Brighthouse Financial, Inc. quarterly report, Q2 FY2023

Brighthouse Financial, Inc. — Q2 2023 Form 10-Q

Reporting period: Quarter and six months ended June 30, 2023. Brighthouse is a U.S. life insurer and annuity provider, reporting Annuities, Life and Run-off segments, plus Corporate & Other. Amounts below are in U.S. dollars; financial statements are unaudited.

Key financial results

Metric	Q2 2023	Q2 2022	Six months 2023	Six months 2022
Total revenue	$263 million	$3.866 billion	$1.547 billion	$5.879 billion
Net income (loss) available to common shareholders	$(200) million	$1.719 billion	$(725) million	$3.277 billion
Adjusted earnings (non-GAAP)	$271 million	$144 million	$466 million	$524 million
Net investment income	$1.196 billion	$1.061 billion	$2.255 billion	$2.212 billion
Net derivative gains (losses)	$(1.811) billion	$1.977 billion	$(2.386) billion	$1.923 billion

The sharp GAAP earnings and revenue reversals primarily reflect market-related fair-value movements in derivatives, including embedded derivatives, and variable-annuity guarantees. In Q2, the change in market risk benefits was a $1.300 billion gain in the income statement, while derivative losses were $1.811 billion. Management reported a net unfavorable $466 million impact from annuity guaranteed benefits and Shield liabilities, versus a favorable $2.626 billion impact in Q2 2022. Adjusted earnings excludes specified market-sensitive items and is not a substitute for GAAP net income.

For the first six months, adjusted earnings declined $58 million year over year. Lower investment spread and fee income were partially offset by lower expenses and improved insurance-related results. Q2 adjusted earnings rose year over year, helped by lower expenses, including the absence of a prior-year $140 million reinsurance-related settlement charge.

Financial position, cash flow and liquidity

At June 30, 2023, total assets were $231.5 billion, total liabilities $226.6 billion and total equity $5.0 billion. Stockholders’ equity attributable to Brighthouse was $4.9 billion, including accumulated other comprehensive loss of $5.9 billion.
Investments totaled $111.3 billion. Available-for-sale fixed maturity securities had a $77.6 billion fair value against $85.6 billion amortized cost; the related gross unrealized loss was $8.0 billion. Allowance for fixed-maturity credit losses was $12 million.
Policyholder account balances were $78.6 billion, up from $73.5 billion at year-end 2022. Market risk benefit liabilities were $9.8 billion, down from $10.4 billion.
Cash and cash equivalents were $3.7 billion, down $378 million from year-end. Six-month operating cash flow was $(628) million, investing cash flow $(1.659) billion and financing cash flow $1.909 billion.
Long-term debt was $3.156 billion, unchanged from year-end. Management reported $3.4 billion in short-term liquidity and $43.8 billion in liquid assets, excluding pledged or otherwise committed assets. These measures are broader than cash on the balance sheet.
Adjusted net investment income yield was 4.21% for Q2, compared with 3.92% a year earlier; for the first six months it was 4.01%, versus 4.14%. These are management-defined, non-GAAP investment measures, not operating margins.

Material changes and management commentary

Q2 GAAP net loss contrasted with positive adjusted earnings; the 2022 comparison included large gains from market-sensitive derivatives and guarantee valuations. Six-month adjusted earnings also fell, despite improved investment income, reflecting lower partnership returns, higher credited interest and lower fee income.
Fixed maturity securities’ fair value rose from $75.6 billion at year-end, but remained below amortized cost. Management attributed unrealized losses largely to interest rates and non-issuer-specific spreads, and said it did not expect to be required to sell the affected securities before recovery.
Management said it believes liquidity is sufficient for business needs under current conditions and certain stress scenarios. It targets a combined statutory risk-based capital ratio of 400%–450% in normal markets; the filing does not provide a current combined RBC ratio in the cited text.
No specific earnings or revenue guidance was provided. The company noted that higher rates may benefit some business lines but can weigh on investment values and create market, liquidity and policyholder behavior risks. It also cited inflation, recession and equity-market risks, commercial real estate exposure, and potential collateral demands.
In July 2023, Brighthouse Life Insurance Company entered into a secured committed repurchase facility allowing transactions up to $500 million, subject to market conditions, for terms of up to two years.

Risks, contingencies and unusual items

The company faces ongoing litigation and regulatory inquiries, including cost-of-insurance class actions. It estimated reasonably possible litigation losses of up to approximately $10 million where estimable; it could not estimate a range for certain other matters.
For certain other loss contingencies, primarily reinsurance-related matters, reasonably possible losses in excess of accruals were estimated at zero to approximately $125 million. Outcomes and timing remain uncertain.
Unfunded commitments included $1.5 billion for partnership investments, bank credit facilities and private corporate bonds, plus $294 million of mortgage loan commitments.
The company adopted long-duration targeted improvements to insurance accounting (LDTI), with a January 1, 2021 transition-date reduction of $5.4 billion to retained earnings and $3.9 billion to accumulated other comprehensive income. This accounting change affects presentation and period comparisons.
Management reported disclosure controls were effective at June 30, 2023. It also identified ongoing systems and process changes, including transition services from MetLife, as material changes in internal control over financial reporting.

Important facts for investors to verify

How variable-annuity guarantee and Shield derivative marks, and their hedge effectiveness, affect future GAAP earnings and statutory capital.
The current statutory RBC position and capital available to the holding company; the stated 400%–450% is a target, not a reported current ratio.
Credit quality and valuation trends in fixed-income holdings, commercial mortgage loans—especially office exposure—and partnership investments.
Liquidity under stressed surrender, collateral and securities-lending conditions, and the terms and actual use of the new $500 million repurchase facility.
Developments in reinsurance disputes and litigation, including whether reasonably possible loss estimates change.
Capital returns: the company repurchased $126 million of common stock in the first half, had $167 million remaining under its program at quarter-end, and repurchased a further $24 million through August 4, 2023. It stated it had no current plan to pay common dividends.