Brighthouse Financial, Inc. Q4 FY2024 earnings call

Accomplishments in 2024

• Record sales of Shield annuities product suite at $7.7B, a 12% increase from 2023.
• Steady growth in life insurance sales by $120M, an 18% increase from 2023.
• Launched BlackRock's LifePath paycheck in defined contribution plans and received first deposits.
• Corporate expenses down over 7% compared to 2023.
• Repurchased $250M of common stock in 2024, reducing shares outstanding by over 50% since 2018.

Strategic Initiatives

• Transitioned to hedging all Shield annuity new business on a standalone basis.
• Completed reinsurance transactions: reinsured a legacy block of fixed and payout annuities in Q3 2024, and a legacy block of universal life and variable universal life products in Q4 2024.
• Focus on improving capital efficiency, unlocking capital, and maintaining combined RBC ratio within target range of 400% to 450% in normal market conditions.

Annuity sales in 2024 totaled $10 billion. The flagship Shield product suite had record sales of $7.7 billion, a 12% increase from 2023, making up a significant portion of annuity sales. Life insurance sales for the full year were $120 million, an 18% increase over 2023. The Shield products are registered index-linked annuities (RILA), and the life insurance business saw steady growth with new enhancements to the SmartCare product.

Forward-Looking

• Continue executing on business strategy and focus on capital-focused initiatives to improve capital efficiency and stay within RBC target range.
• Statutory financial plan anticipates combined RBC ratio will be relatively stable over the next few years without additional support from the holding company, assuming normal market conditions.
• Exploring flow reinsurance deal for Shield new business to alleviate capital strain.

Risks

• Market volatility impact on statutory results, including negative effects from interest rate changes and yield curve movements.
• Complexity in managing legacy variable annuity (VA) and Shield portfolios, with ongoing work needed to determine the appropriate strategy for the back book.
• Uncertainty around future regulatory changes, such as upcoming variable annuity capital and reserving requirements.

Q: Good morning, Ed, I was hoping you could touch a little bit on the driver's RBC in the quarter.

A: Yes, good morning, Wes. This is going to be 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 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. It's approximately $8 billion of reserves. And so, what we saw this year in our testing was in high rate scenarios, you would see a material increase in lapses on this block, which could cause a, to sell bonds at a loss to fund the outflows. So, you're looking at a variety of conservative scenarios when you look at cash flow testing. This year, we saw that the up-rate scenario was going to cause some shortfalls and that's why we set up the $200 million. So, I know that's a lot, but hopefully you can put those pieces together and I think you can get a pretty good understanding of what drove the results in the quarter.

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. So Ed, just to the question and or maybe Eric, on what -- just your intention on where you'd like to run the company in terms of RBC ratio and where is it that you -- as long as you're about 400%, should we assume that you'd be taking sort of additional actions like the insurance or anything else to get it even higher and give you a little bit of cushion or are you comfortable running it at 400%?

A: Good morning, Jimmy. So, the first thing I'd say is we're comfortable running at 400%. In normal market conditions, we say our range of 400% to 450%. And I think over time, as your mix shifts, you can argue for the range coming down. I'm not saying near term, but over time, that would make sense given the changing risk profile of the company. The second thing is we're always looking for opportunities to unlock capital. So, that is not -- that's nothing different than what we've tried to do over the years in a variety of different ways. And so that's just been a consistent effort on our part and it will continue to be. And these different strategic initiatives that we have in place, the approach we're going to take with the back book of VA and Shield, any additional reinsurance that we might put in place, we think that -- that is going to improve capital efficiency, potentially unlock capital. And that's why we continue to be focused on those initiatives.