Corebridge Financial Inc

NYSE:CRBG

Earnings Call Transcript 2022-Q3

[Operator]

Hello, and welcome to the Corebridge Financial Third Quarter 2022 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. Josh, please go ahead.

[Josh Smith, executive]

Good morning, everyone, and welcome to Corebridge Financial's third quarter earnings update.

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 if 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 at www.corebridgefinancial.com.

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

[Kevin Hogan, executive]

Good morning, and thank you for joining us for our first earnings call as Corebridge Financial. I am joined today by Elias Habayeb, our Chief Financial Officer.

Over the last 2 years, a great number of people from our own team, our parent company AIG and our various partners worked diligently to position Corebridge Financial to become a successful standalone public company. This culminated with our September 15 listing on the New York Stock Exchange. I would like to start by thanking all of those that were involved for their contributions in reaching this milestone.

During today's call, I will focus on our financial performance and current market conditions, reinforce our commitment to our stated financial targets, provide an update on recent strategic progress and review our strong financial position. Elias will provide additional detail on our financial results, and then we will take questions.

The third quarter was a very good quarter for Corebridge Financial. I am both pleased with our results and confident in our future. We delivered solid sales in the dynamic market. We made significant progress on our core strategies. Our balance sheet remains strong, and we are on pace to deliver an attractive return of capital to shareholders.

Corebridge reported operating earnings per share of $0.57 for the third quarter, with an adjusted return on average equity, or adjusted ROAE, of 6.8%. This reflects strong results from our core businesses in the face of a challenging macroeconomic environment that was felt across our industry.

Recent market dynamics, such as the pullback in equity markets, increased interest rates and widened credit spreads, and resulting asset value reductions affected each of our businesses to different degrees in the quarter. However, I want to emphasize that we expect that short-term market-related impacts should be more than offset over time by the long-term upside we experienced from rising interest rates and the impact that has on driving sales and margin growth.

The benefits from these conditions began to emerge last quarter, supporting strong new business generation and leading to an inflection point, where historical year-over-year 8 to 16 basis points of base net investment spread compression finally turned from a headwind to a tailwind. We are now seeing spread expansion for the first time in years. Elias will provide more details on this important emerging development.

Turning to the financial targets we disclosed as part of the IPO. We remain confident in achieving each of them as we maintain a strong balance sheet and deliver disciplined growth. We have a clear line of sight on achieving an adjusted ROAE of 12% to 14% and delivering a 60% to 65% payout ratio on adjusted after-tax operating income within 24 months from the IPO.

We expect to deliver capital to our shareholders through a combination of $600 million in annual dividends, along with share repurchases. We have committed to an annual dividend payable quarterly and have already paid our first and declared our second quarterly dividend. And we expect to have the financial flexibility to complement our dividend with additional return of capital to shareholders as early as the second quarter of 2023.

Our ability to execute our capital management strategy is based on the strength of our balance sheet, the consistency of our insurance company cash flows and the diversification in our businesses and earnings sources.

During the third quarter, we also made significant progress on organic growth, investment partnerships and efficiency strategies. As to organic growth, we delivered a strong quarter with robust sales and deposit flows. All 4 of our businesses delivered year-over-year growth in the quarter, and all 4 were supported by assets originated by Blackstone.

Our multiple sources of earnings, diversified product platform and network of distribution partners represent a strategic advantage. We are able to pursue profitable organic growth opportunities by focusing where risk-adjusted returns are the most attractive and customer needs the greatest under various market conditions.

The third quarter once again demonstrated our ability to remain nimble and to pivot between spread-based and fee-based products as capital markets evolve, driving more attractive opportunities for policyholders and for our business in our spread-based products, such as both our fixed and fixed index annuities.

Fixed index annuity conditions were very appealing across our broad range of channels, supported by our income and accumulation products. We set a company record for sales this quarter with deposits of over $1.7 billion, and we delivered positive net flows of $1.3 billion.

The strong position and consistent performance of our fixed index annuity business, a core product for us and individual retirement, has yielded over $4 billion of positive net flows over the last 12 months.

Fixed annuity conditions also remain attractive, where we continue to mobilize our strong position in bank distribution and were further supported by Blackstone's ability to originate attractive assets, leading to fixed annuity sales of approximately $1.3 billion for the third consecutive quarter.

Overall, individual retirement delivered deposits of $3.8 billion for the quarter, reflecting 17% growth year-over-year and positive net flows of nearly $700 million over the 3-month period.

In Group Retirement, deposits were also strong at $2 billion, 11% higher than the prior year quarter, supported in part by new plan acquisitions and growth of out-of-plan deposits, in particular, in fixed annuities.

Turning to Life Insurance. While premiums and deposits were consistent year-over-year, they reflect an improving mix of business in the U.S. and a continuing growth trend in the U.K., where we remain optimistic about our international growth prospects.

And lastly, in Institutional Markets, we had strong GIC issuance of $1 billion, originated $760 million of pension risk transfer transactions and saw inflows to stable value wraps in the face of market uncertainty. We remain focused on full plan terminations in the U.S. and U.K. With attractive funding levels for many plans, our pension risk transfer pipeline remains robust. We also remain confident in our ability to become a more consistent issuer of GICs in the future.

Our broad position across products and channels has been especially advantageous, as we have been able to respond effectively to rapidly changing market conditions and investor appetites.

We are also making good progress in implementing our investment partnerships with both Blackstone and BlackRock. First, Blackstone continues to originate attractive assets across the duration spectrum and volumes that we could not previously achieve, supporting our product competitiveness and recent growth.

The partnership is running well, with Blackstone managing $50 billion of assets that we transferred at the end of 2021 and reinvesting proceeds from those assets. To date, Blackstone has originated approximately $5 billion of private and structured credit at an average gross yield of 6% and an average credit quality of BBB+.

This new origination is part of the asset mix that has supported growth in our shorter-dated annuities and is positioned to support our strong pipeline of pension risk transfer opportunities.

With respect to BlackRock, we are well ahead of the original schedule to transfer our public liquid assets and some private securities, representing $90 billion in amortized cost and $76 billion in market value. As of today, we have substantially completed these asset transfers.

We are also in the product -- project planning stages of the Aladdin platform, which will further modernize our infrastructure and provide us with expanded analytics and accounting capabilities.

In addition to modernizing our business, we are also driving towards a leaner operating model. Our expense reduction and productivity program, known as Corebridge Forward, includes various initiatives such as leveraging our current outsourcing partnerships, refining our target operating model, modernizing our IT infrastructure and rationalizing our real estate footprint.

It is expected to generate approximately $400 million of savings on a run rate basis, with the majority achieved within the next 2 years. We have already made meaningful progress and have achieved just over $100 million of run rate savings year-to-date, ahead of the original plan to achieve the initial $100 million of savings by the end of the year. Elias will provide more information on our Corebridge Forward program.

Turning to the balance sheet. Our capital, liquidity and leverage positions remain strong, despite recent market conditions. Year-to-date, our insurance companies have distributed $2 billion of dividends and tax-sharing payments tied to tax strategies. Our strong position gives us confidence that we are on the path to deliver on our stated financial commitments.

We are excited about our current opportunities and what the future holds for Corebridge. We are gaining momentum from some of the most attractive pricing conditions in recent memory as well as strong tailwinds generated by the rising interest rate environment. We are well positioned to take advantage of these opportunities moving forward while, at the same time, delivering on our capital commitments to shareholders.

I will now turn the call over to Elias.

[Elias Habayeb, executive]

Thank you, Kevin, and good morning. I will provide more details about our financial results and key performance metrics as well as a few updates on the fourth quarter.

Corebridge's performance during the third quarter demonstrates the power of our franchise and the competitive strength of our businesses. We delivered strong growth in our diversified product offerings, with premiums and deposits increasing 23% year-over-year.

In addition, and for the first time in many years, the base yield in our insurance companies as well as the base net investment spread in both of our retirement businesses expanded on a sequential basis as well as on a year-over-year basis. We believe this represents a new trend towards further growth in our base spread income.

Our balance sheet continues to maintain a healthy buffer to our target RBC ratio and the cash flows distributed by our insurance companies in the first 9 months of this year approximate the total distributions made in the entire prior year.

This morning, we reported third quarter adjusted ROAE of 6.8% and operating EPS of $0.57, which includes notable items that lowered our operating EPS by $0.07. In addition, alternative investment returns were below long-term expectations by approximately $0.16, and COVID mortality losses in the quarter amounted to $0.03. Details are provided on Page 5 of the earnings presentation available on our website.

Adjusted pretax operating income, or APTOI, was $423 million, approximately $449 million below a year ago. The decrease in APTOI was driven by approximately a $785 million reduction due to the impact of market conditions on variable investment income, DAC amortization, SOP 03-1 reserves and fee income, as well as structural changes associated with the debt capitalization of Corebridge and divestitures completed in 2021.

This was offset in part by increasing base spread income, improving overall mortality experience, lower expenses and a comparatively better impact from the annual actuarial assumption review.

Turning to earnings. The strength and diversification of our core earnings power is readily apparent when you break down our sources of earnings, which are up 4% year-over-year after excluding variable investment income. Base spread income, which is our largest source of earnings, grew 7% year-over-year.

The longer lasting benefits of higher new money rates and our partnership with Blackstone continue to emerge with more to earn-in during future quarters as more of the investment portfolio is reinvested at higher yields. Since the beginning of this year, we've seen new money rates increase by approximately 300 basis points, presenting a strong tailwind for our base spread income.

Fee income, our second largest source of earnings, is partially a function of underlying asset valuations. Fee income declined 18% versus the prior year quarter due to recent declines in fixed income and equity asset valuations. And fee income is expected to recover as asset valuations increase.

Underwriting margin, excluding variable investment income, which is primarily derived from our Life business, rose 62% year-over-year due to improving mortality experience.

With respect to net investment income, I would like to focus on our base yield, which was 4.08% for the quarter. The base yield was up 5 basis points year-over-year and was up 24 basis points sequentially. The base yield improvement was driven by a combination of factors that includes reinvestment activities at higher rates, reset on floating rate positions and growth of the overall portfolio.

New money rates in the quarter were approximately 6%, having increased 300 basis points since the beginning of the year and now exceed base yields by approximately 200 basis points. Accordingly, we have achieved year-over-year spread expansion for the first time in many years.

Looking forward, while we expect our base yield to continue to benefit from the higher new money rates and floating rate resets, the quantum of the sequential increase will depend on a number of variables, including rates and spreads.

Next, I want to provide you an update on Corebridge Forward, our expense reduction and productivity program. As Kevin indicated, as of September 30, we've already achieved over $100 million of the nearly $400 million of run rate savings from Corebridge Forward that we disclosed as part of our IPO.

The majority of the savings achieved to date represent headcount reductions against our expense baseline, which includes the incremental costs of approximately $300 million to be a separate company. We continue to estimate the onetime cost to achieve of the total $400 million run rate savings program to be in the $300 million range. To date, we've incurred $66 million in costs, which is reported as a component of restructuring and other costs below the line.

I would note that, while we've been able to eliminate some of the expected increase in corporate expenses, we still expect our corporate expenses to increase to approximately $60 million in the fourth quarter as certain expenses kicked in with the IPO.

In terms of our separation efforts from AIG, we continue to estimate that the total investment to complete separation will be in the $350 million to $450 million range, in addition to the $300 million onetime cost to achieve estimate for Corebridge Forward. Year-to-date, we've incurred about $120 million of separation costs, which are reported as a component of separation costs below the line.

Turning to Page 9 in our presentation. The annual actuarial assumption review lowered adjusted pretax operating income by $57 million in the third quarter as compared to $226 million reduction in the prior year and had a de minimis impact to pretax income in the third quarter versus $144 million reduction in the prior year quarter.

There were no significant reserve adjustments this quarter. Specifically, there were no reserve changes to universal life with secondary guarantees, which is a small portfolio for us, representing less than 2% of our net liabilities. We continue to believe our lapse rate assumptions for universal life with secondary guarantees are reasonable and supportable.

For U.S. GAAP, we assume ultimate lapse rates of approximately 1%, while we assume 0% lapses for statutory purposes. The results of the annual assumption review performed in the third quarter principally reflect the impact of a significant rise in interest rates over a relatively short period of time driving up expected fixed annuity lapse rates, resulting in a modest acceleration of DAC amortization. I would also note that the annual actuarial assumption review does not reflect the potential positive impact of rising interest rates on new business margins.

Moving on to our businesses, I'll begin with our largest segment, Individual Retirement. In terms of core earnings sources, base spread income was up nearly 8% over the last year driven by spread expansion, while fee income declined 19% year-over-year due to lower asset valuations. Base net investment spreads increased by 28 basis points sequentially and 8 basis points on a year-over-year basis.

We're encouraged by the operating environment for Individual Retirement and the collective growth of our fixed and fixed index annuity books. Our positive net flows, strong new business margins and expanding spreads continue to improve portfolio profitability. As Kevin noted, our ability to pivot between spread-based and fee-based products in this segment is a strategic advantage.

Similar to Individual Retirement, Group Retirement base spreads income rose 4% over the last year due to spread expansion. Fee income declined 18% year-over-year due to lower asset valuation. Base net investment spreads increased by approximately 25 basis points sequentially and 7 basis points on a year-over-year basis.

In terms of underwriting margin in our Life Insurance business, third quarter results, excluding variable investment income, improved 64% year-on-year. This significant increase in underwriting margin was driven by improved mortality experience on both a COVID and non-COVID basis.

Our third quarter COVID losses of $28 million were largely consistent with the second quarter and in line with our previously provided sensitivity, while our non-COVID mortality emerged favorable to expectations.

In terms of earnings sources for our Institutional Markets business, base spread income increased 11% versus a year ago due to growth in the pension risk transfer portfolio as well as spread expansion. Fee income and underwriting margins were relatively stable.

We're encouraged by the growth of Institutional Markets, reflecting consistent reserve growth, strong new business margins and expanding spreads, which we expect will continue to improve profitability.

I would now like to provide some comments about our capital and liquidity. Adjusted book value as of September 30 was $21.9 billion or $33.90 per share, up 4% from the second quarter. This growth reflects our earnings as well as net realized gains reported below the line.

Our third quarter Life Fleet RBC remains above our target of 400%. We estimate the third quarter to be in the range of 410% to 420%, reflecting adjustments for certain timing items. This is generally in line with the previous quarter. The Life Fleet RBC is down from year-end 2021 principally because of our decision to accelerate cash distributions made by our insurance subsidiaries to establish Corebridge's holding company liquidity.

For the 9 months of 2022, our insurance companies have distributed approximately $2 billion, which is comparable to the normalized distributions for the full 12 months of 2021, which were $2.2 billion.

In total, the accelerated insurance company distributions accounted for a decline of 51 RBC points for the Life Fleet since the beginning of the year, which compares to an actual decline of 21 to 37 points (sic) [ 27 to 37 points ]. This demonstrates we had positive capital generation during a period of significant market volatility and increasing sales activity.

Our holding company liquidity was $2 billion, and our financial leverage was 29.2%, both as of September 30. The roughly 80 basis points increase in the leverage ratio comes as we've taken steps towards finalizing Corebridge's capital structure.

We continue to expect that our balance sheet will naturally delever as a result of book value growth, and our next debt maturity is not until 2025.

We paid $148 million dividend in October, our first public company quarterly dividend, and we declared our fourth quarter dividend yesterday, which will be paid on December 30. This translates into a dividend yield over 4% based upon the IPO price.

We intend to continue paying a quarterly dividend of approximately $150 million to our shareholders, aggregating to approximately $600 million per year. Recent market conditions do not alter our ability to deliver that dividend, nor do they change our capital management plan, including returning capital to shareholders beyond dividends beginning in 2023.

With respect to LDTI, our estimate of the initial transition adjustment to adopt LDTI as of January 1, 2021, is closer to the bottom end of the range of our previously disclosed pretax range of $1 billion to $3 billion net reduction to GAAP shareholders' equity. This represents a reduction in AOCI that's partially offset by an increase in retained earnings. This limited book value impact reflects the benefit of having a diversified balance sheet.

In addition, we expect LDTI to reduce the current volatility in our operating results given changes to accounting for market risk benefits, DAC and life insurance products. While we will provide additional information in advance of the first time we report on an LDTI basis for the first quarter of 2023, it's also remember -- it's also important to remember that LDTI does not impact our statutory results nor our insurance company cash flows.

As we look to the fourth quarter, we expect continued pressure on variable investment income, as our alternative investments are mostly reported on a 1 quarter lag and have a high correlation to equity markets.

At the same time, we expect continued depressed levels of call-and-tender income as well as commercial mortgage loan prepayment activity. Also keep in mind that our fourth quarter EPS will include the full impact of our employee stock-based compensation, which we estimate will result in fully diluted shares of approximately $653 million.

To wrap up, we're pleased with the progress we're making on our strategies to improve profitability. In the context of the current market environment, Corebridge produced a very good third quarter earnings, as evidenced by our robust sales, increasing base spread income and favorable mortality experience. We remain confident in the strength and resiliency of our capital, liquidity and balance sheet.

And now I will hand it back to Kevin.

[Kevin Hogan, executive]

Thank you. And operator, we're now prepared for questions.

[Operator]

[Operator Instructions] Our first question comes from John Barnidge from Piper Sandler.

[John Barnidge, analyst]

You talked about improvement in life insurance mortality experience. Can you maybe talk about non-COVID mortality? And then did the normal seasonality of the business return where 3Q is in a pre-COVID world were the best quarter for mortality experience, at least domestically?

[Kevin Hogan, executive]

Yes. Thanks, John. Appreciate it. So when it comes down to mortality, first of all, the whole COVID event for us has been on earnings, not a capital event. And from the beginning of the pandemic, our projected sensitivity of $65 million to $75 million of COVID losses for every 100,000 population deaths has held up. And indeed, in the third quarter, we were once again within that sensitivity range.

And so noting the COVID activity, the third quarter mortality, all in, including COVID, was better than our expected pricing levels. So the non-COVID mortality also continued to perform well, and that's the second quarter in a row that we've had all-in mortality better than our pricing expectations.

And as we look at mortality, as part of the third quarter review, the data that we've seen suggests no need to change our long-term assumptions. So we do consider that the COVID event was the exception, and we expect our sensitivity to continue to hold up.

What the future holds for COVID remains unpredictable. We would expect our sensitivity to remain valid. And in the event that there is some kind of resurgence in activity, then we'll be prepared to serve our customers as we always have.

[John Barnidge, analyst]

And for my follow-up question, can you talk about back-to-school season for VALIC from a distribution perspective? It seems like this was the first normal back-to-school year since 2019.

[Kevin Hogan, executive]

So our Group Retirement business is extremely well positioned. We have been investing in this platform, as you know, for the 5 last years, and we've dramatically upgraded both our plan sponsor and plan participant experience, as has been noted by some of the external surveys that are done relative to capabilities there.

And we had a very strong growth in deposits in VALIC, 11% year-over-year, and feel great about where the business is positioned. As you know, we really emphasize the role of the value of the adviser, and we focus on those plans that value the role of the adviser.

And we're on track for a strong year in new plan acquisition as well as increasing periodic deposits. So we feel great about the start to the school season for VALIC, and the business is very well positioned strategically.

Now in terms of VALIC, I just want to comment on the flows, right, because we get questions on those. Not every dollar of flow is equal. And first thing I would say is that all of our outflows in VALIC are in guaranteed minimum interest rate business above 2%, most of it above 3%, whereas all of the inflows are actually GMIRs below 2% or our very attractive advisory and brokerage platform.

And as we stated in the Q, right, our net flow definition doesn't include net new assets in the advisory and brokerage platform, which amounted to $500 million in the third quarter and $1.6 billion year-to-date. So despite the fact that the reported flows, our outflows, the economic quality of the overall inflows is improving.

[Operator]

Our next question comes from

[Audio Gap]

[Unknown Analyst]

Operation from AIG or the overall environment or capital levels or otherwise that would -- that you're watching after [indiscernible] your own buybacks or start buybacks.

[Kevin Hogan, executive]

Yes. Thanks, Jimmy. So look, we're off to what we think is a very good start as a public company, and we're confident in achieving our financial targets, 12% to 14% ROE in 24 months. We are executing on the underlying strategies to achieve that and making significant progress.

Our diversified business model shows great value at a time like this, the multiple products, the multiple channels and sources of earnings that we have facilitated for us to pivot to our spread businesses, which we have a long history in managing and which are demonstrating some of the most attractive margins that we've seen in years.

But we have many levers to pull in order to achieve our targets. Part of that is obviously our participation in this upside rate environment. Part of that is the expense reduction plan, which Elias touched on a little bit. Part of it is our overall investment strategy, and part of it is our active capital management.

And we're making excellent progress against all of these levers. We don't need for every single lever to be successful in order for us to have the financial flexibility by the second quarter of next year, to engage in share repurchases beyond our dividend commitment. And we have every confidence in doing so.

[Unknown Analyst]

Okay. And then in terms of your individual retirement flows, obviously, the interest rate environment is benefiting everybody. How is competition in the market? Because a lot of companies have reported very strong fixed annuity flows with just the benefit of higher interest rates.

So is the market still rational? Or are you seeing some companies get more aggressive with terms and conditions given higher human yields?

[Kevin Hogan, executive]

So we're very comfortable with our position in fixed annuity. As you know, it's one of our competitive strengths. And we've long been a participant in this business, so we have a deep level of expertise and experience. We feel good about our position because in order to be successful managing a fixed annuity portfolio over time, there's really 4 important components.

First, you have to have the products and the distribution relationships in order to be able to respond to market needs. The second is you really have to understand policyholder behavior, including surrenders, especially in the face of changing interest rates and credit spreads and investor appetites.

The third is it's very important to proactively manage crediting rates and understand the underlying economics. And especially at a time like this when rates are rising, lapses are expected to rise. And making the right economic choice as to accepting a lapse as opposed to changing a crediting rate is a very important element of the strategy.

And then the fourth is managing the asset portfolio to be in position to support the crediting rate activities that are appropriate. And we are well prepared relative to liquidity, relative to the increasing lapse rates. And frankly, the margins that we're seeing right now are the most attractive that we've seen in many years.

So we haven't seen irrational competition to date. The margins are very attractive. We have the ability to rapidly change our crediting rates, so we can compete in the micro cycles that exist. And to the extent that conditions continue as they are now, we still see attractive margins in this business.

[Unknown Analyst]

Okay. If I could just ask one other quick one. You had a $41 million impact from the unwind of securitizations with AIG. Is that all done? Or could there be more similar items in future periods?

[Kevin Hogan, executive]

Elias?

[Elias Habayeb, executive]

Jimmy, it's Elias. So there is going to be a trailing impact into the fourth quarter, but that's it.

[Unknown Analyst]

Okay. A similar amount?

[Elias Habayeb, executive]

It's mostly -- it could be a small gain, but we have to see where the quarter ends in the fourth quarter. It's mark-to-market from there. We're unwinding. It will be done in the fourth quarter with it.

[Operator]

Our next question comes from Nigel Dally from Morgan Stanley.

[Nigel Dally, analyst]

Question on your investment portfolio repositioning. You commented that you're ahead of plan with regards to transferring assets to Blackstone. So just wanted to clarify, is the benefit already in your base yield? Or is there additional incremental upside to those resets we should expect?

[Kevin Hogan, executive]

So our relationship with Blackstone is excellent. The partnership is off to a really strong start and working well, and the assets that they're originating are an important part of our asset mix needed to support our new business.

I would say what we're -- we've transferred the $50 billion to them, and they're reinvesting the $50 billion and are doing a great job for us so far. So Elias, maybe you can just unpack a little bit where we're seeing this and where we see this go.

[Elias Habayeb, executive]

Nigel, so as you know, we transferred $50 billion to Blackstone. On the original $50 billion, they're reinvesting the principal pay downs. And year-to-date, they've invested about $5 billion for us through the end of September. So I look at it that this is the beginning of a longer partnership, and there's more value to come in.

But if you look at the original $50 billion they invested for us, on a year-to-date basis, the gross yield has been about 6%. So that component is starting to earn in, but I do expect more as time comes by.

I think it's also on the subject of base yield. We had a significant increase from the second quarter into the third quarter to unpack it. And that's a combination of, I would put it, reinvesting maturing money at higher yields right now. It's floating rate resets as well as new money that's coming into the portfolio that's coming from growth.

And the Blackstone -- the value that Blackstone brings in is being picked up in that map, but it's still at the infant stage. Come November, we would start allocating to Blackstone the first annual $8.5 billion, which would be allocated over the course of the next 12 months. And so what their impact on our portfolio is just going to increase from here.

[Nigel Dally, analyst]

Got it. That's good color. I just wanted to follow up on expense reduction. $110 million out of the $400 million has been achieved. Timing for the remainder, relatively linear, a little back-end loaded? Just any additional color on there as well.

[Elias Habayeb, executive]

So we're ahead of schedule from where we expect it to be just a few months ago. Our target was to get to $100 million of the $400 million by the end of this year. And we got there by the end of September, and we're actually a little ahead of the $100 million.

We continue to expect that the majority of the $400 million will be done in the next 24 months from the IPO, which is similar to the time line we provided before, and that would be on a run rate basis. And we're always looking for opportunities to accelerate the programs, so we can get the benefit of the efficiencies sooner.

[Operator]

Our next question comes from Erik Bass from Autonomous Research.

[Erik Bass, analyst]

So certainly nice to see the inflection in base spreads this quarter. I was just hoping you could give some color around what you'd expect for the magnitude of base spread improvement over the next 12 months, I guess, if interest rates hold here.

[Kevin Hogan, executive]

Yes, sure. Erik, thanks. So look, I mean, the diversification of our business model where we have choices as to where to pivot, where the risk-adjusted returns the most attractive is definitely paying off for us right now.

The upside from the rate environment, net of crediting, net of a reduced call tender and prepay activity and net of reductions in fees is more than enough to offset any of the impact on fees from the equity markets.

The sensitivity, the 100 basis points yielding $165 million uplift in year 1 and $365 million in year 3 as a linear sensitivity that you can point to. And what we're seeing right now, conditions-wise, externally, the margins are very attractive.

We have multiple levers to pull in the event that the external environment were to change. We don't need an environment like this in which to be successful. But we're certainly seeing very attractive conditions now.

As Elias pointed out, our new money rates are 6% on average. That's up 200 basis points over the base yield. We're up 300 basis points since the beginning of the year, and we're now seeing it start to come into the base spreads.

Now the change in the base spread is not going to be linear. And as Elias pointed out, there is some floating rate resets and things like that included in the change in the base spreads, but we certainly expect an upward direction.

[Elias Habayeb, executive]

Yes, I would echo that. Our expectation with the current market environment is our base spread income will continue to increase. Our base net spreads will continue to benefit from this environment. Now the quantum and the -- of the improvement from this point is going to depend on the number of variables. But I think looking at their sensitivities is a good proxy.

[Erik Bass, analyst]

Got it. And then can you just talk about how you're thinking about kind of the current level of excess capital that you're carrying and how that positions you for capital return in 2023?

[Kevin Hogan, executive]

Yes. Look, we're in a strong capital position, strong liquidity position. We have RBC above our target. And we created these strong positions, while supporting significant growth in our spread businesses. And we're very intentional about our capital management philosophy.

We're committed to our dividends, $600 million a year, payable quarterly, and we've already begun to deliver on that. We expect to have the financial flexibility to engage in share repurchases by the second quarter of next year, especially in the event that AIG were to engage in any secondary activity.

And we also have the financial flexibility to invest in this very attractive new business and focus on where the risk-adjusted returns are the highest. And so that's our philosophy.

I don't know, Elias, if you want to add anything.

[Elias Habayeb, executive]

I think you covered the kind of our philosophy real well. We feel very comfortable with our capital position today. And when we think of capital, Erik, we look at where we are relative to our target, but as well as where does the parent liquidity stand and our leverage profile.

So collectively, we feel we're in a strong position. And given the diversified nature of our balance sheet and earnings sources, which have helped us over time and when the markets go sideways, we kind of feel comfortable about it going into '23.

[Erik Bass, analyst]

And just one quick technical follow-up. You mentioned 2Q '23 for buybacks. Is there something technical that would prohibit you from doing it, being in the market prior to that?

[Elias Habayeb, executive]

So we're working through our position to be there. As Peter said on the AIG earnings call, the next windows are either March or May. And from our perspective, we're working to be in a position to participate if AIG chooses to go -- to do a secondary in 1 of those 2 windows. But for us, all options are on the table beyond that. But there's nothing technical other than just prioritizing the capital.

[Operator]

Our next question comes from Suneet Kamath from Jefferies.

[Suneet Kamath, analyst]

Just wanted to ask on the $2 billion of distributions that you made from your subsidiaries year-to-date being sort of in line with last year, was there anything unusual on the year-to-date basis that caused that number to be higher? And are you anticipating taking another distribution out in the fourth quarter?

[Elias Habayeb, executive]

So Suneet, it's Elias. So the distributions for '22 were done by design given we knew we needed to establish a strong parent liquidity, and we knew we had onetime expenses with separation in our expense program. So we front-loaded it. And given where we ended up with an RBC at 2000 -- end of '21, we felt comfortable with that. And that's kind of the -- so it's by design why we front-loaded it.

We do expect another distribution in the fourth quarter, but we're pretty close to what we did for the entire year of 2021. That was about $2.2 billion. So we're pretty close in the ZIP code, so it may not be a big distribution.

[Suneet Kamath, analyst]

Got it. And then in terms of your assumption review, is there anything that you're doing on like a statutory basis that could impact year-end capital? And any thoughts on -- maybe you can just remind us what level of AAT reserves did you guys put up last year? Because I'm assuming that could be a tailwind as we get into fourth quarter.

[Elias Habayeb, executive]

So let me take that. So we've done most of the -- for GAAP, we're done in the third quarter. What we have left is the standard year-end actuarial stuff we do for stat, and so that gets done in the fourth quarter there. I don't have the number of what we put up for cash flow testing last year, but we could follow up on that.

[Operator]

Our next question comes from Michael Ward from Citi.

[Michael Ward, analyst]

I was wondering if you could comment on how you see the ownership of your parent company trending over the next several years. I guess, like in your plan, do you have any kind of ultimate ownership level or AIG involvement over time incorporated as you think about it?

[Kevin Hogan, executive]

Well, I mean, that's a question not so much for us. I think that Peter's comments in AIG's public disclosures are pretty clear in terms of their intentions, and I'd refer to those.

[Elias Habayeb, executive]

Yes. And the other thing I would add is I'd refer to the S-1, whereby AIG's rights and how they evolve over different ownership levels are pretty -- are disclosed in the S-1.

[Michael Ward, analyst]

Okay. And maybe on pension risk transfer, just curious about the level of competition in that market. I think it's been a bright spot for the industry recently. And I was wondering if there's any kind of not target, but like sensitivity accretion, dollars of operating earnings per $1 billion of PRT business, for example, like an ROA of some sort. If you could help us understand the financials behind PRT.

[Kevin Hogan, executive]

Sure. Well, like all of our business, Michael, we look at multiple lenses. We look at an economic lens. We look at a stat lens. We look at a gap lens. And in some cases, we look at our tax lens as well. And each business has appropriate hurdles relative to those, and they're all consistent with our medium-term return targets.

Pension risk transfer is a very attractive business for us. And some 5-plus years ago, we decided to focus on full plan terminations. We built a specific proprietary administrative capability to focus on full plan terminations.

And these are more complex. There are fewer participants. There's less competition. And so we found that they have more attractive margins than the more commodity longevity oriented programs.

And the reality is with the current circumstances, we're finding more and more plans being fully funded. And so with the urgency that companies have to derisk, full plan terminations are getting larger, both in the U.S. and the U.K. marketplaces. And so we're seeing a very strong pipeline in full plan terminations.

We take a look at the jumbo commodity longevity deals, but we haven't found the economics attractive. And frankly, our partnership with Blackstone also is going to be helpful to us because they're expanding their tremendous origination capabilities across the duration spectrum, which will also help us support our pension risk transfer business.

[Operator]

Our next question comes from Ryan Krueger from KBW.

[Ryan Krueger, analyst]

My first question is on the base yield. Can you help us understand how much of the 25 basis point sequential improvement was driven by floaters relative to the other impacts?

[Elias Habayeb, executive]

Ryan, it's Elias. The floaters in the quarter was roughly half of the pickup, and that was driven by the significant increase in rates in such a short period of time. That being said, we -- overall, when we look the -- at our portfolio yield, and for base NII, we look at it as being pretty sustainable given all the different factors that are playing into it, not just the floating rate reset, but also the reinvestment at higher rates, as well as what's being driven by new business growth.

Our general account overall had positive inflows in the quarter, north of $1 billion, even though we saw a pickup in surrenders and fixed annuities, both in Group and Individual Retirement.

[Ryan Krueger, analyst]

Great. And then you didn't call anything out, but were there any negative impacts in Individual Retirement outside of the assumption review that was related to the equity market weakness in the quarter?

[Elias Habayeb, executive]

Yes. So you've got -- if you want to unpack Individual Retirement, you've got the impact of the annual actuarial review. That was like an $85 million, $86 million impact.

Also variable investment income, so PE -- are not also for us are primarily PE and equity real estate. They were down because they're on a 1 quarter lag and reflect what happened last quarter, and there was hardly any calling tender activity in the quarter. So that's also down.

And then with respect to equity markets, DAC and SOP 03-1, those are sensitive to where equity markets closed at the end of the quarter. So they were down this quarter relative to the prior year. They weren't as impacted as much in Q3 as much as Q2, but they're below expectation. Now the accounting for DAC and SOP 03-1 is going to change come January, and we'll be restating '21 and '22 to be on an LDTI basis.

So there are a number of things that impacted this quarter from there. But the core, if you look at the business, more than 60% of the earnings comes through spread income. And if you look at the base spread, the experiences, a meaningful improvement, in part driven by the growth you're seeing in the book and in part that's driven by the higher new money yields we're experiencing in the market.

[Ryan Krueger, analyst]

Can you quantify the DAC and SOP impact relative to what you'd normally expect?

[Elias Habayeb, executive]

I would put it in about roughly $50 million for the segment. If it was much stable markets, we would have had $50 million higher earnings because of DAC and SOP 03-1.

And then Ryan, just one thing to add, on top, we have a smaller impact on DAC and SOP in Group, and that's about, I would say, relative to stable markets would be about $10 million there. Those are the 2 segments that are impacted in that manner.

[Operator]

Our next question comes from Elyse Greenspan from Wells Fargo.

[Elyse Greenspan, analyst]

My first question on pension risk transfer, can you just talk to how you think about the capital requirements for new business? And if there is upside in sales, how much capital would you think about allocating towards PRT deals?

[Kevin Hogan, executive]

So the capital intensity of our businesses across the various portfolios is roughly comparable. And in terms of our capital management strategy, Elyse, as I pointed out, I mean, our priorities are making sure that we fund the dividends, that we're in a position to engage in the repurchases. And then a certain amount of capital, we can have the flexibility to invest in new business.

We will optimize that based on where the risk-adjusted returns are the highest and where the customer needs are the greatest. Now, right now, spread businesses have very attractive margins. And so we see great opportunities in fixed annuities, index annuities and also in pension risk transfers. But we will be very thoughtful about how much marginal capital we allocate to new business and ensure that we're optimizing rather than over-allocating.

[Elyse Greenspan, analyst]

Okay. And then on the cost savings program, should the majority come through corporate or through the segments in terms of the saves in the near term? And will you guys kind of call out where that falls into by segment on a quarterly basis?

[Elias Habayeb, executive]

Elyse, it's Elias. So the savings is across the board. It's not just targeting to the corporate center, but both the insurance companies as well as the corporate center will benefit.

For example, part of where the savings is coming from is we're expanding our outsourcing relationships with Accenture, and one of it is in our insurance company operations, where we're seeing kind of -- so some savings will come through that.

We will take it under consideration kind of as to how much transparency we can give in the future, but we did provide something already in the earnings deck on the savings so far.

[Elyse Greenspan, analyst]

Okay. And then one last one. You guys have $2 billion at the holdco. Is there a level that you guys like to have just in normal times or something that you're pointing to once you start buying back your shares?

[Elias Habayeb, executive]

So yes, so our philosophy around the parent liquidity is we want to hold enough liquidity to cover 1 year's worth of parent expenses. Those are higher on the -- at the beginning given some of the onetime expenses I referenced in my prepared remarks.

And I expect that, as we work through these expenses, the run rate from a parent liquidity would be more in line to cover the parent's fixed cost. And I consider the dividend to external shareholders as part of that.

So if you think about it's going to be primarily our debt service cost and our dividend is what we will get to once we're done with the onetime expenses. So the balance of the parent, I would expect, as a result, will come down over time.

But what we're going to -- what we plan to do and we know we can is our insurance companies, if you look historically at their distributions, they've been pretty consistent. We expect that trend line to continue and may improve over time as we improve profitability inside the insurance company, and that excess is what we will use to return back to shareholders in form of share repurchases.

[Operator]

Okay. Our final question is from Tom Gallagher from Evercore.

[Thomas Gallagher, analyst]

Elias, just a follow-up on that question on the amount of holding company liquidity you would expect to maintain, let's say, in the first year and then what it would look like beyond that. If I do the math, are we talking about, what, $1.2 billion to $1.5 billion as kind of a target in a range for year 1 grading down to closer to $1 billion in year 2? Is that directionally the way to think about levels of holdco liquidity that you'd be targeting?

[Elias Habayeb, executive]

So the way I think about it, Tom, is our debt service cost would be about $400 million to $500 million a year. Our dividends to shareholders, $600 million. So let's say that's $1.1 billion. That's sort of the go-forward run rate that I would expect us to be holding.

Between now and then, I referenced in my comments, we had about $350 million to $450 million of cost to complete the separation from AIG, and we have about $300 million of cost to affect our share -- sorry, our expense reduction program.

So we have to fund that. Right now, the plan is to fund it from the parent. So I think if you take that, we expect the onetime costs to be largely done by the end of 2023. So if you factor that in, I think that should give you the building blocks of what's the right number to be thinking about.

[Thomas Gallagher, analyst]

That's great. Yes, that gives me what I need. My follow-up is on the individual fixed annuity blocks. Spreads are very wide there, but your lapse rate moved up to, looks like, 9.6% this quarter. Do you need to start becoming more competitive on the cost of fund side as these lapses are moving up? Or how do you see that trade-off going forward?

[Kevin Hogan, executive]

Yes. Thanks, Tom. So as I pointed out, we have a lot of experience in this business. And one of the important things is understanding policyholder behavior. We do have a dynamic lapse model that we model based on changes in interest rates and credit spreads. And what we believe the lapse results will be that we can make economic decisions around the relative benefit of changing crediting rates as opposed to accepting the lapses.

So far, what we've seen is behavior that is within the expectations of our model for which we are well prepared. And we will continue to monitor the environment and actively manage our crediting rate strategy relative to where the economics make sense.

But right now, we're seeing behaviors that are well within our expectations and, in many cases, below our expectations, so we continue to have flexibility there.

And irrespective of the lapse rate, I think what's important is that, because of our ability to originate new business and the tremendous distribution relationships that we have, we also have a strong position of inflows.

And maybe Elias, if you can just unpack a little bit beyond the lapse rate where we're seeing the actual overall flows in the general account.

[Elias Habayeb, executive]

Yes, if you look at the general account and if you look at Individual Retirement alone, forget the other businesses, the index annuity and the fixed annuity products are both general account products largely. Between the two, we had over $1 billion of inflows into the account.

So we're not worried from a liquidity perspective on the account or disintermediation because we still have net inflows. We are growing the business, plus we've got strong liquidity in the insurance companies.

[Kevin Hogan, executive]

Yes. And because we're well positioned relative to liquidity, since we anticipate environments like this, we're not having to engage in anything like asset sales or whatnot to support the lapses.

[Operator]

I will now hand you back to Kevin Hogan for closing remarks.

[Kevin Hogan, executive]

Okay. Thank you for sharing part of your morning with us. The third quarter was the first step in our journey as Corebridge Financial, and I could not be more pleased, as Corebridge works hard each day to make it possible for more people to take action towards their future goals supported by our broad suite of retirement solutions and insurance products. Thank you.

[Operator]

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