Good morning, ladies and gentlemen, and welcome to Brighthouse Financial's Q3 2021 Earnings Conference Call. My name is Jonathan, and I will be your coordinator today. At this time, all participants are in 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 Call 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'd now like to turn the presentation over to Dana Amante, Head of Investor Relations. Ms. Amante, you may proceed.
Good morning, and thank you for joining Brighthouse Financial's Q3 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, November 5, 2021. The company undertakes no obligation 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, slide 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. I now will turn the call over to our CEO, Eric Steigerwalt.
Thank you, Dana, and good morning, everyone. Thank you all for joining us. Brighthouse delivered strong results in the Q3 of 2021 as we continued to execute on our strategy focused on growing sales, managing expenses, unlocking capital, and repurchasing our common stock. Beginning with sales, I am very pleased with our strong sales results this quarter. Total annuity sales were approximately $2.4 billion in the Q3, up 1% compared with the Q3 of 2020. We reported another quarter of record sales for both our flagship Shield Level Annuities and our variable annuities with FlexChoice Access. Combined, our VA and Shield product sales were up 54% compared with the Q3 of 2020 and ahead of our expectations.
Fixed rate annuity sales were lower quarter- over- quarter as expected as we took repricing actions in the second half of 2020, given the low interest rate environment. The continued strong sales in the Q3 considerably offset annuity outflows. Total annuity net outflows were $587 million in the quarter. As we've said previously, we expect to see the continuation of a favorable shift in our business mix over time as we add more cash flow generating and less capital-intensive new business, coupled with the runoff of older, less profitable business. Our life insurance sales in the Q3 were also ahead of our expectations and up 4% compared with the Q2 of 2021 at approximately $27 million.
I remain very pleased with the progress that we are making as we continue to execute on our life insurance strategy and work to add distribution partners, bring on additional wholesalers, and enhance and add to our product mix. In the Q3, we further grew our distribution footprint for our flagship life insurance product, SmartCare, by strategically expanding into the brokerage general agency or BGA distribution channel and adding new firms, resulting in approximately 14,000 additional financial professionals providing access to SmartCare. We remain focused on further expanding our distribution footprint, as well as enhancing our existing suite of products. In August, we announced the launch of several enhancements to our Shield Level Annuities.
We are excited about these enhancements, which we believe further bolster the attractiveness of Shield to our distribution partners and the clients they serve. Before moving on from sales, I would like to take a moment to thank our distributors for their outstanding partnership and all the work they do every day on behalf of their clients and our customers. Moving to expenses. In the Q3, corporate expenses, which do not include establishment costs, were $222 million, in line with our expectations. Establishment costs were approximately $25 million. We previously committed to a cumulative $175 million reduction in corporate expenses by year-end 2021 relative to our first year as a public company. We remain focused on achieving our expense reduction target.
With that said, we will continue to invest in our infrastructure to enhance the service and support we provide our distributors and their financial professionals as well as our policyholders. Turning to capital. In August, Brighthouse Reinsurance Company of Delaware, or BRCD, paid a $600 million extraordinary dividend to its parent company, Brighthouse Life Insurance Company, or BLIC. We continue to focus on optimizing statutory capital to support our balance sheet strength. Our strong statutory balance sheet and substantial holding company cash continue to support our robust common stock repurchase strategy. In the Q3 of 2021, we repurchased approximately $149 million of our common stock, and through November 2, we repurchased an additional $61 million of our common stock.
Since the announcement of our first stock repurchase authorization in August 2018, through November 2 of this year, we have repurchased a total of more than $1.4 billion of our common stock. This represents a reduction of more than 34% of shares outstanding from the time we became an independent public company and brings us to almost 95% of the way to achieving our capital return target of $1.5 billion by the end of this year. We also have approximately $877 million remaining under our current $1 billion stock repurchase authorization, which we announced this past August. Moving to other results in the Q3. As I said, Brighthouse delivered another quarter of strong results. Our balance sheet and liquidity position remained robust in the Q3, and our hedging program performed as expected.
We estimate that our combined risk-based capital or RBC ratio was between 520% and 540%, 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 $1.5 billion. Adjusted earnings results overall were ahead of expectations as investment income from alternative investments was very strong given the Q2 market performance, and the underwriting margin was higher than the prior quarter. In addition, as I mentioned earlier, we delivered another strong quarter of sales results, and we continued to prudently manage expenses. Ed will provide more details on our financial results in a moment. To wrap up, I am very pleased with the progress that we have made as we continue to execute on our focus strategy.
Sales in the Q3 were better than expected, and we continued to expand our distribution footprint and enhance our product portfolio. In addition, we repurchased more of our common stock, bringing us, as I said, to almost 95% of the way to achieving our goal of returning $1.5 billion to our shareholders by the end of this year. We remain focused on our mission to help people achieve financial security and on our strategy, which we believe will enable us to generate long-term value for our shareholders, our distribution partners, and the clients they serve. With that, I'll turn it over to Ed to discuss our financial results in more detail. Ed?
Thank you, Eric, and good morning, everyone. I'm very pleased with Q3 financial results and the strength of the balance sheet, which is demonstrated by the preliminary statutory results and holding company cash we reported last night. As noted in the earnings materials, results for the Q3 of 2021 reflect the impact of our annual actuarial review. This review is a substantial undertaking as we evaluate all of our long-term assumptions. Overall, the assumption update had an unfavorable impact to GAAP net income of $116 million. There were no significant changes to policyholder behavior assumptions for variable annuities or VA or mortality assumptions for life insurance.
This year's review included the valuation system conversion of the Shield Annuities block of business to our future state platform. This conversion had a modest negative impact on GAAP results, but a positive impact on both statutory total adjusted capital and the risk-based capital, or RBC ratio. Now turning to preliminary statutory results. Combined statutory total adjusted capital, or TAC, increased to $9.7 billion at September 30 from $9.4 billion at June 30. The increase was driven by the $600 million dividend paid from Brighthouse Reinsurance Company of Delaware, or BRCD, to Brighthouse Life Insurance Company, or BLIC. The benefit to TAC was partially offset by the impact from negative market performance in the quarter as VA separate account returns were -0.4% and interest rates were essentially unchanged.
The capital release from BRCD is a good example of our continued focus on optimizing statutory capital. As I mentioned last quarter, we plan to take an ordinary dividend from BLIC in the Q4 that is at least half of our remaining $483 million of ordinary dividend capacity. This would be in addition to the $250 million dividend paid to the holding company in the Q2. At September 30, we estimate that the combined RBC ratio increased to a range of 520%-540%, which is up 40 points sequentially and well above our target range of 400%-450% in normal markets. The increase in the estimated RBC ratio is primarily due to the $600 million dividend from BRCD.
Finally, the negative separate account returns in the quarter, along with essentially no change in interest rates, contributed to an unfavorable result for normalized statutory earnings. In addition, while the underwriting margin returned to a more normal level, there were a variety of items that contributed to a non-VA loss in the quarter. Year-to-date through September 30th, we reported a normalized statutory loss of approximately $200 million. Moving to adjusted earnings. Q3 adjusted earnings, excluding the impact from notable items, were $514 million, which compares with adjusted earnings on the same basis of $458 million in the Q2 of 2021, and $388 million in the Q3 of 2020. Results in the Q3 of 2021 were primarily driven by higher net investment income compared with our quarterly run rate expectation.
There were two notable items in the quarter, which on a combined basis lowered adjusted earnings by $64 million. The notable items on an after-tax basis were a $44 million net unfavorable impact related to the annual actuarial assumption review, including the valuation system conversion for our Shield block of business, and establishment costs of $20 million in corporate and other. Before getting into the segment results, I would like to provide some perspective on the strong net investment income and the Q3 underwriting margin. For net investment income, the positive market performance in the Q2 of 2021 resulted in continued excess returns in alternative investments above our long-term expectation of 9%-11% per year. This was the primary driver of approximately $245 million after tax of earnings above our quarterly run rate expectation.
As a reminder, we generally report alternative investment income on a 1-quarter lag. Asset growth also contributed to the favorable net investment income performance in the quarter. Moving to underwriting. The underwriting margin in the Q3 improved sequentially and included approximately $9 million of pre-tax net claims related to COVID-19. Our direct claims in the quarter, excluding the impact from COVID-19, were in the normal range of $400 million-$500 million, and the reinsurance offset, which was low in the first two quarters of this year, returned to a more normal level. Now turning to adjusted earnings at the segment level, starting with annuities. Adjusted earnings, excluding notable items, were $343 million in the quarter.
Net investment income and fees were both higher sequentially, partially offset by higher reserves as a result of lower VA separate account returns in the Q3. The life segment reported adjusted earnings, excluding notable items, of $107 million in the quarter. Sequentially, results reflect a higher underwriting margin and higher net investment income. Adjusted earnings in the run-off segment, excluding notable items, were $127 million in the quarter. Sequentially, results were driven by higher net investment income and a higher underwriting margin. Corporate and other had an adjusted loss, excluding notable items, of $63 million. Sequentially, results were driven by lower expenses and higher net investment income, partially offset by a lower tax benefit. Overall, I am pleased with our results in the Q3. We maintained our strong capital position while continuing to return substantial capital to shareholders.
We remain committed to managing the balance sheet and holding company cash under a multi-year, multi-scenario framework, which we believe is the best way to support our distribution franchise and the evolution of our business mix over time. With that, we'd like to turn the call over to the operator for your questions.
Thank you, sir. As a reminder, to ask a question, you would need to press star one on your telephone. To withdraw your question, please press the star-pound key. Please stand by while we compile the Q&A roster. I show our first question comes from the line of Elyse Greenspan from Wells Fargo. Please go ahead.
Hi. Thanks, sorry. Good morning. My first question, in prior quarters, you guys used to talk to Ed, I think last quarter, a $300-$320 quarterly run rate earnings. You know, underwriting was more favorable this quarter, and you mentioned some other items. Would you think net-net, you know, where you are relative to that range you provided last quarter?
Hi, good morning, Elyse. If you look at average shares outstanding this quarter, they're down more than 3% from the Q2. That change alone would equate to more than $0.10 a share. I think it is fair to assume that the range is a bit higher than what we had talked about last quarter.
Okay. Within that commentary, like I guess going forward, you would expect the reinsurance offset, which I know you mentioned return to more normal levels this quarter, that would kind of stay in those normalized levels going forward, right?
That's correct.
Okay, thanks. You know, a lot of companies this quarter have started providing some disclosure on the LDTI accounting changes. I was just wondering if we could get, you know, kind of an update from Brighthouse. Is there a target date that you guys have just to provide, you know, more quantitative disclosures as well?
Sure. As you might expect, we've dedicated substantial resources to this program, and we've created a very strong governance framework around it. You know, I would think we'll be in a position to give some estimate of impact in the second half of next year. Obviously, GAAP is important as a public company, but I just would remind you that our ability to generate distributable cash flows to you know, for example, buy back stock will be unaffected by any GAAP accounting change. As you know, we focus on running the company based on statutory balance sheet and holding company cash.
Okay, thanks for the color.
Thank you. Our next question comes from the line of Erik Bass from Autonomous Research. Please go ahead.
I realize it's still early in the life of the buffered annuity market. I was hoping you could talk a little bit about what you're seeing in terms of policyholder behavior at the end of the product term. Are people rolling over into a new Shield annuity, or is there a lot of churn between companies? As the market becomes more competitive, is this a risk like what we saw with BAs historically?
Yeah. Good morning, Eric. You know, again, we just completed our annual actuarial review, and I can tell you that, you know, we have enough experience now with Shield, that and as a result of the review, there was no material impact this quarter from any change in assumptions for Shield. Obviously, we revise assumptions, but in terms of materiality, nothing that I would call out.
Got it. I guess I was thinking less about assumptions, but more just as the market matures, since this is a product with a kind of an end time point to it, kind of just from a growth perspective, do you see, is there a risk of kind of rolling over the product into new Shield annuities? Or do you think across the industry as there's more competitors with offerings out there that you'll see more sort of trading of business between companies?
Eric, good morning. It's Myles Lambert speaking. I think you're accurate in predicting that. I think that as these contracts come out of surrender, you'll see movement either replacing it internally based on, you know, a company offering a new competitive offering, or you could see movement to other carriers. I think it's a little early on to say that since a lot of these products are still new in the market and under surrender. I would expect that you will see movement either internally with the existing carrier, assuming they have a competitive offering, or you could see it move to another competitor.
Hey, Eric, it's Conor. Let me just add a little bit to help out. You're right. I mean, we were issuing six-year products back in 2015, which of course are at that six-year term. If you look at the overall flows or the outflows in the quarter, it's been very consistent with prior quarters in all of Brighthouse's existence. There, there's really not a factor of, call it Shield outflow. There's an element, certainly, but nothing significant in terms of Shield outflows impacting that overall flows picture if that helps you as well.
Yeah. Eric, if you want me to-
Sorry, try that again.
That was my point is, you know, we have not seen anything related to, you know, lapsation of products that had any material impact on financial results when we talk about the assumption review this quarter.
Got it.
That would hold true for your legacy VA block as well, because I know we've seen a few companies, including, I think, MetLife that made lapse assumption changes on VAs as well. Yeah. We had no significant impact from any policyholder behavior changes for VA. Just as a reminder, we did have some meaningful impacts from changing lapses and withdrawal assumptions for VA in the 2017 and 2018 actuarial review.
Got it. Thank you.
Thank you. Our next question comes from the line of Humphrey Lee from Dowling & Partners. Please go ahead.
Good morning, and thank you for taking my questions. In your script, you talked about you're planning to upstream at least half the remaining $500 million of dividend capacity from BLIC. As we think about that, like, what are the factors that may affect the level that you upstream, whether to be $250 or higher than that?
Well, you know, I'm not gonna get more specific than what I said about at least half. You know, we also intend to take our annual dividend from NELICO in the Q4. You know, just anticipating a question on dividends, I will say that if we look to 2022, our base expectation is we take a dividend from BLIC. As you know, our base assumption is that markets go up in line with a more normal long-term rate of return, and that interest rates are slowly increasing. I would say next year, even if markets are where they are today and interest rates are where they are today, I would expect we'd take a dividend from BLIC.
Okay. All right. Fair enough. My second question is shifting to sales. As you pointed out, sales were very good for this quarter, and you talked about some of the distribution expansion. Do you anticipate more kind of distribution expansion in the coming quarters that could drive further sales improvement for both Shield and your life product?
Good morning. It's Myles again. The answer to that question is absolutely. A few months ago, we launched another new major distributor for our Shield product, as well as we also launched a number of new firms for SmartCare. We also expanded into the BGA channel, as Eric mentioned earlier, to sell SmartCare, which it's providing us access to approximately 13,000 additional producers. Yes, expansion in distribution is something that we're absolutely focused on.
I guess maybe the other way to think about it, to ask the question is, the pace of adding new distribution in the coming quarters, how would that compare to the pace in the Q3?
I would say with our SmartCare business, it's going to continue to be something that's a real focus of ours. As it relates to our annuity franchise, we have a very large, diverse group of distributors already, but we're always looking to bring on new ones. I would say that the emphasis will be continuing to expand distribution for SmartCare.
Got it. Thank you.
Thank you. I show our next question comes from the line of Ryan Krueger from KBW. Please go ahead.
Hi. Good morning. Could you provide some additional detail on the non-VA earnings in the quarter and what were some of the key drivers?
Good morning, Ryan. I mean, it really was a quarter where we had a number of different factors. If you would allow me to just take a little bit of a different approach on this and remind everyone the purpose of normalized stat earnings. We came up with this definition of normalized stat to try to give an indication of excess capital generation in normal to good markets, as well as an indication in bad markets of how well are we doing in terms of managing the downside risk of the VA block. When we came up with this, it was pre VA reform.
Now with, you know, in a post-VA reform environment where the risk-based capital ratio is more indicative of the risk profile given its CTE 98, we think that the best way to look at movement in excess capital generation really is the change in the RBC ratio. I've made some reference in the past about, you know, slight differences between normalized stat if you were to look at 95 versus 98. What I would point out this quarter is we increased the range of estimate for RBC by 40 points sequentially. If you look at the composition of that 40 points, about 30 of it was related to the BRCD dividend. About 20 of it was related to the positive impact from our Shield model migration to our future state platform.
That was really refinement of the calculation of cash flows, which if you'll recall, we had a similar benefit from refining the calculation of cash flows to VA during last year's annual assumption update. The offsetting impact would be, we used about 10 points of RBC to fund growth this quarter. If you look at a typical quarter, our sales would probably consume around 5 RBC points. This quarter, it was about double that, and it really has to do with the launch of our institutional spread margin business. You know, balances went from, I think it was $2.6 billion at the end of the Q2 to $4.7 billion at the end of the Q3. Okay, if you net all that together, you see that there's a 40 point...
All of those items explain a 40-point movement sequentially in the RBC ratio. You know, there's, I think, it's fair to assume, therefore, that if you were thinking about, you know, some analog to normalized stat earnings on a 98 basis, it was closer to zero.
Thanks. No, that's helpful. Just a follow-up. Can you give us a sense of what your statutory VA lapse assumption is, for the GMIB block, the floor lapse assumption at this point?
I mean, the answer to that is no. Because of the fact that there is no simple answer to that question. I know we sometimes like to get simple answers, but you know, we have a dynamic lapse function based on moneyness and, you know, different products, different features. I mean, it's just there is no single number to give. The only thing, again, I would highlight is there were a lot of assumption updates prior to VA reform. I mean, as you know, one of the goals of VA reform was to get more consistency in the presentation of the VA business on a statutory basis. You know, our assumption updates aligning with VA reform led us to take, I would say, some pretty meaningful hits related to lapses and withdrawals back in the 2017 and 2018 time periods.
All right. Thank you.
Thank you. As a reminder to ask a question, you would need to press star one on your telephone. To withdraw your question, please press the pound key. I show our next question comes from the line of John Barnidge from Piper Sandler. Please go ahead. Mr. Barnidge, if you have your phone on mute, please unmute your line. Okay, we'll move on to the next question. I show our next question comes from the line of Tracy Benguigui from Barclays. Please go ahead.
Thank you. Good morning. I'd like to understand better the negative market performance that contributed to those negative separate account returns. I believe the sub-account underlying assets is generally two-thirds equity investment and one-third fixed income investments. I want to know if that was fair, and if you could describe, I guess, in which bucket were most of those negative returns came from, and if I could also add if you've been giving your policyholders any other options in terms of what they could invest in.
Hi, Tracy. It's Ed. I believe the S&P was up about 60 basis points in the quarter, but we did have other indices that had negative returns. The MSCI EAFE was down 40 basis points. Emerging market index was down 8 percentage points. You know, it's never a story of just one equity index, right? That's the first thing. The second thing is, I think your estimate of the split between equities and other is pretty close. I mean, it's a reasonable level to use. In terms of options for policyholders, I'm not sure what specifically you're talking about, but obviously they have plenty of options in terms of investment choices.
Okay. Got it. You were going down history a little bit earlier with an earlier question. In an older disclosure, you talked about hitting peak funding in your legacy VA block by 2024. I'm just wondering, based on your experience and your inception updates along the way that you just talked about, if that's still the case, or if you could just provide an update on the timing of when you would hit peak funding.
Yeah. I mean, I think it's not that far off of what you're suggesting. You know, it's scenario dependent. You know, obviously, market movements will have an impact on whether that's longer or shorter. I've made the point in the past about, you know, you hit peak funding, and obviously that means your risk is coming down. You know, as reserves come down, I mean, you're also paying claims, right? It's not like that, you know, the money that's getting freed up is all somehow becoming shareholder funds. I think what's important is that, you know, the amount of capital that you need to support the risk over time as the risk comes down, you know, would likely be a different number than what it is today.
Yeah. That's all fair. I guess you were probably alluding to whether that was the thinking if there would be any skewness in that multi-year distributable earnings scenarios, towards the back half, given that you would reach that peak funding.
Sorry, Tracy. Repeat that one more time.
Yeah. I think you were just getting into my thinking, 'cause in your distributable earnings scenarios, it's over multiple years. It's all aggregated. If we were to think about where the proportion of most of those earnings are coming from, would we think about some skewness after the legacy VA block hit peak funding?
Yeah, I would say obviously peak funding is factored into the distributable earnings disclosures we provide you. But I would not say that, you know, the trend in distributable earnings is driven by peak funding. I would say it's driven by the shift in our business mix over time and the benefits of the products that we're selling today that will generate distributable earnings tomorrow. It's also a function of the fact that we have less impacts as you go out from changes in the mean reversion point under statutory, which I've talked about in the past.
Perfect. Thank you.
Thank you. I show our next question comes from the line of John Barnidge from Piper Sandler. Please go ahead.
Thank you very much for taking my question. On the BGA and the new firms added, you said 13,000 new agents. How many agents had access to the product prior to this quarter? The new distribution being added, is that generally selling higher or lower face values?
This is Myles again. I would say prior to adding the approximate 13,000 new financial professionals that we did over the summer, prior to that, we had access to around 50,000 advisors and financial professionals. As it relates to the face amount question, SmartCare is really a product that's designed to deliver long-term care benefits. From a face amount perspective, generally speaking, our face amounts aren't very significant. Conor, did you want to add anything to that?
No, I think we're good, Myles.
My follow-up question. I understand COVID mortality experience went materially down sequentially, but can you maybe talk about the average age of claim now versus maybe at the pandemic onset for you? Thank you for the answers.
Hey, John, it's Ed. I don't have the average age of the claim now versus before. I mean, I would just say that obviously $9 million is down a lot. I think it's down 20% from the Q2, and it's down substantially from where we were in the Q1 of this year and the Q4 of last year. You know, I'd just again highlight that overall, our COVID claims to date relative to the initial guidance we provided based on the number of U.S. deaths, I think in total, we're probably running at about one-fifth of what we thought we would be to date on COVID.
Thank you. Appreciate it.
Thank you. I'm showing no further questions in the queue. At this time, I'd like to turn the call over to Dana Amante for closing comments. Please go ahead.
Yep. Thank you. Thank you all for joining us today and for your interest in Brighthouse Financial, and have a great day.
This concludes today's Conference Call. Thank you for participating. You may all disconnect.