Thank you, Eric, and good morning everyone. I'm very excited to be on my first earnings call as CFO. I believe in our strategy and most importantly, the team executing that strategy. I'm pleased by our solid business results, robust capital position and the talented and engaged employees at Brighthouse Financial.
Since the separation, the financial management strategy has been to protect the statutory balance sheet and deliver distributable earnings over time. A focus on distributable earnings means a focus on cash.
Over the past three decades, I have maintained that the surest way to create value in the life insurance industry is to manage for cash.
So I'm thrilled, this is a key element of the Brighthouse strategy. Overall, I look forward to working with the entire Brighthouse team to generate long-term value for our shareholders, our distribution partners, and the clients they serve.
Now, turning to our results. Last night we reported third quarter adjusted earnings, excluding the impact from notable items of $260 million, which compares with adjusted earnings on the same basis of $296 million in the second quarter of 2019 and $314 million in the third quarter of 2018.
Sequentially, results were impacted by less favorable market performance and lower net investment income along with a modest increase in corporate expenses. There were three notable items in the quarter, which on a net basis lowered adjusted earnings by $429 million.
The notable items on an after-tax basis were establishment costs of $10 million in Corporate & Other, a $23 million benefit in Corporate & Other from a revaluation of tax items related to the separation from MetLife, and a $442 million charge from the annual actuarial review, primarily in the Run-off segment.
As part of the annual actuarial review, we examine assumptions in three categories. Capital markets, business model, and policyholder behavior. The charge associated with this year's annual review is driven by a change in our capital market assumptions.
Specifically, a reduction in the assumed GAAP long-term mean reversion rate for the 10-year treasury from 4.25% to 3.75%.
We continue to assume that mean reversion occurs over the next 10 years. The negative impact from the lower assumed interest rate was primarily driven by our Run-off block of universal life with secondary guarantees. There was a modest impact on our annuity segment from the change in the mean reversion rate.
Most of our GAAP VA guarantee reserves are currently accounted for as insurance reserves and are therefore relatively insensitive to interest rates. VA guarantees accounted for as embedded derivatives are sensitive to current market rates, not the mean reversion rate. It is also worth noting that the change in the mean reversion rate had no impact on our statutory results.
Turning to adjusted earnings less notable items, I would like to discuss the underlying themes impacting results.
Let's begin with market performance. Equity market performance was mixed in the quarter. The S&P 500 total return was 1.7% and the Nasdaq total return was 1.3%.
While the Russell and MSCI EAFE indices had negative returns. Bond returns were positive given the decline in rates. All in, these factors drove separate account returns of positive 0.8% in the quarter, less than 1 percentage point below our base case assumption and approximately 3 percentage points below the second quarter of 2019.
As a result of less favorable market performance, DAC amortization and reserves increased sequentially for a combined unfavorable impact to adjusted earnings of $25 million or $0.22 per share.
Next, net investment income decreased sequentially by approximately $11 million after tax. The decrease was driven primarily by lower alternative investment returns.
In addition, prepayment income returned to more normal levels in the third quarter, which also contributed to the sequential decline in net investment income.
Asset growth was a partial offset, primarily driven by our continued strong sales momentum.
Moving to corporate expenses. In the third quarter, corporate expenses were $248 million, up approximately $6 million from the second quarter and consistent with our expectations.
As Eric mentioned, we still anticipate 2019 corporate expenses to be in line with the 2018 level, as we continue to transition to the Brighthouse operating platform.
Now, I'd like to make a few comments on segment earnings. Starting with annuities, adjusted earnings excluding notable items were $233 million in the quarter.
As I mentioned, market impacts and net investment income were lower sequentially, which had an unfavorable impact on earnings.
Additionally, taxes were higher relative to the second quarter. Adjusted earnings excluding notable items in the life segment were $54 million in the quarter. Sequentially, results were impacted by higher expenses, partially offset by lower life insurance claims.
The Run-off segment reported adjusted earnings excluding notable items of $5 million in the quarter. The sequential decrease was driven by lower net investment income and higher reserves, partially offset by lower taxes. Corporate & Other had an adjusted loss excluding notable items of $32 million. Sequentially, results were driven by lower taxes, partially offset by higher expenses.
To wrap up, I would like to provide an update on our capital position as of September 30.
Our hedging program continues to perform well and in line with our expectations.
Assets above CTE98 were approximately $1.5 billion at September 30, in line with the second quarter. Normalized statutory earnings were approximately $600 million in the third quarter, primarily driven by gains from our VA hedging program.
Year-to-date normalized statutory earnings were more than $1.2 billion. Statutory combined total adjusted capital was approximately $8.4 billion, up $1.5 billion sequentially. The result this quarter is representative of the total adjusted capital, we would anticipate post VA reform, which we still plan to adopt at year-end 2019.
Going forward, we expect changes in reserves will better align with our hedge target.
Finally, our average financial leverage ratio was approximately 23% and our holding company liquid assets were approximately $800 million at the end of the third quarter or roughly four times our holding company cash target. The sequential decline in holding company liquid assets was primarily driven by share buybacks.
It is worth highlighting that we have more than $200 million of annual inflows to the holding company before consideration of any dividends from our operating subsidiaries.
These inflows cover most of the roughly $240 million of annual debt service and all other holding company outflows. I would also like to note that we plan to take dividends from Brighthouse Life Insurance Company or BLIC starting in 2020. Overall, I am pleased with the results this quarter. We maintained our strong VA capital position, and we continue to prudently manage our statutory balance sheet. Adjusted earnings less notable items were solid and as Eric said, we still anticipate low double-digit growth in adjusted earnings per share less notable items in 2019 versus 2018.
With that, we'd like to turn the call over to the operator for your questions.