Brighthouse Financial, Inc. (NASDAQ:BHF) Q3 2023 Earnings Call Transcript

Brighthouse Financial, Inc. (NASDAQ:BHF) Q3 2023 Earnings Call Transcript November 8, 2023

Operator: Good morning, ladies and gentlemen and welcome to Brighthouse Financial’s Third Quarter 2023 Earnings Conference Call. My name is Justin, and I’ll be your coordinator today. At this time all participants are in a listen-only mode. We will facilitate a question-and-answer session towards the end of the conference. In fairness to all participants please limit yourself to one question and one follow-up. As a reminder, the conference is being recorded for replay purposes. I would like to turn the presentation over to Dana Amante, Head of Investor Relations. Ms. Amante, you may proceed.

Dana Amante: Thank you and good morning. Welcome to Brighthouse Financial’s third quarter 2023 earnings call. Materials for today’s call were released last night and can be found on the Investor Relations section of our website. We encourage you to review all of these materials. Today, you will hear from Eric Steigerwalt, our President and Chief Executive Officer; and Ed Spehar, our Chief Financial Officer. Following our prepared remarks, we will open the call up for a question-and-answer period. Also here with us today to participate in the discussions are Myles Lambert, our Chief Distribution and Marketing Officer; David Rosenbaum, Head of Products and Underwriting; and John Rosenthal, our Chief Investment Officer. Before we begin, I’d like to note that our discussion during this call may include forward-looking statements within the meaning of the Federal Securities Laws.

Brighthouse Financial’s actual results may differ materially from the results anticipated in the forward-looking statements, as a result of the risks and uncertainties described from time to time in Brighthouse Financial’s filings with the SEC. Information discussed on today’s call speaks only as of today, November 8, 2023. The company undertakes no obligation to update any information discussed on today’s call. During this call, we will be discussing certain financial measures that are not based on Generally Accepted Accounting Principles, also known as non-GAAP measures. Reconciliation of these non-GAAP measures on a historical basis to the most directly comparable GAAP measures and related definitions may be found in our earnings release, slide presentation, and financial supplement.

And finally, references to statutory results, including certain statutory-based measures used by management, are preliminary due to the timing of the filing of the statutory statements. And now I’ll turn the call over to our CEO, Eric Steigerwalt.

Eric T. Steigerwalt: Thank you, Dana and good morning everyone. Brighthouse Financial reported solid results for the third quarter of 2023 that reflect the steady execution of our focused strategy. We continue to manage through this volatile market environment, one in which we saw equity markets fall modestly, while interest rates rose significantly, increasing by more than 70 basis points in the third quarter of 2023, as measured by the ten-year U.S. Treasury. As I’ve said before, while we have a cautious view on both the current market and economic environment, we intend to maintain an active and opportunistic share repurchase program and we remain committed to returning capital to our shareholders over time. Year-to-date through November 3rd, we repurchased approximately $216 million of our common stock, which included $64 million of common stock repurchased in the third quarter.

In addition to our share repurchase program, we remain focused on the steady execution of our business strategy along with our multi-year, multi scenario financial management framework and risk management strategy. Turning to the results in the quarter. I am pleased with our sales results in the third quarter. Our annuity sales totaled $2.6 billion, which is a 5% increase sequentially. Sales results in the quarter were largely driven by persistent, strong sales of our flagship Shield Level annuities, which increased 15% sequentially, as well as with sales of our fixed deferred annuities. As one of the top annuity providers in the United States, we continue to leverage the depth and breadth of our expertise, along with our strong distribution relationships to competitively position ourselves in markets we choose to compete in.

We remain focused on offering a diversified portfolio of complementary products to further drive the addition of high quality new business to our in-force book, and we remain pleased with the progress that we continue to make towards shifting our business mix over time. Additionally, we reported $25 million in sales of our life insurance products in the third quarter of 2023, consistent with life sales results in the second quarter of 2023, which continue to be mainly driven by our smart care product. We remain focused on maintaining the competitiveness of our life insurance products as we execute our life insurance strategy. Turning to financial results. Our combined risk based capital or RBC ratio was estimated to be between 400% and 420%, and cash and liquid assets at the holding company remain robust at $900 million as of September 30th.

Additionally, we had solid GAAP results as our adjusted earnings less notable items were generally in line with our expectations, and we continued to effectively manage our expenses. In summary, we reported solid results in the third quarter of 2023. Our statutory balance sheet and liquidity metrics were strong, our sales results remained at a high level, and we continued to deliver on our commitment to return capital to shareholders. We are confident in our strategy and are unwavering in our focus on business growth and prudent financial management. With that, I’ll turn the call over to Ed to discuss our third quarter financial results in more detail.

Edward Spehar: Thank you Eric, and good morning everyone. Last night we reported third quarter earnings along with preliminary statutory results beginning with the preliminary statutory metrics. Our statutory combined total adjusted capital or TAC, was $7.3 billion at September 30th, which compares with $7.6 billion as of the end of the second quarter. Our estimated combined risk based capital, or RBC ratio, was between 400% and 420% as of the end of the third quarter, which was down from a range of 430% to 450% as of the end of the second quarter. Changes in interest rates and our deferred tax assets were key drivers of the decline in TAC and the RBC ratio. In addition, capital requirements associated with new business growth contributed to a reduction in the RBC ratio with an impact consistent with what we have discussed in the past.

Interest rates rose significantly in the quarter, which drove losses on interest rate hedges. As we discussed on our long-term statutory free cash flow projections call in September, a key element of our interest rate risk management strategy is balancing the immediate impact from gains and losses on hedging instruments relative to the multiyear impact from interest rates on our statutory balance sheet. We believe this approach to risk management results in a balance sheet that is substantially protected from movements and interest rates. To illustrate, given where interest rates are today, we anticipate that essentially all of the negative impact on variable annuity or VA risk management results in the third quarter associated with higher long-term interest rates will be recouped by an incremental benefit in the first quarter of 2024 associated with the prescribed valuation interest rate for our VA book of business.

This so-called mean reversion point, or MRP, is anticipated to increase by 50 basis points based on current interest rates, which compares with an expected 25 basis point increase based on rate levels at the end of June of this year. The second driver of the change in our capital metrics was a reduction in admitted deferred tax assets or DTAs. As I have said in the past, the statutory accounting for the deferred tax asset is conservative. The admitted DTA on our statutory balance sheet is now only approximately $100 million or a small fraction of our total tax attributes, which we still anticipate using over the long-term. I would also like to note that the internal reinsurance transaction between Brighthouse Life Insurance Company and its New York affiliate was effective in October.

As I mentioned on our second quarter earnings call, we expect an approximately $200 million benefit to TAC in the fourth quarter as a result of the capital efficiencies created by this transaction. As Eric mentioned, our liquidity remains robust with holding company liquid assets of $900 million at September 30th, consistent with June 30th. Additionally, we still anticipate taking at least $300 million of ordinary subsidiary dividends to the holding company this year. Now, turning to adjusted earnings results in the third quarter. Adjusted earnings excluding the impact from notable items were $275 million, which compares with adjusted earnings on the same basis of $271 million in the second quarter of 2023 and $74 million in the third quarter of 2022.

The notable items in the quarter were primarily related to the Annual Actuarial Assumption Review and had a net favorable impact on adjusted earnings of $51 million after tax. This is our first Annual Assumption Review under a new GAAP accounting framework. As part of this Assumption Review, we increased our assumed GAAP long-term mean reversion rate for the 10 year U.S. Treasury to 3.75% from 3.5%. We continue to assume that mean reversion occurs over 10 years. The increase in our long-term interest rate assumption drove the benefit to adjusted earnings within our Universal Life with Secondary Guarantees or ULSG block of business. Along with the review of capital market assumptions we also reviewed emerging experience and model assumptions.

The interest rate related benefit to total adjusted earnings was partially offset by policyholder behavior assumption updates in the life and annuity segments. I will note that updates related to mortality and lapse assumptions for our ULSG block of business were insignificant. Excluding the impact of notable items, the adjusted earnings results in the third quarter were roughly in line with our quarterly run rate expectation. Alternative investment income was approximately $30 million or $0.45 per share below our quarterly run rate expectation as the alternative investment yield was 1.6% in the third quarter. This was offset by a higher underwriting margin and lower expenses. The underwriting margin was higher than our quarterly run rate expectation driven by overall lower claims experience.

There is variability in the underwriting margin throughout the year, driven by fluctuations and volume and severity of claims along with the offset from reinsurance. In the third quarter, the Life segment experienced some larger claims. However, this was more than offset by favorable overall claims experience including the reinsurance offset within the ULSG business. Additionally, corporate expenses were lower than our run rate expectation in the third quarter. Turning to the segment results, the annuity segment reported adjusted earnings excluding notable items of $291 million in the third quarter. On a sequential basis annuity results were primarily driven by higher net investment income and lower expenses offset by lower fees. The Life segment reported an adjusted loss excluding notable items of $2 million.

Sequentially results were driven by a lower underwriting margin. The runoff segment reported adjusted earnings of $1 million excluding notable items. Sequentially, results reflect a higher underwriting margin, partially offset by lower net investment income. Corporate and other had an adjusted loss excluding notable items of $15 million. On a sequential basis results were driven by lower expenses. Overall, we reported solid third quarter results, maintained our target capitalization, and our holding company liquidity remained robust. We continue to manage the company under a multiyear, multi-scenario framework to support and protect our distribution franchise. With that we would like to turn the call over to the operator for your questions.

Operator: Thank you. [Operator Instructions]. And our first question comes from Alex Scott from Goldman Sachs. Your line is now open.

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Q&A Session

Alex Scott: Hi, good morning. First question I have for you all was just on the GAAP assumption review and the impact on market risk benefits. I wanted to find out are there any statutory implications in some of the things that you changed in the market risk benefits and also if you could provide any clarity on what those changes were?

Eric T. Steigerwalt: Yeah, good morning, Alex. So first, I’d start off with the assumption update was a modest impact. So when we look at GAAP, we had — we talked about a notable item of $51 million for adjusted earnings and said that that was mostly related to the actuarial assumption review. And that was driven by the change in our mean reversion assumption for the 10-year Treasury. So 350 going to 375 was the driver of the overall impact from our assumption update. The other thing I would say is, again, it is a very small number on a GAAP basis, if you think about that, relative to a GAAP balance sheet of north of $220 billion. And the fact that we are reviewing all of our important assumptions underlying that $220 billion balance sheet. And then the final point, which gets to the question on stat, the assumption update had no real impact on our statutory risk based capital ratio.

Alex Scott: Got it. That’s helpful. Second question I had is just on transactional opportunities. You mentioned that one, that I think is bringing up $200 million, that was internal, if I recall. Are there any additional internal or external opportunities that you all could leverage?

Eric T. Steigerwalt: Well, as you can imagine, we’re always considering what makes sense for us to do. There’s nothing else for us to talk about at this point, other than the transaction that you referenced.

Alex Scott: Okay, thank you.

Operator: And thank you. And one moment for our next question. And our next question comes from Alex Scott from Goldman Sachs. Your line is now open.

Alex Scott: I just asked, so I’m good. Thank you.

Operator: Oh, I’m sorry about that. One moment, our next question. And our next question comes from Tracy Benguigui from Barclays. Your line is now open.

Tracy Benguigui: Thank you. Good morning. So you talked about RBC and tax declining because of your interest rate hedging losses. I’m wondering if you could share a sensitivity analysis of RBC to rise of interest rates maybe by 50 basis point, incrementals?

Edward Spehar: Hi Tracy, it is Ed. So I would say we’re not going to give — we’re not going to give that sensitivity other than to say, you can look what happened in this quarter, you could look at what rates did now that’s, it’s an oversimplification for you to look at any one rate. I mean, it’s also movement in the shape of the yield curve is going to have an impact. So I think the key point here though, and it’s consistent with what I had discussed on our statutory free cash — long-term statutory free cash flow call a couple months ago. We are now in a position where we have a substantially hedged out position for interest rates and the way that we define that is we consider what is the trade-off between the immediate impact on gains and losses associated with our hedging portfolio versus the multiyear impact that we will get on our statutory balance sheet driven by the mean reversion point change.

This quarter, it was a very clean relationship, I would say and that the amount of the impact that we had that was negative in the third quarter is expected to fully reverse in the first quarter of next year.

Tracy Benguigui: Got it. You also talked about the statutory reversion to mean next year will increase by 50 basis points, how many points of RBC do you see improvement from that?

Edward Spehar: We said in the past that a 25 basis point increase in the mean reversion point is $200 million to $250 million positive. And so I’ve also cautioned you about linear assumptions, but it’s probably reasonable to be in that range if you think about each of those 25 point increments that we would — we would see at the beginning of next year, based on where rates ended the third quarter.

Tracy Benguigui: Okay, last, I’m not really getting why you’re seeing mixed mortality experience favorable and runoff unfavorable in Life, what made each segment unique this quarter?

Eric T. Steigerwalt: Yeah, I would say that mortality experience, as we’ve said, consistently will bounce around from -to-quarter. And so I think you can have adverse mortality in one area and favorable results in another. I mean, we have a reinsurance offset that we’ve talked about in the past, that may be more beneficial in one segment than it is in another, for example. So I don’t think you can simplify it down to say, if you have favorable mortality you’re going to have favorable mortality across all your segments. And clearly, that’s not the case, because that’s not what we saw this quarter. So I think the most important point would be that mortality overall for us in the quarter was slightly favorable.

Tracy Benguigui: You mentioned reinsurance, was there anything with reinsurance recoverability that was different this quarter?

Eric T. Steigerwalt: It was more favorable than I would say that the typical quarter.

Tracy Benguigui: Thank you.

Operator: And thank you. And one moment for one moment for our next question. And our next question comes from Ryan Krueger from KBW. Your line is now open.

Ryan Krueger: Hey, good morning. I guess a question for Ed. In terms of the some timing disconnect between the immediate impact of rate hedges and then the economic scenario generator, I guess I think another option is to use a clearly defined hedging strategy that would be a little — more using forward rates in statutory reserves for variable annuities, is that something that you would consider switching to given the increased interest rate hedging protection that you now have?

Edward Spehar: Hey Ryan, good morning. Yeah, I don’t really understand that comment because I’m not sure how there’s the linkage between a CDHS and somehow using a different framework for statutory reserve calculation than the generator and the mean reversion points.

Ryan Krueger: Okay, yeah, I think my understanding that some companies use implicit CDHS and it seems to override the economic scenario generator, but I could be mistaken. And then just on the — in terms of the internal reinsurance transaction, based on the RBC impact of that would be about 10 points benefit to RBC?

Eric T. Steigerwalt: I mean, it’s roughly that.