Good morning, ladies and gentlemen, and welcome to the Brighthouse Financial Fourth Quarter and Full Year 2022 Earnings Conference Call. My name is Carmen, and I'll be your coordinator for 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, the conference is being recorded for replay purposes. I will now turn the presentation over to Dana Amante, Head of Investor Relations. Ms. Amante, you may proceed.

Thank you, Carmen, and good morning. Welcome to Brighthouse Financial's fourth quarter and full year 2022 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 other members of senior management. 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 the 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 10, 2023. 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 on the Investor Relations portion of our website, 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 statement. And now I'll turn the call over to our CEO, Eric Steigerwalt.

Thank you, Dana, and good morning, everyone. Brighthouse Financial's fourth quarter results were a strong finish to a successful year in which we maintained a robust capital and liquidity position, exceeded our total annuity sales expectations and continued to return capital to our shareholders through our common stock repurchase program. Before I provide comments on the fourth quarter results, I'd like to take a moment to reflect on the year. 2022 was a difficult year for markets with equity and fixed income indices down significantly amid continued high inflation. While market performance was a negative for separate account returns, our industry benefited from interest rates up over 230 basis points as measured by the 10-year U.S. Treasury. Despite the challenging environments, 2022 marked a year of significant milestones for Brighthouse Financial as we continued to execute on our strategy and remain disciplined in our financial and risk management. As I have said in the past, one of our top priorities is balance sheet strength, which we continue to display in 2022. As we communicated previously, in the rising interest rate environment earlier in 2022, we took the opportunity to add a substantial amount of low interest rate protection. We took additional actions through year-end 2022 to further enhance our interest rate protection and our shift to a more strategic interest rate hedge positioning. These actions reflect our continued focus on protecting our balance sheet, optimizing our distributable earnings and supporting the growth of our franchise through a broad range of market scenarios. We delivered another record year of annuity sales with total annuity sales of $11.5 billion for full year 2022, up 26% compared with 2021. These strong results demonstrate the strength and complementary nature of our product suite. And in August of 2022, we launched a new annuity product,…

Thank you, Eric, and good morning, everyone. Protecting and supporting our distribution franchise remains a top priority and our financial and risk management strategy plays a critical role. As you have heard me say repeatedly, it is our goal to maintain a strong balance sheet under a multiyear, multi-scenario framework. As our fourth quarter and full year 2022 results demonstrate, we maintained a robust capital and liquidity position through the difficult market environment of last year. At December 31, our combined total adjusted capital, or TAC, was $8.1 billion compared with $8 billion at September 30. While equity markets were down significantly for the full year, the market performance in the fourth quarter was positive, which contributed to the increase in CAC. We completed the variable annuity actuarial model conversion in the fourth quarter along with the annual variable annuity statutory assumption updates. The combined impact of these two items was relatively modest, reducing CAC by less than $200 million. Our combined risk-based capital or RBC ratio was approximately 440%, which is near the top end of our target range of 400% to 450% in normal markets. This ratio was down from an estimated range of 450% to 470% at September 30. The sequential decline in the RBC ratio is due to the strong variable annuity or VA results, which were more than offset by the impact from the model conversion and actuarial assumption update, nontrendable items, and capital used to fund a high level of annuity sales. The strong new business trends we saw in the third quarter continued through the end of the year and drove another quarter of above normal capital usage to fund growth. Growth is essential to drive our business mix toward lower risk, higher return products and away from legacy variable annuities. Therefore, we…

[Operator Instructions] It comes from the line of Elyse Greenspan with Wells Fargo. Please go ahead.

My first question, Ed, you mentioned that you guys would look to resume dividends from BLIC in 2023. Do you have a sense of just the timing and the magnitude of dividends that you guys will look to take this year?

Elyse, I think $300 million for dividends this year is a good expectation with most of that coming from BLIC. And in terms of timing, I don't really have anything for you on timing.

And then my second question, do you guys have a sense of earnings, emergence thoughts surrounding LDTI and then you guys considering adding any additional non-GAAP measures to your disclosures?

At this point, no.

And then do you have a sense of just how the impact of the accounting changes would be on your adjusted earnings based on your current disclosures.

Sure. At this point, I would say a pretty modest impact on adjusted earnings from the new accounting standard. So in terms of pieces, there's a portion of fee income in under current accounting that will now go below the line with MRB, so that's a negative. But an offset to that will be any death benefit claims and related reserves that are now above the line are also going below the line with MRB. And then the final piece DAC amortization, while all DAC amortization will now be above the line versus some of it below the line today, with the new simplified approach to amortization, we don't see a material change in that number relative to what we would expect in a normal quarter under current GAAP. And remember, there will be no more volatility in the DAC like you saw this quarter from markets. So overall adjusted earnings, I would expect to be pretty close to what we have today. In terms of net income, I would just first start off by saying, as you all know, we manage the company for stat and cash. So we are not managing the company for GAAP. And so I would expect you'll still see volatility associated with the difference between how we manage the company and the GAAP accounting framework. However, I think it has to be an improvement on the net income line versus what we have today because what we have today is really doesn't work. If you look at net income, for example, or net results this quarter, right, the stock market was strong in the fourth quarter. Interest rates were up. So good stuff, and we lost $1 billion on a net basis. So clearly, current accounting does not capture the fundamentals of the business.

And it comes from the line of Tracy Benguigui with Barclays. Please go ahead.

Can you touch on the reinsurance recapture in the runoff segment? Was that a life product subject to YRT treaty? And if so, which one, I mean, if you could share the net amount of risk or amount in for?

Yes. Tracy, Yes. I mean I think we're going to keep it a little bit higher level than that. We had a $39 million unfavorable impact from actuarial items. And the biggest piece of that was a $24 million impact from a reinsurance recapture. And as you said, I believe you said it was in the runoff segment. We've had these from time to time. We get a rate increase from a reinsurer. We evaluate whether it makes sense to accept that or to recapture the business. And in this case, as has often been the case, it made economic sense for us to recapture the business.

And part of your playbook to grow fixed annuity sales is utilizing reinsurance flow as there's a penalty on the C4 charge on first year sales. I imagine this year, there will be greater demand for reinsurance flow by a number of cedents. Can you touch on reinsurance capacity to meet this demand if there's any deterioration in reinsurance costs where you may wish to retain more of this risk? .

Tracy, this is David. I'll start with that one. So we're not going to get into necessarily the structure of our reinsurance agreement. But 2022 was across the industry a record year for fixed annuities. And we benefited from that as well, and that was partly in conjunction with our reinsurer. We had a competitive offering and strong distribution to sell the products. So we we had adequate reinsurance capacity to meet that demand. As we think forward into 2023, we're not expecting a similar consumer demand to what we saw in 2022, but we will continue to assess that demand with -- in conjunction with our reinsurance partner.

Sorry, one comment you made, I think, about the C4 charge. We have the full C4 charge on the fixed annuity premium. I think you said a portion of it, but we booked the full charge.

No, I said penalty, not portion. Yes. So that relationship you have, you have that preferred relationship where you would be first in line for capacity in '23?

I'm not going to get into the structure, but we have a reinsurance relationship with Athene for fixed rate annuities.

And it comes from the line of Ryan Kruger with KBW. Please proceed.

My first question was, can you help us think about the, I guess, the level of new business strain that you would, I guess, that either maybe occurred in the fourth quarter or you'd expect on a run rate basis as we move into 23?

Sure. Ryan. For full year, we had a little bit more than 30 points of strain from new business. And in the fourth quarter, it was around 10%. So I would say for the full year, Strain was maybe 50% more than what we would see in a typical year. It's good news because more strain meant more growth. And that was our decision to retain capital in BLIC because of the fact that we had this opportunity to produce more sales in the second half of the year than what we had anticipated on the fixed side.

And then are you planning to provide updated distributable earnings scenarios like you've done in the past?

Yes is the short answer. I think timing will be different because as we head into this year, we have a lot of work to do on recasting financial supplement for LDTI, filing an 8-K that will effectively be a recast of our 10-K for LDTI. And in addition, leveraging our new valuation environment, that we completed actuarial transformation in 2022, leveraging that to enhance our DE projections. So all that suggests that timing of DE disclosure this year will be closer to midyear versus historically, we've done it in March.

And then if I could sneak in one more. I think the statutory mean reversion rate when -- I believe it went up 25 basis points at the start of this year. If that's -- well, one, is that accurate? And then two, what would be the impact of that on your RBC ratio?

Yes. So it did go up. And we have seen $200 million to $300 million impact from that. Last year, the impact was negative $250 to $300 million, so it was on the higher end. So we'll get that benefit in the first quarter. In addition, given where rates are today, you would be looking at another 50 basis points to 75 basis point increase in the mean reversion point if you look out '24 and '25.

I see a question from the line of Suneet Kamath with Jefferies. Please go ahead.

Can you give us a sense maybe of how your fixed annuity spreads that you wrote on new business in the sort of fourth quarter and the third quarter kind of compared to the in-force?

Yes. So Suneet, this is David. I'd say given the rate environment and with the investment achievables and where crediting was. The spreads on the product were strong, and we were very comfortable with the profitability as well as the competitive nature of the product that we wrote in the quarter.

And then you made a comment about not expecting, I guess, the same level of fixed annuity sales in 2023. A I guess, where do you see the best growth opportunities in terms of annuities? I mean you mentioned a new Shield product. But just curious kind of where you think the puck is going on that business.

Suneet, it's Myles. I'll take that one. So yes, we're highly focused on growing Shield sales, a suite of Shield products this year, and that's where we're going to -- we expect to see most of the growth.

And it comes from the line of John Barnidge with Piper Sandler. Please proceed.

I noticed on the investment portfolio, mortgage loan exposure grew from 16% to 20% over the last year. Can you maybe talk about the attractiveness of that asset class where rates are. I get it pairs nicely with spread products, but curious on that growth through third-party investment managers.

John, it's John. And yes, the -- our mortgage loan portfolio grew from about 16% of our assets to 20%. So you're pretty nice growth during the year. We like -- well, as a reminder, it's not just commercial mortgage loans. Although they do make up the majority at about $13.5 billion, we have a $5 billion allocation to residential whole loans and a little over $4 billion in agricultural mortgages. We like all three of those asset classes for their relative value as well as a diversifier away from corporate credit, which is our biggest exposure, as you know. So we intended to grow the asset class. And you're right, these loans are a really good fit for our institutional spread margin business. which grew by about $5 billion during the year and accounted for a nice portion of the commercial loan growth.

[Operator Instructions] And the question comes from the line of Tom Gallagher with Evercore ISI. Please proceed.

Eric, I just wanted to start on you're getting a little more cautious on capital return. Can you just give some indication about what guidepost you're looking at? Is it really just the passage of time in terms of the Fed tightening cycle ending and seeing what the impact is before you pivot back to kind of going back to a higher level of capital return? Any color on that?

Sure, Tom. Look, I think you got it, but I'm happy to talk a little bit about it. We're watching the macroeconomic environment. Obviously, us and everybody else is watching what the Fed is doing. Are we going to have a real credit cycle or not? We want to return capital -- we continue to do so as we speak in the first 5 weeks, we repurchased about 0.7% of our shares. So it's not like we've stopped returning capital, and it's definitely strategically not like we're going to stop returning capital. But we're cautious. We've said this many times. You've seen what we've done over the last four years. We want to protect what we've built here. We've got an outstanding distribution franchise. And I want to make sure that we're in a situation where we can sell. You saw we were able to pivot last year, and I know we've gotten a couple of questions today with respect to what's going to happen? What are you expecting like on fixed annuities. We're not expecting to sell as much fixed annuities in '23, but we're prepared if the opportunity arises. So with respect to stock repurchases, we're watching the Fed. We're watching to see what kind of credit cycle might happen. But nothing has changed strategically. We want to return capital. I hope that helped to some degree, Tom.

That does. And my follow-up is can you -- it's really about the competitive conditions in your buffer annuity space and then in the fixed annuity space. From what I've heard, the buffer annuity space has a lot more entrants. But whenever I hear that, I get worried about price competitiveness. And I know you are one of the founders of that business. But just curious, with a lot more competition coming in, are you seeing pricing pressure? Is it affecting margins? Or is that still pretty rational? And then a similar question on the fixed annuity space. You've had two quarters of very strong growth, or should say, strong sales levels. That's considered among the most commoditized products in the industry. And you know the private equity firms with a lot of unique investment strategies are big into that space. So whenever you see sales growth in a space like that, it has to make you wonder from my perspective, what's going on and what the margins look like. But anyway, sorry for the long-winded questions.

Yes. I'll start out. I think everybody is going to jump in here, Tom. And you asked a similar question last quarter. Look, I see a reasonable level of discipline. You've heard other companies talk about the fact that they're really happy with the returns that they're getting in the fixed space. And although you're seeing a lot more competition or peer companies entering the Rila space. Generally, I see, we see decent discipline here. I mean we think this is an excellent product for consumers. Our distributors love it, and we love it as a manufacturer. So again, I'm using the word generally, Tom, but generally, across the various sales classes or product classes, I'm seeing reasonable discipline. David, Miles, even Ed looks like he wants to jump in. Tom, you got a live one here.

All right. I'll start. So I think in addition to what Eric said on the pricing and the economics, we think that simplicity and transparency do matter. We've continued to enhance our Shield suite of products, and we'll continue to keep the product up to date to compete in a variety of market conditions. We're also thinking about ways to address other consumer needs, and we did that successfully with Shield Level Pay.

Tom, just very quickly. So yes, the role space is more competitive as you went from 3 carriers to whatever it is now, 20%, whatever the number is. But I would just point out that the returns initially when there were three carriers were very high. So yes, they are lower today, but still attractive, just not what they were when they were -- when you had basically oligopolistic pricing with three players. If I look at the question you had about competition from alternative asset managers, remember what David said, we have a partnership a reinsurance arrangement with Athene. So we are benefiting from that element of the competitive market with the relationship we have.

Yes. So then it's Myles again, I'll kind of wrap this up. But to Eric's point, we all were jumping at this question, and I'm going to focus my comments specifically on the Rila category. And look, I guess, as it relates to competition and sales, yes, it's had an impact on sales. But the way we think about it is it's a really positive development for advisers and consumers with more entrants in the space. We like the competitiveness of our product. We have a very strong distribution footprint. We remain pleased with ourselves, and you're seeing us continue to evolve our portfolio of Shield products with the new level -- with our new Shield Level Pay Plus product, which gets us into the income category as well.

And it comes from the line of Erik Bass with Autonomous Research. Please proceed.

I was just hoping you could provide some more color on corporate expenses this quarter, which it looks like it may have had sort of a positive favorable item in there? And then related, now that established costs are done, how should we think about the expense outlook going forward?

Erik. So there was favorability in the corporate line in the fourth quarter. We tend to call out the biggest items when we put the numbers out the night before because there are always puts and takes. So I would say that while there was favorability in the corporate line, we also had some elevated corporate expenses that were impacting other segments. So I think if you look at the number that you would calculate from our disclosures of $4.09, I think it was $4.09 of earnings ex those items we identified I would guide you back to the third quarter when we said -- I think I said something like run rate looked like 360 plus or something. Obviously, we had buybacks that would have benefited in the fourth quarter relative to that number. But I would gravitate more toward toward that end as a kind of go-forward number than the north of $4 that you would come up with from what we disclosed last night.

I'll take your establishment costs comment, Erik. We're done with establishment costs going forward, so you won't see them anymore. But is there a little holdover into '23? Is that part of what will maybe have our corporate expenses up a little bit in '23, Yes. There's some cleanup stuff as you can imagine. You've heard companies like us talk about this for years when you've got secondary stuff that you got to clean up. But generally, the future state environment for us is done. It's finished, and you won't see any more establishment costs. So we did 70-ish of corporate expenses in 2022. That number will go up a little bit for 2 reasons. One, I already said, just some cleanup stuff that we'll do in 2023 from a technology point of view and inflation certainly, we will be experiencing some inflation, employee costs, vendor contracts, et cetera. But I'm very pleased with where we are with respect to expenses. You're not going to see a large-scale expense initiative here, though we remain laser-focused on expenses every day.

And then, Ed, I was just hoping you could maybe provide an update on the expected book value impact for LDTI as of year-end.

Well, I can give you -- I guess I would reiterate what I said last quarter because I think it still stands. We gave you the impacts if you look back, and then I said we didn't give you anything as of the third quarter, but I said given where rates were we expected. I can't remember, substantial improvement, significant, whatever word I used. That still applies as of year-end. And just a reminder, remember, we had said that at 12,31,21 that the range was $6 billion to $8 billion to total equity and $3 billion to $4 billion equity ex AOCI. So the application of substantial improvement is relative to those numbers.

And it comes from the line of Alex Scott with Goldman Sachs. Please proceed.

First one I had is just on the drag on new business. When I look at like overall flows and the organic growth rate. It seems like maybe there's probably a bigger drag that's not being released on the legacy products and when do we get to more of a per state where if you're deploying capital behind new business in a bigger way where it's actually pushing your organic growth up, I mean is that years away? Is it -- does that start to unfold more medium term? How do we think about that?

Alex, it's Ed. So let me see if I can help out a little bit. If you look at our TAC and our RBC this year, right, because I think you're getting to -- well, you're using up, it seems a lot of capital to fund growth and where -- when are you releasing capital from other products. I think the numbers this year mask what's going on a bit here, okay? If you look at our TAC, it was down from $9.4 billion to $8.1 billion year-over-year, right? So of that $1.3 billion decline, I would say $1.2 billion of that would be nontrendable items. And I would say that a good portion of those we would expect to reverse over time. So specifically, the DTA write-down was about $400 million. We fully expect to utilize our tax attributes over the long term. Second, the MRP impact was $250 million to $300 million negative in 2022. And not only is that reversing, but as I said, it's going in the other direction as we get 25 basis points up in the first quarter of this year and another 50 basis points to 75 basis points in '24 and '25. And then third, we had some AAT reserves this year that was around $200 million. And in this instance, I consider those reserves to be equity. I don't believe we're going to need them. So I think you're going to see that reverse over time. So you're talking about a very significant amount of tax that I don't deem to be really representative of the economics of what's going on at the company. Putting that into RBC terms, right, RBC ratio for the year went down from $500 to $440 million. Of that 60-point decline, approximately 50 points, I would think, reverses over time. The DTA impact is over a longer period of time. The MRP impact is happening now and the AAT TBD. So when you're trying to get to what actually was going on here at the company, you had 30 points that was used for growth. You had about 75 points that I would say would be nontrendable items and you had about 45 points of core capital generation

Second one I had is just on the system conversion. I mean it seems like as it relates to RBC, that was a reasonably good outcome getting through all of that. As we think about the next piece of information that's going to potentially be impacted by the distributable earnings tables. Do you expect to have much of an impact there? I'm just thinking about the [indiscernible] point is obviously a tailwind, but does that system conversion materially change the way you project your cash flows into the future?

Yes, Alex. I mean I don't think there's any material change in how we project, but we're doing it with -- we're doing more in-house work with a new projection model. And so it remains to be seen what the impact will be. But whatever the number is, I'm going to have more confidence in the numbers because of the position we're in now from an actuarial system and projection standpoint. And just to -- I think there were some questions on this last night. So just to get it out there. The impact of the systems conversion to VA and the assumption updates was, as I said in my prepared remarks, less than $200 million the pieces would be the assumption update component of that was essentially zero. So you can think about the systems conversion being really what drove the number.

And I have no further questions in queue. I will turn the call to Dana Amante for final thoughts.

Thank you, Carmen, and thank you all for joining us today and for your interest in Brighthouse Financial. Have a great day.

And thank you, ladies and gentlemen, that concludes today's call. Thank you for participating, and you may now disconnect.