Good afternoon, ladies and gentlemen, and welcome to the Brighthouse Financial’s Third Quarter 2018 Earnings Conference Call. My name is Carmen and I will be your coordinator today. [Operator Instructions] I would now like to turn the presentation over to David Rosenbaum, Head of Investor Relations. Mr. Rosenbaum, you may proceed.

Good morning and thank you for joining Brighthouse Financial’s third quarter 2018 earnings call. Our earnings release, 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, and we will refer to the slide presentation in our prepared remarks. Today, you will hear from Eric Steigerwalt, our President and Chief Executive Officer, followed by Anant Bhalla, 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 discussion are other members of senior management. 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, including those 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, November 6, 2018. 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. 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 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, David, and good morning, everyone. I’m very pleased with our results from the third quarter of 2018, including our strong adjusted earnings performance and outstanding quarter-over-quarter sales growth. I also feel very good about our progress relative to our plans. In August, our Board of Directors approved a $200 million stock repurchase program, our first as an independent publicly traded company, and significantly ahead of our base case scenario. I’m pleased to announce, we repurchased approximately 982,000 shares in the third quarter and an additional 523,000 shares in October or approximately $64 million of our stock cumulatively. As of the end of October, we have utilized approximately 32% of the authorization. I’m going to focus the remainder of my comments today around the progress we have made with respect to our top priorities for 2018. As a reminder, the top priorities are: First, we are focused on exiting our transition service agreements or TSAs with MetLife. Exiting TSA supports our goal of reducing our overall cost structure as a standalone company. Second, we are enhancing our distribution platform and network, and developing new products that respond to the evolving needs of our advisors and the clients that they serve. And third, we are actively managing through NAIC variable annuity capital reform and growing our earnings power. Let’s begin with the TSAs. Exiting TSAs with MetLife and replacing them with more cost effective solutions is essential to executing on our strategy. We began the year with 147 TSAs remaining, and we expect to end the year with approximately 85, demonstrating significant progress towards solidifying the Brighthouse operating platform. Second, product and distribution. I am very pleased with our annuity sales results in the third quarter of 2018. Annuity sales of over $1.5 billion were up 43% quarter-over-quarter, our highest…

Thank you, Eric, and good morning, everyone. Let me start with the third quarter results and provide some perspectives on the key underlying themes, beginning on slide four. Adjusted earnings excluding the impact from notable items were $314 million in the quarter compared to adjusted earnings on the same basis of $197 million in the second quarter of 2018 and $294 million in the third quarter of 2017. The annuity segment continues to perform well and results in the life segment were strong. There were three notable items in the quarter, lowering adjusted earnings by $44 million after tax or $0.37 per share. The notable items included establishment costs of $69 million after tax, a $121 million after tax net unfavorable impact from the recapture of reinsurance treaties, almost entirely impacting the run-off segment, and a $146 million after tax net favorable impact to adjusted earnings from our 2018 annual actuarial review, which is done each year in the third quarter. The total impact to net income from the annual actuarial review was an unfavorable $32 million after tax. Let me provide some additional color on our annual actuarial review. Over the last couple of years, including 2017 as our first year performing the review as a standalone company, our actuarial reviews have focused on two themes: First, harmonizing the assumptions between GAAP and statutory accounting; and second, updating our actuarial practices. This involved being informed by the richest possible set of data available in the market on client behavior, including the quantitative impact study or QIS, conducted as part of the NAIC’s variable annuity reserve and capital reform initiative. These efforts resulted in Brighthouse being well-positioned with what we believe to be prudent, conservative behavior assumptions. These assumptions include annuitization election rates of 2% for post-retirement age, GMIB contract…

Thank you. [Operator Instructions] And our first question comes from Elyse Greenspan with Wells Fargo. Your line is open.

Hi. Thanks. Good morning. My first question, so, in terms of as we think about investment income going forward from here, you guys highlighted the repositioning of the investment portfolio. Is this quarter kind of a good run-rate to think about going forward or any other onetimers other than the stronger alternative investment income you guys pointed to?

Hi. This is John Rosenthal. As Anant pointed out, this quarter benefitted from higher alts, higher average asset growth and repositioning. Alt was predominantly the key contributor to the increase. I think going forward, as you know, alternative income very difficult to predict quarter-to-quarter. I think having said that, we wouldn’t expect alternatives in Q4 to reach the elevated levels that they reached in Q3. However, net investment income will continue to benefit from portfolio repositioning, higher asset growth and investing at higher interest rates.

Okay. And then, you guys -- the ROE picked up and results were stronger in the quarter. Is the assumption that you guys still expect full-year earnings to come in, in line with that previous $8.50 to $9 per share range?

Good morning, Elyse. It’s Eric Steigerwalt. So, let me answer that question. And then, I’m going to actually add a little maybe longer term strategic context for everybody. First, it’s not bad often that we have equity markets like October. But, as long as markets do reasonably well for the rest of the year, I think that range is still appropriate. That’s why we broke out the excess returns in the presentation for the third quarter, so that you can get a sense of how, slightly abnormal markets affect us. Now, obviously, it will take a pretty good market to be at the top of the range. More importantly, on our December investor call, we will talk about like a longer term base case earnings growth percentage. Okay? And we expect that to be in the higher range than our current mid to high single digits. So, we’ll talk about that in early December. And we’re going to lay out our expense plans, our investment portfolio repositioning and our product strategy, so that you’ll see the drivers of that EPS growth. I might as well just add because I know the question is coming here. With respect to assets above CTE98, post the third quarter, so post October, roughly where we stand today, we believe we’re still well in excess, despite the October equity market performance. However, again, it might be valuable to make a few strategic comments. As Anant said, and as we said before, actually, in the near future, in 2019, we intend to begin operating within a range of RBC levels. And I’m looking forward to discussing that with you, as soon as we can. As I’ve said before, we intend to be a consistent returner of capital across market cycles. And all of our efforts are centered around being able to adopt VA capital form in 2019 to that end. So, I hope I answered your actual question. But, I thought that that additional strategic context might help everybody.

Okay, great. That’s helpful. One last question. Corporate expenses lower than what was implied by your run rate in the quarter. Is that -- should we assume that they will continue to go down from this quarter’s level?

Anant and I are battling as to who gets to go here. So, I’ll start and you can jump in, Anant. Look, again, strategically, they absolutely are going to go down. We are going to hit that $150 million goal period. Obviously, there’s quarterly fluctuations. Generally, a lot of companies have higher expenses in the fourth quarter. But, we’re very focused on this. And it’s a little bit different for us and that we’re on a journey over time here to lower expenses year after year after year. So, the third quarter is a reasonable run rate. It could fluctuate a little bit around that, but you’re certainly not going to see dramatically higher expenses in the fourth quarter.

Okay. Thank you very much.

Thank you. Our next question comes from John Nadel with UBS. Your line is open.

Hey, good morning. So, Eric, you sort of touched on the October market decline. And my question was going to be, how much volatility you expect that we could see in that capital level above CTE98 as you think about some of the drivers including the equity market performance?

Well, John, as you know, the markets are going to move around. We all know that. Our goal is to be in a position both with managing the CTE98, sort of in any regular market environment and then having our CTE95 floor in more severe markets that little fluctuations are not going to stop. I mean, I’m assuming that you’re headed towards capital return. And what happened in October will have zero effect on our share repurchases. We will continue to repurchase stock. I can follow up, if you want to direct us further.

Yes. I’ll follow up offline to get maybe a little bit deeper into the weeds. But, I guess, that’s what I’m sort of trying to understand. You guys have laid out at the spin-off that over time you would take on more risk, effectively your own deductible, if you will. And just trying to understand how much that whole theme may have changed as a result of the VA capital reform.

Yes. I’ll add a little. Anant, you can jump in there. Look, we’ve put a couple of hundred million down into the operating company. That positions us even better with respect to that deductible going forward. So, there is sort of two pieces to that, keep in mind. But secondarily, over time, I’ve said and I will continue to say, the goal is to be a consistent returner. So, I sort of think of like we’re transforming the Company. We’ve come a long way in the last couple of years. And as we continue to execute on this strategy, the goal is to be more consistent with respect to returning capital. And again, it seems to be the overall notion of your question.

Yes, understood. And then, just maybe two quick ones, one for John and one for Anant. John, could you just tell you us what the private equity annualized return was in the quarter? And then, Anant, if we look at the year-to-date effective tax rate on an operating basis, it looks like it’s about mid-13% range. That’s definitely below your high-teens expectations. I’m just wondering whether this is more reflective of the level we should expect going forward, or is this just a matter of timing and we should expect the high teens rates as we look out to 2019 and beyond?

I’ll take these. It’s John. The actual return, the absolute return for the quarter was 4%. So, the annualized was about 16%, which is higher than we would normally expect, John.

Yes. Thanks.

Hi. It’s Anant. On the tax rate, you’re right. We have came in on the lower end of our range. We actually expect to be at that lower end of the range for the rest of the year. But, as earnings go up, we will be at the upper end of the range.

Thank you. Our next question comes from Ryan Krueger with KBW. Please go ahead.

Hi. Thanks good morning. I assume you’ll give us updated variable annuity cash flow spend here, in the 10-K again this year. I was hoping to get some perspective on I guess how meaningful do those change they get impacted by the new NAIC VA reform. And then, related to that, I guess, you’ll -- I believe you said, you’ll reflect the 3.25% long-term tenure going forward as well?

Hi, Ryan. Good morning. The answer to your second question is yes, the 3.25% long-term 10-year treasury is already reflected in our numbers with our annual actuarial review this year. So, when we say we’re CTE98, plus more than $600 million, that’s already factored in. To your first question on sensitivities, we will update them as we update our 10-K. But, let me take a step back, adding on to the earlier answer and how we think about it. Our hedging strategy is not changed. We’re doing exactly what we laid out, diligently executing it and protecting the floor level while managing capital within RBC range with CTE98 going into that calculation, which means we will grow our, what we colloquially call, a deductible or asset -- a shock absorber from $1 billion up to $1.5 billion and then up from there to $2 billion. We’re on path to doing that. I’ll take any follow-on. But I thought, that would be helpful context.

Thanks. And separate question, actually. In terms of the legacy SGL, do you see an opportunity to free-up any reserves to either reinsurance transaction or renegotiating captive [ph] with regulators?

It’s a little hard to hear you, Ryan. But I think your question was freeing up capital from the ULSG block. Was that what you said?

Yes, right. And I guess, either through reinsurance or renegotiating the terms of the captive [ph] with the regulators.

Okay. So, yes, there’s certainly a possibility. It’ll happen over time. Because it needs regulatory approvals, et cetera. So, again, like we’ve said many times, there could be potential opportunities. It’s just one of the arrows in the quiver. It’s not something that’s going to happen tomorrow. But over time, yes, there could be some capital potentially freed up with respect to the ULSG block.

Thank you. Our next question comes from Erik Bass with Autonomous Research. Please go ahead.

Hi. Thank you. It sounds from your comments that you feel pretty confident about being able to early adopting new NAIC for market in 2019. If you can, would this enable you to potentially contemplate an extraordinary dividend from BLICin 2019?

Erik, it’s Anant. We can do an extraordinary dividend even without early adopting it. But yes, the short answer is yes, and we feel very good about that.

Okay. And then, do you have any perspective on -- realizing it’s early on the new GAAP accounting standards that will come into effect and the potential implications for Brighthouse?

It is pretty early to talk about that. It’s an effective date of 2021. What I would say, it does not impact us stack results. We don’t expect it to impact our plans for capital return. We as a management team have demonstrated with VA stack reform that we can successfully navigate through regulatory and accounting changes. And finally, we believe we’re very well-positioned with the leverage ratio that’s in the low to mid-20s, low relative to rating agency expectations for a single year financial strength rating. So, we feel good about our ability to navigate things over time.

Thank you. Our next question comes from Andrew Kligerman with Credit Suisse. Please go ahead.

Hey. Good morning. With regard to the 600-plus-million in excess of CTE98 versus what was quoted as 500-plus last quarter. What if the market were locked in today where it is now, down, since the quarter started? Would you be back at the 500-plus, where do you think you would be?

Andrew, like I said before, I think on the first question, and I’m going to try not to get into this, like on a weekly basis. But, we would still be well in excess.

Okay. I’ll leave it at that. And then, with regard to the portfolio repositioning, how much more do you have to go? And what types of securities, do you want to do with the remainder of this week, repositioning?

Andrew, hi, it’s John. As Anant said, through the end of Q3, we’ve rotated at about -- out of about $4.4 billion of treasuries. We’re continuing to rotate out of treasuries into spread assets. That’s the predominant portion of our repositioning. And we will provide more details about the size of the program, its timing, and the ultimate income pickup during our call next month.

I mean, is it more than $1 billion? I mean, what kind of spread assets are you looking at?

Remaining more than $1 billion is that what you’re asking?

More to go in terms of repositioning, I mean…

There is more to go, and we’ll talk about exactly how much or relatively how much next month. And we’re investing in our really high-quality well-diversified normal asset mix. So, nothing unusual on the reinvestment side.

Okay. And Eric, just one last one. You talked last quarter about being measured and prudent in terms of the buyback. And certainly, 40-plus, that was sort of a quarter of your -- or close to a quarter of your 200. When you did that 300- plus-million-dollar debt offering, so I thought you might accelerate that. Is there a chance you might want to accelerate the buyback as we move forward?

So, are you talking about the current buyback authorization, Andrew that…

Correct.

Okay. Look, it’s worked pretty well for us during the period that we’ve purchased. The stock has been up and down, and we’ve got pretty nice dollar cost averaging there. I would expect it to be just like we’re doing now, a measured but consistent repurchase plan.

Got it. Thanks a lot.

Thank you. Our next question comes from Josh Shanker with Deutsche Bank. Please go ahead.

Good morning, everyone. Curious if internally you have any goals around a timeline for turning to net positive flows in annuities. And if we were to think about losing $5 billion a year net flows of annuities that probably have higher capital charges given the older vintages than the ones that you’re writing today, is that a capital and ROE positive event, losing those assets?

Yes. Hi. It’s Conor. Let me start, I’m sure Eric may want to join in as well. So, look, as we’ve discussed previously, we have a large book to begin with. Clearly we had a good quarter in regard to flows. And we’re very pleased with the business that we’re putting on both in terms of the quality of the business and the return on that business. And as you know and as you acknowledged, much of what comes off is less profitable. So, this isn’t preventing us from expanding our profitable growth goals here.

Is it positive to move to those flows, is that actually beneficial to you over time?

Much -- it’s mix, much of it is. Now remember, some of the flows is just the normal course of what’s happening at annuitization, some of it is surrenders. And a reasonable amount of those surrenders are positive to us because they’re surrenders that are in the money, some of it is significantly in the money. So, that helps us from a profitability and capital perspective.

Yes. It’s Eric. I would add to that. Look, I mean, we don’t pray each day for lapses. Okay? Because over time it will affect your earnings growth. But, the comment that I made at the beginning of this Q&A period, you’re going to see pretty good EPS growth power out of Brighthouse in the December call, and that factors in the net flows, right, for years here. Having said that, there are some lapses that we prefer not to lose, but there are a meaningful amount that that qualify for what you said, Josh, at the beginning of your question, that in the end you’d have to say are sort of ROA or capital positive to us. So, we’re in a little different position maybe than some other companies here. So, I hope that was -- I’m trying -- we’re trying to give you the balanced answer. But, the answer to your original question is, yes.

And is there an internal target for the idea of Brighthouse returning to a net positive flow company?

I don’t have a target. Look, I’ve said this before. It’s going to take a number of years, okay, notwithstanding the fact that as we just discussed, some of these lapses are actually positive for the Company. But, it’s going to take a while. So, I’m not ready to give out a target yet because it would just sort of be a quarterly while you’re still a ways away from it. But, overall, in December, you’re going to see that despite the level of negative net flows, we’ve got some real EPS growth power here.

Thank you. Our next question comes from John Barnidge with Sandler O’Neill.

Thank you. I guess, it’s a difficult thing to quantify but some other companies did provide it last week. So, maybe I’ll ask the question this way. If last night was the quarter close, can you quantify how much of a headwind on an EPS basis the market would be to guidance?

Hey, John, it’s Anant. We did give you the sensitivity which was like, if you translate that, it’d be like $0.09 for 1 percentage point, a separate account return. So, I would just point you to that.

Okay. Thanks. And then, how much of a growth in the increasing fixed sales do you find benefiting from the market volatility versus maybe higher rates and better distribution? Thank you for your answers.

Yes. This is Myles speaking. So, if you take a look at sequentially, most of our growth has come from our Shield product as well as our FIA product that we distribute to mass mutual. If you look at the industry as a whole, in light of some volatility you are seeing, fixed products up. And as we mentioned earlier on the call, we just introduced two new fixed deferred products in September that we’re optimistic we’re going to be able to gain some sales traction with. So, we like the fixed base, we’re applying it on the fixed base, and we’re going to continue to focus on the fixed base moving forward.

Thank you. Our next question comes from Suneet Kamath with Citi. Your line is open.

Thanks. Good morning. So for Anant on the CTE98, moving from 500-plus to 600-plus, over the course of the call, you talked about several pieces, changing the interest rate assumption, tax reform, VA capital reform, and then a capital contribution. Can you help us think through sort of sizing those pieces as we think about a potential lock from 2Q to 3Q?

Good morning, Suneet. Happy to do so. So, let’s start with, we expected to be at CTE98 post VA reform, both the capital reform and the tax rate change, and making a capital contribution. We contributed $200 million down into the life company to that effect. We ended up with the better outcome with assets over $600 million above CTE98 due to strong business results. These were driven by two real factors. Approximately two thirds of that came from market upside in the hedging program. So, our hedging program is working very well. Frankly, over the last five quarters, we’ve had more than a $1 billion of market upside by putting a $1 billion of assets as a deductible. So, that’s really great results, a lot of that coming through this quarter as well. And the other third of the growth came from statutory net income, which if you look at page 21 of the supplement, you’ll see we had good core stack returns and then market upside because of the hedging program. I can pause and take any follow-on you have on it.

And what was the impact of tax reform just on that CTE98 buffer?

Tax reform was actually a bigger driver, if you think about the assets above CTE98. It was actually closer to like more than half.

Sorry. More than half of what?

More than half of the impact of implementing VA reform.

Okay. Maybe I’ll follow-up afterwards. And then, I think you had said that you’ve maintained your lapse rate assumption at 1.5%. And I think there is some commentary around that being consistent with the study. But, as I think about other companies, I think their lapse rate assumptions are less than 1%. But, maybe if you could comment there, but also if you were to reduce the lapse rate to 1%, any sense of what the sensitivity would be in terms of required VA assets?

Sure. So, you’re right. As I said in my prepared comments, we’ve looked at not just one study, we’ve looked at every study that’s out there and participated in the QIS as part of NAIC reform. We feel really good about our assumption changes on lapse, elective annuitizations and all of those that we made. We hope everybody is actually feeling as good as we’re feeling about it, given the changes we’ve made. So, I don’t see us, given what our data is, and our experience is, as Conor and others mentioned, we have in the money policies lapsing, I don’t see how we have to go lower than 1.5%.

Okay. But, no sensitivity, if you did?

It’s sort of a hypothetical that at this point in time doesn’t make intuitive sense because I don’t see how the data would have a go there.

Thank you. Our next question comes from Tom Gallagher with Evercore. Your line is open.

Good morning. The first question is, you’ve been talking about how you’re going to manage to a total RBC standard by the end of 2019, that’s the goal. Right now, I guess all we’ve talked about is VA CTE. What would a total RBC standard entail in terms of -- and the reason I’m asking is obviously you have other businesses, other assets outside of VA. Would everything else, if you kind of categorize that separately, give you significant access over the 400% RBC, if that’s what you’re going to be managing to, or how should we think about that?

Let me start, and Anant you can jump in. Hey, Tom, it’s Eric. We’re going through that with our Board now. So, we’re not going to get there until we adopt VA capital reform. But as you said, and as I’ve said, we’re hopefully going to do that for 2019. So, we’ve got to come up with a range here of where we’re going to manage the company with respect to RBC. And we’re working that through as we speak, literally. As you very well know, the VA capital reform makes RBC robust, right. So, now, you can sort of use that as a global metric for the whole company. So, the idea is that we get to some sort of range that we will certainly make public where we want to manage this. And that could give you some sense of if there’s any dividendable excess capital at the operating companies. And then, obviously, you’d take a look at what we’ve got at the holding company. And like many other companies, we hope to be able to give you a sense over time here of what we think are approximate excess capital position might be. Anant, do you want to add anything?

I think you’ve covered it. But Tom, if you have any follow-ups, we’re happy to take it.

Sure. So, yes, I guess, just one follow-up to that. So, Eric or Anant, at this point, would you say, everything that’s kind of measured outside of VA, is it -- does it look like it would be above, would there be access or it’s not clear at this point? Just higher level directional?

Yes, Tom, it’s Anant. We think of the company to be capitalized in the OpCos at like single A rating levels, so you should think of sort of RBC levels relative to that. And then, going forward, as Eric mentioned, we’ll be at 98, 98-plus, so we’ll be at like 400, 400-plus and we need to come back to that and what that actual target is next year.

Okay. And then, my other question is just on -- Anant, I know you said, you mentioned, you’re going to be shifting to lower hedging costs in 2019 is the plan. Would that primarily be focused on lower use of options? Because I think right now you’re spending around $800 million a year on option premium. Is that the main area or would it be much more -- much broader in terms of how you would change the hedge program?

We would -- yes, we would grow the assets that act as a shock absorber from $1 billion to $1.5 billion in 2019. We’re actually already working on that. And what it allows us to do is strike things to be a little more out of the money. So, you still use an options based program predominantly, but you go little out of the money, and you reap the benefits of that. And I’d sort of rephrase. I mean, the fact that we’ve had this option-based strategy has allowed us to actually have the program allow us contribute $1 billion of upside in the last five quarters. That’s really meaningful and we’ll look to grow that.

Thank you. Our next question comes from Jimmy Bhullar with J.P. Morgan. Please go ahead.

Hi. Thanks. Good morning. Most of my questions were answered. But I’m not sure if you mentioned what the impact of VA capital reform was on your assets above CTE98. How did that affect you, can you quantify?

Good morning, Jimmy. Sure. So, if the question is what was the impact of VA reform on our assets above CTE95, tax reform was a big driver of it. The combined impact of both of those was about $1 billion, driven majority by tax reform and then some amount by really the capital market changes, really nothing material, other than those two to really call out. It’s 3.25% and the biggest drop was coming from 21%. Net of that, we would have still ended up at CTE98. And we’re at 98 plus more than $600 million because of the really strong business results with the two factors I gave in my answer to Suneet earlier.

Okay. And then, on the Shield product, obviously you’ve seen pretty strong sales over the last several quarters. Are you seeing any impact on the business or are your expectations changing as competitors are coming out with some other products, like Lincoln has a buffer annuity, many those are -- there are few other companies that are thinking about coming out of something similar?

Hi. It’s Myles again. No, we feel very confident about our current Shield product. Our advisors love the competitiveness of the product and its simple nature. We’re continuing to bring on new distributors, selling the products, further broadening distribution. And as is always, we’ll monitor the competitive landscape and will make changes if appropriate. But we feel really good about our market position right now.

And then, just lastly on buybacks, I think Eric alluded to this. But, is this safe to assume that despite the market sort of volatility that we’ve seen recently that you’re going to keep buying back stock in the near term?

Jimmy, it is very safe to assume that.

Okay. Thank you.

Thank you. Our next question comes from Alex Scott with Goldman Sachs. Please go ahead.

First question was just on the GAAP changes through the actuarial review for variable annuities. I think you mentioned the election rate assumption is 2% now. Could you give us a feel for how that changed? I mean, that sounds kind of low. But, I know annuitizations have been or elections of annuitizations have been pretty low. Just wondering like how much data you have on that and how big of a change it was?

So, the good news on that Alex is -- great to hear your voice again. The good news is, there was no change in that. The data is coming and showing was conservative relative to that. And we actually made that change two years ago to 2% annuitization. So, across the board, if you look at these assumptions, the data is coming in showing us we were proactive, we moved early and were informed by all the richest data available to make those changes. So, it’s really nothing material to call out with respect to actuarial behavior assumption this year.

Got it. And then, next question I had was just a follow-up on the hedge costs. I think, the VA distributable earnings assumption or estimates you guys have provided in the past suggested maybe you’d to get to a point where the hedge costs were below the rider fees by -- looked like maybe year four or so. I mean, is that expected to significantly speed up? I mean, does that speed up to year 2 or 3 or do you think 2019 could be a year where hedge costs are actually below the rider fees?

Yes. I wish it could be below the rider fees. But I think where we thinking about them is they’re not going to be below the rider fees; they’re just going to be in that $1 billion range, so slightly above the right of fees. So, there’s going to be some modest amount of drag from those fees but still a meaningful amount of reduction which will allow net income to emerge in addition to just operating income or adjusted earnings.

Last quick one. Did you guys say what adjusted statutory earnings were this quarter?

We did not. But they were around $700 million. Now, that’s because largely our -- two thirds of that coming from our hedge program and a third coming from core business earnings of around $200 million, which you can see in the supplement. So, a very strong, well above our plan, and in October, we would have probably given some of that back, but still good outcome for the year.

Thanks very much.

Thank you. And our last question comes from Humphrey Lee with Dowling & Partners. Please go ahead.

Good morning and thank you for taking my questions. Eric, in you’re prepared remarks, you talked about you expect the TSA would reduce to 85 TSAs by the end of the year. But, as we think about the expenses impact from this TSA termination, how should we think about that for the full quarter and then maybe into 2019?

Sure. Humphrey, good morning. It’s kind of back-end loaded, to be honest with you. Like, you’re seeing expense decreases occurring here and you’re going to see more in 2019. The biggest peace will be end of ‘19 into ‘20 where we really get the leverage of getting off some of the largest ones. All of the smaller ones or even medium sized ones are contributing to our ability to lower expenses, like you saw in the third quarter. And again, there’ll be more of that in ‘19, but as you get near the end and into ‘20, then we get off the biggest ones.

Okay. So, more good to come. And then, I guess maybe shifting gears a little bit. So, related to the recapture of the reinsurance and run-off, can you just provide some color in terms of the size of the recaptures and then how should we think about the earnings impact or maybe the -- from the volatility standpoint? Any color you can provide will be helpful.

Humphrey, it’s Conor. The size of the block is a $5 billion block, from the face amount perspective.

And I’ll add into Conor’s point of view is as we moved this block of business, really ULSG to run-off in the second -- in the fourth quarter of 2016, this is answering your point of view, how to think about it on an earnings basis, it’s all reflected now in the earnings. When we recapture a block of business, it changes our profit pattern; the present value of that change in profit pattern gets reflected in the reserves. There is no ongoing impact from it.

Thank you. And ladies and gentlemen, this concludes our Q&A session. I would like to turn the call back to David Rosenbaum for his final remarks.

Thank you, Carmen, and thanks to everyone for joining us today for our third quarter earnings conference call and for your interest in Brighthouse Financial. We look forward to speaking again during our investor outlook conference call on December 3rd. And again, thanks for joining today.

And with that, ladies and gentlemen, we thank you for participating in today’s conference. This concludes the program. And you may all disconnect. Have a wonderful day.