Brighthouse Financial (BHF) CEO Eric Steigerwalt Hosts Investor Outlook Call 2018 Conference (Transcript)

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About: Brighthouse Financial, Inc. (BHF)
by: SA Transcripts

Brighthouse Financial (NASDAQ:BHF) Investor Outlook 2018 Call December 3, 2018 8:00 AM ET

Executives

David Rosenbaum - Head, Investor Relations

Eric Steigerwalt - President and Chief Executive Officer

Conor Murphy - Chief Operating Officer

Anant Bhalla - Chief Financial Officer

John Rosenthal - Chief Investment Officer

Myles Lambert - Chief Distribution and Marketing Officer

Analysts

John Nadel - UBS

Humphrey Lee - Dowling & Partners

Erik Bass - Autonomous Research

Suneet Kamath - Citi

Alex Scott - Goldman Sachs

Tom Gallagher - Evercore

Ryan Krueger - KBW

Jimmy Bhullar - JPMorgan

Andrew Kligerman - Credit Suisse

Elyse Greenspan - Wells Fargo

Operator

Good morning, ladies and gentlemen and welcome to Brighthouse Financial’s Outlook Conference Call 2018 Earnings Conference Call. My name is Shannon and I will be your coordinator today. At this time, all participants are in a listen-only mode. [Operator Instructions] As a reminder, the conference is being recorded for replay purposes. [Operator Instructions] I would now like to turn the presentation over to David Rosenbaum, Head of Investor Relations. Mr. Rosenbaum, you may proceed.

David Rosenbaum

Thank you, operator. Good morning and thank you for joining Brighthouse Financial’s outlook conference call. Our presentation was released this morning. It can be accessed on the Investor Relations section of our website at brighthousefinancial.com. We encourage you to review the presentation and we will refer to it in our prepared remarks.

Today, you will hear from Eric Steigerwalt, our President and Chief Executive Officer, followed by Conor Murphy, our Chief Operating Officer and Anant Bhalla, our Chief Financial Officer. Following our prepared comments, we will open the call up for a question-and-answer period. Also, here with us today to participate in the discussion is John Rosenthal, Chief Investment Officer and Myles Lambert, Chief Distribution and Marketing Officer.

Our discussion during this call will include forward-looking statements within the meaning of the federal securities laws and summarized on Slide 2 of our presentation. Information discussed on today’s call speaks only as of today, December 3, 2018. 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. Reconciliations of these non-GAAP measures on a historical basis to the most directly comparable GAAP measures and related definitions maybe found on the Investor Relations portion of our website. Reconciliations of these non-GAAP measures are not accessible on a forward-looking basis, because we believe it is not possible without unreasonable efforts.

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

Eric Steigerwalt

Thank you, David and good morning. Thank you for joining us today for our first investor outlook call. Today, Conor, Anant and I will take you through the following: first, a company overview and business update; second, the assumptions in key drivers related to our financial outlook; next, the strength of our balance sheet and an update on variable annuity hedging and finally, our financial outlook.

Let’s begin on Slide 5. Brighthouse Financial became an independent publicly traded company in August of 2017. However, we are not new. Brighthouse has a rich history that dates back to 1863. And today, we are one of the largest providers of annuities and life insurance in the United States. We are large by many measures and as of the end of the third quarter of 2018 had $217 billion of assets. We have a well established retail platform serving more than 2 million customers and we distribute annuities and life insurance to individuals through over 400 independent distribution partners. We have solid capitalization with statutory combined total adjusted capital of $6 billion and over $600 million of variable annuity assets above CTE98, both as of the end of the third quarter of 2018. We believe our financial strength ratings position us well to grow our sales and distribution footprint in the future.

We have a solid strategy in place and believe this strategy will generate long-term shareholder value. The key elements of our strategy are as follows. To offer a tailored set of annuity and life insurance solutions that are simpler, more transparent and provide value to advisors, their clients and our shareholders. To sell our products through a broad, well-established network of independent distribution partners and to leverage our financial discipline to manage our expenses and our balance sheet. We feel very good about the progress we are making relative to this strategy and as the next slide shows 2018 provided many examples of its effectiveness.

First, I am very pleased with our outstanding sales results. Over the course of the past 20 months we rolled out a focused set of advertising campaigns designed to introduce our brand and showcase our flagship shield annuities. These campaigns helped to generate brand awareness in the market, allowed us to hit the ground running as the new public company and we are instrumental in growing our sales footprint. Annuity sales were up 40% in the first three quarters of 2018 compared to the same time period in 2017 led by shield and fixed indexed annuities. I am especially pleased with the success of index horizons, a fixed index annuity product created as part of our 10 year distribution agreement with MassMutual, which had sales of over $1 billion since its launch in July of 2017.

We have a lot of sales momentum as we enter 2019. In September 2018, we launched two new fixed annuity products that are already generating sales above our expectations and we are continuing to see excitement from our long-standing distribution partners as well as seeing inbound interest from distribution firms with whom we do not currently have a relationship.

And we are working with all partners both current and perspective to continue to make our distribution network as broad as possible as we help consumers in the United States to achieve financial security.

Second, we have made significant progress exiting transition service agreements or TSAs with MetLife. We began 2017 with 219 TSAs and have exited more than 100 through the third quarter of 2018. We expect additional TSA exits will facilitate further expense reduction in the coming couple of years. Next, we continue to prudently mange our variable annuity capitalization. We are managing our VA business to CTE98 or higher and at the end of third quarter had more than $600 million of VA assets above CTE98. Our hedging strategy continues to perform in line with our expectations. And finally, the $200 million stock repurchase authorization that we announced in the third quarter reflects the progress we have made, the confidence we have in our strategy going forward and our commitment to returning capital to shareholders. This capital return commenced approximately 2 years ahead of our initial timeline as we communicated at the time of the separation. Through November 2018, we have repurchased approximately $83 million of our stock.

Let me set the stage for the rest of the presentation by discussing the evolution of our financial targets since the separation. First, at separation we were targeting annual annuity deposits in excess of $4 billion by 2020 as seen on Slide 7. As of the third quarter of 2018, we have already surpassed $4 billion of deposits and now expect annual annuity deposits in excess of $8 billion in 2021, driven by the strength of our distribution relationships. Second, our focus on reducing annual corporate expenses remains and we are now targeting an additional $25 million of reduction in 2021. This results in annual run rate corporate expenses that were expected to be $175 million lower than the first 12 months post separation.

Third, we were targeting an adjusted return on equity less notable items of approximately 8% and stable over time with mid to high single-digit annual percentage growth of adjusted earnings per share less notable items post separation. We are now targeting low double-digit annual percentage growth in adjusted earnings per share less notable items. And by 2021, we are targeting an adjusted ROE less notable items of approximately 11% and a net income ROE, excluding AOCI of approximately 8%.

And finally, let me discuss capital returns. At separation, we are expecting capital return to commence in 2020 and as previously disclosed we began returning capital to shareholders in September 2018. We have made a lot of progress since the separation, but recognized there is still much to be done to deliver on our commitment to maximize shareholder value. We believe executing our strategy is the best plan to achieve this and we are committed to continuing to work diligently to deliver long-term shareholder value.

With that, let me turn the call over to Conor Murphy. Conor?

Conor Murphy

Thank you, Eric. The assumptions underlying our outlook are summarized on Slide 9. The equity market and interest rate assumptions are consistent with the base case scenario that many of you are familiar with. I want to make three points. First, capital return to shareholders reflected in our outlook is $1.5 billion through 2021. This is inclusive of our current $200 million stock repurchase authorization. Second, we have incorporated an initial view of the impact of variable annuity capital reform for statutory reporting and risk-based capital assuming early adoption at the end of 2019. And third, our outlook does not incorporate any changes from GAAP accounting reform, which we expect to have more information on next year.

As Eric mentioned earlier, our sales performance this year has been very strong. We continue to believe that our strategy and positioning as a focused annuity and life insurance company in the U.S. resonates with our distribution partners, their advisors and the clients they serve. Our plans over the next few years reflect strong expected growth in annual annuity deposits as can be seen on Slide 10 benefiting from our simpler product designs, strong demographic trends and increased wholesaler productivity. The annuity products we currently offer are priced with statutory internal rates of return in the mid-teens. And we expect to see a shift in our business mix profile in the coming years as we add more of this higher returning, more cash flow generating and less capital intensive new business such as shield annuities and fixed annuities coupled with the runoff of less profitable business.

Product diversification is important to us. We have a large block of life insurance with approximately $418 billion of face amount in-force net of reinsurance as of September 30, 2018. We are also focusing on growing new sales of life insurance and are following a strategy that we believe will help us reestablish a competitive foothold in this space. As we have previously mentioned, we have made good progress with the development of our forthcoming life product and are pleased that it has been approved in 47 jurisdictions so far. We are working with a number of firms and expect to launch this product in the coming weeks. As with most product launches, sales were expected to ramp up over time and we are currently targeting life insurance deposits of at least $250 million in 2021 with expected statutory internal rates of return of at least to mid-teens.

Turning to Slide 11, let’s discuss steps we are taking to prudently enhance returns in our general account. We are focused on taking portfolio repositioning actions to generate an additional $125 million pre-tax of net investment income in 2020. As you can see on the slide, the primary driver is reducing our allocation to treasuries and increasing our allocation to higher yielding spread assets such as private assets which we can earn an attractive premium over public assets with comparable risk. These private assets include private placements commercial mortgages, agricultural mortgages and residential mortgage loans. When we separated from MetLife last year, our allocation to treasury assets was approximately 19%. With the migration to our new hedging strategy in the third quarter of 2017 in addition to optimizing our liquidity profile we feel comfortable reducing our allocation to treasuries to less than 10% by the end of next year. During the first three quarters of 2018, we have rotated out of approximately $4.4 billion of treasuries and into higher yielding spread assets. On a run-rate basis, this translates to an increase in investment income of about $80 million or approximately 65% of our 2020 target. The rotation out of treasuries is expected to have a modest impact on the average credit rating of the portfolio on the risk based capital ratio.

Turning to Slide 12, we are projecting $150 million of corporate expense reduction on a run rate basis by year end 2020, with an additional $25 million targeted for 2021. We intend to be a best-in-class company which will enhance our ability to offer competitive products with appropriate risk adjusted returns. A big driver of the expense reduction is exiting our TSAs with MetLife. Another tangible example is the management of our $80 billion plus general account. In early 2019, we expect to begin transitioning from a single manager to a multi-manager platform achieving meaningful cost savings with superior investment management capabilities. We will continue to look for ways to optimize our cost structure and maintain a best in class expense level by applying a focused nimble approach with reduced complexity.

Now, I will turn the presentation over to Anant. Anant?

Anant Bhalla

Thank you, Conor. I will start with the balance sheet. We feel very good about our capitalization levels and the strength of our balance sheet. We manage our variable annuity business to CTE98 or higher and remain at or above that across most market shocks as of the end of the third quarter of 2018 as demonstrated in the table on Slide 14. As an outcome of our statutory focused hedging strategy, the GAAP balance sheet is also very well protected in down market shocks. These market shocks do not require us to change our hedging strategy nor do they change our intent to be a consistent returner of capital. One of the primary drivers of growing GAAP net income and increasing statutory distributable earnings over the next few years is lower hedging costs. As previously disclosed, we fully transitioned to our variable annuity hedging strategy in the third quarter of 2017. Since that time equity markets and interest rates were higher and as a result of our hedging strategy we have captured more than $1 billion of market upside to the third quarter of 2018.

As Slide 15 demonstrates, our goal over the next few years is to lower hedging costs to where they are closer to more than $800 million of rider fees that we collect annually on our variable annuity contracts. So how do we plan to do this, a key pillar of our hedging strategy is to allow the assets above our total asset requirement to act as a deductible to absorb modest declines in market levels. Our current deductible is $1.2 billion, up from $1 billion driven by the capital contribution to one of our life insurance subsidiaries discussed on our third quarter 2018 earnings call. We expect to increase the deductible to $1.5 billion in 2019 and $2 billion in 2020. Increasing the deductible is expected to reduce the quantity of hedges we need to hold, thus lowering hedging costs. We expect this will lower hedging costs to approximately $1 billion by 2021 which will be more closely aligned with the rider fees we collect.

With that, let me turn the call back to Eric.

Eric Steigerwalt

Thanks, Anant. Today, we have provided additional insight into key drivers of near-term performance and demonstrated how our financial targets have improved significantly since the separation.

Let me summarize our financial outlook that is outlined on Slide 17 as well as making a few concluding points. First, we have a solid strategy in place and we believe this strategy will generate long-term shareholder value. Second, we believe we have an attractive new business growth platform and are focused on growing sales with solid returns both in our annuity and life insurance businesses. Third, our outlook reflects meaningful earnings growth and ROE improvement. By 2021, we are targeting an adjusted ROE less notable items of approximately 11% or an increase of 300 basis points from our expectation for 2018. Additionally, we are targeting an ROE, excluding AOCI, of approximately 8% by 2021. This equates to a net income ROE to adjusted ROE less notable items ratio of more than 70%. And finally, we are targeting low double-digit annual percentage growth of adjusted earnings per share less, notable items. Fourth, our hedging program is performing as we expected and we intend to materially reduce hedging costs over the next few years. And finally, our outlook reflects returning $1.5 billion of capital to shareholders through 2021.

And with that, let’s open it up for questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Our first question comes from John Nadel with UBS. Your line is open.

John Nadel

Hey, good morning everybody. First question is if we think about the hedge cost coming down, it sounds like by 2020 or ‘21 the net of your rider fees less the cost of the hedge program should be about a $200 million cost running below the line, how does that $200 million cost compare to the cost that is running through 2018?

Anant Bhalla

Hi, John, it’s Anant, thanks for the question. When we said approximately $1 billion, so that will be approximately 250 a quarter just to clarify and how does that compare if you look at Slide 15 we had $1.8 billion for the year in Slide 15 for 2018, so that’s how I would compare them.

John Nadel

Got it, okay. So that’s the bottom line. Okay, got it. And then the second question is that hedge cost, that net hedge cost, is that really the only primary item that’s driving the difference between adjusted operating income and net income or are there other factors that you guys see as impacting net income over the next couple of years. I am thinking about book value growth?

Anant Bhalla

And rightly so you are. So, between 11% and 8% ROE with 8% being the net income ROE, there are two primary drivers, hedge cost that you just mentioned on a post-tax basis of course, so the rider P&L as we talk about it between hedge cost and change in reserves and the second item is net investment gains and loses which are approximately 10 basis points a year.

John Nadel

Okay. And then one last quick one if I could. If we assumed over the forecast period, then instead of the 6.5% separate account return assumption that if that were zero, how much does that change the overall outlook holding all else equal?

Anant Bhalla

As we have shown in the past, our returns, our distributable earnings and cash flow return is sensitive to markets. So it does change.

John Nadel

I’m just wondering, if you can give some sort of order of magnitude if we’ve – maybe even relative to the 11% ROE target by 2021, is it cost you 100 basis points or 200 basis points of ROE?

Eric Steigerwalt

Hey John, it’s Eric. We’ll present in the K the updated scenarios.

John Nadel

Got it.

Eric Steigerwalt

I’m not going to give you a number, but look you know it’s lower, I mean, we’ve been very transparent with respect to that over time here. So I think you’ve got sort of a rule of thumb on separate account returns and it’s lower, I mean, if it were zero returns you know this. So between that and what you’ll see in the updated scenarios I think that will be helpful. I think Anant wants to add one other thing here.

John Nadel

Okay.

Anant Bhalla

One other thing to add to Eric’s point and what we brought up John in the last quarter’s earnings call, so the rule of thumb for every 1% change in quarterly separate account returns, you could change adjusted EPS, so then obviously adjusted ROE you can make your views on that of $0.09 per share for the quarter.

John Nadel

Got it. Okay. Alright.

Anant Bhalla

Most of that is tax related, so I would give you that as a way to triangulate.

John Nadel

Okay.

Eric Steigerwalt

And John the only – look you know given out of target on everything that’s all else being equal, right, you know that, and all else might not be equal, but hopefully, that’s helpful.

John Nadel

Totally understand. Management is paid to manage. I understand. Thank you.

Operator

Thank you. Our next question comes from Humphrey Lee with Dowling and Partners. Your line is open.

Humphrey Lee

Good morning and thank you for taking my questions. I have a question, which is related to the new kind of balance sheet sensitivity related to the hedging program. I think at the time of the separation, the way the hedging program works is, you are a little bit more sensitive to equity market movements and less sensitive to interest rates, but based on the new disclosure, a 100 basis point decline in interest rate would push you to below CTE98 or kind of maybe CTE97+. I was just wondering, is there a change in terms of how you approach your overall hedging program?

Anant Bhalla

Hi, it’s Anant again. No change in our overall hedging program as we said in our prepared remarks. With our adoption or reflecting the adoption of VA reform, there is a lot lower mean reversion of interest rates, it’s the only mean reverting to 3.25% on the 10-year. So that’s why it reflects that. But we feel very good about our balance sheet and it would really take a combined stress of equities and rates to be using up our entire deductible.

Humphrey Lee

Got it. And then shifting gears a little bit, so looking on the earnings how low you kind of changing it to low double-digit instead of the mid to high single-digit. How should we think about the moving pieces contributing to the upward guidance, it is more because of more new business being put on the books relative to your original assumption and then to a lesser extent, the expenses are a little bit better?

Eric Steigerwalt

Hi, Humphrey, it’s Eric. Yes. Let me kind of summarize this because you kind of get it from the presentation, but I think it’s a good question. So there are a few drivers. First, we didn’t know how successful the branding of the company would be, right. I’m obviously, and I’ve said this a number of times, extremely pleased with where we are at, but there was no guarantee, okay. So that turned out far better than we expected, and as a result, you can see sales growth here meaningfully in excess of what we’d previously talked about when we think about ‘20 and ‘21. Secondly, we have started repositioning the investment portfolio already and now as you see in the presentation, we’re looking to add $125 million on a run rate basis. Third, remember, our tax rate is lower as the result of tax reform like many of our peers. And then finally, our capital return assumption is higher and remember it starts 2 years earlier than our initial estimate. So that’s a way to think of the building blocks and of course, we included that last extra $25 million of expense cuts in 2021.

Humphrey Lee

Got it. This is helpful. Thank you.

Operator

Thank you. Our next question comes from Erik Bass with Autonomous Research. Your line is open.

Erik Bass

Hi. Thank you. Can you just provide some more detail on what you’re investing, and as you restructure the portfolio and I know you kind of give some broad perspective, but maybe how do you think about credit risk appetite at this point in the economic cycle?

John Rosenthal

Hi, it’s John. So I guess, let me take that in two parts. So I think as Conor alluded to, most of this repositioning involves simply trading out of what I’d say is an overweight or outsized position in treasuries to spread assets particularly private – with the focus on private placements. And we – coming to your second part of the question, we feel really good about this. Admittedly, we’re probably in the later stages of the credit cycle, but you have to consider our starting point. We inherited a very conservative portfolio for MetLife. So when you looked at our portfolio versus our peers, again, we mentioned this in the past, but we were over-weighted to treasuries and significantly underweighted to other spread assets particularly credit. So one way to view this repositioning is, we’re simply moving closer to the average, and we’re investing in the same high-quality assets we always invest in. And I think at the end of this repositioning, we would expect to continue to have a more diversified higher quality portfolio than most.

Erik Bass

Thank you. That’s helpful. Thank you. As we get further into the plan period, you’ll have more of the Shield sales that you’ve had in recent years coming up to the renewal period. I’m just curious, what’s your assumption for persistency and policyholder behavior at the time of renewal?

Anant Bhalla

Well, Erik, we’ve got the sales number include obviously a certain element of runover and change within the composition of the portfolio, so that’s all included in the trajectory we’re showing that the growth going from actually would – what was quite recently only $4 billion to at current run rate closer to $6 billion and getting to $8 billion at the end of the period, so we factored all of that in.

Erik Bass

Got it. I guess, I was thinking from a net flow perspective, so the deposits are going up, should we also assume somewhat higher lapses, but some of that gets recycled, I guess, into new sales?

Anant Bhalla

Yes. Certainly, some of it remains on the books, but look let me take the opportunity to kind of step back a little bit. Obviously, and I think this is maybe part of where you’re coming from to is, it’s a large book of business to begin with. It’s not just the fact that the Shield business is now – being out there for kind of 7 years and some of that is starting to reach the renewal period. But just the overall block to begin with and obviously, look we’re very pleased with how much we’re putting on the books in terms of volume, but also the quality of that and the returns on that block. And yes, I’d say, an meaningful amount is coming off the books as well, but remember that’s – how much of that is less profitable business. And it’s just normal course of business, debts, annuitization, surrenders, and a reasonable amount of those surrenders are positive to us because they are in the money, some of them significantly and that helps us from an overall profitability and capital perspective.

Erik Bass

Got it. Thank you.

Operator

Thank you. Our next question comes from Suneet Kamath with Citi. Your line is open.

Suneet Kamath

Thanks. Question on the $1.5 billion of capital return. Any color on the pace of that and does that include the start of regular dividends from your variable annuity entity?

Eric Steigerwalt

Yes. So it’s Eric. So I think it was a two-parter there, right, Suneet. So part one, it will ramp up over time, but we’ve talked about a measured pace, but in the end, it will ramp up over time. So think about that as you factor that into your model. And yes, it would include us being sort of a regular dividender at in the back-years, which should be no surprise. We’ve talked about being able to adopt VA capital reform in the stat reporting in 2019, so you can think about that for ‘20 and ‘21.

Suneet Kamath

Okay. And then just given how you’re generally ahead of your plan if you lay out at separation, one of the things we’ve talked about at that time was trying to do something little bit more structural with the legacy VA block, and I think you’d said at the time, you have a lot on your plate, which obviously you still do, but given how much progress you’ve made, have you given any more thought to any solutions on that back book?

Eric Steigerwalt

Yes. We still do have a lot on our plate, but obviously, I agree with you, things are going very well. Look, I’m just going to repeat what I’ve said all along okay. We will consider things that are potentially executable that we think will add shareholder value. Nothing is off the table, but we have laid out a lot of heavy lifting here. I think we can accomplish everything or I wouldn’t have put it in the presentation in today’s presentation, but nonetheless we have got a lot to do, but it precludes nothing. Obviously, we have included nothing in this particular presentation.

Suneet Kamath

Alright. Thanks Eric.

Operator

Thank you. Our next question comes from Alex Scott with Goldman Sachs. Your line is open.

Alex Scott

Hey, good morning. First question I had was on the hedge cost, could you help me like sort of reconcile how these hedge costs look relative to what was in your base case at the 10-K in the cash flow scenario and how maybe those cash flow scenarios would be impacted one way or the other as we kind of look forward to the disclosure in this 10-K coming up?

Eric Steigerwalt

Yes. So, we will share updated tables in our 10-K. The cash flow profile of the VA business is largely similar pre and post VA reform of 9/30/2018. So hedge costs the benefit of shield and I look at those things they are pretty much similar cash flow profiles going forward and move around a little bit, but in the same ball park.

Alex Scott

Okay. And so what you have assumed in here in terms of volatility? I mean do you have higher levels of volatility compared to what we are currently experiencing or is it sort of have it taper off like what kind of investments are in there for that?

Eric Steigerwalt

The short answer is yes, we have always assumed volatility to be in the 20s, not in the mid to high teens. So we are well protected and have a long-dated option, that’s the other part to keep that in mind.

Alex Scott

Alright. Thank you.

Operator

Thank you. Our next question comes from Tom Gallagher with Evercore. Your line is open.

Tom Gallagher

Good morning. Just few quick questions. The 11% ROE guide by 2021, can you talk about what the book value expectation is between now and 2021, is that expected to be flat meaningfully higher, lower just directionally, can you help us with that?

Anant Bhalla

Hi, Tom. It’s Anant. So as we grow net income right meaning you have 8% net income ROE you see book value accretion from that dynamic and obviously we have said too early to talk about GAAP accounting change, so you have to factor that in down the road.

Tom Gallagher

And Anant for 2019 is book value still expected to go down though because I believe right now just based on how hedge costs have been playing out on a mark-to-market basis you have seen a reduction?

Anant Bhalla

We expect to grow book value in 2019, because we expect to have positive net income ROE that’s the way I would put it from that dynamic and we have got the deductible up to $1.2 billion, we intend to get to $1.5 billion in ‘19 and that’s meaningful for reducing hedge cost.

Tom Gallagher

Okay, thanks. And then variable annuity revenue sensitivity, can you just comment on how much or are based on separate account values versus guaranteed amounts where you would have less account value sensitivity?

Anant Bhalla

Yes. Around fourth quarter of them are benefit base driven, think of the rider fees, so those are not very separate account market sensitive and the rest are market sensitive, around $3 billion is market sensitive and another $1 billion is non-market sensitive.

Tom Gallagher

Got it. And then final question in terms of the plan to reduce hedging cost should we assume I think right now you have a combination of option premium versus I’ll call it mark-to-market hedging costs through things like futures and the like. Should we expect a change in that mix or as we think about hedging costs going from a $1.8 billion to $1 billion, should we think about a ratable reduction into different types of hedges?

Anant Bhalla

Yes. So I love the way you frame the question we think of costs really from the point of view that option time decay, the rest is mark-to-market and the fact that you don’t have a GAAP liability that marks like our hedge target does, that’s why you get that in the cost, it’s $800 million to $1 billion of option time decay. And as hedge costs come down over the next 2 years, both mark-to-market sensitivity and time decay will come out, because largely we will be buying more out of the money options.

Tom Gallagher

Got it. So that option premium that’s been I think it’s been what a $200 million quarter headwind, would that get cut in roughly half then by 2021?

Anant Bhalla

It’s pro rata to sort of reduction. It’s exactly the way you mentioned it. It comes on pro rata as our costs come down.

Tom Gallagher

Okay thanks.

Anant Bhalla

Above the current level.

Tom Gallagher

You are welcome.

Operator

Thank you. Our next question comes from Ryan Krueger with KBW. Your line is open.

Ryan Krueger

Hi, thanks. Good morning. On the $125 million increase in the investment income, can you give a sense of how much of that you have realized so far in 2018?

John Rosenthal

Hi, Ryan, it’s John. As Conor mentioned, we have rotated $4 billion, $4.5 billion of treasuries through the end of Q3 and on a run-rate basis generated about $80 million which is about 65% of the total program. By the end of the year, we anticipate having completed call it about 80% of the program with the rest in 2020 obviously. In terms of how this emerges into earnings, you can think about $50 million emerging this year probably $110 million to $115 million emerging next year and obviously the entire $125 million in 2020.

Ryan Krueger

Great, thanks. And then on the equity market sensitivity, I think you are showing now that a 40% decline you would still be at CTE98, I think in the original or maybe if we think back to the 10-K you would have still been above the CTE95 threshold, but below CTE98 I guess can you help me think about what has changed and led to the improvement there?

Anant Bhalla

Hi, Ryan, it’s Anant. I mean largely because we are very well protected book and with the large option book you threw a market stress on us. On the equity side, it doesn’t heart that much relative to 98 level. It takes a correlated stress. So maybe I will dimensionalize it for everyone. It really would take like a 25% decline in equity, then 100 basis points down in rates, so rates in the low 2% area for us to use up our deductible and still have an option book that’s out in measured in years. So that’s the way we think about it.

Ryan Krueger

Got it. Thanks a lot.

Operator

Thank you. Our next question comes from Jimmy Bhullar with JPMorgan. Your line is open.

Jimmy Bhullar

Hi some of my questions were answered. But I wasn’t able to get when you are talking about a 6.5% separate account assumption, what level is that off of, is it off of September levels or October levels?

Anant Bhalla

Yes, it’s for the year, so 6.5% separate account returns for the year that would be like 1.6 every quarter you would want that to be.

Jimmy Bhullar

Beginning since we ended the most recent quarter then I am assuming right, beginning from September onwards?

Anant Bhalla

Yes exactly.

Jimmy Bhullar

Okay. So then obviously the decline since September that is not part of it and we can adjust based on your sensitivity correct?

Eric Steigerwalt

Hi, Jimmy, it’s Eric. I think we all know where you are going here, so...

Jimmy Bhullar

No, I am just trying to get an idea, because that wasn’t disclosed what it is offered, so there is nothing beyond that in the question?

Eric Steigerwalt

No, I know there is not, but I think we know exactly what your question is and we will try to help you out here. So yes, I think what you just said was as of the third quarter and then forward so it’s not in there. So think about it right the 8.50 to 9 range, I mean that’s still a good range for us, but let’s be clear here given the volatility that we have seen through November you are sort of thinking about the low end of that range. Now if futures are way up today and I certainly don’t want to get into it daily mark-to-market here thing, but I think you are thinking about this the right way so hopefully that was helpful between what Anant and I said.

Jimmy Bhullar

Yes. And then on the capital return and you commented a few times on it, but should we – and you are giving a pretty optimistic number in terms of what you can do over the next several years, should we assume that capital return is going to be an ongoing part of your strategy given what your capital position looks like. So once you exhaust the current program, you would look to renew it or should we assume it’s going to be more backend loaded?

Eric Steigerwalt

Listen as I have said before I don’t want to get ahead of my board, but look we have got a big number in there. It requires us to execute it and it also requires the markets to cooperate, but having said that the strategy is certainly to be a consistent returner of capital, both from the point of view of regular dividends up to the holding company, but also from sort of an overall strategic perspective with respect to management and the Board of our desire to be a consistent returner of capital.

Conor Murphy

And I am just going to add in a little bit over there. As you think about – you all think about our dividends out of BLIC, because lot of you ask this question, I would frame it up in two ways to think about it. First of all, we are not contemplating extraordinary dividends out of BLIC in 2019 as I mentioned to my answer to Tom. We are going to take the deductible up, we are going to get our hedge costs down and become a consistent returner of capital through ordinary dividends. So you should expect that in 2020 onwards we will take ordinary dividends and then from there on and I think this is the most relevant thing statutory distributable earnings is dividendable out of BLIC and statutory distributable earnings and GAAP net income should be comparable.

Jimmy Bhullar

Okay. And then just lastly you have reported pretty strong sales of the shield product and MetLife and Brighthouse were sort of early in that market, but seems like more companies are coming out with buffer annuities, have you seen more competition in that area and how does it affect your views of sales of that specific product?

Myles Lambert

Yes. This is Myles Lambert speaking. Thank you for the question. So we think new entrants into the marketplace, is a good thing for the product category. We continued to like the competitiveness of our products and we continued to add new distributors selling the products, so we feel really good about our competitive positioning in the marketplace.

Jimmy Bhullar

Okay. Thank you.

Operator

Thank you. [Operator Instructions] Our next question comes from Andrew Kligerman with Credit Suisse. Your line is open.

Andrew Kligerman

Hey, good morning. Most of my questions have been answered. Just a little more clarity on the market sensitivity, I think last quarter when the market was up your capital and margin was about 7%, your capital in excess of CTE98 benefited maybe to the tune of $400 millionish. Could you give us an update on that sensitivity I think Slide 14 is trying to capture some of it, but what would it take to erode $1.2 billion of the deductible, where would CTE98 be in the event that the market went down 10% as per that slide?

Anant Bhalla

Hi, Andrew, it’s Anant. So to answer the second part of your question and I will factor into your question about the prior quarter, the $1.2 billion deductible for us to fully utilize the deductible it would take a 20% to 25% decline in equities combined with the tenure being in the low 2% area, so like 100 basis points decline. Those two things need to happen in combination and still you have a hedge program that’s got options measured in years, so it’s not like they have gone tomorrow. To your point about making $700 million or really having stronger statutory adjusted earnings in the third quarter when we had 3% separate account returns. So the market is what it is, but our separate accounts gave us a 3% return which was strong above our 1.6 assumption. So that $700 million of statutory adjusted earnings which are two-thirds from the hedging program performing with sensitivities and that we expected, so us capturing market upside is a great demonstration of how in the last five quarters. We have captured $1 billion of market [upset] from the market. Now as the markets now we are going to give that back somewhat but that gives you a sense of like 3% return in the quarter, two-thirds of $700 million coming from the hedge program and how the book works. I will pause and take any follow-on if you have.

Andrew Kligerman

Yes. Anant, so basically this 20% to 25% market pressure and 100 basis points of interest rates that would take out the capital and likewise that would affect the CTE98 number by the exact same amount, correct?

Anant Bhalla

That’s correct. If your question is there a sensitivity impact on 98, yes it would be similar to that.

Andrew Kligerman

That’s perfect. Thanks a lot.

Operator

Thank you. Our next question comes from Elyse Greenspan with Wells Fargo. Your line is open.

Elyse Greenspan

Hi, good morning. Just a couple of quick questions, in terms of the tax rate I know you guys have said about the tax rate should be in the high teens and then I think in the past you have said the tax rate is higher as your earnings are higher, so should we think about the tax rate maybe being higher in some of the out-years or just are you assuming a stable kind of high-teens rate as you think about growing your earnings from here?

Anant Bhalla

No, that’s a great assumption to have as earnings grow and the tax rate should go to the higher end of that range that we have talked about. And also I would think about it we also have the establishment costs which will be running off which will be helping with earnings growth right. So we expect for the full year to hit a high watermark in 2018 of $240 million to $250 million pre-tax and then 2019 to 2020 onwards throughout the period approximately $200 million more to go. So you factor that in when you think of earnings in fact.

Elyse Greenspan

Okay, thanks. And then in terms of the capital return $1.5 billion plan that you guys have laid out and obviously that runs through 2021. Do you guys have kind of any M&A thoughts or aspirations. So, could there be – get to a point where you consider a deal that might add some diversification to your book and then push out some of the capital return or how do you think about M&A when you balance the $1.5 billion of capital return that you laid out from here?

Eric Steigerwalt

Hi, Elyse, it’s Eric. Obviously, we have nothing in this presentation along those lines. Over times, certainly like any other company you could consider things like that, but right now my number one priority is to execute on this strategy. That means we got to hit all our marks, all our way points and we want to be a consistent returner of capital. So that’s really the focus down the road certainly you could think about something like that, but that’s not what’s on our mind right now.

Elyse Greenspan

Okay, thank you.

Operator

Thank you. Ladies and gentlemen, I will now turn the call back over to Mr. Rosenbaum for closing remarks.

David Rosenbaum

Thank you, Shannon and thank you everybody for joining us today for our outlook conference call and for your interest in Brighthouse Financial. And we look forward to speaking again next quarter. Thank you very much.

Operator

Ladies and gentlemen, this concludes today’s conference. Thanks for your participation. Have a wonderful day.