Brighthouse Financial, Inc. Q2 FY2024 earnings call

• The second quarter had positive aspects such as record sales of Shield Annuities, the first deposits from BlackRock's LifePath Paycheck, and strong adjusted earnings. However, preliminary statutory results were disappointing with an RBC ratio between 380% and 400% compared to the target range of 400% to 450% in normal markets.
• The company is actively involved in initiatives like reinsurance to enhance capital efficiency, unlock capital, and restore the RBC ratio to the target within 6 to 12 months.
• Corporate expenses in the second quarter were $200 million, and year-to-date through June 30, they were $407 million, which is 6% lower than the same period in 2023. Although expenses are expected to rise in the second half of 2024, full-year 2024 corporate expenses are anticipated to be lower than those in 2023.
• In distribution and sales: Year-to-date annuity sales were $5.3 billion, consistent with the same period in 2023. Shield annuity sales exceeded $2 billion in the quarter, with year-to-date sales over $3.9 billion. Fixed indexed annuity sales were $351 million, a 60% increase from 2023. Life insurance sales in the second quarter were $28 million, contributing to a year-to-date total of $57 million, a 19% increase from 2023. The company launched a new Shield product and enhancements to the SmartCare product suite, and received first deposits of over $340 million through BlackRock's LifePath Paycheck.
• A total of $151 million of common stock was repurchased year-to-date through August 2, with $64 million repurchased in the second quarter and an additional $25 million through August 2.

In the second quarter, the Annuities segment recorded adjusted earnings of $332 million. This was due to a higher underwriting margin for income annuities, increased fees, and lower sequential expenses. The Life segment had adjusted earnings of $42 million, with higher net investment income partially offset by a lower underwriting margin. The runoff segment had an adjusted loss of $30 million, with a higher sequential underwriting margin. The Corporate & Other segment reported adjusted earnings of $2 million, which resulted from higher net investment income and a higher tax benefit sequentially.

• The company aims to return the RBC ratio to the target range of 400% to 450% within the next 6 to 12 months through initiatives like reinsurance.
• The company plans to continue its share repurchase program as its strong capital and liquidity position supports this.
• Inflows from LifePath Paycheck are expected to be uneven, with little activity in the third quarter and more in the fourth quarter.

• Statutory results were disappointing due to factors like basis risk, the underperformance of equity hedges relative to Shield liability movement, and capital strain from new Shield business.
• Market volatility and regulatory changes pose risks to the financial performance.

Q: Could you talk a bit more about your comments on basis risk and if it's going to be an ongoing drag in the near-term?

A: Basis risk is volatile on a quarter-to-quarter basis, but there's no reason to expect it to be a long-term drag. We've never given quarterly guidance on norm stat earnings because it's too volatile.

Q: How long do you think it will take to execute these reinsurance contracts?

A: We expect to get back to the target RBC range of 400% to 450% in normal markets by year-end through a combination of initiatives and the results in the second half.

Q: After fully implementing reinsurance arrangements, what do you expect the pro forma free cash flow generation level to be?

A: We plan to release updated long-term statutory free cash flows in the first half of next year. Historically, the average norm stat earnings have been just under $400 million per year, but there's volatility.

Q: Given that most of the loss this quarter was driven by hedging performance of both Shield and VA, do you need to make changes there?

A: We are pursuing multiple avenues to address the complexity from the new statutory requirement and the balanced risk profile between Shield and VA. Simplifying is key.

Q: Why not downstream some capital to help shore up the RBC position right away? And why choosing not to take a pause with the buyback program here?

A: The capital return plan isn't dependent on cash from the operating company. With $1.2 billion at the holding company and no debt coming due until 2027, there's no need to downstream. We're continuing the buyback as we're comfortable with our capital position.

Q: Did the second quarter RBC issue come as a surprise? What pieces of TAC decline were anticipated and what were surprising?

A: Roughly 70% of the norm stat loss was unanticipated. Basis risk is anticipated but expected to be zero over time. Shield now consuming capital adds to the volatility.

Q: What's the trajectory for BlackRock flows?

A: We don't expect much activity in the third quarter but anticipate more in the fourth quarter. It's still new, with new companies being onboarded quarter after quarter.

Q: On the initiatives, is internal reinsurance part of potential initiatives?

A: We already have the reinsurance captive Brighthouse Reinsurance Company at Delaware. We're considering different options but leveraging existing market structures.

Q: Can you give a sense of the minimum liquidity target at the holding company?

A: We don't give out a minimum buffer target as it's situational. Currently, we have $1.2 billion cash at the holding company, which is a favorable position.

Q: Talk about exposure sensitivity to floaters should rates decline.

A: Floating rate assets generally back floating rate or short-term liabilities, so the net margin impact from declining short-term rates should be minor.

Q: Is there an opportunity for external partnerships to alleviate capital strain from Shield and LifePath Paycheck?

A: We're considering opportunities, but there are no specific plans for LPP yet. We're happy with the partnership on LifePath Paycheck.