Brighthouse Financial, Inc. quarterly report, Q2 FY2020

Brighthouse Financial, Inc. — Q2 2020 Form 10-Q

Reporting period: Quarter and six months ended June 30, 2020. Unaudited consolidated results; amounts below are in millions of dollars unless noted. Brighthouse provides U.S. annuity and life insurance products through its Annuities, Life and Run-off segments, with additional results in Corporate & Other.

Financial performance

Metric	Q2 2020	Q2 2019	Six months 2020	Six months 2019
Total revenue	$(922)	$2,370	$8,063	$3,061
Net income (loss) available to common shareholders	$(1,998)	$377	$2,952	$(360)
Adjusted earnings, non-GAAP	$11	$254	$222	$486
Net investment income	$652	$942	$1,568	$1,753
Operating cash flow	Not separately provided for the quarter	$467	$809
Basic earnings (loss) per share	$(21.10)	$3.28	$29.60	$(3.10)

Q2 pretax loss was $2,522, versus pretax income of $469 a year earlier. Net derivative losses of $2,653 were the principal driver of the quarter’s reported loss; Q2 derivative marks were volatile and should not be read as recurring operating performance.
First-half net derivative gains were $4,249, compared with losses of $1,154 in 2019, driving much of the swing in reported earnings. Adjusted earnings, which excludes significant market-related items, fell year over year in both the quarter and half year.
Q2 adjusted earnings fell to $11 from $254. Management cited weaker investment spread—particularly lower limited-partnership returns and reinvestment at lower fixed-income yields—and lower asset-based fees. Lower expenses and reduced Run-off insurance-related costs partly offset these pressures.
First-half adjusted earnings declined to $222 from $486. Lower investment spread, higher insurance-related costs (including claims and GMDB liabilities), and lower fee income outweighed expense reductions.
The filing does not present a single consolidated operating-margin measure; reported revenue is heavily affected by fair-value changes in derivatives and insurance guarantees.

Balance sheet, debt and liquidity

At June 30, total assets were $235.4 billion, up from $227.3 billion at December 31, 2019. Stockholders’ equity was $20.9 billion, versus $16.2 billion; accumulated other comprehensive income was $5.0 billion, up from $3.2 billion.
Cash and cash equivalents were $7.3 billion, compared with $2.9 billion at year-end. Company-reported short-term liquidity was $6.1 billion and liquid assets were $49.2 billion, versus $2.8 billion and $42.6 billion, respectively, at year-end. These measures exclude pledged or otherwise committed assets.
Long-term debt was $4.0 billion, down from $4.4 billion. In Q2, BHF issued $615 million of 5.625% senior notes due 2030 and used the proceeds, together with preferred-stock proceeds, to repay its $1.0 billion term loan; the facility was terminated.
Cash from operating activities for the first half was $467 million, down from $809 million. Net cash increased $4.4 billion, principally reflecting financing inflows, including policyholder account balances and collateral-related payables.
Management targets debt-to-capital of approximately 25% and a combined statutory RBC ratio of 400%–450%; the filing does not provide a current combined RBC ratio. Management stated it believed liquidity was sufficient under current conditions and certain stress scenarios.

Material changes and business developments

Q2 Annuities adjusted earnings were $171 million, down from $265 million; Life was $48 million, down from $58 million; Run-off recorded a loss of $115 million, versus earnings of $2 million; Corporate & Other recorded a loss of $93 million, versus $71 million.
Variable-annuity separate-account balances ended the quarter at $92.2 billion, up from $82.6 billion at the start of Q2 due to positive market performance, partly offset by negative net flows. First-half balances declined from $99.5 billion at the start of the period.
Common-stock repurchases totaled $322 million in the first half, covering approximately 13.3 million shares. Repurchases were temporarily suspended on May 11; $231 million remained under the program at June 30. The company said it had no current plan to pay common-stock dividends.
Brighthouse issued $390 million net proceeds from Series B 6.750% non-cumulative preferred shares. It also expanded its reinsurance financing arrangement’s maximum to $12 billion and extended its term to 2039; $10.6 billion of funding was available and no borrowings were outstanding at June 30.

Outlook, risks and unusual items

No specific earnings or revenue guidance was provided. Management said the duration and economic effects of COVID-19, including any further waves, were uncertain; it could not estimate the pandemic’s longer-term effects or rule out a material impact.
Through Q2, the company reported no material pandemic-related impact on claims, lapses, surrenders, premium payments, vendor services or loss contingencies. It did report $1.1 billion of mortgage loans with borrowers offered forbearance and not making payments at June 30; 1% of pandemic-modified loans were delinquent and 1% were in nonaccrual status. The company said over 99% of its mortgage loans were performing.
Fitch revised the outlook for BHF and certain subsidiaries to negative during Q2, citing pandemic-related economic and market disruption. Management warned that ratings downgrades could adversely affect results, capital and liquidity.
Key sensitivities include equity markets, interest rates, credit spreads, derivative hedge effectiveness, investment credit losses, policyholder behavior, mortality, and actuarial assumptions. Variable-annuity guarantee valuations and hedge performance can cause substantial earnings volatility.
Other exposures include $1.8 billion of unfunded partnership, bank-credit and private-bond commitments; litigation and regulatory matters; and reasonably possible non-litigation losses of $25–$75 million above accrued amounts. For specified litigation matters, the estimated reasonably possible loss above accruals was $0–$10 million; some matters could not be estimated.
A new cost-of-insurance class action was filed in May 2020. The company intends to defend it. It also identified potential sales and litigation risks from the Department of Labor’s June 2020 fiduciary-advice guidance, particularly for retirement-account rollovers and annuity distribution partners.
New expected-credit-loss accounting was adopted January 1, 2020, reducing retained earnings by $14 million after tax and increasing AOCI by $3 million. The company had not yet estimated the impact of forthcoming long-duration insurance accounting changes, expected to take effect in 2022, subject to possible deferral.

Important facts for investors to verify

How much of reported earnings volatility reflects derivative and guarantee remeasurement versus sustainable adjusted earnings, and how well hedges perform under differing market conditions.
Statutory capital and RBC levels at the insurance subsidiaries, including headroom against management’s 400%–450% target and any constraints on dividends to the parent.
Whether the negative Fitch outlook leads to rating actions, higher funding costs, or changes in access to liquidity and reinsurance financing.
Credit performance of pandemic-modified mortgage loans and exposures to commercial property sectors, especially retail, hotels and office; monitor allowance growth and delinquencies.
Trends in annuity sales, separate-account balances, policyholder withdrawals and surrenders, investment yields, limited-partnership returns, and paid claims.
Developments in the new class action, other contingencies, and implementation of long-duration insurance accounting; assess potential effects on capital, earnings and disclosures.