Brighthouse Financial, Inc. Q3 FY2023 earnings call

• Sales Results: Annuity sales totaled $2.6 billion, a 5% sequential increase, driven by Shield Level annuities (+15% sequential) and fixed deferred annuities. Life insurance sales were $25 million, consistent with Q2, mainly driven by smart care product. - Financial Results: Combined RBC ratio estimated between 400%-420%, cash and liquid assets at holding company $900 million. Adjusted earnings excluding notable items $275 million, roughly in line with quarterly run rate. Interest rate hedging losses and deferred tax assets impacted capital metrics. Internal reinsurance transaction expected to benefit TAC by ~$200 million in Q4. - Risk Management: Interest rate risk management strategy balances immediate hedging impacts with multiyear balance sheet effects. Mean reversion point for VA book expected to increase by 50 basis points, recouping Q3 negative impact in Q1 2024.

Annuity segment: Adjusted earnings excluding notable items were $291 million in Q3. Sequentially, driven by higher net investment income and lower expenses, offset by lower fees. Life segment: Adjusted loss excluding notable items was $2 million. Sequentially, driven by a lower underwriting margin. Runoff segment: Adjusted earnings excluding notable items were $1 million. Sequentially, higher underwriting margin partially offset by lower net investment income. Corporate and other: Adjusted loss excluding notable items was $15 million. Sequentially, driven by lower expenses.

• Capital: Anticipates at least $300 million of ordinary subsidiary dividends to holding company this year. Internal reinsurance transaction expected to add ~$200 million to TAC in Q4. - Sales: FRA sales expected to be down from record levels, with flows shifting to Shield products. - Interest Rates: Mean reversion point for VA book expected to increase by 50 basis points, reversing Q3 negative impact in Q1 2024.

• Interest Rate Impact: Changes in interest rates drive losses on hedging instruments and affect capital metrics. - Deferred Tax Assets: Admitted deferred tax assets are low, with significant unadmitted tax attributes. - Regulatory Changes: Uncertainty around DOL proposals and their potential impact on business.

Q: Good morning. First question I have for you all was just on the GAAP assumption review and the impact on market risk benefits. I wanted to find out are there any statutory implications in some of the things that you changed in the market risk benefits and also if you could provide any clarity on what those changes were?

A: Yeah, good morning, Alex. So first, I'd start off with the assumption update was a modest impact. So when we look at GAAP, we had -- we talked about a notable item of $51 million for adjusted earnings and said that that was mostly related to the actuarial assumption review. And that was driven by the change in our mean reversion assumption for the 10-year Treasury. So 350 going to 375 was the driver of the overall impact from our assumption update. The other thing I would say is, again, it is a very small number on a GAAP basis, if you think about that, relative to a GAAP balance sheet of north of $220 billion. And the fact that we are reviewing all of our important assumptions underlying that $220 billion balance sheet. And then the final point, which gets to the question on stat, the assumption update had no real impact on our statutory risk based capital ratio.

Q: Thank you and then add -- do you have a sense just on VII, where Q4 could trend relative to normal levels?

A: Elyse, this is John. I don't think we want to get in the habit of predicting near-term alternative returns. It's generally a losing proposition. But having said that, if you think about the negative equity returns in Q3, and the lag nature of reporting, it would not be unreasonable to suggest that next quarters return is going to be below the midpoint of our long-term expectations.

Q: Good morning. Hey Ed, just a question on DTA that you mentioned there was a write down and there's only 100 million on the balance sheet. That's an admitted asset. Now, how much is the off balance sheet unadmitted DTA at this point? And can you help us think through the scenario under which you would be able to put that back on the balance sheet, I assume very positive earnings over time would do it but any color on that?

A: Hey, good morning, Tom. So the tax benefit is, I believe it's around $1.5 billion right now. So it's a very large number relative to what gets reflected on our balance sheet. I think the important point is when you look at the cash flows that we put out, the 10-year view, we are assuming that we are using those tax attributes. So the fact that they're not on the balance sheet today, does not mean that we don't expect that over this long-term period of time that we will use those attributes.

Q: Thanks. Good morning. So just to come back to RBC just to make sure I have the numbers, right. So we should be thinking about $200 million sort of good guided attack in 4Q from reinsurance. And then I think you mentioned 300 million assuming a reversal for 1Q from the mean reversion parameter, so I just want to make sure that's right? And then relatedly is that mean reversion parameter interest rate assumption sort of locked in at this point, like do you guys know what that is or is it still being calculated?

A: Hey, good morning Suneet. So a few questions in there. So it is not locked in because we have to wait to see what the month end rates are for November and December. But I can tell you that we would get it based on where rates are today, even after having come down from where they were at the end of the third quarter. So there's a reasonable amount of cushion between rates, where rates are today for the 20 year, and where they would need to go to in the last two months for us to still get it. I would point out that if for some reason rates dropped a lot, and we did not get that incremental, we would also have some meaningful hedge gains in our portfolio. So what you saw happened in the third quarter, you'd see kind of the opposite occur in the fourth quarter. So that's a key point to make, I think. Just generally about the ins and outs, first of all, I would say that I was saying for 50 basis points next year on the mean reversion point. I would be assuming something north of $400 million. I thought you might have just said 300 million. But it was something north of 400 million. Maybe I just misheard you. The other thing I'd say, sorry, no, go ahead.