank you. That is now the end of the Q&A session. I’ll now hand you back over to Kevin Hogan for closing remarks.

[Kevin Hogan, President and Chief Executive Officer]

Okay. Thanks, everybody. Appreciate the questions. Hope you have a good day.

[Operator]

This concludes today’s call. Thank you for joining. You may now disconnect your lines.