Brighthouse Financial, Inc. (NASDAQ:BHF) Q3 2023 Earnings Call Transcript
Brighthouse Financial, Inc. (NASDAQ:BHF) Q3 2023 Earnings Call Transcript November 8, 2023
Operator: Good morning, ladies and gentlemen and welcome to Brighthouse Financial’s Third Quarter 2023 Earnings Conference Call. My name is Justin, and I'll 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. In fairness to all participants please limit yourself to one question and one follow-up. As a reminder, the conference is being recorded for replay purposes. I would like to turn the presentation over to Dana Amante, Head of Investor Relations. Ms. Amante, you may proceed.
Dana Amante: Thank you and good morning. Welcome to Brighthouse Financial's third quarter 2023 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. Today, you will hear from Eric Steigerwalt, our President and Chief Executive Officer; and Ed Spehar, 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 Myles Lambert, our Chief Distribution and Marketing Officer; David Rosenbaum, Head of Products and Underwriting; and John Rosenthal, our Chief Investment Officer. Before we begin, I'd like to note that 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 the risks and uncertainties described from time to time in Brighthouse Financial's filings with the SEC. Information discussed on today's call speaks only as of today, November 8, 2023. The company undertakes no obligation to update any information discussed on today's call. 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. 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.
And finally, references to statutory results, including certain statutory-based measures used by management, are preliminary due to the timing of the filing of the statutory statements. And now I'll turn the call over to our CEO, Eric Steigerwalt.
Eric T. Steigerwalt: Thank you, Dana and good morning everyone. Brighthouse Financial reported solid results for the third quarter of 2023 that reflect the steady execution of our focused strategy. We continue to manage through this volatile market environment, one in which we saw equity markets fall modestly, while interest rates rose significantly, increasing by more than 70 basis points in the third quarter of 2023, as measured by the ten-year U.S. Treasury. As I've said before, while we have a cautious view on both the current market and economic environment, we intend to maintain an active and opportunistic share repurchase program and we remain committed to returning capital to our shareholders over time. Year-to-date through November 3rd, we repurchased approximately $216 million of our common stock, which included $64 million of common stock repurchased in the third quarter.
In addition to our share repurchase program, we remain focused on the steady execution of our business strategy along with our multi-year, multi scenario financial management framework and risk management strategy. Turning to the results in the quarter. I am pleased with our sales results in the third quarter. Our annuity sales totaled $2.6 billion, which is a 5% increase sequentially. Sales results in the quarter were largely driven by persistent, strong sales of our flagship Shield Level annuities, which increased 15% sequentially, as well as with sales of our fixed deferred annuities. As one of the top annuity providers in the United States, we continue to leverage the depth and breadth of our expertise, along with our strong distribution relationships to competitively position ourselves in markets we choose to compete in.
We remain focused on offering a diversified portfolio of complementary products to further drive the addition of high quality new business to our in-force book, and we remain pleased with the progress that we continue to make towards shifting our business mix over time. Additionally, we reported $25 million in sales of our life insurance products in the third quarter of 2023, consistent with life sales results in the second quarter of 2023, which continue to be mainly driven by our smart care product. We remain focused on maintaining the competitiveness of our life insurance products as we execute our life insurance strategy. Turning to financial results. Our combined risk based capital or RBC ratio was estimated to be between 400% and 420%, and cash and liquid assets at the holding company remain robust at $900 million as of September 30th.
Additionally, we had solid GAAP results as our adjusted earnings less notable items were generally in line with our expectations, and we continued to effectively manage our expenses. In summary, we reported solid results in the third quarter of 2023. Our statutory balance sheet and liquidity metrics were strong, our sales results remained at a high level, and we continued to deliver on our commitment to return capital to shareholders. We are confident in our strategy and are unwavering in our focus on business growth and prudent financial management. With that, I'll turn the call over to Ed to discuss our third quarter financial results in more detail.
Edward Spehar: Thank you Eric, and good morning everyone. Last night we reported third quarter earnings along with preliminary statutory results beginning with the preliminary statutory metrics. Our statutory combined total adjusted capital or TAC, was $7.3 billion at September 30th, which compares with $7.6 billion as of the end of the second quarter. Our estimated combined risk based capital, or RBC ratio, was between 400% and 420% as of the end of the third quarter, which was down from a range of 430% to 450% as of the end of the second quarter. Changes in interest rates and our deferred tax assets were key drivers of the decline in TAC and the RBC ratio. In addition, capital requirements associated with new business growth contributed to a reduction in the RBC ratio with an impact consistent with what we have discussed in the past.
Interest rates rose significantly in the quarter, which drove losses on interest rate hedges. As we discussed on our long-term statutory free cash flow projections call in September, a key element of our interest rate risk management strategy is balancing the immediate impact from gains and losses on hedging instruments relative to the multiyear impact from interest rates on our statutory balance sheet. We believe this approach to risk management results in a balance sheet that is substantially protected from movements and interest rates. To illustrate, given where interest rates are today, we anticipate that essentially all of the negative impact on variable annuity or VA risk management results in the third quarter associated with higher long-term interest rates will be recouped by an incremental benefit in the first quarter of 2024 associated with the prescribed valuation interest rate for our VA book of business.
This so-called mean reversion point, or MRP, is anticipated to increase by 50 basis points based on current interest rates, which compares with an expected 25 basis point increase based on rate levels at the end of June of this year. The second driver of the change in our capital metrics was a reduction in admitted deferred tax assets or DTAs. As I have said in the past, the statutory accounting for the deferred tax asset is conservative. The admitted DTA on our statutory balance sheet is now only approximately $100 million or a small fraction of our total tax attributes, which we still anticipate using over the long-term. I would also like to note that the internal reinsurance transaction between Brighthouse Life Insurance Company and its New York affiliate was effective in October.
As I mentioned on our second quarter earnings call, we expect an approximately $200 million benefit to TAC in the fourth quarter as a result of the capital efficiencies created by this transaction. As Eric mentioned, our liquidity remains robust with holding company liquid assets of $900 million at September 30th, consistent with June 30th. Additionally, we still anticipate taking at least $300 million of ordinary subsidiary dividends to the holding company this year. Now, turning to adjusted earnings results in the third quarter. Adjusted earnings excluding the impact from notable items were $275 million, which compares with adjusted earnings on the same basis of $271 million in the second quarter of 2023 and $74 million in the third quarter of 2022.
The notable items in the quarter were primarily related to the Annual Actuarial Assumption Review and had a net favorable impact on adjusted earnings of $51 million after tax. This is our first Annual Assumption Review under a new GAAP accounting framework. As part of this Assumption Review, we increased our assumed GAAP long-term mean reversion rate for the 10 year U.S. Treasury to 3.75% from 3.5%. We continue to assume that mean reversion occurs over 10 years. The increase in our long-term interest rate assumption drove the benefit to adjusted earnings within our Universal Life with Secondary Guarantees or ULSG block of business. Along with the review of capital market assumptions we also reviewed emerging experience and model assumptions.
The interest rate related benefit to total adjusted earnings was partially offset by policyholder behavior assumption updates in the life and annuity segments. I will note that updates related to mortality and lapse assumptions for our ULSG block of business were insignificant. Excluding the impact of notable items, the adjusted earnings results in the third quarter were roughly in line with our quarterly run rate expectation. Alternative investment income was approximately $30 million or $0.45 per share below our quarterly run rate expectation as the alternative investment yield was 1.6% in the third quarter. This was offset by a higher underwriting margin and lower expenses. The underwriting margin was higher than our quarterly run rate expectation driven by overall lower claims experience.
There is variability in the underwriting margin throughout the year, driven by fluctuations and volume and severity of claims along with the offset from reinsurance. In the third quarter, the Life segment experienced some larger claims. However, this was more than offset by favorable overall claims experience including the reinsurance offset within the ULSG business. Additionally, corporate expenses were lower than our run rate expectation in the third quarter. Turning to the segment results, the annuity segment reported adjusted earnings excluding notable items of $291 million in the third quarter. On a sequential basis annuity results were primarily driven by higher net investment income and lower expenses offset by lower fees. The Life segment reported an adjusted loss excluding notable items of $2 million.
Sequentially results were driven by a lower underwriting margin. The runoff segment reported adjusted earnings of $1 million excluding notable items. Sequentially, results reflect a higher underwriting margin, partially offset by lower net investment income. Corporate and other had an adjusted loss excluding notable items of $15 million. On a sequential basis results were driven by lower expenses. Overall, we reported solid third quarter results, maintained our target capitalization, and our holding company liquidity remained robust. We continue to manage the company under a multiyear, multi-scenario framework to support and protect our distribution franchise. With that we would like to turn the call over to the operator for your questions.
Operator: Thank you. [Operator Instructions]. And our first question comes from Alex Scott from Goldman Sachs. Your line is now open.
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