Brighthouse Financial, Inc. (NASDAQ:BHF) Q4 2022 Earnings Call Transcript

Brighthouse Financial, Inc. (NASDAQ:BHF) Q4 2022 Earnings Call Transcript February 10, 2023

Operator: Good morning, ladies and gentlemen, and welcome to the Brighthouse Financial Fourth Quarter and Full Year 2022 Earnings Conference Call. My name is Carmen, and I’ll be your coordinator for 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. As a reminder, the conference is being recorded for replay purposes. I will now turn the presentation over to Dana Amante, Head of Investor Relations. Ms. Amante, you may proceed.

Dana Amante: Thank you, Carmen, and good morning. Welcome to Brighthouse Financial’s fourth quarter and full year 2022 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 other members of senior management. 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 U.S. Securities and Exchange Commission. Information discussed on today’s call speaks only as of today, February 10, 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 on the Investor Relations portion of our website, 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 statement. And now I’ll turn the call over to our CEO, Eric Steigerwalt.

Eric Steigerwalt: Thank you, Dana, and good morning, everyone. Brighthouse Financial’s fourth quarter results were a strong finish to a successful year in which we maintained a robust capital and liquidity position, exceeded our total annuity sales expectations and continued to return capital to our shareholders through our common stock repurchase program. Before I provide comments on the fourth quarter results, I’d like to take a moment to reflect on the year. 2022 was a difficult year for markets with equity and fixed income indices down significantly amid continued high inflation. While market performance was a negative for separate account returns, our industry benefited from interest rates up over 230 basis points as measured by the 10-year U.S. Treasury.

Despite the challenging environments, 2022 marked a year of significant milestones for Brighthouse Financial as we continued to execute on our strategy and remain disciplined in our financial and risk management. As I have said in the past, one of our top priorities is balance sheet strength, which we continue to display in 2022. As we communicated previously, in the rising interest rate environment earlier in 2022, we took the opportunity to add a substantial amount of low interest rate protection. We took additional actions through year-end 2022 to further enhance our interest rate protection and our shift to a more strategic interest rate hedge positioning. These actions reflect our continued focus on protecting our balance sheet, optimizing our distributable earnings and supporting the growth of our franchise through a broad range of market scenarios.

We delivered another record year of annuity sales with total annuity sales of $11.5 billion for full year 2022, up 26% compared with 2021. These strong results demonstrate the strength and complementary nature of our product suite. And in August of 2022, we launched a new annuity product, Brighthouse Shield Level Pay Plus expanding our flagship Shield Level annuity suite. This product is specifically designed to help meet an important need in retirement planning, income that lasts for life. We are very pleased with the addition of this product to our suite of Shield annuities and remain focused on offering a portfolio of products that help meet the evolving needs of clients. Another significant milestone that we achieved in 2022 was the completion of all our major system conversions.

This marks the full implementation of our future state operations and technology platform and the end of establishment costs. This accomplishment allows us to increase our focus on growth, the evolution of our business mix and supporting our distribution franchise. These strategic and operational milestones have further enhanced the strong franchise that we have built at Brighthouse Financial. Additionally, in 2022, we returned capital to our shareholders through the repurchase of $488 million of common stock, which included $93 million of common stock repurchased in the fourth quarter. As of year-end 2022, we have reduced the number of shares outstanding by 43% since we began our common stock repurchase program just over 4 years ago in August of 2018.

I’m incredibly proud of all that we achieved in 2022. I would once again like to thank our employees for their hard work and dedication. And I would also like to thank our distribution partners for the important role that they play in our success. Now moving to fourth quarter results. Our balance sheet and liquidity remained strong in the fourth quarter. We estimate our combined risk-based capital or RBC ratio was approximately 440% at year-end. This is at the high end of our target RBC ratio range of 400% to 450% in normal markets. Additionally, we ended the year with $1 billion of holding company liquid assets. As I mentioned earlier, full year 2022 was a record year for annuity sales and the fourth quarter was a strong contributor with total annuity sales of $3.2 billion, an increase of 36% compared with the fourth quarter of 2021.

In the fourth quarter of 2022, we continued to see strong sales of our fixed deferred annuity and Shield annuity products as our complementary annuity product suite continues to meet the needs of our distributors and their clients in different market environments. As we sell the products that we offer today, offer product enhancements and launch new products while continuing to run off our older, less profitable business, we expect our business mix to continue to evolve to a higher cash flow generating and less capital-intensive business. Turning to life insurance. In the fourth quarter, we generated $22 million of life insurance sales. Though life insurance sales were down year-over-year, reflecting the headwinds from the economic backdrop in 2022, we maintained a consistent level of life insurance sales throughout the year.

Importantly, we remain confident in our life insurance strategy. In 2023, we plan to introduce a new life insurance product which we expect will further diversify and strengthen our life product suite, and we will continue to focus on maintaining and enhancing our suite of life insurance products as well as expanding our distribution footprint into the future. I am pleased with the results that we delivered in both the full year and the fourth quarter of 2022. We achieved significant strategic and operational milestones, and we believe that we are well positioned to continue to execute our focused strategy in 2023. We continue to prudently manage statutory capital and target a combined RBC ratio, as you know, of between 400% and 450% in normal markets.

As I mentioned, in 2022, we took actions to move towards a more strategic position on interest rate risk and we plan to continue to dynamically adjust our hedge portfolio to evolving market conditions. Regarding capital return, year-to-date through February 7, and we repurchased approximately $27 million of our common stock. We remain committed to returning capital to shareholders and intend to maintain an active and opportunistic share repurchase program. However, as we have demonstrated in uncertain market environments, we are focused on protecting our distribution franchise. To that end, while we continue to repurchase our common stock, we have reduced the level of buyback to reflect a cautious view on both the market and economic environment.

Photo by scott graham on Unsplash

As I also mentioned, with the completion of our major system conversions in 2022, we can further increase our focus on growth, the evolution of our business mix and supporting our distribution franchise. To wrap up, despite the challenging market environment in 2022, Brighthouse Financial delivered strong results. We maintained a robust capital and liquidity position, and we achieved several major strategic and operational milestones. We are looking forward to 2023 as the Brighthouse Financial franchise continues to grow and evolve to a more diversified company. With that, I will turn the call over to Ed to discuss the financial results.

Ed Spehar: Thank you, Eric, and good morning, everyone. Protecting and supporting our distribution franchise remains a top priority and our financial and risk management strategy plays a critical role. As you have heard me say repeatedly, it is our goal to maintain a strong balance sheet under a multiyear, multi-scenario framework. As our fourth quarter and full year 2022 results demonstrate, we maintained a robust capital and liquidity position through the difficult market environment of last year. At December 31, our combined total adjusted capital, or TAC, was $8.1 billion compared with $8 billion at September 30. While equity markets were down significantly for the full year, the market performance in the fourth quarter was positive, which contributed to the increase in CAC.

We completed the variable annuity actuarial model conversion in the fourth quarter along with the annual variable annuity statutory assumption updates. The combined impact of these two items was relatively modest, reducing CAC by less than $200 million. Our combined risk-based capital or RBC ratio was approximately 440%, which is near the top end of our target range of 400% to 450% in normal markets. This ratio was down from an estimated range of 450% to 470% at September 30. The sequential decline in the RBC ratio is due to the strong variable annuity or VA results, which were more than offset by the impact from the model conversion and actuarial assumption update, nontrendable items, and capital used to fund a high level of annuity sales.

The strong new business trends we saw in the third quarter continued through the end of the year and drove another quarter of above normal capital usage to fund growth. Growth is essential to drive our business mix toward lower risk, higher return products and away from legacy variable annuities. Therefore, we decided to retain capital at Brighthouse Life Insurance Company, or BLIC, to support excess new business growth rather than fund an ordinary dividend to the holding company in 2022. We intend to resume dividends from BLIC to the holding company in 2023. Normalized statutory earnings were approximately $500 million in the fourth quarter, which brought full year normalized statutory earnings to approximately $1 billion. We had a conservative position in the hedge portfolio for equities throughout 2022, and we benefited from the significant increase in interest rates last year.

Additionally, as Eric mentioned earlier, we took the opportunity in 2022 to add a substantial amount of low interest rate protection and in the fourth quarter, extended the duration of that protection. Moving to the holding company. We ended the year in a strong position with $1 billion of cash and liquid assets. In the fourth quarter, New England Life Insurance Company, or NELICO, paid a $38 million ordinary dividend to the holding company, which was more than offset by $93 million of common stock repurchased in the quarter. As we have said previously, the nondividend flows to the holding company cover most of our fixed charges, and we do not have any debt maturities until 2027. As a life insurance company, we believe it is appropriate to have a conservative position at the holding company.

Given the uncertain market and macroeconomic environments, we feel very good about our strong position at both the operating companies and the holding company. Now turning to adjusted earnings results in the fourth quarter. Adjusted earnings, excluding the impact from notable items, were $245 million, which compares with an adjusted loss on the same basis of $3 million in the third quarter of 2022. We and adjusted earnings of $416 million in the fourth quarter of 2021. On a combined basis, the notable items in the quarter had a modest impact on results. reducing earnings by only $3 million after tax. The notable items included: a $39 million unfavorable impact related to actuarial items in the quarter, which included a reinsurance recapture impacting the runoff segment and refinements of certain actuarial assumptions for the life segment; establishment costs of $15 million, as Eric mentioned, the fourth quarter was the last quarter of establishment costs as we have completed all major systems conversions; and a $51 million favorable impact related to the resolution of prior year tax matters.

Excluding the impact of these notable items, fourth quarter adjusted earnings compared with our quarterly run rate expectation were primarily driven by negative alternative investment performance, partially offset by positive VA separate account performance in the quarter. The alternative investment performance in the fourth quarter drove lower-than-expected net investment income of $86 million or $1.23 per share. As a reminder, we expect an annual 9% to 11% alternative investment yield over the long term. In the fourth quarter of 2022, the alternative investment yield was negative 0.2%, which was below our quarterly expectation, though higher than the negative yield in the third quarter. As a result, net investment income was higher sequentially driven by the alternative investment returns as well as continued asset growth.

The other major driver of adjusted earnings less notable items, when compared with our expected quarterly run rate was the impact of the positive equity market in the fourth quarter, which drove VA separate account returns of 6.8%. This corresponded to actuarial adjustments, which had a favorable impact to earnings of $46 million after tax or $0.66 per share, above our quarterly expectation, and is reflected through lower deferred acquisition costs or DAC amortization and lower reserves in the annuity segment. Keep in mind, the quarter-to-quarter fluctuation we see in DAC amortization related to changes in the market will not continue in 2023 and beyond. Under long-duration targeted improvements, or LDTI, which is the new life insurance industry accounting standard.

Turning to adjusted earnings by segment. In the fourth quarter, the Annuities segment reported adjusted earnings of $286 million. Sequentially, Annuity results were driven by the impact of higher VA separate account returns, which resulted in lower reserves and lower DAC amortization. The Annuity segment also benefited from higher net investment income sequentially, which was partially offset by lower fees and higher expenses. The Life segment reported an adjusted loss, excluding notable items of $5 million. On a sequential basis, results were driven by higher DAC amortization and higher expenses partially offset by higher net investment income. The Run-off segment, excluding notable items, reported an adjusted loss of $96 million. Sequentially, results reflect higher net investment income, partially offset by higher expenses.

Corporate and Other reported adjusted earnings, excluding notable items, of $60 million. On a sequential basis, results were driven by a higher tax benefit and lower expenses. In closing, despite a tough year for the markets, we maintained our balance sheet strength to protect and support our distribution franchise and the customers they serve. We continue to manage the company using a multiyear, multi-scenario framework. And given what we perceive to be an elevated level of uncertainty in markets and the economy, we have been more conservative on capital return recently. With that, we would like to turn the call over to the operator for your questions.

Operator: It comes from the line of Elyse Greenspan with Wells Fargo. Please go ahead.

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Q&A Session

Elyse Greenspan: My first question, Ed, you mentioned that you guys would look to resume dividends from BLIC in 2023. Do you have a sense of just the timing and the magnitude of dividends that you guys will look to take this year?

Ed Spehar: Elyse, I think $300 million for dividends this year is a good expectation with most of that coming from BLIC. And in terms of timing, I don’t really have anything for you on timing.

Elyse Greenspan: And then my second question, do you guys have a sense of earnings, emergence thoughts surrounding LDTI and then you guys considering adding any additional non-GAAP measures to your disclosures?

Ed Spehar: At this point, no.

Elyse Greenspan: And then do you have a sense of just how the impact of the accounting changes would be on your adjusted earnings based on your current disclosures.

Ed Spehar: Sure. At this point, I would say a pretty modest impact on adjusted earnings from the new accounting standard. So in terms of pieces, there’s a portion of fee income in under current accounting that will now go below the line with MRB, so that’s a negative. But an offset to that will be any death benefit claims and related reserves that are now above the line are also going below the line with MRB. And then the final piece DAC amortization, while all DAC amortization will now be above the line versus some of it below the line today, with the new simplified approach to amortization, we don’t see a material change in that number relative to what we would expect in a normal quarter under current GAAP. And remember, there will be no more volatility in the DAC like you saw this quarter from markets.

So overall adjusted earnings, I would expect to be pretty close to what we have today. In terms of net income, I would just first start off by saying, as you all know, we manage the company for stat and cash. So we are not managing the company for GAAP. And so I would expect you’ll still see volatility associated with the difference between how we manage the company and the GAAP accounting framework. However, I think it has to be an improvement on the net income line versus what we have today because what we have today is really doesn’t work. If you look at net income, for example, or net results this quarter, right, the stock market was strong in the fourth quarter. Interest rates were up. So good stuff, and we lost $1 billion on a net basis.

So clearly, current accounting does not capture the fundamentals of the business.

Operator: And it comes from the line of Tracy Benguigui with Barclays. Please go ahead.

Tracy Benguigui: Can you touch on the reinsurance recapture in the runoff segment? Was that a life product subject to YRT treaty? And if so, which one, I mean, if you could share the net amount of risk or amount in for?

Eric Steigerwalt: Yes. Tracy, Yes. I mean I think we’re going to keep it a little bit higher level than that. We had a $39 million unfavorable impact from actuarial items. And the biggest piece of that was a $24 million impact from a reinsurance recapture. And as you said, I believe you said it was in the runoff segment. We’ve had these from time to time. We get a rate increase from a reinsurer. We evaluate whether it makes sense to accept that or to recapture the business. And in this case, as has often been the case, it made economic sense for us to recapture the business.