Q1 2021 Brighthouse Financial Inc Earnings Call
[music].
Good morning, ladies and gentlemen, and welcome to Brighthouse Financial's first quarter 2021 earnings conference call My.
My name is Livia and I'll be your coordinator today.
At this time, all participants on a listen only mode.
We live with Joe Payne, our question and answer session towards the end of the conference call.
Fair enough to all participants please limit yourself to one question and one follow up.
As a reminder, this conference 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 the presentation over to David Rosenbaum.
Head of Investor Relations Mr.
Mr. Rosenbaum you May proceed.
Good morning, and thank you for joining Brighthouse Financial's first quarter 2021 earnings call.
Our earnings release Slide presentation, and financial supplement were released last night. It can be accessed on the Investor Relations section of our website at Brighthouse financial Dot com.
We encourage you to review all of these materials today.
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.
Also here with us today to participate in the discussions are Myles Lambert chief distribution, and marketing 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 in Brighthouse Financial's filings.
With the U S Securities and Exchange Commission.
Information discussed on today's call speaks only as of today may 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 reconcile.
Reconciliations of these non-GAAP measures on a historical basis to the most directly comparable GAAP measures and related definitions may be found on the Investor relations portion of our website in our earnings release slide presentation or financial supplement.
And finally references to statutory results, including certain statutory based measures used by management are 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 on your loved ones are remaining safe and well.
Today I will provide some perspectives on the continued execution of our strategy.
Progress we have made on our 2021 focus areas. In addition to discussing our first quarter results.
Bright house delivered strong results from our first quarter glove.
Global equity market performance and rising interest rates provided a favorable backdrop to both earnings and capital generation in the quarter.
Investment income from alternative investments was very strong given the fourth quarter market performance.
The underwriting margin was modestly better than the prior quarter.
But lower than a more normal quarter.
We delivered strong sales results and we continued to prudently manage expenses.
Reflecting on the quarter I could not be prouder of the contributions from our employees and distribution partners to our strong results.
Our balance sheet and liquidity position remained robust in the first quarter on our hedging program performed as expected.
Importantly, we estimate that our combined risk based capital or RBC ratio.
It's range was between 500 and 520%.
Well above our target of between 404 hundred.
In normal markets.
Additionally, we ended the quarter with liquid assets at the holding company of approximately $1.6 billion.
Ed will provide more details on our financial results shortly.
As we have said before one of our top priorities is balance sheet strengths in order to support our distribution franchise and further enhance sales growth.
We believe our distribution franchise will continue to contribute to the evolution of our business mix over time by adding high quality, new business, which should increase the level and predictability of earnings and cash flows going forward.
Turning to sales I am very pleased with our sales results in the first quarter.
Annuity sales were approximately $2 $1 billion up 8% compared with the first quarter of 2020 and ahead of our expectations.
We reported record sales of both our flagship shield level annuities, and our variable annuities with flex choice access.
In addition, our VA and shield product sales were up 6% sequentially.
Fixed rate annuity sales were lower sequentially as expected.
Due to additional repricing actions, we took on the fourth quarter, given the low interest rate environment.
Additionally, we generated approximately $23 million of life insurance sales in the first quarter of 2021 also ahead of our expectations.
I am very pleased with the progress that we've made as we continue to execute on our life insurance strategy.
We remain focused on further expanding our distribution footprint and continuously enhancing the way, we support financial professionals and the clients they serve during.
During the first quarter Brighthouse financial annuities were added to the Simon marketplace over time, leveraging the Simon platform further broadens our distribution footprint and helps make retirement planning more scalable for financial professionals.
We also remain committed to enhancing our products with a focus on field as well as rolling out smart care to more firms and adding more wholesalers as we continue to execute on our life insurance strategy.
Total annuity net outflows were $824 million in the quarter as outflows returned to a more normal level and were partially offset by continued strong sales.
As we've said previously we expect to see a continued shift in our business mix profile over time, as we add more cash flow generating and less capital intensive new business.
Bold with the run off of older less profitable business.
Corporate expenses, which do not include establishment costs were $203 million before tax from the first quarter, which was lower than our expectations.
Establishment costs were approximately $17 million before tax.
We previously committed to accumulative 175 million dollar reduction in corporate expenses relative to our first year as a public company.
That was $150 million in 2020, and an additional $25 million in 2021.
We exceeded the target in 2020, and we are focused on achieving the remainder of the expense reduction commitment in 2021.
With that said, 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.
Lastly, let me discuss our stock repurchase program.
In the first quarter of 2021, we repurchased approximately $68 million of our common stock.
And since the end of the quarter through May seven we repurchased an additional approximately $55 million of our common stock.
Since the announcement of our first stock repurchase authorization in August of 2018 through May 7th of this year.
We have repurchased more than $1 $1 billion of our common stock.
This represents a reduction of more than 29% of shares outstanding from the time, we became an independent public company.
Assuming full utilization of our current authorization, we will have repurchased $1.3 billion of our common stock.
More than 85 per cent of the way toward our target of returning $1 $5 billion to our shareholders by the end of 2021.
And that's a goal we are focused on achieving.
To wrap up.
Brighthouse delivered strong results from the first quarter.
Sales were better than our expectations.
We continued to prudently manage expenses.
And we repurchased more of our common stock in the quarter.
And our balance sheet and liquidity position.
Main robust.
We remain focused on executing our strategy to deliver long term shareholder value.
And with that I'll turn it over to Ed to discuss our financial results Ed.
Thank you, Eric and good morning, everyone.
Before getting into the results for the quarter I would like to take a moment to discuss our updated projected distributable earnings scenarios, which we published March 16th.
There are three key messages to take away from these updated scenarios.
First we have a significant level of projected total company distributable earnings even though all of the scenarios assume interest rates starting from year end 2020.
Or a 10 year U S treasury yield of 93 basis points.
The total company 10 year distributable earnings projections, we published on March 16.
Our comparable to what we presented last year adjusted for the $1 billion capital release in 2020 related to the Derisking of the variable annuity or VA hedging strategy.
Second VA distributable earnings were only modestly lower than what we published last year after adjusting for the $1 billion capital release associated with Derisking, our hedging strategy.
This illustrates that the strong market returns in 2020, we're an effective offset to the negative impact from low interest rates.
And third interest rates today are substantially higher than what is reflected in the scenarios.
The forward curve at year end 2020 projected the 10 year Treasury would reach today's interest rate level in mid 2025.
And our current GAAP mean reversion to 3% over 10 years implies we would be at current rates at year end 2023.
Therefore, we believe that there is upside to the distributable earnings projections, we published in March.
Now turning to the first quarter results, we released last night.
I'm very pleased with our strong financial results and robust capital position.
As Eric noted the continuation of strong equity market performance and a rising interest rate environment was a positive backdrop for the quarter.
Starting with preliminary statutory results.
Our combined statutory total adjusted capital or Tac was approximately $9 $4 billion up $800 million from year end 2020.
We estimate that our combined risk based capital or RBC ratio with between 500 per cent and 520%.
And we reported normalized statutory earnings of approximately $100 million.
These results were driven by the increase in equity markets and interest rates in the first quarter.
The positive market factors.
Including favorable investment performance were partially offset by elevated mortality and a 200 million to $250 million unfavorable impact associated with the prescribed decline in the 20 year Treasury yield mean reversion point for statutory calculations.
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In the first quarter. The mean reversion point was lowered by 25 basis points to 3.25%.
And the $200 million to $250 million unfavorable impact in the first quarter reflects the full year effect of this change.
The decline in the mean reversion point and future declines were factored into our distributable earnings projections published on March 16th.
Moving to the holding company.
We ended the first quarter with holding company liquid assets of approximately $1 $6 billion.
We believe it is appropriate to keep a conservative position at the holding company and as a result of favorable market moves.
Positive developments in the economy.
And the likelihood that the worst of the pandemic is behind US we continue to assess the appropriate level of conservatism.
Shifting to adjusted earnings.
First quarter adjusted earnings excluding the impact from notable items were $428 million, which compares with adjusted earnings on the same basis of $272 million in the fourth quarter of 2020.
And $273 million in the first quarter of 2020.
There were two notable items in the quarter, which lowered adjusted earnings by approximately $43 million.
The notable items on an after tax basis were.
A $29 million unfavorable impact on the runoff segment related to actuarial systems conversions associated with the company's transition to its future state platform.
And establishment costs of $14 million included in corporate and other.
Adjusted earnings less notable items were above our quarterly run rate expectations, driven by favorable net investment income and lower corporate expenses.
Partially offset by lower underwriting results.
Net investment income was approximately $225 million higher than our average quarterly run rate on an after tax basis as.
As the alternative investment yield was 12, 8% in the first quarter driven by the favorable market performance in the fourth quarter of 2020.
Performance was strong across all sectors of the private equity portfolio, particularly in venture capital.
Keep in mind that we expect an annual yield of 9% to 11% over the long term on the alternative investment portfolio.
Expenses were also favorable relative to our normal quarterly run rate by approximately $10 million after tax.
This favorability is typical in the first quarter due to seasonality.
As a partial offset to strong net investment income and low expenses.
Our underwriting margin was approximately $90 million lower than our quarterly run rate expectation on an after tax basis.
The below normal underwriting margin was the result of COVID-19 claims and a lower than typical benefit from reinsurance.
Our direct claims in the quarter, excluding the impact from COVID-19, we are in the normal range of 400 million to $500 million that I've discussed in the past.
Turning to adjusted earnings at the segment level.
Annuities adjusted earnings excluding notable items were $336 million in the quarter.
As mentioned earlier, the strong market performance had a favorable impact on results.
Net investment income was higher sequentially, along with higher fees.
Partially offset by an increase in reserves.
In the life segment adjusted earnings excluding notable items were $42 million in the quarter.
Sequentially results were primarily impacted by higher net investment income.
The runoff segment reported adjusted earnings excluding notable items of $105 million in the quarter.
Sequentially.
Results were driven by higher net investment income and a higher underwriting margin.
Corporate <unk> other had an adjusted loss excluding notable items of $55 million.
<unk> results were driven by a higher tax benefit and lower expenses.
Lee offset by higher total preferred stock dividends.
Overall I am pleased with our results this quarter we.
We maintained our strong capital and cash position, while continuing to return a meaningful amount of capital to shareholders.
We remain committed to using a multi scenario multiyear framework when managing the balance sheet to ensure that we protect our distribution franchise.
With that we'd like to turn the call over to the operator for your questions.
Thank you, ladies and gentlemen to ask a question do you want to press. The Star then the one key on your touched on gel from two.
<unk> Your question press the pound key index.
The situation of time, we ask that you. Please limit yourself to one question and one follow up please standby, while we compile the Q&A roster.
And our first question coming from the lineup Ryan Krueger with <unk>. Your line is now open.
Hey, Thanks. Good morning. My first question was Ed could you walk through some of the day.
Do we think about normalized statutory earnings in the quarter can you walk through some of the moving parts in terms of.
Actual to expected market performance and interest rates kind of impacted impacted that and then the other.
For the April quarter.
Sorry, Ryan Good morning, what was the last part of the question I didn't hear it.
If they were and if there were other meaningful deltas within the normalized statutory earnings that you'd call out.
Okay.
So the normalized statutory earnings were approximately $100 million as I said in my prepared remarks reflected around a $200 million to $250 million impact from lowering the mean reversion rate under statutory prescribed mean reversion rate for the 20 year Treasury. So this was a good quarter considering.
And if that's the full year impact on absorbed in full.
Fully absorbed in the first quarter.
The VA results as you probably would expect were very good in the first quarter.
Driven by the market factors and this was offset.
Bye.
Weaker non VA quarter as you heard me.
Mentioned in prepared remarks. This was this was a tougher mortality quarter. So the story for V. A story for normal Stat earnings was really V E and again the impact from the the full year, our adjustment to the mean reversion.
Got it thanks, and then on the mean reversion impact.
<unk> you already projected these in year distributable earnings scenarios, but just to understand is is that 200 to 250 something that occurs effectively every year.
From lowering the 25 basis points.
How we should think about it.
Yes, so I mean this is.
As you said, we factored in.
Future declines in the mean reversion point as well as this year's decline in the distributable earnings tables.
This this is really the impact of $200 million to $250 million from the reduction this year and so I wouldn't necessarily say, that's an ongoing impact from the reduction this year now.
We did assume based on the rate environment at year end 2020 that we would see another 50 basis point decline.
In in 2022, and the mean reversion point.
If current rate levers levels were to hold on.
On that 50 basis points would be 25 basis points. So obviously there is some upside for.
For next year.
Given the the mean reversion rate coming down less than what we had built into our our tables in mid March.
Got it thank you youre.
Youre welcome.
And our next question coming from the line of Elyse Greenspan with Wells Fargo. Your line is now open.
Hi, Thanks, Good morning, My first question.
I wanted to go to debt capital side do you guys have one liliana.
Early on at the holding company.
I think we've taken a conservative position and you spent a lot of uncertainty over the past year, but from.
From your comments it sounds like things are getting better. So can you just help us think per well.
Whether thoughts around that that number.
Coming down over the year on going up closer to when historically.
On a holdco assets starting on.
Tom on time.
Yeah, Hi, Elyse, it's Ed so.
As I said in the prepared remarks.
We're continuously assessing what's the appropriate level of conservatism for holding company cash and so I don't have a number to provide you, but I would say a couple of things generally about how we think about holding company cash number one I think it is appropriate to have a conservative view of holding company cash when you are.
Insurance company, just as a general overarching comment and the second thing I would say is debt.
I think a target for holding company cash is something that I would hesitate to put out given the fact that I think that target will change over time based on a variety of factors. So all I can do here is just reiterate what I said in the prepared remarks that we clearly are in a better environment.
<unk> markets better the economic outlook is better.
We seem to have a light at the end of the tunnel in terms of the pandemic and.
We continue to buy back a lot of stock I mean, if you look at our repurchases through early may it was more than 3% of our year end 'twenty shares outstanding So no more than 3% over a four month period, obviously is a very significant pace of buyback.
Okay. Thanks, and then my second question.
You know when you guys were talking about.
I know you mentioned within annuities.
Did you guys were ahead of expectations on this.
Can you just give us on you know on.
On outlook.
Occasions for the rest of the year and I'm assuming on.
Q1 was better perhaps on.
Continuing on to look better than you would have previously expected.
Just on the annuity side that would be great.
Yes sure. Good morning Smile speaking, so I guess, what I would say is that our expectations are that we will grow sales on our core products with an emphasis on shield flax and smart care we.
We do expect a decline in fixed deferred rate annuities.
But at this juncture, we feel like the growth in our core product sales should be able to offset the decline that we should see with fixed rate debt fixed rate deferred annuities.
Okay. That's helpful. Thanks for the color.
Our next.
<unk> coming from the lineup.
Tom Gallagher with Evercore Your line is open.
Good morning.
First question can you comment on the proposed changes to the economic scenario generator on.
On the VA framework, how do you think this plays out as it is.
Is it a potential real risk here or do you think it's going to be manageable.
Good morning, Tom It said.
So there's a lot of work to do on the ESG, it's going to take time and as you would expect we're actively involved in the process.
We believe that regulators and the industry are ultimately going to agree on an appropriate framework.
So what we'll see over time I would just point out debt.
We successfully managed through VA reform, which was a significant change in the regulatory framework for us and for others and we have a very strong balance sheet. So I feel very good about our position.
Okay. Thanks, and my follow up just I guess on the product side FERC first question as Youre hearing a lot more chatter about companies.
Entering the buffer annuity space curious what youre seeing there is that.
Is that negatively impacting pricing or.
Is it actually helping because of the awareness.
And kind of.
That aspect and then also.
Do you do you.
Yes.
Does the recent momentum and improvement in life insurance, you think kind of at the beginning of the bigger part of our diversification strategy for Brighthouse, where you think this could be become meaningful from a production standpoint down the road.
Hey, Tom It's Eric I'll start off and then I'm sure Myles and counter my jump in.
To your second point, yes on.
Life insurance you know, we said we were going to get back in this.
As a new business proposition, we kept all of our infrastructure as we were coming up with our flagship product smart care.
And we intend to grow at a year over year over year. We also entered the institutional spread margin businesses. I think you know we got a lot of experience on that that should be part provide both good returns on diversification. So I'm very happy with with how things are going on the on the product front.
Miles you want to add anything there.
As it relates to the competition in the in the <unk> category.
I think it is having some impact on our market share, but ultimately we've always felt that the good thing for.
Financial professionals as well as consumers, we really like the competitiveness of our product as Eric mentioned before the first quarter marked our best quarter ever for shield sales and we're really excited about some of these new enhancements that we're going to be introducing the product later this year, so as I just answered.
With the prior question, we do believe some of the momentum that we have with shield and flex and smart care could potentially offset the decline that we're seeing with fixed deferred rate annuities.
On Hey, Tom It's Conor I think part of your question at the outset was given the competition on the buffered space from a pricing perspective.
But everything.
Remains consistent there as well we're very.
Very happy with the economics and there is no change to that given the entrance like you said I think it's just made the awareness in the space, even broader and that's helping everybody.
So Conor no no feature drift or arm beginning of arms race occurring that.
That might compromise margins no. So we havent had anything noteworthy in recent quarters. We do have some changes that are coming on.
But they are more.
Remember, we're one of the older products in this space. So we have some changes that are.
There are enhancements to the product, but not ones that are difficult to hedge or are that would impact.
The economics in a meaningful way.
And in any way of note.
Okay. Thanks.
And our next question coming from the lineup Humphrey Lee with Dowling and partners. Your line is open.
Good morning, and thank you for taking my questions on.
My first question is on the fixed annuity the first day for annuity sales I understand you've talked about the repricing actions in the fourth quarter debt you would expect sales to come down, but I think the the drop off was pretty <unk>.
Surprise to me I was wondering if there was any call. It anything you can share in terms of the pricing changes that you've made as well as the general kind of competition in the marketplace.
Yes.
Hey, I'm free it's Conor.
Youre right.
We had a couple of rate declines last year. One in August one in December the December one was more meaningful than we had expected that we would have a significant decline in the nature of this space is that.
Those with the most competitive prices do get a lot of the business and on on our rate changes moved us down on the ranks a little bit as I said in in late fourth quarter. So the results for the first quarter in the fixed rate space very much in line with our expectations now when we're talking broadly we also have a couple of fixed.
Indexed annuities in this space and they're performing very much in line with expectations. They remain core products, we'll be somewhat opportunistic in the.
In the fixed deferred space I think everybody knows we were in that space with our with our reinsurance partners. So we are we reconsider rates frequently we do that in partnership with our reinsurance partner.
So again given the changes.
This is very much what we expected in <unk>.
In the early part of 2021.
Got it.
And then my second question is related to the RBC ratio, which at 500% to 520%, it's definitely very strong.
I was just wondering if you can provide a walk from the 485 at year end 2022 kind of where you are today given the.
Relatively.
Dan print on a statutory earnings this quarter.
Yeah, Good morning, Humphrey It's Ed.
So I guess I would start out by saying that for the balance sheet metrics. This quarter on a statutory basis overall, we had.
Material benefit from market factors. So the performance of the increase in interest rates on the performance of equities in the first quarter as well as the lagged impact of market returns on private equity. So that was really a driver here of statutory metrics across the board.
If you look at the balance sheet metrics of Tac and RBC. The key drivers for both of those would be the increase in interest rates in the quarter. So that is that's really what I would highlight.
As driving the sequential improvement in bulk.
Got it thank you.
And our next question coming from the lineup.
Andrew click on them with credit Suisse. Your line is now open.
Hey, Andrew This is David we.
We can't hear you maybe you're on mute.
Hey, operator, maybe we'll just go to the next question Andrew can dial back in.
Our next question coming from the line of Tracy <unk> with Barclays. Your line is now open.
Good morning, Nice to go back to the conversation on Ntic's economic scenario generator and couple that with your just Scrutable earnings scenario that is forward looking just wondering at this point on your projections influenced at all by the proposed methodology, which I understand there's arbitrage free.
Includes negative interest rate scenario and links interest rate to equity market movements.
Yes.
Yeah, Hi, Tracy said.
<unk>.
No and I wouldn't I don't know that I would say that there is even really.
Our proposal I think theres a lot of things that have been going back and forth and so I would be very careful to draw any conclusions around.
Anything thats come out early on here.
You know I think that obviously this is complicated and there are knock on effects from changes you might make to one input and I think all of this stuff has to be considered so theres really nothing to factor in in my opinion.
First of all second of all.
Distributable earnings tables, all were built upon the current statutory framework in the current ESG and reflect the mean reversion point declines over time.
Based on the different rate assumptions, which were basically either mean reverting to a 3% 10 year Treasury in 10 years or following the forward curve at year end 2020, and by the way the forward curve at year end 2020, I think as I said in my prepared remarks had the 10 year Treasury at 165 per.
<unk> at the end of 2025 and here we are four months into 2020 and were five basis points from there.
Okay. Thank you.
Calgon.
Also could you contextualize, how you balance preserving capital for growth versus buybacks and how reinsurance flow and the net.
So I keep on from Jackson.
Well, it's Ed again, I'll start and maybe others will want to chime in.
We are.
A key driver of this story long term is our distribution franchise the growth in our sales and the diversification of our book of business over time. So the way we're going to create real value. We believe is through this high quality.
Good return organic growth supplemented by substantial capital return and it's pretty simple playbook I think.
We don't we don't.
See any issue about having the capital to reinvest that is all built into our.
Total company distributable earnings tables that we provided in mid March and you know as you know new business strain upfront and then it produces cash over time so.
Over time, obviously, new business becomes a more significant contributor to the story.
Tracy, it's Eric I'll jump in as well.
Look we are extremely pleased with our holding company cash RBC ratio et cetera of the balance sheet is in great shape.
As we think about that that dynamic of capital versus buybacks. So I can tell you is that already said, we've repurchased more than 29% of our shares outstanding more than 3% of our shares outstanding This year and I can tell you. We are very focused on hitting both our expense.
Our goal this year and our capital return target.
Okay. Thank you.
And our next question coming from the line of Erik bass with.
I don't know illness research your line is now open.
Hi, Thank you just hoping you could help us think about the linkage between higher interest rates and distributable earnings.
Roughly equivalent to the 202 on the $250 million per 25 basis point change.
In this scenario generator is that a reasonable kind of estimate and then how quickly does that emerge in terms of your distributable earnings.
Yeah, Hi, Eric had said so low.
Let me try to help a little bit here. So if we go back to the tables that we disclosed on distributable learnings in mid March we included a comparison between two scenarios, where the only difference in the scenarios, where the interest rate assumption.
So under the one scenario we had rates following the mean reversion path. So there's 3%.
At the end of 10 years for the 10 year now just clearly that to be clear. That's the GAAP mean reversion assumption that we've assumed not has nothing to do with the scenario generator in the scenario generator is right now $3 25 for the 20 year Treasury and the mean reversion period for that is much longer than 10 years multiples of that.
So anyway, if you looked at the difference between these two scenarios we showed in March.
<unk> had this following our GAAP mean, reversion path, which had the 10 year Treasury at 197 basis points at the end of five years I believe was 197.
And the other was following the forward curve.
As of year end 'twenty, so that had it at 165 basis points at the end of five years. So the only difference in this scenario was.
Ending at 32 basis point higher 10 year in five years and that led to an $800 million difference in distributable earnings over a five year period.
Given that the 10 years at $1 60 today I think it's fair to assume that the benefit is probably is probably more than what was indicated by that.
Scenario comparison.
In terms of the question about the mean reversion point.
As you know from following this industry closely for a long time I think you've got to be very careful about assuming linearity when it comes to anything.
I would say that if you look at the mean reversion point change next year.
We do see some consistency in the impact we would expect next year with what we just realized in the first quarter.
Got it. Thank you that's helpful. And then maybe one other one on the distributable cash flow slides you show a projected cash flow from non VA blocks and new business of roughly $3 billion plus over the next 10 years on your base scenario.
What timeframe do you expect to start generating material distributable earnings from your non VA block and kind of what does that assume for sales growth over that period.
Yes.
Yes, so I think.
If we look at the the breakeven period for our.
For our for our annuity sales.
We said, it's in the five to seven year range.
So I mean that should give you some sense of.
How it plays out and in the in the day tables.
Got it so it was sort of halfway you're showing a 10 year period. So about halfway through I guess, you would reach that crossover point, where it becomes a contributor to cash flow.
I mean, thats a reasonable assumption.
Okay. Thank you.
And our next question coming from the line of John Barnidge with Piper Sandler Your line is open.
Thank you very much you've done a great job of reducing operating expenses is there any weighted dimension how much of the reduction in one Q 'twenty. One is maybe onetime COVID-19 related lack of activity in nature versus planned reductions.
Hey, John it's Eric.
Yes.
It's small.
And as we think about our projections going forward look nobody knows exactly what's going to happen a year from now two years from now.
We're going to be focused on on having a super tight.
Spence ratio no matter, what but it's not that meaningful.
Okay. Thank you and then the follow up to that is with presumably employees returning to office in the coming months is there like a step function higher on operating expenses, and we should be thinking about or no.
No.
I think anything going forward, you know like longer term, let's go John let's call. It like medium term I think it would be a little lower versus a little higher.
Yes, John I'd say, the only thing I would add to that there is some seasonality as you have seen in the expense and so they tend to be lower in the first quarter on higher in the fourth.
Okay. Thank you for your answers.
And our next question coming from the lineup so need come on with Citi. Your line is now open.
Thanks, just on a statutory basis I noticed that you didn't take any dividends out in the first quarter is that just because you're holding company liquidity position is so strong and what are your expectations for dividends and the balance of the year.
Yes, Hi, Sidney just said there's no change in what we've said before which is we expect to take around $300 million a share.
Got it and then and then I guess, if we think about kind of your prior comments about earnings power.
I know there were some notable items and then some other variances, but if we kind of adjust for everything that you have on your slide deck, where getting to something like $3 21 per share.
I think on prior calls you've talked about more of a $3 run rate.
Was there anything kind of onetime in nature related to kind of market impacts or anything like that that we should be thinking about that kind of impacted first quarter results or is the 321 pretty close to your roughly $3 run rate.
Well I'm going to leave the penny out of the discussion here.
In the past I've said, approximately $3 a share which.
Hi.
There was a reason I use the word approximately I do think it's fair to say that given the market increase the increase in separate account balances.
I think you'd probably do shaded a little higher than where we were in the last couple of quarters.
Okay. Thanks.
And our next question coming from the lineup.
Andrew <unk> with credit Suisse. Your line is open.
Hey, Good morning can you hear me now.
Yeah, we can hear you Andrew.
Good good thank you Eric.
Just wanted to follow up on the question Humphrey was asking a bit earlier about <unk> and the pricing action could you be a little more specific on how much you cut crediting read and then given that rates have come up so much in the first quarter.
On <unk>.
Can you be back in the mix pretty soon and competitive.
Yeah, Hey, Andrew it's Conor. So we are we have some various products in this space, we have a three year or five year or seven year.
The changes that we made in the fourth quarter, we were aggregating previously, Iran kind of 2% level a little less for the for the three year now we're aggregating a little closer to the call. It the one on behalf, but again on a below that for the three year.
We actually had a modest increase in the second quarter, but it really was modest again in partnership with our reinsurer that I would say keeps us roughly in the same competitive position we were in Q1 as well so.
Okay. So yes, okay.
And with regard to mortality.
It's just been very interesting with the different performances of the companies, but you cited basically.
$90 million impact from weaker than expected underwriting results of which 45 million was attributable to COVID-19. So I'm kind of curious as to what the drivers of the non COVID-19 figure where.
Was this partly indirect pandemic related.
Claims.
And then with regard to the 20 $29 million charge that you cited from actuarial system conversions associated with the company's transition to future state platform.
Was this driven by Universal life with secondary guarantees.
Yeah, Hi, Andrew list so.
A couple of things.
First of all.
The the driver of the $90 million the primary drivers of the $90 million to get to a normal quarter and when we say normal quarter, we mean.
The average of the full year quarters. So there can be some noise related to seasonality. Okay. So just keep that in mind, but the big drivers we highlighted were.
COVID-19 claims as well as the reinsurance offset so we obviously.
Have a reinsurance benefit in every quarter and that percentage benefit can bounce around and this quarter happened to be one of the lowest quarters we've seen.
It's nothing more than noise I would say and if we look at our direct claims which to me is I think more indicative of the health of the block of business.
You've heard me say in the past that direct claims in the neighborhood of $4 to $500 million a quarter is sort of where we hang out and.
If you look at our direct claims ex COVID-19, we were right in that range. So I don't see anything going on with mortality that.
Makes me worry about any systemic issue with severity or frequency.
Got it.
Mhm.
Sorry go ahead.
Yes.
Generally if you isolated out the reinsurance who would have been a pretty normal and the COVID-19. It would have been a pretty normal mortality quarter then.
Yes, yes, sorry.
And then you asked about the $29 million.
Yes, yes, yes, so we are.
We're in the process as you know are transitioning to our future state operating platform that that involves on actuarial transformation, which includes.
Moving to new models under our new platform and what you saw this quarter was the impact of converting the USG business.
And.
$29 million, if you consider it relative to a reserve balance for U L. S. G on a GAAP basis of almost $8 billion.
It's less than 40 basis points of the reserve balance so.
I don't consider that to be a material movement for a model conversion of that size.
And the other thing I'd say is youre going to see this from time to time as we have conversions I mean, we have future conversions planned for this year.
You will see this and I would just caution you that it can be positive or negative. So it's not always going to be a negative number would be my guess.
Perfect very helpful.
And our final question coming from the line of Tom Gallagher with Evercore. Your line is open.
Hey, Thanks, I just wanted to come back to.
I guess the discussion you have with Eric.
And I realize these things are never linear but.
I think I heard you say, if we roll forward to year end 'twenty.
'twenty, one or 'twenty 'twenty, two that you would have a favorable adjustment of 25 basis points from the mean reversion assumption.
Debt you embedded.
That caused it was negative $200 million to $250 million negative adjustment this quarter.
If all of that right and I just wanted to be clear on the timing of this would you expect to have.
Directionally similar positive adjustment.
Statutory capital of 200 to 250 million going the other way.
If you can sort of give a little more clarity on what you would expect.
Yes, sure Tom So what I said was in our distributable earnings.
On disclosure, we had assumed that the mean reversion point would come down by 25 basis points of this year.
And an additional 50 basis points next year.
Where rates are today.
The decline next year would be only 25 basis points.
Not the 50 basis points that we had factored into our.
Our assumptions.
And what I also said is that while I would caution against assuming linearity for anything that we talk about.
It's I think it's fair to say at least based on what we're looking at today.
That.
The next 25 basis point impact on.
Norm stat would probably be in the range of what you saw in the first quarter this year.
That mean reversion.
Change for next year would also be in the first quarter as it was this year.
Got it so it would be one Q2 thousand 22 is when the adjustment would be made.
Right and what we're saying is that that adjustment today would still be down, but it would be down by less than what we had built into the stuff. We've provided you.
Understood. Thank you.
I'm not showing any further questions at this time I would now like to turn the call back over to David Rosenbaum for any closing remarks.
Alright, Thank you and thank you all for joining us today and for your interest in Brighthouse financial and have a great day.
Ladies and gentlemen that does conclude our conference for today. Thank you for your participation you may now disconnect.
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