Brighthouse Financial, Inc. annual report, FY2019

Abrir documento

Brighthouse Financial, Inc. — 2019 Form 10-K

Reporting period: Fiscal year ended December 31, 2019. This is an annual report, not a standalone quarterly filing; fourth-quarter figures are included where disclosed. The company provides U.S. life insurance and annuity products through Annuities, Life and Run-off segments, plus Corporate & Other.

Financial performance and position

  • Revenue and earnings: Total revenue was $6.554 billion, down from $8.965 billion in 2018. GAAP net loss available to common shareholders was $761 million, or $6.76 per diluted share, versus net income of $865 million, or $7.21 per diluted share, in 2018. The 2019 net derivative loss was $1.988 billion, compared with a $702 million gain in 2018.
  • Adjusted earnings: The company’s non-GAAP measure was $599 million, down from $892 million. Annuities contributed $1.028 billion, Life $231 million, Run-off lost $454 million and Corporate & Other lost $206 million.
  • Drivers and investment performance: GMLB riders generated a $2.482 billion pretax loss, versus a $324 million gain in 2018, reflecting market-driven liability and hedge movements, particularly in Shield Annuities. Adjusted net investment income was $3.585 billion, up from $3.352 billion, while its yield declined to 4.40% from 4.47%.
  • Fourth quarter: Q4 revenue was $306 million and net loss available to common shareholders was $1.077 billion, or $10.02 per share. The filing does not provide a standalone Q4 adjusted-earnings figure in the summarized quarterly table.
  • Cash flow and liquidity: Operating cash flow was $1.828 billion, down from $3.062 billion. Investing activities used $7.341 billion; cash and cash equivalents declined by $1.268 billion to $2.877 billion. Management reported $2.8 billion of consolidated short-term liquidity and $42.6 billion of liquid assets at year-end. Parent-company short-term liquidity was $723 million.
  • Balance sheet and capital: Total assets were $227.3 billion, stockholders’ equity was $16.2 billion, and long-term debt was $4.365 billion, up from $3.963 billion. Insurance subsidiaries had combined statutory total adjusted capital of $9.7 billion and a reported combined action-level RBC ratio of about 550%. Normalized statutory earnings were approximately $1.9 billion.
  • Other operating measures: Annuity AUM, as defined in the business overview, was $150.2 billion; life insurance face amount in-force was $568.1 billion gross and $400.0 billion net of reinsurance. The company reported approximately 2.8 million policies and annuity contracts.

Material changes versus 2018

  • GAAP results swung from $865 million of net income to a $761 million loss, principally reflecting the reversal in GMLB rider results and lower adjusted earnings.
  • Adjusted earnings decreased $293 million. Run-off adjusted losses widened to $454 million from $43 million, largely due to higher insurance-related costs, including ULSG reserve impacts.
  • The 2019 actuarial review lowered the assumed long-term general-account earned rate for GAAP from 4.25% to 3.75%. The review produced a $545 million unfavorable adjusted-earnings impact in Run-off; total pretax adjusted-earnings impact was unfavorable by $504 million.
  • Variable-annuity separate-account balances rose to $99.5 billion from $91.9 billion, mainly on positive equity-market performance, despite negative net flows of $8.5 billion.
  • The company repurchased 11.7 million common shares for $442 million, versus 2.6 million shares for $105 million in 2018. It issued $412 million net proceeds of Series A preferred stock and paid $21 million in preferred dividends.
  • Brighthouse early adopted NAIC variable-annuity reserve and capital reform effective December 31, 2019, and changed its variable-annuity hedging approach toward more swaps and fewer options.

Outlook, management commentary and risks

  • Outlook and capital priorities: No specific earnings or revenue guidance is provided. Management targets a debt-to-capital ratio of approximately 25% and a combined RBC ratio of 400%–450%; the reported year-end ratio was about 550%. It aims to prioritize risk-adjusted value over sales volume and reported no current plan to pay common-stock dividends.
  • Hedging strategy: The revised variable-annuity strategy is intended to better protect statutory capital against smaller market declines, reduce time-decay expense and preserve distributable earnings across more scenarios. Management expects larger hedge mark-to-market losses in rising markets and greater GAAP earnings volatility; the strategy shift was expected to be substantially complete by the end of Q1 2020.
  • Key risks: Variable-annuity guarantees and hedging mismatches can materially affect earnings, statutory capital and liquidity. Low interest rates, equity-market volatility, policyholder behavior, model and assumption changes, asset impairments, counterparty defaults, reinsurance availability and ratings downgrades are significant exposures. The company also depends on regulated subsidiary dividends to fund parent obligations.
  • Reinsurance and legal matters: The company reported $13.8 billion of net ceded third-party reinsurance recoverables, including $11.9 billion with its five largest ceded reinsurers. A $6.7 billion long-term-care block is reinsured through Genworth entities; collateral and Citigroup indemnification are described, but counterparty performance remains a risk. For litigation matters with estimable reasonably possible losses, the aggregate range above accrued amounts was $0–$10 million; other matters could not be estimated. A putative class action concerning group annuity benefits was filed in November 2019.
  • Accounting and regulation: The long-duration insurance accounting standard effective in 2022 may materially affect equity and earnings; the company had not estimated its impact. Initial margin requirements for certain bilateral derivatives were expected to apply beginning September 2020. New best-interest and conduct rules may increase compliance costs or affect distribution.
  • Audit and controls: Deloitte issued unqualified opinions on the financial statements and internal control over financial reporting. Management also concluded disclosure controls were effective at year-end.

Important facts for investors to verify

  • Reconcile the $2.482 billion GMLB rider loss to hedge performance, Shield Annuity embedded-derivative changes and the differing accounting treatment of liabilities and hedges.
  • Review the $545 million unfavorable Run-off actuarial-review impact, particularly the ULSG earned-rate assumption change and related reserve sensitivity.
  • Assess statutory capital and dividend capacity after early adoption of VA reform, including the distinction between the reported 550% RBC ratio and management’s 400%–450% target.
  • Evaluate parent-level liquidity and debt-service capacity against $4.365 billion of consolidated long-term debt, restricted insurance-subsidiary dividends and planned repurchases.
  • Check reinsurance collateral, recoverability and counterparty strength, especially for the long-term-care block and the largest ceded reinsurers.
  • Track implementation and financial effects of the 2022 long-duration accounting standard, derivative margin rules and conduct regulations.
  • Monitor the group-annuity class action and other legal or regulatory matters, including claims for which the filing says a loss range cannot be estimated.