Q3 2021 Brighthouse Financial Inc Earnings Call
Good morning, ladies and gentlemen, and welcome to Brighthouse Financial's third quarter 2021 earnings Conference call. My name is Jonathan and I will be your core.
Coordinator today at this time all participants are in 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 one question and one follow up as a reminder, the conference call is being recorded for replay purposes also we ask that you refrain.
I'm using cell phones speaker phones or headsets joined the question and answer portion of today's call I'd now like to turn the presentation over to Dana Amante head of Investor Relations Sir you.
You May proceed.
Good morning, and thank you for joining Brighthouse Financial's third 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.
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 remarks, we will open the call up for a question and answer period.
Also here with us today to participate in the discussions are other members of senior management.
Our discussion during this call may 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.
The U S Securities and Exchange Commission inferred.
Information discussed on today's call speaks only as of today November five two.
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 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.
I now will turn the call over to our CEO Eric Steigerwalt.
Thank you Diana and good morning, everyone. Thank you all for joining.
Brighthouse delivered strong results in the third quarter of 2021, as we continued to execute on our strategy.
Focused on growing sales.
Managing expenses.
Unlocking capital and repurchasing our common stock.
Beginning with sales I am very pleased with our strong sales results this quarter.
Total annuity sales were approximately $2 $4 billion in the third quarter up 1% compared with the third quarter of 2020.
We reported another quarter of record sales for both our flagship shield level annuities.
And our variable annuities with flex choice access <unk>.
Combined our VA and shield product sales were up 54% compared with the third quarter of 2020 and ahead of our expectations.
Fixed rate annuity sales were lower quarter over quarter as expected as we took re pricing actions in the second half of 2020, given the low interest rate environment.
The continued strong sales in the third quarter considerably offset annuity outflows.
Total annuity net outflows were $587 million in the quarter.
As we said previously we expect to see the continuation of a favorable shift in our business mix 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.
Our life insurance sales in the third quarter were also ahead of our expectations and up 4% compared with the second quarter of 2021 at approximately $27 million.
I remain very pleased with the progress that we're making as we continue to execute on our life insurance strategy and work to add distribution partners.
Bring on additional wholesalers and enhance and add to our product mix.
In the third quarter, we further grew our distributions.
For our flagship life insurance product smart care by strategically expanding into the brokerage General agency or Bgea distribution channel.
And adding new firms, resulting in approximately 14000 additional financial professionals.
<unk> access to smart care.
We remain focused on further expanding our distribution footprint.
As well as enhancing our existing suite of products.
In August we announced the launch of several enhancements to our shield level annuities.
We are excited about these enhancements, which we believe further bolster the attractiveness of shield to our distribution partners and the clients they serve.
Before moving on from sales.
Like to take a moment to thank our distributors for their outstanding partnership.
And all the work they do every day on behalf of our clients and our customers.
Moving to expenses.
Third quarter corporate expenses.
Which do not include establishment costs were $222 million in line with our expectations.
Stablish meant cost work for approximately $25 million.
We previously committed to a cumulative $175 million reduction in corporate expenses by year end 2021 relative to our first year as a public company.
We remain focused on achieving our expense reduction targets.
With that said, we will continue to invest in our infrastructure to enhance the service and support we provide our distributors and their financial professionals as well as our policyholders.
Turning to capital.
In August.
<unk> House reinsurance company of Delaware, or BR, CD paid a $600 million extraordinary dividend to its parent company Brighthouse life insurance company or black.
We continue to focus on optimizing statutory capital.
To support our balance sheet strength.
Our strong statutory balance sheet and substantial holding company cash continue to support our robust common stock repurchase strategy.
In the third quarter of 2021, we repurchased approximately $149 million of our common stock.
And through November 2nd we repurchased an additional $61 million.
Of our common stock.
Since the announcement of our first stock repurchase authorization in August of 2018 through November 2nd of this year, we have repurchased a total of more than one 4 billion of our common stock.
This represents a reduction of more than 34% of shares outstanding from the time, we became an independent public company.
And brings us to almost 95% of the way to achieving our capital return target of one $5 billion by the end of this year.
We also have approximately $877 million remaining under our current $1 billion stock repurchase authorization.
We announced this past August.
Moving to other results in the third quarter as I said Brighthouse delivered another quarter of strong results, our balance sheet and liquidity position remained robust in the third quarter.
And our hedging program performed as expected.
We estimate that our combined risk based capital or RBC ratio was between 520% and 540%.
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 5 billion.
Adjusted earnings results overall were ahead of expectations as investment income from alternative investments was very strong given the second quarter market performance.
And the underwriting margin was higher than the prior quarter.
In addition, as I mentioned earlier, we delivered another strong quarter of sales results and we continued to prudently manage expenses.
And we will provide more details on our financial results in a moment.
To wrap up.
I'm very pleased with the progress that we've made as we continue to execute on our focused strategy.
Sales in the third quarter were better than expected and we continued to expand our distribution footprint and enhance our product portfolio.
In addition, we repurchased more of our common stock, bringing us as I said to almost 95% of the way to achieving our goal of returning $1 5 billion to our shareholders by the end of this year.
We remain focused on our mission to help people achieve financial security and on our strategy, which we believe will enable us to generate long term value for our shareholders our distribution partners.
Clients they serve.
With that I'll turn it over to Ed to discuss our financial results in more detail.
Ed.
Thank you, Eric and good morning, everyone.
I am very pleased with third quarter financial results and the strength of the balance sheet.
Which is demonstrated by the preliminary statutory results and holding company cash we reported last night.
As noted in the earnings materials results.
Our results for the third quarter of 2021 reflects the impact of our annual actuarial review.
This review is a substantial undertaking as we evaluate all of our long term assumptions.
Overall, the assumption update had an unfavorable impact of GAAP net income of $116 million.
There were no significant changes to policyholder behavior assumptions for variable annuities or VA.
Or mortality assumptions for life insurance.
This year's review included the valuation system conversion of the shield annuities block of business to our future state platform.
This conversion had a modest negative impact on GAAP results.
But a positive impact on both statutory total adjusted capital and the risk based capital or RBC ratio.
Now turning to preliminary statutory results.
Combined statutory total adjusted capital or Tac increased to $9 7 billion at September 30th from $9 4 billion at June 30th.
The increase was driven by the $600 million dividend paid from Brighthouse reinsurance company of Delaware or BRC D to.
To Brighthouse life insurance company or Blink.
The benefit to tack was partially offset by the impact from negative market performance in the quarter.
VA separate account returns were negative 0.4%.
And interest rates were essentially unchanged.
The capital release from BRC D is a good example of our continued focus on optimizing statutory capital.
As I mentioned last quarter, we plan to take an ordinary dividend from Blake in the fourth quarter that is at least half of our remaining $483 million of ordinary dividend capacity.
This would be in addition to the $250 million dividend paid to the holding company in the second quarter.
At September.
30th we estimate that the combined RBC ratio increased to a range of 520% to 540%.
Which is up 40 points sequentially and well above our target range of 400% to 450% in normal markets.
The increase in the estimated RBC ratio is primarily due to the $600 million dividend from BR CD.
Finally, the negative separate account returns in the quarter, along with essentially no change in interest rates contributed to an unfavorable result for normalized statutory earnings.
In addition, while the underwriting margin returned to a more normal level. There were a variety of items that contributed to a non VA loss in the quarter.
Year to date through September 30, we reported a normalized statutory loss of approximately $200 million.
Moving to adjusted earnings.
Third quarter adjusted earnings excluding the impact from notable items were $514 million, which.
Which compares with adjusted earnings on the same basis of $458 million in the second quarter of 2021.
And $388 million in the third quarter of 2020.
Results in the third quarter of 2021 were primarily driven by higher net investment income compared with our quarterly run rate expectation.
There were two notable items in the quarter, which on a combined basis lowered adjusted earnings by $64 million.
The notable items on an after tax basis were.
A $44 million net unfavorable impact related to the annual actuarial assumption review.
Including the valuation system conversion for our shield block of business.
And establishment costs of $20 million in corporate and other.
Before getting into the segment results I would like to provide some perspective on the strong net investment income in the third quarter underwriting margin.
For net investment income the positive market performance in the second quarter of 2021 resulted in continued excess returns and alternative investments above our long term expectation of 9% to 11% per year.
This was the primary driver of approximately $245 million after tax of earnings above our quarterly run rate expectation.
As a reminder, we generally report alternative investment income on a one quarter lag.
Asset growth also contributed to the favorable net investment income performance in the quarter.
Moving to underwriting the underwriting margin in the third quarter improved sequentially and included approximately $9 million of pre tax net claims related to COVID-19.
Our direct claims in the quarter, excluding the impact from COVID-19.
We're in the normal range of $400 million to $500 million.
And the reinsurance offset which was low in the first two quarters of this year returned to a more normal level.
Now turning to adjusted earnings at the segment level.
Starting with annuities.
Adjusted earnings excluding notable items were $343 million in the quarter.
Net investment income and fees were both higher sequentially.
Partially offset by higher reserves as a result of lower VA separate account returns in the third quarter.
The life segment reported adjusted earnings excluding notable items of $107 million in the quarter.
Sequentially results reflect a higher underwriting margin and higher net investment income.
Did earnings and the runoff segment, excluding notable items were $127 million in the quarter.
Sequentially results were driven by higher net investment income and a higher underwriting margin.
Corporate and other had an adjusted loss excluding notable items of $63 million.
Sequentially results were driven by lower expenses and higher net investment income, partially offset by a lower tax benefit.
Overall I am pleased with our results in the third quarter.
We maintained our strong capital position, while continuing to return substantial capital to shareholders.
We remain committed to managing the balance sheet and holding company cash under a multi year multi scenario framework.
Which we believe is the best way to support our distribution franchise and the evolution of our business mix over time.
With that wed like to turn the call over to the operator for your questions.
Thank you Sir.
As a reminder to ask a question you would need to press star one on your telephone.
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We stand by while we compile the Q&A roster.
I show. Our first question comes from the line of Elyse Greenspan from Wells Fargo. Please go ahead.
Hi, Thanks, good morning.
First question.
Prior quarter you guys, you did talk to and I think last quarter, a suite to suite 20 quarterly run rate earnings.
And underwriting with more favorable this quarter and you mentioned some other items. So what do you think net net.
Where you are relative to that range you provided last quarter.
Hi, Good morning, Elyse. So if you look at average shares outstanding this quarter, they're down more than 3% from the second quarter and so that change alone would equate to more than 10 cents a share. So I think it is fair to assume that the range is a bit higher than what we had talked about last quarter.
Okay and within that commentary like I guess going forward you would expect the reinsurance off that which I know you mentioned return to more normal level. This quarter that that will kind of stay in those normalized levels going forward right.
That's correct.
Okay. Thanks, and then.
A lot of companies this quarter have started providing some disclosure on the L. DTI accounting changes I was just wondering if we could get kind of an update from Brighthouse and then is there a target date that you buy package to provide more quantitative disclosures as well.
Sure so.
As you might expect we've dedicated substantial resources to this program and we've created a I would say a very strong government governance framework work around it.
I would.
I think we'll be in a position to give some estimate of impact in the second half of next year.
And obviously GAAP is important as a public company, but I just would remind you that our ability to generate distributable cash flows.
Two two for example buyback stock will be unaffected by any GAAP accounting change and as you know we focus on running the company based on the statutory balance sheet and holding company cash.
Okay. Thanks for the color.
Thank you I show next question comes from the line of Erik Bass from Autonomous Research. Please go ahead.
Hi, Thank you.
It's still early in the life of the buffered annuity market I was hoping you could talk a little bit about what youre seeing in terms of policyholder behavior at the end of the product term and our people rolling over into our new shield annuity or is there a lot of churn between company as soon as the market becomes more competitive business risks like what we saw would be as historically.
Yeah, Good morning, Eric.
Again, we just completed our annual actuarial review.
And I can tell you that we haven't we have enough experience now with shield.
That and as a result of the review there was no material impact.
This quarter from any change in assumptions for shield, obviously, we revise assumptions, but in terms of materiality nothing that I would call out.
Got it I guess I was thinking less about assumptions, but more just as the market.
<unk> since this is a product with it.
Kind of a day and time point to it.
Kind of just from a growth perspective.
Do you see the risk of kind of rolling over the product into.
New shield annuities or do you think across the industry as there's more competitors with offerings out there that you'll see more sort of trading of business between companies.
Eric Good morning, It's Myles Lambert speaking so.
I think you're accurate in predicting that I think that as these contracts come out of surrender.
You'll see movement either.
Replacing it internally based on a company offering a new competitive offering or you could see movement to other carriers. He gets a little early on to say that since a lot of these products are still new in the market and under surrender, but I would expect that you will see movement either internally with the existing carrier assuming they haven't.
<unk> live offering where you could see it move to another competitor.
Hey, Eric It's Conor, let me just add a little bit to help out youre right. I mean, we were issuing six year products back in 2015, which of course are at that six year term, but if you look at the overall flows or the outflows in the quarter, it's been very very consistent with prior quarters and all the Brighthouse is existent. So there's really not a factor of call. It <unk>.
So theres an element certainly but.
But nothing significant in terms of shield odd flows impacting that overall flows picture if that helps you as well.
Yes got it.
Got it.
Again that was my point is we have not seen anything related to <unk>.
<unk> the products that would that had any material impact on financial results. When we talk about the assumption review this quarter.
Got it and that would hold true for your legacy VA block as well because I know we've seen a few companies, including I think met that made lapse assumption changes.
On days as well.
Had no significant impact from any policyholder behavior changes for VA and just as a reminder, we did have some meaningful impacts from changing lapses and withdrawal assumptions for VA in the 2017 and 2018 actuarial review.
Got it thank you.
Thank you I show. Our next question comes from the line of Humphrey Lee from Dowling and partners. Please go ahead.
Good morning, and thank you for taking my questions.
Your script, you talked about you're planning to upstream at least half the remaining 500 million of dividend capacity from Blake.
How should we think about that like what are the factors that may affect the level that you will upstream whether to be $2 50 or higher than that.
Well I'm not going to get more specific than what I said about at least half.
We also intend to take.
Our annual dividend from <unk> in the fourth quarter.
And.
Just anticipating a question on dividends I will say that if we look to 2022, our base expectation is we take a dividend from Blake.
As you know our base assumption is that markets go up in line with a more normal rate of return and that interest rates are slowly increasing.
I would say next year, even if markets are where they are today and interest rates are where they are today I would expect we'd take a dividend from Blake.
Okay, Alright fair enough.
And my second question is shifting to sales. So as you pointed out sales were very good for this quarter.
Talk about some of the distribution expansion.
Do you anticipate more distribution expansion in the coming quarters that could drive further sales improvement for both shield and in your life product.
Good morning, It's Myles again, so the answer that question is absolutely two months ago, we launched another new major distributor for our shield product as well as we also launched a number of new firms for smart care. We also expanded into the PGA channel as Eric mentioned.
Earlier to sell smart care, which is providing us access to approximately a thousand pardon me 13000 additional producers. So yes expansion in distribution is something that we're absolutely focused on.
I guess, maybe the other way to think about it I think that's you asked the question is the pace of adding new distributions in the coming quarters, how would that compare to two.
The pace in the third quarter.
I would say with our smart care business, it's going to continue to be something that's a real focus of ours.
Two our annuity franchise, we have a very large diverse group of distributors already but we're always looking to bring on new ones, but I would say that the emphasis will be continuing to expand distribution for small cap.
Got it thank you.
Thank you.
I show. Our next question comes from the line of Ryan Krueger from <unk>. Please go ahead.
Hi, Good morning could you provide some additional detail on the non VA earnings in the quarter and what were some of the key drivers.
Hey, good morning, Ryan So I mean, it really was a quarter, where we had a number of different factors. If you will allow me to take a little bit of a different approach on this and remind everyone. The purpose of norm stat earnings.
It came up with this.
Definitions of norm stat to try to give an indication of excess capital generation in normal to good markets as well as an indication in bad markets of how well are we doing in terms of managing the downside risk of <unk>.
The VA block.
And when we came up with this it was pre pre VA reform.
So now with <unk>.
Post VA reform environment, where the risk based capital ratio is more indicative of the risk profile given the Cte 98.
We think that the best way to look at movement in excess capital generation really is the change in the RBC ratio and I've made some reference in the past about.
Slight differences between norm Stat. If you were to look at 95 versus 98, and what I would point out this quarter as we increased the range of of estimate for RBC by 40 points sequentially.
And if you look at the composition of that 40 points about 30 of it was related to the <unk> dividend.
About 20 of it was related to the positive impact from.
Our shield model migration to futures to our future state platform and that was really.
Refinement of the calculation of cash flows, which if youll recall, we had a similar benefit from refining the calculation of cash flows to VA.
During last years.
Annual assumption update.
And then the offset offsetting impact was would be we used about 10 points of RBC to fund growth this quarter.
No.
If you look at a typical quarter.
Our sales would probably consume around five RBC points. This quarter. It was about double that and really has to do with the the launch of our institutional spread margin business. So.
Balances went from I think it was $2 6 billion at the end of the second quarter to $4 7 billion at the end of the third quarter.
So if you net all that together you see that there is a 40 point all of those items explain a 40 point movement sequentially in the RBC ratio.
There is I think it's fair to assume therefore that if you were thinking about nor some analog to norm stat earnings at a 98 basis it was closer to zero.
No that's helpful.
And then just a follow up.
Can you just can you give us a sense of what your statutory EBITDA lapse assumption is.
<unk> block the floor lapses assumption at this point.
I mean, the answer to that is no and because of the fact that there is no simple answer to that question I know, we sometimes like to get simple answers, but we are a dynamic lapse function based on money is and different products different features I mean, it's just there is no single number to give the only.
Again I would highlight is there were a lot of assumption updates prior to VA reform I mean, as you know one of the one of the goals of VA reform was to get more consistency in the presentation of the VA business on a statutory basis and so on.
Our assumption updates aligning with VA reform.
Let us to take I would say some pretty meaningful.
Hits related too.
Related to lapses in withdrawals back in the 2017 and 2018 time periods.
Alright, thank you.
Thank you.
As a reminder to ask a question you would need to press star one on your telephone to withdraw your question. Please press the pound key.
I show. Our next question comes from the line of John Barnidge from Piper Sandler. Please go ahead.
Mr. Brian is if you have your phone on mute. Please UN mute your line.
Okay, well move on to the next question I show. Our next question comes from the line of Tracy Bengie from Barclays. Please go ahead.
Thank you good morning, I would like to understand better the negative market performance that contributed to that.
Negative separate account return I believe the sub account underlying asset is generally two thirds equity investment and one third fixed income investments wanted to know if that was fair.
You could describe I guess in which bucket where most of those negative returns came from and if I could also add if you've been giving our policyholders any other option in terms of what they could invest in.
Hi, Tracy had said.
So.
I believe the S&P was up about 60 basis points in the quarter, but we did have other indices that had negative returns. So the the MSCI <unk> was down 40 basis points.
Emerging market index was down eight percentage points. So.
It's never a story of just one equity index right and so that's that's the first thing. The second thing is I think your.
Your estimate of the split between equities and other is pretty close I mean, its a reasonable its a reasonable level to use.
In terms of options for.
Policyholders I'm not sure.
I'm not sure what specifically youre talking about but obviously they have plenty of options in terms of investment choices.
Okay got it.
And you are going down history, a little bit earlier with an earlier question in all your disclosure you talked about hitting peak funding in your legacy VA block by 2024 and I'm just wondering based on your experience here inception updates along the way and you just talked about is that still the case or if you could just provide an update on the time.
When you would hit peak funding.
Yeah.
I mean, I think it's it's not that far off of what you're suggesting.
It's <unk>.
Scenario scenario dependent obviously.
Market movements will we will have an impact on on whether that is longer or shorter, but I've made the point in the past about.
Hit peak funding and obviously that means your your risk is coming down but as reserves come down I mean, you're also paying claims right. So it's not like that.
The money, that's getting freed up as all somehow.
Becoming shareholder funds I think what's important is that the amount of capital that you need to support the risk over time as the as the risk comes down.
What would likely be a different number than what it is today.
Yes, that's all fair I guess, you're probably alluding to what I was thinking if there would be any skewing hits in that multiyear that's capable or any scenario that towards the back half given that you would reach that peak funding.
Sorry, Tracy repeat that one more time.
Yes, I think you were just getting into my thinking.
In your distributable earnings scenario.
There are multiple years, so, but it's all aggregated. So if we were to think about where the proportion of most of those earnings are coming from would be.
About the Q&A after our legacy VA block hit peak funding.
Yes, I would say, obviously peak funding is factored into the to the distributable earnings disclosures, we provide you, but I would not say that.
The trend in distributable earnings is driven by <unk>.
Peak funding I would say, it's driven by.
The shift in our business mix over time and the benefits of the products that we're selling today that will generate distributable learnings tomorrow and.
It's also a function of the fact that we have less impacts as you go out from changes in the mean reversion point under statutory which I've talked about in the past.
Perfect. Thank you.
Thank you.
I show. Our next question comes from the line of John Barnidge from Piper Sandler. Please go ahead.
Thank you very much for taking my question on the Bgea and the new firms added you said 13000, new agents, how many agents have access to the product prior to this quarter.
And the new distribution being added is that generally selling higher and lower face values.
So this is Myles again, so I would say prior to adding the approximate 13000.
New financial professionals that we did over the summer prior to that we get access to around 50000.
Advisors and financial professionals and as it relates to the face amount question small carriers really a product that is designed to deliver long term care benefits. So from a face amount perspective, generally speaking our face amounts arent very significant content.
Want to add anything to that.
No I think I think we're good malls.
Okay.
And then my follow up question.
I understand COVID-19 mortality experience materially down sequentially, but can you maybe talk about the average age of claim now versus maybe at the pandemic onset for you. Thank you for the answers.
Hey, John had said so I don't have the average age of the claim now versus before I mean, I would just say that obviously $9 million is down a lot I think it's down 20% from the second quarter and it's down substantially from where we were in the first quarter of this year in the fourth quarter of last year.
And I'd just again highlight that overall, our COVID-19 claims to date relative to the initial guidance. We provided based on the number of U S deaths I think in total we're probably running at about one fifth of what we thought we would be to date on COVID-19.
Thank you I appreciate it.
Thank you.
I'm showing no further questions in the queue at this time I would like to turn the call over to Dana Our Montana for closing comments. Please go ahead.
Yep. Thank you.
Thank you all for joining us today and for your interest in Brighthouse financial have a great day.
This concludes today's conference call. Thank you for participating you may all disconnect.
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