Brighthouse Financial, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; balance-sheet comparisons are with December 31, 2019. Brighthouse provides annuity and life insurance products, with Annuities, Life and Run-off segments, plus Corporate & Other.
Financial results and position
- Revenue: $8.985 billion, versus $691 million a year earlier. The increase was driven primarily by $6.902 billion of net derivative gains; revenue is therefore not a clear measure of underlying operating growth.
- Profit: Net income available to common shareholders was $4.950 billion, compared with a $737 million loss. Basic and diluted EPS were $47.26 and $47.11, respectively. Adjusted earnings, a non-GAAP measure, declined to $211 million from $232 million.
- Adjusted earnings drivers: Net investment spread increased to $441 million from $335 million; insurance-related activities worsened to a $494 million loss from a $273 million loss. Adjusted earnings by segment were Annuities $316 million, Life $11 million, Run-off a $70 million loss, and Corporate & Other a $46 million loss.
- Investment yield: Adjusted net investment income yield was 4.30%, versus 4.10%. GAAP net investment income was $916 million, up from $811 million.
- Cash flow: Operating activities provided $96 million, down from $376 million. Cash and cash equivalents increased to $8.930 billion from $2.877 billion; financing cash flows included a $6.597 billion increase in collateral-related payables. The cash increase should not be read as operating cash generation.
- Balance sheet and liquidity: Total assets were $223.953 billion and equity $20.439 billion. Short-term liquidity was $4.5 billion and liquid assets $44.9 billion, as defined by the company. Separate-account assets and liabilities were each $89.008 billion.
- Debt: Long-term debt was unchanged at $4.365 billion. The company reported compliance with its debt and facility covenants and targets a debt-to-capital ratio of approximately 25%.
- Capital: The company targets a combined risk-based capital ratio of 400%–450%. Its most recent reported statutory capital for each insurance subsidiary exceeded regulatory action levels; the filing does not provide a current-quarter combined RBC ratio.
Material changes versus the prior comparable period
- The swing to large GAAP profit from a loss principally reflected market-related derivative gains. GMLB rider results improved by $5.704 billion, from a $1.330 billion loss to a $4.374 billion gain; the company attributed this chiefly to favorable hedge marks amid lower equity markets and interest rates.
- Adjusted earnings fell $21 million. Higher insurance costs, including increased guaranteed minimum death benefit liabilities and weaker underwriting margins, offset improved investment spread and lower expenses.
- Variable annuity separate-account balances fell to $82.648 billion from $99.498 billion at the start of the quarter, reflecting negative net flows and adverse investment performance.
- Equity was up from $16.237 billion at year-end, while accumulated other comprehensive income declined to $2.647 billion from $3.240 billion. Common shares repurchased during the quarter totaled 5.674 million for $142 million.
Outlook, risks and unusual items
- COVID-19: Management said the pandemic had already negatively affected the company, including sales of certain products and investment valuations, but its duration and broader financial impact could not be estimated. Risks include credit losses, lower rates, reduced liquidity, changing claims and lapse behavior, operational and third-party disruptions, and potential effects on ratings, capitalization and liquidity.
- Ratings: Fitch revised the outlook for BHF and certain subsidiaries to negative from stable. The company warned further outlook changes or downgrades could adversely affect results, capital and liquidity.
- Capital actions: On May 11, 2020, after quarter-end, the company announced a temporary suspension of common-stock repurchases while evaluating pandemic impacts. It had $411 million remaining under the repurchase program at March 31.
- Liquidity measures: On April 2, 2020, an insurance subsidiary issued $1.0 billion of collateralized funding agreements, and on April 24 BHF received a $500 million distribution from BH Holdings. These occurred after quarter-end.
- Investment and market exposure: Fixed maturities were 96.1% investment grade at fair value. The portfolio included $2.5 billion of energy-sector fixed maturities, with $289 million of net unrealized losses. Sensitivity to a 100-basis-point rise in interest rates increased to $9.4 billion from $7.7 billion at year-end.
- Credit losses: The company adopted the expected-credit-loss standard on January 1, recording a $14 million after-tax reduction to retained earnings. At March 31, allowances included $10 million for fixed maturities and $69 million for mortgage loans.
- Legal matters and commitments: The estimated aggregate reasonably possible litigation losses above accruals were $0–$10 million; other matters could not be reasonably estimated. Unfunded investment and lending commitments were $1.7 billion, in addition to $325 million of mortgage-loan commitments.
- Guidance: The filing provides capital targets but no clear earnings or revenue forecast for 2020; management cautioned that prior targets could need revisiting as pandemic effects develop.
Important facts for investors to verify
- How much of reported GAAP earnings reflects derivative and embedded-guarantee valuation movements, and how those results reconcile to adjusted earnings.
- Whether the company’s $4.5 billion short-term liquidity and $44.9 billion liquid-asset measures remain available after collateral, securities-lending and other obligations.
- Subsequent-quarter effects of COVID-19 on investment credit quality, claims, sales, policyholder withdrawals and statutory capital.
- Current insurance-subsidiary RBC levels, rating outlooks, and the availability and cost of contingent funding.
- Developments in mortgage-loan deferrals, sector exposures and litigation, including matters for which losses cannot currently be estimated.