Brighthouse Financial, Inc. annual report, FY2020

Brighthouse Financial, Inc. — 2020 Form 10-K

Business context and period. This annual report covers the fiscal year ended December 31, 2020; it is not a standalone fourth-quarter report. Brighthouse is a U.S. life insurer focused on annuities and life insurance, with Annuities, Life and Run-off segments. Its in-force book comprised approximately 2.8 million policies and contracts. The company reported $247.9 billion in assets, $18.0 billion in stockholders’ equity and $163.1 billion in annuity AUM at year-end.

Financial results and key metrics

Metric	2020	2019
Total revenue	$8.503 billion	$6.554 billion
Net income (loss) available to common shareholders	$(1.105) billion	$(761) million
Adjusted earnings (non-GAAP)	$(278) million	$599 million
Cash from operating activities	$888 million	$1.828 billion
Long-term debt, year-end	$3.436 billion	$4.365 billion

• Revenue rose 30%, but the company recorded a larger GAAP net loss. Policyholder benefits and claims increased to $5.711 billion from $3.670 billion; total expenses increased to $9.922 billion from $7.606 billion.
• Adjusted earnings fell by $877 million. Insurance-related activities deteriorated, including higher Run-off costs, while fee income and net investment spread also declined. Lower expenses, including reduced MetLife transition-service costs, partially offset the decline.
• Segment adjusted earnings: Annuities $1.167 billion (up from $1.028 billion); Life $148 million (down from $231 million); Run-off loss $1.299 billion (versus $454 million); Corporate & Other loss $294 million (versus $206 million).
• Operating cash flow declined by about 51%. Year-end cash and cash equivalents were $4.108 billion, versus $2.877 billion. Management reported total short-term liquidity of $4.5 billion and liquid assets of $52.0 billion; parent-company short-term liquidity was $1.6 billion.
• Combined statutory total adjusted capital was $8.6 billion and the combined company-action-level RBC ratio was approximately 485% at year-end. Normalized statutory earnings were a loss of approximately $0.4 billion, versus earnings of $1.9 billion in 2019.
• Investment portfolio highlights: fixed maturity securities totaled $82.5 billion, with 95.8% investment grade; net unrealized investment gains in AOCI were $5.7 billion. Mortgage-loan allowance for credit losses rose to $94 million from $64 million.

Material changes and unusual items

• The 2020 annual actuarial review reduced the assumed long-term general-account earned rate from 3.75% to 3.00%. This increased ULSG liabilities by $1.2 billion; the total AAR reduced pre-tax income available to shareholders by $2.804 billion, including $1.431 billion attributable to GMLBs and $1.484 billion in Run-off.
• GMLB riders produced a $2.421 billion loss in 2020, compared with a $2.482 billion loss in 2019. Equity markets rose less during 2020 than in the prior year, contributing to unfavorable liability changes; lower interest rates benefited certain hedges and other items.
• Brighthouse issued $615 million of 5.625% senior notes due 2030 and repaid its $1.0 billion term loan. It also issued Series B and C preferred shares, raising $948 million net in 2020. Senior-note repurchases generated a $37 million premium and a $6 million write-off of issuance costs.
• Common-stock repurchases totaled $473 million in 2020. The company temporarily paused repurchases in May and resumed them in August. It authorized a further $200 million of repurchases in February 2021. Management said it had no current plan to pay common-stock dividends.
• COVID-19 prompted customer relief measures and a remote-work transition. Management said pandemic effects on claims, lapses, premiums and vendor services had not been material through year-end, but future effects remained uncertain. Pandemic-related loan modifications included $299 million of mortgage loans with borrowers receiving payment forbearance and not making payments at year-end.

Outlook, risks and contingencies

• No specific earnings or revenue guidance is provided in the filing. Management targets a combined RBC ratio of 400%–450% in normal market conditions and says it expects sufficient liquidity for business requirements under current conditions and certain stress scenarios.
• Key exposures include variable-annuity guarantees, ULSG liabilities, interest-rate and equity-market movements, actuarial assumptions and policyholder behavior. The company’s hedges may not fully offset guarantee costs, and GAAP earnings can be volatile even when hedging supports statutory capital objectives.
• A new long-duration insurance accounting standard is scheduled to take effect in 2023. Management could not estimate its full financial-statement impact; at then-current interest rates, it said the standard would ultimately materially reduce stockholders’ equity.
• Reinsurance is a significant counterparty risk. A $6.7 billion long-term-care block is reinsured through Genworth entities and supported by collateral and a Citigroup indemnity. In February 2021, Brighthouse received an arbitration demand from Genworth reinsurers seeking authorization to withdraw amounts from trust accounts.
• Other risks include rating changes, regulatory and distribution requirements, litigation, cybersecurity, and reliance on third-party service providers. A 2020 annuity-administration conversion caused customer and distributor delays and service interruptions that the company said were largely resolved.
• For litigation and other non-litigation contingencies, the filing estimates reasonably possible losses of up to approximately $10 million and $125 million, respectively, beyond accrued amounts, where estimable. Some matters could not be reasonably estimated.

Most important facts for investors to verify

• Reconcile GAAP losses with non-GAAP adjusted earnings, and assess the assumptions and sensitivity behind the $2.804 billion adverse AAR impact.
• Review the Run-off/ULSG liability outlook, variable-annuity guarantee exposure, hedge performance and the basis for management’s RBC and liquidity targets.
• Track the Genworth trust-account arbitration, collateral adequacy and reinsurance-counterparty concentration, as well as the disclosed contingency estimates.
• Assess the sustainability of operating cash flow, subsidiary dividend capacity, debt service and capital returns given the statutory earnings loss and common-stock buybacks.
• Monitor investment credit quality and mortgage-loan performance, the 2023 accounting-standard transition, and the operational and financial effects of COVID-19 and third-party service arrangements.

The independent auditor issued an unqualified opinion on the financial statements and internal control over financial reporting; the auditor identified policy-benefit liabilities, DAC and variable-annuity embedded derivatives as critical audit matters.