Earnings Call Transcript - BHF Q4 2020

Operator, Operator

Good morning, ladies and gentlemen, and welcome to Brighthouse Financial’s Fourth Quarter 2020 Earnings Conference Call. My name is Josh and I will 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. In fairness to all participants, please limit yourself to one question and one follow-up. As a reminder, the conference is being recorded for replay purposes. Also, we ask that you refrain from using cellphones, speakerphones or headsets during the question-and-answer session portion of today's call.

Operator, Operator

Good morning and thank you for joining Brighthouse Financial’s fourth quarter and full year 2020 earnings call. Our earnings release, slide presentation and financial supplement were released last night and can be accessed on the Investor Relations section of our website at brighthousefinancial.com. 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 comments, 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, Chief Distribution and Marketing Officer; Conor Murphy, Chief Operating Officer; and John Rosenthal, Chief Investment Officer. Our discussion during this call will 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 U.S. Securities and Exchange Commission. Information discussed on today's call speaks only as of today, February 11, 2021. The company undertakes no obligation to update any information discussed on today's call. During this call, we will be discussing certain financial measures used by management that are not based on Generally Accepted Accounting Principles, also known as non-GAAP measures. Reconciliations of these non-GAAP measures on a historical basis to the most directly comparable GAAP measures and related definitions may be found on the Investor Relations portion of our website, in our earnings release, slide presentation or financial supplement. And finally, references to statutory results including certain statutory base 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, CEO

Thank you, David, and good morning everyone. Once again I hope that everyone listening today and your loved ones are remaining safe and well. Well, 2020 was a year like no other; the COVID-19 pandemic upended our communities and the world. Capital markets were volatile. Over the course of 2020 we saw the S&P 500 reach a record level followed quickly by a bear market and recovery resulting in an 18.4% total return for the year.

Ed Spehar, CFO

Thank you, Eric, and good morning everyone. Last night we reported fourth quarter and full year 2020 financial results including preliminary statutory figures. As evidenced by these results, our capital and liquidity position remain strong. Driven by the favorable market environment in the fourth quarter, our combined statutory total adjusted capital or TAC increased to $8.6 billion at December 31, up from $8.4 billion at September 30. TAC increased despite ordinary dividends paid from our insurance subsidiaries of more than $500 million during the fourth quarter, which included the planned $450 million ordinary dividend from Brighthouse Life Insurance Company or BLIC.

Operator, Operator

Thank you. Our first question comes from Humphrey Lee with Dowling & Partners. You may proceed with your question.

Humphrey Lee, Analyst

Good morning and thank you for taking my questions. I guess my first question is regarding the $300 million of dividend upstream plan for 2021. Is there any consideration of market conditions that may change how you think about that plan to move it higher or lower?

Ed Spehar, CFO

Hey good morning, Humphrey. It's Ed. When we think about our dividend plans, it's based on scenario analysis considering potential outcomes for the market and credit. So it isn't based on dividend capacity. We think the right number to take this year would be approximately $300 million, which is well below the actual capacity for $800 million in total and about $700 million for BLIC. I think that number is more consistent with a normal year as I had indicated back on the March 2020 outlook call.

Humphrey Lee, Analyst

Okay. Thank you. And then I guess more of a philosophical question for Eric. I think looking back for the past couple of years definitely have been executing well but it is evident that public markets are not ascribing a proper valuation to VA businesses and this is seen via some of the transactions in the marketplace by some of your peers. Right now Brighthouse is sitting on excess capital that is north of 50% of your market cap and I don't think a risk transfer is necessarily the right answer since you don't really need the extra capital based on what you have right now. At what point does the company look to do something more transformational to unlock the value?

Eric Steigerwalt, CEO

Thanks, Humphrey. Good morning. As we've said all along we are executing a strategy to unlock capital, repurchase stock, rationalize expenses, and sell new business. As we're doing all of that, you can see old business flowing off the books. Conor has discussed many times the net outflows and how frankly a fair amount of that is positive for our balance sheet. I understand your question about valuation, but we think that this strategy is working. We’ve been able to repurchase almost 28% of our common stock in the last couple of years. I’m not going to take anything off the table; if we saw some transaction that might work, we would consider it. Over the past 3.5 years we've created quite a franchise and we're very proud of that. You can see our sales, especially in the fourth quarter, and our ability to repurchase almost 28% of the company is value-creating, and I believe it will pay off over time.

Conor Murphy, COO

Sure. Hi Humphrey. In terms of the mix, the composition of the in-force clearly Shield has become a significant component. As a reminder, when we became a separate entity Shield only represented about 2% of our in-force and that grew by 12 points throughout 2020. Now it's gone from 2 to 14%. The decrease is in the VA business, about 6 points in what we refer to as the capital-intensive and another 6 in the non-capital intensive. Looking forward to the next horizon, between now and possibly the end of 2023, we expect that change to continue to shift such that by 2023 Shields will be approximately 25%, with the capital-intensive block coming down to about 25% as well.

Ed Spehar, CFO

Hey Humphrey, it’s Ed. I would add a couple of things. First of all, our financial strategy is the prudent acceptance of capital markets risk supported by a strong cash and capital position, and that strategy does affect how we view the attractiveness of a block deal. Secondly, we are focused on releasing capital from our VA business and we've released substantial capital without a block deal. For example, with the de-risk hedge strategy early last year, we were able to free up $1 billion of capital which allowed for the significant dividend we took from BLIC last year.

Humphrey Lee, Analyst

I appreciate the color and don't get me wrong; I do think you've been executing very well since the separation, but I really appreciate the feedback. Thanks.

Operator, Operator

Thank you. Our next question comes from Ryan Krueger with KBW. You may proceed with your question.

Ryan Krueger, Analyst

Hey good morning. I had a question on buybacks, not surprisingly. I guess I'm trying to understand the size of the authorization. It's lower than the last couple authorizations and wouldn't get you to the $1.5 billion target. Are you taking a different approach where you're looking to do smaller authorizations but potentially execute them and then re-up, or is this a signal that you may not hit the $1.5 billion buyback target this year?

Eric Steigerwalt, CEO

Thanks, Ryan. It's not a signal. It seems like in some of the reports it's become a signal, but it’s not. Firstly, we don't want to be in a race with ourselves like we did 200 then 400 then 500. Naturally, does the next one have to be 600? When we did the 500 last February, that was in conjunction with a big change in the hedging strategy that freed up about a billion dollars of capital. In this case, we thought it made sense to execute another 200 and just stay right here. I want to hit that goal; I certainly still want to hit it, and I hope that clarifies.

Ryan Krueger, Analyst

Thanks, that does. I appreciate it. For Ed, on your comment on normalized statutory earnings being pressured in the current low interest rate environment, can you provide more detail? Is roughly breakeven your expectation, or would you anticipate positive statutory earnings in this environment?

Ed Spehar, CFO

Yes. Good morning, Ryan. For the fourth quarter results, they were slightly positive for normal statutory earnings. We had good VA earnings in the fourth quarter as a result of the market environment. However, this was offset by weak non-VA results primarily driven by elevated mortality. You may have noticed we had elevated mortality in the fourth quarter. We are not giving a forecast for normal statutory earnings for 2021, but we expect there will be some pressure.

Ryan Krueger, Analyst

Got it. Thank you.

Operator, Operator

Thank you. Our next question comes from Tom Gallagher with Evercore. You may proceed with your question.

Tom Gallagher, Analyst

Good morning. Just a follow-up on Ryan's question, Ed. The $250 million dividend you're expecting to take from BLIC in 2021, does that contemplate keeping RBC flattish? Would you expect to earn or build that amount of capital throughout the year?

Ed Spehar, CFO

Hi. Good morning, Tom. In a normal market environment, we would want to be in the range of the 400% to 450%. I won't provide a specific number for RBC for year-end, but I think it's fair to say we plan to work to that target range over time.

Tom Gallagher, Analyst

Got it. And Eric, thinking about the level of Holdco cash, I believe your Holdco target is $400 million. You're above that; is the first commitment on buybacks simply to use what you're dividing up from BLIC for the year? That will still leave you with this significant cushion.

Eric Steigerwalt, CEO

Yes. Your point is well taken. Over time, we would expect that number to come down. I like the flexibility that $1.7 billion allows us, but we would like to return that to shareholders. What we've done so far with buybacks serves as a roadmap for future actions. I won’t announce new targets today, but I would expect that number to decrease over time.

Tom Gallagher, Analyst

Okay, and one follow-up. Based on where the stock is today, is it a no-brainer to think just share repurchase, or are you considering other uses for that cash?

Eric Steigerwalt, CEO

One aspect may be a dividend. We have had discussions with the board. I have nothing to announce today but we’ll consider whatever we think could help create shareholder value.

Ed Spehar, CFO

I just want to point out that we have shown a willingness to return capital to shareholders. As Eric said, the 28% decline in shares outstanding since separation is significant. We believe the actions taken with share buybacks will create substantial value over time, given our average repurchase price is less than $32 per share.

Tom Gallagher, Analyst

Okay. Thanks, guys.

Operator, Operator

Thank you. Our next question comes from an analyst with Goldman Sachs. You may proceed with your question.

Unidentified Analyst, Analyst

Good morning, everybody. I'll probably take a little bit of a break from the capital questions. I was curious looking at the annuity sales this quarter; deferred annuities, fixed deferred annuities are up considerably again year-over-year for the second quarter in a row. Can you talk about what drove that and why do you expect those sales to be lower in 2021?

Conor Murphy, COO

Yes. Hi, it's Conor. The fourth quarter remained favorable for fixed annuities in the industry, up 41% compared to the fourth quarter of the prior year. We offer a competitive product, have a beneficial reinsurance agreement, and a lower expense base. However, we had some rate decreases as well. We had a rate decrease in the third and fourth quarters. We had a good quarter focused on a few select firms and customers looking for the product. Still, we don’t expect to sell as many fixed annuities in 2021 as we did in 2020.

Unidentified Analyst, Analyst

And why would that be?

Conor Murphy, COO

We don’t expect the market to be as strong, and rate increases will contribute as well. Our growth opportunities will lie more in other products. Perhaps I can turn it over to Myles to discuss where it might come from.

Myles Lambert, Chief Distribution and Marketing Officer

Yes. Thank you, Conor. I reiterate those comments. Our focus next year will be on growing our core business related to our annuity franchise, with a strong focus on Shield sales. We are looking to introduce some new product features with our Shield products sometime mid-year next year.

Conor Murphy, COO

Sorry, I want to correct that: we had decreases in rates in the quarter, not increases. We had a rate decrease in both the third and fourth quarters, which is part of why we expect lower sales in 2021.

Unidentified Analyst, Analyst

Got it, thanks for the clarification. We noticed some elevated mortality beyond COVID-19 in the quarter. Do you think there's some correlation between the pandemic and the elevated claims or should we expect that to carry into the first quarter?

Ed Spehar, CFO

Hey Ryan, this is Ed. Our direct claims are in the range of $400 million to $500 million per quarter, with reinsurance bringing it down to around $250 million in a more normal quarter. We had closer to $600 million this quarter. Some portion of that is COVID-related, while the rest is due to normal volatility in frequency and severity. We do not expect any systemic issues; this was just a bad quarter for mortality.

Unidentified Analyst, Analyst

Do you think some of that volatility, excluding COVID, is related to the pandemic? For example, people not getting their checkups or similar issues?

Ed Spehar, CFO

No, we don't see any indication that there's a COVID-related impact here.

Unidentified Analyst, Analyst

Got it. Thanks for the answers.

Operator, Operator

Thank you. Our next question comes from Elyse Greenspan with Wells Fargo. You may proceed with your question.

Elyse Greenspan, Analyst

Hi, thanks. Good morning. My first question is on the dividend you expect to take, especially the $250 million from BLIC this year. I'm interested in the timing and if you expect share repurchases to be more weighted towards when that dividend occurs.

Ed Spehar, CFO

Good morning, Elyse. We’re not committing to any specific timing on the dividend. I don’t think the BLIC dividend would influence the timing or pace of our share buyback, considering the cash we have at the holding company.

Elyse Greenspan, Analyst

Okay. That's helpful. My second question: some operating expenses seemed elevated in the quarter. Was that typical seasonal or were there any one-off issues within your operating expenses?

Ed Spehar, CFO

Yes. I think it's sensible to clarify. Last quarter I stated that our quarterly run rate EPS was in the neighborhood of $3 a share, and I continue to think that. In the fourth quarter, we had strong alternative investment returns, driving favorable net investment income, around $1.15 a share. Elevated mortality resulted in unfavorable underwriting, which offset that benefit. Our expenses were higher in the fourth quarter, which is typical, and there was also a tax adjustment affecting corporate and other lines.

Elyse Greenspan, Analyst

Okay. That's helpful. Thanks for the color.

Operator, Operator

Thank you. Our next question comes from Tracy Benguigui with Barclays. You may proceed with your question.

Tracy Benguigui, Analyst

Thank you. Good morning. How should we think about your distribution relationship with MassMutual in light of their upcoming acquisition?

Myles Lambert, Chief Distribution and Marketing Officer

Sure. Good morning. We wish our friends at MassMutual well with this transaction. We're pleased with our partnership with them and we will continue to focus on supporting their advisors. However, as we grow distribution at other firms, they will represent a smaller portion of our overall sales.

Tracy Benguigui, Analyst

Okay. Regarding fixed annuity sales; were they driven by MYGA or something else? And on the Shield, could you provide more color on the new features as the market seems crowded?

Myles Lambert, Chief Distribution and Marketing Officer

About 84% of our fixed deferred product was from our MVA product. We feel optimistic about Shield sales; the fourth quarter was our best quarter for Shield sales since our separation. We're working on new features for the product, which we aim to launch mid-year.

Conor Murphy, COO

For clarity, our focus remains on Shield as a core product. While we may tweak or enhance it, we will maintain our expectations in terms of economics.

Tracy Benguigui, Analyst

Thank you.

Operator, Operator

Thank you. Our next question comes from Andrew Kligerman with Credit Suisse. You may proceed with your question.

Andrew Kligerman, Analyst

Thanks. Good morning. Ed, could you give us a sense of what normalized statutory earnings are and reconcile that with total adjusted capital being up despite a $500 million subsidiary dividend?

Ed Spehar, CFO

Let’s start with the second question. I’ve discussed convergence and divergence in relation to volatility in total adjusted capital. The fourth quarter was favorable for markets, which increased TAC by $200 million, even with the $511 million dividend. When good things happen, they affect CTE 70 reserves impacting TAC. The RBC ratio, based on CTE 98, moves less dramatically. Thus, you'll notice a disconnect between TAC and normal statutory earnings. For the first question, we’re refraining from giving annual expectations for normal statutory earnings. They will stabilize over time as we shift our business mix.

Andrew Kligerman, Analyst

That was helpful, thank you. What were the fixed annuity rates in the fourth quarter?

Conor Murphy, COO

We were coming in at above the 1.5% range in the fourth quarter, and now we are closer to the 1% range after the rate changes.

Operator, Operator

Thank you. Our next question comes from Erik Bass with Autonomous Research. You may proceed with your question.

Erik Bass, Analyst

Hi, thank you. Regarding annuity sales outlook, what about the BlackRock product in 2021? Is it expected to see material sales or is it a longer-term opportunity?

Conor Murphy, COO

Yes, we’re excited about the opportunity with BlackRock. We're working closely with them, but it will take time as it is a new category for us and for them. We haven’t discussed financial expectations yet.

Erik Bass, Analyst

Thanks. One other question regarding lapse trends in the older VA block; have they started to normalize?

Conor Murphy, COO

In Q4, we experienced normal outflows, consistent with our expectations. The composition was about half full withdrawals, one-third partial withdrawals, and a couple of percent for debts. We expect similar patterns in 2021.

Operator, Operator

Thank you. Our final question comes from John Barnidge with Piper Sandler. You may proceed with your question.

John Barnidge, Analyst

Thank you. How much of your sales went through MassMutual in Q4 compared to prior years and what percentage do they represent today?

Myles Lambert, Chief Distribution and Marketing Officer

We’ve expanded distribution both within certain product categories and by bringing on new firms. MassMutual represents a smaller portion of our sales compared to previous years but remains a very important relationship for us.

John Barnidge, Analyst

Is MassMutual a majority of sales today?

Myles Lambert, Chief Distribution and Marketing Officer

No, they do not represent a majority of our overall sales today.

Operator, Operator

Thank you. Our next question comes from Tom Gallagher with Evercore.

Tom Gallagher, Analyst

Ed, regarding the gross life claims this quarter of $600 million, what was the net number?

Ed Spehar, CFO

It was between $350 million and $400 million, specifically $360 million.

Tom Gallagher, Analyst

What is the reason for the meaningful delta? Is it that you're retaining more, or was it unfavorable reinsurance participation?

Ed Spehar, CFO

It’s nothing more than normal mortality. We have direct claims and reinsurance percentages that fluctuate. The combination creates volatility.

Operator, Operator

Thank you. Our next question comes from Suneet Kamath with Citi. You may proceed with your question.

Suneet Kamath, Analyst

Eric, in your opening comments, you talked about protecting the distribution franchise. Was that a message around your ratings and potentially lower levels of sales?

Eric Steigerwalt, CEO

Good morning, Suneet. No, not really. It's just about ensuring our distributors see a strong balance sheet as we work on new products. There’s no further message there.

Suneet Kamath, Analyst

Understood. If we consider sales strain, your life sales have been in the mid-teens recently. I assume you want to increase that. Can you share where you see sales strain going in 2021?

Ed Spehar, CFO

We will discuss strain and related impact around the DE figures we release. Generally, it's not meaningfully different from what we discussed last year.

Suneet Kamath, Analyst

Will you host a call when you put out DE tables?

Ed Spehar, CFO

No, we will issue it in an 8-K and answer as many questions as we can then.

Suneet Kamath, Analyst

Thank you!

Operator, Operator

Thank you, Josh, and thank you all for joining us today for your questions and for your interest in Brighthouse Financial. I hope you have a great day.

Operator, Operator

Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for participating.