Q3 2024 Brighthouse Financial Inc Earnings Call
Speaker Change: I look to you today You are what I seek I don't wanna mess with you All my pride, it's all in the mirror And it's taking me anywhere But come up closer to me She gotta love me And I am sure she won't
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Michelle: Good morning, ladies and gentlemen, and welcome to Bright House Financial's third quarter 2024 earnings conference call. My name is Michelle, 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 one question, one follow-up.
Speaker Change: As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to Dana Amante, Head of Investor Relations. Ms. Amante, please proceed.
Dana Amante: Thank you and good morning. Welcome to Bright House Financial's third quarter 2024 earnings call. Materials for today's call were released last night and can be found on the investor relations section of our website. We encourage you to review all of these materials.
Dana Amante: Today, you will hear from Eric Steigerwalt, our President and Chief Executive Officer, and Ed Spehar, our Chief Financial Officer.
Dana Amante: 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 discussion are Miles Lambert, our Chief Distribution and Marketing Officer, David Rosenbaum, Head of Product and Underwriting, and John Rosenthal, our Chief Investment Officer.
Speaker Change: Before we begin, I would like to note that our discussion during this call may include forward-looking statements within the meaning of the Federal Securities Laws.
Speaker Change: Bright House 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 Bright House Financial's filings with the SEC.
Speaker Change: Information discussed on today's call speaks only as of today, November 8, 2024. The company undertakes no obligation to update any information discussed on today's call.
Speaker Change: During this call, we will be discussing certain financial measures that are not based on generally accepted accounting principles, also known as non-GAAP measures.
Speaker Change: Reconciliation of these non-GAAP measures on a historical basis to the most directly comparable GAAP measures and related definitions may be found in our earnings release, slide presentation, and financial supplement.
Speaker Change: 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 statement.
Speaker Change: I'll now turn the call over to our CEO, Eric Steigerwalt.
Thank you, Dana, and good morning, everyone.
Eric Steigerwalt: Today I will provide an update on the strategic initiatives that we discussed on our second quarter earnings call.
followed by some highlights from the third quarter.
Eric Steigerwalt: Following my remarks, Ed will provide more detail on our financial results in the quarter.
Eric Steigerwalt: I am pleased to share that in the third quarter we continue to make progress on our strategic initiatives designed to improve capital efficiency
Eric Steigerwalt: unlock capital and return our combined risk-based capital or RBC ratio to our target range of 400% to 450% in normal market conditions.
The reason for that is twofold.
Eric Steigerwalt: One, we have a number of strategic initiatives underway that we are confident will improve our RBC ratio.
Eric Steigerwalt: And two, we had $1.3 billion of liquid assets at the holding company as of the end of the third quarter.
Eric Steigerwalt: Our strategic initiatives include reinsurance opportunities, along with actions to help simplify our hedging strategy.
Eric Steigerwalt: We are working on multiple reinsurance opportunities, both in-force and flow reinsurance.
Eric Steigerwalt: We have been working on one particular agreement with a third party to reinsure a legacy block of fixed and payout annuities.
Eric Steigerwalt: We are in the final stages and expect to enter into this reinsurance agreement before year-end.
Eric Steigerwalt: Pro forma for this reinsurance agreement, our September 30th estimated combined RBC ratio would be at the lower end of our targeted range in normal markets.
Eric Steigerwalt: In addition, we have made substantial progress on simplifying our hedging strategy.
Eric Steigerwalt: As we have discussed previously, the significant growth we have seen in our shield annuity block over the past several years has resulted in a balanced risk profile for our annuity business.
Eric Steigerwalt: but has also increased the complexity of managing our variable annuity or VA and shield business on a combined basis.
to address this issue.
Eric Steigerwalt: We started to hedge Shield sales on a stand-alone basis with the launch of our new Shield product in July.
which we discussed on our second quarter earnings call.
We are expanding that approach in the fourth quarter.
Eric Steigerwalt: to include our SHIELD Level Pay Plus product that was launched in August of 2022 and any remaining sales associated with our SHIELD product suite.
Eric Steigerwalt: Additionally, we are formulating a revised hedging strategy for our Enforcebook.
which will now essentially be a closed block of business.
Eric Steigerwalt: Despite the refinements to our hedging program, our overall focus remains the same, which is to protect our statutory balance sheet under adverse market scenarios.
Speaker Change: And Ed will discuss that in more detail in a moment.
Speaker Change: As I mentioned earlier, we expect our combined RBC ratio would be at the low end of our target range in normal markets, assuming the entry into the reinsurance agreement on our fixed and payout annuity-enforced business.
Thank you for watching!
Speaker Change: Also, at the end of the quarter, our holding company, Liquid Assets, remained very robust and were approximately $1.3 billion.
Speaker Change: We have consistently stated that it is appropriate for a life insurer to have a conservative cash and liquidity position at the holding company, and our recent experience illustrates why this is a prudent strategy.
Speaker Change: Our substantial cash at the holding company also supports our common stock repurchase program.
Speaker Change: In the third quarter, we repurchased $64 million of our common stock.
with an additional approximately $25 million repurchased through November 1st.
Speaker Change: From the beginning of our share repurchase program, which started in August of 2018, through November 1st of this year, we have repurchased over $2.4 billion of our common stock.
Speaker Change: reducing our shares outstanding by over 50% over that time and since we became an independent public company in 2017.
Speaker Change: Along with our commitment to prudent financial management, our overall priorities at Bright House Financial have been consistent over the years.
Speaker Change: and are focused on executing our growth strategy which is centered around our complementary and competitive market offerings
Speaker Change: as well as our expansive third-party distribution footprint and efficiently managing our expenses as we recognize that being a low-cost producer is very important in our industry.
Speaker Change: We have continued to execute on this focus strategy, which is demonstrated both by our strong sales results through the third quarter of this year, and the year-to-date reduction in our corporate expenses.
Speaker Change: On a year-to-date basis through September 30th, our total annuity sales were $7.8 billion.
consistent with the same period in 2023.
Speaker Change: Sales of our flagship Shield Annuity products have remained very strong at $5.8 billion year-to-date, a 15% increase over 2023, and a record level for Bright House.
with continued growth in our shield sales.
Speaker Change: Additionally, we remain pleased with our fixed annuity sales as we continue to see year-over-year growth in our fixed indexed annuities driven by our SecureKey product.
Speaker Change: While sales of fixed deferred annuities were down on a year-to-date basis,
Speaker Change: They pick back up in the third quarter as expected as we transitioned to a new reinsurer in June.
Speaker Change: We have continued to grow in the life insurance space, with life insurance sales of $87 million year-to-date through September 30th, an increase of 19 percent compared with the same period last year.
Speaker Change: I'm pleased with the strong sales results that we continue to deliver and expect further growth in both annuities and life insurance sales as we remain focused on providing a comprehensive and complementary suite of products.
Speaker Change: I would also like to touch on our expansion into the institutional space with the launch of BlackRock's Lifepath Paycheck product earlier this year.
As we discussed on our second quarter earnings call,
Speaker Change: When we received our first deposits, we did not expect to see much activity in the third quarter as the inflows associated with life path paycheck will be uneven on a quarter to quarter basis as defined contribution plans implement the solution.
Speaker Change: While we expect limited activity through the end of this year, we do expect to see additional inflows in 2025.
Speaker Change: And we remain very excited about this product and its success to date.
Speaker Change: Along with the continued success in our growth strategy, we remain disciplined with our expense management.
Speaker Change: Corporate expenses were $203 million in the third quarter and $610 million on a year-to-date basis.
A 5% decrease year over year.
Speaker Change: As I have said previously, we expect an increase in the fourth quarter expenses as a result of typical seasonality. We still anticipate full year 2024 corporate expenses to come in lower than full year 2023.
John Barnidge, Jamminder Bhullar, Thomas Gallagher,
Speaker Change: In closing, I am pleased with all the progress we have made on our strategic initiatives.
Speaker Change: which are designed to create more capital efficiency, unlock capital, and return our combined RBC ratio to within our target range under normal market conditions.
Speaker Change: While our work continues, we remain focused on continuing to execute on our strategy, and I look forward to keeping you updated on our progress.
Speaker Change: With that, I will turn the call over to Ed to discuss our financial results in more detail.
Thank you, Eric, and good morning, everyone.
Ed Spehar: As of September 30th, our Statutory Combined Total Adjusted Capital, or TAC, was $5.7 billion.
Ed Spehar: An increase of $300 million from $5.4 billion at the end of the second quarter.
Ed Spehar: The increase in TAC is associated with our efforts to simplify our VA and SHIELD hedging program.
Thank you for watching!
Speaker Change: As Eric mentioned, we have expanded our stand-alone hedging strategy for new business.
which creates a simplified approach for risk management.
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Speaker Change: We began the process of managing our Shield product sales on a standalone basis in July with the launch of our new product suite.
Speaker Change: We are expanding that approach in the fourth quarter to include our Shield product with lifetime withdrawal benefits, known as Shield Level Pay Plus.
and the residual sales of our old Shield product suite.
as part of this process.
We have separated the annuity business into two categories.
The first is SHIELD New Business.
which represents approximately 95% of total VA and SHIELD sales.
Speaker Change: And the second is our Enforced Block of Legacy VA and Legacy Shield Contracts.
Speaker Change: which, as Eric mentioned, can essentially be thought of as a closed block.
By hedging SHIELD New Business on a stand-alone basis.
Speaker Change: We are increasingly reflecting all future hedges on the balance sheet today.
Speaker Change: For the legacy block, we are developing a separate hedging strategy and expect this work to continue into 2025.
Speaker Change: As a result, we can only reflect our current hedges for our legacy block on our balance sheet today.
Speaker Change: It is important to highlight again that while we are revising the hedging strategy, our focus on protecting the statutory balance sheet under adverse scenarios remains unchanged.
Speaker Change: For example, we would expect to see substantial gains from our hedging program relative to the VA shield total asset requirement under an extreme bear market scenario.
Speaker Change: The changes to our hedging program in the third quarter resulted in a positive impact to reserves, benefiting TAC.
with an offsetting increase in required capital.
Speaker Change: and therefore a muted impact to the combined risk-based capital or RBC ratio.
Speaker Change: This benefit to TAC was partially offset by a normalized statutory loss of approximately $300 million in the quarter.
Speaker Change: which we anticipate will be less in future quarters as a result of hedging all of our SHIELD new business on a standalone basis.
Speaker Change: In addition, Flow Reinsurance is another initiative that could further reduce new business strain in 2025.
Speaker Change: We also had a modest loss associated with the significant change in the interest rate environment in the quarter.
Thank you for watching!
Speaker Change: The normalized statutory loss led to the change in our combined RBC ratio.
Speaker Change: which we estimate to be between 365% and 385% at the end of the third quarter.
Speaker Change: As Eric mentioned, pro forma for the pending reinsurance transaction that is expected to close before year end.
Speaker Change: Our estimated combined RBC ratio would have been at the lower end of our target range of 400% to 450% in normal markets at September 30th.
Speaker Change: We have consistently stated that it is appropriate for a life insurer to have a conservative cash and liquidity position at the holding company.
Speaker Change: and our recent experience illustrates why this is a prudent strategy.
Thank you for watching!
Now turning to Adjusted Earnings Results in the Third Quarter.
Speaker Change: Adjusted earnings, excluding the impact from notable items, were $243 million.
Speaker Change: which compares with adjusted earnings on the same basis of $346 million in the second quarter of 2024.
and $275 million in the third quarter of 2023.
Thank you for watching!
Speaker Change: The notable items in the quarter were related to the Annual Actuarial Assumption Review and related model refinements.
Speaker Change: which had a net favorable impact on adjusted earnings of 524 million dollars after tax.
Speaker Change: As part of this assumption review, we increased our assumed gap long-term mean reversion rate for the 10-year U.S. Treasury from 3.75 percent to 4 percent.
The increase in our long-term interest rate assumption.
as well as an actuarial model refinement related to expenses.
Speaker Change: drove a substantial benefit to adjusted earnings in our runoff segment.
Speaker Change: Our annual Assumption Review also included consideration of emerging experience and industry experience studies.
Speaker Change: which resulted in modest changes to our life and annuity segments.
Speaker Change: Excluding the impact of notable items, the adjusted earnings results in the third quarter were approximately $30 million below our quarterly average run rate expectation.
driven by lower alternative investment returns.
The alternative investment yield was 1.6% in the quarter.
Speaker Change: As a reminder, we expect returns between 9% to 11% annually over the long term for our alternative investment portfolio.
Speaker Change: The underwriting margin was in line with our quarterly average run rate expectation.
Speaker Change: However, it was lower sequentially driven by normal fluctuations in the volume and severity of claims net of reinsurance.
Speaker Change: In the third quarter, the runoff segment experienced higher net claims.
Turning to segment results.
Speaker Change: In the third quarter, the annuities segment reported adjusted earnings of $307 million, excluding notable items.
Speaker Change: On a sequential basis, annuity results reflect lower fees driven by seasonality.
Speaker Change: Adjusted earnings, less notable items, or 41 million dollars in the life segment.
Speaker Change: Sequentially, lower net investment income, driven by lower alternative investment returns, was mostly offset by a higher underwriting margin.
Speaker Change: The runoff segment reported an adjusted loss of $107 million excluding notable items.
Speaker Change: The sequential results reflect lower net investment in income and a lower underwriting margin.
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Speaker Change: Corporate and other was flat sequentially with two million dollars of adjusted earnings.
Speaker Change: In conclusion, we are simplifying our hedging strategy while pursuing multiple initiatives to improve capital efficiency and unlock capital.
Speaker Change: And we anticipate that these actions will have a positive impact on our combined RBC ratio.
Speaker Change: We are confident in our financial position, which is a combination of our statutory balance sheet and cash at the holding company.
Speaker Change: and we continue to have substantial protection for adverse market environments.
Speaker Change: With that, we would like to turn the call over to the operator for your questions.
Speaker Change: Thank you. As a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. In fairness to all participants, please limit yourself to one question and one follow-up. One moment for our first question.
Speaker Change: Our first question is going to come from the line of Suneet Karmas with Jeffries. Your line is open. Please go ahead.
Thanks, good morning. Just wanted to start with Eric.
Speaker Change: environments we've seen for your business model, and we keep getting these RBC surprises. So just wanted to get your thoughts on, you know, do you need to bring in some more help just to get this thing back on track?
Speaker Change: Yeah, thanks, Sunit. It's a good question. We have brought in more help. We've brought in a number of external resources, and frankly, we've hired up in the last six months
in the hedging area, finance area.
Speaker Change: So, yeah, as we've reached sort of that delta-neutral situation between new SHIELD business and the gross amount of SHIELD business that we put on the books.
Speaker Change: that we have generally, from a hedging perspective, hedged against the old VA block, which we've talked about for years now.
Speaker Change: Now, we're in a situation where we feel it is appropriate to refine that hedging strategy and we have brought in a number of resources to help us do that. We're making a lot of progress there. We still got progress to make. Ed, you want to comment at all in addition?
Yeah. Thanks, Eric. So.
Ed Spehar: I guess what I would say is, you know, echo everything that Eric said.
Ed Spehar: When you look forward, as a result of the things that we are implementing today, the key change we anticipate in the fourth quarter and beyond is less strain from new business.
Ed Spehar: And just to step back for a second, we have benefited from managing VA and SHIELD together historically. It has been a benefit to our capital.
Ed Spehar: Now that we have this balanced risk profile, it does necessitate a change.
Ed Spehar: And I would also add the other significant benefit that is...
Ed Spehar: Difficult to quantify but I think is important over time is simplification of our hedging strategy.
Ed Spehar: more pronounced in the fourth quarter and beyond for a couple of reasons. First of all, we talked about how we started hedging our new Shield product suite, which was introduced in July on a standalone basis.
Ed Spehar: If you look at the new product suite, it was about 30% of our sales in the third quarter, our SHIELD and VA sales combined. So it was still a small percentage.
Ed Spehar: If you look at our expectation for the fourth quarter, as I said in my prepared remarks, the expansion of the hedging of new business on a stand-alone basis would equate to about 95% of our total SHIELD and VA sales. So we expect a significant benefit from that.
Ed Spehar: In addition, if you look in 2025 and beyond, we do see an opportunity to potentially enter into a flow reinsurance deal, which would provide further support on the strain side.
Ed Spehar: And just to put some numbers on this, strain has been the most significant factor in the year-to-date related to our RBC ratio. So, if you look at our RBC ratio, it's declined by between 45 and 65 points in the year-to-date.
Ed Spehar: We estimate that shield strain is approximately 35 points of that decline. And that shield strain is defined as not just what comes through normalized statutory earnings, but also what goes directly to required capital related to asset charges.
Ed Spehar: So, it's fair to say that strain has been more than we had assumed.
Ed Spehar: It's related to the complexity of managing these two businesses together and the fact that we have achieved this balanced risk profile. So, this is the reason that we need to shift toward
Ed Spehar: hedging new business standalone and then formulating a strategy just for this legacy block.
Got it. I guess the follow-up then is...
Ed Spehar: You know, absent the reinsurance deal, are you confident that you will be able to, based on what you just said, I think the answer is yes, but let me just ask.
Ed Spehar: Are you confident that your RBC ratio is sort of troughed out here, again, assuming normal markets?
Ed Spehar: and we're not going to have another sort of step back. And if that's the case, Eric, have you thought about leaning in a little bit more in terms of the buyback, just given kind of where the valuation is? Thanks.
So let me start on that
Ed Spehar: You know, we don't give projections of what the RBC is going to be and and I know you understand better than than most that you know, it is a complicated and conservative calculation and there are always elements that are difficult to predict
Ed Spehar: Secondly, we would anticipate that our strain from new business will be substantially improved from the experience that we've seen in the year to date, and you can see in the year to date it has been a significant negative for the risk-based capital ratio.
Speaker Change: I'll jump in for a second. Maybe I'll just go back to your first question and then answer that second one, Sunit. So Ed said a lot in his part of the answer to Sunit's first question.
And I just want to maybe recap a little bit.
Speaker Change: Look, first of all, we are always open to help, always, okay? So that shouldn't be a surprise to anyone. I would suggest to you that if you've listened to Ed, my answers too, but some of Ed's answers over the last couple of quarters.
Speaker Change: This is about strain, and it's about the complexity of managing the VA business hedging and the SHIELD business hedging together.
Speaker Change: So, this is not, as all of you know, I think, if we look into the past...
Speaker Change: We took actions to de-risk the company in a couple of cases. Equity de-risking and finally a strategic position with respect to our interest rate hedging.
Speaker Change: So this is really focused on where we find ourselves today is the convergence of the focus on managing the hedging of shield and VA together
Speaker Change: and the strain that we're seeing from Shield and Business and I won't repeat that unless somebody asks again what we're doing there and what we expect both in the fourth quarter and then in the first quarter. With respect to your second question Sunit, we've been opportunistic in the past
Speaker Change: All I can tell you is that for now, we've got a robust capital position at the holding company and we are still buying back stock.
Okay, thank you.
Thank you. One moment for our next question.
Speaker Change: Our next question is going to come from the line of Ryan Krueger with KBW. Your line is open. Please go ahead.
Ryan Krueger: Thanks, good morning. Appreciate the commentary on the new business strain. I was hoping to focus more, I guess, on the in-force.
Ed Spehar: Ed, based on the numbers you gave, the in-force still had a negative impact on RBC this year.
Ed Spehar: I'm trying to, I guess, better understand why that's happening, just given the growth in SHIELD that you've had over time and the runoff of legacy.
Ed Spehar: Why the Enforce would be still producing negative impact to RBC, and I guess to what extent do you think that can change as you simplify the hedging strategy?
Speaker Change: Yeah, thanks Ryan. So I would start off by saying that if you look at our norm stat earnings, excluding these strain related factors that we've talked about in the year to date, it has trailed our expectations and there have been a few different things that we've talked about over the course of the year. I would say that, you know,
Speaker Change: We talked about basis risk in one quarter. If you actually look at basis risk through the first nine months, it's pretty insignificant. So that's not really a driver.
Speaker Change: We had talked earlier in the year about some actual to expected in-force impact. I believe that was in the first...
I think it was in the first quarter.
Speaker Change: So this has not been, I would say it's not been a great year
Speaker Change: predict Normstadt earnings on an annual basis because it is volatile.
Speaker Change: We always do it in a multi-year framework, because that's the only way that I think it makes sense when you're talking about a number the way that we calculate it. It's important to point out that...
Speaker Change: You know, this Normstat earnings calculation, and you can look at the definition, is a conservative calculation relative to, you know, when we all think about things like adjusted earnings. So that's another point I think I'd add.
Thank you.
Speaker Change: Got it. Thanks. And then on reinsurance, can you give any more color? It sounds like you're still looking at other in-force opportunities beyond the ones that you expect to complete before the year end. Can you give any more color and what sort of things you're looking at beyond that?
Speaker Change: Well, we've got a number of possibilities, Ryan. I don't want to really go too far into this.
Speaker Change: in that we've got a lot of negotiations going on, etc., etc. But, yes, in-force opportunities, and then, as Ed has already said, flow reinsurance opportunities as well. So, we're looking at a number of opportunities, and I highlighted in my comments, and Ed probably did as well in his comments,
Speaker Change: with respect to a particular reinsurance agreement that we think will close in the fourth quarter.
Okay, thank you
Thank you. One moment for our next question.
Speaker Change: Our next question is going to come from the line of John Barnage with Piper Sandler. Your line is open. Please go ahead.
John Barnage: Thank you. Good morning. Appreciate the opportunity. Is there an opportunity to optimize the investment portfolio at all? I know you're looking at the liabilities, but is an IMA possible?
Speaker Change: It's certainly possible and You know when I think about my comments in the second quarter John We're looking at any number of possibilities
Speaker Change: So, you know, we would never exclude the investment portfolio from that list. So it's a good question.
Speaker Change: Okay and within that framework of not excluding anything are you can now that you talked about kind of the enforced block being considered a closed block
Speaker Change: How do you think of the opportunity to do enhanced annuitizations or buyouts?
as well. Thank you.
John Barnage: Sure, John. Generally, we have stayed away from buyouts, and there's two reasons for that. Many distributors do not love it, right? These are products that they sold to their clients.
John Barnage: for financial needs, and we have stood by those for decades, frankly. And secondly...
Speaker Change: Hey John, is that your microphone or is your microphone still open?
Speaker Change: Okay, there it is. Somebody maybe had theirs on. And secondly...
Speaker Change: The take rate is really, it doesn't really make a difference in the end, so it's an awful lot of work, it's very disruptive, and those are the two reasons why
Speaker Change: why we haven't done them in the past. I'll say to you that, you know, look, we're looking at any number of opportunities, but because of the reasons that I laid out there, that's probably not something that we would actually do.
Thank you.
Speaker Change: Okay, and if I could get one more in. How do you view the TAM or total addressable market for the liabilities? Is it the entire closed block essentially at this point? Thank you.
Speaker Change: I mean, I think I got that. Like, what are you looking at as possible for any kind of deal? Is that what you mean, John?
Yes, that's correct. Yeah, that's what I thought. Okay
Speaker Change: You know, again, we're looking at everything. I don't think there's any reason to exclude anything from the 100,000-foot point of view.
Speaker Change: But then when you get into the details, we've got to figure out the art of the possible We've got a prioritize because you know, we can't have 30 things going on here And so I think what I just said probably gives you your answer, right? We're looking at everything We're seeing the degree of difficulty in certain transactions or potential transactions and then we're prioritizing from there It's a great question John. Thanks
Thank you.
Thank you and one moment for our next question.
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Speaker Change: Our next question is going to come from the line of Alex Scott with Barclays. Your line is open. Please go ahead.
Thank you.
Speaker Change: Hi, good morning. I wanted to see if you could provide some color on...
Speaker Change: You can't estimate it near-term and you know, I think there's
Speaker Change: So, potentially a hockey stick down the line and it gets better. So, I'm just trying to understand like, you know, you guys, I think for years, we're kind of pointing to a handful of years out in the future that that would happen. I mean, is there still an inflection to consider here? I mean, can you help us think it all around?
Speaker Change: You know what that could look like and you know how much it could change from a from a reinsurance deal?
Speaker Change: Good morning, Alex. It's Ed. So, you know, we do plan to provide the long-term statutory free cash flow disclosures next year.
Speaker Change: So, I don't, you know, as I've said in the past, there's a lot of work that goes into it, and so I don't want to...
Speaker Change: I don't want to say too much, but I will say that what we have seen historically, I would expect that we would still see, but it's been pushed out from where it was because we haven't seen the cash flows this year that we would have thought would have been sufficient.
Speaker Change: Five years ago. So I would expect to see a ramp up because...
Speaker Change: The old block of business, the legacy VA block, does run off eventually. And so you will see capital benefits as you see the release of the CTEs associated with that legacy VA block.
I think I-
Speaker Change: articulated the basis for our strategy on some of these initiatives.
Speaker Change: on a previous call, but I would say that if you look at the things we're doing today to benefit capital there can be some give up of free cash flow in those outer years.
Speaker Change: And we think that that makes sense because the cash flows in the out-of-years look very strong.
Speaker Change: And so we sort of have taken a similar approach here on the timeline of cash flows like we have on the actions we've taken to narrow the range of outcomes under market scenarios.
Speaker Change: where we're trying to flatten the line a little bit on the cash flows. So give up some of the capital generation in those out years to benefit capital generation in the near term.
Speaker Change: got it okay that's helpful the other thing I wanted to check on was just the product structure of shield and and whether it's
Speaker Change: being changed at all? I mean, I listen to what you're saying and when I hear, you know, shield legacy block or a shield closed block, it makes me a little nervous that maybe there wasn't something quite right about that product beyond just combining the hedging program.
Speaker Change: Can you can you just help demystify like what like is it is it simply like what you're talking about? It's just around the hedging or are there actually things about the product that needed to change?
Speaker Change: Yeah, Alex, it's the former. It's around the hedging. It's not around any statement on the profitability or the desirability of the old block of SHIELD.
Eric Steigerwalt: Although, I'll just jump in to Eric, Alex, I'll just jump in and say, look, that doesn't mean that we're not going to update the product with new features or new ideas, new ways that the products can be used, but obviously I agree with everything Ed just said.
Thank you.
Okay, thank you.
Speaker Change: Thank you and as a reminder to ask a question at this time please press star 1 1 on your telephone.
Speaker Change: And our next question is going to come from the line of Nick.
Speaker Change: Anita with Wells Fargo. Your line is open. Please go ahead.
Hey, good morning. Thanks.
Speaker Change: A lot of my questions have been answered here, but we're just wondering if you could
Speaker Change: maybe give a little information on like if this reinsurance deal in the fourth quarter is going to be onshore or offshore just just to get an idea from from like a timing perspective because I think we've seen a lot of these things kind of get pushed out and not really hit deadlines so any caller there would be helpful.
Eric Steigerwalt: Hey Nick, it's Eric. Look, I don't want to get into any of that stuff. I'll just tell you that we're confident that it will close in the fourth quarter.
Eric Steigerwalt: I get why you're asking the question so hopefully that answer works for you.
Yeah, that makes sense.
Speaker Change: But I guess going forward, like, you know, appreciate the color on the on the new new hedging program for the standalone shield, but.
Speaker Change: Should we expect shield sales to just continue at this strong pace or should we see a step down in the near term at all or how are you guys thinking about that?
Speaker Change: The one basic thing that we have had in place from the beginning, and it continues, is that we have substantial protection on this balance sheet to protect ourselves against adverse market scenarios.
Speaker Change: I just want to make it clear that there is still a lot of protection and we are still targeting a statutory max first loss framework and that's just a key point to make so that we don't misinterpret what new hedging means. Let me pass it to Eric.
Speaker Change: Nick, so maybe I'll answer this in a couple of ways. Number one, if you think about everything we've talked about here, obviously we want to make sure that we have appropriate capital in the operating company.
As I said in my comments,
Speaker Change: We have, since the beginning, run with a large buffer up at the holding company, and we intend to continue to do that.
Speaker Change: And so there's two things that I think about. Number one, making sure that our capital levels are appropriate. And number two, making sure that we can write new business.
Speaker Change: So I think buried in your question there a little bit is, you know, do you intend to slow down sales? No, we do not we're having a we had a very good October and and given our two goals
Speaker Change: of having appropriate capital levels and being able to write new business, all these initiatives are designed to make sure we can do both of those things. So I think that probably answered your overall question, Nick.
Yeah, I did that.
Thank you and one moment for our next question.
Speaker Change: Our next question comes from the line of Wes Carmichael with Autonomous Research. Your line is open. Please go ahead.
Speaker Change: Hey thanks, good morning. I just wanted to follow up around separating the hedging strategy for new business and Enforce and can you maybe just talk about the changes for the legacy block that you're contemplating? It sounded like it still may be somewhat in flux but I'm just wondering from a big picture or conceptual standpoint what you think makes sense there.
Speaker Change: Hey Wes, you know it's early for us to provide you any details. As I said in my prepared remarks, we are developing a separate hedging strategy and we do expect this work to continue into 25. And you know I know this came up yesterday on some of the the calls.
Speaker Change: You know, if you look at the footnote on Normstadt earnings when we show that the, you know, the TAC was up by 600 approximately, and CT.
Speaker Change: E98 was up by a billion. The related impact from that is just that as we are in this period of time developing this strategy, we can only reflect the hedges on our balance sheet.
for that block.
Speaker Change: and that was the reason for the statutory change. Now the net impact to RBC was was insignificant. I would anticipate that given that this block is
Speaker Change: like a closed block and so is running off over time that there will be some, you know, stability in the profile of the hedges that you have related to that runoff expected over time.
Speaker Change: But other than that, I don't know that there is much we could say at this point.
Speaker Change: Got it. Thanks, Ed. And I guess just since it's still in flux, I know you said 2025 for the pre-cash flow projections, but do you expect that to kind of push the timing out a little bit?
© transcript Emily Beynon
Speaker Change: I would say that we would want to have our strategy buttoned up before we would want to provide the statutory free cash flow projections.
Speaker Change: Yep, makes sense. And then I guess if I can ask one more, just on the runoff segment, I think if we look at the Core-X Notables number, you know, that was maybe a little bit below your run rate. Is there anything going on in that segment this quarter that we should think about in terms of run rate earnings power?
Speaker Change: Yeah, I don't think so. I think if you look at our underwriting margin in the quarter, it was consistent with what we would assume to be a normal margin, but we did have worse than our normal assumption for runoff, and that was offset by better than normal in life.
Speaker Change: You know, I think if you look at mortality in the year to date, it's generally been good and this was another quarter that's Consistent with what we would expect is just by segment. There was some volatility
Thank you.
Thank you.
Thank you and one moment for our next question.
Speaker Change: We have a follow-up question from the line of Alex Scott with Barclays. Your line is open, please go ahead.
Speaker Change: Hey, thanks for taking the follow-up. I think it was mentioned during the remarks that there was a June reinsurer switch that occurred. I think it was on like fixed annuities that improved sales. I just wanted to see if you could unpack that a bit first.
Speaker Change: Yep, thanks Alex, this is David. So we did make a, we did change reinsurers earlier this year that new reinsurance agreement was effective in June. And I think what you saw is...
Speaker Change: FRA sales rebound a bit in the third quarter as a result of that combined with a strong overall market demand.
Speaker Change: Okay, thanks. And then a final question for me, I just wanted to ask around the hedging program. I think at times you all have kind of had some tactical posturing like one way or the other on rates.
Speaker Change: You know, I think more on the rate side than equities with your hedging just just
Speaker Change: You know, recognizing that race is kind of spiked up here, particularly after the election.
Speaker Change: Could you, you know, help us think through like whether you had any kind of tactical posturing on this quarter and just so that we have a good idea of how to, you know, think through marking for rates and how that could impact you?
Speaker Change: Hey Alex said. So I wouldn't say we have any tactical positioning on rates.
Speaker Change: You know, we definitely had tactical positioning on rates prior to 2022, and then we obviously did a lot of long-dated hedging to protect ourselves against low rates when the 10-year was between 3.5% and 4%.
What
Speaker Change: What you saw when we mentioned rates and the impact in the third quarter, we were really referring to the fact that
while, you know, long rates.
Speaker Change: I think dropped by, you know, I don't know, 50, 60 basis points. Don't hold me to that. Short rates were down more like 100. And it was that steepening of the yield curve that created some modest loss for us in the quarter.
Okay, got it. Thanks.
Speaker Change: Thank you and I would now like to hand the conference back to Dana Amante for closing remarks.
Speaker Change: If everybody could stay on just a second, I'm sure you're hanging up now. Believe it or not, it looks like we just were informed that all the necessary approvals...
Speaker Change: were received on this reinsurance transaction that we talked about. So we do expect to execute as of 9.30. And you saw the, or you heard all the comments that Ed and I made during this conference call.
So, with that, I will turn it over to Dana.
Dana Amante: Alright, well thank you. Thank you all for joining today and have a great day.
Speaker Change: This concludes today's conference call. Thank you for participating. You may now disconnect.
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