Brighthouse Financial, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023. Brighthouse is a U.S. annuity and life insurer, reporting Annuities, Life and Run-off segments, plus Corporate & Other. Amounts are in U.S. dollars; financial statement amounts are in millions unless noted.
Financial performance and position
| Metric | Q1 2023 | Q1 2022 / comparison |
|---|---|---|
| Total revenue | $1,284 | $2,013 |
| Net income (loss) available to common shareholders | $(525) | $1,558 |
| Adjusted earnings (non-GAAP) | $195 | $380 |
| Operating cash flow | $(500) | $(199) |
| Net investment income | $1,059 | $1,151 |
| Adjusted net investment income yield | 3.81% | 4.36% |
The GAAP loss reflected $575 million of net derivative losses, $194 million of unfavorable changes in market risk benefits (MRBs), and $96 million of net investment losses. Management said variable-annuity guarantee and Shield annuity valuation effects were the main unfavorable market-related items; these were partly offset by favorable results on interest-rate derivatives used for the ULSG business. Q1 2022 results included a $1.579 billion benefit from MRB changes, making the year-over-year GAAP comparison especially volatile.
Adjusted earnings fell $185 million. Lower investment spread—reflecting weaker limited-partnership returns and higher interest credited—along with lower fee income drove much of the decline. Higher fixed-income yields on reinvested assets and lower expenses provided offsets. By segment, adjusted earnings were $314 million for Annuities, $1 million for Life, $(106) million for Run-off and $(14) million for Corporate & Other.
At March 31, 2023, total assets were $230.0 billion and total liabilities were $224.2 billion; total equity was $5.8 billion, including $5.754 billion attributable to BHF stockholders. Cash and cash equivalents were $3.685 billion. Long-term debt was $3.157 billion, compared with $3.156 billion at year-end 2022. The filing reports $3.5 billion of short-term liquidity and $43.7 billion of liquid assets, excluding pledged or otherwise committed assets. These are management-defined liquidity measures, not balance-sheet cash.
Investments totaled $111.3 billion, including $77.7 billion of available-for-sale fixed-maturity securities and $22.8 billion of mortgage loans, net of allowance. Fixed maturities had $7.0 billion of gross unrealized losses at quarter-end; the filing attributes most unrealized losses to interest rates and non-issuer-specific spreads and says it did not intend, and was not likely to be required, to sell those securities before recovery. AOCI was $(5.288) billion, improving from $(6.106) billion at December 31, 2022.
Material changes and capital
- Compared with Q1 2022, GAAP common-shareholder earnings swung from $1.558 billion of income to a $525 million loss, while adjusted earnings declined from $380 million to $195 million.
- Net investment income decreased by $92 million; the adjusted investment yield declined 55 basis points. Management cited lower limited-partnership returns, partly offset by higher yields on fixed-income reinvestments and short-term investments.
- Policyholder account balances rose to $76.1 billion from $73.5 billion at year-end 2022. Funding agreements issued for spread-lending programs had $10.608 billion aggregate principal outstanding, up from $10.147 billion.
- The company repurchased 1.20 million shares for $62 million in Q1; $231 million remained authorized at March 31. It reported another $24 million of repurchases through May 5. Preferred dividends were $26 million. Management said it had no current plan to pay common dividends.
- Management’s stated target for combined risk-based capital is 400%–450% in normal market conditions. The filing does not provide a current combined RBC ratio.
Outlook, risks and contingencies
The filing provides no specific earnings or revenue guidance. Management said it believes liquidity is sufficient for business requirements under current conditions and certain stress scenarios, while emphasizing that actual results depend on capital markets, the economy and policyholder behavior. It continues to monitor inflation, interest rates, financial-market liquidity, commercial real estate, geopolitical events and the Russia-Ukraine conflict.
- Results and capital are sensitive to equity markets, interest rates, credit spreads, inflation, derivative valuations and policyholder behavior. Management estimated that a 100-basis-point increase in interest rates would reduce the fair value of the modeled net exposures by $5.410 billion; a 10% increase in equity prices would produce $105 million sensitivity. These are model estimates, not forecasts.
- Variable-annuity guarantees and Shield annuity embedded derivatives are measured at fair value and can create substantial earnings volatility. The effectiveness of hedges may vary, and market movements may not affect liabilities and hedges symmetrically.
- Commercial real estate is a monitored exposure: commercial mortgage loans totaled $13.5 billion, including $3.36 billion secured by office properties. Management said it did not then expect its general-account investments in the identified sectors to have a material adverse effect.
- Mortgage-loan allowance for credit losses increased to $136 million from $119 million at year-end; more than 99% of mortgage loans were classified as performing. Fixed-maturity credit-loss allowance was $5 million.
- For litigation matters where loss was reasonably possible and estimable, the aggregate range was up to approximately $10 million. For certain other loss contingencies, primarily reinsurance-related, reasonably possible losses in excess of accruals ranged from zero to approximately $125 million. Some matters could not be reasonably estimated.
- A March 2023 arbitration ruling concerning trusts securing a reinsured long-term-care block directed release of excess trust amounts; the company said it complied. The filing also describes ongoing cost-of-insurance class actions and sales-practices matters.
- The company adopted long-duration contract accounting (LDTI), retrospectively applying certain changes to comparative periods. At transition on January 1, 2021, adoption reduced retained earnings by $5.4 billion and AOCI by $3.9 billion, affecting comparability of reported results.
Most important facts for investors to verify
- How much of quarterly earnings volatility reflects market-driven MRB, derivative and Shield valuations versus recurring adjusted earnings, and how effective the hedging program is across different market scenarios.
- The current statutory and combined RBC ratios, capital at insurance subsidiaries, and capacity to upstream dividends; the filing states a target range but not the current combined ratio.
- Whether the decline in adjusted earnings and investment yield persists, including the trajectory of limited-partnership returns, policyholder crediting costs and reinvestment yields.
- Exposure and credit performance in commercial real estate, particularly office mortgages, and any changes in delinquencies, collateral values or loss allowances.
- Liquidity under stress, including collateral calls, securities-lending cash returns, policyholder withdrawals and the availability and cost of funding agreements or other funding sources.
- Developments in litigation and reinsurance contingencies, including the estimated-loss ranges and the long-term-care trust/arbitration matter.