Prepared remarks
Good morning, ladies and gentlemen, and welcome to Brighthouse Financial's Second Quarter 2025 Earnings Conference Call. My name is Michelle, and I will be your coordinator today. As a reminder, the conference is being recorded for replay purposes. I would now like to turn the presentation over to Dana Amante, Head of Investor Relations. Ms. Amante, you may proceed.
Good morning. Welcome to Brighthouse Financial's Second Quarter 2025 Earnings Call. Material for today's call were released last night and can be found on the Investor Relations section of our website. We encourage you to review all of these materials. Today, you will hear from Eric Steigerwalt, our President and Chief Executive Officer; and Ed Spehar, our Chief Financial Officer. Following our prepared remarks, we will open the call up for a question-and-answer period. Also here with us today to participate in the discussions are Myles Lambert, our Chief Distribution and Marketing Officer; David Rosenbaum, Head of Product and Underwriting; and John Rosenthal, our Chief Investment Officer. Before we begin, I'd like to note that our discussion during this call may include forward-looking statements within the meaning of the federal securities laws. Brighthouse Financial's actual results may differ materially from the results anticipated in the forward-looking statements as a result of risks and uncertainties described from time to time in Brighthouse Financial's filings with the SEC. Information discussed on today's call speaks only as of today, August 8, 2025. The company undertakes no obligation to update any information discussed on today's call. During this call, we will be discussing certain financial measures that are not based on generally accepted accounting principles, also known as non-GAAP measures. Reconciliation of these non-GAAP measures on a historical basis to the most directly comparable GAAP measures and related definitions may be found in our earnings release, slide presentation and financial supplement. And finally, references to statutory results, including certain statutory-based measures used by management, are preliminary due to the timing of the filing of the statutory statements. And now I'll turn the call over to our CEO, Eric Steigerwalt.
Thank you, Dana. Good morning, everyone, and thank you for joining the call today. Through the second quarter of 2025, Brighthouse Financial continued to make progress against its capital-focused strategic initiatives. As a reminder, those initiatives are designed to improve capital efficiency, unlock capital and remain within our target combined risk-based capital or RBC ratio range in normal market conditions. During the quarter, we also continued to execute on our focused strategy, delivering strong sales results, receiving additional deposits through BlackRock's LifePath Paycheck, prudently managing our expenses, and maintaining a strong capital and liquidity position. A cornerstone of our financial and risk management strategy is maintaining a strong capital position at our insurance subsidiaries, as defined by a target combined RBC ratio between 400% and 450% in normal market conditions. In the second quarter, our estimated combined RBC ratio was between 405% and 425%, within our target range in normal market conditions. Our liquidity position also remains strong with liquid assets at the holding company in excess of $900 million as of June 30. As we have discussed in recent quarters, we have been executing on several capital-focused strategic initiatives. Through the second quarter, we made further progress on these initiatives, including the ongoing work to simplify and revise our hedging strategy for both our in-force variable annuity and first-generation Shield books of business. As we have said previously, it is important to note that our focus on protecting our statutory balance sheet under adverse market conditions remains unchanged. I am pleased with the continued success of our distribution franchise as well as the strong sales results that Brighthouse Financial continues to deliver. In the second quarter, we recorded strong sales in both annuities and life insurance. Total annuity sales were $2.6 billion, a 16% increase sequentially and an 8% increase compared with the second quarter of 2024. Shield sales, as always, were a significant contributor to total annuity sales. Shield sales totaled $1.9 billion in the quarter, bringing year-to-date Shield sales to $3.9 billion, consistent with the same period last year. The second largest contributor to total annuity sales in the quarter was sales of our fixed annuities, which totaled $500 million. Our total annuity sales results in the second quarter further demonstrate the complementary and diversified nature of our suite of annuity products. Life insurance sales in the second quarter were $33 million, which contributed to record year-to-date life insurance sales of $69 million, an increase of approximately 21% compared with the same period in 2024. Furthermore, we received $176 million of deposits through BlackRock's LifePath Paycheck, or LPP product, in the second quarter. As I have said previously, we expect our involvement with this product to enable Brighthouse to reach new customers through the worksite channel, and we remain extremely excited about its success to date. Moving on to corporate expenses. As we have said in the past, expense discipline is extremely important for us, and we remain committed to well-controlled expense management. Second quarter corporate expenses were $202 million on a pretax basis, down from $239 million in the first quarter, and up slightly from $200 million in the second quarter of 2024. Before turning the call to Ed to discuss our financial results, I'd like to discuss shareholder return. In the second quarter, we returned capital to shareholders through $43 million of common stock repurchases, bringing year-to-date common stock repurchases through June 30 to $102 million. Since we began our common stock repurchase program in August of 2018, we have repurchased over $2.6 billion of our common stock, which represents 52% of our outstanding shares. As we have disclosed in our public filings, we have historically repurchased our common stock pursuant to Rule 10b5-1 plans and our most recent plan expired at the end of May 2025. As such, there have been no additional share repurchases since that date. We have $441 million of capacity remaining under our Board-approved share repurchase program. In closing, the second quarter was another quarter of continued focus and execution on our strategic priorities, including our capital-focused initiatives. We delivered strong sales results, received additional deposits through BlackRock's LifePath Paycheck product and maintained our focus on expense discipline. Let me turn the call over to Ed now to discuss our second quarter financial results in some more detail.
Thank you, Eric, and good morning, everyone. Yesterday evening, Brighthouse Financial reported second quarter financial results including preliminary statutory metrics. I will begin with commentary on the preliminary statutory metrics and close with a review of our adjusted earnings. As of June 30, the estimated combined risk-based capital or RBC ratio was between 405% and 425%, within our target range of 400% to 450% in normal market conditions. The statutory combined total adjusted capital, or TAC, was approximately $5.6 billion at June 30 compared with approximately $5.5 billion at March 31. The increase in TAC was driven by a decline in our VA and Shield reserves in excess of cash surrender value, which more than offset a negative impact on TAC from our non-VA business. The combined RBC ratio decreased during the period, primarily as a result of seasonality and capital charges for fixed business and adverse non-VA results, partially driven by mortality. A normalized statutory loss associated with the VA and Shield business had a muted impact on the RBC ratio because of the previously mentioned benefit to TAC from VA and Shield. As I have discussed in the past, during periods of strong market performance, there is divergence between VA and Shield reserves on the balance sheet, which impacts TAC and the total asset requirement for the business. Holding company liquid assets were over $900 million at June 30. We consider capital strength to be a combination of the operating company's RBC ratio, holding company liquid assets and a conservative capital structure. Before moving to adjusted earnings results, I would like to reiterate the continued progress we have made on our capital-focused strategic initiatives. As a reminder, as of year-end 2024, we fully transitioned to hedging new Shield sales as well as our entire block of Shield business with a living benefit feature on a stand-alone basis. And we continue to make considerable progress on the development of a separate hedging strategy for our in-force variable annuity and first-generation Shield annuity block of business. We made some modifications to our hedges at the beginning of the third quarter, and we plan to complete the transition to our revised strategy, managing the VA and Shield businesses separately by the end of September. Importantly, the foundation of our financial and risk management strategy is unwavering as we remain focused on protecting our statutory balance sheet under adverse market scenarios. I will now turn to second quarter adjusted earnings results, and first note that there were no notable items in the quarter. Adjusted earnings for the quarter were $198 million or $3.43 per share, which compares with adjusted earnings less notables of $245 million in the first quarter of 2025 and adjusted earnings of $346 million in the second quarter of 2024. The second quarter adjusted earnings of $198 million were approximately $60 million below our quarterly average run rate expectations, driven by lower alternative investment income and a lower underwriting margin. The alternative investment portfolio yield in the quarter was 1.5%, which resulted in lower alternative investment income of $32 million or approximately $0.55 below our quarterly average run rate expectation. As a reminder, over the long term, we expect a yield on this portfolio of 9% to 11% annually. In addition, this quarter, we saw a lower underwriting margin relative to our run rate expectation, driven by higher average severity of claims. As we have said previously, mortality fluctuates quarter-to-quarter and can vary based on volume and severity of claims, along with the reinsurance offset. Turning to results at the segment level. Adjusted earnings in the Annuities segment were $332 million, which reflected lower expenses, partially offset by lower fees as a result of lower average separate account balances sequentially. The Life segment reported an adjusted loss of $26 million. Sequentially, results reflected a lower underwriting margin and lower net investment income, partially offset by lower expenses. The Run-off segment had an adjusted loss of $83 million. Sequentially, results reflected a lower underwriting margin, partially offset by higher net investment income and lower expenses. There was an adjusted loss in the Corporate and Other segment of $25 million, which was flat sequentially. To wrap up we maintained a strong balance sheet and robust liquidity as of the end of the second quarter. The estimated combined RBC ratio remained within our target range in normal markets. Additionally, we continue to make progress on our capital-focused strategic initiatives while we remain committed to protecting our statutory balance sheet under adverse market scenarios. We will now turn the call over to the operator to begin the question-and-answer session.
Questions and answers
Our first question is from Tom Gallagher with Evercore ISI.
First question is around your actuarial review for 3Q, 4Q. I assume it's still 3Q GAAP, 4Q stat. Is there a risk here on the stat side, in particular, that there could be a charge given the continued losses? Or do you see that more about volatility and less about asset adequacy?
Tom, as you know, the actuarial review is a significant undertaking and it's the reason it's done on an annual basis. So there's nothing to report on that yet. I mean, we're in the process of doing the work. So I really don't have any update to give.
And Ed, is it still third quarter GAAP, fourth quarter stat?
We have experienced varying timelines for statutory versus GAAP reporting at different times. In the fourth quarter of 2022, we reported the annuity business on a statutory basis while everything else was reported on a GAAP basis in the third quarter due to the final stages of our actuarial transformation. This necessitated delaying the review of annuities on a statutory basis. We are currently working on the separation of the VA and Shield, which will affect our third-quarter balance sheet compared to the second quarter's balance sheet. We will conduct the statutory review for annuities in the fourth quarter and the GAAP review in the third quarter, but that’s all the information I can provide regarding our actuarial assumption update at this time.
Got you. And then just from a follow-up, Ed, can you elaborate a bit on what will be completed by the end of September? And do you feel like you are then in the right place from a go-forward standpoint, where you think you can start generating positive capital again after implementation at the end of September strategy?
Sure. There are a couple of questions here. First, regarding the revisions to our hedging strategy, we are now managing the Shield and VA books separately. We believe this approach is appropriate given our balanced risk profile between the two. Previously, we received a capital benefit by managing Shield and VA together when Shield was a smaller part of the total. However, as we achieved a balanced risk profile, the complexities of managing them together became apparent. Therefore, we are moving to a separated approach. The implementation occurring in the third quarter will take place in stages. We have already made some revisions to the hedges and are in the process of making further adjustments. By the end of the quarter, we will complete the necessary modeling and valuation changes to reflect this on the liability side. All of this will happen in the third quarter. It's too early to quantify the future impact of the separation, but I can say it will bring simplification, greater transparency, and more effective management of the business block. Overall, we expect to see reduced volatility in our results over time.
I can. It's a little bit of an echo.
Yes. I just started to hear an echo as well. Well, why don't we just pause for a second and see if we can clear this up? Technical difficulties, I think, so. We're working on it. Tom, how about now? No?
Yes, still an echo.
Tom?
That's better.
All right. Sorry about the delay. So what I was going to finish off on in the impact of this separation, I talked about the simplification, the transparency and I think, therefore, more effective management. I think we will see less volatility in our results over time as a result of this change. And the second thing that I would add is that this change positions us better for what we think the new ESG is going to look like. And obviously, we've got much more clarification around that now than we had in the past. And just to finish up, though, you talk about the forward-looking impact on cash flows. We have talked about how after reaching this balanced risk profile, we started to see the capital strain come through and impact our results from writing new business. Now, obviously, writing new business is the franchise value of this company. And so we want to continue to grow and we're pleased with the profitability of the business that we write. And so what we have been looking at in terms of the strategic initiatives is what can we do that can generate more capital today without harming the franchise? So we've talked about reinsurance. We continue to look at various reinsurance opportunities. I would think about this a bit like what we did when we added a lot of interest rate protection after rates went up. We saw a profile of the company where there was a back-end loading of cash flows. And so we decided to put on a lot more protection for rates to narrow the range of outcomes for market movements. And the cost of that was some give-up in longer-term cash flows. And we thought that was a good trade-off because the longer-term cash flows that we see tend to be pretty significant. I would think about what we're doing with these strategic initiatives in a similar fashion. And I think I've said this on a prior call. We're looking at ways where we could enter into initiatives that will be beneficial to near-term capital generation with some give-up of cash flows in the future. And everything we're doing, as I said, is going to make sure that we're protecting the franchise, which is our ability to grow new business.
Our next question is going to come from the line of Jimmy Bhullar with JPMorgan.
So first, just had a question on buybacks. And you've been fairly active in the past on buying back stock, and as you mentioned, you paused in May. Are buybacks are part of your normal plan going forward? And should we assume that you'd continue into 3Q? Or is there any reason to stop to preserve capital or anything else?
Jimmy, it's Eric. Listen, we have historically repurchased, as I think I said in my opening remarks, pursuant to 10b5-1 plans. The Board is very comfortable with that. We're all very comfortable using 10b5-1 plans. So it ran out at the end of May, and we'll see. I would just say, historically, you know we have been a returner of capital. But that's my answer.
Okay. We'll find out in three months. I'm not sure what you want to say about the whole discussion of mergers and acquisitions, but could you comment on your confidence in the company's ability to survive and thrive independently? Do you believe you have the capital flexibility and product breadth necessary? Additionally, how do you feel about the company's capability and your desire to remain independent and function as a stand-alone entity if there isn't a transaction? You can add whatever else you think is relevant.
No, I got it, Jimmy. Look, maybe I can just try to frame up where I think we're at here, and Ed covered some of this. With respect to our legacy liabilities and I'll say specifically our VA block, as you know, it's been pretty complicated to manage, especially since we hit sort of that inflection point where we got to delta neutral there for VA and Shield 1 blocks, Shield 1 block, I'm being specific here. Given this inflection point and because of where interest rates are, where equities are, as Ed has said, we are in the process now of transitioning our hedging strategy, and we're going to end up managing these blocks of businesses separately. Obviously, a lot of work has gone into that. It's one of our most important strategic initiatives, I would say, the last year. An enormous amount of work has gone into that. And so now we've already started that transition. And as Ed said, we'll be done with that transition at the end of September, okay? So since I've been talking about strategic initiatives, we've completed a number of reinsurance transactions. We've talked about all the work that has to go into preparing for this change with respect to the hedging strategy. And now we're actually in the third quarter executing on that. With respect to our distribution franchise and what I'll call our operational and technological capabilities, I think our journey has brought us to the place where it is obvious we are a premier carrier in this industry. So our strategy with respect to new business and our distribution partners has not changed. It's not going to change. We're going to continue to innovate with respect to products. Our technology is state-of-the-art at this point. And we're going to have the very best operational capabilities that we can going forward. Trying to think of what else you asked. Look, with respect to any market rumors, I don't have any comments on that. But sort of overall, if you think about what I just said, you've got the back book, which we have had to manage now for, geez, I guess, 1 day longer than 8 years. I think our 8th anniversary was yesterday. But I'm super pleased with our situation with respect to product development, technology and operations and, of course, our distribution partners. And that includes more progress that we made in the second quarter with respect to bringing in deposits on LifePath Paycheck. So there's sort of an overall answer for you, Jimmy.
Okay. Regarding the Shield, it has clearly been your fastest growing product over the past few years. However, sales this quarter have decreased for the first time in a couple of years. You haven't previously experienced a negative quarter. While the industry as a whole has been growing rapidly, it seems sales growth has recently slowed for some companies. I'm curious if this is related to any specific initiatives on your part, or if you are facing increased competition, or what factors have contributed to this slowdown.
Yes. So this is Myles. I'll go ahead and take that, Eric, if you don't mind. So look, there's a lot of competition out there in the marketplace. But generally speaking, I believe it's been very reasonable. I do think those carriers that do have carrier distribution do have a competitive advantage. But look, we remain really pleased with where we're at. We continue to hit our targets. As Eric said, we did almost $4 billion of Shield sales for the first half of the year. That's coming off of a record year last year. March of this year was our best month ever for Shield sales. April was just slightly behind March. And you got to keep in mind, we're growing off a big base, right? We're a market leader in this category. And we're always focused on continuing to grow sales but, at the same time, maintaining our pricing discipline.
Yes. Jimmy, I'll just jump in and add to the last sentence that he just said. It is nice when you got a small base in a product line and you're growing. That's a great feeling. I think we all know that feeling. We're pretty big, as are some others. We are going to display pricing discipline. We have for 8 years and we're going to continue to do that. I think it's a great product still for manufacturers and certainly for clients. So despite the fact that it's a little tougher to grow, I'm still pretty pleased with the second quarter.
Our next question is going to come from the line of Suneet Kamath with Jefferies.
I guess happy anniversary. So if I look at your unassigned surplus in BLIC at the end of the first quarter, I think it was negative $2 billion. It looks like there was a pretty big stat net loss this quarter. So just wondering where we are with that here in the second quarter. And Ed, do you still expect to take cash out over the planning period as you discussed on the last call?
Yes, Suneet. We discuss normalized statutory earnings over time partly because it accounts for unrealized gains and losses from our hedging program. When you mention the statutory loss, it does not consider $1.2 billion of unrealized gains, after tax, tied to our hedging program. Thus, looking solely at the statutory income statement you referenced does not provide a complete picture. Additionally, the increase in TAC during the quarter illustrates that the overall view, including both realized and unrealized elements, is crucial for us. Regarding unassigned funds, they are negative, around the $2 billion mark, which we see as a technical issue rather than a fundamental one. This is because the VA operates under a statutory total asset requirement framework that leads to movements in both liabilities and capital within that structure. Unlike traditional life insurance and annuity products, where reserves are typically stable and based on conservative estimates, this framework allows for more fluidity between reserves and capital, impacting unassigned funds in ways that might not align with traditional definitions.
But does that still become a gating factor in terms of taking cash out? Or does it not apply anymore?
Yes. It requires a conversation with regulators because it would not be an ordinary dividend; it might be extraordinary. However, we have very good relationships with our regulators. We are transparent and maintain open lines of communication. I can't predict what will happen in the future, but I can tell you that in the past, when we took excess capital out of BRCD, both dividends taken from BRCD were extraordinary. If we determine that we have sufficient capital to support taking money out, we will communicate that to our regulators and see what happens. Regarding your other question, I mentioned during the last call that our 3-year financial plan assumes we will take dividends, and that remains the case.
Yes, that is what I was referring to. For Eric, if we take a step back and consider most annuity companies that focus on spread-based products, it seems they typically have Bermuda captives and alternative asset management partners. I don't believe you have either of those at this time. I'm curious about your thoughts on this. Does it give you a competitive edge? Are these aspects you are contemplating? If you could provide some insight on that, it would be appreciated.
Yes, sure. Look, historically, obviously, we've used reinsurance. So you get a lot of the benefits of what might be a Bermuda captive, and you don't end up in some of the situations that in my career we've ended up in, in the past. So I think you can generally operate on a level playing field if you have good reinsurance partners, which we do. With respect to alternative asset management, let's just say, in my mind, when I talk about things like strategic initiatives, we think about where we might be lacking, where we need to upgrade. And so it wouldn't surprise you, I'm sure, if we're thinking about that every single day. So I think those were your two questions. And Ed wants to add.
Yes. I'd just add, first of all, as I'm sure you are aware, we're always looking for ways to effectively utilize our capital base, be as efficient as possible. And while we don't have, you said, a Bermuda captive, we obviously have a significant captive that gives us capital efficiency, which is BRCD, our reinsurance subsidiary which is used to reinsure our legacy term and ULSG block. I think as Eric alluded to, we also partner with third-party reinsurers. And that has given us, I think, the ability to lever some of the things that you're referencing without owning these other captive structures. We're still availing ourselves of that benefit in the market today.
Our next question is going to come from the line of Wilma Burdis with Raymond James.
TAC increased modestly in 2Q '25, which seemed to be a pretty good result given the S&P 500 was up more than 10% point-to-point in the quarter. Is there any way to clarify how much, if any, that benefited from the additional hedging actions you have taken earlier in 2025?
Yes, it’s Ed. The situation we encountered was not related to our hedging strategies. It’s more about the framework for Variable Annuities. There was a noticeable disconnect this quarter between our normalized statutory earnings and what you saw with our capital base and our Risk-Based Capital (RBC) ratio. To clarify, our RBC ratio declined sequentially. The main factors behind this decline were the seasonal capital charges related to new business, which are independent of our fundamental operating performance, and adverse results in non-variable annuities, including the mortality experience we've discussed. Despite the normalized statutory loss in Variable Annuities, which was significant, it did not impact our RBC ratio as one might expect. This was because, in the strong market you mentioned, we experienced what I’ve referred to previously as divergence. Essentially, our reserves decreased more than our total asset requirement. This occurs in strong market conditions, whereas it tends to converge in negative market conditions. Your total adjusted capital is influenced by your reserves, calculated based on an average of the 30% worst scenarios. The average of those scenarios isn’t too severe. In contrast, the tail is based on the 2% worst scenarios. When the market performs well, your reserves decline, reflecting current conditions. Meanwhile, your capital requirements remain relatively stable since they continue to account for potential future challenges. This is why our total adjusted capital benefitted, leading to a reduced impact from the Variable Annuities on our RBC ratio, despite a roughly $400 million normalized statutory loss in the second quarter. I realize this is quite detailed, but it's critical to understand the disconnect this quarter between our capital generation, RBC ratio, and normalized statutory results.
Should I understand that the $400 million of normalized statutory losses is not very significant for this particular quarter?
I think that would be a good interpretation.
And then could you talk a little bit about the appetite to continue to lean into sales with quarterly pretty strong on the sales front?
Wilma, did you hear her question? Could you repeat the question?
Yes, Wilma, you did cut off there.
Yes. Just could you talk a little bit more about your appetite to continue to lean into sales after a pretty strong quarter in 2Q?
Okay. Yes. We don't have any changes right now with respect to how we're operating from a new business perspective, and that's across the board in all of our product lines we're actually having the beginning of a very nice third quarter. So no change, Wilma.
Next question comes from the line of Nick Annitto with Wells Fargo.
Just wanted to follow up kind of on the assumption viewpoint and, I guess from a higher level, like if you guys decide to go on as an independent entity, like in your opinion, are the auditors going to require Brighthouse to consider any of the findings from all the independent actuarial reviews that have been done as a part of the rumored sales process? I think it's kind of in the same thing with companies in the past.
We have said repeatedly we don't comment on rumors and speculation.
Got it. Okay. And then in terms of the C4 charges, I think kind of the glide path as you get the benefit in Q1 and that kind of ramps down during the year because of the strain, right? So all else being equal, if you have just kind of 0 kind of stat results, we should expect the RBC to kind of decline from here given the C4 targets?
Yes. I think the impact from the C4 charge, you're correct, there's a seasonal benefit in the first quarter and then it will build over the year based on our assumption that we continue to write fixed business that generates the C4 charge. But that is the effect of the C4 charge. I would not extrapolate that to an overall projection of the RBC ratio, which is something that we do not provide.
Our next question is going to come from the line of Alex Scott with Barclays.
So I wanted to ask about the capital in the Delaware Reinsurance Company. And look, the reason I think it's important is from an external standpoint, if we're trying to value your business, it's pretty hard to place the value on your closed block because there's some amount of capital down there. We don't know how much. And so everybody is going to have their views on universal life and do what they're going to do relative to reserves, but we don't know how much equity is down there. So it makes it very difficult to value your company. So I was just hoping that maybe you could provide some disclosures on that entity and help us in any way on thinking through the capital position through your lens.
Yes, Alex. We do provide information in the K on BRCD regarding surplus, and you can estimate the approximate level of the credit-linked notes. While you can derive some basic numbers from that, I would suggest that those figures are not the most relevant when assessing the capitalization of this entity. We conduct cash flow testing scenarios, including stress scenarios like the New York 7 and others, and evaluate our margins under those circumstances. This analysis led us to take actions several years ago to reduce what we consider to be excess capital at BRCD. As I've mentioned over the past couple of years, we no longer view this as a source of excess capital. Instead, we see favorable cash flow testing margins indicating that we are adequately capitalized. However, if you are considering a valuation boost from any perceived excess number, I want to clarify that I do not see an excess capital number in that entity.
Got it. That's helpful. I thought I'd try one more time on just the actuarial review, and so less about like having to do with third-party audits and that kind of thing. I guess I look at the cash flow that you've actually had relative to some of the projections you've given us over time. And equities are obviously up a lot and have performed incredibly well. Interest rates are up. I mean, it's almost hard to believe that we would be this high equity levels with higher interest rates. You sort of got like the magical scenario here. But yet the cash flows have continued to fall significantly short of some of the original projections. And so that sort of suggests that there's something that's problematic about the way you're projecting and accounting for your liabilities. And I just want to better understand that. I mean, is that right? Could you help shed some light on like what has been the crux of the issue there? And is that something you have to deal with in 3Q?
Alex, I was trying to find the question in there, and I think I got one at the end, and it's the same answer. We do our actual assumption update annually and we will be talking to you about that in the second half of the year and early next year.
Our next question comes from the line of Peter Troisi with Barclays.
Just another question on capital. Your cost of preferred equity has been volatile lately in the secondary market. And so in that context, can you discuss a little bit about how the Board thinks about the dividend on your preferred stock? How committed is the company to continuing to pay dividends on your preferred stock? And then would that approach to the preferred dividend change if the company was part of an M&A process?
Let me start with the last question. We're not commenting on rumors and speculation. I want to emphasize that we are very satisfied with our long-term capital structure. We have spent several years shaping it to what we believe is optimal. We have issued preferred stock during this time at very attractive yields, which are fixed indefinitely. We value these preferred instruments in our capital structure, and we've also received positive ratings from agencies as a result. For any other insights you are seeking, I suggest referring to the prospectuses filed with the securities at the time of issuance. There is no intention to withhold payment on preferred dividends; I'm not sure why that question arises. However, I want to confirm that we fully intend to pay preferred dividends. Please consult the prospectus for all relevant terms, conditions, and risks related to our issued securities.
Our next question is going to come from the line of Ryan Krueger with KBW.
This is not about the assumption review. It's about the change in hedging. It's a significant change you're making. Are there implications for the balance sheet on day one when you implement these hedging changes? Should we expect material impacts on your capital and capital ratios due to this major shift in your hedging approach?
Yes, Ryan, I need to clarify a few of your assumptions regarding the terms meaningful, material, and big. I believe, in response to a question from a couple of quarters ago, that these hedging changes aren't starting from scratch. We continue to run the company with the intent of safeguarding the statutory balance sheet in adverse market conditions, and that commitment remains unchanged moving forward. When considering the adjustments to our hedges, particularly on our rate hedges, it's important to note that we have safeguards in place from 2022 against drastic rate drops, similar to COVID levels. We believe we are fairly protected against significant moves in rates on a risk-neutral basis. The revisions we're currently making pertain more to the shape of the curve rather than the overall DDL1. In terms of the equity aspect, we are still working through some elements and while I prefer not to disclose specific actions, I can say that our delta position in equities isn't expected to shift significantly, indicating limited changes to our overall equity risk stance. Much of what has transpired on the rate side has been related to the curve.
Okay. Maybe just one follow-up because it seems like the way you've been describing this suggests you've been studying it for quite a long time. It seemed like it was a fairly significant change. But the way you're describing it sounds a lot more minor. Is that the right interpretation? It actually just involves changes around the hedges. It's not as big of a change as I thought?
I would say that our ability to carry out this separation in a financially sensible way is influenced by the current interest rate environment. So, the feasibility of this separation making financial sense for us is connected to the existing interest rates.
Yes. Ryan, it's Eric. So I'm going to jump in. I'm absolutely cutting you a break here. I mean we've been talking about this for a long time. Externally, it can sound very big. Internally, there's been a ton of work. Having said all that, we found ourselves in a position where, I think it was you who mentioned this, I'm sure somebody previously did as well, rates are pretty high. Equities are pretty high. So in the end, it will probably turn out to not be as big externally. But internally, this has been a lot of work. I'm pretty sure that probably makes sense to you.
Our last question is going to come from the line of Wes Carmichael with Autonomous Research.
And a follow-up maybe on the last one in terms of the transition for hedging. But do you think, Ed, are you guys going to be in a position to provide your long-term free cash flow projections this year? Or do you think that's likely going to be a 2026 event?
Yes. Wes, so as you've heard from Eric and from me, we continue to work on several initiatives, and all of these initiatives are going to have some impact on our long-term free cash flows. So I would just say we need to complete these initiatives before we're in a position to provide an outlook for future results. And I would say that, that outlook for future results is not likely to be in 2025.
Yes. No, I totally understand. And I guess maybe my follow-up. I think you saw a little bit of claims severity heightened in both Life and Run-off. Just wondering if you could unpack a little bit of the experience in the quarter.
Sure. So severity was, I think, 18% higher perhaps than our normal level, something in that range, about 18%. And if you're looking at the impacts by segment relative to what we would think is run rate, you're talking about probably 2/3-1/3 Life, Run-off. Obviously, mortality will fluctuate from quarter-to-quarter. And we've talked repeatedly in the past about frequency, severity and also the reinsurance offset. So this quarter, we had some severity in excess of normal.
Thank you. And this concludes today's question-and-answer session. And I would like to hand the conference back over to Dana Amante for any closing remarks.
Thank you, Michelle. Thank you, everyone, for joining the call today. Have a good day.
This concludes today's conference call. Thank you for participating. Everybody, you may disconnect.