Q4 2019 Earnings Call
Good morning, ladies and gentlemen, and welcome to Brighthouse financial fourth quarter 2019 earnings Conference call.
My name is Shannon and I'll be your coordinator today I.
At this time, all participants are in listen only mode.
We will facilitate a question answer session towards the end at the conference call.
In fairness to all participants please limit yourself to one question and one follow up.
As a reminder to cover this fear recorded for replay purposes.
Also we ask that you refrain from using cell phone speaker phone or his that's starting to questioning answer portion of today's call.
I would now like turn the presentation over to David Rosenbaum head of Investor Relations Mr. Rosenbaum you May proceed.
[music] good morning, and thank you for joining Brighthouse financial fourth quarter 2019 earnings call.
Earnings release Slide presentation. It financial supplement were released last night. It can be accessed on the Investor Relations section of our website it 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 hard 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 mildly MBR cheap distribution and marketing officer, Conor Murphy Chief API.
Operating officer, and John Rosenthal, Chief Investment Officer.
Our discussion during this call will include forward looking statements within the meaning of the federal Securities laws Brighthouse financial <unk> 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 in Brighthouse financial filings with the U.S. secured.
Change Commission.
Information discussed on today's call speaks only as of today February 11, 2020, the company undertakes no obligation to update any information discussed on today's call.
During this call we will be discussing certain financial measures used by management that are not based on generally accepted accounting principle also known as non-GAAP measures reconciliations of these non-GAAP measures on a historical basis to the most directly comparable GAAP measures unrelated definition, maybe found on the Investor Relations.
Portion of our website in our earnings release slide presentation or financial supplement.
And finally references the statutory results, including certain statutory based measures used by management, 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.
2019 was a very strong year for Brighthouse financial as we made significant progress executing our strategy.
I'm very pleased with our outstanding results from 29 team.
As we exceeded our targets for sales normalized statutory earnings and adjusted earnings per share less notable items.
Importantly, we significantly strengthened our capitalization ending the year with approximately $9.7 billion of statutory total adjusted capital.
$2.3 billion compared with 2018.
And with an estimated combined RBC ratio of approximately 550% for 2019.
We also achieved several strategic milestones.
First we successfully managed through early adoption of variable annuity capital reform contributing to the significant growth of statutory total adjusted capital.
29 team.
Second we introduce bright house smart care.
First new life insurance product launches a public company.
And finally, we completed the full transition to our multi manager investment platform.
In addition to the strategic milestones, we continue to prudently manage our transition service agreements with Metlife to ensure a stage and systematic implementation of our operating platform.
And we generated additional statutory capital through a focused effort on balance sheet optimization.
Including receiving approval to take a 600 million dollar dividend from bright house reinsurance company of Delaware.
Moving forward, we believe that we are well positioned to continue the execution of our strategy, which we expect will drive shareholder value in 2020 and beyond.
As we have previously discussed one of our goals is to be a consistent return of capital overtime.
And we continue to make progress toward achieving this goal.
We repurchased approximately $128 million of our common stock in the fourth quarter.
And Weve continued repurchases in the first quarter of 2020 with approximately $23 million of our stock repurchased in January.
Since the announcement of our first stock repurchase authorization in August of 2018.
We have repurchased a total of approximately $570 million of our common stock through January 2020.
Well ahead of our initial expectations.
Last night, we announced that the company authorized the repurchase up to an additional $500 million of our common stock.
We currently anticipate fully utilizing this new authorization within the next 12 months.
Assuming full utilization of this new authorization.
We will have repurchased $1.1 billion of our common stock.
More than 70% of the way towards our target of returning $1.5 billion to our shareholders by the end of 2021.
Now, let me turn to fourth quarter results.
Our key highlights for the quarter are summarized on slide three of our earnings presentation.
First we had another strong sales quarter.
We had approximately $1.9 billion of annuity sales.
Up 10% compared with the fourth quarter of 2018.
We continue to be very pleased with ourselves as well as the quality of new business, we are adding each quarter.
Additionally, we're continuing to see excitement from our longstanding distribution partners.
And remain focused on making our distribution network as broad as possible.
As we help consumers in the United States achieved financial security.
To that end just last week, we launched our secure advantage six year fixed indexed annuity.
The launch of secure advantage six year represents the collaboration a brighthouse financial and market synergy group.
Which gives us access to an exclusive network of independent marketing organizations.
And reflects our continued commitment to provide a tailored set of products that respond directly to client needs in a changing retirement landscape.
Moving to life insurance, we continue to focus on our Highbred life insurance product right, how smart care.
We generated approximately $19 million of deposits and 2019.
I'm very excited about the strong sales momentum as we enter the new year.
And we expect significant growth from smart care in 2020.
We have made good progress, adding major distributors for our smart care product with access to a network of over 56000 advisors.
And we intend to roll out this product to additional distributors overtime.
Second total annuity net outflows were approximately $1.2 billion in the quarter.
Down from the fourth quarter of 2018 and up sequentially due to normal seasonal variation.
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 $283 million in the fourth quarter consistent with our expectations.
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 continue to make necessary investments in our technology infrastructure and in our businesses.
We refer to these investments as establishment costs.
In the fourth quarter establishment costs were approximately $32 million before tax.
And $118 million before tax for full year 2019.
We believe establishment costs will be around 150 million to $160 million in 2020.
And $25 million to $35 million in 2021, both on a pre tax basis.
As I've said before we're being prudent in how we're managing our way through our expected final couple of years of T. assays.
These T I say exits and associated system transitions put us one step closer to our future state operating platform.
Next let me touch on our earnings results.
Normalized statutory earnings were very strong in the quarter at approximately $600 million, bringing the 2019 total to roughly $1.9 billion.
Adjusted earnings less notable items increased sequentially to $265 million for the fourth quarter of 2019 or $2.46 per share.
Full year adjusted earnings less notable items were approximately $1.1 billion or $9 in 58 cents per share.
A 15% growth in adjusted S. Less notable items compared with 2018.
And finally, we continue to prudently manage our statutory capitalization.
As I mentioned at year end 2019, our estimated combined risk based capital or RBC ratio was approximately 550%.
With total adjusted capital of approximately $9.7 billion and approximately $1.7 billion of assets above sea GE 98.
Going forward, we plan to discuss our capitalization using RBC rather than C.G., because under variable annuity capital reform the regulatory framework now aligns with how we manage the business.
Our hedging program continues to perform well across a wide range of economic conditions and inline with our expectations.
In the fourth quarter, we made revisions to our variable annuity hedging strategy that fundamentally lowered the risk profile of the company.
And preserves distributable earnings across different capital market scenarios.
Ed will discuss these revisions in a moment.
Before closing and as we announced last night, we plan to hold a business update teleconference and webcast for analyst and investors on March 15, 2020 at eight am.
We will provide additional details closer to the call.
To wrap up we delivered outstanding results during 2019, as we continued to execute on our strategy.
Our sales remain strong.
Our variable annuity hedging program continued to perform well.
And we repurchased more of our common stock.
Additionally, we have taken steps to optimize our statutory balance sheet.
Resulting in significant capital generation as we reduced risk in our variable annuity hedging program.
Going forward, we remain confident in our strategy.
Which we continue to 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 financial results in more detail.
Ed.
Thank you, Eric and good morning, everyone.
I'm very pleased with our results in the fourth quarter and for the full year 2019.
Our statutory metrics have continued to improve as evidenced by our strong capital position.
Our normalized statutory earnings.
And the performance of our variable annuity hedging program.
And as a result of early adoption of variable annuity capital reform, we now have a statutory framework that aligns with how we manage the business.
Given that we manage the business on a statutory and cash basis.
I'll start off by walking through our statutory results and then I will discuss revisions to our variable annuity or be a hedging strategy.
Which has positive implications for cash and capital.
I will finish up my prepared remarks with comments on adjusted earnings for the fourth quarter.
To start off statutory combined total adjusted capital was approximately $9.7 billion.
Up $1.3 billion sequentially.
The increase this quarter was driven by two factors.
Strong statutory earnings.
And a 600 million dollar dividends from bright house reinsurance company of Delaware or B R. C D.
This is the first dividend from BRC D. Since the separation from our former parent company.
Normalized statutory earnings were approximately $600 million in the fourth quarter.
As business fundamentals were driven by strong equity market performance and favorable underwriting.
Year to date normalized statutory earnings were approximately $1.9 billion, primarily driven by strong equity markets and favorable hedge performance.
Turning to our V a risk management program.
Our hedges continue to perform well and inline with our expectations.
Assets above sea T. 98 were approximately $1.7 billion at December 31st a 200 million dollar increase compared to the third quarter.
Over the past two plus years, our V.A. hedging program has performed inline with our expectations.
And we have captured approximately $1 billion of market upside.
We have benefited from a strong stock market at the same time that bright house has become a much different company relative to when the initial hedging strategy was implemented.
We have successfully established our brand.
Sales are significantly higher and growing.
And our statutory capital level is substantially above where it was in 2017.
Given these developments we believe it is prudent to adopt a lower risk strategy going forward.
We have revised our VA hedging strategy to reduce risk.
Preserved distributable earnings across market scenarios.
And protect the capital generated from the market upside experienced to date.
With this revised strategy, we plan to operate with a first loss position or deductible of no more than $500 million.
And are therefore comfortable operating with a smaller cushion relative to C.T. 98 in normal markets.
As a reminder, our initial VA hedging strategy assumed we would have a 2 billion dollar deductible in 2020 and throughout 2019. This deductible was in the 1 billion dollar plus range.
Also keep in mind that the first loss or deductible concept is related to the hedge target and normalized statutory earnings.
The impact the statutory reserves and thus total adjusted capital could be greater than the maximum loss.
But if it was there would be a substantial offset in required capital.
I would also like to reiterate that with the adoption of V.A. capital reform, our regulatory framework now aligns with how we manage the business.
Given this alignment and the fact that we have a large non VA business.
Going forward, we will discuss our capitalization using projected an actual combined RBC ratios rather than ctcs.
We estimate our 2019 combined RBC ratio at approximately 550%.
This is well above our RBC ratio target of 400% to 450%.
Additionally, our 2020 total subsidiary ordinary dividend capacity is roughly $2.1 billion.
As a result of the substantial reduction in our deductible and strong capitalization.
We currently plan to pay more than $1 billion of dividends from bright House life insurance company or blick in 2020.
As Eric mentioned, we plan to have a business update call for analysts and investors on March fit.
Well, we will provide an update on D.A. distributable earnings, which will incorporate the revision to our hedging strategy as well as the related sensitivities.
Before I move onto adjusted earnings.
I'd also like to mention as of the ended the fourth quarter, our average financial leverage ratio was approximately 25%.
And our holding company liquid assets were approximately $800 million.
Which is flat sequentially and roughly four times, our annual fixed charges.
Moving to adjusted earnings.
Last night, we reported fourth quarter adjusted earnings excluding the impact from notable items of $265 million.
This compares with adjusted earnings on the same basis of $260 million in the third quarter of 2019 and $199 million in the fourth quarter of 2018.
There were two notable items in the quarter, which on a net basis increased adjusted earnings by $17 million.
The notable items on an after tax basis were a $42 million benefit from further refinements to certain actuarial assumptions.
And establishment costs of $25 million in corporate another.
Sequentially adjusted earnings less notable items were driven by the positive equity market performance in the fourth quarter.
Along with better underwriting margins.
Partially offset by lower net investment income and an increase in corporate expenses.
With respect to the market performance impact.
Separate account returns were positive, 6.1% driven by the favorable equity performance in the quarter.
As a result, DAC amortization and reserves decreased sequentially for a combined impact to adjusted earnings of $34 million or 32 cents per share.
The sensitivity of DAC amortization and reserves to changes in separate account returns was slightly below the guidance we've given.
That every one percentage point change in separate account return equates to seven to 11 cents per share.
Next net investment income decreased sequentially.
Alternative investment income was lower as the return was 2% in the fourth quarter compared with 3.6% in the prior quarter.
Asset growth driven by our continued strong sales momentum was a partial offset.
Moving onto our life insurance businesses sequential results were favorably impacted by improved underwriting margins.
Overall underwriting was favorable relative to what we consider to be a normal quarter.
Lastly, corporate expenses were $283 million up approximately $35 million before tax compared to the third quarter and above normal level.
Which brought full year 2019, corporate expenses slightly above the 2018 level.
As Eric mentioned, we still expect a reduction of $150 million a corporate expenses on a run rate basis by year end 2020.
And an additional $25 million of corporate expense reduction in 2021.
Turning to adjusted earnings at the segment level, starting with annuities adjusted earnings excluding notable items were $223 million in the quarter.
Expenses were higher and fees were lower sequentially, which had an unfavorable impact on earnings.
This was partially offset by the favorable market impact.
Adjusted earnings excluding notable items in the life segment were $75 million in the quarter.
Sequentially results were impacted by lower claims, partially offset by lower net investment income.
The fourth quarter reflected a strong result for the life insurance segment.
Results for full year, 2019 were modestly better than 2018 and inline with our expectations.
The runoff segment reported adjusted earnings excluding notable items of $6 million in the quarter, which were comparable to the prior quarter.
Corporate another hadn't adjusted loss, excluding notable items of $39 million.
Sequentially results were driven by higher taxes.
Overall I'm very pleased with the results this quarter.
We increased our already strong capital position and we continue to prudently manage our statutory balance sheet as we shift our hedging strategy to reduce risk.
Preserved distributable earnings across market scenarios and protect the capital generated from strong equity market returns since separation.
Finally, adjusted earnings per share less notable items were solid in the fourth quarter and grew 15% in full year 2019, compared with 2018.
With that we'd like to turn the call over to the operator for your questions.
Thank you you asked a question you will need to press star wanting your telephone withdraw your question press the pound key.
In fairness to all participants please limit yourself to one question and one follow up please standby, while we've compiled the Q any roster.
Our first question comes from Andrew Women with Credit Suisse. Your line is open.
Hey, good morning.
So I'd like to focus on the hedging.
In the second and third quarters of 29 Teen Bright house had reported.
Substantial benefits from I think kind of increasing the hedging.
For interest rates, I think you generated six or $700 million of incremental benefits and so the question is how does that strategy.
Change.
Given that we're looking into 20 2020, and we've already seen.
The 10 year down maybe.
30, bips, so what might be the effect on 2020.
Capital as a result of hedging this year, but has that strategy changed from what we saw into Q3 Q.
Hi, Andrew It's Ed.
So I think I'll start off by the comment on normalized statutory earnings a $1.9 billion.
It was a significant significantly benefited from strong market and the favorable hedge performance as I said in my prepared remarks.
So.
Our old strategy really allowed us to capture the benefit of significant up markets. So.
The significant.
Statutory earnings we had last year really reflected that market capture strategy.
So as we look forward, we're talking about a strategy that will.
Have a more consistent distributable earnings profile and will not be looking to capture upside to the same extent.
But we'll obviously have a very significant benefit in terms of limiting downside.
So you know that the idea of preserving the significant statutory earnings we had last year is really a key driver.
When you think about interest rates.
We will continue to protect ourselves against low rates. So you as you pointed out and I don't know that the numbers as large as what you stated, but we did see a significant benefit last year from a rate hedges.
We continue to have significant rate protection and that will be an element of the revised strategy as well.
Good yeah, no I really like that shift in strategy and just kind of.
Just kind of rounding it out so you talked about putting capital at risk.
$500 million Destiny.
Versus the potential for 2 billion and.
I'm wondering how to think about the cost because I I think just as recently as last quarter.
The amount at risk was about 1.21 0.3, so could add could you give us a little change what's the delta in the hedging costs that we might see going forward into earnings.
Okay. Andrew said again, so as you pointed out a key element of this revision is we're moving from a high deductible strategy to a low deductible strategy.
So the benefit here is we obviously have a meaningful reduction in our losses in stress scenarios.
In addition, this does allow us to preserve distributable earnings across more market scenarios, which we think is a a key element as well.
In terms of the hedging program, we are moving to more or we have moved to more symmetrical hedges, which means more swaps and less options.
So when you think about hedge costs right I would just say the way we think about as you've got sort of the the fixed cost element of it let's say the premiums you're paying on options and the related time decay.
And you also have the mark to market from gains or losses in the equity markets.
So as we as we have moved to the symmetrical strategy and away from options to to swaps.
We have a reduction in the time to K element of our hedge costs.
But it does mean that our hedge gains and losses are going to be more sensitive to market movements.
So in the context of total hedge cost defined as I've just stated.
I think the way to look at this would be.
In in down markets, we obviously have a significant benefit because of the.
The much smaller first loss position.
In in flat markets, we have significantly reduced hedge costs.
With the revised strategy.
In what I would call normal markets.
The hedge costs are pretty consistent.
And finally in significant up markets, we would have more hedge costs associated with the revised strategy.
But keep in mind that we continue to benefit when the equity market goes up.
Driven by the future fees associated with our VA account balances.
But in down markets, we have substantially reduced the maximum loss, we would expect too but expect to see.
Got it very helpful Ed.
Thank you. Our next question comes from Tom Gallagher with Evercore ISI. Your line is open.
Morning up first question is the more than a billion dollar dividend that you expect to take out of Blake in 2020, what do you what are your plans with that closed its going to give you a lot more.
At the holding company than the 500 million buyback are you planning on reducing leverage or what what are your thoughts on on that.
Hi, Tom It said, so let me be a little bit more specific about the dividend plan. So we plan to take $1.25 billion from BLAIC in 2020.
And when you think about that number.
Approximately $1 billion or that dividend relates to the revised hedge strategy.
And the other $250 million you could think about is more the normal dividend, we would have anticipated taking even before we a revised strategy.
So as you pointed out we ended the year with 800 million of of cash and liquid assets. The holding company. If you think about that dividend from BLAIC and you compare it to the new share buyback authorization. I think you can you can see that the plan as we would continue to see an increase in cash and in.
Vested assets at the holding company.
We think it's prudent at this 0.2 to build some flexibility at the holding company and.
I think that you know just overall prudence around cash at the holding company invested asset to the holding company prudently managing the risk based capital ratio down to our 400% to 450% target overtime I.
I think this is going to be the type of you know what do you think you should see or expect to see from us consistent with what we've been saying all along.
You know in terms of the buyback because I'm anticipating you know that as you go through this math you see that the capital position the cash position is very strong.
So we think that returning a double digit percentage of our current equity market capitalization to shareholders in the form of a buyback is a pretty compelling value proposition.
So so ed the so the plan would be to run with a lot with with that excess amount.
You know you'd probably be what at up to.
Maybe almost 1 billion five at the holding company, but the plan would be to just run with a lot more access at the holding company for the time bank.
Correct.
Okay and then my my follow up is.
Ed I heard your comment about the distributable earnings under a range of scenarios can you provide a little more context.
About how we should think about a quantification quantifying that a bit in terms of whether it's in proportion or percentage terms of GAAP earnings were dollar amounts in terms of baseline expectations for.
Ongoing cash flows and dividend double earnings that you would expect to be able to take out of black and the other subs every year because I take the biggest questioned that has surrounded the bright house stock has been the lack of.
Cash flow story that that people can kind of wrap their head around on a consistent basis. So any any way you can you kind of frame that would be helpful.
Okay. So I guess the first thing I would say is this a the plan to take the dividend from Blake. This year is the first dividends that we are taking out of blick since separation.
And you know $1.25 billion is pretty good number.
Of that the $250 million is more indicative of what we would consider to be a more normal dividend from from that operating company.
And you've heard us talk about the $60 million to $70 million normalized run rate. We think we would see from nella go.
You also heard as discussed on the call last quarter about the approximately $200 million of flows that we get to the holding company associated with that.
Other flows than dividends. So that gives you a sense I kind of what comes in in a normal.
In a normal year.
We're gonna have to wait until our business update on March five to get into the specifics on the distributable earnings under scenarios as you can appreciate we're still.
Sort of finalizing all of that analysis based on year end. So we'll have to hold off on that but the one thing that I would sort of direct you to that maybe help you out here is the comment I made about hedge costs under the base scenario.
You know, we wouldn't expect a material difference in our hedge costs with the revised strategy versus the old strategy.
And I think I'm not going out on Ilim here to say that in a bear scenario.
This is clearly a lot better.
Considering the significant reduction in the deductible from $2 billion to up to 500 million.
Understood. Thanks.
Thank you. Our next question comes from Ryan Krueger with KBW. Your line is open.
Hi, Thanks, good morning.
Common dividends from.
Click if you didn't mention the 600 million that that wedding public from from Bright house three that menu you also plan to dividend up to the holding company overtime.
Hi, Ryan It said yeah. Thank you for up for bringing that up because I I meant to mention that the dividend. We are taking from Blake in 2020 has nothing to do with the dividend we receive from BRC date.
So on that obviously benefits benefits our risk based capital ratio.
550% is above our 400% to 450% target and as you alluded to I think we would say the strategy is to manage toward that target overtime and the BRC D dividend clearly gives us more flexibility.
On a statutory basis.
Okay. Thanks, and then can you you're you've made a lot seem to to the variable annuity head of strategy I guess in in the context of all of that.
Can you just give us an update on your thought process.
And your risk transfer solution that as well going forward.
Hey, Ryan it's Eric I've said since the beginning I I don't think we've had a conference call where I haven't gotten this question and and my answer really hasn't changed if there is a transaction that can add long term shareholder value.
And is executable then we would absolutely look at it I would say and I hope it actually goes without saying a little bit here that anything we would consider doing in the future. We would consider doing from a position of strength.
Got it thank you.
Thank you. Our next question comes from Jimmy Bhullar Jpmorgan. Your line is open.
Hi, I just sort of question on your just the overall competitive environment in the annuity market and to your outlook for sale.
And specifically in the buffer annuity market because you've seen a lot of other companies come out good similar products. The shield and you are going purely faster, but at a slower pace than you were before so just any comments on what you're seeing in terms of competitive trends in the market.
And yet you mean sales George I mean, it's Eric I'll start and then I'll, let miles jump in here just the one thing I want to say is you know we've had a number of years here of excellent sales growth.
And while we're working really hard at bright house I got it thank our distribution partners and the advisors who work for them.
They have done a terrific job for US we continue to get inbound calls from new distributors and we've got a new product that just came out so let me turn over to miles and I'll walk you through it a little bit [noise].
Good morning, Jimmy take you through the question, yes. So we really we remain very pleased with our shield results actually the fourth quarter last year marked our best quarter, yet with shield results at Big driver of that as Eric mentioned, a moment ago is that last year for three firms was there first.
Full year in selling our shield product and those three firms did about 800 million of incremental sales. So as we continue to add wholesalers and bring on new distributors as well as enter new channels with our shield product. We remain very optimistic that we're going to be able to continue this type of growth.
And you think the company competitive environment still fairly rational in terms of other companies coming out with similar products and pricing terms that they're offering.
Yeah, I mean, we like the competitive environment, we think it's a good thing for our advisors and consumers. It further validate the product category and we like our competitive position positioning within the product category. So we.
We think it's a good thing.
And just related Lee how fast are you expecting your life sales.
And are you still <unk> are you.
Expecting to rule out any additional products.
The theater or is it mostly just to further distribution expansion of your.
The previously introduced right.
Yeah, we're very pleased with the progress, we're making with smart care, we're selling the product now through over a dozen firms either.
Fourth quarter, we had 11 million of deposits for the second half of the year. We paid for about 250 cases smart care will be our focus this year, but we're also looking to introduce new products in the foreseeable future.
Hey, Jimmy its Conor and I'm, just going out as well maybe I can orange you back to what we talked about a couple of but a little over a year ago at the last outlook call in which we'll talk about again at the next I look calls we are looking toward substantial sales.
Increase in sales in life over the coming years on Momentums continued nicely here in the beginning of the first quarter.
Thanks.
Thank you. Our next question comes from Alex Scott with Goldman Sachs. Your line is helping.
Hi, Good morning of first question I had was just on the statutory earnings you expected generated.
I guess thinking through 2019 is probably not.
Great in terms of.
Being representative of go forward just because of the.
The implementation of the VA reform and so for US. So was wondering if you could help us out with that I mean is that you know expected to be roughly in line with the 250, you mentioned I mean that sounds kind of light relative to where you've been calling normalized stat earnings. So it's just interested if there is some other use of the expected stat earnings.
Hey, Alex said.
So.
If you look at the comments I made on dividends, So 250 million expected from BLAIC and say the 60 to 70 million from now let go.
[music].
If you take that combination and then you know remember we're growing so.
As as you just heard there is a very good sales story here, sometimes I don't know that it gets as much attention as it should but there is some strain associated with that and so if you're thinking about normal stat earnings.
I'm not going to give you a number but take those two dividends and assume it's something above that.
Got it and could you frame, how we should think about the amount of capital that's the sort of in use for business growth.
Yeah, I think that is an excellent question to ask add our business update on March shift.
Okay.
And then maybe one more housekeeping item quickly corporate expenses overall I know you mentioned, how much should come down I think that was like the run rate for the 12 month after the IPO its relative to your but can you just frame how corporate expenses should come in in 2020, and how that will trend down off the 283, you had this quarter.
Yeah, So first of all.
This quarter was unusual I think if you look at the 246 of adjusted earnings.
The way to think about it is we had probably about 25 cents a share of.
Unusual market favorability relative to our base assumption for separate account returns.
And that was essentially offset fully by the operating expenses being above a normal run rate level.
So oh, you know that the fourth quarter expense level is clearly not indicative of what we would expect in the first quarter of 2020 or throughout.
In terms of the target it into the second half run rate a corporate expenses annual basis is $900 million, which is what we had given as our target for for 2020 and that would be to $150 million reduction that you referenced versus the initial starting point of expenses.
Got it that's very helpful. Thank you.
Thank you. Our next question comes from areas that lets autonomous research your line is open.
Hi, Thank you.
Maybe following up on that last question you mentioned some noise specifically at annuities round the favorable market impacts in the fourth quarter as well as the higher expenses. So can you just help us think about the run rate earnings power of the annuity business in 2020.
So you know what I, what I think I'd, rather do is maybe give you a little bit a help on the run rate earnings power of of the company. Overall. So if you looked at this quarter as I said, the big items would be the market and the expenses.
And they essentially offset there obviously you know puts and takes every quarter, we talked a little bit about underwriting was little favorable but you know overall the number is probably at a pretty decent number to think about maybe it maybe maybe a little higher.
And if you look out to 2020.
I wouldn't be thinking about growth driven by.
The reduction in corporate expenses that we just did I just referenced.
And the full year impact of the buyback we had in 19 and whatever buyback you're going to see in 2020.
Got it that's helpful. Thanks, and then one for the hedging program. Just can you talk about the impact of shifting away from an auctions based strategy on the required cash outlays for the program and it does that have free cash flow implications since it gets you'd have an upfront cost of purchasing options.
No I think the you know the cash implication is there can be more liquidity needed associated with a symmetrical hedging strategy, but that that is not an issue for us at all in terms of the distributable earnings I would say.
Go back to the comment I made that in a base type scenario. There is not a material difference in hedge costs between our new strategy and the old strategy overall and again hedge cost defined as you know premium that you're paying and the associated time decay with options.
And the mark to market gains and losses that you would expect to see with the symmetrical instruments like swaps.
Got it thank you.
Thank you. Our next question comes from lease Greenspan with Wells Fargo. Your line is okay.
Hi, Thanks. Good morning on my first question have you guys said you know.
Well during the here.
Yeah, and I'm sure some Blake.
And I guess I, just think about that and then share repurchase should we just think about kind of and [laughter] purchases I guess throughout the fourth quarter is and that's another capital related question I'll go in there on it sounds with all the talk about we purchase that we should assume that that's the main capital return metrics first chance on perhaps.
The dividend at some point to shareholders.
Hi, Lisa said, so I think on the last question, Yes, I think you should assume that buyback is the is the way we're returning capital to shareholders I think that in terms of the blick dividend.
You, probably should expect to see it spread out throughout.
2020.
And then remind me again your middle question.
I'm, just asking about share repurchase we think about that kind of.
Thank you and run rate right. So I think the run rate will be I think you'll see a little bit less in the first quarter because of the but really the blackout dates associated with the the but to the the update call I'm, so it'll be a slightly lower run rate.
Slightly lower than the run rate, we've seen I think it's like 80.
Something like that $80 million, maybe is what we would expect and then if you look at then the subsequent three quarters you probably should be looking at you know consistent with what you've seen in the prior quarters.
Okay, that's helpful and Tom.
600 million dollar dividend time on <unk> I, just wanted to make sure I understood that correctly that that's not necessarily all coming up the whole calling 2020, that's part of.
RPC drive down overtime is that correct.
Yes.
Correct that except that would modify just a little bit to say that there is no plan to take any of it to the holdco in 2020.
Okay. Thanks, I appreciate the color.
Thank you on next question comes from Humphrey Lee with Dowling and partners. Your line is open.
Good morning, and thanks for taking my questions.
Just to circle back on the then the the revision in the hedge program. So in a pass you use kind of all the money options as part of the strategy and now he's changing to swap is just an element of that kind of the money a top component in your hedge program and if so has that changed compared to where to watching the past.
Hi, Humphrey it's Ed.
There is still an out of the money component associated with interest rates.
But not equity markets.
I mean, not not to any substantial Dennis Smith some okay.
Much much much different alright got it and then in terms of <unk> I understand you talked about you and intend to keep a little bit more at the holdco at least in a near term while the RBC you kind of saying you gradually you would draw it down to 400 450 from 550, but is there any plan to hold onto.
A a lease it and additional RBC buffer for time being so that it's actually probably won't see A.H. rolled out below that level until late appearance.
Sorry, Humphrey what was the last part of your question about the RBC cushion yeah. So right now you have 550 versus target of 400 to full 50 is any plan to hold on to additional buffer for the time being similar to you guys.
I was hoping to more cash and liquidity at the Holdco.
Well I mean keep in mind that as we take a billion to 50 odd a black.
That does the 550% RBC, obviously comes down by a lot.
The the denominator of the.
The combined RBC ratios about $1.8 billion. So you know obviously that movement of RBC to the holding company is is what you're seeing.
Got it thanks.
Thank you once again, ladies gentlemen, if you wish to ask questions. At this time. Please press Star then one are you touched on telephone.
Our next question comes from Ian Ryan with Bank of America. Your line is okay.
Thanks, Good morning, one of your competitors expects that decline in annuity earnings as they have some policies that are rolling off or past kinda surrender charge period.
Since many were sold I think in 2010 to 2012, a legacy met so a lot of these policies and about 2011.
One with these policies roll off and get this dynamic happening to you as well.
This is catarina, let me take thought I would say front for us you're seeing a pretty consistent level of outflows.
Over the last 10 quarters.
It was remarkably consistent and 2019, and we expected to be a consistent and maybe ticking down a little bit in 2020, but you're right different.
We have different Traunches. If you will so yes, we have not as some sort of 2011 2012 met policies that we'll be rolling off but we've seen that phenomena over the last few years, we have a little bit shield now I was up to six year level, where we started selling it but we didn't actually felt that much of it in 2014 for there's nothing really.
If you get there as well so we we talk about this we constantly see a pretty consistent level of outflows. Obviously, we're seeing a significant growth in the inflows getting us to an improving that position all the time that trajectory should largely continue.
Into 2020, and again, just a reminder that much of what flows odd for us.
Is is positive from our perspective and not much of it is from this sort of older more capital intensive block of business from 10 plus years ago.
Got it thank you and I'm just on the increased sensitivity of your hedge gains and losses is this just a function of switching to more.
Swaps than using out of the money options.
Yes.
Great.
Thank you.
Thank you ladies gentlemen, ill now turn the call back over to Mr. Steigerwald for closing remarks.
Thank you operator, well I hope you got a sense here, obviously, we had a great quarter and a integrate year 29 team was a great year for bright house, you can see that our discipline has paid off and now I sort of think about it as we're adding an extra level of flexibility.
And you know if you've watched us in the last two and a half years. Our goal is to turn that flexibility into shareholder value as we move forward.
I just couldn't be more pleased with our progress we've been prudent and thoughtful in our approach to managing our business and it's obviously paid off and we're going to continue to do that.
Revisions, we made to the hedging strategy in the fourth quarter fundamentally lowered our risk profile going forward and as Ed said at least three or four times on this call preserves distributable earnings across various capital market scenarios, and we will talk about that more on our update call on March 15.
We are running this company for all of our stakeholders and believe we are well positioned to continue the execution of our strategy.
And we expect that to drive shareholder value in 2020 and beyond so we look forward to speaking with all of you on March Fiveth and thanks for being on the call.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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