Brighthouse Financial, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; balance-sheet comparisons are with December 31, 2020. Brighthouse provides U.S. annuity and life insurance products through its Annuities, Life and Run-off segments, with Corporate & Other reported separately. Amounts below are in millions unless stated otherwise.
Financial performance and position
| Metric | Q1 2021 | Q1 2020 / prior quarter-end |
|---|---|---|
| Total revenue | $938 | $8,985 |
| Net income (loss) available to common shareholders | $(610); $(6.96) per diluted share | $4,950; $47.11 diluted EPS |
| Adjusted earnings, non-GAAP | $385 | $211 |
| Net investment income | $1,187 | $916 |
| Operating cash flow | $(104) | $96 |
| Cash and cash equivalents | $4,025 | $4,108 at Dec. 31, 2020 |
| Total assets / total equity | $241,937 / $15,082 | $247,869 / $18,088 at Dec. 31, 2020 |
| Long-term debt | $3,435 | $3,436 at Dec. 31, 2020 |
The filing does not provide conventional consolidated profit-margin measures. Revenue and GAAP earnings were heavily affected by fair-value movements in derivatives; reported revenue should not be read as an indicator of underlying operating performance on its own. Adjusted earnings is management’s non-GAAP performance measure.
- Adjusted earnings by segment: Annuities $336 (up from $316); Life $42 (up from $11); Run-off $76 (versus a $70 loss); Corporate & Other $(69) (versus $(46)).
- Liquidity: Management reported $3.9 billion of short-term liquidity and $48.9 billion of liquid assets at March 31, down from $4.5 billion and $52.0 billion, respectively, at year-end. These measures exclude pledged or otherwise committed assets.
- Investments: Total investments were $103.2 billion. Fixed-maturity securities had an estimated fair value of $79.0 billion; 95.5% were investment grade. Net investment income increased about 30%, with management citing higher limited-partnership returns and average invested assets, partly offset by lower fixed-income yields.
- Cash flows: Investing activities used $200; financing activities provided $221. Cash and cash equivalents declined by $83 during the quarter.
Material changes and unusual items
- Common-shareholder net loss was primarily driven by a $1.504 billion net derivative loss, compared with a $6.902 billion gain in Q1 2020. Management attributed the change principally to market-related valuation movements affecting variable-annuity hedges and liabilities, Shield annuity liabilities, and interest-rate hedges for universal life with secondary guarantees.
- GMLB rider results changed from a $4.374 billion gain to a $353 million loss. Higher interest rates and equity markets had offsetting effects across guarantees, hedges, reinsurance and deferred acquisition costs; hedge losses were a significant unfavorable factor.
- Comprehensive loss was $2.910 billion, including a $2.327 billion other-comprehensive-income loss. AOCI fell to $3.389 billion from $5.716 billion, primarily reflecting lower unrealized investment gains.
- Adjusted earnings rose $174 million year over year, led by improved net investment spread and fee income. Management also reported higher DAC/VOBA amortization and expenses.
- The company repurchased $68 million of common stock in the quarter and authorized up to an additional $200 million of repurchases in February. It reported $212 million remaining under the repurchase program at March 31. No common-stock dividend was planned at the time of filing.
Outlook, risks and contingencies
- Outlook and capital targets: The filing provides no specific earnings or revenue guidance. Management stated it believed liquidity was sufficient for business needs under current conditions and certain stress scenarios. Targets include debt-to-capital of approximately 25% and a combined risk-based capital ratio of 400%–450% in normal market conditions; actual quarter-end RBC was not stated here.
- Market and pandemic risks: COVID-19’s duration and economic effects remained uncertain. Interest rates, equity markets, credit spreads, policyholder behavior and derivative performance can materially affect results, liquidity and capital. Management reported that a 100-basis-point rise in interest rates would affect estimated fair values by $7.4 billion, down from $8.7 billion at year-end.
- Investment and liquidity exposures: Mortgage-loan borrowers with debt-service forbearance and not making payments represented $250 million at quarter-end. Securities-lending cash collateral liabilities were $3.3 billion, including $907 million on open arrangements that could require next-business-day return. The company reported over 99% of mortgage loans as performing.
- Legal and other contingencies: Estimated reasonably possible litigation losses, in excess of accruals, were up to approximately $10 million where estimable. Separately, reasonably possible non-litigation losses were up to approximately $125 million, primarily related to reinsurance disputes; some matters could not be estimated. Two cost-of-insurance class actions are described, including a suit filed in April 2021. The company said adverse outcomes could affect particular reporting periods.
- Commitments and subsequent events: Unfunded partnership, bank-credit-facility and private-bond commitments totaled $2.0 billion; mortgage-loan commitments were $279 million. After quarter-end, the company reported $700 million issued under a new funding-agreement-backed notes program, $500 million of FHLB funding agreements, and $25 million of Farmer Mac funding agreements. It also repurchased an additional $49 million of shares through May 6.
- Accounting: The company was evaluating the long-duration insurance contract standard, effective for fiscal years beginning after January 1, 2023, and could not yet estimate its financial-statement impact.
Important facts for investors to verify
- How much of the GAAP loss and revenue volatility reflects hedge-accounting and valuation timing versus changes in underlying economics, and how hedging effectiveness is evolving.
- Whether improved adjusted earnings—particularly the limited-partnership contribution—are sustainable, and how lower reinvestment yields affect future spreads.
- Current statutory RBC, capital available for holding-company needs, and the basis for management’s liquidity and capital targets.
- Developments in COVID-related mortgage modifications, reinsurance disputes and class actions, including any changes to loss estimates or reserves.
- Post-quarter funding-agreement issuance, share repurchases and rating outlook developments, and their implications for liquidity, leverage and capital flexibility.