Brighthouse Financial, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; balance-sheet comparisons are with December 31, 2017. Brighthouse provides individual annuities and life insurance through Annuities, Life and Run-off segments, plus Corporate & Other. The company was separated from MetLife in August 2017; the 2017 comparative operating period is presented on a combined basis and may not represent results as a standalone company.
Financial results and position
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Total revenue | $1.815 billion | $965 million |
| Net loss available to common shareholders | $67 million; $(0.56) per share | $349 million; $(2.91) per share |
| Adjusted earnings (non-GAAP) | $283 million | $280 million |
| Operating cash flow | $291 million | $360 million |
| Net cash change | Increase of $31 million | Increase of $584 million |
- Revenue and reported loss were heavily affected by derivative fair-value changes. Net derivative losses were $334 million versus $965 million a year earlier; the company attributed the current-period loss principally to lower interest rates affecting freestanding interest-rate derivatives.
- Adjusted earnings were nearly unchanged. Higher fee income and lower taxes were offset by higher expenses, lower net investment income and greater DAC/VOBA amortization. Adjusted net investment income yield was 4.50%, down from 4.74%.
- Q1 adjusted earnings by segment: Annuities $226 million (prior year $228 million); Life $66 million (prior-year loss $7 million); Run-off $50 million (prior year $49 million); Corporate & Other loss $59 million (prior-year income $10 million).
- Total assets were $219.0 billion, down from $224.2 billion; total liabilities were $205.3 billion, down from $209.6 billion. Stockholders’ equity was $13.6 billion, down from $14.5 billion, primarily reflecting a $875 million decrease in accumulated other comprehensive income.
- Cash and cash equivalents were $1.888 billion. Long-term debt was approximately $3.6 billion, including $600 million under a term loan due 2019; no Revolving Credit Facility borrowings were outstanding. The filing reports $2.0 billion of unused commitments under the credit facilities.
- Consolidated liquid assets were $35.8 billion and short-term liquidity $1.4 billion. These are management-defined liquidity measures, not equivalent to unrestricted parent-company cash.
Changes, outlook and notable items
- The company changed its segment capital-allocation methodology in Q1 (“Portfolio Realignment”). It did not change consolidated net income or adjusted earnings, but affected segment results and assets; management estimated the change increased Q1 Life pre-tax adjusted earnings by $30–$35 million, largely offset in Run-off. Prior-period segment results were not recast, limiting comparability.
- Management cited Shield Annuity sales growth of 59% year over year. Variable-annuity separate-account balances declined to $106.1 billion from $109.9 billion at year-end, reflecting negative net flows and weak equity-market performance.
- Management targets a parent debt-to-capital ratio of approximately 25% and $2–$3 billion of assets above CTE95 to support variable-annuity contracts in normal markets; assets above CTE95 were $2.7 billion at quarter-end. It does not anticipate regular common dividends in the near term. No specific earnings guidance was provided.
- In April 2018, a subsidiary entered into a committed repurchase facility of up to $2.0 billion, with a three-year term beginning July 31, 2018.
- Risks include market and interest-rate volatility, variable-annuity guarantees and hedging effectiveness, policyholder withdrawals, credit and liquidity exposures, regulatory changes, and reliance on MetLife and other third-party service providers. The DOL Fiduciary Rule faced material legal uncertainty following a March 2018 appellate decision; proposed SEC conduct rules were also under review.
- Litigation estimates: reasonably possible losses in excess of accrued amounts were estimated at $0–$10 million for matters that could be estimated; other matters could not be reliably quantified. Management said outcomes were not likely to materially affect financial position based on information then available, but adverse outcomes could affect particular periods.
- Gross unrealized losses on fixed-maturity securities rose by $481 million during the quarter, primarily due to higher longer-term interest rates. Management concluded the securities were not other-than-temporarily impaired at March 31.
Important facts for investors to verify
- How interest-rate and equity-market movements, and the company’s hedging program, affect reported earnings, statutory capital and variable-annuity guarantee exposure.
- Whether adjusted earnings trends persist, including the effects of higher expenses, net investment spread, portfolio allocation changes and lower separate-account balances.
- Insurance-subsidiary statutory capital and dividend capacity: the filing says capital exceeded regulatory RBC levels at the most recent annual statutory reporting date; permitted dividends are subject to regulatory limits.
- Liquidity access and potential collateral demands, including securities-lending obligations, derivative collateral and the new repurchase facility’s terms and actual use.
- Developments in legal and regulatory matters, MetLife service transitions and administration of legacy policies, deferred-tax realizability, and MetLife’s announced intention to divest its remaining 19.2% ownership interest during 2018.