Brighthouse Financial, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2017; filed August 15, 2017. The unaudited statements are combined results of the business while it was part of MetLife, not a full representation of standalone results. The separation was completed August 4, 2017.
Business context
Brighthouse provides individual life insurance and annuity products in the United States. It reports Annuities, Life and Run-off segments, plus Corporate & Other. Management uses operating earnings, a non-GAAP measure, alongside GAAP net income to assess core performance.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Total revenue | $2.025bn | $(584)m | $2.990bn | $1.805bn |
| Net income (loss) | $246m | $(1.423)bn | $(103)m | $(1.016)bn |
| Operating earnings, after tax (non-GAAP) | $324m | $79m | $604m | $419m |
| Operating cash flow | Not stated separately | Not stated separately | $1.325bn | $2.134bn |
Six-month total expenses were $3.259bn, compared with $3.481bn. Net derivative losses were $78m in Q2 and $1.043bn for the half-year, versus losses of $2.973bn and $2.680bn in the respective 2016 periods. These mark-to-market items materially affected GAAP results; operating earnings excludes many market-driven items and is not a substitute for GAAP income.
Operating earnings for the first half increased despite lower fee income and net investment spread, reflecting prior-year charges related to the 2016 actuarial assumption review and ULSG model change. Excluding the favorable comparison to the prior-year actuarial review charge, management reported operating earnings increased $45m year over year for the half.
Balance sheet, cash flow and capital
- At June 30, total assets were $224.328bn, up from $221.930bn at December 31, 2016. Total liabilities were $207.863bn; shareholder’s net investment and noncontrolling interests were $16.465bn.
- Investments totaled $81.809bn, including $63.507bn of fixed-maturity securities. Separate-account assets and matching liabilities were each $115.566bn.
- Cash and cash equivalents were $4.443bn, down from $5.228bn at year-end. Investing activities used $2.361bn and financing activities provided $251m during the first half.
- Long-term debt was approximately $3.0bn at June 30, after issuance of $3.0bn of senior notes in June. The $2.797bn collateral financing arrangement was repaid; MetLife also forgave $750m of affiliated surplus notes.
- Following quarter-end separation transactions, the company reported pro forma cash of $3.245bn and long-term debt of $3.616bn, including $600m drawn under a new term loan. Brighthouse paid MetLife a $1.8bn cash distribution.
- Management stated it expected a debt-to-capital ratio of approximately 25%, initial funding of $2bn–$3bn of assets in excess of CTE95 for variable-annuity support, and a combined action-level RBC ratio of approximately 650%. These are stated expectations, not reported actual outcomes. It did not anticipate regular cash dividends in the near term.
Material changes and management commentary
- GAAP results improved sharply against 2016, when the actuarial assumption review generated a significant charge. Management attributed the comparison primarily to that prior-period charge and more favorable current-period guarantee liability movements; current-period hedging results partly offset those gains.
- Annuities operating earnings declined to $454m for the half from $613m. Annuity sales fell 23%, with management citing the sale of the retail advisor force, Fidelity’s suspension of sales and discontinuation of variable-annuity GMIB rider sales. Life sales fell 59%, reflecting the advisor-force sale and discontinuation of certain products.
- Investment spread faced pressure from lower reinvestment yields, terminated interest-rate swaps and a smaller securities-lending program. Favorable equity markets increased average separate-account balances, but net flows remained negative; general-account net flows were positive.
- ULSG liabilities continued to rise following the 2016 model change. Management expected related increases of approximately $40m–$45m each quarter, gradually declining over time.
- The separation ended MetLife’s net-worth maintenance and liquidity support agreement. Brighthouse also assumed standalone public-company costs and remains dependent on insurance-subsidiary distributions, which are subject to regulatory restrictions.
Risks, contingencies and unusual items
- Key exposures include variable-annuity guarantees, equity and interest-rate movements, policyholder behavior assumptions, derivative hedging effectiveness and counterparty risk. The company notes that guarantee valuations rely partly on unobservable assumptions and can fluctuate materially.
- About 95.4% of fixed-maturity securities were investment grade at June 30. Management reported no other-than-temporary impairment conclusion for securities in unrealized-loss positions, but said future impairment depends on issuer performance, markets and intent or ability to hold securities.
- Cash collateral in securities lending totaled $6.75bn; $2.188bn was in open arrangements and could require prompt repayment if securities are returned. The filing warns that liquidity stress could require asset sales, although the open-loan collateral consisted of U.S. government and agency securities.
- Reasonably possible litigation losses in excess of accrued amounts were estimated at $0–$10m for matters where a range could be estimated; other matters could not be estimated. A California case involving NELICO had a judgment of approximately $2.7m and a separate attorneys’ fee award of approximately $6.5m, both under appeal.
- The filing describes uncertainty around the Department of Labor fiduciary rule and potential effects on distributor compliance, costs and annuity sales. It also identifies separation-related leverage, ratings, access to capital, reinsurance availability, regulation and tax matters as risks.
- Subsequent to quarter-end, the company completed its separation, with MetLife distributing 80.8% of Brighthouse shares and retaining 19.2%. The filing also describes a tax receivable arrangement and a $553m payable to MetLife related to a deferred tax asset.
Most important facts for investors to verify
- Standalone capital adequacy and statutory RBC after the separation, including whether the stated 650% target and CTE95 asset funding were achieved.
- Actual post-separation debt, cash, liquidity and debt-to-capital ratio, and the terms and covenant headroom of the revolving and term loan facilities.
- Underlying operating earnings trends after separating prior-year actuarial/model charges, recapture effects, and volatile derivative and guarantee marks.
- Variable-annuity guarantee exposure, hedging effectiveness, policyholder behavior assumptions and sensitivity to equity and interest-rate shocks.
- Sales, persistency and distribution trends following the advisor-force sale, product discontinuations and changes in MetLife support and services.
- Resolution and financial impact of litigation, tax-sharing obligations, reinsurance financing and regulatory developments.