Brighthouse Financial, Inc. (NASDAQ:BHF) Q1 2024 Earnings Call Transcript

Brighthouse Financial, Inc. (NASDAQ:BHF) Q1 2024 Earnings Call Transcript May 8, 2024

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Operator: Good morning, ladies and gentlemen, and welcome to Brighthouse Financial’s First Quarter 2024 Earnings Conference Call. My name is Norma 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 call. [Operator Instructions]. As a reminder, this conference is being recorded for replay process. I would now 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 first 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. 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 Product 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 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, May 08, 2024. 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. Good morning, and thank you to everyone for joining today’s call. Brighthouse Financial’s first quarter results demonstrate the steady execution of our strategy. During the quarter, we maintained a strong balance sheet, continued to focus on executing our growth strategy, and sustained a disciplined approach to expense management. As you’ve heard us say in the past, the strength of our balance sheet is essential to support our distribution franchise, and we continue to focus on prudent financial and risk management. We ended the first quarter with $1.3 billion of liquid assets at the holding company and an estimated risk-based capital, or RBC ratio between 415% and 435%, which is in the middle of our target range of 400% to 450% in normal markets.

Our strong RBC ratio and robust holding company liquid assets support our ability to consistently return capital to shareholders through our common stock repurchase program. In the first quarter of 2024, we returned $62 million of capital to shareholders through repurchases of our common stock. Since we began our common stock repurchase program in 2018, through the first quarter of 2024 we have reduced shares outstanding by just short of 50%. We remain committed to returning capital to our shareholders, and through May 3rd have repurchased an additional $27 million of common stock. Now, I would like to take a moment to talk about the success of our distribution franchise. The execution of our growth strategy is focused on providing a complementary suite of annuity and life insurance products designed to help people achieve financial security.

I am very pleased with our first quarter 2024 annuity sales, especially with the continued steady growth in our SHIELD Annuity product suite as we remain a leader in the Registered Index-Linked Annuity or RILA market. Our total SHIELD Annuity sales were $1.9 billion for the first quarter of 2024, a 2% increase sequentially, and a 20% increase compared with the first quarter of 2023. Additionally, we are very pleased with our Fixed Indexed Annuity, or FIA sales, with 191 million of total FIA sales in the first quarter driven by our SecureKey product. As I mentioned on our fourth quarter call, in November of 2023 we launched our new FIA SecureKey, expanding our distribution footprint in the Fixed Indexed Annuity market. Fixed Deferred Annuities were also a strong driver of total annuity sales in the first quarter, with $637 million of sales.

This is down from the fourth quarter of 2023 as expected. Overall, our annuity sales totaled $2.9 billion in the first quarter, an increase of 5% sequentially and 3% compared with the first quarter of 2023. These strong annuity sales results demonstrate the strength and complementary nature of Brighthouse Financial’s annuity product portfolio. First quarter annuity net outflows were approximately $1.5 billion. As we discussed last quarter, annuity outflows were elevated in 2023, given the interest rate environment, coupled with business coming out of the surrender charge period and we expected elevated surrenders in 2024. That was the case for the first quarter, with outflows in line with the fourth quarter of 2023, partially offset by continued strong annuity sales.

Over the last several years, the combination of our steady annuity sales growth and the outflows of legacy business has led to a meaningful shift in our business mix, away from the legacy block of higher capital intensive business to more spread-based, less capital intensive business. On an account value basis, spread-based business made up roughly 15% of our annuity product mix in 2016 and approximately 40% at the end of 2023 and is expected to make up approximately 55% by the end of 2027. In the past, we have talked about our SHIELD business as a natural offset to the equity risk on our legacy VA business. With the growth we have seen with SHIELD Sales, which has helped drive the significant shift in business mix, we have now achieved a point of balance for equity market risk.

This demonstrates the success of our core strategy to diversify away from our legacy block of business. Turning to life insurance sales, we continue to see steady sales in our life insurance product suite with $29 million in the first quarter, a 26% increase compared with the first quarter of 2023. Overall, our first quarter sales results were a strong start to the year. And I am especially pleased that on April 24th, we joined BlackRock in announcing that BlackRock’s LifePath Paycheck is now available in defined contribution plans. LifePath Paycheck offers U.S. workers an opportunity to access a guaranteed income stream in retirement. This solution is a target date strategy that will over time include an allocation to innovative annuity contracts to be issued by Brighthouse Financial and another selected insurer.

This is a significant breakthrough for the industry and it’s exciting to see planned participants already beginning to take advantage of this solution. As I mentioned last quarter, BlackRock is currently working with 14 plan sponsors to implement LifePath Paycheck as an investment option for their employees defined contribution plan. These 14 plan sponsors with plans totaling $27 billion in target date assets are planning to make this solution available to over 500,000 employees. As a company whose mission is to help people achieve financial security, Brighthouse is pleased to assist even more Americans with preparing for retirement through LifePath Paycheck, and we are excited to work with BlackRock on this solution. In supporting our distribution franchise, along with our focus on balance sheet strength, we recognize that maintaining a disciplined approach to expense management is extremely important.

Our corporate expenses in the first quarter of 2024 were $207 million on a pre-tax basis, which was down 1% compared with the first quarter of 2023 and down 15% sequentially. First quarter expenses are typically lower driven by seasonality. However, with our continued commitment to controlling expenses and realizing efficiency gains, we do expect 2024 full-year corporate expenses to be lower than 2023. We remain committed to executing on our growth strategy with continued growth in our SHIELD product suite, an expanded presence in the Fixed Indexed Annuity market, and our entrance into the worksite channel through working with BlackRock on its LifePath Paycheck solution. Our focus remains on balance sheet strength and controlling expenses, and we continue to return capital to shareholders, supported by our strong RBC ratio and robust holding company liquid assets.

I will now turn the call over to Ed to discuss our first quarter financial results in some more detail.

Edward Spehar: Thank you, Eric, and good morning, everyone. After the market closed yesterday, Brighthouse Financial reported results for the first quarter of 2024, including preliminary statutory metrics. Through the first quarter of 2024, Brighthouse Financial maintained a strong statutory balance sheet and robust liquidity position. The company also reported adjusted earnings, less notable items in line with our expectations for the quarter. Starting with preliminary statutory results, combined total adjusted capital, or TAC, was $6 billion as of March 31, 2024, an approximately $300 million reduction from year-end 2023. The primary driver of the decrease in TAC was the impact from a reinsurance premium rate increase retroactive to September 2019, which resulted from the conclusion of a reinsurance arbitration.

This rate increase is associated with a legacy block of life insurance, and there was no statutory reserve impact from this item. Moving to normalized statutory earnings, the first quarter results reflect a $250 million to $300 million benefit from a 50 basis point increase in the prescribed 20-year treasury yield mean reversion point, or MRP. This benefit was largely offset by normal fluctuations in quarterly results, which as we have said in the past can be plus or minus a couple hundred million dollars. A key source of variability this quarter was actual to expected changes in our in force annuity book. Keep in mind that small variations from quarter-to-quarter associated with an approximately $125 billion block of business can have a magnified impact on results.

We have also started to see a negative impact on normalized statutory earnings associated with growth. In recent years, growth has largely been funded outside of normalized statutory earnings in the form of higher required capital associated with business risk. More recently, we are seeing the growth in SHIELD annuities reduce normalized statutory earnings as our SHIELD business is now consuming capital, which contrasts with providing a capital offset to the equity risk associated with our in-force VA block, as has been the case historically. The impact of this shift has been more pronounced than we originally anticipated, partially as a result of significant growth in SHIELD Annuities. As Eric mentioned, SHIELD sales increased 20% quarter-over-quarter.

This development highlights the success of our core strategy to diversify away from our legacy block of variable annuities, or VA. Capital consumption for SHIELD reflects that we are now close to a delta neutral position on equities, meaning market movements that benefit VA are adverse for SHIELD and vice versa. As a reminder, the life insurance industry is a business where you commit meaningful capital up front to generate cash in the future. As we have said in the past, we are focused on generating more consistent, long-term statutory free cash flows. A substantial increase in interest rate hedges in 2022 was a significant step towards narrowing the range of outcomes under different market scenarios. And we believe our balanced exposure to equities today is another step towards more predictable results over the long-term.

At March 31st our estimated combined risk-based capital, or RBC ratio, was between 415% and 435%, which is the middle of our target range of 400% to 450% in normal markets. The impact from a reduction in TAC was mostly offset by a benefit in required capital associated with lower new business risk charges for fixed annuities. Our liquidity position remains robust with holding company liquid assets of $1.3 billion as of March 31st. I would also remind you that the non-dividend flows to the holding company cover most of our fixed charges, and we do not have any debt maturities until 2027. Moving to adjusted earnings results. The first quarter adjusted loss was $98 million, which compares with adjusted earnings of $177 million in the fourth quarter of 2023 and adjusted earnings of $195 million in the first quarter of 2023.

The adjusted loss in the first quarter of 2024 includes a $366 million unfavorable notable item or $5.81 per diluted share. Entirely related to the reinsurance premium rate increase retroactive to September 2019 and the related reserve increase from the impact of the higher premium rate over the expected life of the block of business. As with any reinsurance rate increase, we evaluate the option of recapturing the business versus accepting the price increase. In this case, we determined to accept the rate increase. Excluding the impact of the notable item, adjusted earnings were $268 million, or $4.25 per share, which is consistent with our expectations for the quarter. The alternative investment yield was 2.3% in the quarter or consistent with our long-term annual return assumption of 9% to 11%.

Alternative investment returns in the quarter were the primary driver of the sequential increase in net investment income. The underwriting margin was in line with our expectations for the quarter, however, net claims were higher compared with the fourth quarter of 2023 as there is seasonality in direct claims. Additionally, corporate expenses were lower sequentially, mainly driven by seasonality. Turning to the sequential results by segment. Adjusted earnings, excluding notable items in the annuity segment were $313 million in the quarter. Sequentially, annuity results reflect higher fees driven by variable annuity separate account returns of 5.96% along with higher fees, expenses were lower sequentially, which was partially offset by lower net investment income.

The Life segment reported adjusted earnings, excluding notable items of $37 million in the quarter. On a sequential basis, results reflect a higher underwriting margin, higher net investment income, and lower expenses. The Run-off segment reported an adjusted loss of $48 million, which was relatively flat on a sequential basis. Higher net investment income was offset by a lower underwriting margin. Corporate and other had an adjusted loss, excluding notable items of $34 million. On a sequential basis, results were driven by a lower tax benefit. In conclusion, we continue to focus on diversifying away from our legacy business and generating more predictable statutory free cash flow over the long-term. While we have reduced the range of outcomes associated with movements in equity markets and interest rates, we still anticipate near-term volatility in results.

However, we believe that our strong balance sheet and robust liquidity position continue to support the consistent return of capital to shareholders. With that, we would like to turn the call over to the operator for your questions.

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Q&A Session

Operator: Thank you. [Operator Instructions]. And our first question will come from the line of Suneet Kamath with Jefferies. Your line is now open.

Suneet Kamath: Thanks, good morning. Ed, in your prepared remarks, you talked about some actual to expected impacts in the annuity business that affected regulatory capital. Can you just provide a little bit more color in terms of what happened in the quarter?

Edward Spehar: Sure, good morning Suneet. So I also mentioned in my remarks that we’re talking about a $125 billion block of annuity business. So you will have fluctuations between expected in-force and actual in-force in every quarter. And it will be driven by mortality, withdrawals, annuitizations, and again, you don’t need to have much of a deviation for it to matter for earnings. We spent a lot of time working on attributions and analyzing results versus expectations. For example, you’ve heard us talk about basis risk in the past as an item that was notable. There are many factors quarter — in every quarter that move around. And in this quarter, this was the one that was notable to point out.

Suneet Kamath: Got it, okay. And then I guess on the growth in SHIELD and now you are sort of more of an equity market neutral situation. Is that going to impact those distributable earnings scenarios that you typically give us in the spring?

Edward Spehar: So, let me start with some of the things that I said in prepared remarks and then expand a little bit. We have experienced SHIELD sales growth that’s been better than our expectations. And this has exerted some pressure on norm stat earnings. And now that SHIELD is a capital consumer, I would say that we are moving into a new phase for how we manage this product. So as a reminder, historically, we have managed VA risk and SHIELD together, and that has been beneficial to us from a capital standpoint as well as from a risk management standpoint. Now that we are in this delta neutral position for equities, we see an opportunity to modify our hedging approach for SHIELD and specifically, what we are planning on doing going forward is managing SHIELD on a stand-alone basis versus mixing with VA and that will entail purchasing a basket of options that will directly offset the guarantee that we are selling in the product.

So we will see a change in how we manage this, which we think is going to be beneficial for us going forward.

Suneet Kamath: Okay, thanks.

Edward Spehar: And just specifically on the cash flows, there’s a lot of work, as you know, that goes into providing those numbers. And there are a lot of factors that move things plus and minus. And so I don’t think it’s appropriate to give any indication of those numbers until it’s time for us to disclose them again.

Suneet Kamath: Okay.

Operator: Thank you. Our next question will come from the line of Tom Gallagher with Evercore ISI. Your line is now open.

Thomas Gallagher: Good morning. First question, just on the reinsurance arbitration. Ed, as you alluded to, historically, you’ve done more recaptures and they’ve been maybe modest charges. This one was a lot larger. Was there something unique to this or is it possible we’ll see some other larger settlements as you think about your overall docket for various arbitrations, any perspective you can give on that? Thanks.

Edward Spehar: Hey good morning, Tom. So this was different from the standpoint of it’s a retroactive premium rate increase because we have been involved in a dispute around this specific contract. So you’re looking back at four and half years’ worth of premium rate increases, and that’s the reason that this is sizable relative to the stuff we’ve had in the past. And if you look, we’ve had seven instances of reinsurers coming to us with rate increases. And we have chosen to recapture in six of those instances, and we decided to take the rate increase in this case.

Thomas Gallagher: Got you. And anything beyond as you think about other situations that we might see something directionally similar over the next couple of years or do you feel like this was unique and kind of a one-off?

Edward Spehar: I feel like it is different from the standpoint of it was a multiple year dispute that was resolved and therefore, the size was material. I think if you look at our book of business, which is really, I think, the question you’re trying to get at here, we have had very little changes to our mortality assumptions over the years. So every year, we go through a deep analysis of all of our critical actuarial assumptions, which you know we do in the third quarter. And every year, we’re looking at our actual experience versus what we had assumed for mortality, and we’ve had very little change associated with that. So I don’t believe that this is indicative of anything to do with our overall book of business.

Eric T. Steigerwalt: Yeah Tom, it’s Eric. I’ll just jump in for a second, too, maybe to wrap this up. It was a pretty unique situation, as Ed said. In my mind here, going forward, with respect to the concept of what you’re talking about, it’s business as usual. Hopefully, that’s helpful to try to distinguish the difference.

Thomas Gallagher: That is, appreciate that guys. And just one final follow-up on the question about how you were describing managing SHIELD differently and how you’re going to do more stand-alone hedging. Considering that it sounds like your costs will be going up just through stand-alone purchase of hedges, is that something that you may need to change pricing on as a result, if you are going to make this change, can you help us think through what that kind of means through a broader lens?

Edward Spehar: Sure, I’ll start out and maybe David will have some follow-up. If we look at our pricing, we are already assuming that we are hedging SHIELD in the fashion that I am talking about going forward. So that’s already assumed in how we price the business. But I’m going to give it to David to give some more details on pricing.