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Brighthouse Financial, Inc. (NASDAQ:BHF)
Q2 2019 Earnings Call
Aug 6, 2019, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Quarter 2019 Earnings Conference Call. My name is Brian and I will be your coordinator today. [Operator Instructions] We will facilitate a question-and-answer session toward end of the conference call. In fairness to all participants, please limit yourself to one question and one follow-up. [Operator Instructions]. Also, we ask that you refrain from using cell-phones, speakerphones or headsets during the question-and-answer portion of today's call.

I would now like to turn the presentation over to David Rosenbaum, Head of Investor Relations. Mr. Rosenbaum you may proceed.

David Rosenbaum -- Head of Investor Relations

Good morning and thank you for joining Brighthouse Financial's Second Quarter 2019 Earnings Call. Our earnings release, presentation and financial supplement were released last night and can be accessed on the Investor Relations section of our website at brighthousefinancial.com. We encourage you to review all of these materials and we will refer to the slide presentation 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 Interim 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 discussions are John Rosenthal, Chief Investment Officer; Myles Lambert Chief Distribution and Marketing Officer; and Ed Spehar our Incoming Chief Financial Officer.

Our discussion during this call will 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, including those described from time to time in Brighthouse Financial's filings with the U.S. Securities and Exchange Commission. Information discussed on today's call speaks only as of today, August 6, 2019. 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 may be found on the Investor Relations portion of our website and our earnings release, slide presentation or financial supplement. And finally, references to statutory results 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.

Eric Thomas Steigerwalt -- President, Chief Executive Officer and Director

Thank you, David, and good morning, everyone. Brighthouse delivered strong results during the second quarter of 2019. Equity markets were strong and while U.S. interest rates declined, which we will discuss later, we generated additional capital during the quarter. Investment income from alternative investments was higher, as expected, given first quarter market performance.

Claims results improved modestly sequentially, while expenses were higher in the second quarter as expected. Sales remained very strong and we completed the repositioning of our investment portfolio as well. Moving forward, we remain focused on executing our strategy, which we continue to believe will generate long-term shareholder value.

Also, we recently announced the addition of Ed Spehar to the company as our Chief Financial Officer. Ed is with us today and will officially assume the CFO role on August 12. He is a seasoned leader with an in-depth knowledge of our business. I am confident that Ed's addition to our management team will help us continue to execute our strategy and deliver a long-term value to shareholders, partners and customers. I also want to take a moment to thank Conor Murphy for his leadership as the Interim CFO over the last six months.

As we have previously discussed, one of our goals is to be a consistent returner of capital over time and we continue to make progress toward achieving this goal. We repurchased approximately $136 million of our common stock in the second quarter. And we've continued repurchases in the third quarter of 2019 with approximately $43 million of our stock repurchased in July. Since the announcement of our first repurchase authorization in August of 2018, we have repurchased a total of $336 million of our common stock through July 2019.

Now let me turn to second quarter results. Our key highlights for the quarter are summarized on slide three of our earnings presentation. First, I'm very pleased with our outstanding sales results in the second quarter. We had approximately $1.9 billion of annuity sales, up 34% compared to the second quarter of 2018 and up 11% sequentially. We continue to be pleased with our sales growth as well as the quality of new business we are adding each quarter.

In February, we launched our new hybrid life insurance product Brighthouse SmartCare. This launch marked our first life insurance product introduction since becoming an independent public company and is part of our strategy to reestablish a competitive presence in the life insurance market. The early feedback from our distribution partners has been extremely positive. Results are in line with our expectations in the second quarter, but I'm pleased with the very strong sales pipeline, as we move into the third quarter.

We continue to add major distributors for our SmartCare product in the second quarter, and intend to roll out this product to additional distributors throughout the rest of the year.

Second, we are continuing to make necessary investments in our technology infrastructure and in our businesses. We refer to these investments as establishment costs. In the second quarter, establishment costs were approximately $30 million post-tax.

Third, let me touch on our earnings results. Adjusted earnings, less notable items improved sequentially driven by higher investment income, primarily from our alternative investment portfolio given the favorable equity markets in the first quarter of 2019. Equity market performance in the second quarter provided a benefit to adjusted earnings, but to a lesser extent than in the first quarter.

And finally, we continue to prudently manage our variable annuity capitalization. As we have talked about previously, we are managing our VA business to CTE98 or higher. As of the second quarter, our VA assets were approximately $1.5 billion in excess of CTE98 consistent with our strategy. Our hedging program continues to perform well, across a wide range of economic conditions and in line with our expectations.

Before turning the call over to Conor to discuss our second quarter results in more detail, let me provide a few perspectives on interest rates. Brighthouse, like all insurance companies, is impacted by the level of long-term interest rates.

With that said, we believe our balance sheet is well protected for a low rate environment. We have successfully managed our capital markets exposures through the use of derivatives and existing capital on the balance sheet over the last two years.

During the first and second quarters of this year, we proactively added interest rate protection, reducing our sensitivity to changes in long-term interest rates on statutory capital.

The net result of our VA hedging strategy was an increase of assets above CTE98 in the quarter to approximately $1.5 billion, as I said previously. This is yet another example of Brighthouse prudently managing its balance sheet.

Despite the current low interest rate environment, we continue to believe in our ability to achieve our $1.5 billion capital return target by 2021. We believe we have multiple levers to achieve the remainder of our capital return target.

First, as I just discussed, we are prudently managing the capital backing our variable annuity block. Despite the low rate environment, we have generated more than $600 million of normalized statutory earnings given the strong equity market performance in the first half of 2019.

Although Brighthouse Life Insurance Company or BLIC has ordinary dividend capacity in 2019, we are currently planning for regular dividends for the holding company from BLIC to begin in 2020 post the implementation of variable annuity capital reform in our statutory financials.

Second, as we have said previously, our reinsurance subsidiary, Brighthouse Reinsurance Company of Delaware is robustly capitalized. And we believe it is possible that over time excess capital could be released.

Third, we anticipate that New England Life Insurance Company or NELICO will continue to be a stable source of capital for the holding company. NELICO's 2019 ordinary dividend capacity is over $100 million.

We intend to dividend this amount to the holding company later this year. We expect NELICO will continue to generate approximately $60 million to $70 million of dividend capacity per year over the next several years.

And finally, we currently have excess capital at the holding company. As a reminder, our goal is to have liquid assets at the holding company of at least 2 times our annual fixed charges. And as of the second quarter of 2019, we are well in excess of our target.

To wrap up, we had solid results this quarter and we continue to take proactive steps to ensure our balance sheet is well protected for a low interest rate environment. We have made significant progress over the past two years as an independent company.

As we celebrate our second anniversary this week, I want to take a moment to thank all of our employees for their tremendous dedication, focus and hard work over the past two years.

Going forward, we remain focused on continuing to grow life and annuity sales, reducing expenses, effectively managing our capital, and driving long-term shareholder value.

With that, I'll turn the call over to Conor to discuss our second quarter financial results in more detail. Conor?

Conor Ernan Murphy -- Executive Vice President, Chief Operating Officer and Interim Chief Financial Officer

Thank you, Eric, and good morning, everyone. We had strong adjusted earnings results in the quarter and continued improvement in key balance sheet metrics as evidenced by the performance of our variable annuity hedging program. Last night, we reported adjusted earnings excluding the impact from notable items of $296 million in the quarter, compared with adjusted earnings on the same basis of $259 million in the first quarter of 2019 and $197 million in the second quarter of 2018.

Overall, investment results were solid the equity markets performed better than our base case, claims improved modestly, and corporate expenses were higher as expected. There were two unfavorable notable items in the quarter: establishment costs of $30 million after-tax impacting Corporate & Other; and $12 million after-tax related to a reinsurance adjustment impacting the Run-off segment.

A few underlying themes influenced our results this quarter. Overall, net investment income increased approximately $100 million after-tax sequentially. The increase was driven primarily by the alternative investment returns, which improved given the positive first quarter market performance. Prepayments were higher as was asset growth, which was primarily driven by our continued strong sales momentum.

I would also like to note through the second quarter of 2019, we have repositioned approximately $8 billion of treasuries into a diversified mix of high-quality spread assets, marking the completion of the repositioning of our investment portfolio. Continuing with the market impact on results, separate account returns were positive 3.8% in the quarter, over two percentage points above our base case assumption.

Compared with the base case, this resulted in a favorable impact of $20 million after tax. While separate account returns were higher than our base case assumption, they were below the first quarter 2019 separate account returns, which resulted in higher DAC amortization on reserves on a sequential basis.

Variable annuity separate account balances ended the quarter at $99 billion modestly higher than at the end of the first quarter of 2019. Higher separate account balances coupled with more processing days resulted in higher fee revenue sequentially.

Moving on to life insurance, claims were modestly favorable compared to the first quarter 2019, primarily as a result of higher reinsurance recoveries in the second quarter. Lastly, our corporate expenses in the second quarter were $242 million, up approximately $17 million pre-tax sequentially consistent with our expectations.

We anticipate full year 2019 corporate expenses to be in line with or slightly below the 2018 full year level as we continue to transition to the Brighthouse operating platform. We are still projecting a $150 million of corporate expense reduction on a run-rate basis by year-end 2020 and an additional $25 million in 2021.

Turning to adjusted earnings at the segment level, which excludes the previously mentioned notable items. Starting with annuities, adjusted earnings in the Annuity segment were $265 million in the quarter. As I mentioned, separate account returns were strong in the quarter and above the base case, which benefited adjusted earnings to a lesser extent than in the first quarter. Alternative investment returns were positive driven by the first quarter 2019 market performance and asset balances increased sequentially aided by our continued strong sales momentum.

Additionally, fee income increased as I previously mentioned. Adjusted earnings in the Life segment were $58 million in the quarter. Sequentially, results were favorably impacted by the increase in alternative investment returns and higher reinsurance recovery. This was partially offset by higher DAC amortization. The Run-off segment reported adjusted earnings of $14 million in the quarter. The sequential increase was driven by higher alternative investment return. Corporate & Other had an adjusted loss of $41 million. Sequentially, expenses were higher driven by the timing of ongoing marketing and branding programs.

To wrap-up, I would like to provide an update on our capital position as of June 30, 2019. With respect to our variable annuity hedging strategy, results were in line with expectations in the quarter and outperformed the sensitivities outlined in our 2018 Form 10-K. As we previously mentioned in the first half of 2019, we proactively added more interest rate protection, reducing the sensitivity of our statutory capital to changes in long-term interest rate.

The net result of our VA hedging strategy was a sequential increase in assets above CTE98 in the second quarter to approximately $1.5 billion despite lower interest rates. Additionally, normalized statutory earnings in the quarter were approximately $280 million bringing our year-to-date total as Eric said to over $600 million. Statutory combined total adjusted capital was approximately $6.9 billion up $600 million from the prior quarter driven by gains from our variable annuity hedging program in the second quarter.

We intend to adopt NAIC VA reform for statutory reporting by year end 2019. We believe the new reserve framework will help pave the way for growth in ordinary dividend capacity in the years to come as we expect changes in reserves will better align with our hedge target.

Finally, our average financial leverage ratio was consistent with the prior quarter at 24% and our holding company liquid assets were approximately $900 million at the end of the second quarter. In all, we had another quarter of solid performance and we continue to prudently manage our balance sheet.

With that, we'd like to turn the call over for questions.

Questions and Answers:

Operator

Thank you, sir. [Operator Instructions] And our first question will come from the line of Elyse Greenspan with Wells Fargo. Your line is now open.

Elyse Greenspan -- Wells Fargo Securities -- Analyst

Hi. Good morning. My first question. You guys pointed to the increase on interest rate hedges that you guys purchased in the quarter with the subsequent to the end of the second quarter we're seeing the 10-year drop it's now at 1.75, obviously at 2 at the end of the quarter. Could you just give us a sense of the interest rate hedges and their ability to work -- continue to work with the 10-year at the level that it's at today?

Conor Ernan Murphy -- Executive Vice President, Chief Operating Officer and Interim Chief Financial Officer

Hi, Elyse, it's Conor. Yes, so you're correct. We did add a reasonable amount of protection in the first half of the year. At this stage we believe we are well-protected for low rate environment. With respect to the hedging strategy it is designed to protect the statutory balance sheet and we're executing our strategy. But we're mining it up against market conditions as well.

So given the implied interest rate volatility being at historically low levels in the first half of the year, we took some opportunity to increase that protection. So we're feeling pretty good. We believe we're well-protected at this stage. With respect to the impacts from here on a statutory basis, we believe that as of right now that we wouldn't be meaningfully different from where we finished the second quarter.

Elyse Greenspan -- Wells Fargo Securities -- Analyst

Okay. That's helpful. And then in terms of the annuities the sales were pretty strong in the quarter. Some other companies have commented given lower interest rates as they had to adjust their pricing on some of their products. So have you guys taken action as well? And would you expect an impact on sales from here or is just -- is there an offset from new distribution arrangements that could help offset potentially any changes on the pricing side of things?

Conor Ernan Murphy -- Executive Vice President, Chief Operating Officer and Interim Chief Financial Officer

Yes. Let me start from my Chief Operating Officer and pricing heart for a second and then I'll give it to Myles. We're not seeing a meaningful impact in terms from a pricing perspective. We do revisit the pricing on all of our annuity and Shield-liked products every two weeks. But not seeing anything meaningful from a pricing point of view. But I'm going to ask Myles to add some commentary from a sales and pipeline perspective.

Myles J. Lambert -- Executive Vice President and Chief Distribution and Marketing Officer

Yes. Thank you, Conor. And as everyone knows the majority of our sales are coming from our Shield product. So we remain very confident that we'll be able to continue sales -- continue to grow sales on that front. So we don't see a significant impact as it relates to our ability to produce sales on a low interest rate environment.

Elyse Greenspan -- Wells Fargo Securities -- Analyst

Okay. Thank you for the color.

Operator

Thank you. And our next question will come from the line of Andrew Kligerman with Credit Suisse. Your line is now open.

Andrew Kligerman -- Credit Suisse -- Analyst

Hey, good morning. First question is around the hedging instruments that you are using to protect your statutory balance sheet from -- with respect to interest rates. Could you talk about the types of hedges you're buying?

Conor Ernan Murphy -- Executive Vice President, Chief Operating Officer and Interim Chief Financial Officer

Yes. Well, I mean, I think you're probably pretty familiar with the composition that we disclosed. It was about $100 billion of notional in the 10-Ks and 10-Qs. In terms of what changed this quarter is we added more interest rate options. We had about $10 billion of notional at the end of the year. We brought that up to about $17 billion in the first quarter and we brought it up to about $21 billion in the second quarter.

Andrew Kligerman -- Credit Suisse -- Analyst

I see and are they swapped? So they -- are they future oriented? What options -- what in particular, I mean if rates rise are you going to feel the pressure on the opposite direction?

Eric Thomas Steigerwalt -- President, Chief Executive Officer and Director

Andrew, it's Eric. The composition of the instruments isn't different. I mean swaptions, swaps options we use all of them. In this particular case what we added was interest rate options. And no we feel pretty comfortable if rates go up. But we feel very comfortable if rates stay where they are at now or even go a little lower with respect to the hedging portfolio.

Andrew Kligerman -- Credit Suisse -- Analyst

And Eric, are these options long-term?

Eric Thomas Steigerwalt -- President, Chief Executive Officer and Director

Longer term, I mean they're certainly not short-dated options. Over the last two years, we've discussed being out duration a little bit they're not 10-year duration. But they're longer than three months.

Andrew Kligerman -- Credit Suisse -- Analyst

Got it. And then over the statutory financials, I saw that you had a net loss of $100 million. And you've mentioned on the call that normalized you should be at $600 million of earnings. So could you clarify what the dynamics there that generated a statutory loss of $100 million?

Eric Thomas Steigerwalt -- President, Chief Executive Officer and Director

Yeah. So I think the pieces that you're missing are the elements of the standard scenario, which were not terribly significant this quarter changes in the CTE95 and then the unrealized gains and losses on the hedging program. So when you adjust for those that's what's giving you the normalized stat earning number of $280 million.

Andrew Kligerman -- Credit Suisse -- Analyst

I see. And then just lastly what's the deductible standing out right now?

Conor Ernan Murphy -- Executive Vice President, Chief Operating Officer and Interim Chief Financial Officer

Well, so we haven't had any change overall in the deductible since last quarter. So we're, obviously, more meaningfully above the 95. I think the last time we had spoken about it we had a number in the sort of $1.2 billion range by potentially going up to about $1.5 billion. But we haven't changed it in the quarter.

Andrew Kligerman -- Credit Suisse -- Analyst

So $1.2 billion?

Conor Ernan Murphy -- Executive Vice President, Chief Operating Officer and Interim Chief Financial Officer

Correct.

Andrew Kligerman -- Credit Suisse -- Analyst

Thanks a lot.

Operator

Thank you. And our next question will come from the line of Tom Gallagher with Evercore. Your line is now open.

Tom Gallagher -- Evercore ISI -- Analyst

Good morning. Just a follow-up on the change in the interest rate hedging program. Would you expect that this is going to change the long-term distributable cash flows at the block? So I guess what I'm getting at is what's -- is there a cost associated with the extra protection you put on when you think about counting your from long-term economics?

Conor Ernan Murphy -- Executive Vice President, Chief Operating Officer and Interim Chief Financial Officer

No, Tom. I would -- well, I've mentioned we did add and actually to some extent extended maturities here. There's no meaningful change in terms of the overall cost. So you got to put this in the context of the $100 billion of notional.

Eric Thomas Steigerwalt -- President, Chief Executive Officer and Director

Hey Tom, it's Eric. I might just add this. I don't really think it's a change in the hedging program. We -- we're opportunistic. I'm sure other companies are opportunistic as well. VA was pretty low in the first quarter. It's not like there's any wholesale change to the program. The program is very well established. It has parameters around its strategy. And we found a way to increase protection and frankly even duration a little bit. So I just want to say that for everybody, I don't consider a wholesale change in the program itself.

Conor Ernan Murphy -- Executive Vice President, Chief Operating Officer and Interim Chief Financial Officer

And let me just start again as a reminder and part of what drove the opportunity here was that the implied volatility is at historically low level. So that gives us a chance to -- well we saw attractive pricing for interest rate options in the first half of the year as well.

Tom Gallagher -- Evercore ISI -- Analyst

Thanks. And then my follow-up is Eric, you sound confident that you can still extract some of the excess capital out of the SGUL captive. What -- is there anything you can give us could you mention how much excess you think might be there? And what would the process be when -- and from a timing standpoint when would you think you could begin to extract the capital?

Eric Thomas Steigerwalt -- President, Chief Executive Officer and Director

Yeah Tom. Look this all revolves around conversations with our regulators. We have a very good relationship with them, we want to keep a very good relationship with them. We feel we're managing the company very prudently. I can't put words in their mouth but I do think that they pay attention to what we're doing and I hope they think we're doing a pretty good job. I can't dimension either the size or the timing because it all depends on these conversations. So over time we will be discussing the capital position in BRCD and what we think of as excess capital and, obviously, they have to agree. So while I believe over time, we absolutely will be able to extract some capital there I can't dimension it yet. And as soon as I can I'll be happy to do so.

Tom Gallagher -- Evercore ISI -- Analyst

Got you. And then just a quick follow-up on that. The current interest rate environment would not persuade you from believing your still material excess capital there?

Eric Thomas Steigerwalt -- President, Chief Executive Officer and Director

All right. I've been persuaded to spend a lot of time on the definition of the word current over the last 24 hours. So let me be very explicit here. Currently the 10 year's in the 175 area, OK? If we see some of the volatility that we've seen in terms over time here, i.e. rates go back up to some degree, probably not a lot but to some degree. Then I feel like we have the capability in our normal operating environments and some extra levers to be able to hit the $1.5 billion of capital returns.

Now if you tell me that if we look at the current interest rate environment and it's going to be like this for three years then I would say that there's some headwinds there. And we'd have to take that into consideration, if we were going to make a call on that assumption.

And I think you all know that, because we published these scenarios, they're in the last 10-K. So you all have a pretty good sense of longer-term there.

So I hope I was clear there. If we see volatility in rates, by the way if equity markets continue to do well and I don't mean like the last couple of days. You know what I'm talking about here. Then again, I feel pretty comfortable. But a longer-term rates were lower for a number of years. That will put some headwinds. Again, I know that's no surprise. I hope that was helpful.

Tom Gallagher -- Evercore ISI -- Analyst

That was. Thanks.

Operator

Thank you. And our next question will come from the line of Erik Bass of Autonomous Research. Your line is now open.

Erik Bass -- Autonomous Research -- Analyst

Hi. Thank you. Just first one follow-up may be along that vein is -- how should we think about any changes to the previously provided interest rate sensitivities that you've given both for capital and cash flow?

Conor Ernan Murphy -- Executive Vice President, Chief Operating Officer and Interim Chief Financial Officer

So, Erik again, just maybe I don't -- let me get totally redundant or repetitive to Eric's part from -- we have our year-end disclosures for both distributable earnings and cash flows. The cash flows are not as impacted and those are 50-year scenario. So if you were to compare those today with where we're at the end of the year, they're similar and probably modestly better.

In terms of the distributable earnings, then it gets back to what you think from an equity market perspective, part of the drivers, the equity market and part of it is interest rate. So as Eric said, the equity markets are OK, and the interest rates stay where they are not for the next few years, then it's going to be a lower number. If both of them were lower then your -- you know what that looks like, because we gave you that scenario in the 10-K.

Erik Bass -- Autonomous Research -- Analyst

Got it. Thanks. And then can you provide any sensitivity to the net income impact if you were to make any changes to your, I think, 4.25% long-term interest rate assumption, just kind of thinking ahead to the third quarter review?

Edward Spehar -- Incoming Chief Financial Officer

Hi, Erik, it's Ed. So as you know our actual rate assumption update is done once a year in the third quarter. And so we will discuss it on next quarter's call. But let me provide a little bit perspective on the interest rate assumptions. So, on a GAAP basis, we have a mean reversion rate of 4.25% for the 10-year.

On a stack basis, which is how we run the company the implied interest rate assumptions are lower. So first, under VA reform, there's a prescribed methodology for interest rates based on a weighted average of historical data. So, as a result, our CTE calculation includes an implied mean reversion rate of 3.25% for the 10-year.

Second, we're required to perform cash flow testing for stack reserves on an annual basis and this exercise includes a variety of interest rates stress scenarios. At year-end 2018, we had have meaningful cash flow testing margins. And at current rates, we believe we continue to have meaningful margins.

So it's fair to say that changing the GAAP mean reversion rate assumption would have no bearing on our CTE calc or our stat balance sheet. So, just to give you a sense of the difference between interest rate assumptions on a GAAP and stack basis. Hope that helps.

Erik Bass -- Autonomous Research -- Analyst

Got it. And then on that GAAP basis, it's obviously non-cash and accounting-oriented. Is there any kind of sizing you can give at this point, or just wait until third quarter?

Edward Spehar -- Incoming Chief Financial Officer

Yeah. I think you're going to have to wait until the third quarter.

Erik Bass -- Autonomous Research -- Analyst

Okay. Thanks.

Edward Spehar -- Incoming Chief Financial Officer

Actually, no. This is an involved process. So stay tuned.

Operator

Thank you. And our next question will come from the line of John Nadel with UBS. Your line is now open.

John Nadel -- UBS -- Analyst

Hey, good morning, everybody. Just coming back to the incremental hedging that you guys have put on impressions or not obviously beneficial in the first half of the year maybe late 2018 into the first half of the year. I know Eric that you're describing it as sort of as no real change in your overall hedge approach, but I'm curious how have you guys actually not done what you did? All else equal what would that $1.5 billion relative to CTE98 look like as of 2Q? Because it seems to me that that incremental action has been very beneficial.

Conor Ernan Murphy -- Executive Vice President, Chief Operating Officer and Interim Chief Financial Officer

Hi, John. It's Conor. Yeah, fair question. Had we not put on the additional protection the CTE numbers would have been consistent with first quarter. They would have been pretty flat. So you would not have seen the increase and the increase from -- the increase looks like a $400 million. It's probably closer to $300 million in terms of the rounding.

John Nadel -- UBS -- Analyst

Okay.

Conor Ernan Murphy -- Executive Vice President, Chief Operating Officer and Interim Chief Financial Officer

So it would have been pretty flat had we not added the extra protection.

John Nadel -- UBS -- Analyst

Okay. That's helpful. And then I think -- I want to try to paraphrase this, but maybe you can tell me if I've got it right or wrong. The incremental actions and where you guys think your expectation is that it doesn't really have a meaningful impact on distributable cash books?

Conor Ernan Murphy -- Executive Vice President, Chief Operating Officer and Interim Chief Financial Officer

Yes. Are you talking about the protection, or you talking about the cost?

John Nadel -- UBS -- Analyst

Just net. Does it put you in a better position on a statutory basis for dividend potential to the holding company or does it not materially change your potential dividend activity as we look out the next year or two?

Conor Ernan Murphy -- Executive Vice President, Chief Operating Officer and Interim Chief Financial Officer

I don't think it's material. Look and again, we're going to be able to revisit those at the end of the year with the full adoption or the full implementation of VA reform that's going to the more meaningful I don't think this is terribly meaningful to that.

John Nadel -- UBS -- Analyst

Got you OK. And then just one more question on investment income so -- I'm not sure if alternatives includes prepayments and make-wholes, I just wonder if you could just help us understand may be relative to the total $942 million of investment income this quarter at 2Q, how much of that on an underlying basis would you consider sort of a normalized level of NII?

John Rosenthal -- Chief Investment Officer

Hi, it's John.

John Nadel -- UBS -- Analyst

Hi John.

John Rosenthal -- Chief Investment Officer

So, I think we break alternatives in prepayments into two buckets. As you know the alternative return for the quarter was 4.1%, $76 million on a base of about $1.8 billion, returns from alternatives are hard to predict year-to-year much less quarter-to-quarter as these quarterly returns are real woeful. It's a long-term asset class for this and as we talk about in the past.

But as we disclosed in our presentation we expect a 9% to 11% long-term return from alts and again, that's long-term. So, you can feel free to use those numbers to derive what a normal quarter might look like, but just please keep in mind that there is pretty much no such thing as a normal quarter for alts.

On the prepayment side, we -- prepayments were elevated during the quarter, primarily due to one mortgage prepayment, one bond prepayment. You could -- I'm not sure whether we give that as a separate prepayment number, but you can take off $10 million to $15 million pre-tax to get a more normalized number from prepayment.

John Nadel -- UBS -- Analyst

Okay. Okay so at quarterly NII that's in the high $800 million, may be bordering on $900 million seems to be about right?

John Rosenthal -- Chief Investment Officer

I think that's a pretty good guess.

John Nadel -- UBS -- Analyst

Okay. And that's inclusive of all the benefits of the full repositioning, correct?

John Rosenthal -- Chief Investment Officer

Yes it is.

John Nadel -- UBS -- Analyst

Thanks so much.

Operator

Thank you. And our next question will come from the line of Jimmy Bhullar with JPMorgan. Your line is now open.

Jimmy Bhullar -- JP Morgan -- Analyst

Hi, good morning. First just on your annuity sales. Obviously, the Shield product is helping you grow, you've added distribution as well. I just wanted to get an idea on of all the distributors or the major ones that you've added over the past year like Chase, Primerica, are you fully benefited, or there is more to go in terms of you getting sort of what you believe is your fair share through some of those distribution outlets?

Myles J. Lambert -- Executive Vice President and Chief Distribution and Marketing Officer

It's Myles. Thank you for the question. No, we feel like there's still a lot of room for growth as it relates to some of the new distributors that we brought on selling our flagship product. But in addition to that we continue to grow distribution to expand into other firms and new channels.

And then lastly what I would say is that the firms that we've been working with over the past several years that are selling Shield, we've seen them continue to grow their business there. So, we feel like there's still a lot of runway as it relates to growing our Shield sales moving forward.

Jimmy Bhullar -- JP Morgan -- Analyst

Okay. And then on the reinsurance cost adjustment do you expect an impact on your ongoing earnings from that as well? And if yes, how much is it if you can quantify?

Conor Ernan Murphy -- Executive Vice President, Chief Operating Officer and Interim Chief Financial Officer

Hi, it's Conor. No, that is a one-time reflection. There's not an ongoing impact in future quarters.

Jimmy Bhullar -- JP Morgan -- Analyst

Okay. Thank you.

Operator

Thank you. Our next question will come from the line of Ryan Krueger with KBW. Your line is now open.

Ryan Krueger -- KBW -- Analyst

Hi thanks, good morning. On the life reinsurance captive when you did the separation, you had purchased a pretty large amount of interest rates hedges for the stack capital back in that. Do you still maintain all of those rate hedges? So, should we think about lower rates, I guess, it's not materially impacting your view of access capital on the reinsurance captive?

Conor Ernan Murphy -- Executive Vice President, Chief Operating Officer and Interim Chief Financial Officer

Yes, the simple answer is yes. We keep -- we maintain our protection on that as well from an interest rate perspective.

Ryan Krueger -- KBW -- Analyst

Got it. And then I guess on NAIC VA reform, I think you've already incorporated -- I guess I believe you've incorporated most of the impacts already in terms of when you discuss your capital in excess of CTE98. But I just wanted to I guess confirm that would you expect much additional change when you fully adopt this at the end of this year or do you generally capture the impact already?

Conor Ernan Murphy -- Executive Vice President, Chief Operating Officer and Interim Chief Financial Officer

Not with respect to the CTE calculation.

Ryan Krueger -- KBW -- Analyst

So, just the RBC calculation?

Conor Ernan Murphy -- Executive Vice President, Chief Operating Officer and Interim Chief Financial Officer

Well, that will be a -- yes. So, there will be -- yes, there are elements for the transition that are not complete. But in terms of how we calibrate the CTEs, those already incorporate the impacts of VA reform.

Ryan Krueger -- KBW -- Analyst

Okay. Thank you.

Operator

Thank you. Our next question will come from the line of Suneet Kamath with Citi. Your line is now open.

Suneet Kamath -- Citi -- Analyst

Thanks. Good morning. Just wanted to try to reconcile a few things, if I could. On the one hand, you seem pretty confident in your ability to get dividends out of BLIC by 2020. But then, on the other hand, if we look at your 10-K disclosures, the distributable earnings out of the VA business are pretty sensitive to rates. And if we look at that scenario for in particular, it shows a pretty big drop-off in the level of distributable earnings. I'm just trying to reconcile those few things and understand if we're in this low rate environment, what gives you the confidence that you can get dividends out of BLIC?

Conor Ernan Murphy -- Executive Vice President, Chief Operating Officer and Interim Chief Financial Officer

Well let me start. I see you mentioned the differences between sort of scenario one and four. And you're right, it's a meaningful difference because in scenario four, there is a little to no distributable earnings. But remember, the difference between those two scenarios is a combination of both interest rates and equity market returns. And they're both meaningful the equity market might actually be a little bigger than the interest rate element. So, again I think back to what Eric had said earlier, if you're isolating the interest rate from the equity market component, yes that will be a challenge. If you're saying both that we have the low equity markets and prolonged low interest rates then, yes the ability to -- well that'll be an additional challenge to the ability to take those out over the next few years.

Now again remember we're $600 million in already. We've executed over $300 million of that. I think we've got $264 million to go after the end of July. We also have $600 million of start earnings in the first six months of this year. So again depending on when you're starting point is, if you're starting today, I think you'll have to count that into your distributable earnings calculation as well. And we've made reference to some of the other drivers that we have as well.

Suneet Kamath -- Citi -- Analyst

Got it. Okay. That's helpful. And then just one quick one on the captive, I know it's still very much tied to conversations with the regulators. But I believe on last quarter's call, you talked about having those conversations this summer. Any color on whether you've had them and if there's been any initial feedback from the regulators to the extent you can comment?

Eric Thomas Steigerwalt -- President, Chief Executive Officer and Director

Yes. Suneet, it's Eric. Yes, we have had some conversations and we've got plenty more to go. This stuff never revolves around one conversation nor should it frankly. These are ongoing conversations that we have with our regulators. And that'll continue to go on for as long as they need to. We want them to understand exactly what we're doing; understand how we're prudently managing the company etc. So, I'd love to be able to give you a play-by-play here, but it really just doesn't work that way. This will unfold over time. I do believe that we have excess capital there. And as these conversations unfold to the point where I can truly talk about it on a call like this I definitely will.

Suneet Kamath -- Citi -- Analyst

Okay. Thanks.

Operator

Thank you. Our next question will come from the line of John Barnidge with Sandler O'Neill. Your line is now open.

John Barnidge -- Sandler O'Neill -- Analyst

Thanks. Most of my questions have been answered. But on the tax rate, it's danced around a bit, I get there is some level of volatility quarter-to-quarter. But what are your current thoughts on a full year tax rate range?

Eric Thomas Steigerwalt -- President, Chief Executive Officer and Director

You should expect it'll be in the mid-teens.

John Barnidge -- Sandler O'Neill -- Analyst

Okay. And then given the volatility of the markets on the equity and interest rate side, how the conversations on an annuity sale change this year versus last year because not only has Shield sold well this year, but so have fixed indexed annuities. Thanks for the answers.

Edward Spehar -- Incoming Chief Financial Officer

Can you clarify that question again a little bit?

John Barnidge -- Sandler O'Neill -- Analyst

Sure. How has the conversation on a sales perspective changed this year versus last year given the volatility in the market both on the equity side and the interest rate side for your products in the Annuities segment? I ask this in light of Shield having sold well, but also fixed indexed annuities having sold well this year.

Edward Spehar -- Incoming Chief Financial Officer

Yes. So on the Shield side; I think this type of market volatility on a short-term perspective could slightly impact sales. But to your point on a longer-term perspective, as clients look for more protection, but yet still remain invested in equity market is actually a good thing for our Shield product. As it relates to what we're seeing with FIA sales, I think it's a similar story. I think for those clients and advisors that are looking to provide maximum protection even though cap rates might come down a little bit from an interest rate standpoint, it's still providing that type of guarantee that customers are looking for, so that they can stay invested in the market with fully protected products.

Eric Thomas Steigerwalt -- President, Chief Executive Officer and Director

John, it's Eric. I'll just add something too. On the pure fixed side, look, obviously if we're seeing any pressure on pricing, it's going to be there. And we got to prudently manage our returns, but people are still looking for guarantees. So that's why I think not only here, but at other companies, you're seeing fixed annuity sales doing OK. We'll have to see what happens here, where rates go next. But -- I thought I'd just clarify that.

Operator

Thank you. And our next question will come from the line of Alex Scott with Goldman Sachs. Your line is now open.

Alex Scott -- Goldman Sachs -- Analyst

Hey, good morning. I have a follow-up also on the hedged program. So, when I look at the disclosure you guys provide on the movement in your derivatives quarter-over-quarter, spent $800 million. And I think through some of the product sensitivity that you guys have provided around the way, the CTE requirements move. I guess it's -- it was a bit surprising that there is that big of an offset in the liabilities didn't move as much.

So I'm wondering, is it the equity exposure that's driving some of this. Have you -- are the options that you have so far out of the money that now if equity markets move up there's just not much of a drag from the marks on the equities? And does that change your sensitivity going forward?

Eric Thomas Steigerwalt -- President, Chief Executive Officer and Director

Alex, let me start. It's Eric. We've had this conversation a couple of times on these calls. It's a big portfolio, right? You got to understand the movements and liabilities. You got to understand the movements on the asset side, volatility changes frankly stat changes. It's pretty hard from the outside to perfectly predict where this is going. And I said previously, I don't consider what we did in the first and second quarter, a big change. I consider generally that we had a strategy as we spun off the company. And we've been following that strategy.

Now it's shades of gray on the margin from time to time and everybody does that. This is a particularly interesting time for us. I know John and I -- that'll cause oppression. But look we were looking at volatility. We are constantly watching the markets etc. And I think we've got a reasonable handle on our liability calculations as well. So we're managing the hedge portfolio all the time.

Not necessarily trading all the time, certainly but managing it all the time. So I think maybe a couple of quarters ago I was like, it would be hard for anybody on the outside to sort of get within better than $300 million-ish, OK? So I know you're trying to get it right down to the penny, but that's not the easiest thing to do. Conor, I'll turn it over to you. I know you want to add something.

Conor Ernan Murphy -- Executive Vice President, Chief Operating Officer and Interim Chief Financial Officer

Well actually I think you've -- you really captured it. What I was going to say is, again I appreciate that you're a very detailed analyst and you've gone through the portfolio in great detail, but in order to be -- to do this calculation completely as Eric said, you need not just the components of the hedges, but the liability changes as well. And your elements of yes time decay and basis risk and fees and everything else. So to Eric's point, you're going to be able to get a reasonable assumption, but you won't be able to do it as fine-tuned as I think you'd like to.

Eric Thomas Steigerwalt -- President, Chief Executive Officer and Director

And maybe I'll just add this as well. Our goal with the hedging program is to protect the stat balance sheet. And now I think tomorrow is our two-year anniversary, I have no issues with all of you wanting to understand. Do you really have a handle on this hedging portfolio and this hedging strategy. And I do believe it's starting to unfold that we do. We know what we're doing here. I feel really good about the strategy. There's not been wholesale changes in the strategy. Again, at the margin we do some things, but I feel really good about our ability to protect the stat balance sheet and that is the ultimate goal of the hedging program. I hope those comments were helpful.

Alex Scott -- Goldman Sachs -- Analyst

Yes. Those comments were very helpful. One more follow-up on that. I guess just around the options that I think if 1Q hedged balances were still intact the options associated with equities were like 40% to 50% out of the money now. So have you taken the opportunity to pull any of those? And further -- and I'm not talking about small changes, but I think that was like the need of this equity options was very far out of the money. So just interested if those were pulled in or not?

Eric Thomas Steigerwalt -- President, Chief Executive Officer and Director

So in retrospect, as you can eventually find out where these positions are you'll be able to take a look at what we're doing, but I don't want to comment on like what we're doing right this minute. Conor, you want to add anything?

Conor Ernan Murphy -- Executive Vice President, Chief Operating Officer and Interim Chief Financial Officer

I think yes, I would agree with Eric. And look you'll get the queue in due course and you'll get the schedule BAs. But the -- I would say broadly speaking we talked about a pretty meaningful increase in our interest rate option protection across the other elements of the portfolio it's not meaningfully different including the equity option.

Alex Scott -- Goldman Sachs -- Analyst

Thank you.

Operator

Thank you. And our next question will come from the line of Humphrey Lee with Dowling & Partners. Your line is now open.

Humphrey Lee -- Dowling & Partners Securities -- Analyst

Good morning and thanks for taking my questions. Just a follow-up on your comment about the hedged program. I understand it's going to be dynamic and you would be optimistic in terms of fine-tuning your protection. I guess like based on your earlier comment, it sounded like you're planning anything incremental at least right now. But what could trigger some further fine-tuning and if so what are some of those potential actions would be?

Eric Thomas Steigerwalt -- President, Chief Executive Officer and Director

Well I love your fine-tuning. That's a good phrase Humphrey. Because that's what it is it's fine-tuning. Just watching as we see liability changes, watching the markets every day, but again I would consider it more fine-tuning. And when you do that you get secondary order affects like you might change duration a little bit to the positive, right? A little longer duration. So I don't see anything right now that would have us do anything but I do like your phrase fine-tuning because that's how we think about it.

Humphrey Lee -- Dowling & Partners Securities -- Analyst

I'm glide you liked that. So I'm shifting gear. For one-off I know the segment is going to be volatile quarter-over-quarter -- at any given quarters. But I still think you've said to that kind of $15 million based on expectations for a number of quarters now. It was the third quarter we were just coming up. Could that be any kind of potential area of concern as you're kind of looking through the -- your book?

Eric Thomas Steigerwalt -- President, Chief Executive Officer and Director

Okay. Well, and just to reiterate or to underscore that range if you will is X notable items. I think -- look it is nothing materially different. I think we'll have an opportunity with our Investor Outlook Call later in the year perhaps to revisit the run rates. This is -- it's a small amount. I think we talk about it currently in the $10 million to $15 million range. And it doesn't take a lot to move that number very much. But broadly speaking, I think the run rates are largely intact and we'll revisit them at the end of the year and let you know if they need to be treated.

Humphrey Lee -- Dowling & Partners Securities -- Analyst

Thank you.

Operator

Thank you. And our next question will come from the line of Joshua Shanker with Deutsche Bank. Your line is now open.

Joshua Shanker -- Deutsche Bank -- Analyst

Yeah. Thank you for taking my question. We have a lot of good information even some more data on sensitivities. And we're always getting more, but the one area that we don't have great detail on is volatility. The VIX yesterday went up to 25 from 15 at the beginning of the quarter. Can you update us a little bit on how should we think about equity markets of all? And also you never really talk about that what are the sensitivities to earnings and capital from interest rates falls?

Conor Ernan Murphy -- Executive Vice President, Chief Operating Officer and Interim Chief Financial Officer

Hey, it's Connor. Okay. So look it's hard. I -- the VIX is probably not the best determinator, if you will for the vol calculation for us. I -- yeah, it's meaningful and higher volatility is generally a positive for us. I will say in Q2, specifically vol was really not a factor it was a very benign second quarter but --

Joshua Shanker -- Deutsche Bank -- Analyst

No, I'm asking about third quarter of course.

Conor Ernan Murphy -- Executive Vice President, Chief Operating Officer and Interim Chief Financial Officer

Yeah. Look there's going to be a lot of -- we have a long way to go in the third quarter. So I'm going to stay away from any predictions on where that may collide other than what I said previously that, in terms of interest rates we would be broadly speaking where we finished the second quarter currently.

Eric Thomas Steigerwalt -- President, Chief Executive Officer and Director

But Joshua, it's Eric. It could help. I mean, you obviously know that. But yeah, I mean from the point of view of early August it's pointless to speculate where it'll be at the end of the quarter.

Joshua Shanker -- Deutsche Bank -- Analyst

I read it this morning, I'm actually not looking for speculating, but I'm looking for is there a rule of thumb that we can sort of think about this or are you going to point to help us to frame it?

Eric Thomas Steigerwalt -- President, Chief Executive Officer and Director

Not really. I mean, you know higher is good that you definitely know. And I'm not trying to be a smart guy here. But these calculations are pretty complicated. The overall hedging strategy isn't really that complicated, but the calculations are so. So it's not perfectly linear. So I don't want to give out some rule of thumb here. Higher is better and you all know that. So I'll leave it at that.

Joshua Shanker -- Deutsche Bank -- Analyst

And interest rate fall is there a big impact? How should we think about that?

Eric Thomas Steigerwalt -- President, Chief Executive Officer and Director

Less than equity. Interest rate vol would be -- would have an effect less than equities.

Joshua Shanker -- Deutsche Bank -- Analyst

Is a positive -- is this higher vol positive or negative in interest rate for the calculations?

Eric Thomas Steigerwalt -- President, Chief Executive Officer and Director

Similar.

Joshua Shanker -- Deutsche Bank -- Analyst

Similar, higher vol better, OK.

Eric Thomas Steigerwalt -- President, Chief Executive Officer and Director

You're getting there. Anything else, Joshua?

Operator

Ladies and gentlemen, I would now turn the call back over to Mr. Steigerwalt for closing remarks.

Eric Thomas Steigerwalt -- President, Chief Executive Officer and Director

Thanks. While everybody is still on here, I just thought maybe I'd spend two minutes here on just to wrap-up on where we're on our sort of second anniversary. Look, we all know low interest rates pose a challenge to the industry and we have talked about that a lot today. Over the last two years, we've prudently managed our capital and we'll continue to do so in the future. And we believe our balance sheet is well protected for a low rate environment as we've discussed on a large part of this call.

We began returning capital to shareholders almost two years ahead of our plan and have continued repurchasing stock even as interest rates have declined. Also, we're maintaining our capital return target of $1.5 billion by year-end 2021, because at this time as we've discussed again on this call, we're not assuming rates will stay at the current level for an extended period although they could and then we'll have a different conversation.

We do have other levers that we could and can pull to offset some of the low pressure from interest rates. And obviously we would also have to talk about where equity markets are as well.

Let me just say a few more things. Look, I couldn't be more pleased with our annuity sales. They continue to be robust. A couple of you asked Myles some questions today. And I think you can sense that he still feels very good about our prospects going forward here.

In addition, let's remember that our Shield product has a meaningful risk offset to our enforce block of variable annuities. So, it was designed that way years ago and it is working as advertised. We're also reestablishing our presence in the life insurance space. So, I'm really excited about the momentum going into the third quarter here.

We made good progress exiting the TSAs, and I'll tell you we feel really good about our expense reduction plans. I do want to say this, my guess is that our one-time establishment costs will be a little higher. So, we'll get into that probably in the third quarter, certainly on an investor call. Maybe that's one spot, it's probably going to take a little longer and cost a little more. And I think it'll be important for you all to know that.

With respect to the investment portfolio, we're now fully transitioned to our multi-manager strategy, and the cost savings that are associated with that. We've also repositioned approximately $8 billion of treasuries into a diversified mix of high-quality spread assets.

So, I feel good about that John's looking at me right now. We've almost fully transitioned to the multi-manager strategy. We've talked about the hedging program a lot today. I hope all of you are starting to get the feeling that this strategy is working and that we are managing it well through various economic cycles.

And finally, I'll just say we remain committed to executing on our strategies. So, we laid out a strategy, and we have -- I don't know, 8-ish targets out there. And it's our goal to hit as many of those as we possibly can, no matter what the economic conditions, but we'll always be transparent with respect to what the economic conditions ramifications are on that strategy.

So, thank you all for paying attention over the last two years, and thanks for being on board today.

Operator

[Operator Closing Remarks]

Duration: 62 minutes

Call participants:

David Rosenbaum -- Head of Investor Relations

Eric Thomas Steigerwalt -- President, Chief Executive Officer and Director

Conor Ernan Murphy -- Executive Vice President, Chief Operating Officer and Interim Chief Financial Officer

Myles J. Lambert -- Executive Vice President and Chief Distribution and Marketing Officer

Edward Spehar -- Incoming Chief Financial Officer

John Rosenthal -- Chief Investment Officer

Elyse Greenspan -- Wells Fargo Securities -- Analyst

Andrew Kligerman -- Credit Suisse -- Analyst

Tom Gallagher -- Evercore ISI -- Analyst

Erik Bass -- Autonomous Research -- Analyst

John Nadel -- UBS -- Analyst

Jimmy Bhullar -- JP Morgan -- Analyst

Ryan Krueger -- KBW -- Analyst

Suneet Kamath -- Citi -- Analyst

John Barnidge -- Sandler O'Neill -- Analyst

Alex Scott -- Goldman Sachs -- Analyst

Humphrey Lee -- Dowling & Partners Securities -- Analyst

Joshua Shanker -- Deutsche Bank -- Analyst

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