Description

We believe CRBG currently offers one of the best long opportunities in U.S. life insurance.  CRBG is the former U.S. life & retirement subsidiary of AIG which was taken public one year ago in a minority IPO.  CRBG currently trades at one of the lowest multiples in the sector because they have a technical overhang from being a controlled company in which the largest shareholder is seeking a complete exit.  This overhang should be largely resolved over the next year as AIG sells down most or all of their position.  These types of situations have played out before with other minority IPOs of U.S. life subsidiaries; the most recent examples were EQH and VOYA, which both ended up outperforming peers by as much as 30% during their respective selldowns. 

And now, we believe CRBG should be set up for similar outperformance because: CRBG currently trades at the lowest multiple in the sector despite having proven out to be a solid business over the past year, which should support several turns of multiple re-rate; consensus eps estimates still seem too conservative, which should lead to continued beat-and-raise quarters into 2024; CRBG has an important near-term catalyst with AIG intending to complete another secondary offering before year-end, which could reduce AIG’s ownership below 50% and declassify CRBG as a controlled company; and CRBG should benefit from several other near-/medium-term catalysts which will likely be further accretive to both earnings and multiple.  These catalysts include: the planned sale of CRBG’s U.K. life subsidiary; the likely announcement of an 80c special dividend (4% dividend yield) later this year; and potential for further risk transfer opportunities, particularly in variable annuities where recent deals have been priced attractively. 

Both the risk/reward and catalyst path have improved since unlatchmergers’ last VIC write-up in Nov 2022.  During this time, CRBG shares have fallen -18% (which is in-line with their peer average of -15%) while consensus estimates for their 2024 eps have increased by +10%, which is the highest degree of sellside eps revisions within its peer group.  Said differently, CRBG’s multiple has de-rated substantially as a result of broader industry headwinds, despite the company having had several strong prints during their first year as a standalone public entity which have given us and the specialist community more confidence in their normalized earnings power.  And during this time, mgmt has also been pulling all the right levers for shareholders - divesting noncore business units, prioritizing capital return, rationalizing the expense base, and delivering on the financial targets that they had laid out ahead of their IPO. 

So now, the resulting setup is that CRBG has been proving to be a “good lifeco” (i.e., credible mgmt team, limited tail risk, consistent capital return, high degree of visibility into fcf generation) but still trades at a “bad lifeco” multiple.  This valuation disconnect exists because CRBG has the smallest public float and one of the thinnest trading volumes of the sector - AIG and Blackstone collectively own 75% of outstanding shares and the average trading value is only $20-30m per day on $12b of market cap, which altogether limit serious long-only and institutional engagement in the stock.  The supply overhang from AIG is also weighing on shares, as has been the case with prior U.S. life IPOs which have involved a former parent company seeking to fully exit their stake (AXA/EQH, ING/VOYA).  But these overhangs should be lifted over time as AIG sells down from their current 65% ownership position, as had been the case with EQH and VOYA as well.  AIG has already announced their intention to complete another secondary offering before year-end, which could lead to deconsolidation as their ownership of CRBG falls below 50%; and additional offerings should follow over the next 12 months.

Putting it altogether, we see potential for at least 40% upside driven by both positive revisions and multiple re-rate.  CRBG currently trades at 3.5x PE and 6x P/FCF, which is the lowest multiple in the sector next to LNC and JXN.  CRBG should not be trading at the same multiple as LNC or JXN, which are two of the lowest-quality companies in the sector.  Our base case is $25/sh, representing 5.50 of 2024 eps and 3.50 of FCFps, capitalized at 7.5x P/FCF.  Our bear case is $16/sh or -8% downside, representing 4.75 of 2024 eps (-4% below cons) and 3.00 of FCFps, capitalized at 5.5x P/FCF.  This leads to a risk/reward of 5x, which we believe is the most attractive skew in U.S. life right now.  Over time, we see potential for CRBG to trade more like PRU at 11x P/FCF given the close similarities in their business mix, FCF generation, and ROE profile; this would imply over $30/sh, which is the same medium-term price target that unlatchmergers had laid out in his write-up as well.      

Positive revisions story.

We see potential for hsd% positive revisions to 2024 eps, even with consensus estimates having already reset +10% higher over the past year; and for context, hsd% revisions is a relatively high degree of earnings variance for a U.S. lifeco like CRBG.  The simplest way to explain the eps upside opportunity is - prior to their IPO, CRBG had laid out a target of 12-14% adjusted ROE by 2024.  We believe this target is conservative because CRBG had already achieved a 11.7% ROE in 2Q23, and their ROE should continue to grind higher from their 2Q baseline as a result of continued base spread expansion, normalization of variable investment income, execution on another $100m of planned cost savings, and natural organic growth.  So this leads us to forecast CRBG earning a 13.5% ROE in our base case valuation.  The street is only forecasting a 12% ROE in 2024, which seems too conservative in the context of the results that CRBG has already achieved and the low-execution risk opportunities that they have readily available.

We believe the primary reason for why this variance exists between our estimates and sellside consensus is because the street does not do a good job of modeling CRBG’s core spread earnings, which is the most important driver of their earnings power.  For brief context, CRBG has three primary revenue streams: fee earnings (a function of fee yields on average AUM), spread earnings (net investment income less interest expense), and underwriting income (premiums less benefits).  Spread earnings is the most important, and also the most difficult to model because there are three components (variable investment income, base investment income, and interest credited) which should each be modeled separately, and at the consolidated company level rather than the individual segment level.  But sellside analysts do not model with this level of granularity because this is not how CRBG or other lifecos disclose their results.  Instead, sellside analysts will typically model spread earnings at the segment level without disaggregating the contribution from the three components parts, which typically leads to two inaccuracies: (i) they model off a starting baseline which is too low because they typically have not adjusted for variable investment income; and (ii) they gloss over the front book / back book repricing dynamics, which become more evident at the consolidated company level but are less so at the individual segment level. 

As a result, sellside consensus underappreciates the cadence and magnitude of the base spread expansion opportunity.  CRBG has been reinvesting new credits at an average of 6.60% while rolling off their back book at 4.40%.  We estimate their core base yield was only 4.60% at 2Q23, so this front book / back book dynamic should provide over 200bps of uplift to base investment yields as the investment portfolio turns over in the next several years, which the street does not explicitly bake into their forecasts.  At the same time, CRBG’s crediting rates have been well-contained through this rate hike cycle, with their cumulative beta for crediting rates having held steady at 10% over several quarters while their cumulative beta for base yields have approached 30% through 2Q23.  This dynamic has led their base spreads to grind higher at a 5-10bps pace over each of the last two quarters, and this pace of improvement should be sustainable into 2024 given their continued yield repricing tailwind combined with their ability to manage crediting rates.  So long story short, we forecast combined spread earnings from Individual Retirement, Group Retirement, and Institutional Markets of $5.0b in 2024 while the street is forecasting only $4.4b, and we forecast total spread earnings of $6.2b (with no comparable estimate from the street).   

For historical context, this dynamic around spread earnings had played out fairly predictably during the 2Q23 print.  Heading into 2Q earnings, the sellside average for 2Q Individual Retirement base spread earnings excluding variable investment income (VII) was $600m, and the high on the street was $640m.  CRBG reported $655m of ex-VII spread earnings.  We believe this was not an isolated beat, but rather a reflection of how sellside consensus does not accurately capture the underlying economics of CRBG’s spread repricing tailwind.  We would expect a similar beat to occur this quarter as well; the street is currently estimating $655m of Individual Retirement ex-VII spread earnings in 3Q23, and we expect actual results could be closer to $700m.  These continued beats on core spread earnings should lead consensus estimates and stock price to grind higher over time. 

Separately, CRBG should also benefit from two additional earnings tailwinds in 2024 which are worth mentioning, although they are well-understood and have largely been baked into sellside numbers already.  First, CRBG has a cost savings initiative to reduce run-rate expenses by $400m by YE24, of which they have already completed $300m.  We estimate that these cost savings could lead to $1.8b of consolidated G&A expenses in 2024, which is in-line with consensus estimates.  Second, CRBG had been under-earning on variable investment income over the last several quarters, which was a common dynamic across the U.S. life sector.  These VII returns should normalize beginning in 2H23.  VII returns are largely comprised of unrealized returns on alternative investments which are marked on a one-quarter lag, and VII will typically recover on a lag to broader markets.

Optionality from shareholder-friendly strategic initiatives and capital return.

The CRBG mgmt team has been pursuing the right set of shareholder initiatives by divesting noncore business units and prioritizing capital return.  CRBG mgmt has had a good track record of divesting noncore business units - for instance, they have exited from several subscale businesses over the past 10 years and also divested Fortitude Re as part of their pre-IPO restructuring.  Most recently, CRBG had announced the sale of their Ireland health insurance unit for an estimated 20x pre-synergy PE, which was a strong outcome considering CRBG trades at 4x PE.  We estimate the Ireland sale should result in $500m of net deployable proceeds, which CRBG intends to return to shareholders via special dividend later this year (equating to 0.80/sh, or a 4% yield).  

CRBG has also recently announced that they have initiated a sale process for their U.K. life business, which Bloomberg has reported could fetch a sale price of $650m, or 6% of current market cap.  And following the sale of U.K. life, we suspect CRBG could pursue additional risk transfer opportunities, which mgmt did not dismiss as an option during the 2Q call.  Any risk transfer deal would likely be centered around CRBG’s variable annuity block and should be positively received by the market given the attractive multiples that recent deals have received.  CRBG has a relatively well-managed variable annuities book which makes up ~20% of consolidated earnings, and similar VA deals have been priced in the range of 9-11x earnings over the last couple years (Manulife/Venerable, Equitable/Venerable, and Prudential/Fortitude).  So a risk transfer deal would be accretive to CRBG considering that they only trade at 4x PE, while also reducing the multiple overhang and potential tail risk that investors associate with variable annuities.

Furthermore, our capital rollforward suggests that CRBG could support a higher level of buybacks and dividends than the street has baked in.  This matters to investors because capital return is one of the most important metrics for lifecos like CRBG, given the skepticism around GAAP earnings.  We estimate CRBG could support over $1.3b of buybacks in 2024, which is above consensus of $1.1b - so this is another accretive lever that mgmt could pull over time.  We suspect that as AIG comes to market with more secondary offerings, CRBG will repurchase more of these shares as part of their capital return program. 

Multiple re-rate story.

CRBG currently trades at 4x PE and 6x PFCF on consensus 2024 estimates.  CRBG should not be a 6x PFCF business.  JXN and LNC are the two other lifecos which currently trade at 6x PFCF, and CRBG should not trade at the same multiple as these companies given the stark differences in business and management quality.  CRBG’s multiple currently suffers from a supply overhang from AIG as well as an illiquidity discount, as has been the case in past U.S. life IPOs of this nature (AXA/EQH, ING/VOYA) - but these issues should be resolved over time as AIG comes to the market with more secondary offerings, as was also the case in these past IPOs. 

JXN is not an appropriate comp for CRBG.  JXN is a pure-play variable annuities company which seems to face perennial concerns around their hedging and capital, and is perceived by investors to be the biggest black box in the sector.  Variable annuities is one of the lowest multiple businesses in the U.S. life sector, and CRBG has a far superior earnings mix relative to JXN (only 20% of CRBG’s earnings are from VA).  CRBG’s VA block is also one of the lower risk blocks in the industry, while JXN’s is one of the highest.  For example, CRBG has lower basis risk and better hedging protections, which reduce tail risk during periods of market stress.  This is because CRBG has historically had a higher allocation to passive investment options and a lower allocation to equity funds in their separate accounts, which reduces their basis risk during market volatility; in contrast, JXN’s VA book has the highest degree of basis risk in the industry.  Additionally, a large portion of CRBG’s rider fees are tied to changes in the VIX, which reduces the cost of hedging during periods and is relatively unique to CRBG’s portfolio.  CRBG also screens as one of the better VA blocks in the industry on other risk metrics, such as net amount at risk and the percent of policies from pre-crisis vintages. 

And LNC is not an appropriate comp for CRBG either.  LNC has had a recent history of operating mishaps and capital issues; their fcf generation could remain well below normalized levels in 2024; and they are likely unable to resume buybacks until at least 2025 - altogether, a vastly different fundamental outlook from CRBG.  LNC also has a recent track record of being poorly managed, and their multiple reflects some lingering distrust of a mgmt team which has lacked credibility and burned investors in the recent past.  For example, about a year ago, LNC’s mgmt had signaled confidence around their annual review of life insurance reserves during an investor conference, and then surprised investors two months later with a $2b reserve charge in their guaranteed universal life block, along with a significant guide-down in the future earnings power of their life block and a 20%pt hit to their RBC ratio.  And earlier in 2022, LNC had struggled with other issues around variable annuity hedge breakage and group disability claims administration.  So in short, LNC faces several idiosyncratic issues which CRBG does not.

CRBG should trade at a premium to JXN and LNC, and could trade closer to PRU over time.  CRBG is most similar to PRU in terms of capital return (both 60-65%) and ROE profile (both low-/mid-teens), and they have similar business mixes in U.S. life & retirement.  CRBG should ultimately trade at a discount to PRU because PRU is higher quality (they have good businesses in asset management and international insurance, which CRBG lacks), more diversified, and has a better track record.  But the valuation gap is wide enough, with PRU at 11x PFCF and CRBG at 6x, that there is plenty of room for CRBG to narrow the gap over time. 

Valuation.

Our base case is $25/sh or +40% upside, representing 5.50 of 2024 eps and 3.50 of FCFps, capitalized at 7.5x P/FCF.  Our estimates imply a 13.5% ROE, which is on the upper end of mgmt’s 12-14% guidance.  Our valuation implies a 12% fcf yield, which is above PRU (9%), and below LNC (14%) and JXN (15%). 

Our bear case is $16/sh or -8% downside, representing 4.75 of 2024 eps and 3.00 of FCFps, capitalized at 5.5x P/FCF.  Our estimates imply a 12% ROE, which is on the lower end of mgmt’s guidance range.  Our valuation implies a 15% fcf yield, which is in-line with LNC and JXN. 

Risks.

We believe the biggest risk from here is credit as CRBG has above-average credit risk in their investment portfolio, driven by a relatively higher concentration of below-IG (9% vs peer median 4%) and BBB securities (36% vs peer median 34%).  However, we have not seen much evidence of a deterioration in their credit portfolio: we estimate CRBG’s unrealized losses on their investment portfolio to be in-line with peers based on the latest 2022 statutory data (approx. -8%), and unrealized losses are typically not an issue given that these securities are essentially held to maturity.  Additionally, CRBG’s credit migrations have been net positive in 2023, which indicates that the company has not seen material signs of credit stress so far; CRBG has been actively reducing their exposure to below-IG credits this year; and approx. 75% of their fixed income investment portfolio is managed by either Blackstone or Blackrock, which are credible managers.  Finally, we believe investors are well-compensated for potential credit risk at the current stock price. 

Catalyst

AIG secondaries.  Continued earnings beats.