Good morning, ladies and gentlemen, and welcome to Brighthouse Financial's fourth quarter and full year 2021 earnings conference call. My name is Shannon, and I will be your coordinator today. At this time, all participants are in a listen-only mode. We will facilitate a question and answer session towards the end of the conference call. In fairness to all participants, please limit yourself to one question and one follow-up. As a reminder, the conference is being recorded for replay purposes. Also, we ask that you refrain from using cell phones, speakerphones, or headsets during the question and answer portion of today's call. I would now like to turn the presentation over to Dana Amante, Head of Investor Relations. Ms. Amante, you may proceed.
Thank you. Good morning. Thank you for joining Brighthouse Financial's fourth quarter and full year 2021 earnings call. Our earnings release, slide presentation, and financial supplement were released last night and can be accessed on the investor relations section of our website. 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. 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 U.S. Securities and Exchange Commission. Information discussed on today's call speaks only as of today, February 11th, 2022. The company undertakes no obligations to update any information discussed on today's call.
During this call, we will be discussing certain financial measures used by management that are not based on generally accepted accounting principles, also known as non-GAAP measures. Reconciliations of these non-GAAP measures on a historical basis to the most directly comparable GAAP measures and related definitions may be found on the investor relations portion of our website in our earnings release by presentation or financial supplement.
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. Now I'll turn the call over to our CEO, Eric Steigerwalt.
Thank you, Dana. Good morning, everyone, and thank you all for joining us. I am pleased to share that 2021 was another strong year for Brighthouse Financial. Despite the challenges resulting from the COVID-19 pandemic, we remain steadfastly focused on our mission and strategy and on delivering for our customers, partners, and shareholders. Thanks to the tremendous dedication of our employees, we accomplished many important strategic milestones in 2021, including.
We achieved our target of returning $1.5 billion to our shareholders by the end of 2021. As a result, we have reduced the number of shares outstanding relative to when we became an independent public company in 2017 by 35%. That includes $499 million of our common stock that we repurchased in 2021, representing a reduction of 12% of shares outstanding relative to year-end 2020.
We continued to optimize statutory capital to further strengthen the balance sheet and paid subsidiary ordinary dividends totaling $594 million to the holding company, primarily consisting of $550 million from Brighthouse Life Insurance Company or BLIC. Sales of both annuities and life insurance were very strong throughout the year.
In each of the first three quarters of 2021, we delivered record sales for both our flagship Shield Level Annuities and our variable annuities with FlexChoice Access. The strong sales continued in the fourth quarter, resulting in a record year of total annuity sales in 2021. Life insurance sales grew steadily throughout the year and were ahead of our expectations. We continued to expand our distribution footprint and enhance the way we support financial professionals and the clients they serve.
During the year, we added new distribution relationships, including the addition of our annuities to the SIMON Markets. We also added more life insurance wholesalers, rolled out SmartCare to more firms, selectively expanded into the brokerage general agency or BGA distribution channel, and rolled out enhancements to our Shield Level Annuities and SmartCare.
We launched our institutional spread margin business, which we expect will enhance and diversify our earnings profile over time. We achieved almost 90% of our run rate expense reduction relative to the first year post-separation, while simultaneously making strategic investments in 2021 to start up the institutional spread margin business and fund future growth.
Some of these investments allowed us to provide better support to our distributors and their financial professionals, as well as our policyholders and contract holders. Finally, we completed a major platform conversion as we continued our efforts to implement our future state operations and technology platform. Turning to our fourth quarter results, our balance sheet and liquidity position remained robust in the fourth quarter, and we estimate our combined risk-based capital or RBC ratio was approximately 500%. Additionally, we ended the year with holding company liquid assets of $1.6 billion. Brighthouse delivered strong sales results in the fourth quarter. Annuity sales were $2.4 billion, driven by variable annuity and Shield product sales of $2 billion combined. Total VA and Shield sales were up 14% compared with the fourth quarter of 2020.
Fixed rate annuity sales were lower quarter-over-quarter as expected. I have mentioned previously, we took repricing actions in the second half of 2020, given the low interest rate environment. Additionally, we generated approximately $35 million of life insurance sales in the fourth quarter of 2021, an increase of 133% compared with the fourth quarter of 2020, and an increase of 30% compared with the third quarter of 2021. I said, we delivered steady growth in life insurance sales in 2021, which is a result of the focus and execution on our life insurance strategy, including the addition of new distribution partners and bringing on additional wholesalers. We couldn't be more pleased with our sales results last year.
Before moving to expenses, I would like to thank our distribution partners for all they do on behalf of their clients and our customers every day. Now turning to expenses. Corporate expenses, which do not include establishment costs, were $247 million before tax in the fourth quarter. Establishment costs were approximately $27 million before tax. I am pleased with the results for both the full year and fourth quarter of 2021. We have made significant progress in 2021, and we believe we remain well positioned to continue to execute on our focus strategy in 2022. We continue to prudently manage statutory capital and target a combined RBC ratio of between 400% and 450% in normal markets. In addition, our business mix will continue to evolve by adding more high quality new business.
We expect to see a continued shift in our business mix profile over time as we add more higher cash flow generating and less capital intensive business, coupled with the runoff of older, less profitable business. As we enhance our existing products, develop new ones, and expand our distribution reach, we expect to see continued sales growth across annuities and life insurance. We remain very excited about being one of two annuity providers selected to help deliver BlackRock's LifePath Paycheck, an investment solution that is designed to provide millions of American workers with simplified access to lifetime income throughout their retirement. We have significantly reduced corporate expenses, and we plan to continue to manage expenses effectively to drive our statutory expense ratio down over time.
Additionally, we will continue to prudently manage the exit of the remaining transition services agreements as we implement our future state operations and technology platform. We expect the remaining establishment costs to occur in 2022. Lastly, we intend to continue to deliver on our ongoing commitment to return capital to our shareholders. Year- to- date through February 8th of this year, we have repurchased $57 million of our common stock.
To wrap up, Brighthouse Financial made significant progress in 2021. We continue to believe that we have the right strategy in place, and we remain focused and well positioned to continue the execution of our strategy. As the Brighthouse Financial franchise grows and evolves to include a more diversified business mix, we are committed to consistently driving shareholder value. With that, I will turn the call over to Ed to discuss financial results. Ed?
Thank you, Eric. Good morning, everyone. Brighthouse Financial reported strong results for the fourth quarter and full year of 2021. Favorable equity market performance and higher interest rates provided a positive backdrop for the year. We further strengthened the balance sheet and ended the year with an estimated combined risk-based capital, or RBC ratio of approximately 500%, well above our target range of 400%-450% in normal markets, and up from our year-end 2020 combined RBC ratio of 487%. Statutory combined total adjusted capital, or TAC, was approximately $9.5 billion at December 31st, compared with $9.8 billion at September 30th.
The decrease is explained by $344 million of subsidiary ordinary dividends paid to the holding company in the quarter. Looking at year-over-year, favorable equity markets and rising interest rates helped drive a $900 million increase in TAC from year-end 2020. Additionally, in 2021, the operating companies paid total ordinary dividends of $594 million to the holding company. The total Brighthouse Life Insurance Company, or BLIC, ordinary dividend paid in 2021 was more than double our initial plan for last year. Turning to normalized statutory earnings. This metric was close to breakeven in the fourth quarter. For the full year, the normalized statutory loss was approximately $300 million.
Strong core variable annuity, or VA, results were more than offset by a $200 million-$250 million negative impact from a decline in the statutory mean reversion point for interest rates and a loss in non-VA. As I discussed on the last earnings call, normalized statutory earnings is meant to give an indication of excess capital generation in normal to good markets and to measure our performance managing risk in bad markets.
Importantly, this measure in its current form was introduced prior to the adoption of VA reform. Starting this year, we are redefining normalized statutory earnings to better align with VA reform and therefore movement in the RBC ratio. At an operating company level, we believe that the RBC ratio is the best indicator of excess capital generation over time. Cash at the holding company is the other important indicator of excess capital.
Holding company liquid assets were $1.6 billion at December 31st, up from $1.5 billion at September 30th. Also, in the fourth quarter, we took advantage of historically low holding company funding costs by extending debt maturities and adding more fixed for life preferred equity capital. We issued $400 million of 30-year senior notes and $350 million of preferred stock. The net proceeds were used to repurchase approximately $680 million of senior notes with a weighted average maturity of approximately 10 years. As we look to 2022, balance sheet strength remains a top priority, and we continue to manage the company using a multi-year, multi-scenario framework to evaluate capital, liquidity, and subsidiary dividend plans to the holding company.
In 2022, total subsidiary ordinary dividend capacity is approximately $1.3 billion, and we currently expect to pay ordinary dividends to the holding company of approximately $300 million. Shifting to adjusted earnings. Fourth quarter adjusted earnings, excluding the impact from notable items, were $416 million, which compares with adjusted earnings on the same basis of $514 million in the third quarter of 2021 and $272 million in the fourth quarter of 2020.
The notable items on an after-tax basis were a $59 million debt repayment expense in corporate and other associated with the repurchase of the company's senior notes, establishment costs of $21 million included in corporate and other, and $13 million net unfavorable actuarial items, including reinsurance recaptures in the runoff segment, refinements to certain actuarial assumptions, and valuation systems conversions associated with our transition to the future state platform.
There are two key themes when we think about the fourth quarter adjusted earnings results compared with the quarterly adjusted earnings expectation. First, while net investment income was lower sequentially, it was still very strong in the fourth quarter, primarily due to a 7.5% alternative investment return. Net investment income was approximately $165 million above a quarterly run rate expectation on an after-tax basis.
For the full year, the alternative investment return was 42.6%, which greatly exceeded the 9%-11% annual return we anticipate for this asset class. Second, the fourth quarter underwriting margin, which included $34 million of pre-tax net claims related to COVID-19, was lower sequentially. There is variability in the underwriting margin throughout the year, driven by fluctuations in a number of factors, including frequency of claims, severity of claims, and the offset from reinsurance. As we have previously communicated, we expect direct claims on a quarterly basis to average between $400 million and $500 million. In the fourth quarter, we were at the higher end of that range as we experienced a higher volume of direct claims. Moving to adjusted earnings at the segment level. Annuity adjusted earnings, excluding notable items, were $361 million in the quarter.
Sequentially, Annuity results were driven by lower amortization of deferred acquisition costs, or DAC, and a smaller increase in reserves, both as a result of the favorable market performance in the quarter. This was partially offset by lower fees and higher expenses. The Life segment reported adjusted earnings excluding notable items of $58 million in the quarter.
On a sequential basis, results reflect lower net investment income, a lower underwriting margin, and higher expenses. Adjusted earnings in the Run-off segment excluding notable items were $6 million in the quarter. Sequentially, results were driven by lower net investment income, a lower underwriting margin, and a tax true-up that was offset in the Corporate and Other segment. Corporate and Other had an adjusted loss excluding notable items of $9 million. Sequentially, results reflect a higher tax benefit and the previously mentioned tax true-up.
Before I conclude, I would like to mention that we plan to provide an update in March on distributable earnings as we have done in prior years. Overall, I'm very pleased with the fourth quarter and full year 2021 results. We continued to optimize statutory capital, strengthen the balance sheet, and return a substantial amount of capital to shareholders. With that, we would like to turn the call over to the operator for your questions.
Thank you. As a reminder, to ask a question, you will need to press star one on your telephone. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. Our first question comes from Thomas Gallagher with Evercore. Your line is open.
Good morning. First, just a question on capital generation in the quarter. Ed, I think I heard you mention $200 million-$250 million negative mean reversion interest rate adjustment. Was that done this quarter? Was that like a true-up done this quarter?
Hey, good morning, Tom. No, that was the impact we had in the first quarter of last year. What you're talking about in the fourth quarter, I think, is norm adjustments on a statutory basis. The actuarial items and other insurance adjustments line when we talk about the norm stat earnings disclosure in the supplement. Let me give you a little color on it. I think it's important to understand the movement in the RBC ratio. In the fourth quarter, we made substantial progress on transitioning to our future state platform in actuarial. As a reminder, this is movement away from multiple valuation systems and customized models to one valuation platform and more standardized models. This has created and will continue to create more time for value-added analysis, more flexibility, and also a better control environment.
The fourth quarter was a busy quarter for this, and we had three models that were fully put into production and for three product lines. The total statutory reserves we're talking about is around $33 billion. You know, one thing to think about when you look at these conversions, it's sort of like an actuarial assumption review for the associated product line. While we had gone through our review in the third quarter, every time you do this model conversion, you're looking very closely at the one model versus the other model and the differences.
As a result of this, in the fourth quarter, there was a negative impact on TAC and the RBC from the transition to the future state. This really explains the sequential change in the RBC ratio that you see in, y ou know, on top of the impact you calculated from the dividends we paid up to the holding company. You know, that's really the driver of this incremental change in RBC in the fourth quarter. The final thing I'd say is it's important to note that if you look at these actuarial adjustments on a full year basis for statutory, it was a positive impact on our RBC ratio.
Gotcha. That's helpful, Ed. Tell me if these numbers sound directionally correct. If I solve for a 30-point RBC drop, that equates to $500 million-$600 million of TAC, keeping the denominator constant. The dividend clearly accounted for the majority of your drop in RBC, you know, say actually a little less than half of the drop in the RBC. This systems conversion then would've been, you know, $700 million it sounds like. I mean, I was calculating upwards of half a billion negative impact on your RBC, assuming you would've had a normal level of stat capital generation in the quarter. Is it kind of that order of magnitude in the RBC adjustment or, any help there would be appreciated.
Yeah, that's high. It's not a half a billion dollar impact. I would say this. Remember I said the total impact for the year of actuarial adjustments was positive, right?
Right.
On a stat basis. I think on the third quarter call, I discussed that the statutory impact from our actuarial assumption review was positive by something around 20 RBC points. I think it was 21 RBC points.
Right.
I think you could use that as an anchor to think about like how much of a negative impact must there have been in the fourth quarter, you know, if we can still say it's positive for the full year.
Gotcha. Okay. Just follow up to this. Any you know, I totally get it, but are there any further large systems conversions left where there could be adjustments here? How many of these are left when you think about the next couple of years?
Yeah. We have the VA transformation, which is going to occur this year. That's it for actuarial.
How is that a really big one, or I assume it is when I hear VA. But how? Maybe dimension that a little bit. Thanks.
Yeah. I don't know how to dimension. I would say, using an actuarially approved term, it's a big one. I think that is probably fair to say. You know, we've learned an awful lot along the way here, with the model conversions that we've completed already. You know, I think we're very well positioned here and, you know, we'll have to see what happens. You know, I think we're very well positioned obviously from a capital standpoint and, you know, the movements we're talking about here, like I said, have not been that significant, in total, again, positive for full year 2021 when we had an awful lot of activity on the actuarial transformation front.
Gotcha. Thanks.
Thank you. Our next question comes from Tracy Benguigui with Barclays. Your line is open.
Good morning. In the past, you referenced buying back stock at an average daily trading volume of 4%-6%. If I look at the last two quarters, you're well above that, I would say around 9% or so. On the other hand, your stock may not be as cheap as it once was. Are you still targeting this 4%-6% range, or have you changed your thinking behind that? Also coupling on your expanded ordinary dividend capacity, your healthy hold co liquidity and your RBC cushion.
Oops, my mic didn't work. Hi, Tracy, it's Eric.
Hi.
Look, let me just start out by saying we are laser focused on the strategy that we laid out a couple years ago, and that has not changed at all. You're trying to get a sense of what we're going to do going forward, and Ed will jump in here on dividend capacity. We have returned a lot of capital to shareholders, as you're very well aware, and we still have over $700 million of buyback authorization. I think it's fair to say either today or anytime in the future, when we get buyback authorization, we intend to carry out the buyback. Now you're mentioning 4%-6%. In 2021, we accounted for roughly 8%, so slightly more than that. Yes, I understand the stock price is higher.
We still think it's undervalued, and as a result, we are buying back stock. You see what we've bought back so far in 2022. While I'm not going to give an exact number, you know, 4%, 6%, 8%, and it was 8% in 2021, sounds like a reasonable guide. Of course, that excludes any time that, you know, we think there's an opportunity to purchase even more. I know Ed wanted to say this, but I guess I'll say it. We bought back 17% of our shares in 2020, at around $26 a share. I think all of what I just said gives you know, a good some guidance on what we intend to do going forward. Ed, I know you want to add.
Yeah. Hi, Tracy. The only thing I would add is, you know, we don't target a percentage of average daily volume. The reason that we've quoted those statistics, you know, today and in the past is just to give you a sense of how much, you know, how much we're buying back and how active we are. You know, we bought back 12% of our shares outstanding last year. We've, as I think Eric said, we bought back 35% or shares outstanding have declined by 35% since we separated. You know, obviously we take capital return very seriously, and we've been very active and, you know, it's our strategy, and I don't really see our strategy changing.
Got it.
I'm sorry.
But-
Yeah, sorry.
Yeah, go ahead.
Sorry. I know you had another question. Just if you could repeat that.
No, I think you answered my first question. I guess my second question is, you mentioned in March you're going to provide a refresh of your distributable earnings scenarios. Should we expect it to be directionally more positive, particularly given the 10-year treasury is now sitting above 2%? I think the assumptions last year you shared was at 0.93% as of year-end 2020. Is it really not comparable because of what you said earlier about redefining normalized stat earnings?
Well, I wouldn't say that the change in the definition of norm stat earnings is really going to be a meaningful factor here. I mean, we are aligning norm stat with the RBC ratio, and the RBC ratio, as I said, is the best indicator over time of excess capital generation. You know, when we think about distributable earnings, we think about what can we pay up to the holding company while still maintaining a strong capital position at the operating company level.
Just to be clear.
Sorry.
Go ahead.
You know, I'm not gonna give a preview of what we're gonna say in March. I mean, clearly we are happy that interest rates are higher than they were when we did it last time.
Okay. I mean, just considering that you early adopted VA capital reform, so it's been a little while, so it's almost like same-store basis because that's how you were thinking about it last year. It should be on the same basis. Is that fair?
Sorry, what should be on the same basis?
Viewing your view of distributable capital being some derivative of excess RBC.
Yeah, well, I mean, I guess I'm not 100% sure what you're asking, but let me try this. When we give you distributable earnings disclosures for VA and for the company under various scenarios, we're looking at what can we pay up to the holding company and still support the appropriate level of capital at the operating company. You know, nothing's changed in terms of how we think about that today versus a year ago because as you said, VA reform was in place a year ago and it's in place today.
Yeah. I guess the big difference would be, you know, under RBC, you're looking at CTE 98, and I think under your definition of normalized stat earnings, you are looking at CTE 95. I just wanted to make sure that the assumptions would be similar if I just wanna make a comparison, you know, your disclosure this year in March versus what you shared last year.
Yeah. I don't think you're gonna have a problem.
Okay. Thank you for confirming.
Thank you. Our next question is from Ryan Krueger with KBW. Your line is open.
Hey, good morning. Ed, based on where rates are right now, would you expect the mean reversion rate to come down 25 basis points in the first quarter of 2022? If so, is the impact still $200 million-$250 million?
Yes and yes.
All right. That was easy. I guess secondly, just on the subsidiary dividends to the holdco, I guess, is your RBC, you know, a fair amount above your target. You know, would you consider at some point starting to take additional dividends to work down closer towards the high end of the 400%-450% target? Or at this point, are you just still looking to run the stat capital within the subs with more of a cushion?
Yeah. You know, obviously we have a high RBC ratio and a lot of cash at holding company. I guess I would just say with $1.6 billion of cash at holding company, most of our fixed charge is covered by non-dividend flows from the operating companies. With our first debt maturity in 2027, which by the way has been reduced by more than 40% because of the capital transactions we did late last year. You know, we issued $750 million of a combination of 30-year debt and fixed-for-life preferred and took out that shorter debt, most of it in the 2027. You know, we're very happy we locked in historically low funding costs for us.
I mean, as you can imagine, the yields on our debt and preferred are up a fair amount from where they were at that point in time. You know, it also means that there's less, even in 2027, the amount that's maturing is small. We have the ability to, you know, complete the authorization without any reliance on dividends anywhere, certainly not from BLIC over time. I mean, you know, I don't really, you know, that's point number one. Point number two, we look at taking dividends based on, as you've heard me say repeatedly, this, you know, in a multi-year, multi-scenario framework. It's great to have a lot of dividend capacity, but, you know, that's not what's gonna drive us to determine what we're gonna take up in any one year.
That makes sense. Thanks, Ed.
Thank you. Our next question comes from Alex Scott with Goldman Sachs. Your line is open.
Hi, thanks for taking the question. I just wanted to circle back on the comments about transforming the platform for variable annuities. Could you talk about what that entails? What are some of the changes that are made? I guess specifically on the scenario generator, I mean, is that one of the changes that occurs? Is that kind of a platform switch? Just any way you could help us demystify that?
Yeah. There's no change in the scenario generator. I think you're referring to the, you know, discussions around the new scenario generator for statutory, which is going to be a, you know, I think it's gonna be a long process. Obviously, we're very engaged. There's a lot of work to do. As you can imagine, it's extremely complicated. you know, it's gonna take time. I'm optimistic that the industry and regulators will, you know, come to a good framework. you know, I'd just say, look, we've proven we can manage through VA reform. We've got a lot of capital. I'm not really concerned about the change in the ESG.
In terms of the VA, you know, I would just say that, you know, there are multiple systems that are in place now, and we're going to, as I said, a single environment for all of our products. It does provide simplification. It does provide, I think, ease of use and frees up the time for people to do more value-added analysis. I'm really looking forward to the opportunities we're gonna have as a result of completing, fully completing this transformation, and the benefits that we'll realize. I don't know that there's anything specific I would go into on, you know, the VA system.
Got it. Should I take that to mean that when we think through what you're gonna bring forward in March around cash flow scenarios and so forth, that's not really a consideration that we need to take into account?
That is correct. You do not need to take it into account.
Maybe for my follow-up, I just wanted to find out, you know, how you guys are thinking about inflation, you know, on the expenses and just is there any impact that we should expect from that heading into next year? Maybe if you could shed any light around, you know, how much the institutional platform investments in 4Q was.
Well, I'll start on inflation. You know, I would say if we assume that inflation translates to higher interest rates, which certainly yesterday's market action would suggest that's a reasonable linkage to think about. You know, inflation is an overall good guy for us. You know, obviously people have to deal with wage inflation across all industries, and we'll have to do the same. You know, higher interest rates, higher inflation is not something that we're afraid of.
Yeah. It's Eric. I'll add to that. So I think over time here, you can count on us talking about our sort of stat expense ratio continuing to go down, despite any effects that might hit us with respect to inflation. You should expect continued sales growth and margin expansion as we think about, you know, the stat expense ratio coming down. This particular year, 2021, we did start up. You know, it's a new business for Brighthouse. Certainly for some of us, it's a business we've been in for a long time, but the institutional spread margin business, and I think you specifically asked about that. So it was in the neighborhood of $10-ish million to get that all up and running in 2021. Of course, that affected our expenses, right?
That made them $10-ish million higher. You didn't ask this question, but I'll answer it anyway. We had originally set out to save $150 million off our sort of starting expense base, and then another $25 million in 2021. We did not hit that for two reasons. One, the institutional spread margin business, which was about half of the difference. We did a lot of investing this year, and we'll continue to do that in distribution. You will see that in 2022 as well, and probably in 2023. Along with your comments on inflation, we will still lower our stat expense ratio. Hope that helps.
Thank you.
Thank you. Our next question comes from Elyse Greenspan with Wells Fargo. Your line is open.
Thanks. Good morning. My first question goes back to capital return, I guess. I'm assuming given where your stock price is, even though I think someone pointed out earlier, it's obviously more expensive than where it was, that you would still look for share repurchase, you know, for your return of capital as opposed to instituting a dividend. I was intrigued with any updated thoughts there.
Yeah, I think that's a good assumption.
Okay, thanks. My second question. You guys had a reinsurance recapture that you pulled out of earnings in the quarter. Can you just give us any additional color there?
Yeah, sure. Hi, Elyse. You know, the recapture was not a meaningful impact from a statutory basis. In the total items on a GAAP basis, which had a net unfavorable impact of $13 million, the reinsurance recaptures had a $36 million unfavorable impact included in that number. I think as you know, when we're presented with a rate increase, we evaluate whether it makes sense to accept that or just to recapture the business. In this instance, we decided it made sense to do the latter.
Okay, thank you.
Thank you. Our next question comes from John Barnidge with Piper Sandler. Your line is open.
Thank you. Maybe if we talk about other companies have announced cost-cutting programs after close to two years in a heavily hybrid world, totally understand you're able to start up your company and digitize it very quickly. With establishment costs set to end in 2022, how do you approach future expense rightsizing opportunities?
Hi, John. I think there's still room for us to take out some expenses. You mentioned the digitization, it's taken a while, by the way, you know, we started this a number of years ago, so, you know, it's finally coming to fruition here after a number of years. There will be still some areas where we can take some expenses out, maybe some rent over time here. I think from a previous question, obviously inflation will be a factor. It is not going to preclude us, as I've said twice now, from lowering our stat expense ratio. Also we are never gonna shy away from making investments in growth. We've made investments for the BlackRock LPP product.
We've made investments in new product, which you'll see this year and next year, and we will continue our sort of digitization for the financial professionals that we work with. There are gonna be opportunities, but frankly, I'm pretty focused on growth and investing in growth as well.
That's very helpful. Thank you very much. Maybe my follow-up. Last quarter, you added 13,000 agents to the 50,000 you had previously. Can you talk about performance of those new agents in the quarter and then success in recruitment of new agents as well? Thank you.
Hi, it's Myles Lambert speaking. We did launch several new relationships, and I think you're referencing specifically for our SmartCare product in August and throughout the fall of last year. We brought on about 13 new distributors, giving us access to approximately 14,000 additional advisors. We also expanded into the BGA channel. It happened, like I said, throughout the summer and the fall, and we're starting to slowly see some growth from that new distribution opportunity, from those new distribution opportunities.
Thank you.
Thank you. Our next question comes from Humphrey Lee with Dowling & Partners.
Good morning, and thank you for taking my question. Just looking at the mortality claims, kind of, there's definitely ups and downs throughout the quarters. If we're taking a step back and look at kind of the direct claims, maybe, say, over the past four to six quarters, and compared to the reinsurance recoveries, where do you end up, you know, relative to your expectations?
Yeah. Hi, Humphrey, it's Ed. Yeah, we pointed out that underwriting was a little less favorable than what we would consider to be normal. You know, I think that has been the case generally in the pandemic. We talk about obviously there's the COVID impact that's direct that explains part of that. You know, I also think, and you know, I don't believe we can prove this, but there could be a knock-on effect here, right? Where you have people that aren't as quick to go to the hospital. They're not as quick to go to the emergency room. You know, we know the cause of death reporting is imperfect, so what we identify as COVID-related deaths are the deaths that are tagged as COVID.
You know, we know that that has to be, I would say, the minimum number of COVID deaths because there are others that are possibly not categorized correctly. I think it's difficult to really be that precise about what's pandemic and what's not. I would say that this is not something that is an issue for us. I talked about in the third quarter how we generally had very little change in our mortality expectations based on our experience studies, so our, you know, heavy third quarter actuarial assumption update analysis of this issue. We continue to look at it. You know, reinsurance percentage was a little lighter this quarter than what we would consider to be the average. It can bounce around a lot.
You know, the direct claims themselves, the fact that I give a range of $400 million-$500 million gives you some indication of the type of volatility you can see. I would say there's nothing to see here, but you know, I think there is probably somewhat of a pandemic impact that's affected the last year or two.
Okay. Thank you for the color. My second question is related to kind of how to think about the market impact running through annuities. I think you used to provide some guidance in the past, but as the product mix continue to shift to Shield from your legacy GMIBs, like, can you just give us an updated rule of thumb in terms of how to think about the market impact?
Sure. We're not identifying a specific market impact. I think we qualitatively said that if you look at market impact, that it was an offset to say, the slightly less favorable expenses as well as the underwriting issue that we talked about if you're thinking about run rate. If you look at the Annuities segment, the DAC this quarter, I believe, was $49 million.
Now, that has an impact from the systems conversions that we talked about. There's actually a DAC benefit. Unlike statutory, where there was the negative impact, there was a positive impact for GAAP because of DAC. If you adjust for that, the run rate or the number in the quarter for DAC related to adjusted earnings and annuities was more like $80 million-$90 million.
I have said in the past that a more normal quarter for DAC amortization's probably in the neighborhood of $100. I think it's fair to say that it's a higher number than that now. That should give you some indication of how to think about the market impact.
Got it. Thank you for that.
Thank you. Our next question comes from Erik Bass with Autonomous Research. Your line is open.
Hi, thank you. I wanted to follow up on Elyse's question about a potential common dividend. Well, certainly it's hard to argue with the value of buying back your stock. A dividend could potentially expand your shareholder base and send a strong signal about your confidence in the sustainability of cash flow. Just interested in getting a little bit more thoughts on how you're thinking about that.
Hi, Eric. I'm having problems with this microphone today. Look, it's not like we never discuss it. You know, certainly this is a board topic as well. But at this point, it still strikes us that buying back our stock is the right way to go. Does that preclude eventually a dividend? No, it does not. You know, as I kinda hinted, and I'll say it more formally, we will talk about this. This is a topic that we should be talking about both as a management team and as a board. Over time, there is certainly a possibility that we will pay a common dividend. For the time being, and I think the words I used were, you know, buying back stock is probably a good assumption when you think about capital return for us right now.
Got it. Thank you. I know you'll provide, obviously, the update on VA cash flows in a month or so. Was just hoping you could remind us of kind of the relative sensitivity to interest rates versus equity markets. If we have an environment of higher rates, but modestly declining markets like we've seen year- to- date, is that still something we should think of as a net positive for you?
Yeah, Eric, I'm not gonna get into the specifics here, like ahead of the DE tables. The only thing I'd point out is when we did this last year, I remember we talked about how our DE tables looked very similar to the prior year, adjusted for the $1 billion of additional capital that we took out, you know, two years ago because of the de-risking of the hedge strategy, right? The point that I was making then was, look, it's interest rates had come down a lot. I think it's down 100 basis points. At the same time, the equity market had performed very well. You know, it gave you an indication that they're both important, right?
Yeah, certainly. Well, we'll stay tuned.
Thank you. Our next question comes from Mike Zaremski with Wolfe Research. Your line is open.
Hey, great. Happy Friday. Just one question. When you talk about your RBC ratio target, you use the word normal markets. Maybe you can comment on what is your view of normal markets, and has it evolved over recent quarters?
Mike, happy Friday to you. It probably won't be a surprise that Eric just waved the hand to me to discuss the answer to this question. We were just sort of having a few laughs about what exactly does normal markets mean, right? 'Cause it doesn't feel like normal, maybe ever. You know, it's a guide for us to say that 400%-450% is it feels like the right number for an RBC ratio during a you know kind of on a full cycle basis. You know, when times are really good, you would expect it to be above that, and if times got tough, you'd expect it to be below that. That's why I think you wanna make sure that you are positioned, you know.
We've had a very good run here. I mean, the stock market's done very well. Interest rates, not so much, but until recently, now we're seeing, you know, rates going up, too. So I don't know that now is the time to get too aggressive in terms of how you think about your capitalization at the operating company level.
Understood. Thank you.
Thank you. Ladies and gentlemen, I will now turn the call over to Dana Amante for closing remarks.
Thank you, Shannon. Thank you all for joining us today and for your interest in Brighthouse Financial. Have a great day.
This concludes today's conference call. Thank you for participating. You may now disconnect.