Brighthouse Financial, Inc. — Q3 2022 Form 10-Q
Business context and reporting period. Brighthouse Financial is a U.S. provider of annuity and life insurance products. It reports Annuities, Life and Run-off segments, plus Corporate & Other. This unaudited filing covers the quarter and nine months ended September 30, 2022; comparisons are with the corresponding 2021 periods unless noted. Interim results are not necessarily indicative of full-year performance.
Financial performance and position
- Q3 results: Total revenue was $1.482 billion, down from $2.512 billion. Net loss attributable to common shareholders was $702 million, or $9.82 per diluted share, versus net income of $361 million, or $4.34 per diluted share. Adjusted earnings, a non-GAAP measure, were $97 million versus $450 million.
- Nine-month results: Revenue was $8.019 billion versus $5.126 billion. Net income available to common shareholders was $868 million, or $11.61 per diluted share, compared with a $239 million loss, or $2.80 per share. Adjusted earnings were $415 million versus $1.270 billion.
- Drivers and earnings quality: Q3 included a $416 million net derivative loss, compared with a $56 million gain in Q3 2021. Nine-month net derivative results were a $1.830 billion gain versus a $2.132 billion loss. The filing attributes the Q3 loss primarily to unfavorable valuation changes in interest-rate derivatives used to manage ULSG exposure and GMLB riders. Adjusted earnings declined in both comparison periods, including from lower investment spread, lower fee income and higher insurance-related or DAC/VOBA costs.
- Cash flow: For the nine months, operating activities used $939 million, compared with $644 million provided in 2021. Investing activities used $7.596 billion; financing activities provided $8.854 billion. Cash and cash equivalents ended the period at $4.793 billion, up from $4.474 billion at year-end 2021.
- Margins and investment income: The filing does not provide a single consolidated operating-margin measure. GAAP net investment income was $877 million in Q3 and $3.089 billion for nine months, down from $1.281 billion and $3.680 billion, respectively. Adjusted net investment income yield was 3.20% in Q3 and 3.82% for nine months, compared with 5.16% and 5.12% in 2021.
- Balance sheet and debt: Total assets were $221.641 billion versus $259.840 billion at December 31, 2021; total equity was $5.879 billion versus $16.207 billion. Accumulated other comprehensive loss was $6.637 billion, compared with accumulated other comprehensive income of $4.172 billion. Long-term debt was $3.156 billion. A $1.0 billion revolving credit facility had no borrowings or letters of credit outstanding.
- Liquidity and capital: Company-wide short-term liquidity was $3.4 billion and liquid assets were $41.5 billion, down from $3.8 billion and $54.9 billion at year-end 2021. Management targets a debt-to-capital ratio of approximately 25% and a combined RBC ratio of 400%–450% in normal market conditions; the filing does not state a current combined RBC ratio.
Material changes versus the prior comparable period
- Common-shareholder results shifted from Q3 2021 profit to a substantial Q3 2022 loss, while nine-month GAAP results improved from a loss to income. Adjusted earnings, however, fell sharply in both the quarter and year-to-date comparison.
- Rising rates and market movements drove a major decline in investment fair values and AOCI. Fixed maturity securities had $10.031 billion of net unrealized losses at September 30, 2022, versus $8.347 billion of net unrealized gains at year-end 2021. The company reported comprehensive losses of $4.221 billion for Q3 and $9.859 billion for nine months.
- Variable annuity separate account balances fell to $75.055 billion from $105.197 billion at year-end 2021, reflecting unfavorable investment performance, negative net flows and policy charges. This pressures asset-based fees and can affect DAC amortization and benefit costs.
- General-account surrenders and withdrawals, including repayments of institutional spread-margin funding agreements, were $14.3 billion for nine months, versus $2.2 billion in 2021. Policyholder account-balance deposits and withdrawals were also materially higher.
Outlook, risks, contingencies and unusual items
- Outlook: The filing gives no specific earnings or revenue guidance. Management says it believes liquidity is sufficient for business requirements under current conditions and certain stress scenarios, while noting liquidity access could weaken or become more costly in adverse markets.
- Markets and insurance risks: Management highlights sensitivity to interest rates, equity markets, credit spreads, inflation, recession risk, policyholder withdrawals and behavior, and the effectiveness and cost of hedging variable annuity guarantees. It also cites geopolitical and pandemic uncertainty. The company reported no direct Russia or Ukraine exposure at September 30, 2022.
- Accounting change: Long-Duration Targeted Improvements (LDTI) are effective for the company in 2023. Based on December 31, 2021, the company estimated adoption would reduce total stockholders’ equity by $6–$8 billion and equity excluding AOCI by $3–$4 billion, primarily due to market risk benefits. It expected the impact measured at September 30, 2022 to have improved significantly as interest rates changed.
- Actuarial review and unusual items: The 2022 annual actuarial review increased the assumed long-term general-account earned rate by raising the mean-reversion rate from 3.00% to 3.50%, and updated other assumptions. Its total pre-tax impact for the nine months was a positive $5 million, including a $94 million negative GMLB impact and $99 million positive impact within adjusted earnings. A $140 million reinsurance-related settlement was recorded in other expenses in Q2.
- Legal and commitments: Estimated reasonably possible litigation losses above accruals were up to approximately $10 million; for certain other loss contingencies, the estimated range above accruals was $0–$125 million, primarily related to reinsurance matters. The company also reported $2.2 billion of unfunded partnership, bank-credit-facility and private-bond commitments, and $439 million of mortgage-loan commitments.
- Regulatory and capital developments: The Inflation Reduction Act introduced a 1% excise tax on stock repurchases effective after 2022 and a corporate alternative minimum tax whose applicability and potential impact the company said it could not yet assess. New York annuity regulation changes may affect product design and competition. The company repurchased $395 million of common stock during the nine months and had $386 million remaining under its program at September 30.
Most important facts for investors to verify
- How much of reported GAAP earnings volatility reflects market-sensitive derivatives and guarantee liabilities, and how consistently adjusted earnings represent underlying performance.
- The effect of further rate, equity and credit-market changes on investment marks, AOCI, hedging results, liquidity and statutory capital.
- Current statutory RBC and holding-company capital resources; the filing states the target range but does not give a current combined RBC ratio.
- The drivers and sustainability of higher withdrawals and funding-agreement activity, and the company’s capacity to meet collateral calls and other liquidity needs under stress.
- The actual transition effect of LDTI, including the sensitivity of the estimate to market conditions and updated assumptions.
- Developments in reinsurance disputes and litigation, including whether reasonably possible losses exceed the disclosed estimates.