Brighthouse Financial, Inc. (NASDAQ:BHF) Q4 2023 Earnings Call Transcript February 13, 2024
Brighthouse Financial, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good morning, ladies and gentlemen, and welcome to Brighthouse Financial Fourth Quarter and Full Year 2023 Earnings Conference Call. My name is Olivia 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 fourth quarter and full year 2023 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, February 13, 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 Steigerwalt: Thank you, Dana, and good morning, everyone. Looking back on 2023, I'm proud of the progress we made as we continue to execute on our strategic priorities. We bought back a substantial amount of common stock, delivered strong sales results, enhanced and grew our core product suite and nicely controlled expenses, all while maintaining our strong balance sheet and robust liquidity. We continue to return capital to shareholders through the company's common stock purchase program. For the full year 2023, we repurchased $250 million of our common stock, reducing shares outstanding relative to year-end 2022 by approximately 7%, further demonstrating our ongoing commitment to return capital to our shareholders over time.
In November, we announced a new share repurchase authorization of up to an additional $750 million. We delivered strong sales results and further strengthened our annuity and life insurance product portfolios. For full year 2023, total annuity sales were $10.6 billion, and total life insurance sales were $102 million, both of which exceeded our 2023 targets. Contributing to the strong total annuity sales results for the full year 2023 was a record sales year for our flagship Shield level annuity products. Field sales totaled $6.9 billion, an increase of 17% on a full year basis. Sales of our fixed rate annuities were also a strong contributor to the overall annuity sales totaling $2.7 billion down from $3.7 billion in total fixed rate annuity sales in 2022.
As I mentioned, in 2023, we continue to strengthen our annuity and life insurance product portfolios. In May, we introduced new enhancements to our Shield Level annuities product suite as we continue to be a leader in the buffered annuity marketplace that we help to create. In November, we launched Brighthouse secure fixed indexed annuities, expanding our distribution footprint in the fixed indexed annuity market. And we also expanded our life insurance suite with the launch of Brighthouse SmartGuard Plus, our first registered index-linked universal life insurance policy. Turning to expenses. We recognize that being a low cost producer is a great way to a sustainable competitive advantage in this industry. Efficiency gains are what will allow us to consistently offer competitive products in the marketplace, while also generating an appropriate return for shareholders.
Our focus on controlling expenses was illustrated in 2023, with full year corporate expenses up only 2% to $885 million, that's a pretax number in an environment with core inflation of approximately 4%. Finally, we continued to focus on maintaining the strength of our balance sheet, ended the year with an estimated combined risk-based capital or RBC ratio of approximately 420% and liquid assets at the holding company of $1.3 billion. The composition of the RBC ratio has changed, largely driven by the implementation of a new statutory requirement to reflect the effects of all anticipated future hedging on our variable annuity or VA reserves and required capital. The implementation of this new requirement had a favorable impact on our required capital, with an offsetting increase in statutory reserves.
So while our total combined adjusted capital, or TAC declined to $6.3 billion as of year-end 2023, there was an insignificant impact to our RBC ratio. Ed will discuss our preliminary statutory results and the new statutory requirement in more detail in a moment. But I want to highlight that our overall risk management strategy remains unchanged and we do not anticipate that this new statutory requirement will have a material impact on our long-term statutory free cash flows. Before turning the call over to Ed to discuss our fourth quarter financial results, I'd like to touch just for a moment on our priorities for 2024. First, we will continue to strengthen our product suite and leverage the depth and breadth of our expertise, along with our strong distribution relationships to competitively position ourselves in the markets we choose to compete in.
A closeup of a hand signing a life insurance policy, illustrating the security it provides.
We believe that this combination will lead to continue growth in Shield sales and expanded presence in the fixed indexed annuity market and the first dollar contributions into our worksite product offering in partnership with BlackRock. We remain very excited about our expanded relationship with BlackRock to deliver BlackRock's LifePath Paycheck. They are working with 14 plan sponsors at this point to implement this product offering. These 14 plan sponsors totaled $27 billion in target date fund assets and include more than 500,000 individual employees. Initial planned sponsor funding is expected to occur this year. Second, we intend to continue to manage our expenses with the expectation that our corporate expenses will be down in 2024 versus 2023.
Finally, balance sheet strength always remains a key priority and we believe that our strong RBC ratio and substantial holding company cash position will allow us to continue to return capital to shareholders. I'm proud of all that we achieved in 2023 and look forward to 2024 as the Brighthouse Financial franchise continues to grow and evolve to a more diversified company. And with that, I'll turn the call over to Ed to discuss our fourth quarter financial results.
Edward Spehar: Thank you, Eric, and good morning, everyone. I am pleased with our results in the fourth quarter and for the full year 2023. Our estimated combined risk based capital or RBC ratio increased approximately 10 points sequentially to 420%, even after $350 million in subsidiary dividends paid to the holding company in the fourth quarter and the subsidiary dividends explained the sequential increase in holding company liquid assets to $1.3 billion at year end. Liquid assets at the holding company increased from $1 billion at year end 2022, even though we repurchased $250 million of stock in 2023. As Eric touched on earlier, our preliminary statutory results as of year-end 2023 reflect the impact of a new statutory requirement, which mandates that life insurers reflect all anticipated future hedging in variable annuity reserves and capital.
There are three things that I believe are important to highlight related to this new statutory requirement. First, our total asset requirement at CTE98 was reduced by $1.14 billion because we now include the benefits from all anticipated future hedging. As a reminder, CTE98 is a conditional tail expectation that is the average of the worst 2% of capital market scenarios for the company. There is a substantial decrease in the total asset requirement at CTE98 from this new requirement because we now reflect the benefit of hedging over the life of the block of business versus previously only reflecting the benefit from existing hedges. Second, inclusion of all anticipated future hedges increased our total asset requirement at CTE70 by $870 million.
And this translated to an equivalent increase in reserves, reducing combined total adjusted capital or TAC. CTE70 is a conditional tail expectation that is the average of the worst 30% of capital market scenarios for the company. Given that we are hedging to protect CTE98, which is a more conservative calculation, it is understandable that this new statutory requirement is a cost at CTE70. And third, the net impact on the RBC ratio from this new statutory requirement was insignificant. The impact from reflecting future hedges has a favorable impact on required capital because the total risk is lower and more of the risk is now reflected in reserves. As a result, the decline in TAC associated with the new statutory requirement was effectively offset by a decline in required capital.
Importantly, our risk management strategy remains unchanged. We continue to manage the existing shield and variable annuity blocks on a combined basis, with a statutory hedge target and a $500 million maximum first loss tolerance. In addition, we do not anticipate material changes in hedge costs under the normal, moderate and adverse scenarios that were the basis for the long-term statutory free cash flow projections we provided in September 2023. As of December 31, 2023, our TAC was $6.3 billion, which compares with $7.3 billion as of the end of the third quarter of 2023. The key drivers of the sequential decline were the impact of the new statutory requirements and $350 million in subsidiary dividends to the holding company, with $266 million from Brighthouse Life Insurance Company, or BLIC and $84 million from New England Life Insurance Company.
Also, we realized the capital benefits associated with the internal reinsurance transaction between BLIC and its New York affiliate that we had discussed with you previously. And this included the release of approximately $200 million of asset adequacy testing reserves. I also want to note that largely because of the reserve increase associated with the new statutory requirement, we had a negative unassigned funds balance at BLIC of approximately $1.1 billion at year-end. Therefore, any potential dividend from BLIC in 2024 would be subject to regulatory approval as an extraordinary dividend. Given the substantial amount of cash at the holding company, our capital return plan is not dependent on dividends from BLIC. Now turning to adjusted earnings results in the fourth quarter.
Adjusted earnings for the quarter of $177 million reflected a $12 million unfavorable notable item or $0.19 per share related to legal matters. Adjusted earnings, excluding the impact from the notable item were $189 million, which compares with adjusted earnings on the same basis of $275 million in the third quarter of 2023 and $282 million in the fourth quarter of 2022. Excluding the impact of the notable item, the adjusted earnings results in the fourth quarter were below our average quarterly run rate expectation. This was driven by lower alternative investment returns and seasonally higher expenses. Alternative investment income was approximately $60 million, or $0.95 per share below our average quarterly run rate expectation. The alternative investment yield was 0.7% in the fourth quarter.
Additionally, corporate expenses are typically higher in the fourth quarter. This seasonality resulted in higher expenses compared with our average quarterly run rate expectation. Turning to the segment results in the fourth quarter. The Annuities segment reported adjusted earnings of $245 million. Sequentially, annuity results were driven by lower fees, higher expenses and a lower underwriting margin. Adjusted earnings in the Life segment were $4 million. On a sequential basis, Life segment results reflect a higher underwriting margin partially offset by lower net investment income and higher expenses. The Run-off segment reported an adjusted loss of $50 million. Sequentially, results reflect a lower underwriting margin and lower net investment income.
Corporate and Other had an adjusted loss, excluding notable items of $10 million and sequentially reflects lower expenses, partially offset by a lower tax benefit. In closing, we ended the year with a strong statutory balance sheet and substantial cash at the holding company. Our financial position allowed us to support growth as well as return capital to shareholders in 2023, and we expect this to continue in 2024. We would now like to turn the call over to the operator for your questions.
