Brighthouse Financial, Inc. Q4 FY2024 earnings call

• 2024 was a year of both successes and challenges. Significant strides were made in the growth strategy, including consistent growth in Shield product suite and fixed-indexed annuity sales, entrance into the work site channel with BlackRock's LifePath paycheck, steady growth in life insurance sales, and enhancements to product suites.
• Made progress on strategic initiatives: fully transitioned to hedging all Shield annuity new business on a standalone basis, completed reinsurance transactions in third and fourth quarters to create capital efficiencies, and returned capital to shareholders through common stock repurchases.
• In 2024, corporate expenses were down over 7%, delivered record sales of Shield level annuities product suite, and received first deposits with BlackRock's LifePath paycheck product launch. Ended the year with an estimated combined RBC ratio of approximately 400%.

In 2024, annuity sales totaled $10 billion, with the flagship Shield product suite achieving record sales of $7.7 billion, a 12% increase compared to 2023. Life insurance sales saw steady growth with $120 million in full-year sales, an 18% increase over 2023. Corporate expenses were down over 7% for the full year. The company repurchased $250 million of common stock in 2024, with $60 million in the fourth quarter, and had reduced shares outstanding by over 50% since August 2018. Holding company liquid assets were $1.1 billion as of December 31, 2024, and pro forma for the capital contribution to BLIC, were $1 billion.

• Continue to execute on the business strategy and focus on capital focus strategic initiatives to improve capital efficiency, unlock capital, and remain within the combined RBC ratio target range.
• Financial plan anticipates that the combined RBC ratio will be relatively stable over the next few years without additional support from the holding company, with expectations to see benefits from higher interest rates over time.
• Explore flow reinsurance deal for Shield new business as an ongoing initiative for 2025.

• Actual results may differ materially from forward-looking statements due to risks and uncertainties described in filings with the SEC.
• Interest rates and yield curve changes can negatively impact annuity statutory results. For example, a significant steepening in the yield curve in the fourth quarter had a negative impact on annuity statutory results.
• Asset adequacy testing reserves for legacy fixed annuity blocks increased, contributing to the decline in TAC.
• Complexity associated with managing the VA and Shield business on a combined basis can lead to strain in statutory results.

Q: Good morning, Ed, I was hoping you could touch a little bit on the driver's RBC in the quarter. I think it declined if you exclude the capital contribution reinsurance, but maybe you could just touch on, I know you quantified the capital contribution, but reinsurance transaction as well.

A: Yes, good morning, Wes. This is going to be a, a long answer, but hopefully, it'll help you with understanding the quarter. There was a lot going on this quarter. We had the benefit from our strategic initiatives, including the reinsurance that you mentioned, the standalone hedging for shield new business, as well as some of the market factors. And then finally the year end asset adequacy testing. So, let me start with the strategic initiatives. If you look at our supplement, you'll see we show some normalizing adjustments for norms stat, and there are -- it's a positive number in the fourth quarter. And that's despite the fact that in includes this AAT impact. So, if you're looking at the roughly at a round when you do the math, it shows to $300 million. The actual impact from these positive items is north of $400 million. And so, the benefits that we realized from these strategic initiatives would really be captured in that bucket. And there's really two things. First of all, you heard us talk about hedging Shield new business on a standalone basis beginning in July. The real benefit that you get from that is when you build it into your statutory modeling. And so, in the fourth quarter, we implemented the statutory modeling adjustments as associated with hedging shield new business on a standalone basis, as well as our shield level pay plus product, which is both the new version as well as the old version. The reason this is important is because when you build it into your financial statements, you are required to take into account the future hedges that will be associated with this standalone hedging approach into your liability cash flows. And so, we saw a significant benefit from that impact in the fourth quarter. The second strategic initiative that was positive was the reinsurance deal. So, we did a legacy block of UL, VUL, life reinsurance deal, and that benefited us overall to RBC about 10 points to 15 points. So that's in that number as well. So that's the real positive here from the strategic initiatives, which, as I said, was significant and north of $400 million. Turning to norm stat, we had a $200 million norm stat loss in the quarter, approximately. In the quarter, I mentioned the interest rate impact in my prepared remarks. In norm stat, there was about roughly a $350 million negative from rates. And so, let me explain. Obviously, fundamentally, higher interest rates are positive for a VA block. They're positive because you have a lower present value of future claims, you have lower future claims, and that's partially offset by lower bond fund values. So that's the fundamental impact of higher interest rates for VA. Now let's talk about the statutory impact, both near and long term. In the near term, immediately, with long rates up and the yield curve steepening, you lose on your derivatives that hedge the rate risk, and you don't get the full benefit you would expect to see from the rate move because the yield curve did not move in a parallel fashion. And the way the statutory framework works is it's very dependent on the one year and the 20 year. And so, the fact that the long rates went up had more of an impact on your hedge assets, and the fact that the yield curve did not move in parallel fashion did not have as much of a positive impact on your liabilities as you would expect to see. Now over time, the benefit you will realize is clearly the most obvious benefit is in the mean reversion point adjustment in the statutory framework for the 20-year treasury. And just to illustrate, at the end of September in our three-year financial plan, we thought we would have two MRP increases over the three-year period. Now based on year-end actuals, we would expect to see three increases in the MRP. So, there is a timing issue associated with rates. The final piece I want to talk about is the asset adequacy testing reserve, and that was approximately a $200 million increase. This is related to a legacy block of fixed annuities.

Q: Good morning. First question, just on the stable RBC, should we think stable meaning at 400% or somewhere in that range that you target? And then does that outlook contemplate any subsidiary dividends out of BLIC?

A: Good morning, Suneet. So, I think, we're going to -- we're not going to get any more specific than stable. I mean, you could interpret stable in a variety of ways, but I would say that if it's approximately 400% at year-end and we are targeting to be in our range in normal markets, if you assume normal markets, that should give you some indication of what stable means. And in terms of dividends, our financial plan does contemplate taking money from operating companies after this year.

Q: Good morning. Could you just -- I know you talked about 4Q, but could you just give us a broad sense of what's been leading to normalized debt losses in, I guess, several of the most recent quarters? Is it RILA under higher equity markets? Is it hedging on traditional VAs? Maybe just give us a broad sense.

A: Sure. Good morning. One of the things we've talked about, along with just the normal volatility that you can have associated with market moves, which we've had a variety of things that we've talked about in prior quarters, which I'm sure we could follow up with you to just remind you of what we have said in each of those quarters on the market moves. But the other thing we've talked about is the strain from new business and the fact that we -- and what drove our decision to change our approach for hedging new business is once we achieve this balance in our risk profile between VA and Shield that we were no longer seeing the same benefit that we used to see from the way we managed and so that we needed to change. So, there was some additional strain impact that you saw in 2024 beyond what we would anticipate going forward and really anticipate going forward for a couple of reasons. Number one, because of the approach we're taking to managing the business from a hedging standpoint, and number two, you've heard us talk about exploring sort of flow reinsurance deal for Shield new business, which would also help alleviate capital strain. And we continue on that path. We have multiple interested parties in a deal of that nature. And so that's something in terms of another initiative that we have in the works for this year, I'd make sure and remind everyone of that one because it continues to be an important one.