Brighthouse Financial, Inc. — 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. This is an annual filing, not a standalone fourth-quarter report; quarterly figures are included in the filing. Brighthouse is a U.S. life insurer and annuity provider, organized in Annuities, Life and Run-off segments, plus Corporate & Other. MetLife divested its remaining Brighthouse shares in June 2018.
Financial performance and position
| Metric | 2018 | 2017 |
|---|---|---|
| Total revenue | $8.965 billion | $6.842 billion |
| Net income (loss) available to common shareholders | $865 million | $(378) million |
| Adjusted earnings, after tax (non-GAAP) | $892 million | $920 million |
| Net cash provided by operating activities | $3.062 billion | $3.396 billion |
| Net cash used in investing activities | $(4.538) billion | $(3.915) billion |
| Net cash provided by (used in) financing activities | $3.764 billion | $(2.852) billion |
| Total assets at year-end | $206.294 billion | $224.192 billion |
| Stockholders’ equity at year-end | $14.418 billion | $14.515 billion |
| Long-term debt at year-end | $3.963 billion | $3.612 billion |
Fourth-quarter 2018 net income available to common shareholders was $1.442 billion, following losses in each of the first three quarters. The large quarter materially affected full-year GAAP results. No conventional operating margin is presented as a key insurer measure in the filing.
- Revenue growth and the return to GAAP profitability chiefly reflect swings in derivative results: net derivative gains were $702 million in 2018 versus losses of $1.620 billion in 2017. The 2018 result benefited from lower equity markets, especially in the fourth quarter, which improved variable-annuity hedge and embedded-derivative results.
- Adjusted earnings declined $28 million. Lower fee income and higher DAC/VOBA amortization and standalone-company costs offset improved net investment spread.
- Adjusted net investment income was $3.352 billion, up from $3.210 billion; reported net investment income was $3.338 billion. The adjusted portfolio yield was 4.47%, versus 4.44%.
- Cash and cash equivalents were $4.145 billion. Company-wide short-term liquidity was $2.2 billion and liquid assets were $36.5 billion. These are management-defined liquidity measures.
- Combined insurance-subsidiary total adjusted capital was $7.4 billion and combined action-level RBC exceeded 450% at year-end. Adjusted statutory earnings were approximately $320 million, a non-GAAP/statutory measure.
Material changes versus the prior comparable period
- GAAP earnings improved from a $378 million loss to $865 million of income available to common shareholders, largely because derivative results reversed direction. Adjusted earnings, by contrast, slipped from $920 million to $892 million.
- Variable-annuity separate-account balances fell to $91.9 billion from $109.9 billion, reflecting negative investment performance of $6.1 billion and net outflows of $9.1 billion. Total separate-account assets declined to $98.3 billion from $118.3 billion.
- Annuity annualized new premium rose to $591 million from $434 million, supported by Shield Annuity sales; Shield deposits were approximately $3.2 billion versus $2.5 billion.
- Life segment adjusted earnings increased to $228 million from $16 million. Run-off adjusted earnings turned to a $43 million loss from $104 million of income, principally reflecting ULSG reserve growth and unfavorable mortality. Corporate & Other’s adjusted loss widened to $316 million from $217 million.
- Accumulated other comprehensive income fell to $716 million from $1.676 billion, largely reflecting unrealized investment losses. Total assets declined as separate-account assets and other balances changed.
- The company repurchased $105 million of common stock during 2018. It said it did not anticipate paying cash dividends.
Outlook, risks and unusual items
- Management emphasized profitability, risk-adjusted returns, independent distribution, expense discipline and a more targeted product set rather than maximizing sales volume. It expects outsourced administration arrangements, including with DXC, to reduce expenses over time, but gave no specific earnings guidance.
- For variable annuities, management targets assets at or above CTE98 in normal markets and above CTE95 in most plausible stressed conditions. At year-end, assets were $11.7 billion against an $11.3 billion CTE98 target. Management’s modeled funding needs vary substantially by market scenario; these estimates are not guarantees. Under its base case, the filing estimated variable-annuity distributable earnings of $0.6–$1.6 billion over 2019–2021 and $1.9–$2.9 billion over 2019–2023, before tax.
- Variable-annuity guarantees, equity-market and interest-rate movements, policyholder behavior, hedge effectiveness, derivative counterparties and statutory reserve requirements can cause material earnings and capital volatility. NAIC variable-annuity reserve and capital reforms were approved in 2018; implementation details and their effects remained uncertain.
- A new long-duration-contract accounting standard is expected to take effect in 2021. It will require fair-value measurement of qualifying market risk benefits, including variable-annuity guarantees. The company had not estimated the impact and cautioned that equity and earnings sensitivity could increase.
- Other notable exposures include $6.6 billion of long-term-care reinsurance recoverables associated with Genworth reinsurers, rated B- in the filing; reliance on MetLife and other third parties for administration and services; and tax, legal, regulatory, cyber and distribution risks. The estimated reasonably possible litigation losses in excess of accruals were $0–$10 million for matters where an estimate could be made; other matters could not be estimated.
- Unusual prior-period comparisons include the 2017 Separation-related $1.1 billion non-cash tax charge, substantially offset by a Tax Act benefit, and 2018 favorable variable-annuity derivative movements. The 2018 annual actuarial review had a net $40 million unfavorable effect on income before tax, including a $226 million unfavorable GMLB impact offset by favorable impacts elsewhere.
- Subsequent to year-end, BHF borrowed $1.0 billion under a new five-year term loan on February 1, 2019, repaid the prior $600 million term loan and used the balance for general corporate purposes. A Farmer Mac funding-agreement program of up to $500 million was also established; it had no borrowings at February 26, 2019.
Most important facts for investors to verify
- How much 2018 GAAP profitability depended on fourth-quarter market and derivative movements, and how adjusted earnings trends compare with GAAP results.
- Variable-annuity guarantee exposure, hedge performance, CTE funding assumptions and the capital impact of NAIC reform and the 2021 accounting standard.
- Liquidity and parent-company debt-service capacity, including reliance on regulated subsidiary dividends, collateral needs and the new $1.0 billion term loan.
- Whether ULSG reserve growth, policyholder behavior, mortality and reinsurance recoverability produce further earnings or capital pressure.
- Progress on expense reductions, technology and administration transitions, and the concentration of sales among independent distributors.
The financial statements received an unqualified audit opinion, and management and Deloitte reported effective internal control over financial reporting as of December 31, 2018.