Brighthouse Financial, Inc. — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. Brighthouse is a U.S. life insurer and annuity provider, reporting Annuities, Life, Run-off, and Corporate & Other. Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted.
Key financial results
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Total revenue | $2,370 | $1,702 | $3,061 | $3,517 |
| Net income (loss) available to common shareholders | $377 | $(239) | $(360) | $(306) |
| Adjusted earnings (non-GAAP) | $254 | $153 | $486 | $436 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $809 | $1,017 |
- Q2 diluted EPS was $3.27; basic EPS was $3.28. Six-month basic and diluted loss per share was $3.10.
- Q2 revenue rose about 39% year over year, while six-month revenue fell about 13%. Six-month GAAP losses widened despite higher adjusted earnings.
- Net investment income was $942 million in Q2 and $1.753 billion for six months. Q2 net derivative gains were $149 million, versus losses of $312 million a year earlier; six-month derivative losses were $1.154 billion, versus $646 million.
- Q2 total expenses were $1.901 billion, compared with $2.019 billion. Six-month total expenses were $3.545 billion, versus $3.947 billion. The filing does not present a conventional operating-margin measure.
Financial position, debt, and liquidity
- At June 30, total assets were $221.2 billion, total liabilities $204.9 billion, and total equity $16.3 billion, compared with $206.3 billion, $191.8 billion, and $14.5 billion, respectively, at year-end 2018.
- Cash and cash equivalents were $4.0 billion. Long-term debt was $4.365 billion, up from $3.963 billion at December 31, 2018. The company borrowed $1.0 billion under a new term loan and repaid $600 million under its prior term loan.
- Management reported $3.0 billion of short-term liquidity and $40.8 billion of liquid assets, excluding assets pledged or otherwise committed. It stated that liquidity was sufficient for business needs under current conditions and certain stress scenarios.
- Six-month cash flow: $809 million provided by operations, $2.932 billion used in investing, and $1.959 billion provided by financing; cash declined $164 million to $3.981 billion.
- Fixed maturity securities were $67.2 billion at fair value; 95.5% were investment grade. Mortgage loans totaled $15.1 billion, and the company reported over 99% of mortgage loans as performing.
Changes, outlook, and risks
- Q2’s return to GAAP profitability reflected gains in the universal-life secondary-guarantee hedging program as interest rates declined, lower GMLB rider losses, investment gains, and improved adjusted earnings. Six-month GAAP results were hurt by $1.563 billion of GMLB rider losses, primarily reflecting market movements and guarantee-liability remeasurement.
- Adjusted earnings increased $101 million in Q2 and $50 million for the first half. Management cited stronger investment spread and lower expenses, partly offset by lower fee income. Annuity sales rose 35% in the first half, driven by Shield, fixed-indexed, and fixed annuities.
- No specific earnings or revenue guidance is provided in the supplied filing text. Management targets a debt-to-capital ratio of approximately 25%, reported assets in excess of CTE98 at quarter-end, and does not currently anticipate common-stock dividends.
- Market sensitivity remains significant: variable-annuity guarantees, derivatives, interest rates, equity markets, and hedging performance can cause substantial earnings volatility. Management also cited low-rate, credit, liquidity, counterparty, regulatory, reinsurance, distribution, and actuarial-estimate risks.
- The NAIC’s variable-annuity reserve and capital changes were expected to take effect January 1, 2020, subject to the described adoption process; management had not determined the effect on its hedging and risk-mitigation programs. The company was also evaluating accounting changes for long-duration contracts and expected a significant impact, particularly on variable-annuity guarantees.
- Litigation and regulatory inquiries are ongoing. For matters with estimable reasonably possible losses, the aggregate range above amounts accrued was $0–$10 million; other matters could not be estimated. Management said an adverse outcome could affect particular reporting periods.
- Capital actions included $188 million of common-stock repurchases in the first half, with $307 million remaining under the program at June 30, and a $412 million net issuance of 6.60% Series A preferred stock.
Most important facts for investors to verify
- How much of Q2’s GAAP profit came from market-sensitive derivative and guarantee revaluations versus recurring adjusted earnings.
- Drivers of the $1.563 billion first-half GMLB loss and the sensitivity of guarantee liabilities and hedges to interest-rate and equity-market changes.
- Statutory capital and insurance-subsidiary dividend capacity; GAAP equity and reported liquidity do not by themselves establish insurer capital adequacy.
- Debt service, the term-loan and revolving-facility covenants, and the effect of repurchases and preferred dividends on parent liquidity.
- Potential costs or capital effects of NAIC variable-annuity reforms, accounting-standard changes, litigation, and regulatory developments.