Brighthouse Financial, Inc. — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. Brighthouse is a U.S. life insurer and annuity provider, with Annuities, Life and Run-off segments, plus Corporate & Other. Amounts below are in U.S. dollars; financial statement amounts are in millions unless otherwise stated.
Key financial results
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Total revenue | $309 | $3,187 | $8,372 | $6,248 |
| Net income (loss) available to common shareholders | $(3,012) | $676 | $(60) | $316 |
| Adjusted earnings (non-GAAP) | $(689) | $(169) | $(467) | $317 |
| Net investment income | $996 | $928 | $2,564 | $2,681 |
| Net derivative gains (losses) | $(1,857) | $1,057 | $2,392 | $(97) |
| Operating cash flow | Not provided by quarter | Not provided by quarter | $515 | $1,322 |
Revenue and earnings were highly affected by derivative and insurance-liability fair-value changes; reported revenue is therefore not a straightforward measure of underlying operating momentum. The filing does not present a conventional operating-margin measure.
Financial position, liquidity and capital
- At September 30, total assets were $239.7 billion and total equity was $18.3 billion, compared with $227.3 billion and $16.2 billion, respectively, at December 31, 2019.
- Cash and cash equivalents were $6.2 billion, versus $2.9 billion at year-end 2019. Management reported short-term liquidity of $5.6 billion and liquid assets of $50.5 billion, compared with $2.8 billion and $42.6 billion, respectively.
- Long-term debt was $4.0 billion, down from $4.4 billion. During Q2, the company issued $615 million of 5.625% senior notes due 2030 and repaid its $1.0 billion term loan. It targets a debt-to-capital ratio of approximately 25%.
- Nine-month cash flows included $515 million from operations, $4.2 billion used in investing activities and $7.0 billion provided by financing activities. The increase in cash also reflected policyholder deposits, collateral-related funding and financing transactions.
- Management stated that it believed liquidity was sufficient under current conditions and certain stress scenarios. The company targets a combined risk-based capital ratio of 400%–450%; the filing does not provide the current ratio in this text.
- Adjusted net investment income yield was 3.91% for the first nine months, versus 4.44% in 2019; for Q3 it was 4.42%, versus 4.52%. Management cited lower fixed-income reinvestment yields as a headwind.
Material changes and management commentary
- Q3 common-shareholder loss of $3.0 billion compared with income of $676 million a year earlier. Management attributed the deterioration principally to the annual actuarial review (AAR) and unfavorable fair-value changes in guaranteed minimum living benefit (GMLB) riders, with higher equity markets, lower interest rates and tighter credit spreads affecting the results.
- The AAR reduced the assumed long-term general account earned rate, including a reduction in the mean reversion rate from 3.75% to 3.00%. The reported pretax AAR impact for the first nine months was $(2.8) billion, including $(1.4) billion for GMLBs and $(1.4) billion in adjusted earnings items.
- Year-to-date adjusted earnings turned to a $467 million loss from $317 million of earnings. Annuities reported $874 million of adjusted earnings and Life $135 million; Run-off recorded a $1.3 billion adjusted loss, compared with a $460 million loss in 2019. The Run-off deterioration primarily reflected higher insurance-related costs, including changes in long-term earned-rate assumptions.
- The company completed conversion of a significant portion of its in-force annuity business to a third-party administrator in Q3. Customers and distribution partners experienced delays and service interruptions; management said these were largely resolved but warned of potential future expense, reputational, litigation or regulatory consequences.
- COVID-19 had not materially affected claims, lapses, surrenders, premiums or the company’s financial results through Q3, according to management. The company emphasized that future impacts remain uncertain. Fitch revised the outlook for BHF and certain subsidiaries to negative during Q2.
- Common-stock repurchases resumed in August after a temporary suspension. The company repurchased $376 million of stock in the first nine months and had $177 million remaining under its repurchase program at September 30. No common-stock dividend was planned.
Risks, contingencies and unusual items
- Insurance guarantees and derivatives create material sensitivity to market movements and actuarial assumptions. Q3 included a $2.7 billion pretax loss from GMLB riders; the company notes that hedge and liability movements may not offset in any given period.
- COVID-19-related mortgage modifications covered $700 million of loans where borrowers had been offered debt-service forbearance and were not making payments at September 30. The mortgage-loan allowance for credit losses increased to $90 million from $64 million at year-end 2019; over 99% of mortgage loans were classified as performing.
- Litigation loss contingencies reasonably possible above amounts accrued were estimated at $0–$10 million. Certain non-litigation contingencies, primarily reinsurance matters, had reasonably possible losses of up to $50 million above accruals; other matters could not be estimated. The filing also describes a new cost-of-insurance class action.
- Unfunded commitments included $271 million of mortgage-loan commitments and $1.8 billion of partnership, bank-credit and private-bond commitments. The company had $10.8 billion of available funding under its reinsurance financing arrangement and no borrowings under it.
- The company adopted the expected-credit-loss standard in 2020, recording an after-tax $14 million reduction to retained earnings. A new long-duration insurance accounting standard is expected to take effect January 1, 2023; the company had not estimated its impact, with variable-annuity guarantee measurement expected to be a significant area.
Outlook: The filing provides capital and risk-management targets, but no specific earnings or revenue guidance. Management cautioned that pandemic, market, actuarial, regulatory and third-party service developments could affect future results and liquidity.
Important facts for investors to verify
- How the AAR assumptions and variable-annuity guarantee valuations affect future reserves, earnings volatility and statutory capital; obtain the company’s current RBC ratio and compare it with the 400%–450% target.
- Whether the Q3 annuity-administration conversion issues remain resolved, and whether service disruption produces additional costs, customer attrition, claims or regulatory action.
- Developments in COVID-19 impacts on mortgage borrowers, investment credit quality, policyholder behavior, collateral needs and credit ratings.
- The status and potential exposure from reinsurance disputes, litigation and the cost-of-insurance class action, including any changes to accruals or loss estimates.
- How lower investment yields, Run-off losses, derivative results and capital returns affect adjusted earnings and liquidity in subsequent periods.