Q3 2019 Earnings Call
Good morning, or.
And gentlemen, I'm looking for Brighthouse financial third quarter 2019 earnings Conference call. My name is Catherine and I'll be your coordinator today.
At this time, all participants are in listen only mode.
We will facilitate a question and answer session towards the end of the conference call.
Fair enough to all participants please limit yourself to one question and one follow up.
As a reminder, this conference call is being recorded for replay purposes.
Also we ask that you refrain from using cell phone speaker phones or headsets. During the question and answer a portion of today's call I.
I'd now like to turn the presentation over to David Rosenbaum head of Investor Relations Mr. wasn't Maam you May proceed.
Our earnings release presentation in financial supplement were released last night. It can be accessed on the Investor Relations section of our web site at Brighthouse financial Dot Com.
We encourage you to review all of these materials and we will refer to the slide presentation in our prepared remarks.
Today, you will hear from Eric Steigerwald, our President and Chief Executive Officer, followed by its be Har, our Chief Financial Officer.
Following our prepared comments, we will open the call up for a question and answer period also here with us today to participate in the discussions are miles Liam Burke, Chief distribution, and marketing Officer, Conor Murphy, Chief operating officer in John Rosenthal, Chief Investment Officer, our discussion. During this call will include forward looking statements within the mean.
One of the federal Securities laws Brighthouse financial actual results may differ materially from the results anticipated in the forward looking statements as a result of risks and uncertainties, including those described from time to time Brighthouse financial filings with the U.S. Securities and Exchange Commission.
Information discussed on today's call speaks only as of today November 5th 2019. 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 reconciliations of these non-GAAP measures on a historical basis to the most directly comparable GAAP measures and related definitions may be found on the investor relations portion of our website.
Our earnings release slide presentation or financial supplement.
And finally references to statutory results our preliminary due to the timing of the filing of the statutory statements.
And now I'll turn the call over to our CEO , Eric Steigerwald. Thank you David and good morning, everyone.
Right House delivered solid results during the third quarter of 29 team.
Global equity market performance was mixed and while U.S. interest rates declined our variable annuity capitalization remained in line with the second quarter.
Investment income from alternative investments was strong.
Given the second quarter market performance, while prepayment income returned to more normal levels.
Claim results were in line with the prior quarter and sales remained strong.
Moving forward, we remain focused on executing our strategy, which we continue to believe will generate long term shareholder value.
As we've previously discussed one of our goals is to be a consistent returner of capital over time.
And we continue to make progress toward achieving this goal.
We repurchased approximately $126 million of our common stock in the third quarter.
And Weve continued repurchases in the fourth quarter of 29 team with approximately $49 million of our stock repurchased in October .
Since the announcement of our first stock repurchase authorization in August of 2018.
We have repurchased a total of $468 million of our common stock through October 2019.
Now, let me turn to third quarter results.
Our key highlights for the quarter are summarized on slide three of our earnings presentation.
First we had another strong sales corridor.
We had approximately $1.8 billion of annuity sales up 17% compared with the third quarter of 2018.
We continue to be very pleased with our sales as well as the quality of new business, we are adding each quarter.
Moving to life insurance, we continue to focus on our hybrid life insurance product right, how smart care.
This is our first life insurance product introduction since becoming an independent public company and as part of our strategy to reestablish a competitive presence in the life insurance market.
The early feedback from our distribution partners has been extremely positive we have made good progress, adding major distributors for our smart care product with a network of over 56000 advisers.
And we intend to roll out this product to additional distributors overtime.
Results to date or in line with our expectations and I'm pleased with the strong sales pipeline as we move into the fourth quarter.
Second.
Total annuity net outflows were approximately $1.1 billion in the quarter.
Down from both the prior quarter and the third quarter of 2018.
As we've said previously we expect to see a continued shift in our business mix profile overtime, as we add more cash flow generating and less capital intensive new business, coupled with the run off of less profitable business.
Third.
Corporate expenses, which do not include establishment costs were 248 million in the third quarter consistent with our expectations.
We anticipate 2019 corporate expenses to be in line with the 2018 full year level.
As we continue to transition to the bright house operating platform.
We are still projecting $150 million of corporate expense reduction on a run rate basis by year end 2020.
And an additional 25 million of corporate expense reduction.
In 2021.
Fourth.
We're continuing to make the necessary investments in our technology infrastructure and in our businesses.
We refer to these investments is establishment costs in the third quarter establishment costs were approximately $13 million pre tax.
And $85 million before tax through the first three quarters of the year.
Let me provide a few perspectives on a sablich admin costs going forward.
First we have made significant progress setting up our technology infrastructure and branding our company and we are pleased that we have exited 163 transition service agreements or T assays with only 56 remaining.
Second.
We believe establishment costs will be 295.
$325 million before tax.
On a cumulative basis.
Were 29 teen through 2021.
This is higher than our initial estimate.
The 175 million to $200 million before tax as a result of two factors.
The first is that we expect some of the more complex t. assays with Metlife.
We'll take a little longer and cost more to exit than previously thought.
The second factor is that we're making additional investments in our company as we transition to our future state operating platform.
We currently expect establishment costs to be between 120.
And $130 million in 2019.
$150 million to $160 million in 2020.
And $25 million to $35 million in 2021, all on a pre tax basis.
In the end I'm very pleased with respect to how we're doing with establishment costs and exiting the t. assays.
But we are being prudent in how we're managing our way through the final a couple of years.
Next.
Let me touch on our earnings results.
Adjusted earnings less notable items.
Decreased sequentially, driven by less favorable equity market results.
As compared with the second quarter of 29 team.
We still anticipate low double digit percentage growth in adjusted earnings per share less notable items in 29 teen versus 28 team.
Normalized statutory earnings were very strong in the quarter at approximately $600 million.
And finally, we continue to prudently manage our variable annuity capitalization.
As we've talked about previously we are managing our VA business to see T. 98 or higher.
As of the ended the third quarter RV assets were approximately $1.5 billion in excess of C. D E <unk>.
Consistent with our strategy and in line with the second quarter results.
Our hedging program continues to perform well across a wide range of economic conditions and in line with our expectations.
To wrap up.
We delivered solid results during the third quarter of 2019, as we continue to execute our strategy.
Our sales remained strong.
Our hedging program continued to perform well.
And we repurchased more of our common stock.
Going forward, we remain confident in our strategy, which we believe will enable us to generate long term value for our shareholders.
Our distribution partners and the clients they serve.
With that I'll turn the call over to Ed to discuss our third quarter financial results in more detail Ed.
Thank you, Eric and good morning, everyone.
I'm very excited to be on my first earnings call as CFO .
I believe in our strategy and most importantly, the team executing that strategy.
I'm pleased by our solid business results.
Robust capital position.
And the talented and engaged employees at Brighthouse financial.
Since the separation.
Financial management strategy has been to protect the statutory balance sheet.
Deliver distributable earnings over time.
A focus on distributable earnings means a focus on cash.
Over the past three decades I have maintained that the surest way to create value in the life insurance industry is to manage for cash.
So I'm thrilled this is a key element of the bright house strategy.
Overall, I look forward to working with the entire bright house team to generate long term value for our shareholders, our distribution partners and the clients they serve.
Now turning to our results.
Last night, we reported third quarter adjusted earnings excluding the impact from notable items of $260 million.
Which compares with adjusted earnings on the same basis of $296 million in the second quarter 2019.
And $314 million in the third quarter of 2018.
Sequentially results were impacted by less favorable market performance and lower net investment income.
Along with a modest increase in corporate expenses.
There were three notable items in the quarter, which on a net basis lowered adjusted earnings by $429 million.
The notable items on an after tax basis were establishment costs of $10 million in corporate and other.
A 23 million dollar benefit in corporate and other from a revaluation of tax items related to the separation from Metlife.
And a $442 million charge from the annual actuarial review, primarily in the run off segment.
As part of the annual actuarial review, we examine assumptions in three categories.
Capital markets.
Business model and policyholder behavior.
The charge associated with this year's annual review is driven by a change in our capital market assumptions.
Specifically a reduction in the assumed gap long term mean reversion rate for the 10 year treasury from 4.25% to 3.75%.
We continue to assume that mean reversion occurs over the next 10 years.
The negative impact from the lower assumed interest rate was primarily driven by our run off block of Universal life with secondary guarantees.
There was a modest impact on our annuity segment from the change in the mean reversion rate.
Most of our GAAP via guarantee reserves are currently accounted for as insurance reserves and are therefore relatively insensitive to interest rates.
Via guarantees accounted for as embedded derivatives are sensitive to current market rates not the mean reversion rate.
It is also worth noting that the change in the mean reversion rate had no impact on our statutory results.
Turning to adjusted earnings less notable items I would like to discuss the underlying themes impacting results.
Let's begin with market performance.
Equity market performance was mixed in the quarter.
The S&P 500, total return was 1.7% and the NASDAQ total return was 1.3%.
While the Russell and M.S.C. I eat the indices had negative returns.
Bond returns were positive given the decline in rates.
All in these factors drove separate account returns of positive 0.8% in the quarter.
Less than one percentage point below our base case assumption and approximately three percentage points below the second quarter of 2019.
As a result of less favorable market performance DAC amortization and reserves increased sequentially.
For a combined unfavorable impact to adjusted earnings of $25 million or 22 cents per share.
Next net investment income decreased sequentially by approximately $11 million after tax.
The decrease was driven primarily by lower alternative investment returns.
In addition, prepayment income returned to more normal levels in the third quarter, which also contributed to the sequential decline in net investment income.
Asset growth was a partial offset primarily driven by our continued strong sales momentum.
Moving to corporate expenses.
In the third quarter corporate expenses were $248 million up approximately $6 million from the second quarter and consistent with our expectations.
As Eric mentioned, we still anticipate 2019 corporate expenses to be inline with the 2018 level as we continue to transition to the bright house operating platform.
Now I'd like to make a few comments on segment earnings.
Starting with annuities adjusted earnings excluding notable items were $233 million in the quarter.
As I mentioned market impacts and net investment income were lower sequentially.
Which had an unfavorable impact on earnings.
Additionally, taxes were higher relative to the second quarter.
Adjusted earnings excluding notable items in the life segment were $54 million in the quarter.
Sequentially results were impacted by higher expenses.
Partially offset by lower life insurance claims.
The run off segment reported adjusted earnings excluding notable items of $5 million in the quarter.
The sequential decrease was driven by lower net investment income and higher reserves.
Partially offset by lower taxes.
Corporate another had an adjusted loss excluding notable items of $32 million.
Sequentially results were driven by lower taxes, partially offset by higher expenses.
To wrap up I would like to provide an update on our capital position as of September 30.
Our hedging program continues to perform well and inline with our expectations.
Assets above sea T. 98 were approximately $1.5 billion at September 30, inline with the second quarter.
Normalized statutory earnings were approximately $600 million in the third quarter.
Primarily driven by gains from our VA hedging program.
Year to date normalized statutory earnings were more than $1.2 billion.
Statutory combined total adjusted capital was approximately $8.4 billion up $1.5 billion sequentially.
The result, this quarter is representative of the total adjusted capital we would anticipate post the reform.
Which we still plan to adopt at year end 2019.
Going forward, we expect changes in reserves will better align with our hedge target.
Finally, our average financial leverage ratio was approximately 23% and our holding company liquid assets were approximately $800 million at the end of the third quarter.
Or roughly four times, our holding company cash target.
The sequential decline in holding company liquid assets was primarily driven by share buybacks.
It is worth highlighting that we have more than $200 million of annual inflows to the holding company before consideration of any dividends from our operating subsidiaries.
These inflows cover most of the roughly $240 million of annual debt service and all other holding company outflows.
I would also like to note that we plan to take dividends from Bright House life insurance company or blick, starting in 2020.
Overall I'm pleased with the results this quarter.
We maintained our strong capital position and we continue to prudently manage our statutory balance sheet.
Adjusted earnings less notable items were solid and as Eric said, we still anticipate low double digit growth in adjusted earnings per share less notable items in 2019 versus 2018.
With that we'd like to turn the call over to the operator for your questions.
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To withdraw your question. Please press the pound key.
Please standby, we compile the culinary roster.
And our first question comes from Tom Gallagher with Evercore ISI. Your line is open.
Good morning, just Ed Ed if you follow ups on the the final things you mentioned that the N. there. The BLAIC are starting to take dividends coming in 2020 can you can you expand a bit on that in terms of.
Whether it's the levels were range and.
What would what would the driver and source would that be.
Hi, Good morning, Tom So I don't want to get into specifics about what dividends, we might take next year from BLAIC, but I would just point out that you know with the one of the half a billion dollar sequential increase in total adjusted capital.
We had a similar increase in unassigned funds at Blix. So flicks unassigned funds were negative 350 million at the end of the second quarter and that increase to positive 1.2 billion at the end of the third quarter and as you know that's a that's an important number when you think about dividend capacity.
And just a follow up on that any any way of gauging dividend capacity and I know you're not.
Not done with the.
The final stat filings, obviously for 2019, but do you have can you give some perspective on what capacity how that would change capacity for dividend.
Well, what when I talk a little bit about.
Now, we think our balance sheet at the end of the third quarter reflects what we believe it will look like under V.A. reform.
So if we if we first step back and say why do we like the reform.
We like V.A. reform, because we end up with a regulatory framework, that's consistent with how we manage the risk.
And at the ended the third at the end of the third quarter. What you had was a statutory balance sheet.
That was consistent with how we manage the risk and therefore representative of what we would expect tack to be with V.A. reform and the reason for that is we've had a decline in interest rates as you know in the year to date and as a result of that declining interest rates, we've seen an increase in post V.A. reform reserves.
And a convergence with the standard scenario reserve.
Which is what's on our balance sheet today.
Not surprisingly with the increase in opposed to be a reform reserves. We've also seen appreciation in our hedge portfolio.
And those unrealized gains in the hedge portfolio is what's driven the a significant increase in tax that we saw in the third quarter.
So I think I would still go back to focusing on that increase intact and the significant unassigned funds and ask you to sort of use that as some guide to think about dividend capacity from Blake over a you know over the coming years.
Okay. That's that's helpful perspective, and it just final quick question can you give some perspective on.
How would the hedges performed versus other assumption changes to get your your neutral billion five the a buffer for the quarter.
Sure so.
As you pointed out the assets above sea T. 98 were one and a half billion at the end of the third quarter, which is essentially the same as the ended the second quarter, but there is a good underlying story to that number.
We had approximately a 400 million dollar benefit.
From our VA risk management program in the quarter.
As our hedge portfolio gains.
We are greater than the increase in our total asset requirement.
That performance was driven by our interest rate derivatives, where we had about a $900 million gain in the quarter.
This 400 million dollar positive was offset by the actuarial assumption review on a statutory basis.
Of about $400 million.
There were a variety of items that impacted the statutory assumption review the largest of which was a change in expense allocation to the annuity business.
Importantly, this has nothing to do with total company expenses.
As you know a total company expenses are coming down this was simply an allocation.
And so that was really the offset the the the one other thing I'd point out is that there was no impact on the statutory results from the change the change in the gap mean reversion right.
Okay. Thanks.
Thank you and our next question comes from Erik Bass with Autonomous Research. Your line is open.
Hi, Thank you so hoping you could provide more detail on exactly what goes into the establishment costs bucket and then kind of how you determine what goes there versus normal course expenses.
And how much of what goes into the separation cost is driving that ultimately that the targeted expense savings that you've talked about.
[noise] haircuts are I'm I missed your last one could you just repeat that second part.
Yeah. The second was just how much of kind of the establishment costs are ultimately driving the 150 million.
<unk> expense savings over time in terms of because the tech that you're adding and efficiencies I guess is there a linkage between the two.
Got it okay. So the first part look we have a reasonably rigorous process around what goes into establishment costs and what we consider run rate and I guess, that's probably the best way to think about it right. If if costs are going to continue theoretically forever will then they're certainly not establishment costs. There just normal run rate cost if you.
Think about like how we started you know the branding the original branding initiatives were one time costs right. We we were not going to continue those once we we felt that that the company was at a certain level than those costs no longer go into establishment costs.
A number of the the costs associated with still being still having administration and operations at Metlife and then transferring those either to ourselves or mostly to some of our partners like do you see establishment costs. Okay. So so one time in nature.
Sure ends up in establishment costs anything that that very much looks like a just an ongoing expense ends up in normal corporate expenses and then with respect to the drivers.
Yeah, I mean, there's there's obviously a number very important drivers take the the move for for bright house to a multi asset management right. That's a real cost save or for us, but also getting out of legacy systems transferring to our new administrative flat.
Form is a big driver of costs those are probably two of the bigger buckets. So we do not believe given what I said, a little bit higher a onetime cost is going to affect either the 150 target that we have out there or that extra 25 million in though in the following year.
But we are being prudent with respect to the final couple of years here as I said in <unk> in my opening remarks. This is complicated it's probably not a surprise to many of you that that in a few areas. It's even more complicated than we thought you know some of these expenses as I mentioned are going to go to investments you know.
The the patient is open does it as it were and we're going to we're going to do some things that otherwise we might not have been able to do but also we're going to be rigorous about Q way testing et cetera, et cetera, adult double staffing from time to time to make sure that we finish out you know the movement out of that.
Say the way, we've we've been able to do it so far hope that helps.
Yes. Thank you and then just one follow up on expenses you talked about the wasn't 50 run rate I think getting there by the end of next year is how should we think about the expense savings coming through in 2020 kind of over the course of a year.
You mean as we as we head towards the 150.
Exactly so should it be sort of ratably throughout the year kind of more in the back half forget it only perspective on how to think about it yes more in the back half.
Absolutely we got a lot to do in in the first part and then you will see expenses start to come down in the second half of 2020.
Got it thank you.
Thank you and our next question comes from at least Greenspan with Wells Fargo.
Line is open.
Hi. Thank you. Good morning. My first question you know on on time want to kind of questions. You guys are going well on the components of.
Oh, the assumption review and I think you guys mentioned a change in expense allocation to the annuity business just was hoping to get a little bit more color on what's going on there and I thought it you can quantify.
The impact there.
Sure.
Hi, Lisa said.
So of that roughly 400 million dollar impact from the actuarial assumption review on stat.
Something like 240 million of it was related to this expense allocation.
And this was again no change in the overall expenses as as you just heard from Eric you know we continue to have.
Expenses coming down and expect that will be a what we'll see next year as well.
But what we did see was based on some time study work some product work that we did that we determined that there was a greater level of expenses that should be.
Oh aligned to the in force annuity business.
And what you have here as you have a multiplier effect. So you know this roughly 240 million dollar impact that we see from the assumption review is really you know like roughly a five times multiplier on the change in the expense allocation because the you know you're assuming that these expenses are going to be higher.
Going forward and it says you know, it's an ongoing impact there for on the total asset requirement.
Okay. That's helpful and then on in terms of on the dividend. It sounds like next year can you give us a sand it sounds odd timeframe and just how we should think about on thinking about capital and at the Holdco and potential on share repurchases.
In 2020.
Yeah, I at least sorry, I just have to go back to a.
Pointing you to the unassigned funds of.
Of $1.2 billion and I guess, one piece of additional color I would add is it.
I think you know eminent anticipate what I might get here on this topic of the unassigned funds because you know we I just said we had unrealized gains in hedge for portfolio drive the tech increase and the improvement not assigned funds. So I'm anticipating someone might say well what happens a you know how should we think.
Got unrealized gains and what that means for both of those numbers.
If we go back to when we first started talking about V.A. reform in 2018, we had communicated that we thought there would be a material benefit to our total adjusted capital from V.A. reform.
And at the time interest rates were more than 100 basis points I believe more than 100 basis points above where they are today.
You know if we were to go back to two where we were if rates were to go up 100 basis points, we would anticipate that these unrealized gains and the hedge portfolio would be eliminated.
But we would also anticipate that our reserves would come down by a similar amount and so we would expect that total adjusted capital add on assigned funds would look pretty much like what you saw at the end of the third quarter everything else being equal.
Okay.
That is helpful. And then in terms of last question as we people think about I know sounds I smile and it sounds like don't modeling establishing cost <unk> is there on over the last time to think about modeling and then and you know throughout the quarter, South 2020, I'm kind of even okay.
Yes, it does it feel more frontloaded.
Yeah, I don't think we can give you much.
Guidance on timing and there is a fair amount of uncertainty around how these will flow through quarter to quarter as you've seen already I think the best bet at this point is to divide by four.
Okay. Thank you very much.
Thank you. Our next question comes from Ryan Krueger with KBW. Your line is open.
Hi, Thanks, good morning.
I guess what is the interest rate assumption in the gap Esso P. reserves for variable annuities and what would cause that to to change I guess I thought it would have.
Needed to change as part of the assumption review as well.
Sorry, Ryan could you could you clarify that maybe try one more time, yeah, I guess in a in a you lowered your long term interest rate by 50 basis points, but I think you said it had no no impact on the SLP reserves for variable annuities can you can you give us a sense of what the in interest rate assumption is in the.
Yes, Okay reserves for variable annuities, and what would cause that to <unk> you did to change that.
Yes, hi, right. So are you know the separate account return assumption I think which is going to include obviously, both the equity and fixed income return is unchanged at 6.5%.
So I think maybe that's what you're you're getting at in terms of you know the return assumption associated with.
You know the VA business. The reason that you saw a little sensitivity.
To the interest rate change for our annuity business is really.
All of the change in the mean reversion for annuities came through in DAC and there is really associated with lower future spread income so lower gross profits on the fixed side.
The via guarantees.
Most of those are accounted for as insurance and they are relatively insensitive to this mean reversion rate.
And the portion that is accounted for.
As a an embedded derivatives is is sensitive to rates, but it's sensitive to market rates not the mean reversion right.
Got it.
Thanks, and then.
Going forward are you still planning to manage variable annuity capital to an assets above CTG 98 framework or.
Would you anticipate shifting more to an RBC ratio following.
The full implementation of the reform.
Yeah, I think we would I mean, I don't let this mean change and how we manage assets or above sea T. 98, I think the goal would still be to be see T.H.C.T.E. 98, plus in normal it normal markets and to protect C.T. 95 across markets.
But.
I think managing to an RBC framework is going to work for us now because I.
I think as you've heard us say you know.
We have a RBC capital framework that aligns with Ah that how we think we should manage the risk I would just say on RBC. You know we ended 2018 with a 485% RBC ratio.
And where we sit today, we don't believe there's going to be a material difference in our RBC ratio at the end to 2019 post V.A. reform.
Okay. Thank you.
Thank you. Our next question comes from Andrew Clark Women with Credit Suisse. Your line is open.
Hey, good morning.
I wanted to ask you about the establishment costs.
So the got the new guidance is about $120 million higher than original that's more than a 60% increase in what you originally guiding and I think Eric you said it was.
The complexity of the T. assays as one and the additional investments that you're making could you break out those two pieces in terms of the parts of the 120 and maybe provide a little more clarity on on on how such a big change could occur only in it.
Couple of years.
Yeah sure Andrew look I've been involved in a number of these big transformational efforts and try as we might get the original projections correct, it's very difficult, especially in a situation, where where we want to make sure. This works right. We really only have one shot at this right.
As we've discussed previously you know Metlife is not in the <unk> say business they have their own strategy and it doesn't include being its USA provider to bright house. So as we get off these and we've been pretty successful at getting off you know the majority of them now we want to make sure that we get this right as we move from met either to enter.
No ops or into some of our large service providers going forward. So in the end the number here that we will have spends will be somewhere in the 700 million dollar range. It's a big number. So you know we were reasonably confident in our numbers, obviously, when we gave them out or we wouldn't have given the.
Now, but the idea that we've had a you know a revision in these numbers is not overly surprising you know given the magnitude of this project so I would say.
Then kind of to your second question I would say, maybe 60 plus percent would be you know additional resources associated with finishing off the biggest t. assays and then that includes things like double staffing for longer periods than you would've liked to but I think prudent.
Calls for that and that's what we're gonna do and then you know less than 40%, but still a reasonable number our investments that we're going to be able to make again because as I said before you know the patient is open if you will and it's a good time to do some things that heretofore you wouldn't have even known.
Would've been valuable necessarily but now given the focus on advisor experience and customer experience et cetera, I want to make these investments. So hopefully that gives you a sense on on what we're doing here and why that what you know the math behind the increase yes. Thank you and then shifting over to.
This is a derivative gains they were over a billion dollars and I'm trying to get a sense of how they were so big given that the 10 year Treasury yields fell 32 basis points in the third quarter of 19 that compared with a 42 big drop in the second quarter of 19.
Whereas in the second quarter of 19, the derivative gains were just about 149 million. So.
Maybe you could give a little color on.
What those hedging instruments, where and why the big differential from two Q1 nine.
Hi, Andrew It said.
So I think one piece you need to consider when you look at the second quarter versus the third quarter is the equity side.
So you know the we had equity rises in the in the second quarter, which I think a sort of mitigated the benefit from a some of the interest rate positions.
And I guess I would just say that you know a 37 basis point decline in a 10 year in one quarter is a is a significant move so and also consider the fact that when we hedge interest rates and and equities you know we have at the money as well as out of the money protection.
Okay and.
And and any Kent, just you know the change in total adjusted capital. So that was just simply a.
And when you when you tie that into the.
The capital in excess of C.T. 98 that was simply an expense allocation.
And it boosted the unassigned funds.
And does that materially change your dividend capacity at Blix versus last quarter or where are you planning to dividend a you know.
You know I know you didnt disclose the number but would you have been dividending assist similar now had you not seen that change and unassigned funds.
Okay. So Andrew let me go back to.
The comments I made about the change in unassigned funds.
So because we had a statutory balance sheet at at the end of the third quarter.
It's really representative of how we manage the risk and therefore representative of what we think we're going to see under VA reform.
You know we captured a large benefit in terms of tack relative to the second quarter and and so that really explains the one and a half billion dollar increase both in total adjusted capital as well as on a sign funds.
But it really isn't related to the expense piece I think what you're referencing on expenses is the gain that we saw in the game. We would have seen in assets above ctdna right was eliminated by the statutory actuarial.
Our assumption review.
So you know isn't it was an effective offset yeah $400 million positive from our VA risk management and you had a you know about a 400 million dollar negative from the actuarial assumption review and the bulk of that was related to expense allocation. Okay again, not not the level of expenses across the company simply.
How much of our expenses, we allocate to the enforceability business.
C.
Thanks, Ed.
You're welcome.
Thank you. Our next question comes from Jimmy Bhullar with JP Morgan Your line is open.
Hey, good morning.
On the expense allocation I'm just to clarify there was an offsetting impact I think in the life business or it's still not no. In fact as you mentioned for the overall company.
Yeah, Hi, Jim you had said there was on the gap side not on the stat side.
Got it and then on your your capital obviously benefited a lot from indeed from your hedges and especially the interest rate derivatives that you have any sort of color on the duration of those hedges in sort of a waterfall and how.
How much it roughly expires within the next 123 years, just so we can get an idea on your sensitivity.
Do future changes in rates and or other sort of factors.
Sure. So as you know we carefully manage the maturity profile. The hedges. So that we're you know that were never in a position where we have significant role risk during.
You know market dislocation elevated period of volatility et cetera, you know if you look at.
Our hedges the average life for those hedges are in the range of two to five years.
For bulk equity and pretty even these trades with phones categories.
And pretty evenly spread and the theory it or is it more that there are like most of them expire until years versus five.
Yeah pretty evenly spread sort of going back on comment I made up front about how we want to make sure. We manage the maturity profile of this book So that were never in a position where we have to roll too much at one time.
And then just on on the establishment costs and there were lot of questions. On these should we assume that once you're through this period, let's say.
2021, <unk> or <unk> whenever it sort of you're done that the order projects well. These expenses entirely go away or do some of them. We have a lot of companies do these projects and then the cost go into the business the company never really benefits as much. So how do you think about should we assume that at some point in the future lets it on deep runny do that all of the.
These costs are going to be gone or what some of them.
Stay with you.
In the one one or the other divisions.
So do you think about that.
Hey, Jimmy it's Eric no. They they have to go away I mean, frankly, I hope they could have gone away in 21 now you see we've still got a little bit in 22, just following our methodology and I won't go through my longer explanation that I did a little while ago, but but these are truly establishment costs if.
We got in a situation, where we wanted to make another sort of meaningful investment.
We would talk about it as that but but you know establishment costs have to end at some point because the company has to be established at some point.
Okay. Thank you.
Yes.
Thank you.
Next question comes from Alex Scott with Goldman Sachs. Your line is open.
Hi, Good morning first question I had.
It was on just the normalized statutory earnings you mentioned, it's 600 million I think there's also mentioned that some of that have to do with variable annuity hedge gains. So I just wanted to find out I mean is that does that normalize such Tory earnings number synonymous with variable annuity distributable earnings.
And once once you've adopted the reform like how much [noise].
Economic value, where are you able to create this quarter.
Hey, Alex It's Eric let me I, just want to make sure. It because I know you you all right. These numbers down on my last answer I said 22, and I meant 21 on Jimmy's question. So Ed I'll turn this over to you know.
Okay. Thanks, Alex.
So first of all just let me give it a definition of what what we mean when we talk about normalized statutory earnings.
So we start from net gain from operations.
Directly from the Stat statements. So we take pre tax net gain from operations, we adjust out whatever the current period changes in that'd be a stat reserves because as we said we're trying to get to a sort of how we're managing the business. We then add in the change in the total asset requirement under seats.
95, so we basically get the reserves on a basis of how we're managing the business.
Then we add in realized gains and all of the unrealized unrealized gains attributed to the V.A.
To the VA business and then finally will normalize for stuff like the actuarial assumption review establishment costs et cetera.
So the 600 million dollar number approximately 600 million dollar number you referenced.
You know, let's just say in the neighborhood of $450 million was VA or was the annuity business and the rest was non VA.
This was a particularly good quarter for non V.A. I wouldn't expect that to be kind of the normal run rate we had some.
Some timing adjustments related to reinsurance that that gave us a benefit or above what I would expect normally from the non VA business.
But there was really the number that we would think is.
Sort of normalize statutory earnings is the number that we would think is more indicative of the type of you know distributable earnings power that you have overtime, obviously, it's going to move depending on market conditions in the quarter.
Okay.
And then just thinking through RBC at 45, you know it wasn't that long ago, where I guess there wasn't much of a buffer on CP 98, which I think would probably place you closer to 400, so it's a pretty pretty big Delta and I appreciated the rates have moved a lot and equity markets have moved a lot.
In that time period.
But I guess, how would you guys think about drawing down.
Yeah that RBC ratio, if the normalized statutory earnings lets say aren't coming through or weaker associated with.
The environment.
Would you be willing to draw that down at all or do you feel like you need to have that higher RBC ratio because of the volatility that that it will have.
Yes. So you know I guess, the first thing you mentioned the equity market, we shouldn't we shouldn't.
We shouldn't ignore the fact that the stock market is up more than 20% year to date right. So that's a very significant positive impact and you know as you as I think you're alluding to you saw that benefit in the assets above sea T. 98 at the end of the end of 2018, we had $300 million of assets above CTG 98.
At the end of the third quarter. It was one and a half billion dollars.
So you know when we talk about distributable earnings in the 10-K, we've talked about you know we've given ranges based on the assumption of having you know assets.
$2 billion to $3 billion above sea T. 95.
So you know there is a there is an impact on distributable earnings based on the starting point of where we are with our capital position.
Got you. This is it fair to say there is some flexibility too.
That RBC come down lower and still be comfortable with the way you're hedging to managing the VA business.
Yeah, I guess as you said you know if you look at the VA business posed to be a reform.
RBC of 400 is equivalent to roughly CTG 98, now keep in mind, we're not we're not just to be a company I mean, we have you know.
It's just say round numbers $200 billion of assets with $90 billion of a general account so.
There is a good portion of our of our capital. That's that's non VA. So you can't just look at if we are pure V. A company, 400% would be a nine D.C.T. 98, but it's not that simple with us.
You know I would just go back to what I said earlier that you know that the plan is still to manage capital. So that we're at C.T. 98, plus a normal markets and to protect C.T. 95 across market cycles.
Got it thank you.
Thank you. Our next question comes from Ian arrive with Bank of America. Your line is open.
Thanks for taking my questions just a couple a stock buybacks and stuff like that healthy the last couple of quarters I'm guessing that started to do with that 400 million dividend Nalco was that a kind of a driver to some of the buybacks last couple of quarters.
Yeah, and I think that's correct.
Okay, Great and then related Lee you know if I think if at all the pieces right you have four times fixed coverage at the Holdco that'd be getting regular dividends from Mexico and that regular dividends from black into next year as thinking about the sources and uses of capital is there anything to see.
Yes that you couldn't do a similar level of buybacks per quarter in 2020.
There's no it's Eric Theres nothing to suggest we couldn't no.
You sort of lifted out most of the litany I can't even pick up off the last little conversation that Ed was having.
Look we have a number of levers whether it's you know some room in the RBC ratio, whether it's a potential dividend from BRC de whether it's the nella code dividend that we would get et cetera, you know or even at this time, what we've got at the holding company with respect to a liquidity so the answer to your.
Russians no there's nothing that would prevent something similar I just want to add.
That at the same time, we're not oblivious to markets. We are managing this company every single day.
So we have all you know you're alluding to a two though $1.5 billion capital return target, which we want to still hit but we will always manage it prudently I think we covered your question.
Yeah, and then just just lastly, because we've been talking about the other side slots.
Important driver when thinking about dividend capacity, so what would be the drivers that would cause it to go the other way, perhaps in the fourth quarter or the first quarter of next year.
Yeah, Hey in its Ed so.
We're not going to get into specific numbers, obviously, but I tried to give you a sense that the reason we like.
VA reform is that we have a statutory framework that we think makes sense for how we manage the risk and so that means that we should see assets and liabilities moving together it won't always be were in fact, but as I as I said earlier, you know in a scenario where rates go back up a 100 basis points I know no one ever seems to think that can have.
Open, but if rates go back up 100 basis points, we would expect a very similar movement on both sides of the balance sheet.
And at a total adjusted capital number that would be similar to what you saw at the end of the third quarter.
The one other thing you know I know you were on that your first question you're talking about the sort of sources and uses the one of the thing I would just.
Add to that which I'm I mentioned in my prepared remarks is that you know we have over $200 million of annual flows coming into the holding company you know unrelated to dividends from the operating companies.
Right.
That's true.
Perfect. That's all really helpful. Thank you.
Thank you. Our next question comes from Suneet come off with Citi. Your line is open.
Thanks, just one on capital as well Eric you just mentioned the potential dividend out of the a the reinsurance subsidiary I know we talked about this on the last quarter call, but any update in terms of conversations with regulators and are you able to size, how big a dividend you could take out of that sub.
Yes, the need.
I know, even the lilt in my voice, sometimes gets a commented on but.
Look work there was a process to do this we remain very comfortable that we have excess capital and BRC do but I don't want to front run the regulators, we have a very nice relationship with them and so we're working through the process I repeat I I believe we believe that we have excess capital there and we've also had.
Just to be our cities capital position. So we're hedged generally to interest rates here.
So I can't comment on on where we actually are in the process, but I'll tell you we're in the middle of it.
Okay, and then just back on the on attack and the.
In the quarter a at I get we said about if rates go up you'd see a move offsetting movements in terms of the reserves and the capital or the unrealized gain but if rates just remain flat.
Would we expect there to be sort of a negative impact on reserves and no change in the unrealized gain.
Hi, Suneet overtime, you would expect to see that.
I guess I'd say, we've we've we've shown you in the sensitivities that we provide the 10-K the various impacts of Ah you know different interest rate scenarios and you know clearly as you know Eric said, we're you know rates low for a long period of time. It does have an impact on the business. We've we've.
Talked about that and we've shown you that.
Right. Okay, and then just maybe lastly on this on this improvement in the attack.
Did this how much of this was due to the derivatives that you've you've bought last quarter I know we spend some time talking about that that you are opportunistic but was that but those purchasers are big driver of this improving in tact that we're seeing.
Yeah, I guess I would say they clearly helped me I think you know the bulk of the additional interest rate protection that we add it was in the first quarter.
And it helped now you know we.
I know we've had some discussion about the notional amounts in the V.A. tables, you'll see an increase in notional again for V.A. derivatives, when you see that the third quarter Q.
But it's it's not really indicative of any material change in our interest rate protection. This quarter I mean, notionals a rough guide it it can have a double counts in there, but you know offsetting positions. So I'm just going to tell you that there was no material change in our projection protection third quarter versus the second quarter.
Okay. Thanks.
Thank you. Our next question comes from Josh Shanker with Deutsche Bank. Your line is open.
Josh Please check your mute button.
Okay are they might they might be on another call. So we can we're going to stay on for those of you have to get on another call, but we will stay on we've got one more question.
Okay. Our next question comes from John .
Our niche with Sandler O'neill Your line is open.
Thanks can you talk to me I have a battle for shelf space has changed this year given the decline rates, but also maybe now that you're further removed from that and demonstrating independence as a company.
I don't know it hasn't it doesn't seem to have changed that much our situation is a little different obviously, because we had the brand ourselves, which you're kind of pointing to but at this point.
You know we've said over a couple of conference calls that we get inbound calls from distributors.
Its business, though you got to you got to fight everyday for it but I feel really good about about our abilities in the marketplace across.
You know literally hundreds of distributors miles you want out anything yes sure absolutely. Thank you are so what I would say is that with the annuity side of the business. We are getting inbound calls as it relates to expanding and offering our annuity solutions to new firms. We're also expanding with the annuity business into a new.
Channels channels that we haven't been in the past and as it relates to smart care I mean, we've been incredibly pleased with the demand from a number of firms major firms out there that would like to have the smart care products on their platform. So as it relates to expanding distribution of bringing on new firms in entering new channels on it hasn't been.
Challenge at all for Us.
Okay, and then my follow up.
In other life insurer had a large write down on the quarter on a private equity position can you quantify among your private equity investor capital positions you have maybe what the average investment size. How many of them you have in what is the largest on carrying value. Thanks for the answers.
Hi, it's it's John so.
We have a portfolio that is well diversified across strategies managers geographies and vintages.
We own about 300 funds and the average fund size is a little north of $6 million.
And to the last part of your question our largest to indirect underlying portfolio company positions are each about 25 million.
The next largest is below 15 million.
Okay, I am showing no further questions I'd like to turn the call back to Mr. Steigerwald for closing remarks.
Thank you operator for those people, who are able to still be on here.
Let me just summarize our results this quarter I thought were quite good annuity sales continued to be strong. We're very pleased with the quality of the business that we're writing.
I'm also pleased the progress that we've we've made with our new smart care a life product.
We now have a network of over 56000 advisers able to sell out.
As you saw we made good progress exiting the T. assays and continue to feel good about our ultimate expense reduction plans.
Our hedge program continue to perform well and as we talked throughout the call here our assets, even with the offsets remained a $1.5 billion over CTG 98.
And finally, we prudently managed our capital and we will continue to do so in the future. We believe our balance sheet as well protected for a low rate environment.
And thank you for your interest in bright house, we look forward to talking to next quarter.
Ladies and gentlemen. This concludes today's conference call. Thank you for participating you may now disconnect everyone have a great day.