Q2 2021 Brighthouse Financial Inc Earnings Call

August 6, 2021

[music].

Good morning, ladies and gentlemen, and welcome to the Brighthouse Financial's second quarter 2021 earnings Conference call.

My name is Howard and I will be your coordinator today.

At this time all participants are in a listen only mode. We will facilitate a question and answer session towards the end of the conference call in fairness to all participants please limit yourself to 1 question and 1 follow up.

As a reminder, the conference is being recorded for replay purposes also we ask that you. Please 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. Rosenbaum you May proceed.

Good morning, and thank you for joining Brighthouse Financial's second quarter 2021 earnings call.

Our earnings release Slide presentation, and financial supplement were released last night and can be accessed on the Investor Relations section of our website at Brighthouse financial Dot com.

We encourage you to review all of these materials.

Today, you will hear from Eric Steigerwalt, our President and Chief Executive Officer, and Ed <unk>, Our Chief Financial Officer.

During 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 mild 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 Law 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 filings with the U S Securities and exchange.

<unk> Commission information discussed on today's call speaks only as of today August 6.2021.

The company undertakes no obligation to update any information discussed on today's call.

During this call. We will also be discussing certain financial measures used by management that are not based on generally accepted accounting principles also known as non-GAAP measures reckon.

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 include 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 and your loved ones are remaining safe and well.

Today, I will discuss our second quarter results and provide some perspectives on the continued execution of our strategy.

Brighthouse delivered strong results in the second quarter investment.

Income from alternative investments was very strong given the first quarter market performance as a reminder, alternative investment income.

Is generally reported on a 1 quarter lag.

The underwriting margin was in line with the prior quarter, but lower than a more normal quarter.

We delivered another quarter of strong sales results and we continued to prudently manage expenses.

Our balance sheet and liquidity position remained robust in the second quarter and our hedging program performed as expected.

We estimate that our combined risk based capital or RBC ratio range was between 480% and 500% well above our target of between 400% and 450% in normal markets.

Additionally, we ended the quarter with liquid assets at the holding company of approximately $1.6 billion, which includes a $250 million ordinary dividend paid to the holding company from Brighthouse life insurance company or Blake.

Ed will provide more details on our financial results shortly.

As we have said before our strategy has remained focused on growing sales.

Managing expenses unlocking capital and repurchasing our common stock.

Let me provide a few perspectives on each of these pillars.

Starting with sales I am very pleased with our results from the second quarter.

Annuity sales were approximately $2.3 billion up 25% compared with the second quarter of 2020 and ahead of our expectations.

We reported record sales this quarter for both our flagship shield level annuities, and our variable annuities with flex choice access.

Additionally, we generated approximately $26 million of life insurance sales in the second quarter of 2021 also ahead of our expectations.

I remain very pleased with the progress that we're making as we continue to execute on our life insurance strategy.

We remain focused on enhancing our existing suite of products as well as further expanding our distribution footprint.

Earlier this week, we launched several enhancements to our shield level annuities.

We believe these enhancements bolster the competitiveness of shield, while also continuing to provide value to our distribution partners and the clients they serve.

Also in July we further grew our distribution footprint for smart care.

As we execute our life insurance strategy, we expect to continue to add distribution partners.

Bring on additional wholesalers.

And enhance and add to our product mix.

Total annuity net outflows were $735 million in the quarter.

<unk> outflows were partially offset by continued strong sales.

As we've said many times 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, coupled with the run off of older less profitable business.

Turning to expenses.

Corporate expenses, which do not include establishment costs were $218 million in the second quarter.

Establishment costs were approximately $29 million.

We previously committed to a cumulative $175 million 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 remain focused on achieving the remainder of our expense reduction commitment in 2021.

With that said as I've said before we will continue to invest in our infrastructure as we seek to enhance the support we provide our distributors and their financial professionals as well as our policyholders and contract holders.

Moving to capital.

We continue to focus on optimizing statutory capital to support our balance sheet strength and our share repurchase program.

I am extremely pleased to announce that in July we received regulatory approval to take a $600 million dividend from Brighthouse reinsurance company of Delaware or BRC D. As we foresee as we refer to it too.

<unk> parent company Black.

Since 2019, we have unlocked almost $3 billion of statutory capital, including $1 billion related to the derisking of our variable annuity hedging strategy.

Lastly, let me discuss our stock repurchase program.

In the second quarter of 2021, we repurchased approximately $125 million of our common stock.

And since the end of the second quarter through August 4 we repurchased an additional approximately $53 million of our common stock.

Since the announcement of our first stock repurchase authorization in August of 2018 through August 4th of this year.

We have repurchased almost 1.3 billion of our common stock.

This represents a reduction of more than 31% of shares outstanding.

From the time, we became an independent public company.

Last night.

We announced a new authorization to repurchase up to an additional $1 billion of our common stock.

We are very pleased with this new authorization as it reflects our financial strength positions.

Positions us to achieve our goal of returning $1.5 billion to our shareholders by the end of this year.

And supports our ongoing commitment to return capital to our shareholders.

Before turning the call over to Ed.

I'd like to take a moment to congratulate David Rosenbaum, who recently assumed the role of head of product strategy and pricing for Brighthouse.

As I'm sure. Many of you know David has served as head of Investor Relations for Brighthouse since our launch in 2017 and his responsibilities expanded in 2019 to include financial planning and analysis.

David has been pivotal in driving our financial strategy over the last number of years and I and we are excited for him in his new role.

I am also very pleased to share the Dana Monte has succeeded David as the head of bright of Brighthouse as Investor Relations program.

Dana has also been with Brighthouse since our launch as part of our finance organization and most recently as director of Investor Relations and we are thrilled that she has taken on this new role.

To wrap up Brighthouse delivered strong results from the second quarter sales were better than our expectations.

We continued to prudently manage expenses and we repurchased more of our common stock in the quarter.

Our balance sheet and liquidity position remained robust.

Additionally, we unlocked more capital during the quarter and our new authorizations supports our ongoing commitment to returning capital to our shareholders.

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.

Today, I will discuss our robust capital position as demonstrated by the preliminary statutory results we reported yesterday.

I will also provide a few comments on adjusted earnings.

At June 30th combined statutory total adjusted capital or Tac was approximately $9.4 billion.

Which was unchanged from March 31.

Even though we paid a $250 million dividend from Brighthouse life insurance company or Blake to the holding company.

This blip dividend was consistent with the 2021 dividend plan I communicated on our fourth quarter 2020 earnings call.

Tac benefited from the increase in equity markets in the second quarter.

And strong investment performance and our alternatives portfolio.

Capital strength is a top priority and we continue to look for opportunities to optimize statutory capital.

The regulatory approval of a $600 million dividend from Brighthouse reinsurance company of Delaware or BRC D is the most recent example of these efforts.

We intend to take this dividend up to blip in the third quarter.

This additional capital further enhances an already strong capital position at Brighthouse life insurance company.

And we plan to take another dividend from this entity to the holding company in the fourth quarter of this year.

At June 30, we estimate that our combined risk based capital ratio or RBC ratio.

Was between 480% and 500%.

The change in the RBC ratio from the first quarter range of 500% to 520% is primarily explained by the $250 million blick ordinary dividend paid to the holding company.

Additionally in June the National Association of insurance Commissioners are NTIC adopted changes to the RBC factors for bonds and real estate.

Assuming these factor modifications are effective on December 31, 2021, we estimate the changes will have a mid single digit negative impact on the RBC ratio.

And this impact is included in the estimated range of $480 to 500%.

The RBC ratio remains well above our target range of 400% to 450% in normal markets.

Starting with preliminary statutory results, we reported breakeven normalized statutory earnings during the first 6 months as.

As the positive equity market performance in the first half of 2021 was offset by the negative impact from interest rates and non VA results.

Holding company liquid assets were approximately $1.6 billion at the end of the second quarter unchanged from the first quarter.

Shifting to adjusted earnings set.

Second quarter adjusted earnings excluding the impact from notable items were $458 million.

Which compares with adjusted earnings on the same basis of $428 million in the first quarter of 2021 and $39 million in the second quarter of 2020.

We had 1 notable item in the quarter establishment costs of $23 million after tax which was included in corporate and other.

When we think about the adjusted earnings results compared with our quarterly adjusted earnings expectation there are 2 key themes.

First net investment income was very strong primarily due to an 11, 5% alternative investment yield in the quarter.

This was the second quarter in a row that the quarterly return in alternative investments exceeded the 9% to 11% annual return we anticipate for this asset class.

Excess return is the primary driver of approximately $225 million of additional after tax earnings relative to the quarterly run rate expectation.

Second while the underwriting margin was consistent with the first quarter. It was approximately $70 million lower than the quarterly run rate expectation on an after tax basis.

The underwriting margin included $37 million of pre tax net claims related to COVID-19, and overall, we had a lower than normal benefit from reinsurance in the quarter.

We anticipate potential volatility in underwriting on a quarterly basis, driven by fluctuations in a number of factors, including frequency of claims severity of claims and the offset from reinsurance.

Overall, we believe that our quarterly adjusted earnings run rate is in the range of $3 to $3.20 per share.

Turning to adjusted earnings at the segment level on.

Annuities adjusted earnings excluding notable items were $338 million in the quarter <unk>.

Sequentially results were driven by lower reserves as a result of the favorable market.

Mostly offset by higher expenses and lower net investment income.

In the life segment adjusted earnings excluding notable items were $68 million in the quarter.

On a sequential basis results reflect lower DAC amortization, a higher underwriting margin and higher net investment income.

The runoff segment reported adjusted earnings excluding notable items of $122 million in the quarter.

Sequentially results were driven by higher net investment income, partially offset by a lower underwriting margin.

Corporate <unk> other had an adjusted loss excluding notable items of $70 million.

Sequentially results were driven by higher expenses on a lower tax benefit partially offset by lower total preferred stock dividends.

Include I am very pleased with our results this quarter.

We maintained our robust capital and cash position and we continue to return a meaningful amount of capital to shareholders.

We announced a new common stock repurchase authorization of up to an additional $1 billion, which supports our ongoing commitment of returning capital to shareholders.

And we received regulatory approval to unlock $600 million of capital from <unk>.

We remain focused on executing our strategy and committed to using a multi scenario multiyear framework to determine the appropriate level of capital returned to shareholders.

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

Ladies and gentlemen, if you have a question on comment. Please press Star then 1 on your telephone keypad.

If your question has been answered or you wish to remove yourself from the queue simply press the pound key.

As a reminder, we ask forget you. Please ask 1 question and 1 follow up.

Again, if you have a question or comment at this time. Please press Star then 1 on your telephone keypad.

Our first question or comment comes from the line of Ryan Krueger from K VW. Your line is open.

Hey, Good morning, Ed I think you mentioned in the prepared remarks that you plan to take another dividend from Blake in the fourth quarter can you give us any sense of sizing there.

Sure Good morning, Ryan.

So we have.

Almost $500 million of remaining ordinary dividend capacity at Blake and I would expect we to take at least half that amount.

Got it thanks and then.

Does the.

Now that you've gotten another $600 million out of BR BB does.

How does that influence your your dividend plans that are out of lick beyond this year I guess that gives you gives you a bit more mark question to think about it teams.

Well I'd start by saying, we feel very good about the the capital position at our operating companies as well as the holding company cash position and we are better.

We're in a better position.

Day with with.

With the RBC ratio than we would have anticipated at the beginning of the year.

And as you know the.

The number in the second quarter does not reflect the $600 million be RCD dividend. So I would just say that we continued to manage the company to make sure that we are appropriately capitalized in using this multi year multi scenario framework that we've talked about and that we.

So you when we disclose our day tables.

And.

That's going to continue to drive our decisions about capital management.

Thanks, just 1 more follow up on that.

I guess now that you've got $1.2 billion.

The dividend approved out of <unk> or are the reserves now I get closer to your view of where of appropriate reserves did you.

Additional capacity longer term.

So as you've heard us talk about the primary means to assess the capital position of the RCD as our cash flow testing margins and even after this.

This dividend we continue to have I consider very strong cash flow testing margins and <unk> and remember we look at that under a multitude of scenarios.

Got it thank you.

Thank you. Our next question or comment comes from the line of Humphrey Lee from Dowling and partners. Your line is open.

Good morning, and thank you for taking my questions.

Thinking about the.

1 billing on share repurchase authorization, how should we think about the pace of the buyback going forward is there any reason why we should not look at the historical pace as a guidepost.

I'll start Humphrey.

I think it would be smart to look at that history as a guidepost.

Obviously, we feel great about our flexibility here.

Youre going to give a little help right.

Once you give a little help a little help or so.

We don't think it's in the best interest of shareholders to discuss future buyback plan. So.

I'll tell you what we've done and as Eric said I think we have a strategy and I would expect that that strategy would continue.

If we look at the last couple of years.

Our repurchases have typically been in that 4% to 6%.

Average daily market volume.

<unk>.

If you look at the early stage of the pandemic because of the opportunity. We saw we ramp that up to about 16% of average daily market volume due during.

A couple of month period so.

We know how important returning capital is to shareholders in financial companies and I think the fact that through.

August 4th we've repurchased.

31% of our shares outstanding since separation.

I would say that that illustrates.

That illustrates our commitment to capital return.

Okay got it.

Switching back to be RCD.

The.

Definitely a positive development debt.

On a 600 billion all of it.

The timing was probably quicker than I thought.

Now.

<unk> taken $600 million okay.

Ill be RCD 2 years in a row.

Is that the than the pace that we should expect or is it as any weighted to help us to think about like the.

The the dividend capacity out of the FCB.

So.

I wouldn't suggest that you start to build in some.

Pace based on 2 data points.

I would say that again, we feel very good about the cash flow testing margins at BRC day and.

That is the reason that debt.

We ask the regulator to allow us to take this out and the reason that the regulator agreed I believe is because of the fact that those cash flow testing margins remained strong.

Okay alright, thank you.

Thank you. Our next question or comment comes from the line of Elyse Greenspan from Wells Fargo. Your line is open.

Hi, Thanks, My first question on.

The EPS that we report.

And then I guess.

For a couple of items you pointed out.

Getting into better al.

I guess around from day around <unk>.

You guys gave the range of $3.20.

Plenty of the run rate from.

Other 1 off items on the quarter.

From kind of normal level underwriting volatility when you get that kind of quarterly run rate.

<unk>.

Good morning, Elyse. So as you can imagine there are a number of items every quarter that.

Our off trend and I would say, we called out the 2 big ones this quarter in our and our and our disclosures around underwriting and alternative investments.

But the 1 notable item that we did not call out debt.

Was the bigger 1 of the remaining would be market impact, which was favorable in the quarter.

And so that's really what that's really what.

That drove our decision to.

To give a different or lower range than what the 2 items that.

We highlighted would suggest.

Okay.

And then on.

In terms of.

Shifting back to capital Hey.

Since the pandemic line of also maintained a healthy level of capital on the holding company with the new buyback.

And also they are more uncertainty that we're coming out of the pandemic are there any thoughts about kind of changing the buffer. Thank you.

We're looking to hold at the hotel whether that's later on to hearing from you guys are thinking about from 'twenty 2.

Okay. So.

Last quarter I made some comments about how we were assessing the appropriate level of conservatism in our holding company cash position and I think the answer to the outcome of that assessment was our decision to ask the board for a $1 billion repurchase authorization, which is equivalent to 26% of our equity.

Market cap.

And is 2 times the largest previous authorization.

Okay. Thank you.

Thank you again, ladies and gentlemen, if you have a question on a comment at this time. Please press Star then 1 on your telephone keypad. Our next question or comment comes from the line of John Barnidge from Piper Sandler Your line is open.

Thank you can you talk about the growth in the life insurance business sales, maybe expectations going forward and do you anticipate like do you see this is coming from brought in on a distribution a.

A pull forward from raised awareness or really.

Shifting to a higher gear. Thank you.

Yeah.

Yes sure this is mark.

Myles happy to take the question so.

We're really pleased with the progress that we continue to make with.

<unk> care sales.

And as Eric mentioned in some of your prior comments, we continue to expand distribution.

Over the last few weeks, we've been able to bring in about a half a dozen new firms.

We have expanded strategically through 2 partnerships into the Bgea space and that is now providing us access to approximately 13000.

New advisers, which we're very excited about but the product itself.

Great product, it's very competitive as it relates to the indemnity benefit that it has.

And.

The policy has the opportunity for cash value growth based on and to see performances that coupled with the fact that a few major national distributors have really embraced the product on doing a great job on selling it coupled with the fact that we continue to grow our sales force in the region.

And why we expect to see continued growth with smartcard moving forward.

And John It's Conor let me just add 1 comment to underscore we filled almost as much smart care in the first half of 2021 as we build on all of last year.

But we have we're also working on some other life products to round out that suite as well so you'll see those in the future.

Okay.

Maybe the follow up to that is and thanks for the answers there that was helpful.

We're having good distribution on the annuity side on top of life.

Some of your expenses are variable obviously, some are fixed given the outlook for distributions.

Constructive how should we think about operating expenses within that day. Thank you for the answers.

Thank you our next question or comment Oh, sorry, sorry, sorry, we have to answer that.

Yeah.

Ah.

So on operating expense corporate expenses were the <unk>.

First half of the year $421 million.

On that.

That's lower than what we would anticipate it would be in the second half of the year.

As you can imagine travel is it still.

Low relative to what we budget and there are some other <unk>.

Some other areas, where we would expect more expense in the second half of the year.

But I don't know Eric if you have any further comments.

Just say sort of strategically we're investing in distribution.

We're investing both operationally and in distribution itself and that's going to continue so.

I am pleased with where we are on expenses and that includes investments that were making now on are going to make in the future.

Thank you.

Thank you. Our next question on comment comes from the line of Zach buyer from Autonomous Research. Your line is open.

Hi, good morning.

Just had a quick question you've done a few funding agreements year to date.

Curious kind of how big of an opportunity do you see this becoming and how quickly do you expect it to ramp up they also kind of where where should we find the results.

So this kind of nascent line of business and your and your reported.

Hi, Zack it's John.

We think this is really an attractive space to be in as it will enhance our overall business profile and provide good risk adjusted returns and product diversification.

Bit premature to talk about how big we think the business is going to be or what kind of earnings power. It may have.

Just beginning to grow it but so far things are going extremely well. The program started in April and we currently have about $4 billion of outstanding balances.

And we look forward to talking to you more about it in the future as this business grows.

It's Eric I'll, just add it sits in corporate and other and Thats, where it will probably sit for a while.

Thank you.

Thank you again, ladies and gentlemen, if you have a question or comment at this time. Please press Star then 1 on your telephone keypad.

I have a follow up from Mr. Ryan Krueger from K B W. Your line is open.

And could you provide a little bit more detail on the normalized Stat earnings then I guess in particular I would've thought given the favorable equity markets and the favorable alternative investment income they would've been a bit stronger can you give some perspective on the assets.

Sure.

I think the first thing to recognize is that.

Most of the benefit that we're seeing from the alts is coming through and unrealized gains and so thats going directly to attack. It is not included in normalized statutory earnings.

So.

That's 1 of the reasons that you see the.

The disconnect between perhaps some of the other statutory metrics and and norm stat. The second thing is debt.

We have had 2 quarters, so the year to date.

<unk> for non VA have been.

Less favorable than what we would normally anticipate.

And you've heard us talk about mortality now for 2 quarters and that's that's a factor and then the <unk>.

First quarter, we talked about I believe we talked about good VA results. Despite the fact that we absorbed the full year impact of the lower mean mean reversion point for the statutory accounting framework and I think we identified that as being a $200 million to $250 million hit in the first quarter, which represents the annual amount.

Of that.

Of that change.

And.

And in the second quarter as you know interest rates came down. So we didn't we did have a negative impact from rates in the second quarter, both on the VA business as well as a modest impact in our fixed indexed annuity liabilities.

Just on that last point on.

So on the lower right you have to reflect the lower starting point.

There was no additional meaner version.

Impact is that correct.

No.

Got it thank you.

Thank you I'm showing no additional questions in the queue at this time I would like to turn the conference back over to MS. Dana on monitoring for any closing remarks.

Thank you all for joining us today and for your interest in Brighthouse financial I look forward to working with you have a great day.

Ladies and gentlemen, thank you for participating on today's conference. This concludes the program you may now disconnect everyone have a wonderful day.

[music].

Good morning, ladies and gentlemen, and welcome to the Brighthouse Financial's second quarter 2021 earnings Conference call My.

My name is Howard and I will be your coordinator for today.

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

Good morning, and thank you for joining Brighthouse Financial's second 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, you will hear from Eric Steigerwalt, our President and Chief Executive Officer, and Ed <unk>, Our Chief Financial Officer.

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

<unk> Commission information discussed on today's call speaks only as of today August 6.2021.

The company undertakes no obligation to update any information discussed on today's call.

During this call we will also be discussing certain financial measures used by management.

Not based on generally accepted accounting principles also known as non-GAAP measures reckon.

Reconciliations of these non-GAAP measures on a historical basis to the most directly comparable GAAP measures and related definitions maybe found on the Investor relations portion of our website and on our earnings release slide presentation or financial supplement and finally references to statutory results include certain statutory basically measures used by.

Management are preliminary due to the timing of the filing of the statutory statement 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.

Today, I will discuss our second quarter results and provide some perspectives on the continued execution of our strategy.

Brighthouse delivered strong results in the second quarter.

Investment income from alternative investments was very strong given the first quarter market performance as a reminder, alternative investment income.

Is generally reported on a 1 quarter lag.

The underwriting margin was in line with the prior quarter, but lower than a more normal quarter.

We delivered another quarter of strong sales results and we continued to prudently manage expenses.

Our balance sheet and liquidity position remained robust in the second quarter and our hedging program performed as expected.

We estimate that our combined risk based capital or RBC ratio range was between 480% and 500% well above our target of between 400% and 450% in normal markets.

Ed will provide more details on our financial results shortly.

Yeah.

As we have said before our strategy has remained focused on growing sales.

Managing expenses unlocking capital and repurchasing our common stock.

Let me provide a few perspectives on each of these pillars.

Starting with sales I'm very pleased with our results in the second quarter.

The annuity sales were approximately $2.3 billion.

25% compared with the second quarter of 2020 and ahead of our expectations.