Good morning, ladies and gentlemen, and welcome to Brighthouse Financial's Second Quarter 2021 Earnings Conference Call. My name is Howard, 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. . 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 second quarter 2021 earnings call. Our earnings release, slide presentation, and financial supplement were released last night. It 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, August 6th, 2021. The Company undertakes no obligation to update any information discussed on today's call. During this call, we will also 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, include certain statutory-based measures used by management are preliminary due to the timing of the filing of the statutory statements. And now, I will turn the call over to our CEO, Eric Steigerwalt.

Thank you, David, and good morning, everyone. Once again, I hope that everyone listening today and your loved ones are remaining safe and well. Today, I will discuss our second quarter results and provide some perspectives on the continued execution of our strategy. Brighthouse delivered strong results in the second quarter. Investment income from alternative investments was very strong, given the first quarter market performance. As a reminder, alternative investment income is generally reported on a one quarter lag. The underwriting margin was in line with the prior quarter, but lower than a more normal quarter. We delivered another quarter of strong sales results, and we continued to prudently manage expenses. Our balance sheet and liquidity position remained robust in the second quarter and our hedging program performed as expected. We estimate that our combined risk-based capital or RBC ratio range was between 480% and 500% well above our target of between 400% and 450% in normal markets. Additionally, we ended the quarter with liquid assets at the holding company of approximately $1.6 billion, which includes a $250 million ordinary dividend paid to the holding company from Brighthouse Life Insurance Company or BLIC. Ed will provide more details on our financial results shortly. As we have said before, our strategy has remained focused on growing sales, managing expenses, unlocking capital, and repurchasing our common stock. Let me provide a few perspectives on each of these pillars. Starting with sales, I'm very pleased with our results in the second quarter. Annuity sales were approximately $2.3 billion, up 25% compared with the second quarter of 2020, and ahead of our expectations. We reported record sales this quarter for both our flagship shield level annuities and our variable annuities with FlexChoice Access. Additionally, we generated approximately $26 million of life insurance sales in…

Thank you, Eric, and good morning, everyone. Today, I will discuss our robust capital position, as demonstrated by the preliminary statutory results we reported yesterday. I will also provide a few comments on adjusted earnings. At June 30, combined statutory total adjusted capital or TAC was approximately $9.4 billion, which was unchanged from March 31st even though we paid a $250 million dividend from Brighthouse Life Insurance Company, or BLIC, to the holding company. This BLIC dividend was consistent with the 2021 dividend plan, I communicated on our fourth quarter 2020 earnings call. TAC benefited from the increase in equity markets in the second quarter, and strong investment performance in our alternatives portfolio. Capital strength is a top priority, and we continue to look for opportunities to optimize statutory capital. The regulatory approval of a $600 million dividend from Brighthouse Reinsurance Company of Delaware, or BRCD, is the most recent example of these efforts. We intend to take this dividend up to BLIC in the third quarter. This additional capital further enhances an already strong capital position at Brighthouse Life Insurance Company and we plan to take another dividend from this entity to the holding company in the fourth quarter of this year. At June 30, we estimate that our combined risk-based capital ratio or RBC ratio was between 480% and 500%. The change in the RBC ratio from the first quarter range of 500% to 520% is primarily explained by the $250 million BLIC ordinary dividend paid to the holding company. Additionally, in June, the National Association of Insurance Commissioners or NAIC adopted changes to the RBC factors for bonds and real estate. Assuming these factor modifications are effective on December 31, 2021, we estimate the changes will have a mid-single-digit negative impact on the RBC ratio and this…

. Our first question or comment comes from the line of Ryan Krueger from KBW. Your line is open.

Hey, good morning. Ed, I think you mentioned in the prepared remarks that you plan to take another dividend from BLIC in the fourth quarter. Can you give us any sense of upsizing there?

Sure. Good morning, Ryan. So we have almost $500 million of remaining ordinary dividend capacity at BLIC. And I would expect we to take at least half that amount.

Got it. Thanks. And then I guess, does the -- now that you've gotten another $600 million out of BRCD does -- how does that influence your dividend plans out of BLIC beyond this year? I guess it gives you a bit more cushion to think about it seems?

Well, I'd start by saying, we feel very good about the capital position at our operating companies, as well as the holding company cash position. And we're better -- we're in a better position today with the RBC ratio than we would have anticipated at the beginning of the year. And as you know, the number in the second quarter does not reflect the $600 million BRCD dividend. So I would just say that, we continued to manage the company to make sure that we are appropriately capitalized in using this multi-year, multi-scenario framework that we've talked about, and that we show you when we disclose our DE tables. And that's going to continue to drive our decisions about capital management.

Thanks. Just one more follow-up on this. I guess now that you've got $1.2 billion of dividends approved out of BRCD are the reserves now, I guess, closer to your view of where -- of appropriate reserves? Did you still think there's additional capacity longer-term?

So as you've heard us talk about, the primary means to assess the capital position of BRCD is our cash flow testing margins. And even after this dividend, we continue to have; I consider very strong cash flow testing margins in BRCD. And remember, we look at that under a multitude of scenarios.

Thank you. Our next question or comment comes from the line of Hung-Fai Lee from Dowling & Partners. Your line is open.

Good morning and thank you for taking my questions. I guess thinking about the $1 billion of share repurchase authorization, how should we think about the pace of the buyback going forward? Is there any reason why we should not look at the historical pace as a guidepost?

I'll start Hung-Fai. I think it would be smart to look at that history as a guidepost. Obviously, we feel great about our flexibility here. Ed, you're going to give a little help, right? Why don't you give a little help?

A little help. So we don't think it's in the best interest of shareholders to discuss a future buyback plan. So I'll tell you what we've done. And as Eric said, I think we have the strategy and I would expect that that strategy would continue. If we look at the last couple of years, our repurchases have typically been in this 4% to 6% of average daily market volume. And if you look at the early stage of the pandemic, because of the opportunity we saw, we ramped that up to about 16% of average daily market volume during a couple month period. So we know how important returning capital is to shareholders in financial companies. And I think the fact that through August 4th, we've repurchased 31% of our shares outstanding since separation. I would say that that illustrates our commitment to capital return.

Okay. Got it. Just switching back to BRCD like I think the -- this is definitely a positive development that you get another $600 million out of it. I guess the timing was probably quicker than I thought. Any, like now you've taken $600 million kind of -- of BRCD two years in a row. Like, is that the pace that we should expect or like is it -- is there any way to help us to think about like how the dividend capacity of BRCD?

So I don't -- I wouldn't suggest that you start to build in some pace based on two data points. I would say that, again, we feel very good about the cash flow testing margins at BRCD. And that is the reason that that we asked the regulator to allow us to take this out. And the reason that the regulator agreed, I believe is because of the fact that those cash flow testing margins remain strong.

Thank you. Our next question or comment comes from the line of Elyse Greenspan from Wells Fargo. Your line is open.

Hi, thanks. My first question, if we go back to the EPS that you reported. And then I adjust that for a couple of items, you pointed out being the underwriting and a better COGS, gets to around something around $3.52, whereas you guys gave the range of $3 to $3.20 as the run rate, so there is some other one-off items in the quarter? Or is it just assuming some kind of normal level of underwriting volatility when you give that kind of quarterly run rate of $3 to $3.20?

Good morning, Elyse. So, as you can imagine, there are a number of items every quarter that are off of trend, and I would say we called out the two big ones this quarter in our disclosures around underwriting and alternative investments. But the one notable item that we did not callout was the bigger one of the remaining would be market impact, which was favorable in the quarter.

And do you have that?

And so that's really what -- that's really what drove our decision to give a different a lower range than what the two items that that we highlighted would suggest.

Okay. And then, in terms of shifting back to capital, you guys since the pandemic right have also maintained a healthy level of capital as a holding company with the new buyback and also there is more certainty that we're coming out of the pandemic. Are there any thoughts about kind of changing the buffer that you're looking to hold at the HoldCo whether that's later this year, or something that you guys are thinking about for 2022?

Okay. So last quarter, I made some comments about how we were assessing the appropriate level of conservatism in our holding company cash position. And I think the answer to the outcome of that assessment was our decision to ask the board for a $1 billion repurchase authorization, which is equivalent to 26% of our equity market cap, and is two times the largest previous authorization.

Thank you. . Our next question or comment comes from the line of John Barnidge from Piper Sandler. Your line is open.

Thank you. Can you talk about the growth in the life insurance business sales, maybe expectations going forward? And do you anticipate, like do you see this is coming from broadening out of distribution, a pull-forward from raised awareness or really shifting to a higher gear? Thank you.

Yes sure, this is Myles, happy to take the question. So we're really pleased with the progress that we continue to make with SmartCare sales. And as Eric mentioned in some of his prior comments, we continue to expand distribution. Over the last few weeks, we've been able to bring in about a half a dozen new firms. We have expanded strategically through two partnerships into the BGA space. And that's now providing us access to approximately 13,000 new advisors, which we're very excited about. But the product itself is a great product. It's very competitive as it relates to the indemnity benefit that it has. And the policy has the opportunity for cash value growth based on industry performances. That coupled with the fact that a few major national distributors have really embraced the product and are doing a great job of selling it coupled with the fact that we continue to grow our sales force is the reasons why we expect to see continued growth with SmartCare moving forward.

And John, it's Connor. Let me just add as well, one comment to underscore we filled almost as much SmartCare in the first half of 2021 as we filled in all of last year. But we have -- we're also working on some other life products to run that suite as well. So you'll see those in the future.

And maybe the follow-up to that is, and thanks for the answers there. That was helpful. You're obviously having good distribution on the annuity side on top of life. Some of your expenses are variable. Obviously some are fixed. Given the outlook for distribution is still constructive. How should we be thinking about operating expenses within that thing? Thank you for the answers.

Thank you. Our next question or comment --

Oh, sorry, sorry. Wait, sorry. We have to answer that.

Oh, sorry.

So on operating expense, corporate expenses were the first half of the year $421 million that's lower than what we would anticipate it would be in the second half of the year. As you can imagine, travel is still low relative to what we budget and there are some other areas where we would expect more expense in the second half of the year. But I don't know, Eric, if you have any further comments.

Well, I'll just say, sort of strategically, we're investing in distribution, we're investing both operationally and in distribution itself and that's going to continue. So I'm pleased with where we are in expenses and that includes investments that we're making now and are going to make in the future.

Thank you. Our next question or comment comes from the line of Zach Byer from Autonomous Research. Your line is open.

Hi, good morning. Just had a quick question, you've done a few funding agreements year-to-date. Curious how big deal of an opportunity do you see this becoming and how quickly do you expect it to ramp up. Also kind of where should we find the results for this kind of nascent line of business in your reporting?

Hi Zach, it's John. We think this is really an attractive space to be in, as it will enhance our overall business profile and provide good risk adjusted returns and product diversification. It's a bit premature to talk about how big we think the business is going to be or what kind of earnings power it may have, as we're just beginning to grow it. But so far things are going extremely well. The program started in April and we currently have about $4 billion of outstanding balances. And we look forward to talking to you more about it in the future as this business grows.

Hey, it's Eric. I'll just add. It sits in Corporate & Other, and that's where it'll probably sit for a while.

Thank you. . We have a follow-up from Mr. Ryan Krueger from KBW. Your line is open.

Thanks. Ed, could you provide a little bit more detail on the normalized stat earnings? And I guess in particular, I would have thought given the favorable equity markets and the favorable alternative investment income, they would have been a bit stronger. Can you give some perspective on the offsets ?

Sure. I mean, I think that the first thing to recognize is that most of the benefit that we're seeing from the ALF is coming through in unrealized gains. And so that's going directly to tax. It is not included in normalized statutory earnings. So that's one of the reasons that you see the disconnect between perhaps some of the other statutory metrics and norm stat. The second thing is that, we have had two quarters, so the year-to-date results for non-VA have been less favorable than what we would normally anticipate. And you've heard us talk about mortality now for two quarters, and that's a factor. And then the first quarter, we talked about -- I believe we talked about good VA results, despite the fact that we absorb the full-year impact of the lower mean reversion point for the statutory accounting framework. And I think we identified that as being a $200 million to $250 million hit in the first quarter, which represents the annual amount of that change. And in the second quarter, as you know, interest rates came down. So we didn't -- we did have a negative impact from rates in the second quarter both in the VA business as well as a modest impact in our fixed indexed annuity liabilities.

Just on that last point on the lower rates you have to reflect the lower starting point, but there is no additional mean aversion impact, is that correct?

No.

Thank you. I'm showing no additional questions in the queue at this time. I'd like to turn the conference back over to Ms. Dana Amante for any closing remarks.

Thank you all for joining us today and for your interest in Brighthouse Financial. I look forward to working with you. Have a great day.

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect. Everyone have a wonderful day.