Q4 2020 Brighthouse Financial Inc Earnings Call
[music].
Your room engineered and Joe on your room, and good morning, ladies and gentlemen, and welcome to Brighthouse Financial's fourth quarter 2020 earnings Conference call. My name is Josh 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 and fairness to all participants please limit yourself to one question and one follow up as a reminder, the conference is being recorded for replay purposes.
Also we ask that you refrain from using cell phones speaker phones or headsets. During the question and answer portion of today's call I would now like to turn on the presentation over to David Rosenbaum head of Investor Relations. Mr. Rosenbaum you May proceed.
Good morning, and thank you for joining Brighthouse financial fourth quarter and full year 2020 earnings call our earnings release, and slide presentation and financial supplement were released last night. It can be accessed on the Investor Relations section of our website at Brighthouse financial Dotcom.
We encourage you to review all of these materials today, you will hear from Eric Steigerwalt, Our President and Chief Executive Officer, and Ed Bihar, Our Chief Financial Officer. Following our prepared comments, we will open the call up for a question and answer period on.
Also here with us today to participate and the discussions are Myles Lambert 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 Brighthouse Financial's 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 and Brighthouse financial filings with the U S Securities and exchange.
Information discussed on today's call speaks only as of today February 11th 2021. 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 may be found on the investor relation.
A 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 and 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.
Once again, I hope that everyone listening today and your loved ones are remaining safe and well.
Well 'twenty and 'twenty was a year like no other.
The COVID-19, pandemic up and did our communities and the world.
Capital markets were volatile.
Over the course of 'twenty and 'twenty, we saw the S&P 500 reach a record level, followed quickly by a bear market and recovery.
Resulting in an 18.4% total return for the year.
Long term interest rates as measured by the 10 year U S Treasury.
So similar volatility.
Throughout all of this we continued to execute on our strategy. Thanks to the tremendous dedication of our employees.
As the COVID-19 pandemic continues to evolve.
Brighthouse Financial's mission to help people achieve financial security has never been more critical.
The financial situations of millions of Americans, including those working and those already and retirement.
Been affected by the pandemic and the resulting economic slowdown.
At Brighthouse, we remain focused on our mission and strategy and continue to believe that we are well positioned to help people achieve financial security and address retirement concerns over the long term.
We are also focused on our communities.
Throughout 2020, Brighthouse financial provided financial assistance to help meet some of the most pressing needs of our communities. During these trying times.
Brighthouse financial Foundation made contributions to more than 40 nonprofits with a focus on COVID-19 response and racial equity.
Before turning to our results this quarter.
I would like to touch on some of our strategic accomplishments for the year.
First.
We repurchased approximately $473 million of our common stock and 2020 a.
A reduction of approximately 17% of the shares outstanding relative to year end 2019.
Second.
We completed the revision of our hedging strategy significantly reducing the risk profile of the company.
Third.
We paid ordinary dividends of approximately $1 $3 billion to the holding company.
Primarily consisting of one point to $5 billion from Brighthouse life insurance company or black.
First dividends paid by Black since we became an independent public company.
Four we had strong sales results and both annuities and life insurance.
Launched two new products and expanded our distribution network.
Next we achieved run rate expense reductions of $166 million relative to the first year post separation.
Seeding our targets of $150 million.
And finally, we made significant progress and our multiyear effort to implement our future state operations and technology platform.
So now let me turn to our fourth quarter financial results.
First we continue to prudently manage our statutory capitalization.
Our hedging program performed as expected and the fourth quarter of 2020.
Importantly, we estimate that our combined risk based capital or RBC ratio was approximately 485%.
Additionally, we ended the year with liquid assets at the holding company of approximately $1 $7 billion.
And we'll provide more details on statutory results in a minute.
Second.
We had a strong sales quarter.
Despite the challenging environment.
Annuity sales were approximately $3 billion.
Up 58% compared with the fourth quarter of 2019.
And up 26% sequentially.
Additionally, we generated approximately $15 million of life insurance sales and the fourth quarter of 2020.
I am very pleased with the progress that we've made as we continue to execute on our life insurance strategy.
Third let me turn to total annuity net inflows.
Which were $72 million and the quarter.
Driven by continued strong sales as outflows returned to near normal level.
As we've said previously we expect to see a continued shift and our business mix profile over time.
As we add more cash flow generating and less capital intensive new business.
Coupled with the runoff of less profitable business.
Four.
Corporate expenses, which do not include establishment costs were $236 million and the fourth quarter.
And finally.
We continue to make necessary investments and our technology infrastructure and and our business.
We refer to these investments as establishment costs.
And the fourth quarter establishment costs were approximately $40 million pre tax.
As I've said before we.
We entered the current climate from a position of strength and.
And our results and 2020 demonstrate that our balance sheet and liquidity remains strong.
Before turning the call over to Ed to discuss our financial results I would like to touch on our areas of focus for 2021.
First.
We intend to continue to execute on our focused strategy.
Second we plan to continue to prudently manage our statutory capitalization and.
As we have said previously we target a combined RBC ratio of between 400, and 450% and normal markets.
Third we want to further drive the evolution of our business mix by adding high quality new business.
Our sales results and 2020 were very strong driven by fixed rate annuities.
For 2021, we currently expect growth and shield and variable annuities.
And while fixed rate annuity sales are expected to be lower.
In 2021, we are committed to enhancing our products with a focus on shield.
And as well as rolling out smart care to more firms.
And adding more wholesalers as we continue to execute on our life insurance strategy.
And we remain very excited about our selection to help deliver Blackhawks life path paycheck and.
And investment solution that is designed to provide millions of American workers with simplified access to lifetime income throughout their retirement.
Next we intend to continue to prudently manage our expenses.
We previously committed to accumulative $175 million reduction in corporate expenses relative to our first year as a public company.
That's $150 million and 2020, and an additional $25 million and 2021.
We exceeded the target in 2020.
And we'd like to achieve the remainder of the expense reduction commitment in 2021.
With that said, we will continue to invest and our infrastructure with the goal of providing better support to our distributors and our financial professionals as well as our policyholders and contract holders.
As I have said before we are being prudent and how we are managing our way through our expected final couple of years of TSA exits.
These TSA exits and associated systems transitions.
Put us closer to our future state operating platform.
We currently anticipate about $150 million of establishment costs over the next two years as we continue the transition to our future state operations and technology platform.
The majority of the expenses expected to occur in 2021.
And lastly, let me discuss share repurchases.
Since the announcement of our first stock repurchase authorization and August of 2018.
We have repurchased a total of more than $1 billion of our common stock through February nine of this year.
This represents a reduction of approximately 28% of shares outstanding.
From the time, we became an independent public company.
Last night.
We announced and authorization to repurchase up to an additional $200 million of our common stock.
Assuming full utilization of this new authorization and the $53 million remaining under our $500 million stock repurchase authorization announced in February of 2020.
We will have repurchased one $3 billion of our common stock.
More than 85% of the way toward our target of returning $1 5 billion to our shareholders by the end of 2021.
As I have said before we have a capital return target that we would like to achieve with that said, we will continue to emphasize prudence and flexibility regarding future share repurchase authorizations.
To wrap up.
Our balance sheet and liquidity positions are strong and.
And we continue to believe that we have the right strategy in place to deliver long term shareholder value.
And that we are well positioned to continue the execution of this strategy.
With that I'll turn the call over to Ed to discuss our financial results Ed.
Thank you, Eric and good morning, everyone.
Last night, we reported fourth quarter and full year 2020 financial results.
Including preliminary statutory figures.
As evidenced by these results our capital and liquidity position remains strong.
Driven by the favorable market environment, and the fourth quarter, our combined statutory total adjusted capital or Tac increased to $8 6 billion at December 31.
Up from $8 4 billion at September 30.
Cash increased despite ordinary dividends paid from our insurance subsidiaries of more than $500 million during the fourth quarter.
Which included the planned $450 million ordinary dividend from Brighthouse life insurance company or Blake.
Total subsidiary ordinary dividends for full year 2020 were $1 3 billion.
Which was in line with the plan, we communicated on our business update call in early March last year.
Our combined risk based capital or RBC ratio is estimated to be 485% at December 31 2020.
Which is above our RBC ratio target of 400% to 450% and normal markets.
Additionally, total subsidiary ordinary dividend capacity is roughly $800 million and 2021.
In the fourth quarter, we had normalized statutory earnings close to breakeven.
For the full year, we had a normalized statutory loss of approximately $400 million.
Which was entirely due to weak results in the first quarter of 2020.
As a reminder, the first quarter loss was $800 million.
And driven primarily by a tax adjustment associated with VA reform.
Our hedging program now contemplates the tax volatility that accompanies VA reform.
Looking at 2021, even though interest rates have increased recently, we anticipate that the low rate environment will continue to exert pressure on normalized statutory earnings.
Moving to the holding company.
We ended the fourth quarter with liquid assets of approximately $1 $7 billion.
Up from $1 3 billion at September 30th.
We continue to believe it is appropriate to have a conservative position at the holding company and the current environment.
We also took advantage of the attractive market environment in the fourth quarter by adding permanent equity to our capital structure.
We issued $575 million of preferred stock and use the proceeds to tender for $550 million of our senior notes.
This was our largest preferred issuance ever and a five 375% our lowest dividend rate.
We will continue to emphasize prudence and flexibility when evaluating dividend plans from our operating subsidiaries as capital strength continues to be a top priority.
So that and we currently expect to pay ordinary dividends to the holding company are slightly above $300 million and 2021.
Less than half of dividend capacity for this year.
The dividend plan contemplates $250 million from black.
Which is consistent with what I identified on our March 20 update call as a more normal dividend for this entity.
Moving to adjusted earnings.
Last night, we reported fourth quarter adjusted earnings excluding the impact from notable items of $272 million.
Which compares with adjusted earnings on the same basis of $388 million and the third quarter of 2020 and $265 million in the fourth quarter of 2019.
There were three notable items in the quarter, which lowered adjusted earnings by approximately $83 million.
The notable items on an after tax basis were about $34 million debt repayment expense and corporate and other associated with the repurchase of the company's senior notes.
Establishment costs of $32 million also included in corporate and other.
And a $17 million unfavorable impact related to the modeling of reserves for unreported claims associated with the transition to our future state operating platform.
There were four major themes that impacted fourth quarter adjusted earnings less notable items.
First the underwriting margin was lower than expected.
Our quarterly average for direct claims is between 400 and $500 million.
With average net claims of approximately $250 million.
As is typical there is variability and the underwriting margin throughout the year and.
And in the fourth quarter, along with $42 million of net claims from COVID-19.
We experienced higher claims overall versus our quarterly average.
Offsetting the lower underwriting margin were very strong alternative investment returns.
As the alternative investment yield was eight 5% in the fourth quarter.
The full year 2020 alternative investment yield was 10, 8%.
At the upper end of our long term expectation of 9% to 11% per year.
Additionally, our separate account returns were 11, 5% in the quarter.
This was significantly above our assumed return and contributed <unk> 47 per share above our normal quarters results.
And lastly expenses were elevated as is typical in the fourth quarter.
Corporate expenses were $236 million, which was higher than the third quarter and higher than our quarterly run rate.
Turning to adjusted earnings at the segment level.
Annuities adjusted earnings excluding notable items were $293 million and the quarter.
Sequentially results reflect higher fees and higher net investment income.
Partially offset by higher expenses.
Life adjusted earnings excluding notable items were $30 million and the quarter.
Sequentially results were impacted by a lower underwriting margin, partially offset by higher net investment income.
The run off segment reported adjusted earnings excluding notable items of $25 million and the quarter.
Sequentially results were driven by a lower underwriting margin, partially offset by higher net investment income.
Corporate and other had an adjusted loss excluding notable items of $76 million.
Sequentially results were driven by a lower tax benefit and higher expenses.
Before I conclude I would like to mention that we plan to provide an update for our VA distributable earnings sensitivities in March.
Our top priority continues to be balance sheet strength and substantial liquid assets at the holding company in order to protect our distribution franchise.
We believe this franchise will continue to drive the business mix shift away from our legacy VA book.
Which should increase the level and predictability of distributable earnings over time.
Our continued strong capital and liquidity position at the end of 2020 highlights our emphasis on prudence and flexibility.
And we will continue to manage the company to ensure a full cycle business model.
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 will need to press star one on your telephone to withdraw your question first the balance sheet. Please standby, while we compile the Q&A roster.
Our first question comes from Humphrey Lee with Dowling and partners. You May proceed with your question.
Good morning, and thank you for taking my questions I.
And I guess my first question is regarding to the the 300 million of.
Dividend upstream plan for 2021.
Is there any I guess any kind of.
Thinking into that or any kind of market conditions that may change, how you think about it that plan to move it higher or lower.
Hey, good morning, Humphrey, it's Ed so when we think about our dividend plans, it's based on a scenario.
Our scenario analysis, thats, considering potential outcomes for the market and credit.
No it isn't based on dividend capacity. So you know as you see we think that the right number to take.
This year would be.
Approximately $300 million and that is that's well below the actual capacity for.
And for $800 million and total and about I believe it's 700 million for Blake.
And.
I think that debt that number as I said is more consistent with a normal year as I had indicated back on the March 2020.
Outlook call.
Okay.
Okay. Thank you.
And then I guess more of a philosophical question for Eric.
I think looking back for the past couple of years definitely have been executing well, but I think at the same times as evident debt for public markets and not ascribing a proper valuation to VA businesses and does it seem V or some of the transactions that we have been seen.
<unk> and the marketplace by some of your peers or.
And then talking about it.
I think right now brighthouse sitting on excess capital debt is north of 50% of your market cap and I don't think a risk transfer is necessary and the right answers is that you don't really need the extra capital based on what you have right now.
And what point does the company and look to do something more transformational to unlock the value.
Thanks Humphrey good morning Lee.
Look as we've said all along we are executing on our strategy right. We've had a strategy to unlock capital repurchase stock rationalized expenses and sell new business and as we're doing all of that you can see old business flowing off the books Conor as discussed many times.
And you know the net outflows and how frankly, a fair amount of that is a good thing for our balance sheet. So.
And I understand your question about valuation, but we think that this strategy is working I mean, we've been able to repurchase almost 28% of our common stock and the last couple of years. So.
I'm not going to take anything off the table and Ive repeated this many times and I'm really not taking anything off the table. If we saw some transaction that might work, we would consider it but this strategy.
Sort of the culmination of this strategy I think is two things number one over the past three and a half years, we've created quite a franchise and we're very proud of that you can see our sales you can see our sales and the fourth quarter and we've been able to repurchase almost 28 per cent of the company, which we think is is.
A value, creating positive exercise and we will pay off over time. So so that's the strategy.
Conor maybe you might want to mention and.
Where we've come with respect to the.
And the liability changes that have happened on our balance sheet over a couple of years sure Hi, Humphrey So in terms of the.
The mix the composition of the of the in force clearly shield has become a significant component and as a reminder, when we became a separate entity shield only represented about 2% of our in force and that's grown by 12 points through to 2020. So now it's gone from from two to 2014 and the <unk>.
Decrease is in the VA business about six points and and what we referred to as the capital intensive and another six and the and the non capital intensive and as we look on it over the next pretty near term horizon and kind of between now and and maybe the end of 2023, we expect that change to continue to shift such that we will end up by.
<unk> 2023 with shield approximately 25% on the capital intensive block coming down on to actually the same and mind about 25% now that would leave us with about 35 of the non capital intensive and then the remaining 15 is that the fixed book So right in line with the progress that we've talked about and a significant shift thats happening.
And really every day.
Hey, Humphrey, it's it said I'd just add a couple of things first of all our financial strategy is the prudent acceptance of capital markets risk supported by a strong cash and capital position and and that strategy does affect how we view.
On the attractiveness of a block deal.
The second thing I would say is.
I think you know we are focused on releasing capital from our VA business and.
And we have released substantial capital without a block deal for example, with the Derisked hedge strategy early last year, we were able to free up $1 billion of capital, which allowed for the substantial dividend, we took from black last year and.
And in addition.
As related to the pie charts that conners, referring to we're derisking every quarter with the natural attrition of our VA in force block.
And then.
Appreciate the color and don't get me wrong and I do.
Thank you will be and executing very well since the separation.
I really appreciate it the feedback thanks.
Thank you. Our next question comes from Ryan Krueger with <unk> you May proceed with your question.
Hey, good morning.
A question on buyback and not surprisingly.
I guess I'm trying to understand the size of the authorization at lower than the last couple authorizations and wouldn't get you to the $1 5 billion target.
Are you taking a different approach where you are looking to do smaller authorization, but potentially.
And keep them and then re up or is this a signal that.
You may not.
Hit the $1 5 billion buyback target this year.
Thanks Ryan.
It's not a signal it seems like and some of the reports its become a signal but it is it is not a single on and so let me say a couple of signal, let me say a couple of things about it.
First of all we don't want a b and a race with ourselves right. Like we did 200, then 400, then 500 and so naturally just the next one has to be 600 or something like that.
When we did the 500 last February.
That was in conjunction.
With a pretty big change and the hedging strategy that freed up about $1 billion and capital. So you can sort of see theres, a theres a nice nexus there.
And in this case, it's like well you could've done and any number of ways, but we thought okay. We got a little bit to go on the current one let's do another 200, and then I'll just say right here I would like to finish it off we have a goal I've said, all along I want to hit that goal and I certainly still want to hit it now so no.
So it is it's not any signal other than I hope it makes sense my comments about not kind of being in a race with ourselves.
That does I appreciate it and then.
Ed.
On your comment on normalized statutory earnings being pressured and the current low interest rate environment can you give any more detail on that.
And roughly breakeven your your expectation or would you or would you anticipate some positive statutory earnings in this environment.
Yes, good morning, Ryan so.
First of all the fourth quarter results were.
Slightly positive for norm Stat earnings and it's I think it's important to understand the composition because we did have good VA earnings in the fourth quarter as a result of the market environment. This was offset by weak non VA results primarily.
Driven by mortality I think you and others have noticed that we did have elevated mortality in the fourth quarter. So I would just say that you don't see the underlying strength of the VA results in the fourth quarter because of.
The challenging mortality quarter.
Looking forward, we're not going to give a F.
Our forecast or or and.
Outlook for norm Stat earnings for 'twenty, one, but I would say that when you get the distributable earnings tables, which we're not going to do a business update call. In March we are planning to release, the distributable earnings tables, and an 8-K I think based on the scenarios, we show you'll be able to derive some sensitive.
He's around rates, but while rates have come up I mean, they're still at a low level. So we would expect.
Some some pressure on 'twenty, one and norm stat earnings.
Got it thank you.
Thank you. Our next question comes from Tom Gallagher with Evercore. You May proceed with your question.
Good morning, just the.
Follow up on Ryan's question, Ed D day.
So the the 250 million dividend, you're expecting to take from Blake and 2021 would you say that does that contemplate keeping RBC flattish meaning.
Do you would you expect all things equal to earn or build that amount of capital.
Throughout the year or is that sort of the way youre thinking about it or would you expect.
Bob your RBC target to be potentially drawing down your RBC I just want to understand.
Is the intention here.
Get to around $4 50 RBC.
Thus, we should expect a drawdown or would.
Would you like to maintain and RBC buffer for the time being.
Alright, good morning, Tom.
I mean, I guess I would say that over time in a normal market environment, we would want to get we would want to be and the range of the 400% to 450%.
So.
I don't I don't want to give a specific number for RBC four for year and I mean, we have not done that and.
I don't I don't know that we want to start doing that now, but I think it's fair to say that over time, we would plan to work to that that target range of 400% to 450%, which we believe gives us.
Significant a significant cushion to absorb you know the bad things that can happen from time to time.
Got it and.
And I guess, Eric the thinking about the.
The level of Holdco cash now I think your Holdco target is 400 million Euro 1 billion three above that.
I guess the first commitment here on buybacks is simply to use what your dividend being up from Blake for the year that will still leave you with this significant cushion over and above your target.
How are you thinking about that.
It's a sizable amount.
Would the intention here to be just keep doing more and more buybacks given the current valuation or are you considering other other uses for that for that cash and chest. So sizable relative to market cap. It seems like the elephant in the room at this point.
Yeah, I got it Tom.
Look we.
We were we were thinking how many times, we've said the words prudent and flexibility this morning.
And maybe we're overdoing it a little bit but.
But look you know we're we're still on a global pandemic you see where rates are we're very proud of this franchise and we want to protect it.
We're thrilled with the situation, we find ourselves and with distributors and we want to make sure that they're comfortable et cetera, but your point is well taken overtime I would answer. This question kind of the same way that Ed just answered. Your RBC question over time, we would expect that number to come down.
Now I really like the flexibility that $1 7 billion allows you but over time.
That to return that to shareholders and and you know when you think about what we've done so far with respect to buybacks that obviously is a little bit of a roadmap with respect to what we do and the future I'm certainly not going to announce any new targets or anything today, but over time I would expect that number to come down.
Okay, and then and sorry, just one follow up.
Based on where the stock is today is it is it a no brainer that you would.
Be thinking just share repurchase or did you or are you thinking any any anything aside from share repurchase.
Obviously, one of the things you may be referring to is the dividend.
Look you know obviously.
Lee we have these discussions and we've had these discussions with the board.
I have nothing to announce today, but I would say in keeping with our R. A phrase prudence and flexibility I mean, we'll consider whatever we think could help create shareholder value. That's how we think about this and that's how we'll continue to think about this and do you want to add anything.
Yes, just one thing I just would point out here is we've obviously shown a willingness to return substantial capital to shareholders as Eric pointed out a 28% decline and shares outstanding since separation is obviously, a sizable number and and importantly, we believe that the <unk>.
Actions, we've taken to date on share buyback will prove to create substantial value over time.
Given that our average repurchase price since the inception of the program is less and $32 a share.
But at the same time and we have to consider that debt. We think the greatest value. We can create is supporting our distribution franchise. So we can continue to grow sales and shift our business mix and so while.
We're probably all getting tired of saying prudence and flexibility, we're going to continue to manage the balance sheet with those two words.
It's because it's the right thing to do for the business.
Okay. Thanks, guys.
Thank you. Our next question comes from your on Canal with Goldman Sachs. You May proceed with your question.
Good morning, everybody.
I'll, probably take a little bit of a break from the capital questions.
I was just curious looking at the at the.
Annuity sales this quarter.
Deferred annuities fixed deferred annuities are up quite a bit again year over year second quarter and your ROE.
Can you maybe talk about what drove that and.
In light of that why do you expect those sales to be down lower on.
In 2021.
Yeah.
Yeah, Hi, it's Conor yeah.
So.
I would say maybe similar to the third quarter, the fourth quarter remained a favorable quarter for fixed annuities and the industry I think <unk>, citing a.
41% increase compared with the fourth quarter of the prior year and obviously, we offer a competitive product we have a beneficial reinsurance agreement.
A lower expense base, but we had some rate decreases as well we had a rate decrease in the third quarter and and the fourth.
We we obviously had.
We had a good quarter focused on a few select firms and we had customers looking for the product.
However, we don't expect to sell as many fixed annuities in 2021.
As we did in 2020.
And why would that day.
On the wall.
We don't expect the market will be as hot necessarily.
With the rate increases will impact on it as well.
So we think in terms of where the index, where our growth opportunities are there going to lie more in the other products and perhaps I can turn it over to miles and he can talk about maybe where it might come from.
Instead.
Yeah. Thank you Conor and I reiterate all of those comments I think that our focus next year will be growing.
And our core business as it relates to our annuity franchises and real focus on shield sales. We are looking to introduce some new product features with our shield products and time mid year next year and continuing the momentum that we've had on.
Throughout 2020 with the South Lamar.
Hum.
Sorry, sorry, I just want to correct.
And my rate changes, we had decreases in rates on the quarter I realize I may have said increases we had a rate decrease and the third quarter and another rate decrease in the fourth quarter. So that's part of why we expect to have lower sales in 2021.
Got it and thanks for the clarification.
And then my second question.
We saw from elevated mortality I guess on the quarter debt went beyond Covid I don't think it was unique to Brighthouse do you think is there is some correlation there between the pandemic and the non pandemic elevated claims, namely should we expect that to maybe continue into the first quarter.
Hey, your own it said so.
Our direct claims.
Or and in the range of $400 million to $500 million a quarter.
And then we have.
Reinsurance that that may bring us down, let's say in the neighborhood of $250 million and a and a more normal quarter, but if you focus on the direct claims of four to 500 million and a typical quarter. We had closer to 600. This quarter. So a portion of that is COVID-19 as we as we as we discussed and.
And then a portion of that is just.
Volatility that we see from time to time in our.
Frequency and severity and there is nothing that we see that's systemic.
This was not a good quarter from mortality and.
It's going to bounce around and we're talking about a number that that's that large obviously you know.
Movement and that number can have a meaningful impact on our quarterly earnings.
Right and I guess, what I'm trying to get at is do you think some of that volatility ex COVID-19 is <unk>.
So related to the pandemic on people not getting their checkups or whatever it maybe.
And therefore would you expect that to maybe carry and two <unk> of this year or do you really see it as uncorrelated volatility that could swing any which way any given quarter. Yeah. We don't see any indication that there's a COVID-19 related impact here.
Got it thanks for the answers.
Yeah.
Thank you. Our next question comes from Elyse Greenspan with Wells Fargo. You May proceed with your question.
Hi, Thanks, good morning on <unk>.
My first one on and.
And then.
And that you guys expect fatigue and especially.
The $250 million from what this year.
Interested and the timing there and then.
And given the timing should we expect on share repurchase maybe on given the flexibility and the conservatism you've pointed to taking up with the whole call capital should we expect buybacks.
To be more weighted to the timing of when that dividend take takes place.
Good morning, Elyse, we're not.
Going to commit to any specific timing on and on the dividend and and I guess I would say that.
I don't really think that the timing of the blip dividend would in any way influence on the timing of our pace of our share buyback considering the amount of cash we have at the holding company.
Okay.
Okay, that's helpful and.
Then my second question on some of the operating expenses seemed elevated and the quarter. I know you. Just said there is a typical kind of quarterly seasonality and costs run a little bit heavier on the fourth quarter.
And that or is there anything else on that.
That was kind of maybe one off with that within your operating expenses and the fourth quarter.
Yes, Okay. So you know and I think probably maybe it makes sense too.
Spend a minute here on on trying to help put up pull all this together because I know, we've we've got and the question on mortality and now were unexpected and and I know that there's there's interest and run rate and so and.
Maybe I can make.
Make a bit more of a global answer to this question and that kind of addresses a number of things including expenses. If that's okay.
Yes that would be great. Okay. So last quarter, I said that I thought our quarterly run rate EPS was and the neighbor of neighborhood of $3 a share.
And why.
Why would continue to think that it's still in the neighborhood of $3 a share.
If we look at the fourth quarter, we had very strong alternative investment returns as we've already discussed.
And that really drove our favorable net investment income relative to what we would consider to be and normal quarter and that was probably around $1 15, a share lets say.
If you look at the mortality.
As I discussed around the direct claims being closer to $600 million versus the $4 million to $500 million normal level that was the primary driver of the overall unfavorable underwriting we had in the quarter.
Which in total.
Roughly offset the benefit that we had from the alts.
So those two cancel each other out.
And when we're looking at the rest of the items the favorable market impact that we identified as 47 a share.
There's a good portion of that may be somewhat less than half of that that would be related to.
The expenses being at an elevated level relative to run rate.
In the in the fourth quarter and I think as I pointed out it's not atypical for the expenses to be higher in the fourth quarter.
And then the final adjustment you'd want to make is we did have a true up and the fourth quarter for the full year tax rate. So I think you saw that that the corporate and other line was a bigger loss was driven by this tax adjustment and that true up the out of period adjustment.
And that impacted fourth quarter earnings would roughly be the balance of this.
<unk> market impacts. So if you put these expenses and the tax true up together, they roughly offset the favorable market impact if you look at underwriting it roughly offsets the alts, so you're back to $3.
Per share is a I would say kind of a normal quarter.
Okay. That's helpful. Thanks for the color.
Thank you. Our next question comes from Chase Tresiba and <unk> with <unk>.
Barclays You May proceed with your question.
Thank you and good morning, how should we be thinking about E. Our distribution relationship with massmutual and light of their upcoming acquisition of <unk> life insurance business and its product suite and it kind of looks like yours and if you could also remind that the level of dependence do you have on that and more broadly from marketing purposes.
Yes sure. Good morning, it's Myles speaking, so certainly we wish our friends well at mass mutual with this new transaction.
We remain very pleased with our partnership with net mutual and our focus there will continue to be on.
And our ability to best support their advisors very there are meaningful relationship of ours.
But as we continue to grow distribution and other firms and other channel. They do represent a smaller portion of our overall sales.
Okay, and then maybe I'll stick on the topic of sales and as some of the comments you made earlier miles and we're talking about on.
Fixed annuity and Sheila.
I'm just wondering if the fixed annuity sales from chairman by my that it does seem to be the case and third quarter and can you just didn't have appetite for that product and on the shield side, maybe you could just provide a little bit more color on your comment about adding and product features as that market is becoming more crowded I'm wondering if you would.
The offering.
G L b or on others.
Other types of I guess writers to that.
And so I'll start with the fixed business.
Roughly 84% of our business on the fixed deferred product came from.
And the <unk>.
And VA product and about 56% was our three year product and about 43%, whereas on five year product as it relates to shield.
Obviously, theres a lot of competition in that space right now and as it relates to.
Our market share, we feel really good about it.
The fourth quarter of last year was our best quarter as Brighthouse with shield sales. So we believe our product is still very competitive and we're working through what kind of features that we're going to want to include on the product.
We believe we will launch sometime mid year.
Okay, but what it changed the risk characterization and since you are trying to move away from capital intensive business.
Conor I'll, let you take that one yeah I would say look we are pleased with the returns on all of our products, but I would say that shield is our core product.
And it will continue we expect it will continue to be a core product and while we will continue to tweak the product a little bit and not enhancements and so on and we will do it by maintaining our.
Our expectations in terms of the.
The economics as well.
Okay. Thank you.
Thank you. Our next question comes from Andrew Clarke and men with Credit Suisse. You May proceed with your question.
Hey, Thanks, good morning.
Just one for Ed and I know you mentioned earlier and the call that you didn't want to project from normalized Stat earnings.
But.
It's zero or a little slightly positive and the quarter negative 400 for the year.
And it's a brighthouse metric so on.
And I'm curious could you give us a sense of what normalized normalized stat earnings are just.
May be a number there and then with that maybe reconciling it to the fact that your total adjusted capital was up $200 million. Despite a.
A $500 million subsidiary.
Larry dividend.
Yeah.
Okay, Andrew let me let.
Let me start with the.
The second question and I'll come back to your first one.
Hum.
The second question, maybe is more satisfying answer than the one you'll get for the first one but we'll try to value.
So you know.
You've heard me talk and the past about.
Convergence and divergence and as an explanation for why you will see more volatility and total adjusted capital then you will see in the RBC ratio.
And under VA reform.
So think about the fourth quarter as being a very good quarter right from markets and so you saw an increase in tax sequentially of $200 million, even though we took a $511 million dividend right and the reason for that is it win win good.
Things happened and they tend to get reflected.
And your Cte 70 reserves, which impacts your Tac.
And the opposite occurs when you have bad things happen.
The RBC ratio, however, and is based on the.
Total adjusted.
The total asset requirement at Cte 98, which is <unk>.
More of a tail type set of scenarios and it doesn't move as much. So you have more stability and that figure, whereas the Tac will move more based on movement and <unk> 70, the <unk>.
Same concept applies to norm stat earnings as remember.
And one of the key adjustments to get to norm Stat earnings as we replace the change and reserves at a <unk> 70 level with the change and total asset requirement at Cte 95.
It's not surprising that you don't see the link between the change and Tac and.
And the norm Stat earnings number considering the fact that we.
We have this divergence at play.
And then norm stat earnings as well.
The going back to your first question.
What I would say is.
It is easier to talk about.
A figure like.
Norm Stat earnings by thinking about distributable earnings and thinking about it over multi year period, so and under different scenarios. So if you look.
Just maybe you could just be a little bit patient because we will get something out to you within a relatively short period of time, when we release, our distributable earnings tables, but youll see distributable earnings under different market scenarios.
Over a multiyear period and you can think about.
And those distributable earnings figures being tied to a norm stat concept because the norm stat is capital generation above the Cte nine's right, it's above Cte 95, and and obviously Cte 98 is what matters for RBC, but we're not giving and annual.
Expectation for norm Stat earnings. It is volatile we would expect over time as we continue to shift our business mix that there will be more stability to norm stat earnings and distributable earnings, but it will take time and for now I think what I would suggest is by looking at the different scenarios that we're going to give you and <unk>.
March and the distributable earnings over multi year period that that should give you some sense of how to think about.
Norm Stat earnings.
Great debt that was helpful and I will look for those sensitivities and then just a quick follow up on Conner's early comments about fixed annuities and lowering the rates kind of where did the was the rate in the fourth quarter and where did you bring it and maybe they are different products, but in general, we're where the fixed annuity rates.
I'll give you a general sense we were.
Coming into the quarter, and we have various products and various lengths, but we were and the.
Above the one 5%.
Range on we're closer to a 1% range broadly speaking.
On.
After the rate change.
Yes and interesting.
Thanks, a lot.
Yeah.
Yeah.
Thank you. Our next question comes from Erik Bass with Autonomous Research you May proceed with your question.
Hi, Thank you I wanted to go back to the annuity sales outlook and miles and I don't think you mentioned, the Blackrock product and you.
Our discussions and I'm just wondering is that something that you expect to start to see material sales and 2021 or is that more of a longer term opportunity.
Conor actually I'll I'll take that one.
So Blackrock, obviously, we're very very excited about the opportunity with Blackrock.
We're working closely with them and obviously, taking their lead as well, but remained very bullish on the product and on how it's going to help Americans, but it's a new category for us on and for them, it's going to take a little bit of time. So we.
We don't we haven't actually talked about what the.
The financial expectations are we likely won't do that for a little bit longer here as well so.
Stay tuned on that one thank you.
Got it thank you and maybe one other one for you Conor.
You mentioned that lapse trends and the older VA block have started to normalize and so maybe if you could touch on that a little bit.
And more.
Sure Yeah, Yeah, honestly I would describe Q4 as being very consistent with our expectations.
It looks very much like Q1 actually.
And so.
And that $3 billion number in terms of the outflows the composition.
It's very consistent so about half of it being full withdrawals about a third of it being partial withdrawals, 15%. That's on a couple of percentage of annuities.
So.
Really expect pretty normal and I'm not.
I'd say thats, our expectation heading into 2021 as well so we'll see.
Got it thank you.
Thank you our next question comes from.
John Barnidge with Piper Sandler you May proceed with your question.
Thanks going back to the mass mutual distribution question, you talked about wanting to distribute more than just threw them can you talk about what percentage of sales went through mass mutual and <unk> 'twenty versus maybe at the time of spin and as compared to a year ago.
So we can get a better sense of how <unk> been building greater distribution partners.
Yes, I mean, we've done a lot. It's Myles again, we've done a lot as far as expanding distribution and bulk.
And certain product categories, bringing on new firms and we successfully launched a new FIA products and through the traditional ISO channel. This.
This year secure advantaged six year, and we were really pleased with our results and did not $325 million of sales given the macro environment with the pandemic.
And our distribution network is growing outside of mass mutual and as I said, a few moments ago.
Mass mutual represent a smaller portion of our sales and that's been consistent over the last few years, but they remain a very important relationship of ours.
We provide dedicated wholesaling to them and our focus is still to provide them. The same level of support and continue to grow sales and there in the future.
And then a majority of sales today.
Geordie of our overall sales today no.
Okay. Thank you.
Thank you and our next question comes from Tom Gallagher with Evercore. You May proceed with your question.
Thanks, just just.
And just a quick follow up the.
And the gross life claims this quarter of $600 million.
And what was it a net number.
Hey, Tom.
It was it was.
It was between $3 50, and 400 it was like $3 60, I believe $3 60, something.
Okay.
That's.
And that's a meaningful delta right relative like normally it's 50% and is there any anything was that is that just because you're retaining more or was that just on favorable.
Reinsurance participation relative to normal.
Yes, its nothing other than we believe normal mortality I mean, the we have this big direct claims number every quarter and we have.
Reinsurance percentage that'll move around based on where reinsurance coverages from where it's not so.
It's those two those two elements combined that creates the volatility that we see.
Okay alright. Thanks.
Thank you and our next question comes from Sydney.
Sydney You May proceed with your question.
Yeah. Thanks, good morning.
Eric I think in your opening comments you talked about one of your goals around capital is to protect the distribution franchise, if I heard it right.
Is that a sort of a message that around your ratings and and then if your ratings were higher perhaps you'd be able to generate a higher level of sales just wondering if thats, what youre getting out there.
Hey, good morning, Cindy no not really it was just an overall sort of look where.
We work really hard for our distributors and they're just they're fantastic partners across the board.
So you know it it's it helps them when they see a strong balance sheet and us working on new products et cetera, but no. There was there was no other message and that.
Got it and then I guess, if we think about sales strain kind of going forward your line.
Sales have sort of been in the mid teens here for the past couple of quarters I'm, assuming you want to get that higher I think you talked about annuities flipping from outflows and inflows and <unk> can you get us give us a sense.
And on where you see kind of net sales strain going into 2021.
Yeah.
Yeah.
I don't on a benchmark relative to like earnings or something along those lines, but just I'm. Just wondering if that's if that's going to be a use of your and your sort of excess capital.
Yeah, Hi, so needed it said.
Yes, we will.
If you recall last year, when we gave the the day figures, we gave some indication of of strain.
And the related impact.
I expect that debt that would be a topic, we would be willing to discuss.
Around the time of the day tables.
But I would say generally I wouldn't think it's it's a meaningfully different story than what we had talked about last year.
Got it and did you say youre, having a call when you put out the day tables.
No we're not having a call we're going to we're going to put it out and an 8-K and then we will set aside time to obviously to answer.
As many of your questions as we can.
Got it okay. Thanks.
Yeah.
Yeah.
Thank you, ladies and gentlemen, I will now turn the call back over to Mr. Rosenbaum for any closing remarks.
Alright, Thank you Josh and thank you all for joining us today for your questions and for your interest in and Brighthouse financial and I Hope you have a great day.
Thank you ladies and gentlemen. This concludes today's conference call. Thank you for participating you may now disconnect.
[music].
And.
And.
And.
Okay.
And.
True.
[music] range.
Okay.
And the dividend.
Great.
[music] and growing revenue.
And then.
Okay.
[music].
And going forward.
And.
[music].
And.
[music] economy and.
And on that.
[music].
And.
Okay.
Great.
And then.
[music].
Yes.
Yes.
And then.
[music] financial expenses.
And the timing.
Yes.
Okay.