Brighthouse Financial, Inc. — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024; comparisons are with Q1 2023 unless otherwise noted. Brighthouse Financial is a U.S. annuity and life insurer, organized into Annuities, Life and Run-off segments, with additional results reported in Corporate & Other. Amounts below are in U.S. dollars; financial statement amounts are generally in millions.
Financial results and position
- GAAP results: Total revenue was $74 million, down from $1.284 billion. The company recorded a $614 million pretax loss and a $519 million loss available to common shareholders, compared with a $525 million common-shareholder loss in Q1 2023. Basic and diluted loss per share was $8.22, versus $7.72.
- Drivers of reported results: Net derivative losses were $1.921 billion, compared with $575 million; this included a $1.886 billion loss on embedded derivatives. A $1.440 billion favorable change in market risk benefits partly offset those losses. Net investment losses were $42 million, versus $96 million.
- Adjusted earnings, a non-GAAP measure: Adjusted loss was $98 million, compared with adjusted earnings of $195 million. Annuities contributed $313 million; Life had a $36 million loss; Run-off had a $341 million loss; and Corporate & Other had a $34 million loss. The measure excludes specified market-related items and should not be treated as a substitute for GAAP results.
- Revenue and operating components: Net investment income increased to $1.254 billion from $1.059 billion. Policy fees fell to $436 million from $606 million; premiums were $202 million versus $197 million; and other revenues were $145 million versus $93 million. Adjusted net investment income was $1.267 billion, with a 4.25% yield, compared with $1.097 billion and 3.81%.
- Adjusted earnings drivers: Higher investment spreads and returns on limited partnerships were favorable. Lower fee income, higher insurance-related costs and other expenses were unfavorable. Management cited lower income-annuity underwriting margins and higher costs tied to a reinsurance arbitration.
- Cash flow: Operating cash outflow was $530 million, compared with $500 million. Investing cash outflow was $625 million, versus $1.325 billion; financing cash inflow was $1.127 billion, versus $1.395 billion. Cash and cash equivalents ended the quarter at $3.823 billion, down $28 million during the quarter.
- Balance sheet and debt: Total assets were $239.688 billion, compared with $236.340 billion at year-end 2023. Total liabilities were $235.428 billion and total equity was $4.260 billion, down from $5.008 billion. Long-term debt was essentially unchanged at $3.155 billion.
- Investments and reserves: Total investments were $115.894 billion. Available-for-sale fixed maturity securities had a $7.054 billion net unrealized loss at quarter-end; 97.1% of their fair value was investment grade. Mortgage loans, net of allowance, were $22.670 billion; the filing says over 99% of the portfolio was performing.
Material changes versus the prior period
- Adjusted earnings moved from $195 million of earnings to a $98 million loss, principally reflecting higher Run-off insurance costs and lower fee income, partly offset by improved investment spreads.
- Net investment income and its disclosed portfolio yield increased, while policy fees declined. Annuities adjusted earnings were nearly unchanged at $313 million; the largest segment deterioration was Run-off, whose adjusted loss increased from $106 million to $341 million.
- Reported GAAP losses remained broadly similar year over year, but the mix of market-related gains and losses changed substantially. In Q1 2024, the company reported a large favorable market-risk-benefit change alongside substantial derivative losses.
- At March 31, separate account assets and liabilities were each $90.332 billion, up from $88.271 billion at December 31. Policyholder account balances rose to $84.159 billion from $81.068 billion.
Outlook, risks and unusual items
- Guidance and capital: The filing provides no specific earnings or revenue guidance. Management targets a combined risk-based capital ratio of 400%–450% in normal market conditions. It states that statutory capital at each insurance subsidiary exceeded applicable RBC action levels in the latest annual statutory statements; the filing does not provide a current-quarter combined RBC ratio.
- Liquidity: Management reported $4.0 billion of short-term liquidity and $44.5 billion of liquid assets at March 31, excluding pledged or otherwise committed assets, and believes liquidity is adequate under current conditions and certain stress scenarios. It cautions that adverse markets could reduce access to liquidity or increase its cost.
- Reinsurance arbitration: A March 2024 arbitration ruling granted a reinsurer a premium rate increase retroactive to September 2019, resulting in a $187 million loss: $167 million recorded in policy fees and $20 million in other expenses. Management identified this ruling and related costs as significant contributors to the adjusted loss.
- Market and investment risks: Results and reserves are sensitive to interest rates, equity markets, credit spreads, policyholder behavior and derivative valuations. The company highlights commercial real estate exposure; office loans were 23.8% of its commercial mortgage portfolio. Securities-lending collateral and derivative collateral arrangements also create liquidity demands under stress.
- Contingencies: For certain litigation matters with estimable reasonably possible losses, the aggregate range was up to approximately $10 million. For certain other loss contingencies, the disclosed reasonably possible range in excess of accruals was zero to approximately $75 million; some matters cannot currently be estimated. The filing describes ongoing sales-practices, cost-of-insurance and data-security litigation, among other matters.
- Regulation and controls: The Department of Labor issued a final fiduciary-advice rule on April 23, 2024. The company was assessing potential effects on distribution, compliance, products, compensation and litigation exposure. Management reported disclosure controls were effective at March 31; it also described ongoing changes to processes, systems and third-party arrangements as material changes in internal control over financial reporting.
- Capital returns: The company repurchased $62 million of common stock during the quarter and reported $731 million remaining under its repurchase program. It declared and paid $26 million of preferred dividends and stated it had no current plan to pay common dividends.
Important facts for investors to verify
- How the retroactive reinsurance rate increase and related costs affect future Run-off and Life segment results, and whether additional arbitration or reinsurance disputes arise.
- How much of the quarter’s derivative volatility reflects economic hedging versus accounting mismatches, and how sensitive earnings and statutory capital remain to interest rates and equity markets.
- Current statutory capital and combined RBC levels, subsidiary dividend capacity, and the availability of parent-company liquidity; the filing gives a target range but not a current-quarter combined RBC ratio.
- Credit and valuation trends in commercial real estate and the broader investment portfolio, including unrealized fixed-income losses, mortgage loan performance and pledged-asset liquidity.
- Potential effects of the new DOL fiduciary rule and developments in the disclosed litigation and regulatory matters.