Corebridge Financial Inc

NYSE:CRBG

Earnings Call Transcript 2022-Q4

[Operator]

Good morning, everyone, and welcome to the Corebridge Financial Incorporated Fourth Quarter 2022 Earnings Call. My name is Emily, and I'll be coordinating your call today. [Operator Instructions].

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

[Josh Smith, Head of IR]

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

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 Kevin.

[Kevin Hogan, President and CEO]

Thank you, Josh, and good morning to everyone. During our call today, we will present our fourth quarter and full year 2022 results. I will speak to the competitive landscape, review the progress we are making on our core strategies, reinforce our commitment to our financial goals and discuss how Corebridge is well positioned to create long-term value for shareholders and other stakeholders. Elias will then deliver additional details on our financial results, offer a few comments on LDTI and provide some guidance for 2023.

Corebridge Financial had a strong debut in 2022, notwithstanding external conditions. We delivered operating earnings per share of $0.88 in the fourth quarter and $2.87 for the year. Our results for the fourth quarter and the full year demonstrate the resilience of our franchise and the competitive strengths of our businesses. Our diverse sources of earnings, our broad product platform and our unrivaled network of distribution partners remain strategic advantages for Corebridge, and position us to perform well in different market environments.

Our businesses grew in 2022 as we expanded our product range, enhanced customer solutions, advanced strategic initiatives and began to implement a leaner operating model, all while completing our initial public offering last September. We are well on the way toward creating sustainable, profitable and incremental growth while delivering on the strategies and financial goals we've previously outlined.

Adjusting for earnings volatility related to market conditions, such as from variable investment income, the earnings power of our core insurance businesses improved, aided by tailwinds from higher interest rates, wider credit spreads and favorable mortality, which more than offset headwinds from equity market performance. New money rates more than doubled this year, climbing to 7% in the fourth quarter, an increase of approximately 400 basis points. Over the last 12 months, base net investment spread expanded during the second half of the year, contributing to a healthy level of organic growth.

Looking at individual retirement, we delivered balanced sales with healthy margins and strong general account cash flows across our spread-based products. The breadth of our portfolio and the strength of our distribution partnerships helped us generate premiums and deposits of $3.8 billion in the fourth quarter contributing to $15.1 billion of new deposits over the course of 2022, with positive net flows of $2.4 billion, reflecting nearly 200% growth in net flows year-over-year.

In fixed annuity, we saw some of the best conditions in recent memory. At the same time, we remain disciplined, effectively balancing competitiveness and margin growth. We delivered sales of more than $1.3 billion in each quarter of 2022, contributing to $5.7 billion in premiums and deposits for full year 2022, an 89% increase year-over-year. This extraordinary level of new business reflects a strong appetite for fixed annuity products in the marketplace, combined with the strength of our bank distribution relationships.

Fixed index annuity also benefited from a very attractive landscape with $1.7 billion of premiums and deposits in the fourth quarter and over $6.3 billion for the full year. Full year net inflows were $4.5 billion. The strong position of this business is supported by our income and accumulation products, which we distribute across a broad range of channels.

In Group Retirement, premiums and deposits were also strong at nearly $2.2 billion for the fourth quarter or approximately $8 billion for the full year, supported by new planned acquisitions and growth of out-of-plan deposits, in particular, in fixed annuities. These out-of-plan deposits reflect one part of our broader strategy for this business, which includes serving individuals outside of their traditional employer-sponsored retirement plans. And as a reminder, large new plant acquisitions or surrenders are nonlinear.

Thinking about retirement across group and individual, we were pleased the U.S. Congress was able to pass SECURE 2.0. This federal legislation is another important step in building a stronger retirement system and improving retirement outcomes for all Americans. We anticipate a positive impact from SECURE 2.0 across both our individual and group retirement businesses as this legislation should result in increased contributions, larger account balances and delayed withdrawals from retirement accounts.

Life Insurance generated stable premiums and deposits year-over-year as we continue to transform this business. Sales over the last year reflect our efforts to improve the mix of business in the U.S. and to grow the business in the UK. And in institutional markets, we closed pension risk transfer transactions totaling $1.3 billion in the fourth quarter. While premiums and deposits were lower in the fourth quarter and full year versus 2021, we continue to see a robust pipeline for full plan terminations in the U.S. and the UK.

We also remain confident in our ability to become a more consistent issuer of GICs in the future, subject to market conditions. Overall, I am very pleased with the performance of our businesses and the levels of organic growth we produced in spite of challenging market and industry conditions. We have a lot of momentum particularly since completing our IPO and we are well positioned to grow and continue to strengthen our relationships with distribution partners in the coming year.

Next, I will discuss the progress we are making to advance our investment partnerships and our efficiency strategies that I outlined during our third quarter earnings call. Our partnerships with Blackstone and BlackRock continued to benefit us as they each bring considerable resources to bear in support of our strategic initiatives.

Looking at Blackstone first, we continue to see great value from our growing relationship. Blackstone's asset sourcing capabilities have aided our product competitiveness as they are able to originate attractive assets at volumes we could not previously achieved. These assets are successfully supporting all four of our businesses. For the full year, Blackstone executed approximately $8 billion of new transactions across a variety of asset classes, including private and structured credit at an average gross yield of just over 6.5% and an average credit quality of single A.

The purchase yield on assets originated during the fourth quarter was 7.2%. We've been putting more money to work in private credit as we believe this asset class will generally perform better during a downturn due to the structural protections that are built into these transactions.

With respect to BlackRock, they are now managing approximately $83 billion of our invested assets, primarily focused on the public liquid credit portfolio. We also continue to make strides in our migration to BlackRock's Aladdin platform, which will further modernize our infrastructure and provide us with expanded analytics and accounting capabilities. We expect to be live on this platform in 2024.

Partnering with these world class asset managers greatly enhances our access to attractive assets but does not reflect the change to our investment strategy, risk appetite or asset allocation process. We own the balance sheet, and we will continue to direct asset allocation regardless of the source of origination. Our investment strategy has always been and will remain liability driven. Our diversified and high-quality investment portfolio is well matched to our liability profile.

Our risk appetite remains unchanged relative to our liabilities. We continue to actively manage both the performance and the risk of the entire portfolio, irrespective of origination and we are proactive in taking action on individual assets when appropriate. We believe we will be able to respond effectively to any changes in the credit cycle.

Now turning to Corebridge Forward, our modernization program that will deliver both expense reduction and increased efficiency. We have contracted on $232 million of exit run rate savings. This equates to more than 50% of our stated goal of $400 million of run rate savings over the next three years. Much of the exit run rate savings to date represent refinements to our operating model, enhanced outsourcing with existing partners, real estate consolidation opportunities and the early stages of our IT modernization, which will eventually lead to our ability to exit our data centers.

We continue to expect the majority of the run rate savings to earn in within 24 months of our IPO. Elias will provide more information in his remarks.

Turning to our financial goals, we remain focused on achieving each of the targets we outlined on our last earnings call as we continue to maintain a strong balance sheet, deliver disciplined growth and provide an attractive return to shareholders. We maintain a clear line of sight toward achieving an ROE of 12% to 14%, and we remain committed to delivering capital to our shareholders through a combination of $600 million in annual dividends along with share repurchases, resulting in a 60% to 65% payout ratio on adjusted after-tax operating income. We are on target to achieve these goals within 24 months of our IPO.

Before turning the call over to Elias, I would like to add a few comments about our commitment to creating shareholder and broader stakeholder value. As I look back on 2022, market conditions were challenging. Our team demonstrated an ability to respond, leveraging our unique platform to maximize opportunities as they arose. While 2023 remains uncertain and volatile, we are well positioned to deliver to customers, shareholders and our other stakeholders.

Our broad diversification across products and channels continues to serve us well as we are not dependent upon a single product or distribution channel. We remain nimble and we'll pursue profitable growth by focusing on areas where risk-adjusted returns are the most attractive in our new business growth as this is most accretive to our operating earnings. While we have recently been emphasizing capital deployment to our spread-based businesses, our fee-based business remains healthy and is poised to benefit when asset values recover and investor appetite rebounds.

To summarize, the core strengths of Corebridge, coupled with changes to our operating model and the execution of our strategic initiatives position us to continue to generate attractive financial results under various scenarios. This, in combination with our active capital management strategy puts us in a position to create long-term shareholder value.

I will now turn the call over to Elias.

[Elias Habayeb, CFO]

Thank you, Kevin, and good morning. I'll provide additional information about our financial results and key performance metrics as well as a few updates on LDTI and some high level guidance for 2023.

We reported fourth quarter results and full year results this morning, boosted by improving base spread income and favorable mortality experience, notwithstanding recent market conditions. And we continue to make meaningful progress on our strategic initiatives to improve profitability.

Fourth quarter adjusted ROE was 10.6%, operating EPS was $0.88, and adjusted pretax operating income, or APTOI, was $639 million. Our results included several notable items that contributed $0.16 to our operating EPS. These were offset by alternative returns below long term expectations of $0.12 and COVID mortality losses of $0.03. Adjusting for these items, our operating EPS would have been $0.87 for the quarter.

With respect to APTOI, our results were 31% or $287 million below the prior year quarter. Approximately $635 million of this decline was driven by the impact of market conditions and structural changes associated with debt capitalization of Corebridge as well as divestitures completed in 2021. The principal headwind was variable investment income, which accounted for nearly $490 million of the decline.

Excluding variable investment income, APTOI was 48% higher than the fourth quarter of 2021, largely due to increasing base spread income and improving mortality experience. Assets under management and administration was $357 billion as of December 31, up 3% sequentially, reflecting both market conditions and new business growth.

The strength and diversification of our core earnings power is evident when you look at our sources of income for the fourth quarter, which, in aggregate, were up 15% year-over-year, excluding variable investment income. Base spread income, which is our largest source of earnings, grew 25% compared to the fourth quarter of 2021 due to higher new money rates coupled with strong growth in our spread-based products.

Fee income, our second largest source of earnings declined 20% versus the prior year quarter partially a function of underlying asset valuations. Underwriting margin, which is primarily derived from our life business, rose 91% year-over-year, excluding variable investment income, mainly due to improving mortality experience.

Shifting to net investment income, base yield was 4.42% in the fourth quarter. This was the second quarter in a row where we saw significant growth with a base yield up 34 basis points sequentially and 54 basis points year-over-year. This growth was driven by a combination of reinvestment activity at higher new money rates, resets on floating rate assets and growth of the overall portfolio as well as a onetime notable item. This notable item contributed 15 basis points to the base yield, most of which benefited our Life Insurance segment.

To reiterate my comments during last quarter's call, we expect the benefit of higher new money rates and our partnership with Blackstone to continue to emerge during future quarters as more of the investment portfolio is reinvested at higher yields and earns in. Thus far, the improvement in base yield has outweighed any increases in policyholder crediting rates.

Moving on to expenses, total operating expenses increased sequentially on a net basis. While our fixed cost benefits from Corebridge Forward activity, they were more than offset by incremental costs that kicked in with our IPO, continued establishment of standalone capabilities as well as a onetime item.

Following up on Kevin's earlier comments about Corebridge Forward, we have a roadmap for $400 million of expense savings, and we have acted upon or contracted approximately $232 million of exit run rate savings as of the end of 2022. Only a small percentage of these savings have earned into our results thus far. We expect that approximately $130 million will earn in, in 2023, with an offset from the full year earn-in effect from incremental costs that we picked up during 2022 to operate a standalone public company, which we estimate at $75 million to $100 million.

We continue to estimate the cost to achieve will approximate $300 million over the life of the initiative, with this onetime investment delivering $400 million in annual run rate savings. So far, the cost to achieve has been $84 million. We continue to expect the implementation of a leaner operating model will contribute approximately one point to ROE growth by 2024.

We also made significant strides separating Corebridge from AIG. To-date, we've incurred about $180 million of the $350 million to $450 million estimated cost to achieve. The bulk of the remaining work is centered around separating shared applications which should largely be completed by the end of 2023 or early '24.

Next, I will speak to segment results, beginning with Individual Retirement, our largest business. Individual Retirement reported APTOI of $436 million, benefiting from strong growth in base spread income as well as overall lower expenses, partially offset by lower fee income. Base spread income for the quarter was up 35% over the prior year quarter, driven by spread expansion. Base net investment spreads increased 54 basis points year-over-year and 27 basis points sequentially.

Fee income declined 21% due to lower asset valuations and net outflows in our variable annuity portfolio. Our hedging programs continued to perform as expected despite volatile market conditions. The higher rates that have been driving our strong sales at attractive margins are as expected, also leading to higher surrenders. That being said, our surrender rate remains below our expectation and net inflows in the general account were quite strong at $740 million in the fourth quarter and over $4 billion for all of 2022.

In addition, we maintained strong liquidity in the general account, well positioning us to cover surrenders which we expect will remain elevated in 2023 relative to historical levels due to the materially higher interest rate and credit spread environment.

Group Retirement has been influenced by many of the same trends impacting Individual Retirement. Group Retirement reported APTOI of $177 million, benefiting from strong growth in base spread income, offset by lower fee income. Base spread income grew 13% versus the fourth quarter of 2021 due to spread expansion. Base net investment spread increased 17 basis points year-over-year but was flat sequentially.

Fee income declined 20% year-over-year due to lower asset valuations and net outflows. While net flows remain negative, we continue to see outflows concentrated in the higher GMIR bucket with inflows in the lower GMIR buckets. This trend is expected to improve the spread profile for the business over time.

We expect continued growth of our advisory and brokerage fee revenue, which reflects our strategy to pivot the business into a platform which provides for a higher stream of less captive incentive cash flows over time.

Life Insurance reported APTOI of $97 million in the fourth quarter inclusive of $22 million of notable items. Core underwriting margin, excluding notable items, improved 78% year-over-year due to improved mortality experience. Our fourth quarter mortality experience was favorable to expectation, inclusive of $21 million of COVID losses.

Notable items in Life Insurance included approximately $64 million of a onetime item in net investment income, offset by $42 million related to the positive resolution of certain legal matters. The legal matters included a recapture of certain YRT treaties that were subject to arbitration as well as the resolution of an unrelated litigation matter. We have now resolved a majority of our YRT disputes.

Considering this business more broadly and looking forward, we expect continued growth of base portfolio income and a reversion to historical mortality levels as COVID moves into an endemic phase. Institutional markets reported APTOI of $64 million in the fourth quarter with stable core sources of income as compared to the prior year quarter. The year-over-year decline in APTOI was largely driven by lower variable investment income.

Total insurance reserves grew 8% year-over-year, reflecting the growth of our PRT business and gate [ph] portfolio. We're encouraged by the progression of the institutional markets business, reflecting consistent revenue growth -- sorry, reserve growth, strong new business margins and expanding spreads, which we expect will continue to improve profitability in 2023.

And lastly, losses in our Corporate and Other segment increased sequentially due to higher interest expense, resulting from a full quarter of debt service on hybrid securities and the delayed draw term loan, which was drawn down in the third quarter 2022.

Turning to our balance sheet, we assess the strength of our balance sheet through different lenses including, but not limited to liquidity levels, capital ratios, financial leverage and our risk profile. Our balance sheet remains healthy with strong liquidity and capital as well as a balanced diversified investment portfolio and reasonable financial leverage as of December 31.

Adjusted book value was $21.4 billion or $33.10 per share, up 9% year-over-year, but down 2% from the third quarter. The sequential decline was due to derivative and foreign exchange mark-to-market losses in the fourth quarter that partially reversed gains from the first nine months of the year.

Our financial leverage ratio was 29.6%, within our target range. We continue to expect that our balance sheet will naturally delever over time as a result of book value growth. Our Life Fleet RBC ratio remained strong and was above target of 400%, largely aligned with the prior year quarter estimate -- prior quarter estimate. Recognizing there's a lot of uncertainty in the macro environment, we feel we're starting 2023 in a strong position.

We ended the year with ample holding company liquidity of $1.5 billion. Our insurance companies returned $2.2 billion of normalized distribution during 2022 on par with the distributions made in each of the preceding three years. We paid dividends to our shareholders of approximately $300 million since the IPO. We declared our dividend for the first quarter of 2023, which will be paid on March 31. This represents a dividend yield over 4% based upon our recent stock price.

As Kevin previously indicated, we remain focused on delivering on our financial goals, including achieving a total payout ratio of 60% to 65% by 2024.

Pivoting to LDTI, it's important to remember that LTI [ph] does not impact our economic returns, statutory results or insurance company cash flows. When we begin reporting under LDTI in 2023, we expect to see reduced volatility in our operating results given changes to the accounting for market risk benefits impact. The impact to our operating earnings run rate should be neutral to modestly favorable over time.

We expect continued volatility in our GAAP earnings due to the requirement to fair value market risk benefits in our GAAP results. We also expect an increase in adjusted book value which we currently estimate to approximate $1.5 billion as of September 30, 2022.

In terms of the initial transition adjustment as of January 1, 2021, we currently estimate an approximate $1 billion to $1.5 billion reduction in GAAP shareholders' equity resulting from a decline in other comprehensive income, offset by an increase in retained earnings. We further estimate the overall impact to GAAP shareholders' equity as of September 30, 2022, is an increase of approximately $1 billion. This favorable impact to book value reflects the benefit of Corporate having a diversified balance sheet, including both life and annuity products.

In terms of sensitivities to macro factors, our preliminary estimate of the APTOI impact from movements in equities and interest rates post LDTI are as follows. First, an immediate 10% reduction in equities is expected to reduce fee income net of advisory fee expense by approximately $85 million over a 12 month period. And second, an immediate upward parallel shift of 100 basis points across the treasury curve is expected to raise APTOI by approximately $165 million, $265 million and $365 million for each of the first, second and third years following the rate increase.

Now I would like to conclude with a commentary on our outlook for 2023. Looking ahead, we expect to achieve EPS growth resulting from our initiatives involving expense savings, investments, organic growth and capital management. As to our sources of income over the next 12 months, we expect to see incremental growth in base spread income and underwriting margins, while fee income will depend on the extent of a recovery in asset valuations.

We continue to expect long-term return assumptions for our alternative investments will range between 8% and 9%. And finally, we expect our effective tax rate will approximate 21% in 2023 before discrete items.

In summary, we remain focused on executing our strategies and deploying capital in a way that aids our efforts to create sustainable and profitable long-term growth. We have a strong balance sheet, and we remain focused on delivering on our financial goals.

I will now hand it back to Kevin.

[Kevin Hogan, President and CEO]

Thank you, Elias. Operator, we are now ready to take questions.

[Operator]

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question today comes from Ryan Krueger with KBW. Ryan, please go ahead. Your line is open.

[Ryan Krueger, KBW]

Hi, thanks good morning. Yesterday, on the AIG call, they indicated a possible secondary offering before the end of the first quarter. I just wanted -- was hoping for updated commentary on, if you think you would be in a position to commence the buyback program around that same time to be able to participate if that occurs?

[Kevin Hogan, President and CEO]

Yes. Thanks, Ryan. Our focus is on delivering on our strategies and having the financial flexibility. And we feel really good about where we ended the year. Our capital position at the end of the year was consistent with our strategy. Our RBC in the 410% to 420% [ph] range, similar to the third quarter. And that's, as Elias pointed out in his prepared remarks, after paying $2.2 billion in distributions.

And we also made a provision for some modest cash flow testing reserves in New York. And our parent liquidity is where we expect it to be. It's within our target of being able to pay for our corporate expenses and to have the financial flexibility to invest in attractive new business as well as to complement our committed dividend with additional repurchases. And our leverage is in the range that we intend, in the 25 to 30, at the higher end of the range based on where we are. So we feel good about where we are.

We can't comment further on AIG's plans relative to its strategy, but we have the financial flexibility that we intended.

[Ryan Krueger, KBW]

Great. Thanks. And then follow-up on the expense commentary. I just want to make sure I understood it correctly. Were your comments that you expect $130 million of incremental expense saves to earn in, in 2023 and that $75 million to $100 million of incrementally higher standalone company expenses. I just want to make sure that are those incremental or are they more total amounts? And if any of that was already incorporated into the 2022 results?

[Kevin Hogan, President and CEO]

Thanks, Ryan. There's a lot of moving parts. I'll ask Elias to sort of unpack all the pieces.

[Elias Habayeb, CFO]

Yes. So Ryan, we've acted or contracted about $232 million in savings related to -- exit run rate savings associated with Corebridge Forward. A little of that has earned in, in 2022. The incremental portion related to the $232 million that we estimate will earn in, in '23 is $130 million. But offsetting it, as you know, we have been -- if you look at over the course of the year, our expense has been coming up as we build up the capabilities to be a standalone public company. That has not fully earned into our results in '22.

So there's an offset of about $75 million to $100 million that we'll earn in next year.

[Ryan Krueger, KBW]

Great, thanks a lot.

[Operator]

The next question comes from Elyse Greenspan with Wells Fargo. Elyse, please go ahead.

[Elyse Greenspan, Wells Fargo]

Hi, thanks. My first question was on the elevated fixed annuity surrender activity in the quarter. I was just hoping to get more color on how customers are behaving given the rising interest rate environment? And what protections do you guys have in place against disintermediation on that product?

[Kevin Hogan, President and CEO]

Yes. Thanks, Elyse. So the environment for fixed annuities is very attractive, right? The higher rates, the wider spreads means both higher sales, but also very attractive margins. And it does come along with higher surrenders, which are quite natural. And I think that there's three things to keep in mind relative to the surrenders as we look at this portfolio. The first is that while the surrenders are higher, they are lower than our expectations based on where rates and spreads were during the fourth quarter. And so it is a natural part of managing a fixed annuity portfolio to manage surrenders and understand the right time to accept the surrender and essentially replace it with new business at higher margins. And that's essentially what we've chosen to do.

Now in order to be able to do that, you need to have the liquidity associated with that to be able to support the surrender without diluting the margin on the new business. And that has long been a part of our strategy to maintain that liquidity. So that's the first thing to keep in mind. The surrenders, whilst they are higher, are naturally higher based on where the rates were, but lower than what we are prepared for.

The second thing I would say is that kind of indicative of that is that despite the higher surrenders, because of the strength of the new business, we have had strong positive flows of $700 million in the fourth quarter, as Elias pointed out, and $4 billion in the full year. So the general account is growing.

And the third thing I would say is that we do actively manage crediting rates. We have the opportunity to manage crediting rates even for the business beyond the surrender charge period. And that's really where we make the economic decision relative to the value of a surrender as opposed to the opportunity for new business. So we're quite comfortable where the fixed annuity portfolio is. It's possible if rates rise further, spreads widen further, that surrenders may rise, but that means that new business is also likely to rise and the margin is likely even more attractive than what we found in the fourth quarter.

[Elyse Greenspan, Wells Fargo]

And then my second question, the parent liquidity went down $500 million in the quarter. I know the interest and dividend's around $250 million. What were the other sources and uses that took that down? And as we think about going forward, is the target -- are you looking for that to still be, I guess, last quarter, I think you said around $1.1 billion after you go through some of the expenses associated with the separation and the program?

[Elias Habayeb, CFO]

Elyse, it's Elias. So we manage our liquidity at the parent to cover the next 12 month worth of expenses or needs from the parent. And we treat the $600 million annual dividend to our shareholders as if it's a fixed cost. So we reserve for it from that perspective. Now -- and that's going to be our philosophy, how we manage liquidity going forward. Where we ended up the year at $1.5 billion, it approximates our next 12 month needs.

And with respect to what drove the decline from the end of September down to the end of December, one element is debt service. Our debt service payments are lumped between the second and the fourth quarter. In addition, we didn't pay the third quarter dividend until October. So you had another $150 million there. And finally, we're making progress on the onetime expenses and that's kind of another contributor to the drop from the third quarter.

[Elyse Greenspan, Wells Fargo]

Thank you.

[Operator]

The next question comes from Alex Scott with Goldman Sachs. Alex, please go ahead.

[Alex Scott, Goldman Sachs]

Hi, good morning. First one, I had is a little nuance. I was looking at your interest maintenance reserve and the statutory filings, and it looked like you guys have one of the larger balances. And I was interested just because I think that would potentially give you more flexibility in a higher rate environment to reallocate. And I know you've already sort of talked about these plans to some degree with Blackstone. But just interested in timing and just thinking through the interest maintenance reserve balance, I mean, does that allow you to be a little more aggressive with reallocating more near term?

[Elias Habayeb, CFO]

So hey, Alex, it's Elias. So when we look at our investments plan, we look at totality. IMR is just one element from how we look at balance sheet capacity. But to us, that's not necessarily a determining factor for how we decide what to do with the investment portfolio. As Kevin said, our strategy around investments is really driven by the liabilities and where we see opportunities in the market. And we consider also capital in totality and not just looking at the IMR. We do continue to have a positive IMR balance, but to note, as you've seen in our stat supplement.

[Alex Scott, Goldman Sachs]

Understood. Okay, thanks. Second question I had is just a follow-up on some of the commentary on the crediting rate decisions you're making. Could you talk about the benefit of higher net investment income from yields? And how is your decision making around crediting rates evolving? And has that changed at all, the sensitivity that is?

[Kevin Hogan, President and CEO]

Sure. So let's look at the fourth quarter. So new money rates in the fourth quarter were about 400 basis points higher than what they were at the beginning of the year. And the margins on the new business are extremely attractive, also supported by some of the asset origination through our partner, Blackstone, which are high credit quality as well as higher returning assets in the current market. And so the margin opportunity is really reflected in what's going on with our net spreads.

If you look at the total portfolio on a sequential basis, the net spreads are up 27 basis points and year-over-year, up 54 basis points. That's a reflection of the improving earnings capacity of the business. And in terms of our strategy for managing crediting rates, we understand what the implications of potentially increasing crediting rates could be on preservation of the business. But much of that business would be preserved irrespective of what we do with the crediting rate.

So economically, the new business capital and the margins on the new business capital are more valuable than the capital supporting that in-force business. And it is a dynamic kind of trade, a surrender in fixed annuity and return for new business and indexed annuity. And our team has a great deal of experience in managing the cycle of the fixed annuity and indexed annuity portfolios, and I think we're benefiting from that insight.

[Alex Scott, Goldman Sachs]

Thank you.

[Operator]

The next question comes from John Barnidge with Piper Sandler. John, please go ahead.

[John Barnidge, Piper Sandler]

Thank you very much. Favorable mortality experience was called out. I know UK is a sizable market there and has seen stubbornly elevated mortality. Sequential growth in underwriting margin in that business, was UK mortality improvement, a driver or any additional color on underlying mortality trends, as some noted in early peaking of flu? Thank you.

[Kevin Hogan, President and CEO]

Yes. Thanks, John. Look we're very happy with the overall life business and the way that it's performed even through the pandemic. And the mortality improvement -- the UK, it's a nice business. It's a fast-growing business in terms of new business, but the balance sheet is still quite small because it's a relatively young business. The real improvement in mortality for us was in the U.S. where once again, even including COVID, which remains at that sensitivity that we have projected since the beginning of the pandemic, even including COVID, was for the second quarter in a row below our pricing expectations.

So the mortality performance really in the U.S. is what is driving that improvement and has consistently been quite attractive over the last couple of years. And we're repositioning the portfolio in the U.S. and that's also going well. We've moved away from the more interest rate-sensitive businesses, essentially stopped VUL and GUL a couple of years ago and are focusing on indexed universal life in the permanent area, and then simpler protection products in the rest of the portfolio.

The fourth quarter did have a couple of one-offs, as Elias mentioned, but the earnings have returned in this portfolio to the levels that we would have expected pre-pandemic. And in addition, it contributes extremely strong cash flows. So we're very happy with the position of the Life business.

[John Barnidge, Piper Sandler]

Thank you very much. And my follow-up question, sticking with that business, are you experiencing an increase reinsurance rates after the pandemic? Some other companies have noted that. Thank you.

[Kevin Hogan, President and CEO]

The reinsurance rate environment following the pandemic hasn't been something that has been a material factor for us in managing the business.

[John Barnidge, Piper Sandler]

Thank you very much.

[Kevin Hogan, President and CEO]

Thank you.

[Operator]

Our next question comes from Michael Ward with Citi. Michael, please go ahead. Your line is open.

[Michael Ward, Citi]

Thanks. Good morning. I was just wondering if you could discuss some of your portfolio -- investment portfolio changes between asset classes. I think for the year, I noticed you guys rotated out of residential and commercial MBS and into a little bit more CLOs and ABS. So I'm just curious how you see these asset classes, and I assume part of it is from your partnerships with asset managers.

[Kevin Hogan, President and CEO]

Yes. Thanks, Michael. I'll start and then maybe hand over to Elias. But first of all, I'd just like to say we're very comfortable with our asset portfolio. It's a high-quality, well-diversified portfolio, on average credit rating of single A minus where it's been the last couple of years. And our assets reflect the profile of our liabilities, including our spread businesses, which are, in many cases, illiquid and longer dated. And we do actively manage the portfolio, which has performed well in different cycles. So I think that's the context in which to think about our asset strategy, but I'll hand over to Elias.

[Elias Habayeb, CFO]

Hey, Michael, hi. How are you? So with respect to your question on the portfolio, we have shifted over the course of the year some of the asset allocation. That was a deliberate action. As Kevin said, our investment strategy is driven by the liability side. But we've been working with our asset management partners to see what's the opportunities and see what's the appropriate asset classes for the business we write.

You called out CLO specifically. So our total CLO portfolio as of the end of the year is about $9 billion out of about $200 billion in assets. And the vast majority is investment-grade and over 90% is in single A and better. And we like that asset class. We think it makes a lot of sense given some of the liabilities we issue. And our portfolio over the last 10 years has performed really well.

With respect to 2022, we invested a little over $2 billion in CLO, about $1.6 billion is AA rated class. So we like it, and we're comfortable with it, and it fits our risk appetite.

[Michael Ward, Citi]

Awesome. Thanks, helpful. And then I was just wondering, as you look forward and recognizing you guys have a lot to work on between expense programs, capital distributions and secondaries, but strategically, just wondering how you think about liability repositioning as in -- and I know we've touched on this in the past, but how do you guys think about your business mix going forward? Are you looking at making any changes from here?

[Kevin Hogan, President and CEO]

So yes, thanks, Michael. We feel very good about the portfolio that we have. I mean we've worked hard over the last 8, 10 years to focus on the four businesses where we have very strong market positions, strategically well positioned and supported by the tailwinds of the macro environment. But as I think we demonstrated when we created Fortitude Re, we are constantly looking to optimize the liability side of the portfolio. That was a big transaction for us and ultimately derisking with the disposition of that.

We're constantly looking for opportunities to optimize the in-force. And as you would expect, we are in the current conversation relative to where the market is relative to various transactions. We certainly haven't seen anything yet that makes economic sense to us, but we will continue to look for opportunities to optimize. But we're extremely comfortable with the portfolio that we have. We don't see any holes in the portfolio. And we have, as you said, a lot on our plate.

We're focused on executing the strategies necessary to deliver on our financial targets, the 12% to 14% ROE, having the financial flexibility to deliver beyond the dividend and engage in repurchases to get to that 60% to 65% payout ratio once we get through onetime expenses. So that's what we're fully focused on.

[Michael Ward, Citi]

Awesome, thank you guys.

[Kevin Hogan, President and CEO]

Thank you.

[Operator]

The next question comes from Erik Bass with Autonomous Research. Please go ahead, Erik.

[Erik Bass, Autonomous Research]

Hi, thank you. Just hoping you could give a little bit more color on how you see base NII building over the course of 2023. Maybe how much uplift there still could be from floating rate assets? How much incremental reinvestment is still happening with the assets transferred to Blackstone? And then any sense of just portfolio cash flows to invest at clearly a lot higher new money yields.

[Kevin Hogan, President and CEO]

Yes. Thanks, Eric. I'll hand over to Elias in a minute here. But the first thing I want to say is that we do not have an intention of any portfolio trade relative to the assets that we transferred to Blackstone. That's not the idea. We transferred them assets to manage, and those assets support our liabilities. So it's not like there's an intention of something like that. I'll ask Elias relative to the further questions on NII, what's happened and where we see it going.

[Elias Habayeb, CFO]

So Eric, hi. So there's been like three drivers behind our base NII and base spread income growth year-over-year through '22. And we expect that trend to continue into 2023. We're benefiting from the higher new money rates. So on the reinvestment side, in the fourth quarter, as Kevin quoted, purchase yields on average are about 7%. That's about 400 basis points up relative to the beginning of the year and 300 basis points above where the portfolio yield was in the fourth quarter. And that's going to continue to earn in.

You also got floaters, and the floaters will be impacted by more short-term rate side, but some of it is matching floating rate liabilities. So that we will give back given what happens to rate. And finally, growth. The portfolio is growing, as you've seen during the quarter of '22. So those three drivers should continue to contribute to growth in base NII as well as base spread income next year.

[Erik Bass, Autonomous Research]

Got it. Thank you. And then apologies if I missed this, but Elias, can you spike out what you're including in the $0.16 of favorable items that you mentioned?

[Elias Habayeb, CFO]

Yes. So the $0.16 is on the -- in the earnings deck. It's a combination of -- we had a lower tax rate. We've had a onetime item on investments associated with it. But it's in the earnings that we gave you the details on it.

[Erik Bass, Autonomous Research]

Okay, thank you.

[Kevin Hogan, President and CEO]

Thank you.

[Operator]

The next question comes from Suneet Kamath with Jefferies. Please go ahead.

[Suneet Kamath, Jefferies]

Great, thanks. I wanted to ask about the $2.2 billion of distributions to the holding company despite the weaker markets. Is there a way to think about how much of that was RBC drawdown versus capital generated and maybe some thoughts on what you expect for 2023?

[Kevin Hogan, President and CEO]

Suneet, good to hear from you. So the $2.2 billion is made up of two things. It's made up of dividends that were paid to the holding company, which is about $1.8 billion as well as about $400 million in tax sharing payments paid to AIG. And those are related to tax strategies that increase taxable income but not statutory income. Those strategies ended with the IPO when we deconsolidated from AIG on a tax basis and they reduced kind of dividend capacity dollar for dollar in the past. So that's why we give you this normalized view $2.2 billion.

As it relates to the year, if you look at the past year, the insurance companies distributed about $2.2 billion. We also had the macro environment, and we also grew new business during the course of the year. But in totality, we still ended the year above our target of $400 million. So we're at $410 million to $420 million which still puts us in a healthy position. And if you look historically, our insurance companies distributed about $2 billion a year, that's been our historical trend from there.

[Suneet Kamath, Jefferies]

Got it. Okay. And then I guess maybe a separate question just on your annuity philosophy. It seems like you are one of the few companies that's not pursuing the RILA market. And so I'm just curious, why not when it seems like pretty much everybody else is entering that market?

[Kevin Hogan, President and CEO]

Yes. Thanks, Suneet. When we started developing our index annuity -- our index annuity strategy, we recognize that our suite of both income-oriented and accumulation-oriented index annuities serves a similar population as to the RILA marketplace, albeit with a potential advantage of a zero floor. And we have a broad range of index options for investors to invest in, and our fixed index annuity portfolio continues to expand and grow.

We added an additional option more recently from Dimensional Fund Advisors that seems quite popular. So we haven't necessarily ruled out entering the RILA marketplace, but serving a similar market with a different product has worked well for us so far.

[Suneet Kamath, Jefferies]

Okay, thanks Kevin.

[Kevin Hogan, President and CEO]

Thank you.

[Operator]

That's all the questions we have for today. We currently have no further questions in the queue. So I'll hand the call back to Kevin Hogan for closing remarks.

[Kevin Hogan, President and CEO]

Thanks, everybody for joining the call today to ask your questions. As I mentioned, 2022 is an important year for Corebridge and I would like to thank all of our colleagues across Corebridge, our colleagues at AIG and our various partners for their great work throughout the year. As we look ahead to 2023, we are well-positioned to capitalize on the positive momentum of the last 12 months, which should bolster our ability to deliver on our commitments, and we look forward to creating long-term value for our shareholders. Have a good day. Thank you.

[Operator]

Thank you, everyone, for joining us today. This concludes our call, and you may now disconnect your lines.