Q3 2020 Brighthouse Financial Inc Earnings Call

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Good morning, ladies and gentlemen, and welcome to Bright House Financial's third quarter 2020 earnings Conference call. My name is Sonia and I'll be your coordinator today.

This time all participants are in a listen only mode. We will facilitate a question answer session towards the end of the conference call in fairness to all participants. Please limit yourself to one question and one follow up I should remind you that the conference is being recorded for replay purposes. Also we ask that you refrain from using cell phones speaker phones.

Or headsets during the question and answer session portion of the call I would now like to turn the presentation over to David Rosenbaum head of Investor Relations Mr. Rosenbaum you May proceed.

Good morning, and thank you for joining Brighthouse financial third quarter 2020 earnings call. Our earnings release Slide presentation and financial supplement were released last night and 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 Steigerwalt, our President and Chief Executive Officer, and Ed Spi Har, our Chief Financial Officer. Following our prepared comments, we will open the call up for a question and answer period also here with us today to participate in the discussions are miles Lambert chief distribution and marketing officer.

Her Conor Murphy, Chief operating officer, and John Rosenthal, Chief Investment Officer Art.

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 described from time to time in bright house Financial's filings with the U.S.

Securities and Exchange Commission.

Information discussed on today's call speaks only as of today November six 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 and related definitions maybe found on.

On the Investor Relations portion of our web site in our earnings release slide presentation or financial supplement.

And finally references to 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.

I hope that everyone listening today and your loved ones are remaining safe and well.

Before discussing our results in the third quarter of 2020.

I want to once again recognize our employees for their tremendous dedication and focus during these very challenging times.

As the COVID-19 pandemic continues to evolve.

Brighthouse financials mission to help people achieve financial security is more critical than ever.

Due to the pandemic many people across the U.S. are facing increased uncertainty about their financial future both.

Both those planning for retirement and those already in retirement.

As I've said before despite the challenges created by the pandemic, we remain focused on our strategy and on delivering for our partners our customers and our shareholders.

Importantly.

We entered the current climate from a position of strength and remain confident in our focused strategy.

Our balance sheet and liquidity remains strong and our investment portfolio is high quality and well diversified.

Before turning to our results this quarter.

I would like to give an update on our share repurchase program.

As previously disclosed we resume repurchases of our common stock on August 24.

Reflecting on our repurchase program since the announcement of our first stock repurchase authorization in August of 2018.

We have repurchased a total of approximately $980 million of our common stock through November four of this year.

This represents a reduction of more than 25%.

Of the shares outstanding from the time, we became an independent public company and.

And significantly ahead of our initial expectations.

I am very pleased that after the completion of our current share repurchase authorization.

We will have repurchased $1.1 billion of our common stock.

As I've said before we have a capital return target that we would like to achieve with.

With that said, we will continue to emphasize prudence and flexibility regarding future share repurchase authorizations as well as the completion of our 1.5 billion dollar target.

So now let me turn to third quarter results.

Our key highlights for the quarter are summarized on slide three of our earnings presentation.

First.

We continue to prudently manage our statutory capitalization.

Our hedging program performed as expected in the third quarter of 2020.

Importantly, we estimate that our combined risk based capital our RBC ratio was in the range of 525% to 545%.

Ed will provide more details on statutory results shortly.

Second.

We had a strong sales quarter, despite the challenging environment.

The annuity sales were approximately $2.3 billion up 29% compared with the third quarter of 2019.

And up 27% sequentially.

Additionally, we generated approximately $13 million of life insurance sales in the third quarter of 2020.

I'm very pleased with this progress.

We have made as we continue to execute on our life insurance strategy.

Third.

Let me turn to total annuity net inflows, which were $174 million in the quarter driven by continued strong sales as well as the market environment as fewer contract holders surrendered policies.

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 card.

Coupled with the run off of less profitable business.

For.

Corporate expenses, which do not include establishment costs were $204 million in the third quarter.

We remain committed to reducing corporate expenses by $150 million on a run rate basis by the end of this year.

Finally.

We continue to make necessary investments in our technology infrastructure and in our business as you know we refer to these investments its establishment costs.

In the third quarter establishment costs were approximately $19 million before tax.

As I've said before we are being prudent in how we are managing our way through our expected final couple of years of T.S.A. exits.

These T.S.A. exits and associated systems transitions put us one step closer to our future state operating platform.

And importantly, we will continue to invest in our infrastructure with the goal of providing better support to our distributors and their financial professionals.

As well as our policyholders and contract holders.

To wrap up we believe our balance sheet and liquidity positions are strong we.

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.

With that I'll turn it over to Ed to discuss our financial results Ed.

Thank you, Eric and good morning, everyone.

Last night, we reported third quarter earnings along with preliminary statutory results.

As these results illustrate we have maintained a strong capital and liquidity position.

Which is a function of our focus on prudent some flexibility.

Turning to key statutory metrics.

Our combined statutory total adjusted capital or Tac increased to $8.4 billion at September 30.

Our estimated combined risk based capital our RBC ratio increased to a range of 525% to 545%.

And we had a normalized statutory loss of approximately $200 million in the quarter.

The improvement in our capital metrics reflects the continued strong equity markets in the quarter and the impact of the annual actuarial review.

Before discussing current period performance drivers I would like to spend some time on the actuary overview completed in the quarter.

As part of this review, we examine long term assumptions, including capital markets and interest rates.

There was an impact on both statutory and GAAP results as a result of the 2020 review, but in different directions.

The statutory impact was a benefit of approximately 40 points on our risk based capital ratio.

We've continued to refine our models and assumptions to better align with variable annuity or be a reform.

Which we adopted at the end of 2019.

During this process, we determined that we had been more conservative than we needed to be with respect to how we reflected invested assets backing BA.

Specifically the invested assets that support our V. A total asset requirement have average yields above current market levels.

And those yields were not fully reflected in the calculation of the total asset requirement.

Model revision to align with the reform on this issue was the driver of a $600 million statutory capital benefit from the assumption update.

On a GAAP basis.

The total net income impact was a $2.2 billion charge.

With $1.7 billion driven by a reduction in the assumed GAAP long term mean reversion rate when the 10 year treasury from 3.75% to 3.0%.

We continue to assume that mean reversion occurs over 10 years.

The interest rate related charge was split between our run off block of Universal life with secondary guarantees and BA.

The change in the mean reversion rate had no impact on statutory results.

The balance of the GAAP charge was related to a number of different items.

With mortality updates being the largest driver.

Turning to our third quarter results Tac increased to $8.4 billion at September Thirtyth from $7.7 billion at June Thirtyth.

The increase was driven by equity market returns and the actuarial review.

Despite the favorable markets in the third quarter, we had a normalized statutory loss of approximately $200 million.

This loss was driven by an increase in the 20 year swap rate.

Which caused a modest unwind of the substantial unrealized gains in our interest rate derivatives.

Overall, we believe we are conservatively positioned in the hedge portfolio for both equities and interest rates given the elevated level of market economic and political uncertainty.

Our estimated combined RBC ratio increased to a range of 525% to 545%.

The normalized statutory loss in the quarter was more than offset by the favorable statutory impact from the actuarial review.

In the current uncertain environment, we continue to place heavy emphasis on the RBC ratio.

Which as a reminder, is well above our target range of 400% to 450% in normal markets.

To close my statutory comments I'd like to focus on capital release and dividends.

In the year to date, we have generated $1.6 billion of capital release related to our VA business.

First early this year, we revised our VA hedging strategy.

This revision contributed to a lower risk profile, allowing for the release of $1 billion of capital.

Second by removing excess conservatism in our models to better align with the reform, we released approximately $600 million of additional capital as part of this year's actuarial review.

Given our strong capital position in the fourth quarter, we intend to take the remaining $450 million of our planned $1.25 billion ordinary dividend from Brighthouse life insurance company or GLIC.

As well as a $60 million ordinary dividend from new England life insurance company or Nellika.

As a reminder, this is consistent with the plan that we communicated on our business update call in early March.

Moving to the holding company, we ended the third quarter with cash of approximately $1.3 billion.

Which is consistent with the second quarter and roughly five times annual fixed charges.

We believe it is appropriate to have a conservative position at the holding company in the current environment.

Moving to adjusted earnings.

Last night, we reported third quarter adjusted earnings excluding the impact from notable items of $388 million.

Which compares with adjusted earnings on the same basis.

$39 million in the second quarter of 2020.

And $260 million in the third quarter of 2019.

There were two notable items in the quarter, which lowered adjusted earnings by approximately $1.1 billion.

The notable items on an after tax basis were.

A $1.1 billion charge from the actuarial review.

And establishment costs $15 million included in corporate and other.

When we look at third quarter adjusted earnings less notable items there are four underlying themes.

First.

Alternative investment returns were strong.

As our alternative investment yield was 7.6% in the third quarter driven.

Driven by the favorable market performance in the second quarter.

Our year to date alternative investment yield was 1.7% through September thirtyth.

Second.

Separate account returns were 6% in the quarter.

This was well above our assumed return and contributed approximately 15 cents per share above a normal quarters results.

Third expenses were lower than expected.

Corporate expenses were $204 million, which was modestly below the second quarter and lower than a normal level.

The fourth and final theme, our underwriting margin was slightly lower than a normal quarter.

As covert claims remain modest.

Net claims from COVID-19 were approximately $14 million pretax in the third quarter, which.

Which is down from $25 million in the second quarter.

Turning to adjusted earnings at the segment level.

Our newest ease adjusted earnings excluding notable items were $285 million in the quarter.

Sequentially results reflect higher net investment income along with higher fees and lower DAC amortization.

Partially offset by higher expenses.

Life adjusted earnings excluding notable items were $87 million in the quarter.

Sequentially results were impacted by higher net investment income per.

Partially offset by higher DAC amortization.

The runoff segment reported adjusted earnings excluding notable items of $33 million in the quarter.

Sequentially results were driven by higher net investment income.

Partially offset by a lower underwriting margin.

Corporate and other had an adjusted loss excluding notable items of $17 million.

Sequentially results were driven by lower expenses and lower taxes paid.

Partially offset by higher preferred stock dividends.

Before I conclude I want to emphasize that our top financial priority remains balance sheet strength and excess cash at the holding company.

In order to protect our distribution franchise and validate that we have a full cycle business model.

I believe our continued strong capital and liquidity position at the end of the third quarter highlights our emphasis on prudence and flexibility in the current uncertain environment.

With that we'd like to turn the call over to the operator for your questions.

Thank you as a reminder to ask the question you need to press Star one on your Telesat switch on your question press the pound key our first question comes from Erik bass as I touched on this research. Your line is now open.

Hi, Thank you and we recently saw one of your competitors execute a reinsurance transaction for an enforced tier model the block that freed up significant capital and works well received by the market I know Youve consistently said that you'll evaluate any transactions that make sense, but just wondering does the venerable deal suggests that the market for VA risk transfer.

For his opening up and that the bid ask spread is closed and as their broad interest in the type of liabilities that you have.

Good morning, Eric It's Eric.

Here's what I would say.

First of all for us.

We have and have had a strategy to unlock capital.

Repurchase stock rationalize expenses and sell new business and as you see including in this quarter, we've been doing all of that.

We're executing on that strategy will continue to pursue that strategy now there could be a transaction at some point, if like I've said over and over it adds value and is executable.

From a market perspective, obviously this was a pretty big transaction. So I don't know if it if I can say, whether the market has changed materially or not.

But but our stance has not changed we're going to continue this strategy that I just laid out in two sentences there.

And some day that May include a transaction Thats, what I would say I think it is going to jump in as well.

Yes, Thanks, Eric good morning.

First every company has its own strategy and our financial strategy is the prudent acceptance of capital markets risk.

Supported by a strong cash and capital position.

And this strategy does impact our view of the attractiveness of a potential block deal.

Second we are focused on releasing capital from our VA business and we have released substantial capital from VA without a block transaction.

So just again as a reminder, as a result of our revised hedging strategy earlier, this year, which was a de risk strategy.

We were we were able to release approximately $1 billion of capital.

In the third quarter as a result of refinement of our VA models post V.A. reform.

That led to a release of an additional $600 million of capital.

And also we're de risking every quarter with the natural attrition of our VA enforce block.

And when you take all these actions together. This is certainly benefactor, that's allowed us to repurchase more than 25% of our common shares over the past roughly two years.

Got it thank you.

Then.

Maybe Ed if you could talk a little bit more about the drivers of your adjusted statutory earnings and must continue to be pretty sensitive to market movements can you just help us think about the key items that can create positive or negative variances there.

Sure well why don't I talk about the quarterly results. So I think as you know we had a.

$200 million normalized statutory loss in the quarter.

I'd say two things first we are conservatively positioned in the hedge portfolio today.

We do see a significant level of market economic and political uncertainty. So thats, just an overarching comment I would make.

Specifically in the quarter the norm stat loss was driven by I would say some basis risk between our derivatives portfolio and the liability. So we saw a 16 basis point increase in the 20 year swap rate, which is the most relevant rate to look at when you think about market.

Moving rates in our derivative book, our interest rate derivatives.

And that was versus only a five basis point increase in the 20 to 20 year Treasury yield which is the relevant rate for our variable annuity total asset requirement.

And just as a reminder.

We continue to have substantial unrealized gains in what were previously out of the money interest rate derivatives and we've kept substantial protection in place in the event that rates go lower.

Got it thank you.

Thank you and the next question comes from Humphrey Lee Dowling and partners. Your line is now open.

Good morning, and thank of taking my questions.

Just maybe a little premature but as we look ahead for 2021, how do you think about kind of your dividend capacity given your capital position now.

But at the same time, considering you have a lot of holding capital holding company capital at the moment as well so how should we think about that.

Hey, good morning, Humphrey. So a couple of things first of all you know as we said we plan to take the.

The remaining dividend that we had targeted for Brighthouse life insurance company or BLAIC.

In the in the fourth quarter, that's $450 million. So for the full year, we'll have taken $1.25 billion from BLAIC, which is in line with the.

The number that we had communicated to you in on our our March business updates so pre cove it.

If we look at we also plan to take about a $60 million dividend from Nellix. So we've got about a half a billion dollar dividend that we're going to be taken here in the fourth quarter.

If we look to next year, you know I'm not going to preview what we might do I'll tell you that our unassigned funds at BLAIC.

Improved to approximately $1.5 billion at the end of the third quarter.

So there's plenty of capacity based on the third quarter. However, I'm. Obviously, we you know we we decide on our dividend considering a number of factors. It's not just a clearly what the unassigned funds number is.

Thank you for that for that color.

Just looking at your corporate expenses it appears to be trending favorability relative to your target.

Kind of a 150 million improvement or I guess, how much of that is kind of pandemic related or just you have been gaining a share efficiency.

And then kind of how should we think about that additional 25 million improvement in 2021.

Hey, Humphrey it's Eric.

Yeah, we're doing well against the $150 million target. There is some in there I think last quarter I got asked you know do you are you experiencing any real estate savings and the answer to that is no. But we are we are getting a little help from travel for instance, and I'm sure. Some other companies are as well so.

Capital costs are well down and and we'll be certainly for the rest of the year, we have a target out for 21 as you know.

And look generally I'd like to hit that target, we'll talk about it as we finish our planning so I'm sure we'll talk about it on the next call quarterly call.

No. The only thing I might say is you know as we go through the planning work.

Work you know maybe there are some investments we might want to make us the only sort of offset that I can think of right now we've got some pretty good opportunities here.

And you see how our sales are doing so that's the only real possibility Ed you want to add anything.

Yeah I would so just.

To add a little on expense and maybe anticipating a question we might get about run rate. So.

We reported for 19 of adjusted earnings next notable item X notable items in the quarter.

You know the biggest adjustment as I'm sure you can appreciate would be related to our alts performance and also some benefit from strong market. So.

You'd probably take about a dollar out of that just in total for those two items, but theres also probably about another 15 cents that I would adjust for.

On expenses being favorable in this quarter relative to what we have thought about as a more normal level. So bottom line is you did have favorability in expenses here in the third quarter and if you're thinking about putting all these together you are talking about run rate EPS round number of about $3 a share on a core.

Early basis.

That's helpful. Thank you.

Thank you and our next question comes from and the screen span of Wells Fargo. Your line is now open.

Thanks, Good morning.

My first question, let me get a little bit more color on the sales that you're a thousand annuities in the quarter on your fixed annuity sales are still pretty strong again.

Good show some growth sequentially and again any color on how sales have trended in this environment.

And then on how we should think about that going forward.

Yes sure. Good morning, it's miles happy to take that question. So we remain incredibly pleased as it pertains to our sales results for the quarter as Eric mentioned, we did about $2.3 billion of annuity sales lift which is our best quarter, yet as a publicly traded company.

We continue to see solid results in our shield or with our shield product and in our field category and we're really pleased with the growth that we're seeing with both our flex assets product as well as our fr itself and the team. The sales teams have pivoted quite well in this environment and continue to support our.

Hi, there is to the best of their ability to contract. If you want to add anything on the fixed rate product Yeah, Let me do that.

Just for everybody's benefit. So we are with fixed products are core to our strategy both fixed indexed on fixed deferred annuities alongside of our VA phase on our on our buffered annuities I Q3 from an industry perspective, limbers reporting a 47% increase year over year we.

We do offer a suite of competitive products and specifically with a fixed rate annuity. We re entered that space with a lower expense base and we have a reinsurance agreement in place, which is which is beneficial to us and to follow up on models as we've been focused on a few select firms on the customers have been looking for the product so yes.

Was a decent amount of volume in the quarter.

Yes.

That's helpful and then my second question.

As we think about capital on Dom highlighted.

Highlighted that dividend, you'll be taking from black in Mexico in the fourth quarter and then also pointed to just trying to have some level of conservatism just given the uncertain environment as we think about your buyback plan from now through the end of 2020 line should we just think as you work towards that.

Your target that is kind of.

Evenly spread throughout the quarters or is there any kind of on updating you on timing of buybacks relative to the conservatism on the cat.

Hi at least CEREC.

Yeah. So as I've said before look here, we are getting near the end of 2020.

We've got the $1.5 billion capital return target out there, we'd like to hit it.

We're buying back stock now as you know.

And you can see the levels look I.

You know the the daily obviously, if you if you do the math changes a little bit, but it's at a reasonable pace, which.

Which I would expect to continue.

Obviously I don't want to get ahead of our board here. Okay will eventually run out of this authorization and we've got to have a conversation at the board level.

But I'd like to hit the $1.5 billion and it will be some sort of average level on a daily basis, but to your point look we're going to have a lot of money up at the holding company, which is great a lot of cash at the holding company, but part of our strategy in this environment, which is now heading into.

Do you know.

No a full year soon is to make sure that we've got the flexibility that we need.

Some things are looking good from a macroeconomic perspective, but who knows we got to keep watching and part of this strategy is to have a lot of cushion at the holding company. So you should you should think that that will continue.

So Justin Haley said, just a follow up on that just first of all to Echo Erics comments I mean, we are prioritizing balance sheet strength in the current environment. So I would just say that generally and I think you can see from our statistics.

525 to 545.

RBC ratio $1.3 billion of holding company cash no debt maturities until 2027, and all of that speaks to prioritizing the balance sheet and then I would just just to give you. The numbers I think you know this but there is approximately $120 million remaining.

On our existing authorization.

Okay. That's great. Thanks for the color.

Thank you and again, ladies and gentlemen, if you would like to ask the question at this time. Please press Star then one on your Touchtone telephone.

And our next question comes from Tom Gallagher of Evercore. Your line is now open.

Good morning, Hey, Erik I wanted to circle back on variable annuity risk transferred just.

For a little more color if you wouldn't mind do you think.

Kind of balancing out.

The changes that have occurred on counterparties that are looking to transact.

You know, whether it's looking at the equitable deal and evaluating that from your perspective or looking at the number of Counterparties do you think.

Do you think it might make sense to do something sooner rather than later for bright house considering.

The terms of trade that are merged bid ask spread or whatever you want to call. It what do you think.

More realistically the macro and low interest rates are not for the headwind that you might be better off waiting a bit.

Just want to just really thinking more about do you think this is something that.

You want to do more due diligence on like sooner or do you think this is more of a longer term situation.

Situation for you.

Hey, Tom Good morning, I'm, all right, let me see if I can help out a little bit here look.

I said before on the I guess the first question.

You know the strategy that we have has been pretty consistent and I think you would you would agree with that right unlock capital repurchase stock rationalize expenses sell new business being sort of the highlights.

Here, we sit after after three plus years with an RBC ratio.

You know we through the range of 525 to 545 and a billion three at the holding company. So we're in pretty darn good shape, we've unlocked a lot of capital and we're using some of that obviously to repurchase stock here you know as you heard Ed say 20.

25 ish percent, we've been able to buyback of the company in the last couple of years. So it's not like we're not looking at these transactions. Okay. I don't want anybody to think that that we're not paying attention here.

Well, we'll continue to think about whether something like that makes sense for us right equitable, obviously decided it made sense for them and that's that's fantastic. So we'll just keep watching here I don't think I can take sort of the next step would there be a transaction and if so what.

To be sooner rather than later, but but I guess my overall messages is you can at least be assured that we are paying attention to everything that's going on here Ed I'm sure you're going to add something yeah. Thanks.

So Tom I would say you know.

You mentioned something about over time, you just heard about the statistics that Eric quoted on the balance sheet and you know in addition, what I said about no debt maturities until 2027, you know we have plenty of time and our balance sheet suggests that you know our ability to weather an uncertain environment for.

Years, not quarters is pretty clear and you know so I would just reiterate something we've said in the past you know anything we would ever do here would be from a position of strength, we don't need to do anything very happy with where we sit today.

That makes sense guys. Thanks, and my follow up is.

Yes, I was pretty interesting developments on statutory capital this quarter moving in different directions. The net impact was positive.

I thought when I see you know.

I guess my question is just considering.

You know you had this favorable $600 million Reserve review, our what I should say is had you not had that you would have had some serious hedge breakage in the quarter based on the difference in swap versus you know treasury rates and the difference in.

Hedges versus the way the reserving is calculated.

So does that does.

Is that something that you thought about in terms of the basis risk there I mean, I don't even know if you could.

Tactically change that based on the structure of.

The types of derivatives that you can buy.

Any thoughts as to maybe ways to narrow that gap of basis risk. What do you think that's just kind of smooth itself out over time.

Yes sure. So there's a few few questions in there I mean, I guess the first thing I would say is that I I would take issue with the concept that this was significant hedge breakage in the quarter.

You know as I've said in the past I think the way you assess the hedge program is not in a normal quarter. The way you assess the hedge program is when bad stuff happens and if we look back to the first quarter when a lot of bad stuff was happening.

Our total asset requirement for V.A. went up by $8.1 billion.

That is the quarter you do not want to have hedge breakage and you know our VA assets went up by 8.4.

So just to just to be clear from our standpoint, you know these are numbers that can move around.

Well I think we said in the past a $2 million to $300 million movement. In these types of numbers is is not unusual and when we look at this quarter. I think you know as you correctly pointed out there was basis risk.

And you know it is the nature of the instruments were using I mean, we have a lot of swaptions. So by definition you know the swap rate is the relevant rate for us you.

And the other thing I'd point out as you know you know about the the fact that the derivative assets are more reactive to rate changes then the total asset requirement given the nature of the ESG. So I'm you know all that stuff together I think would suggest that you know this.

This is not a quarter that I would define as particularly unusual.

Oh Im sorry, just one other point of clarification. So the $600 million benefit was at CTG 98, If you look at the increase in our total adjusted capital in the quarter, which was up $700 million sequentially about half of that was as a result of the strong equity market. So you know that convergence divergence.

Comment on that you've heard us talk about and the other half was due to the assumption update.

Did I get it all or is there something I missed no you got it that is helpful. Thanks.

Thank you and our next question comes from John Barnidge at Piper Sandler Your line is now open.

Thank you.

The withdrawal activity tick down quite a bit from a year ago as a percent of beginning period assets in annuities are.

Are there any trends to know and how are you thinking about those perspectively.

Hey, John its Connor.

So from a flows perspective it's.

So, let's say Q1 was it was a normal flow quarter from an outflow perspective, Q2 was definitely sub judice. So instead of running at the kind of $3 billion a month 3 billion a quarter, we were down closer to two one.

We were back up to about two three this quarter. So I would say still subdued start.

Starting you know continuing to maybe trend up a little bit every month, but but not all the way back yet.

We've talked before the components the the mind of outflows from from death, and Annuitizations remains very very consistent every quarter. So we're seeing a continuation here of a subdued level of outflows in both full and partial withdrawals.

So as that I, it's hard to predict from here, it's it's trending back up but it's it's not back where.

Where it was first quarter or indeed, the average for 2019, which was very consistent as well.

Great. Thanks for the answers.

Thank you and our next question comes from Angie Hinerman of Credit Suisse. Your line is now open.

Yes, just a few.

Update items, so yes, you have a.

Sensitivity out there, but $70 million cold 19 claims pre tax per 100000 mortalities.

He came in at about $14 million. This quarter, that's that's great relative to what you were expecting.

You think you need to take down that sensitivity a bit.

Good morning, Andrew So first just a just a slight correction the sensitivity we gave was $70 million after tax.

For our run rate yet for every 100000 U.S. debts. So if you look at where we are you know at.

We ended the third quarter, you were right around 200000 use stats and we've had year to date covert claims of $42 million pretax.

So that compares to what our guidance would have implied of $140 million after tax.

So clearly.

That initial guidance.

Does not apply and we're not providing an update.

You know the difference between where we are today and what we had assumed earlier is that the impact of Cove. It on the general population has been more pronounced than on the insured population.

Yes that makes it makes a lot of sense and just you previously also on.

Credit.

You expected about a 50 basis point negative hit from your stress scenario.

How does that stand right now or are things better than you expected it to you.

Where are you coming out on your stress scenario.

Andrew Hi, John.

On our first quarter call I suggested at our investment stress scenario would impact RBC by about 50 points over two years.

Since then weve been doing more modeling and I would say our stresses ranged from a roughly 50 point RBC impact the 100 <unk>.

100 point impact over three years.

But those.

Those are the stress scenarios, if you're asking how do we feel at the moment I would say the severe stress scenario, where that 100 basis points cases.

Probably less likely than than it used to be.

[noise] anything emerging worse than you thought.

Actually no and I mean this is a good.

I might as well just say so far impairments has been minimal downgrades have been within expectations and both are moderating in the third quarter, we had no net impairments.

And year to date pretax impairments had only been $37 million.

I would as to our expectation for future losses, I mean, all the damage to date has been quite modest and certainly lower than we would have expected.

It is too early to say we're out of the woods. Thus, we would expect some amount of.

Additional losses going forward, but to the extent of any the extent of any future losses, and downgrades that matter will depend the large degree on the virus and its impact on the general recovery in certain specific industry sectors, but but let me reiterate what Eric and Ed has said that.

The portfolio is well positioned to weather this uncertain environment additional losses, given its high quality and strong diversification.

Thanks.

Thank you and our.

Our next question comes from Sunny Summit the Citi. Your line is now open.

Thanks, Good morning.

I wanted to start on statutory if I could take.

I guess as you look at the VA capital reform and your current assumptions.

Are there any other big sort of deviations that could lead to something like this $600 million.

A capital benefit that you got in the third quarter.

So the short answer is no.

I don't believe so, but let me just spend a second talking about the impact that we had in the quarter. So you know I mentioned in the prepared remarks that.

No we've been aligning our models and assumptions to be consistent with the reform, which as you know we early adopted at the end of last year and you know late last year, we identified what we thought was a conservative assumption an overly conservative assumption in the model.

We did not we did not put it through at year end, because we wanted to make sure that we fully understood. The impact that there was no unintended consequence in our models and assumptions as a result of changing this and so we spent a decent amount of time this year, making sure that we were very.

The clear on a on the impact of this assumption in our model and so we've gotten comfort that it is appropriate to to make a change and that's why you see it in the third quarter assumption update as I said in the prepared remarks, you know the variable annuity assets that support our total asset requirement, which is.

The substantial number are invested at an average yield above the current market yield.

And this average yield was not fully factored into our calculation of the total asset requirement.

So.

Just to add a little more color. This average yield was reflected in the discount rate, but it was not reflected in the earned rate and just to reiterate our new approach is now aligned with VA reform.

Got it and then on a GAAP side.

When we think about the interest rate related charge can you give a sense how much of that was from kind of a lower starting point versus the change in the mean reversion assumption and then should we expect any kind of ongoing impact on your operating earnings from this assumption review.

Okay. So let me start with <unk> of the total charge of $2.2 billion $1.7 billion of it was related to the interest rate change.

And Oh.

That was split roughly 50 50 between a universal life with secondary guarantees and and VA. So.

So on the U.S.G. side, it was about as I said about $900 million aftertax.

And thats versus a $600 million after tax charge last year.

For the mean reversion change that we put in place in the third quarter of 19. So the impact is consistent with the change in the rate this year versus last year, because we came down 75 basis points. This year, we came down 50 basis points last year. So you know I would never suggest that we should always assume linearity in these.

Types of things, but you know we are seeing it in terms of the interest rate impact on the U. LSG, Bob block and and just to highlight here just to make it clear this is gap.

This has nothing to do with Stat and when you look at statutory first of all you have more conservative assumptions to begin with and second of all you know the GAAP mean reversion rate isn't even a relevant concept.

And when we look at you LSG for Stat, we have about 70% of that in our reinsurance captive in terms of reserves, but a larger percentage of the risk associated with secondary guarantees.

And as you've heard me say I think repeatedly in the in the past we have significant cash flow testing margins at BRC D.

Bright house reinsurance company a Delaware.

Even at rates substantially lower than the current level. So just that just to make sure we have that distinction here between GAAP and stat.

Turning to the GAAP impact for annuity you know we had a bigger charge. This year, we had $800 million versus essentially nothing last year and the reason for this is that on our legacy models for V.A.

I had assumed that credit spreads would move inversely to the risk free rate.

And so if you go back over the last 40 years, you will see a negative correlation of about <unk> 0.5 between the 10 year treasury yield and credit spreads. So there's certainly a historical basis for this assumption and we had assumed that last year, which meant very little impact.

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With rates at a lower level, we've decided that the conservative approach is to assume that this relationship no longer applies.

So we did not assume any credit spread offset in and and the reason.

That really explains why we had a negative impact this year versus essentially nothing last year.

Got it and then any ongoing impact.

Yes, sorry.

There shouldn't be any material ongoing impact on.

On adjusted earnings from this changes.

Okay. Thanks.

Thank you and ladies and gentlemen, this does conclude our question and answer session I would now like to turn the call back over to David Greenbaum for any closing remarks.

All right. Thank you all for participating on today's call and for your interest in bright house.

And we look forward to talking with you again next quarter.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.

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Good morning, ladies and gentlemen, and welcome to Brighthouse financial start of quarter 2020 earnings Conference call My.

My name is Sonia and I'll be your coordinator for today at this time.

All participants are in a listen only mode. We will facilitate a question and answer session towards the end of the conference call and fairness to all participants. Please limit yourself to one question and one follow up I'd remind you that the conference is being recorded for replay purposes.

Also we ask that you refrain from using cell phones speaker phones or headsets. During the question and answer session portion of the call I.

I would now like to turn the presentation over to David Rosenbaum head of Investor Relations Mr. Rosenthal you May proceed.

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Good morning, and thank you for joining Brighthouse financial third quarter 2020 earnings call.

Our earnings release Slide presentation, and financial supplement were released last night and 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 always refer to the slide presentation in our prepared remarks.

Today, you will hear from Eric Steigerwalt, our President and Chief Executive Officer, and Ed Spi 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 mildly in Burke, chief distribution and marketing officer.

Conor Murphy, Chief 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 Bright house financials actual results may differ materially from the results anticipated in the forward looking statements as a result of risks and uncertainties described from time to time in bright house financial filings what the U.S.

Securities and Exchange Commission.

The information discussed on today's call speaks only as of today November six 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 and related definitions maybe found.

On the Investor Relations portion of our website and our earnings release slide presentation or financial supplement.

And finally references to 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 Steigerwalt.

Thank you David and good morning, everyone.

I hope that everyone listening today and your loved ones are remaining safe and well.

Before discussing our results in the third quarter of 20 Twond.

I want to once again recognize our employees for their tremendous dedication and focus during these very challenging times.

As the COVID-19 pandemic continues to evolve.

Right How's financials mission to help people achieve financial security is more critical than ever.

Due to the pandemic many people across the U.S. are facing increased uncertainty about their financial future.

Those planning for retirement and those already in retirement.

As I've said before despite the challenges created by the pandemic, we remain focused on our strategy and on delivering for our partners our customers and our shareholders.

Importantly.

We entered the current climate from a position of strength and remain confident in our focused strategy.

Our balance sheet and liquidity remains strong.

And our investment portfolio is high quality and well diversified.

Before turning to our results this quarter.

I would like to give an update on our share repurchase program.

As previously disclosed we resume repurchases of our common stock on August 24.

Reflecting on our repurchase program since the announcement of our first stock repurchase authorization in August of 2018.

We have repurchased a total of approximately $980 million of our common stock through November four of this year.

This represents a reduction of more than 25%.

Of the shares outstanding from the time, we became an independent public company.

And significantly ahead of our initial expectations.

I am very pleased that after the completion of our current share repurchase authorization.

We will have repurchased $1.1 billion of our common stock.

As I've said before we have a capital return target that we would like to achieve with.

With that said, we will continue to emphasize prudence and flexibility regarding future share repurchase authorizations as well as the completion of our 1.5 billion dollar target.

So now let me turn to third quarter results.

Our key highlights for the quarter are summarized on slide three of our earnings presentation.

First.

We continue to prudently manage our statutory capitalization.

Our hedging program performed as expected in the third quarter of 2020.

Importantly, we estimate that our combined risk based capital our RBC ratio was in the range of 525% to 545%.

Ed will provide more details on statutory results shortly.

Second.

We had a strong sales quarter, despite the challenging environment.

Annuity sales were approximately $2.3 billion up 29% compared with the third quarter of 2019 and.

And up 27% sequentially.

Additionally, we generated approximately $13 million of life insurance sales in the third quarter of 2020.

I'm very pleased with this progress that we have made as we continue to execute on our life insurance strategy.

Third.

Let me turn to total annuity net inflows, which were $174 million in the quarter driven by continued strong sales.

As well as the market environment as fewer contract holders surrendered policies.

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 couple.

Coupled with the run off of less profitable business.

For.

Corporate expenses, which do not include establishment costs were $204 million in the third quarter.

We remain committed to reducing corporate expenses by $150 million on a run rate basis by the end of this year.

Finally.

We continue to make necessary investments in our technology infrastructure and in our business as you know we refer to these investments as establishment costs.

In the third quarter establishment costs were approximately $19 million before tax.

As I've said before we are being prudent in how we are managing our way through our expected final couple of years of CFA exits.

These T I say exits and associated systems transitions put us one step closer to our future state operating platform.

And importantly, we will continue to invest in our infrastructure with the goal of providing better support to our distributors and their financial professionals.

As well as our policy holders and contract holders.

To wrap up.

We believe our balance sheet and liquidity positions are strong we.

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.

With that I'll turn it over to add to discuss our financial results Ed.

Thank you, Eric and good morning, everyone.

Last night, we reported third quarter earnings along with preliminary statutory results.

As these results illustrate we have maintained a strong capital and liquidity position, which is a function of our focus on prudent some flexibility.

Turning to key statutory metrics.

Our combined statutory total adjusted capital or Tac increased to $8.4 billion at September Thirtyth.

Our estimated combined risk based capital our RBC ratio increase to a range of 525% to 545%.

And we had a normalized statutory loss of approximately $200 million during the quarter.

The improvement in our capital metrics reflects the continued strong equity markets in the quarter and the impact of the annual actuarial review.

Before discussing current period performance drivers I would like to spend some time on the actuarial review completed in the quarter.

As part of this review, we examine long term assumptions, including capital markets and interest rates.

There was an impact that both statutory and GAAP results as a result of the 2020 review, but in different directions.

The statutory impact was a benefit of approximately 40 points on our risk based capital ratio.

We have continued to refine our models and assumptions to better align with variable annuity or be a reform.

Which we adopted at the end of 2019.

During this process, we determined that we had been more conservative than we needed to be with respect to how we've reflected invested assets backing D.A.

Specifically the invested assets that support our V. A total asset requirement at average yields above current market levels.

And those yields were not fully reflected in the calculation of the total asset requirement.

Model revision to align with the ever form on this issue was the driver of a $600 million statutory capital benefit from the assumption update.

On a GAAP basis.

The total net income impact was a 2.2 billion dollar charge.

With $1.7 billion driven by a reduction in the assumed gap long term mean reversion rate.

The 10 year Treasury.

3.75% to 3.0%.

We continue to assume that mean reversion occurs over 10 years.

The interest rate related charge was split between our run off block of Universal life with secondary guarantees and BA.

The change in the mean reversion rate had no impact on statutory results.

The balance of the gap charge was related to a number of different items.

With mortality updates being the largest driver.

Turning to our third quarter results Tac increased to $8.4 billion at September 30 up from $7.7 billion at June Thirtyth.

The increase was driven by equity market returns and the actuarial review.

Despite the favorable markets in the third quarter, we had a normalized statutory loss of approximately $200 million.

This loss was driven by an increase in the 20 year swap rate.

Which caused a modest unwind of the substantial unrealized gains in our interest rate derivatives.

Overall, we believe we are conservatively positioned in the hedge portfolio for both equities and interest rates given the elevated level of market.

Economic and political uncertainty.

Our estimated combined RBC ratio increased to a range of 525% and 545%.

The normalized statutory loss in the quarter was more than offset by the favorable statutory impact from actuarial review.

In the current uncertain environment, we continue to place heavy emphasis on the RBC ratio.

Which as a reminder, is well above our target range of 400% to 450% in normal markets.

To close my statutory comments I'd like to focus on capital release and dividends.

In the year to date, we have generated $1.6 billion, a capital release related to our VA business.

First early this year, we revised our VA hedging strategy.

This revision contributed to a lower risk profile, allowing for the release of $1 billion of capital.

Second by removing excess conservatism in our models to better align with the reform, we released approximately $600 million of additional capital as part of this year's actuarial review.

Given our strong capital position in the fourth quarter, we intend to take the remaining $450 million of our planned $1.25 billion ordinary dividend.

Brighthouse life insurance company or public.

As well as a $60 million ordinary dividend from new England life insurance company or Nellika.

As a reminder, this is consistent with the plan that we communicated on our business update call in early March.

Moving to the holding company, we ended the third quarter with cash of approximately $1.3 billion.

Which is consistent with the second quarter and roughly five times annual fixed charges.

We believe it is appropriate to have a conservative position at the holding company in the current environment.

Moving to adjusted earnings.

Last night, we reported third quarter adjusted earnings excluding the impact from notable items of $388 million.

Which compares with adjusted earnings on the same basis of $39 million in the second quarter of 2020.

$260 million in the third quarter of 2019.

There were two notable items in the quarter, which lowered adjusted earnings by approximately $1.1 billion.

The notable items on an after tax basis for.

A 1.1 billion dollar charge from the actuarial review.

And establish would cost.

$18 million included in corporate and other.

When we look at third quarter adjusted earnings less notable items there are four underlying themes.

First alternative investment returns were strong.

As our alternative investment yield was 7.6% in the third quarter driven.

Driven by the favorable market performance in the second quarter.

Our year to date alternative investment yield was 1.7% through September thirtyth.

Second.

Separate account returns were 6% in the quarter.

This was well above our assumed return and contributed approximately 15 cents per share above a normal quarters results.

Third expenses were lower than expected.

Corporate expenses were $204 million, which was modestly below the second quarter and lower than a normal level.

The fourth and final theme, our underwriting margin was slightly lower than a normal quarter.

As covert claims remain modest.

Net claims from COVID-19 were approximately $14 million pretax in the third quarter, which.

Which is down from $25 million in the second quarter.

Turning to adjusted earnings at the segment level.

Annuities adjusted earnings excluding notable items were $285 million in the quarter.

Sequentially results reflect higher net investment income along with higher fees and lower DAC amortization.

Partially offset by higher expenses.

Life adjusted earnings excluding notable items were $87 million in the quarter.

Sequentially results were impacted by higher net investment income part.

Partially offset by higher DAC amortization.

The run off segment reported adjusted earnings excluding notable items.

$33 million in the quarter.

Sequentially results were driven by higher net investment income.

Partially offset by lower underwriting margin.

Corporate and other had an adjusted loss excluding notable items of $17 million.

Sequentially results were driven by lower expenses and lower taxes.

Partially offset by higher preferred stock dividends.

Before I conclude I want to emphasize that our top financial priority remains balance sheet strength and excess cash at the holding company.

In order to protect our distribution franchise and validate that we have a full cycle business model.

I believe our continued strong capital and liquidity position at the end of the third quarter highlights our emphasis on prudence and flexibility in the current uncertain environment.

With that we'd like to turn the call over to the operator for your questions.

Thank you as a reminder to ask a question you need to press star one on your telephone switch on your question press. The pound key <unk> first question comes from Erik Bass of Thomas Research. Your line is now open.

Hi, Thank you and we recently saw one of your competitors execute a reinsurance transaction for an enforced GM IB block that freed up significant capital and works well received by the market I know Youve consistently said that you'll evaluate any transactions that make sense, but just wondering does the venerable deal suggests that the market for VA risk transfer.

Her is opening up and that the bid ask spread is closed and as their broad interest in that type of liabilities that you have.

Good morning, Eric is there.

Here's what I would say first of all for us.

We have and have had a strategy to unlock capital.

Repurchase stock rationalize expenses and sell new business and as you see including in this quarter, we've been doing all of that.

We're executing on that strategy, we will continue to pursue that strategy now there could be a transaction at some point, if like I've said over and over it adds value and is executable.

From a market perspective, obviously this was a pretty big transaction. So I don't know if it if I can say, whether the market has changed materially or not.

But but our stance has not changed we're going to continue the strategy that I just laid out in two sentences there and someday that that may included transaction. That's what I would say I think it is going to jump in as well.

Yeah, Thanks, Eric Good morning.

First every company has its own strategy and our financial strategy is the prudent acceptance of capital markets risk.

Supported by a strong cash and capital position.

And this strategy does impact our view of the attractiveness of a potential block deal.

Second we are focused on releasing capital from our VA business and we have released substantial capital from VA without a block transaction.

So just again as a reminder, as a result of our revised hedging strategy earlier, this year, which was a de risk strategy.

We were we were able to release approximately $1 billion of capital.

In the third quarter as a result of refinement of our V.A. models post V.A. reform.

That led to a release of an additional $600 million of capital.

And also you know we're de risking every quarter with the natural attrition of our V.A. enforced block.

And when you take all these actions together. This is certainly benefactor, that's allowed us to repurchase more than 25% of our common shares over the past roughly two years.

Got it thank you.

And then maybe.

Maybe Ed if you could talk a little bit more about the drivers of your adjusted statutory earnings and this continued to be pretty sensitive to market movements that can you just help us think about the key items that.

Can create positive or negative variances there.

Sure well why don't I talk about the quarterly results. So I think as you know we had a $200 million normalized statutory loss in the quarter.

I'd say two things first we are conservatively positioned in the hedge portfolio today.

We do see a significant level of market economic and political uncertainty. So thats, just an overarching comment I would make.

Specifically in the quarter the norms that loss was driven by I would say some basis risk between our derivatives portfolio and the liability. So we saw a 16 basis point increase in the 20 year swap rate, which is the most relevant rate to look at when you think about market.

Movements in our derivative book, our interest rate derivatives.

And that was versus only a five basis point increase in the 20 to 20 year Treasury yield which is the relevant rate for our variable annuity total asset requirement.

And just as a reminder, we continue to have substantial unrealized gains in what were previously out of the money interest rate derivatives and we've kept substantial protection in place in the event that rates go lower.

Got it thank you.

Thank you and our next question comes from Humphrey Lee of Dowling and partners. Your line is now open.

Good morning, and thank you for taking my questions.

Just maybe a little premature but as we look ahead for 2021, how do you think about your dividend capacity given your capital position now.

But at the same time, considering you have a lot of holding capital holding company capital at the moment as well so how should we think about that.

Hey, good morning, Humphrey. So a couple of things first of all you know as we said we plan to take the.

The remaining dividend that we had targeted for Brighthouse life insurance company or BLAIC in the in the fourth quarter, that's $450 million. So for the full year, we'll have taken $1.25 billion from BLAIC, which is in line with the.

The number that we had communicated to you in on our March business update so pre cove it.

If we look at we also plan to take about a $60 million dividend from Nellix. So we've got about a half a billion dollar dividend that we're going to be taken here in the fourth quarter.

If we look to next year, you know I'm not going to preview what we might do I'll tell you that our unassigned funds that BLAIC.

Improved to approximately $1.5 billion at the end of the third quarter.

So there is plenty of capacity based on the third quarter. However, obviously, we you know we we decide on our dividend.

Considering a number of factors, it's not just a clearly what the unassigned funds number is.

Thank you for that for that color I'm, just looking at your corporate expenses it appears to be trending favorably relative to your target.

Kind of a 150 million improvement or I guess, how much of that is kind of pandemic related or just you have been gaining a share efficiency.

And then kind of how should we think about that additional 25 million improvement in 2021.

Hey, Humphrey it's Eric.

Yeah, we're doing well against the $150 million target. There. There is some in there I think last quarter I got asked you know do you are you experiencing any real estate savings and the answer to that is no. But we are we are getting a little help from travel for instance, and I'm sure. Some other companies are as well.

Well costs are well down and and we'll be certainly for the rest of the year, we have a target out for 21 as you know.

And look generally I'd like to hit that target, we'll talk about it as we finish our planning so I'm sure we'll talk about it on the next quarter or quarterly call.

No. The only thing I might say is you know as we go through the planning work.

Work you know maybe there are some investments we might want to make us the only sort of offset that I can think of right now we've got some pretty good opportunities here.

And you see how our sales are doing so that's the only real possibility Ed you want to add anything.

Yeah I would so just.

To add a little on the expense and maybe anticipating a question we might get about run rate. So.

We reported for 19 of adjusted earnings next notable items EPS notable items in the quarter.

You know the biggest adjustment as I'm sure you can appreciate would be related to our alts performance and also some benefit from strong market. So.

You'd probably take about a dollar out of that just in total for those two items, but theres also probably about another 15 cents that I would adjust for on expenses being favorable in this quarter relative to what we have thought about as a more normal level. So.

Bottom line is you did have favorability in expenses here in the third quarter and if you're thinking about putting all these together you're talking about run rate EPS round number of about $3 a share on a quarterly basis.

That's helpful. Thank you.

Thank you and our next question comes from at least Greenspan of Wells Fargo. Your line is now open.

Thanks, Good morning.

My first question.

A little bit more color on the sales that you're the sales within annuities in the quarter on your fixed annuity sales are still pretty strong again.

Did show some growth sequentially. So just any color on how sales have trended in this environment.

And then how we should think about that going forward.

Yes sure. Good morning, it's miles happy to take that question. So we remain incredibly pleased as it pertains to our sales results for the quarter as Eric mentioned, we did about $2.3 billion of annuity sales lift which is our best quarter, yet as a publicly traded company.

We continue to see solid results in our shield or with our shield product that in our shield category and we're really pleased with the growth that we're seeing with both our flex assets product as well as our fr itself and the team. The sales teams have pivoted quite well in this environment and continue to support our.

Hi, there so to the best of their ability on or do you want to add anything on the fixed rate product Yeah, Let me do that.

Just for everybody's benefit so we are.

Fixed products are core to our strategy both fixed index on fixed deferred annuities alongside of RV A's and on our preferred annuities I Q3 from an industry perspective, limbers reporting a 47% increase year over year we.

We do offer a suite of competitive products and specifically with a fixed rate annuity, we re entered that space with the lower expense base.

We have a reinsurance agreement in place, which is a which is beneficial to us and to follow up on models as we've been focused on a few select firms on the customers have been looking for the product so yes.

Yeah. It was a decent amount of volume in the quarter.

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That's helpful and then my second question.

As we think about capital.

Highlighted that dividend, you'll be taking from black another call in the fourth quarter and then also pointed to is just trying to have some level of conservatism just given the uncertain environment as we think about your buyback plan from now through the end of 2021 should we just think as you work toward that.

Sure sure.

Target that it's kind of evenly.

Evenly spread throughout the quarters or is there any kind of update you on timing of buybacks relative to the conservatism on the capex.

Hi, Lisa it's Eric.

Yeah. So as I've said before look here, we are getting near the end of 2020.

We've got the $1.5 billion capital return target out there, we'd like to hit it.

We're buying back stock now as you know.

And you can see the levels look I.

You know the the daily obviously, if you if you do the math changes a little bit, but it's at a reasonable pace, which.

Which I would expect to continue.

Obviously I don't want to get ahead of our board here. Okay will eventually run out of this authorization and we've got to have a conversation at the board level.

But I'd like to hit the $1.5 billion and it'll be some sort of average level on a daily basis, but to your point look we're going to have a lot of money up at the holding company, which is great a lot of cash at the holding company, but part of our strategy in this environment, which is now heading into.

Two.

No a full year soon is to make sure that we've got the flexibility that we need.

Some things are looking good from a macroeconomic perspective, but who knows we got to keep watching and part of the strategy is to have a lot of cushion at the holding company. So you should you should think that that will continue.

So Justin <unk>.

Haley said just a follow up on that just first of all the Echo Erics comments I mean, we are prioritizing balance sheet strength and the current environment. So I would just say that generally and I think you can see from our statistics.

525 to 545.

RBC ratio $1.3 billion of holding company cash no debt maturities until 2027.

All of that speaks to prioritizing the balance sheet and then I would just just to give you. The numbers I think you know this but there is approximately $120 million remaining on our existing authorization.

Okay. That's great. Thanks for the color.

Thank you and again, ladies and gentlemen, if you would like to ask a question at this time. Please press Star then one on your Touchtone telephone.

And our next question comes from Tom Gallagher of Evercore. Your line is now open.

Good morning, Hey.

I wanted to circle back on variable annuity risk transferred just.

For a little more color if you wouldn't mind.

Do you think.

Kind of balancing out.

The changes that have occurred on counterparties that are looking to transact.

Whether you are looking at the equitable deal and evaluating that from your perspective or looking at the number of Counterparties do you think.

Do you think it might make sense to do something sooner rather than later for bright house considering.

The terms of trade that are merged good that spread or whatever you want to call. It what do you think.

More realistically the macro and low interest rates are enough for the headwind that you might be better off waiting a bit.

Just want to just really thinking more about do you think this is something that.

You want to do more due diligence on like sooner or do you think this is more of a longer term.

Duration for you.

Hey, Tom Good morning.

All right, let me see if I can help out a little bit here.

Look.

I said before on the I guess the first question.

That's the strategy that we have has been pretty consistent and I think you would you would agree with that right unlock capital repurchase stock rationalize expenses sell new business being sort of the highlights.

You know here, we sit after after three plus years with an RBC ratio Oh, we through the range of 525 to 545 and a billion three at the holding company. So we're in pretty darn good shape, we've unlocked a lot of capital and we're using some of that obviously.

Lee to repurchase stock here, you know as you heard Ed say 20, Fiveish percent, we've been able to buyback of the company in the last couple of years. So it's not like we're not looking at these transactions. Okay. I don't want anybody to think that that we're not paying attention here.

Well, we'll continue to think about whether something like that makes sense for us right equitable, obviously decided it made sense for them and that's that's fantastic. So we'll just keep watching here I don't think I can take sort of the next step would there be a transaction and if so would it.

Be sooner rather than later, but but I guess my overall message is is you can at least be assured that we are paying attention to everything that's going on here and I'm sure you're going to add something yeah. Thanks.

So Tom I would say you know.

You mentioned something about over time, you just heard about the statistics that Eric quoted on the balance sheet and you know in addition, what I said about no debt maturities until 2027.

We have plenty of time and our balance sheet suggests that you know our ability to weather an uncertain environment for years not quarters is pretty clear and you know so I would just reiterate something we've said in the past you know anything we would ever do here would be from a position of strength, we don't need to.

Do anything we're very happy with where we sit today.

That makes sense guys. Thanks, and my follow up is.

Yes, I was pretty interesting developments on statutory capital this quarter moving in different directions. The net impact was positive.

But when I see you know.

I guess my question is just considering.

You know you had this totaled about $600 million Reserve review.

I should say as had you not had that you would have had some serious hedge breakage in the quarter based on the difference in swap versus treasury rates and the difference and.

Hedges versus the way the reserving is calculated.

So does that.

Is that something that you thought about in terms of the basis risk there I mean, I don't even know if you can.

Tactically change that based on the structure.

The types of derivatives that you can buy.

And any thoughts as to maybe ways to narrow that gap of basis risk. What do you think that's just kind of smooth itself out over time.

Yes sure. So there's a few few questions in there I mean, I guess the first thing I would say is that I I would take issue with the.

Concept that this was significant hedge breakage in the quarter.

You know as I've said in the past I think the way you assess the hedge program is not in a normal quarter. The way you assess the hedge program is went bad stuff happens and if we look back to the first quarter when a lot of bad stuff was happening.

Our total asset requirement for V.A. went up by $8.1 billion.

That is the quarter you do not want to have hedge breakage and you know our VA assets went up by 8.4.

So just to just to be clear from our standpoint. These are numbers that can move around.

Well I think we've said in the past a two to 300 million dollar movement in these types of numbers is it.

It is not unusual and when we look at this quarter I think you know as you correctly pointed out there was basis risk.

And you know it is the nature of the instruments for using I mean, we have a lot of swaptions. So by definition the swap rate is the relevant rate for us.

You know and the other thing I'd point out as you know you know about the the fact that the derivative assets are more reactive to rate changes then the total asset requirement given the nature of the S.G. So all.

All of that stuff together I think would suggest that.

This is not a quarter that I would define as particularly unusual.

Oh Im sorry, just one other point of clarification. So the $600 million benefit was at C. T 98, if you look at the increase in our total adjusted capital in the quarter, which was up $700 million sequentially about half of that was as a result of the strong equity market. So you know that convergence divergence.

Phenomenon that you've heard us talk about and the other half was due to the assumption update.

Did I get it all or is there something I missed no you got it that is helpful. Thanks.

Thank you and our next question comes from John Barnidge at Piper Sandler Your line is now Ben.

Thank you.

The withdrawal activity tick down quite a bit from a year ago as a percent of beginning period assets in annuities are.

Are there any trends to note and how are you thinking about those perspectively.

Hey, John its Connor so from a flows perspective it's.

So, let's say Q1 was it was a normal flow quarter from an IPO perspective, Q2 was definitely sub judice. So instead of running at the kind of $3 billion a month 3 billion a quarter, we were down closer to two one.

We were back up to about two three this quarter. So I would say still subdued start.

Starting you know continuing to maybe trend up a little bit every month, but but not all the way back yet.

We've talked before the component the the.

The mind of I suppose from death, and Annuitizations remains very very consistent every quarter. So we're seeing a continuation here of a subdued level of outflows in both full and partial withdrawals.

So as that I, it's hard to predict from here, it's it's trending back up but it's not back where.

Where it was first quarter or indeed, the average for 2019, which was very consistent as well.

Great. Thanks for the answers.

Thank you.

Our next question comes from Angie Harmon of Credit Suisse. Your line is now open.

Yes, just a few.

Update items, so yes, you have a.

Sensitivity out there $70 million COVID-19 claims pre.

Pre tax per 100000 Mortalities.

Came in and about $14 million this quarter, that's that's great relative to what you were expecting.

You need to take down that sensitivity if it.

Good morning, Andrew So first just a just a slight correction the sensitivity we gave was $70 million aftertax.

For everybody right yet for every 100000 U.S. debts. So if you look at where we are.

You know at the end of the third quarter, you were right around 200000 use stats and we've had year to date covert claims of $42 million pretax.

So that compares to what our guidance would have implied of $140 million after tax so clearly.

That initial guidance.

Does not apply and we're not providing an update.

You know the difference between where we are today and what we had assumed earlier is that the impact of Cove. It on the general population has been more pronounced than on the insured population.

Yeah that makes it makes a lot of sense and just you previously also on.

Credit.

You expected about a 50 basis point negative hit from your.

Stress scenario, how does that stand right now or are things better than you expected.

Where are you coming out on your stress scenario.

Andrew It's John.

On our first quarter call I suggested that at our investment stress scenario would impact RBC by about 50 points over two years.

Since then weve been doing more modeling and I would say our stress has ranged from a roughly 50 point RBC impact the 100.

Hundred point impact over three years.

But those.

Those are the stress scenarios, if you're asking how do we feel at the moment I would say the severe stress scenario or that 100 basis point cases.

Probably less likely than than it used to be.

[noise] anything emerging worse than you thought.

Actually no and I mean this is a good.

I might as well just say so far impairments have been minimal downgrades have been within expectations and both are moderating in the third quarter, we had no net impairments.

And year to date pretax impairments has only been 37 million.

Uh huh.

I would as to our expectation for future losses, I mean, all the damage to date has been quite modest and certainly lower than we would have expected it.

It is too early to say we're out of the woods. Thus, we would expect some amount of.

Additional losses going forward, but to the extent of any the extent of any future losses and downgrades for that matter will depend so large degree on the virus and its impact on the general recovery in certain specific industry sectors, but but let me reiterate.

No what Eric and Ed has said that.

The portfolio is well positioned to weather this uncertain environment additional losses, given its high quality and strong diversification.

Thanks.

Thank you and our next question comes from Suneet Kamath of Citi. Your line is now open.

Thanks, Good morning.

I wanted to start on statutory if I could.

I guess as you look at VA capital reform and your current assumptions.

Are there any other big sort of deviations that could lead to something like this $600 million.

Capital benefit that you got in the third quarter.

So the short answer is I don't believe so, but let me just spend a second talking about the impact that we had in the quarter. So you know I mentioned in the prepared remarks that you know.

We've been aligning our models and assumptions be consistent with the a reform, which as you know we early adopted at the end of last year and you know late last year, we identified what we thought was a conservative assumption an overly conservative assumption in the model.

We did not we did not put it through at year end, because we wanted to make sure that we fully understood. The impact that there was no unintended consequence in our models and assumptions as a result of changing this and so we spent a decent amount of time this year, making sure that we were very.

Clear on a on the impact of this assumption in our model and so we've gotten comfort that it is appropriate to to make a change and thats why you see it in the third quarter assumption update as I said in the prepared remarks.

The variable annuity assets that support our total asset requirement, which is a substantial number are invested at an average yield above the current market yield.

And this average yield was not fully factored into our calculation of the total asset requirement.

So just.

Just to add a little more color. This average yield was reflected in the discount rate, but it was not reflected in the earned rate and just to reiterate our new approach is now aligned with VA reform.

Got it and then on the GAAP side.

When we think about the interest rate related charge can you give a sense how much of that was from kind of a lower starting point versus the change in the mean reversion assumption and then should we expect any kind of ongoing impact on your operating earnings from this assumption review.

Okay. So let me start with <unk> of the total charge of $2.2 billion $1.7 billion of it was related to the interest rate change.

And.

That was split roughly 50 50 between a universal life with secondary guarantees and and VA.

So on the U.S.G. side. It was about as I said about $900 million aftertax, and that's versus a $600 million after tax charge last year.

For the mean reversion change that we put in place in the third quarter of 19. So the impact is consistent with the change in the rate this year versus last year, because we came down 75 basis points. This year, we came down 50 basis points last year. So you know I would never suggest that we should always assume linearity in these.

The types of things, but you know we are seeing it in terms of the interest rate impact on the U.S.G., Bob block and and just to highlight here just to make it clear this is gap.

This has nothing to do with Stat and when you look at statutory first of all you have more conservative assumptions to begin with and second of all they know the gap mean reversion rate isn't even a relevant concept.

And when we look at you LSG for Stat, we have about 70% of that in our reinsurance captive in terms of reserves, but a larger percentage of the risk associated with secondary guarantees and as you've heard me say I think repeatedly in that in the past.

We have significant cash flow testing margins.

B R C D a bright house reinsurance company a Delaware.

Even at rates substantially lower than the current level. So just to just to make sure we have that distinction here between GAAP and stat.

Turning to the GAAP impact for annuity.

You know we had a bigger charge this year, we had $800 million versus essentially nothing last year and the reason for this is that on our legacy models for VA.

Had assumed that credit spreads would move inversely to the risk free rate.

And so if you go back over the last 40 years, you will see a negative correlation of about 0.5 between the 10 year treasury yield and credit spreads. So there's certainly a historical basis for this assumption and we had assumed that last year, which meant very little impact.

Act.

With rates at a lower level.

We've decided that the conservative approach is to assume that this relationship no longer applies.

So we did not assume any credit spread offset in and and the reason that that really explains why we had a negative impact this year versus essentially nothing last year.

Got it and then any ongoing impact.

Yes, sorry.

There shouldn't be any material ongoing impact.

On adjusted earnings from these changes.

Okay. Thanks.

Thank you and ladies and gentlemen, this does conclude our question and answer session I would now like to turn the call back over to David Rosenbaum for any closing remarks.

All right. Thank you all for participating on today's call and for your interest in bright house.

And we look forward to talking with you again next quarter.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.