Brighthouse Financial, Inc. — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022. Unaudited consolidated results are presented under U.S. GAAP. Brighthouse is a U.S. annuity and life insurer with Annuities, Life and Run-off segments, plus Corporate & Other. Unless noted, financial amounts are in millions of dollars.
Key financial results
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Total revenue | $3,797 | $1,676 | $6,537 | $2,614 |
| Net income (loss) attributable to Brighthouse | $983 | $31 | $1,623 | $(554) |
| Net income (loss) available to common shareholders | $957 | $10 | $1,570 | $(600) |
| Diluted earnings (loss) per share | $12.77 | $0.11 | $20.62 | $(6.93) |
| Adjusted earnings, non-GAAP | $24 | $435 | $318 | $820 |
| Net cash from operating activities | Not presented by quarter | $18 | $69 |
GAAP earnings were highly affected by market-related remeasurement of guarantees and derivatives: Q2 net derivative gains were $1,733, versus losses of $684 a year earlier; six-month gains were $2,246, versus losses of $2,188. GMLB riders contributed $1,832 of pretax gains in Q2 and $2,722 for the six months. These market-sensitive gains more than explain the contrast with adjusted earnings, which excludes significant market-volatility items and fell sharply year over year.
Q2 adjusted earnings declined to $24 from $435; six-month adjusted earnings fell to $318 from $820. Management cited higher insurance-related costs, lower investment spread and fee income, and higher DAC/VOBA amortization. Annuities adjusted earnings were $204 in Q2 and $515 for six months; Life was $23 and $49; Run-off recorded losses of $164 and $148; Corporate & Other recorded losses of $39 and $98.
Financial position, liquidity and capital
- Assets and equity: Total assets were $228.2 billion at June 30, down from $259.8 billion at year-end 2021. Total equity was $10.3 billion, down from $16.2 billion; parent-company stockholders’ equity was $10.2 billion versus $16.1 billion.
- Investment valuation: Fixed maturity securities had a fair value of $78.6 billion, down from $87.6 billion. Their net unrealized position moved to a $5.0 billion loss from an $8.3 billion gain. AOCI was a loss of $3.1 billion versus income of $4.2 billion at year-end. Six-month comprehensive loss was $5.6 billion.
- Investments and credit: Total investments were $110.4 billion. Mortgage loans, net, were $21.5 billion, with a $103 million allowance; management reported more than 99% of mortgage loans performing. Fixed maturity securities were 96% investment grade by fair value.
- Debt: Long-term debt was $3.157 billion, unchanged from year-end. The company entered a new $1.0 billion senior unsecured revolving facility maturing in 2027; no amounts were drawn at June 30. It reported a target debt-to-capital ratio of approximately 25%.
- Liquidity: Company-wide short-term liquidity was $4.0 billion and liquid assets were $46.1 billion, compared with $3.8 billion and $54.9 billion at year-end. Management said it believes liquidity is sufficient under current conditions and certain stress scenarios. Cash and cash equivalents were $5.071 billion.
- Cash flows and funding: Six-month investing cash outflow was $5.019 billion and financing cash inflow was $5.598 billion. Net deposits to policyholder account balances were $5.630 billion. General-account surrenders and withdrawals, including funding agreement repayments, totaled $5.6 billion, versus $1.4 billion in the prior-year period.
- Capital returns: The company repurchased 5.15 million shares for $259 million during the first half; $522 million remained under the repurchase authorization at June 30. It repurchased a further 1.28 million shares for $52 million through August 2. Preferred dividends were $53 million for the first half. The company said it had no current plan to pay common dividends.
Material changes and management commentary
- GAAP net income rose substantially from the prior-year periods, mainly because of favorable GMLB and other derivative fair-value movements. Management cautioned through its discussion that market volatility can distort reported trends; adjusted earnings, a non-GAAP measure, declined materially.
- Higher interest rates and lower equity markets contributed to significant fair-value changes and the decline in unrealized investment values. The Federal Reserve raised rates three times during the first half and again in July. Management reported that sensitivity to a 100-basis-point rise in rates was $7.9 billion at June 30, down 12% from $8.9 billion at year-end.
- Variable annuity separate account balances fell to $81.6 billion from $105.2 billion at year-end, reflecting unfavorable investment performance, negative net flows and policy charges. Lower balances reduced asset-based fees and contributed to higher DAC/VOBA amortization.
- Management identified new reinsurance agreements as increasing liabilities in the ULSG business. A $140 million reinsurance-related matter was settled in Q2 and reported in other expenses.
- The company expects to adopt the long-duration insurance contract accounting standard in 2023, with transition to January 1, 2021. It expects a material effect on financial statements and stated that prevailing June 2022 rates imply a less significant equity impact than prevailing year-end 2021 rates; it could not estimate the ultimate impact.
Risks, contingencies and outlook
- No specific earnings guidance: The filing provides no clear numerical forecast for future revenue or earnings. Management describes its liquidity and capital plans, including a target combined risk-based capital ratio of 400%–450% in normal market conditions; the filing does not state a June 2022 actual RBC ratio.
- Market and insurance risks: Results and capital are exposed to interest rates, equity markets, credit spreads, inflation, investment liquidity, mortality, policyholder behavior, and the effectiveness and cost of hedging variable annuity guarantees. The company also notes that asset and liability duration mismatches can occur.
- Investment and funding risks: A sharp rise in unrealized fixed-income losses, collateral requirements, early policyholder withdrawals, or market disruption could affect liquidity and capital. Securities lending cash collateral liabilities were $5.4 billion at June 30; open loans may require prompt collateral repayment.
- Legal and other contingencies: The estimated aggregate reasonably possible litigation and regulatory losses, where estimable and in addition to accruals, were up to approximately $10 million. Other loss contingencies were estimated at zero to approximately $125 million above accruals, primarily related to reinsurance matters. Some matters could not be estimated; management said outcomes are not likely to materially affect financial position, though particular periods’ income or cash flows could be materially affected.
- Commitments: Unfunded partnership, bank credit facility and private corporate bond commitments totaled $2.4 billion; mortgage loan commitments were $358 million.
- Other uncertainties: The filing discusses COVID-19, geopolitical and economic conditions, regulatory developments, reinsurance counterparty performance, competition, cyber risk and the transition to new accounting standards. Management stated disclosure controls were effective as of June 30, 2022.
Important facts for investors to verify
- How much of reported GAAP earnings reflects recurring operating performance versus GMLB and other derivative fair-value movements; review the reconciliation to adjusted earnings.
- Current statutory capital and RBC ratios, and any subsequent changes to the stated 400%–450% target; the filing does not provide the June 2022 actual ratio.
- The effects of continued interest-rate and equity-market changes on unrealized losses, guarantee liabilities, hedging effectiveness, collateral demands and distributable capital.
- Progress and estimated financial impact of the 2023 long-duration contract accounting adoption, including its retrospective transition effects.
- Developments in reinsurance-related contingencies, the $140 million settlement, and whether the remaining estimated loss range changes.
- Whether elevated policyholder withdrawals and the company’s increased funding-agreement balances remain manageable under stressed liquidity conditions.