Brighthouse Financial, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019. Brighthouse provides U.S. annuity and life insurance products through Annuities, Life and Run-off segments, plus Corporate & Other. Unless stated otherwise, amounts are in millions of dollars.
Financial performance and position
- GAAP results: Total revenue was $691, down from $1,815 in Q1 2018. The company reported a $737 net loss attributable to common shareholders, or $6.31 per diluted share, compared with a $67 loss, or $0.56 per share. The much larger loss primarily reflected $1,303 of net derivative losses, principally associated with higher equity markets.
- Adjusted earnings: The company’s non-GAAP measure was $232, down from $283. Annuities contributed $295 (up from $226); Life contributed $25 (down from $66); Run-off recorded a $36 loss (versus $50 of earnings); Corporate & Other recorded a $52 loss (versus $59).
- Key operating components: Net investment income was $811 versus $817. Fee income was $901 versus $1,036, and net investment spread was $335 versus $344. Policyholder benefits and claims increased to $772 from $738. DAC and VOBA amortization fell to $22 from $305; management attributed lower adjusted-earnings amortization partly to positive equity-market performance.
- Cash flow: Operating activities provided $376, compared with $291. Investing activities used $1,272 and financing activities provided $615; cash and cash equivalents declined $281 to $3,864 during the quarter. The investing outflow principally reflects investment activity and is not, by itself, a measure of operating profitability.
- Balance sheet and liquidity: At March 31, total assets were $216.4 billion, total liabilities $201.4 billion and total equity $15.1 billion. Cash and cash equivalents were $3.9 billion; company-defined short-term liquidity was $3.2 billion and liquid assets were $39.3 billion, excluding pledged or otherwise committed assets. Policyholder account balances were $41.2 billion and future policy benefits $37.2 billion.
- Debt and capital: Long-term debt was $4.4 billion, up from $4.0 billion at year-end 2018. The company borrowed $1.0 billion under a new five-year term loan and repaid $600 million of its former term loan. It issued $412 million net proceeds of 6.600% Series A preferred stock and repurchased $52 million of common shares.
- Investment portfolio: Total investments were $86.2 billion, including $64.8 billion of available-for-sale fixed maturity securities. The portfolio was 95.4% investment grade by fair value. Net unrealized investment gains in AOCI rose to $1.72 billion from $763 million at year-end, primarily reflecting lower longer-term interest rates and narrower credit spreads. Adjusted investment yield was 4.10%, down from 4.50%.
Material changes versus Q1 2018
- The GAAP loss attributable to common shareholders widened by $670 million, net of tax. The principal driver was the change in GMLB rider results: a $1.33 billion pretax loss in Q1 2019 versus $6 million of pretax gains in Q1 2018. Management cited higher equity-market performance, which adversely affected equity-derivative hedges and Shield Annuities embedded derivatives.
- Adjusted earnings decreased $51 million. Lower fee income and net investment spread and weaker results in Life and Run-off were partly offset by stronger Annuities earnings and lower DAC/VOBA amortization.
- Annuity sales increased 36%, driven by Shield Annuities, fixed indexed annuities and fixed annuities. Variable-annuity separate-account balances rose during the quarter, mainly from positive market performance, despite negative net flows.
- Comprehensive income was $219 million versus a $925 million comprehensive loss in Q1 2018, reflecting substantial improvement in other comprehensive income.
Outlook, commentary and risks
- The filing provides no specific numerical earnings or revenue guidance. Management said it believed liquidity was sufficient for business requirements under current conditions and certain stress scenarios, and reported assets in excess of its CTE98 variable-annuity capital target at March 31.
- The company targets a debt-to-capital ratio of approximately 25%. It said it did not currently anticipate common-stock dividends. On May 3, 2019, it authorized an additional $400 million common-stock repurchase program; no purchases under that authorization had been made as of May 7.
- Market and insurance risks include equity and interest-rate movements, credit spreads, policyholder behavior and mortality, derivative and counterparty exposures, liquidity demands, reinsurance performance, regulation and the effectiveness of variable-annuity hedging. The filing notes that non-hedge-accounting treatment can create earnings volatility when derivatives and the economically hedged items are recognized differently.
- Management described the mortgage portfolio as high quality, with over 99% of mortgage loans classified as performing. Securities-lending activity creates potential short-notice collateral-return needs; the company said its broader general-account liquidity was available to help meet such demands.
- Litigation and regulatory matters remain ongoing. For matters where a reasonably possible loss could be estimated, aggregate losses in excess of accruals were estimated at $0–$10 million; losses for other matters could not be estimated. Management said adverse outcomes could affect particular reporting periods, though it did not believe pending matters were likely to materially affect financial position based on information then available.
- Subsequent events include a May 7 replacement of the $2.0 billion revolving facility with a $1.0 billion five-year facility and the additional repurchase authorization. The company also began transitioning investment management to a multi-manager platform and brought derivatives trading in-house.
Key facts for investors to verify
- How equity-market, interest-rate and volatility movements affect GMLB liabilities, hedges and reported GAAP earnings; assess adjusted earnings separately from GAAP results.
- Whether annuity sales growth, separate-account balances and fee income persist, particularly given negative variable-annuity net flows and lower Q1 fee income.
- The sustainability of investment income and spread, including alternative-investment results, portfolio repositioning and credit quality.
- Available liquidity after collateral demands and pledged assets, and the effect of debt, preferred dividends and share repurchases on capital and leverage.
- Developments in litigation, regulatory inquiries, reinsurance recoveries and the company’s transition to new investment-management arrangements.