Good morning, ladies and gentlemen, and welcome to Brighthouse Financial’s First Quarter 2024 Earnings Conference Call. My name is Norma 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.

Thank you, and good morning. Welcome to Brighthouse Financial's first quarter 2024 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, May 08, 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.

Thank you, Dana. Good morning, and thank you to everyone for joining today's call. Brighthouse Financial's first quarter results demonstrate the steady execution of our strategy. During the quarter, we maintained a strong balance sheet, continued to focus on executing our growth strategy, and sustained a disciplined approach to expense management. As you've heard us say in the past, the strength of our balance sheet is essential to support our distribution franchise, and we continue to focus on prudent financial and risk management. We ended the first quarter with $1.3 billion of liquid assets at the holding company and an estimated risk-based capital, or RBC ratio between 415% and 435%, which is in the middle of our target range of 400% to 450% in normal markets. Our strong RBC ratio and robust holding company liquid assets support our ability to consistently return capital to shareholders through our common stock repurchase program. In the first quarter of 2024, we returned $62 million of capital to shareholders through repurchases of our common stock. Since we began our common stock repurchase program in 2018, through the first quarter of 2024 we have reduced shares outstanding by just short of 50%. We remain committed to returning capital to our shareholders, and through May 3rd have repurchased an additional $27 million of common stock. Now, I would like to take a moment to talk about the success of our distribution franchise. The execution of our growth strategy is focused on providing a complementary suite of annuity and life insurance products designed to help people achieve financial security. I am very pleased with our first quarter 2024 annuity sales, especially with the continued steady growth in our SHIELD Annuity product suite as we remain a leader in the Registered Index-Linked Annuity or RILA market. Our total…

Thank you, Eric, and good morning, everyone. After the market closed yesterday, Brighthouse Financial reported results for the first quarter of 2024, including preliminary statutory metrics. Through the first quarter of 2024, Brighthouse Financial maintained a strong statutory balance sheet and robust liquidity position. The company also reported adjusted earnings, less notable items in line with our expectations for the quarter. Starting with preliminary statutory results, combined total adjusted capital, or TAC, was $6 billion as of March 31, 2024, an approximately $300 million reduction from year-end 2023. The primary driver of the decrease in TAC was the impact from a reinsurance premium rate increase retroactive to September 2019, which resulted from the conclusion of a reinsurance arbitration. This rate increase is associated with a legacy block of life insurance, and there was no statutory reserve impact from this item. Moving to normalized statutory earnings, the first quarter results reflect a $250 million to $300 million benefit from a 50 basis point increase in the prescribed 20-year treasury yield mean reversion point, or MRP. This benefit was largely offset by normal fluctuations in quarterly results, which as we have said in the past can be plus or minus a couple hundred million dollars. A key source of variability this quarter was actual to expected changes in our in force annuity book. Keep in mind that small variations from quarter-to-quarter associated with an approximately $125 billion block of business can have a magnified impact on results. We have also started to see a negative impact on normalized statutory earnings associated with growth. In recent years, growth has largely been funded outside of normalized statutory earnings in the form of higher required capital associated with business risk. More recently, we are seeing the growth in SHIELD annuities reduce normalized statutory earnings as…

Thank you. [Operator Instructions]. And our first question will come from the line of Suneet Kamath with Jefferies. Your line is now open.

Thanks, good morning. Ed, in your prepared remarks, you talked about some actual to expected impacts in the annuity business that affected regulatory capital. Can you just provide a little bit more color in terms of what happened in the quarter?

Sure, good morning Suneet. So I also mentioned in my remarks that we're talking about a $125 billion block of annuity business. So you will have fluctuations between expected in-force and actual in-force in every quarter. And it will be driven by mortality, withdrawals, annuitizations, and again, you don't need to have much of a deviation for it to matter for earnings. We spent a lot of time working on attributions and analyzing results versus expectations. For example, you've heard us talk about basis risk in the past as an item that was notable. There are many factors quarter -- in every quarter that move around. And in this quarter, this was the one that was notable to point out.

Got it, okay. And then I guess on the growth in SHIELD and now you are sort of more of an equity market neutral situation. Is that going to impact those distributable earnings scenarios that you typically give us in the spring?

So, let me start with some of the things that I said in prepared remarks and then expand a little bit. We have experienced SHIELD sales growth that's been better than our expectations. And this has exerted some pressure on norm stat earnings. And now that SHIELD is a capital consumer, I would say that we are moving into a new phase for how we manage this product. So as a reminder, historically, we have managed VA risk and SHIELD together, and that has been beneficial to us from a capital standpoint as well as from a risk management standpoint. Now that we are in this delta neutral position for equities, we see an opportunity to modify our hedging approach for SHIELD and specifically, what we are planning on doing going forward is managing SHIELD on a stand-alone basis versus mixing with VA and that will entail purchasing a basket of options that will directly offset the guarantee that we are selling in the product. So we will see a change in how we manage this, which we think is going to be beneficial for us going forward.

Okay, thanks.

And just specifically on the cash flows, there's a lot of work, as you know, that goes into providing those numbers. And there are a lot of factors that move things plus and minus. And so I don't think it's appropriate to give any indication of those numbers until it's time for us to disclose them again.

Okay.

Thank you. Our next question will come from the line of Tom Gallagher with Evercore ISI. Your line is now open.

Good morning. First question, just on the reinsurance arbitration. Ed, as you alluded to, historically, you've done more recaptures and they've been maybe modest charges. This one was a lot larger. Was there something unique to this or is it possible we'll see some other larger settlements as you think about your overall docket for various arbitrations, any perspective you can give on that? Thanks.

Hey good morning, Tom. So this was different from the standpoint of it's a retroactive premium rate increase because we have been involved in a dispute around this specific contract. So you're looking back at four and half years' worth of premium rate increases, and that's the reason that this is sizable relative to the stuff we've had in the past. And if you look, we've had seven instances of reinsurers coming to us with rate increases. And we have chosen to recapture in six of those instances, and we decided to take the rate increase in this case.

Got you. And anything beyond as you think about other situations that we might see something directionally similar over the next couple of years or do you feel like this was unique and kind of a one-off?

I feel like it is different from the standpoint of it was a multiple year dispute that was resolved and therefore, the size was material. I think if you look at our book of business, which is really, I think, the question you're trying to get at here, we have had very little changes to our mortality assumptions over the years. So every year, we go through a deep analysis of all of our critical actuarial assumptions, which you know we do in the third quarter. And every year, we're looking at our actual experience versus what we had assumed for mortality, and we've had very little change associated with that. So I don't believe that this is indicative of anything to do with our overall book of business.

Yeah Tom, it's Eric. I'll just jump in for a second, too, maybe to wrap this up. It was a pretty unique situation, as Ed said. In my mind here, going forward, with respect to the concept of what you're talking about, it's business as usual. Hopefully, that's helpful to try to distinguish the difference.

That is, appreciate that guys. And just one final follow-up on the question about how you were describing managing SHIELD differently and how you're going to do more stand-alone hedging. Considering that it sounds like your costs will be going up just through stand-alone purchase of hedges, is that something that you may need to change pricing on as a result, if you are going to make this change, can you help us think through what that kind of means through a broader lens?

Sure, I'll start out and maybe David will have some follow-up. If we look at our pricing, we are already assuming that we are hedging SHIELD in the fashion that I am talking about going forward. So that's already assumed in how we price the business. But I'm going to give it to David to give some more details on pricing.

Hey Tom, just maybe a couple of comments here. You've heard Ed say before many times that we manage the company across a multi-scenario, multiyear view, and that approach applies to our pricing of new products as well. And we talked a little bit about the tremendous growth that we've seen in SHIELD over time, and that was 2% of account value back in 2016 and was around 26% at the end of the quarter. So we have maintained our pricing discipline during that period of growth and are comfortable with the economics of the business that we have written and are writing. And just to kind of wrap up, as I mentioned, we have always looked at pricing SHIELD on a stand-alone basis, so this will not change that.

Okay, thanks.

Thank you. Our next question will come from the line of Elyse Greenspan with Wells Fargo. Your line is open.

Hi, thanks. Good morning. My first one, I guess, Ed, you were talking about the distributable earnings earlier. Is the plan still to provide them I don't -- actually, I don't know if you have told us a specific time frame, would it be, I guess, kind of in line with September when they were disclosed last year?

Good morning, Elyse. So I would -- we haven't determined when we're going to do it yet. But I would remind you that last year was a bit of an off cycle time for the release of distributable earnings. We had a number of things that were going on related to LDTI, I remember, I think I talked about that. There were a number of things that -- moving to all of our in-house modeling versus some external modeling that we had been using. And so that's why we did it in September. If you recall, prior to that, we had been doing it in March of the year. So just to point that out. We haven't made a decision yet, but last year was a little bit different from a timing standpoint.

Okay, thanks. And then you typically talk about kind of a 5-point strain on RBC from new business. I know it is different in the Q1 just given the lower charges on the fixed annuity business. So how would you think should we still use that same kind of rule of thumb of kind of 5 points a quarter going forward?

Yes. So on the 5 points a quarter, as you correctly note, we have said that you will see the first quarter be actually beneficial to capital because of the timing of the business risk charge, which will roll off at the end of each year and then it grows over time. And so we would assume that you will be using capital beyond the 5 points, everything else being equal. But everything else is not always equal. I mean, you obviously have to consider what is the level of fixed sales in one year versus another because that's going to be the key driver of that business risk charge. So sales levels will be important for fixed when you think about that. In terms of the amount of strain that we're seeing now starting to emerge in our normalized statutory earnings, again, I would say we're in the process of making this change in hedging. And I don't really think it's time to talk about the specifics of what we're seeing that's coming through norm stat earnings. So for now, I think you would stick with the what I've given you as sort of the outlook for capital strain associated with the business that comes directly through the denominator of the RBC ratio.

Elyse, it's Eric. Look, we have no intention of slowing down sales here with respect to SHIELD. And of course, as you heard me discuss LifePath Paycheck, it is going to be coming online throughout the year. Just to give you a little sense, though, in the second quarter, you will see a small amount of FRA sales. So it will be down a fair amount. David, do you want to comment on that?

Sure. So Elyse, we do manage Fixed-Rate Annuities and the Fixed Index Annuity business together. And as Eric mentioned, we do expect really lower sales in Fixed Rate Annuities this year relative to last year. And more specifically, this quarter relative to the first quarter we expect it to be lower. The second quarter versus the first quarter. And really, that is as we are transitioning reinsurers for our FRA business. So that is really the driver of why we expect sales to be lower in the second quarter.

Okay, thank you.

Thank you. Our next question comes from the line of Wes Carmichael with Autonomous Research. Your line is now open.

Hey, good morning. On the reinsurance impact, I think you mentioned there was no impact on statutory reserves, but was there a statutory impact related to the retroactive nature of that item?

Hey, good morning Wes. Yes, it was $187 million for stat.

Got it, thanks Ed. And just on annuity surrenders in VA and SHIELD, you mentioned they picked up sequentially. You talked about that a little bit in prepared remarks, but should we think about this as kind of being more of a run rate level in 2024, I think, outflows and in that bucket were about $3.8 billion in the quarter?

Hey Wes, this is David. Good morning. So one of the things that Eric had commented on in his prepared remarks and then we talked about really, on the last earnings call is that we expected the elevated surrender activity that we saw in 2023 to continue in 2024 and albeit with a different mix, and we're seeing that. So with respect to kind of the total outflows, they were flat compared to the last quarter and up over the first quarter given full surrenders of VA and SHIELD really on a higher account and higher average balance given equity market performance. So when we think about it kind of on a sequential basis, so versus the fourth quarter, the majority of that is driven by VA. We do see quarter-to-quarter volatility, and we saw that in the quarter driving higher outflows. We also had the higher account balances and a slight increase in SHIELD. Overall, outflows are weighted to VA and we do continue to benefit from outflows of the capital-intensive legacy blocks. And with respect to the comments we made a minute ago on fixed-rate annuity sales, that could have an impact on sort of driving overall net flows in the second quarter higher.

Thank you. Our next question comes from the line of Wilma Burdis with Raymond James. Your line is now open.

Hey, good morning. Could you just talk a little bit about the products that were impacted by the reinsurance repricing? Thank you.

Hey, good morning Wilma. Yes, so we had -- it was UL and VUL, primarily ULSG to a lesser extent.

Okay, thank you.

Thank you. Our next question comes from the line of Ryan Krueger with KBW. Your line is now open.

Hey, good morning. A couple of companies had COI litigation outcomes in the first quarter. I'm not sure if that was a coincidence or something broader is going on. So just curious if you have anything outstanding there?

Hey Ryan, it's Eric. If you look at the 10-K from 2023, you can see that we have two things in there on COIs. But our situation is a little different from what you've probably seen previously. We have not raised COI rates on any class of policyholders. And so the two Brighthouse COI litigations are not based on allegations that Brighthouse raised COI rates on a class of policyholders. So it's a little different than what you've seen in at least some of the other cases. So the disclosures identify these two COI litigations, but they are not related to COI rate increases.

Okay, that's helpful, thank you. And then on the LifePath Paycheck, anything you can do to frame the potential size, I guess, when you think about the $27 billion of eligible AUM, I guess would you anticipate like a low single-digit allocation to annuities to start or anything you can do to frame that?

Ryan, you can't believe how much I would love to frame that. But I'm going to -- we're just going to take it step by step. We are extremely excited about this. As you see, we got the first money in here in April, and you're going to see more coming through as companies adopt LifePath Paycheck in their 401(k) plan. And then we start to get the allocation from those folks who are 55 and older buying income units from the two carriers. So I think what we'll do is over this year, we're going to start to be able to give some sense of what it looks like and then hopefully be able to give a sense of what it might look like going forward. I'm going to wait until later in the year, but I will just say we are very excited. This has been a long time coming, and it's an exciting development for all of us.

Will you report those in the Annuity segment or where will that come through?

Yes, we will.

Okay, great. Thank you.

Thank you.

So just very quickly, if I could follow up on Wilma's question because I want to clarify the breakdown that I was providing you was as a percentage or relative to our reinsurance in force for those various categories. So if you're looking specifically at this contract, this was more ULSG than it was UL and VUL, but as a percentage of our total reinsured book, it's the other way around.

Thank you. [Operator Instructions]. Our next question will come from the line of Jimmy Bhullar from J.P. Morgan. Your line is now open.

Hey, good morning. Hey Ed, can you talk about the DOL rule and if you expect any impact on your business from that to the extent you can give us any details or color?

Good morning Jimmy, it's Eric. Look, you've heard a lot about this now all the way back to the previous situation a number of years ago. I think companies are still trying to figure out exactly what it will mean. But we're working with all of our distributors on what to do here, what we think might happen. We don't really have any sense with respect to a sales hit. But, look we've got the NAIC suitability. It's called Suitability and Annuities Transactions Model out there. It's been adopted by 45 states. It is designed to protect consumers. You've heard this before. So generally, we share the concerns of many in the industry regarding the potential impact here even with respect to just regulation that is not necessary. So it's hard to quantify any sales potential sales hit. I would say that it would be fair to think that a number of companies are going to have higher compliance costs, etcetera, etcetera. But I can't really quantify it. And I can tell you, for the time being, sales are strong. So we'll have to see how this plays out in future months, but that's about all I can really tell you.

Okay, and then on the reinsurance, the price increase, should we assume a modestly negative impact on future GAAP and stat income and I'm not sure if you're able to quantify what it would be?

Hi Jimmy, it's Ed. So, we have said -- I have said that normal run rate EPS for us is something around North of $4. $4 you saw this quarter if you adjusted for the notables, it was 4.25, which we said was in line with our expectations. This price increase does not change any of the outlook I've given in terms of what the normal run rate would be for GAAP earnings. It does have a negative impact because you're paying more. But in terms of significance it's not going to change my view on what the run rate earnings for the company are.

Okay, thank you. Also there's something in the division, but it gets absorbed sort of, I guess, not major enough to move the overall needle on overall EPS, right?

Correct.

And then if I could just ask one more. On the SHIELD product, you've obviously grown pretty fast over time and many of your peers have as well. How is that market overall in terms of terms, conditions, attractiveness from your standpoint and the reason I'm asking is a lot of other companies have similar products, so are you seeing fairly rational and disciplined competition or are there some companies that have come in that are trying to sort of offer better terms and conditions just to gain share?

Jimmy, maybe I'll start and then Myles, you're going to jump in, correct. Look, this market has grown really well. You probably heard Myles -- I know you've heard Myles say, over the last couple of years, that we welcome the competition because it has grown the market, and this is a good product for consumers and it's a good product for manufacturers. I think it's still rational. We don't see situations where we just can't understand. And we continue to grow very nicely even as we enter the second quarter here. So we want to keep growing this business here at Brighthouse, certainly. Myles, any additional conversation you want to make?

I guess what I would say, Eric, I agree, I believe competition has been appropriate. And we think it's a good thing for advisers and consumers. I think it certainly has had some impact on sales. But overall, I think the category is strong, and it is growing. From our perspective, we remain very pleased with sales. The first quarter is one of our best quarters yet as it relates to overall SHIELD sales. We like the competitiveness of our product, and we continue to round out our offering with things like SHIELD Level Pay Plus and a new crediting strategy that we offered last year, which was separate edge. So we like our competitive positioning and we like where the category is at overall.

Thank you.

Thank you. This concludes our Q&A session. I will now turn the call back to Dana Amante for closing remarks.

Thank you, Norma and thank you, everyone for joining the call today. Have a great day.

This concludes today's conference call. Thank you for your participation. You may now disconnect. Everyone, have a wonderful day.