Q1 2020 Earnings Call
[music].
Good morning, ladies and gentlemen, and welcome to Brighthouse financial first quarter 2020 earnings Conference call.
My name is Daniel and I'll be your coordinator today.
This time, all participants are not listen only mode.
We will facilitate a question answer session towards the end of the conference call.
In fairness all participants please limit yourself to one question and one follow up I.
As a reminder of the conference is being recorded for replay purposes.
We also to refrain from using cell phones speaker phones or headsets during the question and answer portion of today's call.
Now I'd like to turn the presentation over to David Rosenbaum.
How does Investor Relations Mr. Rosenbaum you May proceed.
Thank you operator, good morning, and thank you for joining Brighthouse financial first quarter 2020 earnings call. Our earnings release Slide presentation in financial supplement were released last night it can be accessed on the investor.
Relations section of our website 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, John Rosenthal, Chief Investment Officer, and its be Hart, 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 Lambert cheap distribution and marketing officer in Conor Murphy Chief operating officer, our discussion. During this call will include forward looking statements within the meaning of the federal Securities laws.
Bright house financials actual results may differ materially from the results anticipated in the forward looking statements as a result of risks and uncertainties, including those related to the cobot 19 pandemic and others described from time to time in Brighthouse financial filings with the U.S. Securities and Exchange Commission information.
Discussed on today's call speaks only as of today May 12, 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 principles 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 may be found on the Investor relations portion of our website in our earnings release slide presentation or financial supplement and finally references to statutory results, including certain statutory base.
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.
I want to cover a few topics today.
First I will provide some perspectives on the current environment.
Next I will give an update on our share repurchase program.
And finally, I will cover Brighthouse financial results in the first quarter.
Let's start with the current environment.
I hope it you on your loved ones are safe and well that's a call, but nice seems endemic offends our communities in the world.
Right else financials top priority at this time remains the wellbeing safety of our employees and their families our partners and our customers.
Through the Bright House Foundation.
And Brighthouse financial corporate contributions to date, we have donated more than $500000 to local food bye.
Another organization in our communities to support those in need throughout the same dynamic and beyond.
That's cities and states across the country.
Began to enact measures to help protect the health and safety is our communities in March we probably implemented our business continuity plan.
Quickly and successfully shifted all our employees to work from home environment, where they remain today.
We have taken a number of stuff.
Support our employees through this time.
Including flexible work arrangements and additional vacation days that are intended to allow them to spend time with family.
Or to take care of personal needs, while the work from home period remains in effect.
And in the midst of these trying times, we continue to bring on outstanding talent.
Outsourcing.
It is going on certain times like these when our mission to help people chief financial security becomes even more important.
Please know that despite the challenges created by the pen down there.
Thanks to the incredible adaptability and resilience of our employees, we remain steadfastly focused on our mission and strategy and on delivering for our partners customers and our shareholders.
Well the pandemic continues to impact the global economy, driving equity markets down increasing volatility and leading to a historically low interest rates. We believe we are well positioned to weather the current downturn.
On slide four of earnings presentation, we've provided a summary of certain potential ongoing impact.
The current environment on our business.
Which we currently believe are manageable.
We entered the situation from a position of strength.
And we remain confident in our focus strategy.
Finally, our balance sheet and liquidity position are strong and our investment portfolio is well diversified.
The second topic I'd like to cover share repurchases.
In 20, Twond through May as well.
We repurchased approximately $360 million of our common stock.
Representing over 12% of our shares outstanding relative to year end 20 nights.
This was a significant value, creating action for our shareholders and since the announcement of our first stock repurchase authorization in August of 2018.
We have repurchased a total of approximately $864 million of our common stock roommates. It this year a reduction of more than 22% of our shares outstanding from the time, we became an independent public company and well ahead of our initial expectation.
Now you have heard us use the word prudence many times.
And given the unprecedented market environments in which we are offering we are temporarily suspending repurchases of our common stock.
We will continually evaluate our repurchase program.
And we'll resume repurchases of our common stock and circumstances warrant.
Importantly, our target of returning $1.5 billion of capital to our shareholders by yearend 2021 remains in place.
Now, let me turn to first quarter results.
Our key highlights for the quarter are summarized on slide five of our earnings presentation.
First we continue to prudently manage our statutory capitalization.
Our hedging program performed extremely well in the first quarter of 21.
Importantly, we estimate that our combined risk based capital or RBC ratio.
Was 515% to 535%, even though we paid a 300 million dollar ordinary subsidiary dividends to the holding company in the quarter.
Ed will provide more details on statutory results shortly.
Second we had very strong sales in this quarter.
Nobody sells were approximately $2 billion up 15% compared with the first quarter of 29.
Additionally, we generated approximately $16 million of life insurance sales in the first quarter of 2020 ahead of our expectations and up 33% compared with the fourth quarter of 29.
Driven primarily by smart.
I'm very pleased with ourselves results in the first quarter.
And the transition our teams made moving from a face to face model to a virtual model in order to connect with and remain in front of financial professionals.
And we remain focused on supporting our financial professionals and their clients.
During this time.
Looking forward it probably does not surprise you that the current market environment is the headwinds in near term sales of annuity and life insurance products for the industry and for bright house.
As a result, it maybe challenging to generate sales growth in annuities.
For this year coming off of a very strong 29.
With respect to life insurance.
We launched smart care last year and have been focused on building relationships with firms and advisors.
Obviously that becomes more challenging in a virtual world and may have an impact on the timing of when we achieve our life insurance sales targets. However.
It is clear that our plan for 20, Twond was achievable and that gives me great confidence with respect to our strategic goal for life insurance going forward.
Even though we will be facing headwinds we are laser focused on growing our life insurance business.
As I've said previously rising healthcare costs.
Unforeseen health care needs and insufficient income in retirement, our pervasive retirement concerns for Americans, we believe Brighthouse financial is well positioned to help people with chief financial security and help address retirement concerns over the long term.
Third let me turn to total annuity net outflows, which were approximately $900 million in the quarter.
Down from both the first quarter of 2019 and down sequentially.
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 less capital intensive new business.
Coupled with the run off of less profitable business.
For.
Corporate expenses, which do not include establishment costs.
Were $214 million in the first quarter consistent with our expectations.
We remain committed to reducing corporate expenses.
$150 million on a run rate basis by the end of this year.
And by an additional $25 million.
2021.
Finally.
We continue to make necessary investments in our technology infrastructure and in our business.
We refer to these investments establishment costs.
First quarter.
<unk> costs were approximately $18 million and fourth huh.
We continue to believe establishment costs will be around 150 million.
The $160 million 2020.
And 25 million to $35 million in 2021, both on a pre tax base.
As I've said before.
We are being prudent and how we are managing our way through our expected final couple of years its yesterday.
These T S I I just.
And associated systems transitions put us one step closer to our future states operating platform.
To wrap up.
I want to thank our employees for the dedication and Brazilians they've shown in the face of this unprecedented situation.
As a result of their adaptability and commitment.
We are able to continue to support our customers and place financial professionals, both now and into the future.
Our balance sheet and liquidity positions are strong.
And we expect them to remain strong even in the midst of distressed market.
We continue to believe we have the right strategy in place to deliver long term shareholder value.
And we believe that we are well positioned to continue the execution of our strategy.
I'll now turn the call over to John Rosenthal, Our Chief investment Officer, who will provide an overview of our investment portfolio as well as detailed on several assets sectors of interest.
John.
Thank you Eric let me start by saying that we believe our investment portfolio is well positioned for a downtime.
As we have a very well diversified in high quality portfolio.
We've been preparing for it turned in the cycle since early last year and adopted a more conservative investment strategy as a result.
This included limiting new investments into cyclical and weaker investment grade credit.
No longer allocating new money to and below investment grade credit and producing the portfolios exposure is to be below investment grade credit sector as well as higher risk investment grade physician.
Let's start on slide six of the presentation, which provides an overview of or investment portfolio.
If you will see this is a very good story.
At March 31st we had approximately $105 billion total investments, excluding cash cash equivalent on a GAAP carrying value based.
The Pie chart on the left illustrates the level of diversification demonstrates that we are not overly concentrated in any one asset class. The chart on the right illustrates the ratings distribution of our fixed maturity securities portfolio approximately three quarters of the investment portfolio was fixed maturity of which roughly 90.
6% is investment grade.
With that as a backdrop and given the current environment I want to provide some perspectives on specific assets sectors for corporate credit and commercial mortgage loans that may be more exposed to covert 19 risk.
Overall this is a good story for us with what we believed to be manageable exposure.
Turning to slide seven and corporate credit.
Book value basis, we had approximately $108 billion of total investment, including cash and cash equivalents.
We have a high quality credit portfolio with about 90, 393% rated investment grade at the end of the quarter.
Importantly, our corporate credit allocation of approximately 40%. The total investments is low relative to the industry, which we believe is an important distinction during an economic downtime.
Over the last several years, we've been putting more of our new money to work in private corporates. If we believe these assets will generally performed better than due primarily to the structural protection.
These assets accounted for more than 25% of our corporate credit portfolio at the end of the quarter.
Our exposure to sectors, we believe likely to be more impacted by cobot 19, including energy retail leisure metals autos and airlines was approximately $6.3 billion at March 31st or less than 6% of a total investment.
I'll discuss shortly most of this exposure with the higher quality energy and retail credit.
The $6.3 billion only 3.1 billion for approximately 3% of our total investment.
But anyway, any I see two rating for public or below investment grade ratings for public some private.
So again, a very good story with what we believe are manageable exposures.
I'd like to now provide a little more detail about our holdings in the energy and retail credit sectors as well as our retail and hotel exposure that we have in our commercial mortgage portfolio.
Moving to slide eight.
We provided an overview of a $2.8 billion energy exposure at March 31st.
Overall, our exposure is higher quality with 57% rated be double AC were higher in 88% rated investment grade.
Approximately 50% of our energy holdings are in midstream energy companies, which are generally less volatile as a result of having less commodity price risk and contractual cash flows.
Our integrated energy company holdings, which accounted for another 16% of our energy sector exposure had an average rating of high eight at March 31st.
Finally, we believed that our independent exploration and production company.
Exposure is manageable at slightly less than $600 million about 20% over energy holdings at March 31st.
The 600 million only about 30% is rated below investment grade.
Our 1.7 billion dollar retail exposure related to corporate credits at March 31st is detailed on slide nine.
Almost two thirds of these holdings where retailers.
Its exposure is high quality was 96% rated investment grade in fact.
Top five corporate retail I suppose is at Walmart home depot.
Lows, Walgreens and target, which together accounted for about 50% of this exposure and had a weighted average rating of single a at March 31st.
Importantly, we have no direct department stores for.
The remaining one third of our holdings or retail real estate investment Trust.
He's holdings are geographically diversified and highly rated.
Before turning the call over to add let me touch on our commercial loan portfolio.
In total our commercial loan portfolio was approximately $9.5 billion at March 31st.
Overall, we believed that our commercial mortgage portfolio is well diversified across vintage.
Dougherty and property type. It is also high quality with an average loan to value of 53% at March 31st.
The two sub sectors that we believe will be most impacted by cope with 19, a retail and hotel and as summarized on slide 10.
Like our overall portfolio. These mortgages have strong credit metric.
Retail commercial mortgage loan exposure was approximately $2.1 billion covering 70 alone.
These are high quality assets with strong sponsors and located affluent market.
Our hotels commercial mortgage loan exposure was approximately $923 million covering 22 love.
These assets are also well diversified geographically and are generally located primarius with major brands.
To summarize our overall investment portfolios high quality and well diversified and we believe our exposure to assets sector is likely to be more impacted by covert Nike is manageable.
With that I'll turn it over to add to discuss our financial results.
Good.
Thank you John and good morning, everyone I hope, you're all staying safe and healthy.
I would like to start by repeating something I said on our March business update call.
Prudence and flexibility our two words, you will hear frequently from us.
And recent market movements for the reminder of the value of both for financial services Company.
Because of our focus on prudence and flexibility.
We entered this challenging environment with a strong statutory balance sheet and a material reduction in our equity market risk profile.
And as I believe our first quarter results illustrate.
We have maintained a strong capital and liquidity position. Despite the steep decline in equities and interest rates in the first three months of the year.
I will begin my prepared remarks with comments on our statutory results.
I will then discuss holding company liquidity and share repurchases.
And finish with comments on adjusted earnings.
At the end of the quarter combined statutory total adjusted capital or Tac.
$7.2 billion down from $9.7 billion at year end 2019.
There were three primary drivers of the change from year end.
First an increase in variable annuity or V.A. reserves as a result, with the decline in equity markets and interest rates.
Which was only partially offset by the benefit from hedge gains and lower reserves for our shield annuity product.
Second a 300 million dollar ordinary dividend paid from bright house life insurance company or blick to the holding company.
And three unfavorable results for our non variable annuity business.
It's important to point out that we expected V.A. reserves to increase substantially in an environment like we experienced in the first quarter.
And that this increase would have a negative impact on total adjusted capital.
As I said, our March 5th business up Big call.
And that's also discussed in our 2019 10-K.
The impact on total adjusted capital could be greater than our maximum loss target for our hedging program.
If it was we would expect a substantial offset in required capital.
Which would diminish the impact on the RBC ratio.
This is how the neighbor form works and exactly what we saw in the first quarter.
We estimate that our combined RBC ratio was in the range of 515% to 535% at March 30 Onest.
This compares to 552% at yearend 2019.
And includes an approximately 20 point negative impact from the 300 million dollar ordinary dividend paid by bright House life insurance company in the quarter.
We had a normalized statutory loss of approximately $800 million in the first quarter.
However, we did not use any of our up to 500 million dollar first loss position.
Which is the revised hedged target we discussed with you on our fourth quarter earnings call and the March 5th business uptake called.
Gains on our previously out of the money low interest rate hedges fully offset the negative impact of other market related items.
Approximately two thirds of the normalized statutory loss was attributable to increased volatility in tax liabilities associated with our adoption of V.A. reform.
We view this impact as nonrecurring as we have incorporated this into our hedging program going forward.
The remaining one third of the loss was driven by non variable annuity results below the levels seen over the last two years.
Which was a function of unfavorable mortality.
And then impact from low interest rates on our market value adjusted annuity book.
To summarize our hedging program performed extremely well during a challenging market environment.
Our total asset requirement for variable annuities at C.T. 98 increased by $8.1 billion in the quarter or almost 90%.
This was more than offset by an 8.3 billion dollar increase in our variable annuity assets.
The real test of hedge effectiveness is during a stressed market environment.
We believe that an 8.3 billion dollar increase in assets relative to an 8.1 billion dollar increase in the asset requirement suggest a very effective hedging program.
Success on variable annuity risk management is the key reason that we are reporting an RBC ratio in a stressed market environment that is well above our long term target of 400% to 450% in a normal market environment.
I'd now like to discuss our holding company liquidity.
We ended the first quarter with holding company cash of approximately $1 billion are almost five times annual fixed charges.
Since the end of the first quarter. The holding company received an additional 500 million dollar dividend from bright House life insurance company.
So even after considering the shares of common stock repurchased in the second quarter to date, we would anticipate a significant increase in holding company cash at the end of the second quarter.
Looking forward, we will continue to emphasize prudence and flexibility when evaluating dividend plans from our operating subsidiaries, including the $450 million remaining of our 2020 planned bright house life insurance company dividends of $1.25 billion.
Also as a reminder, we expect more than $200 million of annual inflows to the holding company before consideration of any operating company dividends, which covers most of our holding company fixed charges.
Additionally, we have a robust liquidity stress testing framework that helps ensure we maintain the liquidity necessary to support our business.
We comfortably exceed our liquidity coverage targets under a scenario based analysis, which includes a capital stress scenario similar to the 2008 financial crisis.
Well, that's a spike scenario for interest rates and equity markets.
I'd now like to take a moment to talk about our common stock repurchases.
We have taken significant action to create value for our shareholders.
As Eric mentioned in the year to date through May Eightth, we repurchased $316 million of common stock at an average price of $24.26 per share.
Representing over 12% of our shares outstanding relative to year end 2019.
Approximately 84% of the 2020 repurchase amount as of May Eightth was completed after our March 5th business update call at an average price of $22 on 51 cents per share.
As you heard from Eric we have temporarily suspended our repurchase program and we will exercise prudent says we continually assess went to resume share buybacks.
Moving to adjusted earnings.
Last night, we we reported first quarter adjusted earnings excluding the impact from notable items of $273 million, which compares with adjusted earnings on the same basis of $265 million in the fourth quarter of 2019 and $259 million in the first quarter of 2019.
Okay.
There were two notable items in the quarter, which decreased adjusted earnings by $62 million.
The notable items on an after tax basis, where.
$48 million unfavorable impact in run off related to a reinsurance recapture and a onetime adjustment from the transition to a new vendor.
And establishment costs, a $14 million in corporate and other.
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Actually adjusted earnings less notable items were driven by lower corporate expenses in the first quarter, along with favorable net investment income.
Partially offset by unfavorable market impacts and an unfavorable underwriting margin.
Starting with corporate expenses.
Corporate expenses were $214 million down approximately $69 million compared with the fourth quarter.
As Eric mentioned, we remain committed to reducing corporate expenses by $150 million on a run rate basis by year end 2020.
And then additional $25 million of corporate expense reduction in 2021.
Moving to investment performance net investment income increased sequentially.
Alternative investment returns were 3.7% in the first quarter, which compared with 2% in the fourth quarter.
Keep in mind that alternative returns this quarter reflected the favorable market returns in the fourth quarter of last year as alternatives are reported on a one quarter lag.
Given equity market performance in the first quarter, we expect second quarter alternative returns to be negative, but it's too early to provide a meaningful estimate.
Also we continued to see asset growth, which contributed to the positive sequential change and net investment income in the quarter.
Turning to market performance separate account returns were negative 14.3% in the quarter driven by the significant decline in the stock market.
Separate account return performance drove an increase in DAC amortization for variable annuities and life insurance, along with an increase in V.A. reserves.
However, the increase in VA DAC amortization was offset by lower shield DAC amortization.
Moving onto our life insurance businesses.
Sequential results were impacted by unfavorable underwriting.
Which was driven by higher severity of claims in the first quarter.
Claims frequency was relatively flat compared with the fourth quarter of 2019.
But above historical levels.
Well the data we've seen does not suggest a significant impact from cobot 19 to date.
Cause of death reporting is imperfect.
In addition, there is still uncertainty around timing of the first U.S. infection and death related to this pandemic.
Turning to adjusted earnings at the segment level, starting with annuities adjusted earnings excluding notable items were $316 million in the quarter.
DAC amortization and expenses were lower sequentially, which had a favorable impact on earnings.
This was partially offset by higher reserves and lower fees.
Life segment adjusted earnings excluding notable items were $11 million in the quarter.
Sequentially results were impacted by higher claims and higher DAC amortization.
Partially offset by lower expenses and higher net investment income.
The run off segment reported an adjusted loss, excluding notable items of $22 million in the quarter.
Sequentially results were driven by higher claims partially offset by alternative investment income.
Corporate another had an adjusted loss excluding notable items of $32 million.
Sequentially results were driven by lower expenses.
Overall, I'm very pleased with our results this quarter.
With a strong capital and liquidity position and we continue to emphasize prudence and flexibility as we manage the balance sheet to protect the franchise through stressed markets.
With that.
We'd like to turn the call over to the operator for your questions.
Ladies and gentlemen to ask a question you will need a press star one on your telephone.
To withdraw your question press the pound key.
In the interest of time and in fairness to all participants please limit yourself to one question and one follow up please standby and while we compile the Q on a roster.
Our first question comes from Erik bass with Autonomous Research. Your line is now open.
Hi, Thank you I'm, how should we think about the future dividend capacity from black as well as the captive and how this is affected by the recent equity market and interest rate movements unrelated to that use provide an update on unassigned surplus at public as of March 31st.
Yeah, Good morning, Eric It said.
So.
I guess I.
I'd refer you back to the March update call when we talked about what we thought potential dividend capacity wise or just I'm, sorry, distributable earnings in our bear scenario and we had talked about $1.3 billion. So you know if you look at the the deal.
Evidence we've taken today, we've taken 800 million out of public.
You know we will.
We will assess over the coming months, what to do with the remaining fourfifty.
You know we haven't taken the dividend that we normally take from Nellika, which I know you know is a.
There's not a real market sensitive.
Business and kind of more of a runoff block more predictable dividend.
Pasadena.
I think.
In terms of BRC D or.
You know we were happy to to get the 600 million dollar dividend up at the end of last year.
You know, we told you that that had no impact on our dividend plans in the near term that we would assess that over time.
In terms of the capitalization of BRC D., we are very well hedged for low rates.
And our cash flow testing margins.
At rates lower.
Actually much lower than where they are today is not materially different than what it is in our base scenario for or be RCB. So we feel feel very good about the mechanical testing margins would be our C. D, which is as you know the way that we think about the capitalization to that end.
Finally on unassigned funds, it's around negative $100 million little bit more than a negative hundred million dollars at the end of the first quarters our estimate.
As you know that does not impact dividend capacity for this year, which is a function of.
Year end 2019 capital unassigned funds and.
Prior year operating gain.
Got it. Thank you and then maybe moving to the operating earnings.
Just provide a little bit more details on the movements in annuities and the interplay between shield in the legacy VA block and how should we think about the equity market sensitivity of your earnings going forward relative to I think the seven to 11 cents per kind of 1% move in separate account.
Returns that you'd given previously.
Sure so.
You know were reassessing that sensitivity I don't have a updated rule of thumb to provide to you.
It is different than what we had been assuming and it's really driven by the increased importance of shield as a percentage of our total enforce book I think if you look back at our business update call. We had talked about how shielded gone from something like 2% of our annuity block back in 2016% to 11% at.
Year end 2019.
What we saw in the quarter was why we did have a negative DAC impact from our VA block, we had a greater positive DAC impact from our shield block.
I think a couple of things I can I can provide for you to hopefully help you out on how to think about DAC amortization going forward. The first would be if you look at the last five quarter average for DAC amortization for the annuity segment, it's I believe and adjusting out for the third quarter assumption update its up I think it's a 103 million.
There's a quarter.
If you look at the first quarter of this year it was 38.
So I think you could look at the difference between that five quarter average and 38 and that is roughly the net positive impact.
Shield relative to the net negative impact of.
Be a debt.
The other thing I'd say about DAC is that you know we're still looking into this but it appears that the negative impact you saw throughout 2019 for shield is not that far off of the positive impact we saw in the first quarter, which which isn't surprising if you consider that are separate account returns.
Above our baseline for full year 2019 by about the same amount that they were below our baseline for the first quarter.
Got it thank you.
Thank you.
Our next question comes from Tom Gallagher with Evercore. Your line is now open.
Good morning.
Eric first question is just just want to get a little more behind the thinking.
You know the decision to be aggressive with buyback.
Kind of in the earlier part of the second quarter, you know getting to almost $200 million.
And then deciding to pause was that just more opportunities just the opportunity where you saw the value when.
And maybe just a little more color behind the pause versus you know deciding over the last month and a half to be more aggressive.
Yeah, Hi, Tom Yes, you you kind of got it let me flush it out a little bit look in in a nutshell, maybe we came into this.
Situation with the flexibility to by which we did and now we have the prudence to pause so.
We knew we were well positioned coming in with respect to capital and liquidity.
As a result of all of our stress testing. We also felt good about buying back roughly the amount of stock that we bought through early may.
Now obviously this was a value creating exercise for our shareholders, but having repurchased you know what we sort of said we wanted to.
We feel it's appropriate to pause at this point just a survey the economic you know market landscape et cetera over the coming months and see where we're at we're gonna be constantly monitoring. This so you know it's pretty straight forward, what we were able to do.
Got you know so Eric there was nothing new that you found out within the last week or so.
That that has changed your view really just a matter of.
Well say the opportunity and now having done a lot taking a pause is at a fair way of describing it yeah, nothing new and nothing out of the ordinary you know that I mean, you're hearing this from a lot of companies obviously right. We're thrilled to have been able to buyback the those shares that.
We bought back at the prices that we were able to buy them out and we're just we're just taking a pause here like many other companies as we survey the economic landscape Ed you want to add anything.
Yeah, I would I'd I'd just like to go back to I think comment you made Eric about you know the amount of stock that we bought was.
Over 12% of our shares outstanding.
At the end to 2019, so I think it's important to highlight that number because why we're taking a pause along with so many others. The I think.
That number 12% is a very substantial amount relative to.
What we what we would consider to be obviously any type of normal things and so the ability to do spend them. The amount of money that we spent to buyback as much stock as we would thought thought we would buy actually more stock than we thought we would buy for the full year I think is that is noteworthy.
No that does that make sense. They can you guys. Just it my follow up is can you provide some perspective on.
You're kind of updated view on unconsolidated excess capital because on one hand. Your RBC remained quite solid you know flattish if you adjust for the dividend.
Out, but then on the other hand, you know when I think about solving for access capital, it's kind of a proportion or percentage attack and tack went down by 25%.
So there's some puts and takes there, but what what is your.
What was your overall view on sort of updated excess capital up companywide.
Yeah. Thanks, Tom.
So let me step back and talk about the tack movement that you mentioned because you as I said in my prepared remarks, we've been talking about this potential disconnect between the movement in total adjusted capital and our first loss position relative to our hedge target. So you know I mentioned this.
And in prepared remarks on the fourth quarter call on our business update call and we also spent a reasonable amount of time talking about this in our 2000 1910 k. So we've been giving this as a sort of an indication of what would happen in an environment like we just saw in the first quarter and it's exactly what happened.
So remember we manage to a total asset requirement for variable annuities and that's a combination of capital and reserves and as you know it's a key element of variable annuity reform, which we adopted at year end 2019.
So when markets decline there is a shift from capital to reserves.
As a potential adverse event, which was reflected in capital has become an actual adverse event, which is now reflected in reserves.
So this is what happens with the aim reform and because this actual adverse event is now reflected in reserves you don't have to hold capital against it and so there's a decline in the required capital. So when you think about you know the movements in these these these factors you really need to look at RBC rate.
Because the change in the attack and the change in the required capital. The combination of those two is going to be more analogous to what we talk about when we talk about our first loss positions. So you know you referenced the RBC ratio ending fyfifteen by 35.
Do you consider about 20 points related to the dividend. We took out you know you're essentially unchanged from where you were at the ended the year.
So.
When you think about capital obviously with the rebound in the market in the second quarter to date, you would anticipate a decline in V.A. reserves and therefore, an increase in total adjusted capital that would also be an increase in required capital most likely because of the dynamic that I just mentioned.
But you know tack is going to move based on the market environment and you know it's not surprising that when you have a bear market you're going to have this negative impact on back to.
To the extent you see a reversal over time, you'll see Tac follow suit as well.
Okay. Thanks.
Thank you. Our next question comes from a lease Greenspan with Wells Fargo and your line is now open.
Hi, Thanks, good morning.
First question can you just give us sense.
The macro environment.
Sensitivity that you would need to see for that remaining pointing a 50 million on from left to be dividend up this year.
Good morning, a lease it said.
Yeah, we're not going to get into any specific on.
Factors that might influence our decision on on the remaining fourfifty.
Clearly, we're in an uncertain environment and you know in an abundance of caution and again, emphasizing prudence and flexibility, we're going to sort of see how that the balance of the year develops and then make a decision about the remaining for 50, I mean, obviously with with taking.
800 million up even after adjusting for the.
The buybacks that we did in the second quarter to date in my prepared remarks, I said, we expected a substantial increase in holding company cash I mean, I can tell you that.
Our probably best gas and you could probably get there is it's probably around $1.3 billion at the end of the second quarter. So you know we feel really good about where we are at the holding company today and you know we're gonna we're going to sort of assess the second half of the year and make a decision.
Okay. That's helpful on as we think about.
Right.
Right.
Headwind there.
Can you help.
Think about.
No levels of sales that you could see.
The balance the you're giving just called me related Hadley.
Yeah, Hi, good morning, its miles speaking so as Eric mentioned earlier on the conversation, we do expect to see an impact on life sales and down if you really think about our life franchise. It was very much and startup mode. We began to bring on a distributor selling.
The product.
Last Barry and that really continued on October so the distributors that we're working with they're really due to selling the product life insurance team has been highly focused on.
Tablets and relationships with advisors and they were doing that very successfully and I think you'd look to our results over the last several months to do that but because the business. It advisors.
Relatively that are merely because we just on selling the product and I didn't quite a year ago, it's going to be difficult car life insurance wholesalers to prospect in this environment as they work remotely, but our strategy would absolutely working and we remain committed to our distribution strategy, which is.
Proven to be successful and we look forward to getting back to more normal environment, where we could start to grow sales again.
It's Eric I'll just jump in for one second too I just got to say.
A shout out to all of of our wholesales wholesalers and the advisors that they work with they have been tremendous taking care of their clients and you know, we're taking care of them.
This is an important business for us it was very exciting to see the results develop in January February March in a in the life business and you look we're just going to keep pushing it's not like we're not in a virtual environment, where we're not talking to financial advisors were talking to them. All the time and you know, they're trying to take or their client.
But I do think it's fair to say that that you know will have a little slow down here, but you know the overall targets and the strategy of getting back into the life insurance business from a new sales perspective is unchanged.
Okay. Thank you for the color.
Thank you.
Our next question comes from Ryan Krueger with KBW. Your line is no.
Hi, good morning.
From the lower expected sales activity. This this year do you expect.
I guess any material amount of additional capital generation due to that.
Yes, Hi, Ryan It said so.
You know I don't think we want to put a number on anything like that right. Now I think you know you recall that.
At our business update we talked about the sort of that the strain from new business on our on our distributable earnings that we had said it might be in the neighborhood of $400 million and that over time that obviously flips, but we're not going to get and get into any specifics around.
How that might change going forward.
And it's Eric I'll, just add one thing look it might end up that we do free up a little capital because it's not it's not used to back new sales, but we want to sell we want to be there for for advisors and their clients. So you know I think as we move farther down the road in the year here, we can give you.
A number if it materializes, but frankly, I'd I'd like to get back to selling as quick as possible.
Thanks, and then.
Ed you had provided an RBC sensitivity to equity market down, 25% interest rate that 1% and credit and I think the total was about 100 point of RBC can you just can you break out how much of that was credit versus versus market than interest rates.
I can think about them separately.
Yes, sure Ryan So I'll start and then I'll I'll pass it over to John for some more color but.
And our business update call, we provided the stress and and it included as you said it equity market shock interest rates down and a credit losses and migration. So you know we obviously saw two of the three occur in the first quarter.
As I'm sure you're not surprised there was a very minimal impact in the quarter from impairments in credit migration, but I guess, what I would say is that with two of these three three items playing out in the first quarter and thus ending up at a 515 to 535.
RBC ratio and holding company cash a $1 billion I think it's fair to say that we have a cushion to absorb the losses that we had anticipated when we gave our business update as well as something beyond that if you want to overlay.
Some more stress type of.
Scenario, so I'll I'll pass it over John now to maybe provide some specifics on on what we had talked about.
In terms of the impact back in March.
Ryan I'll, just remind you of the assumptions we use.
For the March data.
I assume corporate credit losses could sit consistent with actual experienced during the financial crisis.
Specifically there based on 2008 to 2010, Moody's data from migration and defaults.
With respect to structured finance, we use the assumptions from our outside managers based on their best estimates of expected losses and migrations.
During that kind of scenario and for mortgage our mortgage loan portfolio. We use 1990 to 90 93 data.
West the made shocks for Ltvs, which informs expected credit migration losses there.
Maybe to your.
Question this stress scenario.
For credit losses, and migration would account to account for approximately a 50 percentage point.
Impact on RBC over two years.
That's helpful. Thank you.
Thank you. Our next question comes from Humphrey Lee with Dowling and partners. Your line is now open.
Good morning. Thank you my questions I was wondering if you can provide some updates on kind of interest rate sensitivity, especially it's up 1% 10 years environment hurting the the business update call you kind of stop at 1%, but how should we think about in the sub 1% environment.
Yes, Hi, Humphrey, it's Ed so.
You know I guess.
Let me talk about what we saw in the quarter and then.
Maybe just qualitatively give you some assistance here.
So.
The reason that we.
Did not.
Peers are not peers did not use up any of our first loss position relative to our hedge target in the first quarter is because a substantial gains on our previously out of the money interest rate protection offset.
All the other negative.
Impacts in the markets. So you know we have talked about significant out of the money protection for interest rates and obviously in the current environment that that has become pretty valuable.
However, we also showed you at our on our business update that you know, we clearly benefit from higher interest rates and higher separate account returns than you saw that when you looked at our base scenario versus our you know lower separate account return lower interest rate scenario, so I'm not going to provide an update.
Right on.
What are the distributable earnings numbers with the tenure treasury at 77 basis points, but I would you say you know qualitatively.
We feel very good about where we are today from a capital position, we feel very good with the interest rate protection, we have in the the gains that it's provided and.
We'll have to see where we go from here in terms of you deal with the markets, but obviously were to it we're in a very uncertain environment right.
That's helpful. And then just to fall early your early comment about Ah you feel very comfortable with the cash focusing margin low rate environment should I kind of take that as you don't expect any any meaningful okay thats true impacts on capital from from their current interest rate environments.
Was it just seems like it's very manageable like how should we think about that.
Yes, So let me let me clarify so.
You know my comments were specific to the question on BRC de our life insurance captive and Ah I said that.
The cash flow testing margin, which is what we focus on when we think about the capitalization of that and that entity is very strong even at rates that are substantially lower.
From where we are today.
So that's obviously a key piece of our life block in terms of overall cash flow testing margins.
I'm not going to get ahead of our fourth quarter.
Process for cash flow testing.
Lastly last year.
Year end, we were fine I think the question about where we are with.
Third quarter assumption update or fourth quarter cash flow testing you know I don't think it's prudent to to get ahead of ourselves. There's a lot of work that goes into calculating those those impacts and we're going to have to wait for the second half of the year to provide those.
Fair enough okay. Thank you.
Thank you.
Our next question comes from Alex Scott with Goldman Sachs. Your line is now open.
Hi.
Good morning, heavy follow up on.
I guess just attacking the excess capital.
No what I.
I was trying to assess the quarter I was just looking is it the amount of tack you have sort of in excess of how much you would need to be it your RBC targeted I guess minimum levels that you've communicated.
Yeah, but I do that calculation there has been some decline quarter over quarter and you know I don't think that's unexpected or something but I, but I guess just.
How do I square that with what you're saying about the first loss position, having not been touched and is there something about that thinking that that's not that's different from the way that you guys think about managing capital in your and your excess capital position.
Hey, Alex It said so.
The first thing I would say is it you know we adopted V.A. reform as you know at year end 19. So I think when you look at the framework for V.A. reform.
It is a total asset requirement and as I as I mentioned before there is a shift between capital and reserves depending on the market environment. So you know I know you're a technical guy. So let me, let me get a little bit more technical and.
On this one so.
You know when adverse market events occur like we saw in the quarter. There's convergence between CTG 70 reserves, which you know is the basis basically the base basis or the a reform reserves and C.T. 98, which is the basis for capital under V.A. reform.
So you see a convergence between.
Cdseventy NCTC 98, because Siti night, C.T. 70 does not reflect the potential adverse events to the same extent as Siti 98.
Just to underscore this for you. If you think about the average of that 30% were scenarios that average really isn't a bad outcome overall.
So you know to illustrate this.
If we didnt hedge RCT 70 reserves would be less than what they are today and the reason for that is because hedging is a cost not a benefit when you look at the average of the 30% worst scenario.
Pretty interesting.
I think if you look at what happened this quarter is that when this potential adverse event becomes a real adverse event right. Your CP 70 reserves go up because the average of the 30% isn't so bad so when an actual event happens you have a bigger increase in Cdseventy then you haven't seen 98.
And so I don't think that's any different than what anybody else is going to phase if they look at.
The reform and and manage the company do a framework.
And you know as a reminder.
98 free pure be a company under the reform as a 400% RBC ratio.
So.
I hear what you're saying about the shift between.
You know intact I mean, you know capital in reserves, but when you're thinking about total asset requirement and managing the risk of this business I think you need to be looking at the change in the RBC ratio as more indicative of a first loss type of concept than looking at any one component.
Got it Okay, and then I've a follow up just on the the credit stress.
You know I would think.
The total adjusted capital one of the implications. There is just that I think credit losses would would eat a bigger part of your go forward tack at 331. So you know where there were those credit stress is as of yearend or as of March 31, and does it doesn't change much this sensitivity to credit losses.
Impairments are in downgrades.
It's John.
The stresses were based on our 12 31.
12, 31 portfolio actually things haven't changed much since then and I would say did actually you know.
A greater proportion of the.
Use of capital is actually coming from downgrades and not losses, probably something in the range of 50 545.
Okay. Thank you.
Thank you. Our next question comes from John Barnidge with Piper Sandler Your line is open.
John Your line is now open please check your mute button.
Thank you and our next question comes from Andrew Clark Herman Credit Suisse. Your line is now open.
Hey, good morning, guys.
I think it's kind of absolutely so I never use the first dollar loss of $500 million.
I'm curious and now with the equity markets rallied back.
It doesn't seem that even get close to having to use it. So I'm I'm wondering what might be a scenario.
It would kick in and it would start to get utilized and then.
Next question could you specify what your hedging.
Ones in the first quarter recording variable annuity.
Hi, Andrew It said, you've cut out a little bit on the second part of your question I Wonder if you could just repeat that.
Yes.
No.
Given that they never exercise to use the first loss of $500 million would you provide a scenario in which.
That would occur.
And then secondly, with respect to hedge hedging effectiveness, what could you put a number on that.
In what sounds like you said two thirds of $800 million to maybe a little north of 500 million was the.
Statutory loss.
Is that the hedging effectiveness.
Yeah.
Okay, Andrew So let me let me start with this this hedge effectiveness kind of question because I know a number of people talk about this and I find it fascinating because I think the.
The real measure of hedge effectiveness occurs I think relatively infrequently and it occurs in a quarter like we saw.
If we just lift.
So just to restate what I had commented on in my script.
You know, our our total asset requirement at CTV 98.
Was $9.4 billion at the end of 2019.
That number went up to 17 and a half billion dollars.
At the end of first quarter.
So we had an 8.1 billion dollar increase in CTG 98. This is a quarter when you assess hedge effectiveness.
And the fact that the combination of our derivative gains.
Which were $5.3 billion.
Our benefit from the shield product $2.5 billion.
And our VA product cash flows, which was a half a billion dollars.
An 8.3 billion dollar increase at variable annuity assets.
Before the dividends.
So.
I mean, I don't know people calculate percentages, but I would say if your total asset requirement goes up by 90% and its 8.1 billion dollar increase and your BA assets go up by 8.3 billion.
That's a pretty effective hedge program.
Sorry.
Our two the the first loss you know the comment I made here was that.
We had significant gains on our interest rate.
So you know a scenario where you know if interest rates go back up obviously some of those gains might go away, but I'd say, what I don't think any of US with mine seen interest rates go back up so.
That's that's not necessarily a a negative thing.
And I guess I would just say that this target of up to a 500 million dollar first loss. It's it's just that it's up to 500 million dollar first loss. So we've never been.
We haven't said exactly what the target is but you know I think.
We're pretty happy with how things played out in the first quarter.
Yes, it sounds like you immigrants from session and maybe less the on that reinsurance recapture.
$48 million on lot of company, so that spiked up a few years ago I think we saw Lincoln recently to recapture.
What's your sense going forward is there any and major risk that you may have to recapture on the other.
Individual life treaties and what do you think that's it.
Yes, Hi, Andrew.
So we have had some of these I think it's impossible to predict.
What are what other ones we might see.
When they come up we have to make a decision about what's the right economic thing to do.
The right decision here was to recapture.
And so unfortunately, I'm not going to real really be able to provide you.
Any guidance on how to look at that.
But but the notable item that you that you mentioned remember the 48 million was not all the reinsurance recapture I mean, there were two items in there one of the items was related to it say exit in a vendor change and so that the.
The reinsurance recapture was probably a it was around two thirds of that 48 million dollar number.
So just just to just give you a little sizing on that.
Hey, Andrew It and it's a hot or let me just thought a little contact the recapture it it's a little over 1% of the you LSG import and it's about a quarter of 1%.
The overall in force enforced block of over a million policies. So it's it's not a significant amount in the context of the overall in force.
Thanks, a lot.
Thank you.
Ladies and gentlemen, I'll now turn the call back over to Mr. Steigerwalt for any closing remarks.
Thanks, everybody. So hopefully you got a sense here you know we entered the current climate from a position of strength, our balance sheet and liquidity position are strong and we expect them to remain strong even in the midst of of distressed markets.
Our overall investment portfolio is high quality and well diversified.
As you heard today, our hedging program performed extremely well during a challenging market environment.
And we continue to believe we have the right and strategy strategy in place and we're going to execute on that strategy. So I hope you and your loved ones stay safe and healthy and we look forward to talking with you again.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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