Corebridge Financial, Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. Unless otherwise noted, amounts are in U.S. dollars. Corebridge completed its IPO on September 19, 2022; AIG retained 77.7% ownership. The filing notes that pre-reorganization periods are presented on a combined basis, so historical results may not reflect results as a stand-alone company.
Financial performance and condition
- Q3 revenue and earnings: Revenue was $7.1 billion, up from $5.5 billion a year earlier. Net income attributable to Corebridge was $2.35 billion versus $1.42 billion; diluted EPS was $3.63.
- Earnings quality: Q3 GAAP results included $2.7 billion of net realized gains, including a $1.46 billion gain on the Fortitude Re funds-withheld embedded derivative. These and other items excluded from management’s non-GAAP measure helped lift reported results. Adjusted pre-tax operating income (APTOI) fell to $423 million from $872 million; adjusted after-tax operating income was $364 million versus $660 million.
- Nine-month results: Revenue was $22.8 billion versus $16.6 billion, net income attributable to Corebridge was $8.72 billion versus $4.23 billion, and APTOI declined to $1.54 billion from $2.76 billion. Net realized gains were $9.70 billion, including $6.69 billion from the Fortitude Re embedded derivative.
- Operating trends: Q3 APTOI was $199 million in Individual Retirement, $180 million in Group Retirement, $103 million in Life Insurance, $83 million in Institutional Markets, and a $146 million loss in Corporate and Other. Individual Retirement and Group Retirement were pressured by weaker variable investment income and lower fee income; Corporate and Other reflected higher debt costs.
- Cash flow: For the first nine months, operating cash flow was $2.20 billion, investing cash flow was negative $3.33 billion, and financing cash flow was positive $980 million. Cash and restricted cash ended at $444 million, down $157 million from year-end 2021.
- Capital and balance sheet: Total assets were $354.6 billion, down from $416.2 billion at December 31, 2021. Corebridge shareholders’ equity was $7.5 billion versus $27.1 billion; accumulated other comprehensive loss was $17.3 billion, compared with $10.2 billion of accumulated other comprehensive income at year-end. Falling fixed-income values amid higher interest rates were a major factor.
- Investments and credit: Total investments were $213.8 billion, including $151.0 billion of available-for-sale bonds. Those bonds had $27.7 billion of gross unrealized losses at quarter-end; management attributed losses primarily to non-credit factors and said it neither intended nor expected to be required to sell before recovery. 88% of the fixed maturity securities held by U.S. entities were investment grade.
- Debt and liquidity: Short- and long-term financial debt totaled about $9.4 billion; a further $6.0 billion of consolidated investment-entity debt was reported as non-recourse to Corebridge, subject to limited exceptions. Corebridge Parent and intermediate holding companies reported $4.5 billion of liquidity sources, including $2.0 billion of cash and short-term investments and a $2.5 billion committed revolving credit facility.
- Dividends and flows: Corebridge paid $580 million of common dividends in the first nine months and declared a $0.23-per-share dividend for October 2022. Q3 net flows were negative $92 million overall: positive $696 million in Individual Retirement was more than offset by negative $788 million in Group Retirement.
Material changes versus comparable periods
- Reported Q3 and nine-month net income rose year over year, but growth was driven substantially by realized gains and Fortitude Re-related fair-value movements. In contrast, APTOI declined in both periods.
- Net investment income fell to $2.16 billion from $3.01 billion in Q3 and to $7.02 billion from $8.75 billion for nine months. The filing cites lower Fortitude Re funds-withheld income and weaker variable investment income, including alternative investments and yield-enhancement income.
- Q3 premiums increased to $1.31 billion from $941 million, mainly reflecting new pension risk transfer business. General operating expenses rose to $578 million from $521 million, and interest expense rose to $149 million from $83 million.
- Corebridge issued $6.5 billion of senior notes and $1.0 billion of hybrid junior subordinated notes, and borrowed $1.5 billion under a delayed-draw term facility. It repaid the $8.3 billion AIG promissory note. Long-term debt consequently increased substantially from year-end.
- Assets under management and administration declined to $345.2 billion from $410.9 billion at year-end, reflecting market declines, higher rates, and wider credit spreads.
Outlook, risks and unusual items
- Management outlook: Management said rising rates could improve reinvestment yields, spread income, and fixed-annuity sales, but also noted pressure on fee income from lower asset values and the potential for higher surrenders. Fixed-annuity sales benefited from competitive pricing and higher rates; the company is monitoring surrenders as contracts leave surrender-charge periods. No numerical earnings guidance is provided in the supplied filing text.
- Separation and efficiency: Corebridge estimated $350 million–$450 million of one-time separation expenses from January 1, 2022, with most expected by December 31, 2023. It also expected a one-time $300 million expense to achieve close to $400 million of annual run-rate expense reductions within two to three years of the offering, with most savings targeted within 24 months.
- Accounting change: Corebridge planned to adopt the long-duration insurance accounting standard on January 1, 2023. It estimated a $1 billion–$3 billion decrease in pre-tax equity at the January 1, 2021 transition date. Fair-value measurement of market risk benefits may add earnings volatility after adoption.
- Tax and market exposure: Following tax deconsolidation from AIG, Corebridge recorded a $127 million valuation allowance related to tax attributes and other deferred tax assets. It also established a $1.6 billion valuation allowance on deferred tax assets related to unrealized capital losses, allocated to OCI. Interest-rate, credit-spread and equity-market movements can materially affect investment values, insurance guarantees, fees, and liquidity.
- Reinsurance and legal matters: Fortitude Re-related accounting creates volatility in net income that management says is largely offset in OCI. The company also disclosed disputes and arbitrations over requested reinsurance rate increases. In the Moriarty California life-insurance litigation, class certification was denied without prejudice; a trial was set for February 7, 2023. Corebridge had accrued its estimate of probable loss, but the filing does not provide a clear amount.
- Other risks: The filing highlights potential liquidity and collateral needs, investment and counterparty risk, policyholder claims and surrenders, regulatory constraints on subsidiary dividends, AIG-related separation and service dependencies, and possible credit-rating downgrades. Management stated that disclosure controls were effective as of September 30, 2022.
Investor verification checklist
- Reconcile GAAP net income to APTOI and assess how much reported earnings depends on Fortitude Re and other realized or fair-value gains.
- Review the drivers of the $17.3 billion AOCI loss, the bond portfolio’s unrealized losses, and management’s ability to hold assets through recovery.
- Verify statutory capital, dividend capacity, and liquidity available at the insurance subsidiaries, including any limits on transferring funds to the holding company.
- Track debt-service costs, the delayed-draw facility’s terms, credit-rating triggers, and any collateral posting requirements.
- Assess the pace and cost of AIG separation, the projected expense savings, and progress on the Blackstone and BlackRock investment-management arrangements.
- Monitor 2023 insurance-accounting adoption effects, tax-asset recoverability, reinsurance disputes, and developments in the Moriarty litigation.