Brighthouse Financial, Inc. — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. Unaudited consolidated financial statements; amounts below are in millions of dollars except per-share data. Brighthouse provides annuity and life insurance products through Annuities, Life and Run-off segments, plus Corporate & Other.
Financial performance and position
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Total revenue | $3,187 | $1,422 | $6,248 | $4,939 |
| Net income (loss) available to common shareholders | $676 | $(271) | $316 | $(577) |
| Adjusted earnings, non-GAAP | $(169) | $270 | $317 | $706 |
| Diluted earnings (loss) per share | $6.06 | $(2.26) | $2.75 | $(4.82) |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $1,322 | $1,496 |
Q3 revenue and GAAP earnings were strongly affected by fair-value changes in derivatives: net derivative gains were $1,057, versus losses of $691 a year earlier. Nine-month net derivative losses were $97, compared with losses of $1,337 in 2018. These volatile items help explain the difference between GAAP results and adjusted earnings.
Net investment income was $928 in Q3 and $2,681 for the nine months, up from $853 and $2,476, respectively. The nine-month adjusted net investment income yield was 4.44%, versus 4.46% in 2018. Q3 policyholder benefits and claims rose to $1,319 from $822; nine-month benefits rose to $2,936 from $2,373. The filing does not provide a single consolidated operating-margin measure.
Balance sheet at September 30, 2019: Assets were $225,876, liabilities $208,116 and total equity $17,760, compared with $206,294, $191,811 and $14,483, respectively, at year-end 2018. Fixed-maturity securities were $70,723; cash and cash equivalents were $4,289; and separate-account assets and liabilities were each $103,928.
Debt and liquidity: Long-term debt was $4,365, up from $3,963 at year-end. The company reported $3.1 billion of short-term liquidity and $42.9 billion of liquid assets, versus $2.2 billion and $36.5 billion, respectively, at year-end 2018. It reported $1,322 of operating cash flow for the nine months, while investing activities used $5,699 and financing activities provided $4,521. Management stated that it believed liquidity was sufficient under current conditions and certain stress scenarios; the company also reported assets in excess of its CTE98 variable-annuity capital target.
Material changes and drivers
- Q3 GAAP net income improved by $947 after tax compared with the prior-year quarter, principally due to favorable GMLB rider results and gains in the ULSG hedging program as long-term interest rates declined, along with investment gains. In contrast, adjusted earnings turned to a loss of $169 from income of $270.
- Nine-month adjusted earnings fell to $317 from $706. The filing attributes the decline mainly to the annual actuarial review (AAR), lower fee income and weaker insurance-related results, partly offset by higher net investment spread and lower other expenses.
- The 2019 AAR reduced the assumed long-term general-account earned rate for GAAP from 4.25% to 3.75%. Its reported nine-month impact was a $475 reduction in pre-tax income available to shareholders, including a $559 unfavorable impact on pre-tax adjusted earnings and an $84 favorable GMLB impact.
- Segment adjusted earnings for the nine months were $763 in Annuities (down from $848), $156 in Life (down from $164), a Run-off loss of $460 (versus a loss of $61), and a Corporate & Other loss of $142 (versus a loss of $245).
- Annuity sales increased 28% in the first nine months, driven by Shield, fixed-indexed and fixed annuities. Variable-annuity separate-account balances ended September at $96,752, up from $91,923 at the start of the year, reflecting positive investment performance partly offset by net outflows and policy charges.
- Net unrealized investment gains in AOCI increased to $3,567 from $716 at year-end, substantially reflecting lower longer-term interest rates and narrower credit spreads. The company said gross unrealized losses on fixed maturities declined during the nine months and concluded the securities in unrealized-loss positions were not other-than-temporarily impaired.
Outlook, risks and unusual items
- No specific earnings or revenue guidance is provided. Management described its liquidity and capital position as adequate under current conditions and certain stress scenarios, and targets a debt-to-capital ratio of approximately 25%.
- Management cited sensitivity to interest rates, equity markets, credit spreads and currency movements; variable-annuity guarantees; actuarial assumption and model risk; counterparty and reinsurance performance; regulation; and access to capital. Sensitivity to a 100-basis-point rise in interest rates increased to $8.3 billion from $5.8 billion at year-end, primarily because lower rates increased the fair value of fixed maturities and interest-rate derivatives.
- Nine-month tax results included one-time adjustments, primarily from revaluation of Separation-related liabilities. The filing reports an unusually low 5% effective tax rate on GAAP results and 4% on adjusted earnings for the period; these rates may not indicate a normal ongoing tax rate.
- Litigation includes sales-practice claims and regulatory inquiries. For matters assessed as reasonably possible, estimated aggregate losses in excess of accruals were $0–$10 million; the company could not estimate a range for some matters and warned that adverse outcomes could affect quarterly or annual income or cash flows.
- Commitments included $235 million of mortgage-loan commitments and $1.9 billion of unfunded partnership, bank-credit and private-corporate-bond commitments. The company also described potential liquidity demands from collateral, securities lending and policyholder withdrawals.
- Brighthouse issued $412 million net of costs in Series A preferred stock, repurchased $314 million of common stock during the nine months, and had $181 million remaining under its repurchase authorization at September 30. It said it did not then anticipate common-stock dividends.
- ASU 2018-12, which changes long-duration insurance accounting and is expected to significantly affect variable-annuity guarantee measurement, was not yet adopted; the company said it was early in its assessment and could not estimate the impact.
Most important facts for investors to verify
- How much of reported GAAP earnings reflects market-driven derivative and guarantee valuations, versus recurring adjusted earnings; review the reconciliation and hedge performance.
- The drivers and durability of the AAR-related reserve, DAC and earnings impacts, especially the lower long-term earned-rate assumption and Run-off ULSG exposure.
- Variable-annuity guarantee exposure, hedging effectiveness, statutory capital adequacy and the implications of the reported interest-rate sensitivity.
- Whether liquidity and parent-company cash access remain adequate after collateral calls, securities-lending returns, policyholder withdrawals and regulatory limits on insurance-subsidiary dividends.
- Credit quality and liquidity of the investment portfolio, commitments and securities-lending reinvestment portfolio, as well as developments in litigation and regulatory matters.
- The eventual effects of long-duration insurance accounting changes and the sustainability of earnings excluding one-time tax adjustments.