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

Brighthouse Financial, Inc. (NASDAQ: BHF) Q2 2025 Earnings Call dated Aug. 08, 2025

Corporate Participants:

Dana Amante — Investor Relations

Eric Steigerwalt — President, Chief Executive Officer, Director

Edward Spehar — Chief Financial Officer

Myles Lambert — Chief Operating Officer, Executive Vice President

Analysts:

Thomas Gallagher — Analyst

Jimmy Bhullar — Analyst

Suneet Kamath — Analyst

Wilma Burdis — Analyst

Nic Annitto — Analyst

Alex Scott — Analyst

Peter Tracey — Analyst

Ryan Krueger — Analyst

Wes Carmichael — Analyst

Presentation:

Operator

Good morning ladies and gentlemen, and welcome to Brighthouse Financial Second Quarter 2025 Earnings Conference Call. My name is Michelle, and I will be your coordinator today. At this time, all participants are in a listen-only mode. We will facilitate a question and answer session towards the end of the conference call. [Operator Instructions] 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.

Dana Amante — Investor Relations

Thank you, and 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 Financials filings with the SEC. Information discussed on today’s call speaks only as of today, August 8th, 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 these statutory statements.

And now I’ll turn the call over to our CEO, Eric Steigerwalt.

Eric Steigerwalt — President, Chief Executive Officer, Director

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%, 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 30th. 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 totalled $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 pre-tax 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.

Edward Spehar — Chief Financial Officer

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 30th, 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 30th compared with approximately $5.5 billion at March 31st. 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 in 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 30th. 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 standalone 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 investments 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:

Operator

Thank you. [Operator Instructions] Our first question is going to come from the line of Tom Gallagher with Evercore ISI. Your line is open. Please go ahead.

Thomas Gallagher

Good morning. 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?

Edward Spehar

Yeah. Good morning, 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.

Thomas Gallagher

And Ed, is it still third quarter GAAP? Fourth quarter stat?

Edward Spehar

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.

Thomas Gallagher

Gotcha. 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? Thanks.

Edward Spehar

Sure. So there are a couple questions in there. I think first of all, your question on the revisions to our hedging strategy. So, we are separating and managing individually the Shield book and the VA book, and we think that’s appropriate at this point given our balanced risk profile between Shield and VA. So we’ve talked in the past about how we were getting a capital benefit when we — we were getting a capital benefit when we were doing Shield and VA together, when SHIELD was a smaller portion of the total.

And once we got to this balanced risk profile, we started to see more of the complexity of managing them together become an issue. And so that’s why we’re going to the separated approach. With the implementation in the third quarter, it’s really, I would say, in a couple stages, we’ve done revisions to the hedges. We’re in the process of doing some more, and then by the end of the quarter, we will have implemented the modeling and valuation changes necessary to have it reflected on the liability side.

So this will all take place in the third quarter. In terms of the go forward impact of this. It’s too early to talk about, to quantify what the impact of separation will be, but I’ll tell you that it will introduce simplification, more transparency, and allow for more effective management of the block of business. I also think overall, we’re going to see less volatility in our results over time. Wait, can you hear me?

Thomas Gallagher

I can. It’s a little bit of an echo.

Edward Spehar

Yeah. 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. Any technical difficulties I think so. We’re working on it. Tom. How about now?

Thomas Gallagher

No. Yes, still echo.

Edward Spehar

Tom.

Thomas Gallagher

That’s better now.

Edward Spehar

All right. Sorry about the delay.

Thomas Gallagher

No problem.

Edward Spehar

So what I was going to finish off on 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.

Thomas Gallagher

Gotcha. Thank you, Ed.

Edward Spehar

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 these 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.

Thomas Gallagher

Got you. Thanks for that, Ed.

Operator

Thank you. And one moment as we move on to our next question. Our next question is going to come from the line of Jimmy Bueller with JP Morgan. Your line is open. Please go ahead.

Jimmy Bhullar

Hey, good morning. So first I said 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 be assumed that you’d continue into 3Q or is there any reason to stop to preserve capital or anything else.

Eric Steigerwalt

Hey, 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’s 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, we have been a returner of capital, but that’s my answer.

Jimmy Bhullar

Okay, we’ll find out three months anyway. And I’m not sure what you want to say on the whole discussion of M&A, but maybe just comment on your confidence in the company’s ability to sort of survive and thrive on a standalone basis. Like, do you feel you have the capital flexibility, the product breadth and just other sort of — how do you feel about the company’s ability to? And your desire to be able to stay independent and strive sort of as a standalone entity in case there is no transaction or whatever else? Yeah.

Eric Steigerwalt

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 one blocks. Shield one 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 one day longer than eight years. I think our eight year 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.

Jimmy Bhullar

Okay. And just on the shield, that’s been obviously your fastest growth product in the last several years. I think sales this quarter were down for the first time in the last couple of years. You haven’t had a negative quarterly — quarter. And everybody in the industry had been growing fairly fast the last few years. But it seems like for some of the companies, sales growth has slowed down recently. So I’m not sure if you — in your case, it has to do anything with any company specific initiatives or are you just seeing more competition or what is it that you’ve seen that’s resulted in a slowdown?

Myles Lambert

Yeah. 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 career 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 of a big base. 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.

Eric Steigerwalt

Yeah. 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 eight 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.

Jimmy Bhullar

All right. Good luck. Thanks.

Operator

Thank you. One moment for our next question. Our next question is going to come from the line of Suneet Kamath with Jefferies. Your line is open. Please go ahead.

Suneet Kamath

Hey, good morning. And 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?

Edward Spehar

Yeah. Hi Sunit. So you know, the reason that we talk about normalized statutory earnings, one of the reasons we do over time is because it includes unrealized gains and losses on our hedging program. And so you talk about the statutory loss and what that doesn’t take into account is $1.2 billion of unrealized gains associated on an after tax basis associated with our hedging program. So I think it is not a complete, I know it’s not a complete picture to look at the stat income statement that you’re referencing.

And you can also see it’s not an accurate picture of what’s going on with our capital because you saw that TAC was up in the quarter. So there’s another example of how the total picture of not just operating and realized, but also unrealized is important to take into account for us.

The second point about the unassigned funds, it’s negative in the around the same number, around the minus $2 billion range. We consider that a technical consideration, not a fundamental one. And the reason for that is, as I’ve talked about in the past, you have a framework for VA on a statutory basis that’s a total asset requirement framework. And you will see movement in both liabilities and capital within that total asset requirement framework.

So unlike the traditional life insurance annuity type of product line where you have reserves established on a conservative basis that don’t change much. Now obviously that will be becoming less of an issue over time because of principals based reserving, but generally still they don’t change much and then you have capital as a buffer. Right. This is a different framework because you have reserves and capital moving and therefore there are implications for unassigned funds that I don’t think were contemplated when you were thinking about really what unassigned funds means in the traditional framework, not the VA framework.

Suneet Kamath

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

Edward Spehar

Yeah. I think it requires a conversation with regulators because of the fact that you would not be ordinary dividend. It might be extraordinary, but I think we have very good relationships with our regulators. We are transparent and have open lines of communication. I can’t predict what will happen in the future, but I can tell you that in the past, specifically when we were taking excess capital out of BRCD, both of the dividends that were taken out of — BRCD were extraordinary in nature.

So, if we think we have the level of capital that would support taking money out, we will convey that to our regulators and then we’ll see what happens. In terms of your other question, I believe on the last maybe it was the fourth quarter call, I made some comments about dividends and I said that our three year financial plan assumes we will take dividends and that is still the case.

Suneet Kamath

Yeah. That’s what I was referring to. I guess the second question for Ed, sorry for Eric. If we just take a step back and think about most of these annuity companies that are focused on spread based products. It seems like a common denominator is they have Bermuda captives and they have alternative asset management partners. And I don’t believe you have either at this point. So I’m just wondering your thoughts there. Does that put you at a competitive advantage? Are those things that you’re considering? If you could just shed some light on that, that would be helpful. Thanks.

Eric Steigerwalt

Yeah. 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 oh, Ed wants to add.

Edward Spehar

Yeah. I’ll 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 cite a Bermuda captive, we obviously have a significant, 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.

Suneet Kamath

Got it. Thanks for the answers.

Operator

Thank you. And one moment for our next question. Our next question is going to come from the line of Wilma Burdis with Raymond James. Your line is open. Please go ahead.

Wilma Burdis

Hey, good morning. TAC increased modestly in 2Q25, 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? Thanks.

Edward Spehar

Yeah. Hi, Wilma, it’s Ed. So it didn’t have anything to do with the hedging actions. What it has to do with is sort of what I was talking about with Suneet in terms of the framework for VA. So, and the reason that there was a — I think a disconnect this quarter between our normalized statutory earnings and what you actually saw with our capital base and our RBC ratio. So, I would just start by saying the RBC ratio was down sequentially and the drivers of that were really in equal part, roughly equal parts. The seasonality of capital charges for new business. So nothing to do with the fundamental operating performance.

And the second would be adverse results in non-VA, which was driven by some of the — which included some of the mortality experience that we talked about. So even though VA had a normalized statutory loss and was the biggest piece of the normalized statutory loss. It actually didn’t have the type of impact on our RBC ratio that you would have thought. And the reason for that was with the strong market that you referenced. We had, what I’ve talked about in the past and I mentioned it in my prepared remarks, divergence.

And what that means is that our reserves went down more than our total asset requirement. And the reason that you have that dynamic divergence in a very strong market environment and convergence in a negative market environment is that your capital, your total adjusted capital, is affected by your reserves, and your reserves are calculated on a CTE70 or average of the 30% worst scenarios, okay. And the point here is that the average of 30% worst scenarios ain’t so bad, okay.

Your tail on the other hand, is calculated the average of the 2% worst scenarios. And so when the market goes up a lot, you see your reserves drop because your reserves are really reflecting more the state of where you are today. You see your capital requirement not change as much as you would think because your total asset requirement doesn’t come down as much because you continue to contemplate bad stuff happening in the future. Right.

And so that’s the reason that you saw a benefit to TAC, which actually translated to a muted impact from the VA business on our RBC ratio, even though we had an approximately $400 million norm stat loss in the second quarter. So, I know that’s a lot, but, I think it’s very important for us to understand sort of — this quarter there was a disconnect between, capital generation, our RBC ratio, and the norm stat result.

Wilma Burdis

Should I interpret that, that the $400 million of normalized statutory earning losses just. It’s not very meaningful in this particular quarter.

Edward Spehar

I think that would be a good interpretation.

Wilma Burdis

And then could you talk a little bit about the appetite to continue to lean into sales. The quarter quarter looked pretty strong on the sales front. Thanks.

Eric Steigerwalt

Wilma. Did you hear her question? Could you repeat the question?

Edward Spehar

Yeah. Wilma, you just cut off there.

Wilma Burdis

Oh, yeah. Just could you talk a little bit more about your appetite to continue to lean into sales after a pretty strong quarter in 2Q. Thanks.

Eric Steigerwalt

Oh, okay. Yeah. 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.

Wilma Burdis

Okay. Thank you.

Operator

Thank you. And one moment for our next question. Our next question comes from the line of Nic Anito with Wells Fargo. Your line is open. Please go ahead.

Nic Annitto

Hey, good morning. Thanks. Just wanted to follow up kind of on the assumption review point. 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 been the same thing with companies in the past.

Edward Spehar

Hi, good morning. We have said repeatedly we don’t comment on rumors and speculation.

Nic Annitto

Got it. Okay. And then in terms of the C4 charges, I think the kind of the glide path is you get the benefit in Q1 and then it kind of ramps down during the year because of the strain. Right. So all else being equal, if you have just kind of zero kind of stat results, we should expect the RBC to kind of decline from here given the C4 charges.

Edward Spehar

Yeah. I think the impact from the C4 charge, you’re correct. There’s a seasonal impact 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.

Operator

Thank you. And one moment as we move on to our next question. Our next question is going to come from the line of Alex Scott with Barclays. Your line is open. Please go ahead.

Alex Scott

Hey, thanks. 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 a value on your closed block because there’s some amount of capital down there, we don’t know how much. And so everybody’s 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.

Edward Spehar

Yeah. Hi, Alex. So we do disclose information in the K on BRCD related to surplus. And you can also figure out what the approximate level of the credit link notes are. So you can get to some basic numbers. I would tell you that the numbers that you see there are not the most relevant numbers to consider when you’re looking at the capitalization of this entity. We look at cash flow testing scenarios, as you can imagine the stress scenarios that you would think the New York seven plus others. And we consider what are our margins under those different scenarios.

And it was that analysis that led us to the actions that we took several years ago in terms of bringing down the excess, what we consider to be excess capital at BRCD. As I have said over time now, I mean, the last, at least the last couple years, maybe more, that we don’t see that as a source of excess capital. We see cash flow testing margins that are favorable to suggest that we are appropriately capitalized. But that is not something that if you’re thinking about sort of a valuation boost from some excess number or something, I would just tell you I don’t see an excess capital number in that entity.

Alex Scott

Got it. That’s helpful. I thought I’d try one more time on just the actuarial review. And so less about 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 performed incredibly well. Interest rates are up. I mean, it’s almost hard to believe that we would be at this high of equity levels with higher interest rates.

You sort of got like the magical scenario here, but yet the cash flows 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?

Edward Spehar

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.

Alex Scott

Understood. Thank you.

Operator

Thank you. And one moment for our next question. Our next question comes from the line of Peter Tracey with Barclays. Your line is open. Please go ahead.

Peter Tracey

Hi, good morning. 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?

Edward Spehar

Hi, good morning. Let me start with the last one. We’re not commenting on rumors and speculation. I start off by telling you that we’re very pleased with the long term capital structure that we have. We’ve spent several years getting our capital structure to a place that we thought made sense and we have issued preferred stock in that process at very favorable yields and they’re fixed for life. So we like the place that preferred plays in our capital structure and we also receive favorable rating agency treatment from that.

So, I guess I would just say that, for any of the other things that you’re trying to discern here, I would refer you to, the prospectuses that were filed with all these securities when we issued them. But you know, we are, there is no intent to not pay preferred dividends. I’m not sure why that would be a question. But if I need to say that on this call, say there’s all intents to pay preferred dividends. But please read the prospectus for the appropriate terms and conditions and risks associated with any security that we’ve issued.

Peter Tracey

Thank you, Ed.

Operator

Thank you. One moment for our next question. Our next question is going to come from the line of Ryan Krueger with KBW. Your line is open. Please go ahead.

Ryan Krueger

Hey, good morning. This is not about the assumption review. It’s about the change in hedging. It’s a pretty major change you’re making. Are there and I definitely understand the reason you’re doing it, but are there implications for the balance sheet at day one when you make these hedging changes? Should we anticipate material impacts to your capital and capital ratios? Because this is such a big change to the way you’re hedging the business?

Edward Spehar

Yeah. Hi, Ryan. So I’m going to have to just modify a few things that you’re assuming because I don’t the words meaningful, material and big. I might just take some issue with. And the reason for that is, I think in response to a question that I got a couple quarters ago, maybe from Tom. This is not like start with a blank sheet of paper type of hedging changes. We have continued to run the company with the view of protecting the statutory balance sheet under adverse market scenarios. That has never changed and it hasn’t changed going forward either.

So, and when you think about the actual changes to the hedges that we’re making. I would say one of the revisions on our rate hedges because — first of all, if you look at the amount of rate hedges that we put on in 2022, we are protected for that bad scenario of rates drop and covid level type rates. And I think we’re protected on pretty much like a risk neutral type of basis for those very large moves in rates.

If you look at the revisions we’re making today on rates. I think it’s more along the curve than it is the overall DV-01. So that’s something to think about on the rate side. And if you look on the equity side, we’re working through it a little bit still. We’ve — I’d say we’ve probably done more on the — well, I don’t want to talk about what we’ve done, actually. We’re too big to talk about what we’re done, what we’re doing.

But I will say that on the equity side, our delta position is not going to change that much. So I don’t see a lot of change in the equity overall risk position. And I’d say a lot of what has happened on the rate side is along the curve.

Ryan Krueger

Okay. Maybe just one follow up, because it seems like the way you’ve been describing this is like it is, I guess just in the sense that you’ve been studying it for quite a long time. Seemed like it was a fairly meaningful change, but I guess the way you’re describing it sounds a lot more minor. So is that the right interpretation? It actually is just kind of changes around the edges. It’s not like some — it’s just not as big of a change, maybe, as I thought.

Edward Spehar

Yeah. I guess I would say that the ability to execute this separation and have, and do it in a way that makes sense for us financially is — it is driven by where we are with the current rate environment. So the ability to do this and have it make sense for us financially is linked to the fact that interest rates are where they are.

Eric Steigerwalt

Yeah. Ryan, it’s Eric. I’m going to jump in. I’m absolutely cutting your 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.

Ryan Krueger

Okay. Yeah. That does make sense. Thanks a lot for the color.

Operator

Thank you. And one moment for our next question. Our last question is going to come from the line of Wes Carmichael with Autonomous Research. Your line is open. Please go ahead.

Wes Carmichael

Hey, good morning. Thanks for taking my question. In 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? Do you think that’s likely going to be a 2026 event?

Edward Spehar

Yeah. Hi, 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.

Wes Carmichael

Yeah. I totally understand. And I guess maybe my follow up, I think you saw a little bit of claim severity heightened in both life and run-off. Just wondering if you could unpack a little bit of the experience in the quarter.

Edward Spehar

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 two-thirds,one-third 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.

Wes Carmichael

Thank you.

Operator

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.

Dana Amante

Thank you, Michelle. Thank you everyone for joining the call today. Have a good day.

Operator

[Operator Closing Remarks]