Brighthouse Financial, Inc. — Form 10-Q Summary
Reporting period: Quarter ended September 30, 2017; year-to-date comparisons are for the nine months ended September 30. Amounts are in U.S. dollars. Brighthouse completed its separation from MetLife on August 4, 2017, so 2017 results combine pre-separation and post-separation reporting, while 2016 periods are combined historical results and may not represent standalone performance.
Business context and financial results
Brighthouse sells individual annuities and life insurance in the United States. Its segments are Annuities, Life and Run-off, with remaining items reported in Corporate & Other.
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Total revenue | $1.972 billion | $1.766 billion | $4.962 billion | $3.571 billion |
| Net income (loss) | $(943) million | $(158) million | $(1.046) billion | $(1.174) billion |
| Income (loss) before tax | $(124) million | $(252) million | $(393) million | $(1.928) billion |
| Operating earnings (loss), after tax | $(676) million | $329 million | $(72) million | $748 million |
| Operating earnings before tax | $504 million | $495 million | $1.322 billion | $1.024 billion |
| Basic earnings per share | $(7.87) | $(1.32) | $(8.73) | $(9.80) |
Operating earnings is a non-GAAP measure used by management and excludes, among other items, market-driven investment and derivative results, goodwill impairment and specified non-core or separation costs. It should not be treated as a substitute for GAAP net income.
Financial position, cash flow and liquidity
- Assets and equity: Total assets were $223.3 billion at September 30, versus $221.9 billion at December 31, 2016. Total equity was $13.8 billion, down from $14.9 billion.
- Investments: Total investments were $81.7 billion, including $63.6 billion of available-for-sale fixed maturity securities and $10.4 billion of mortgage loans. About 95.5% of fixed maturity securities were investment grade by the disclosed NAIC designations.
- Cash flow, nine months: Operating activities provided $2.030 billion; investing activities used $2.554 billion; financing activities used $3.006 billion. Cash and cash equivalents fell $3.530 billion to $1.698 billion.
- Debt: Long-term debt was $3.615 billion on the balance sheet, including $3.601 billion of listed debt and $14 million related to consolidated securitization entities. Brighthouse issued $3.0 billion of senior notes and borrowed $600 million under a term facility. The prior $2.797 billion collateral financing arrangement was repaid in April.
- Liquidity: Company-wide liquid assets were $36.8 billion and short-term liquidity was $1.6 billion at September 30. Parent-company and certain non-insurance subsidiaries held $776 million of liquid assets, including $646 million at the parent. These measures have different scopes and exclude pledged or committed assets as specified in the filing.
- Variable annuity capital support: Assets above CTE95 were $2.3 billion, within management’s stated target range of $2.0–$3.0 billion. A $10 billion third-party reinsurance financing facility had $8.1 billion of funding available and no drawdowns at September 30.
The filing does not provide a single consolidated operating margin. Its investment yield presentation shows net investment income yield of 4.32% for Q3 2017 versus 4.95% in Q3 2016, and 4.49% for the first nine months of 2017 versus 4.81% in 2016; this management presentation differs from GAAP net investment income.
Material changes versus the prior comparable periods
- Q3 revenue increased $206 million, primarily as net derivative losses narrowed to $164 million from $501 million. Despite lower pre-tax loss, net loss widened because income tax expense rose to $819 million from a $94 million benefit.
- Nine-month pre-tax loss improved by $1.535 billion, reflecting substantially less severe GMLB-related results and higher pre-tax operating earnings. Net loss improved only $128 million, as tax expense shifted to $653 million from a $754 million tax benefit.
- A non-cash tax charge of approximately $1.1 billion, related to a tax obligation triggered before separation and addressed under the tax separation arrangements, drove the unusual tax result. Management also recognized tax benefits and reserve adjustments; reported effective tax rates were not meaningful for comparison.
- Q3 after-tax operating results varied by segment: Annuities earned $355 million versus $247 million; Life earned $6 million versus $26 million; Run-off earned $83 million versus $26 million; Corporate & Other lost $1.120 billion versus income of $30 million, mainly reflecting the tax charge.
- For the first nine months, Annuities operating earnings were $809 million versus $860 million, Life $11 million versus $50 million, and Run-off $184 million versus a $189 million loss. Corporate & Other lost $1.076 billion versus income of $27 million.
- Sales declined over the nine-month period: annuity sales fell 14% and Life sales fell 74%. Management cited the MPCG distribution-channel sale, Fidelity’s suspension of sales, discontinuation of GMIB rider sales, and product mix changes. Index-linked annuity sales increased. Separate-account balances rose with equity markets despite continued negative net flows; general-account net flows were positive.
Outlook, management commentary and key risks
- Targets: Management’s base-case targets are to begin returning 50% to 70%-plus of operating earnings to shareholders at approximately 2020, achieve mid- to high-single-digit annual operating EPS growth, and maintain an average operating ROE of approximately 8% over time. The ROE target was revised from approximately 9%, reflecting a higher-than-expected equity base. These are targets, not guarantees.
- Dividends and leverage: Brighthouse did not expect to pay regular cash dividends in the near term. It targeted a debt-to-capital ratio of approximately 25% and said it may pursue additional debt financing or refinance term-loan borrowings.
- Actuarial estimates and unusual items: The 2017 assumption review changed policyholder behavior, economic assumptions and model alignment. Management reported a favorable $521 million pre-tax impact to net income from changing the embedded-derivative nonperformance-risk reference from MetLife’s to Brighthouse’s creditworthiness. It also reported a $62 million after-tax unfavorable total impact from the 2017 assumption review for the nine-month period, including a $214 million unfavorable GMLB effect and favorable impacts in other activities.
- Market and guarantee exposure: Variable annuity guarantees expose results and statutory capital to equity markets, interest rates, volatility, policyholder behavior and hedging effectiveness. Derivative and reinsurance counterparties may fail to perform. Sustained low returns or interest rates could increase guarantee costs and reserve needs.
- Liquidity and investment risks: Securities lending creates potential short-notice collateral-return needs; $1.5 billion of cash collateral was associated with open securities-lending arrangements at September 30. Investment values, credit losses, mortgage performance and market liquidity can affect earnings and liquidity.
- Separation, regulation and tax: Standalone operating costs, reliance on transitional MetLife services and investment management, distributor relationships, regulatory changes, pending tax reform and tax-related agreements with MetLife may affect costs, sales, capital and cash flows.
- Contingencies: The company reported an estimated $0–$10 million aggregate range of reasonably possible losses above accruals for matters where an estimate could be made; other litigation exposures could not be estimated. Management noted that adverse outcomes could affect particular periods. A settlement in principle was reached with 97 plaintiffs in the Diversified Lending Group litigation, while related appeals remained pending.
Most important facts for investors to verify
- Reconcile the $1.1 billion non-cash tax charge, related tax benefits, and MetLife’s responsibilities under the separation and tax agreements; assess any remaining exposure.
- Review the assumptions and sensitivities behind variable annuity guarantee liabilities, hedging results, the $2.3 billion CTE95 excess-asset figure, and the stated $2.0–$3.0 billion target.
- Confirm parent-level liquidity, debt-service capacity, covenant headroom, subsidiary dividend constraints, and the availability and terms of the $8.1 billion unused reinsurance financing capacity.
- Assess whether falling annuity and Life sales, distributor changes and standalone transition costs affect future fee income, investment spread and expenses.
- Track litigation developments, collateral and securities-lending cash requirements, and changes to tax, ERISA and insurance-capital regulation.