Brighthouse Financial, Inc. (BHFAP) Q2 2025 Earnings Call Transcript

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 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 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 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.

Our first question is going to come from the line of 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 had different timelines at different points in time for stat versus GAAP. If you recall, I think it was the fourth quarter of 2022, we did the annuity business on a stat basis and everything else in the third quarter on a GAAP basis because we were in the final stages of actuarial transformation. And so we needed to push the review for annuities on a stat basis. So we're in the process of the VA, Shield separation work here, which is going to have an impact on our ending third quarter balance sheet relative to the ending second quarter balance sheet. And so we will have the stat review again this time on an annuity basis in the fourth quarter and the GAAP review in the third quarter. But that's all I can tell you at this point on our actuarial assumption update.

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 within your inquiry. First, regarding the updates to our hedging strategy, we are now managing the Shield book and the VA book separately. This approach is considered appropriate at this time due to our balanced risk profile between the two. Previously, when Shield represented a smaller portion of our total, we benefited from capital gains by managing them together. However, as we achieved a balanced risk profile, the complexities of managing them jointly became problematic. Therefore, we are adopting a separated strategy. The implementation will occur in stages during the third quarter. We have made revisions to the hedges and are currently in the process of making additional adjustments. By the end of the quarter, we will have completed the necessary modeling and valuation changes to reflect this on the liability side. Although it's too soon to quantify the future impact of separation, I can say it will lead to simplification, increased transparency, and better management of the business. Overall, we anticipate experiencing less volatility in our results over time. Can you hear me?

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. 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 a 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 anyway. 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 variety? How do you feel about the company's ability and your desire to remain independent and operate as a standalone entity in case there is no transaction? Feel free to add anything else as well.

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 several years. It seems that sales this quarter have declined for the first time in a couple of years. You haven't experienced a negative quarter until now. The entire industry has been growing rapidly in recent years, but it appears that some companies are seeing a slowdown in sales growth lately. I'm curious if this is related to any specific initiatives on your part or if you are facing increased competition. What factors do you believe 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 talk about normalized statutory earnings over time because it includes unrealized gains and losses from our hedging program. When discussing the statutory loss, it doesn't reflect the $1.2 billion in unrealized gains on an after-tax basis related to our hedging efforts. Therefore, relying solely on the statutory income statement you mentioned does not provide a complete picture of our financial situation. Additionally, the increase in TAC during the quarter further emphasizes the importance of considering both realized and unrealized figures. Regarding the unassigned funds, they are currently negative, around the $2 billion mark. We view this as a technical issue rather than a fundamental one. The framework for VA on a statutory basis involves total asset requirements, which leads to fluctuations in both liabilities and capital. Unlike traditional life insurance or annuity products, where reserves are set conservatively and remain stable, this framework allows for changes in reserves and capital, which affects unassigned funds differently than what might be expected in traditional models.

But does that still become a gating factor in terms of taking cash out? Or does it not apply anymore?

Yes. I believe we need to discuss this with regulators since it would not be a typical dividend; it could be classified as extraordinary. However, we have strong relationships with our regulators, and we maintain transparency and open communication. While I cannot predict future outcomes, I can share that in the past, when we extracted excess capital from BRCD, both dividends taken were extraordinary. If we determine we have enough capital to support a withdrawal, we will inform our regulators and then see what follows. Regarding your other question, I mentioned in the last fourth quarter call that our three-year financial plan includes taking dividends, and that remains unchanged.

Yes, that's what I was referring to. I guess the second question for Eric, if we take a step back and think about most of these annuity companies that focus on spread-based products, it seems a common theme is that they have Bermuda captives and alternative asset management partners. I don't believe you have either at this point. So I'm wondering your thoughts on that. Does that put you at a competitive advantage? Are those aspects that you're considering? If you could provide some insights on that, it would be helpful.

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 issues we faced this quarter were not related to our hedging actions but were more about the framework for variable annuities. There's a disconnect this quarter between our normalized statutory earnings and our capital base and risk-based capital (RBC) ratio. The RBC ratio decreased sequentially, and the contributing factors were approximately equal: one was the seasonal capital charges for new business, which weren't tied to our fundamental operating performance, and the second was unfavorable results in non-variable annuities, particularly due to mortality experiences that we've discussed. Even though variable annuities contributed to a normalized statutory loss this quarter, their impact on our RBC ratio wasn't as significant as expected. This was influenced by strong market performance, which led to what we've previously referred to as divergence. This means our reserves decreased more than our total asset requirements. In strong market conditions, reserves can drop as they reflect the current situation, while capital requirements remain relatively stable because they still account for potential adverse future events. Thus, we benefited from total adjusted capital, which resulted in a limited impact from our variable annuity business on our RBC ratio, despite an approximate $400 million normalized statutory loss in the second quarter. It's essential to recognize that this quarter presented a disconnect between capital generation, our RBC ratio, and the normalized statutory result.

Should I interpret that the $400 million of normalized statutory losses is not very meaningful in 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 or 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, we do provide information in the K on BRCD related to surplus, and you can also estimate the approximate level of the credit-linked notes. You can derive some basic numbers from that. However, I would emphasize that those numbers may not be the most relevant when evaluating the capitalization of this entity. We analyze cash flow testing scenarios, including stress scenarios like the New York 7 and others, and assess our margins under those conditions. This analysis informed the actions we took a few years ago to reduce what we viewed as excess capital at BRCD. Over the last couple of years, we have not regarded that as a source of excess capital. Instead, we see favorable cash flow testing margins, indicating that we are appropriately capitalized. If you are considering a valuation boost from an excess capital number, I would clarify that I do not see an excess capital figure 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 addressing rumors and speculation. I want to emphasize that we are very satisfied with our long-term capital structure. We have spent several years shaping our capital structure to align with our goals. During that process, we issued preferred stock at very favorable yields, which are fixed for life. We appreciate the role of preferred equity in our capital structure, and we've also received positive ratings from agencies as a result. Regarding your other inquiries, I suggest referring to the prospectuses filed with these securities when issued. There is no intention to withhold preferred dividends, and I’m uncertain why that would even be a question. I want to make it clear that we fully intend to pay preferred dividends. However, I encourage everyone to read the prospectus for the specific terms, conditions, and risks associated with any securities we've issued.

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 implementing. Are there implications for the balance sheet on day one when you make these hedging changes? Should we expect material impacts on your capital and capital ratios due to this major shift in how you're hedging the business?

Yes, Ryan. I need to clarify some of your assumptions because I take issue with the terms meaningful, material, and big. In response to a question I received a couple of quarters ago, this isn't like starting from scratch with our hedging changes. We have consistently operated the company with a focus on protecting the statutory balance sheet against adverse market scenarios, and that approach remains unchanged. When considering the actual modifications to our hedges, one key revision is on our rate hedges. The amount of rate hedges we implemented in 2022 protects us against adverse scenarios, such as significant drops in rates similar to those seen during COVID. We're essentially protected on a risk-neutral basis for those substantial rate moves. The revisions we're implementing today are more about adjusting along the curve rather than impacts on the overall DDL1. Regarding the equity side, we are still evaluating our position. I would say we’ve been active, but I won't disclose specific actions since we operate at a scale where it's sensitive information. However, our delta position in equity isn't likely to change significantly, so I don't foresee much alteration in our overall equity risk position, and much of the adjustments on the rate side are aligned along the curve.

Okay. Maybe just one follow-up because it seems like you've been studying this 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 correct interpretation? It actually is just some adjustments around the hedges. It's not as big of a change as I thought?

Yes. I would say that the ability to execute this separation in a financially sensible way is influenced by the current interest rate environment. Therefore, our capacity to proceed and ensure it makes financial sense is connected to where interest rates currently stand.

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.