Brighthouse Financial, Inc. — 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. This was Brighthouse’s first year as an independent public company following its August 4, 2017 separation from MetLife. The 2017 results include both pre- and post-separation periods; historical combined results and separation-related costs limit comparability with a standalone company.
Business context and financial highlights
Brighthouse provides U.S. annuity and life insurance products through independent distribution partners. Its reporting segments are Annuities, Life, Run-off and Corporate & Other. At year-end, the company had approximately 2.7 million policies and contracts, $224.2 billion in assets, $14.5 billion in stockholders’ equity including AOCI, and $200.6 billion in assets under management.
| Metric | 2017 | 2016 |
|---|---|---|
| Total revenues | $6.842 billion | $3.018 billion |
| Net income (loss) | $(378) million | $(2.939) billion |
| Adjusted earnings, non-GAAP | $920 million | $686 million |
| Operating cash flow | $3.396 billion | $3.736 billion |
| Cash and cash equivalents at year-end | $1.857 billion | $5.228 billion |
| Long-term debt, balance-sheet carrying amount | $3.612 billion | $1.910 billion |
Revenue and GAAP earnings were heavily affected by market-sensitive derivatives: net derivative losses were $1.620 billion in 2017 versus $5.851 billion in 2016. Management attributed the 2017 GAAP net loss primarily to unfavorable derivative changes associated with strong equity markets and rising interest rates. Adjusted earnings excludes substantial market-related items and should not be treated as a substitute for GAAP net income.
Net investment income was $3.078 billion, down from $3.207 billion. The company’s adjusted investment yield was 4.44%, compared with 4.78% in 2016. Fixed-maturity securities totaled $65.0 billion; 95.4% were investment grade. No standalone operating margin figure is clearly provided in the filing.
Material changes versus the prior comparable period
- GAAP net loss improved by $2.561 billion from 2016, while adjusted earnings rose $234 million. The change in GAAP results mainly reflects less severe derivative losses and lower prior-year charges.
- Adjusted earnings by segment: Annuities $1.017 billion, down from $1.152 billion; Life $16 million, down from $26 million; Run-off $104 million, compared with a $539 million loss; Corporate & Other had a $217 million loss, compared with $47 million of earnings.
- Annuity annualized new premium was $434 million versus $458 million. Shield Annuity deposits increased to approximately $2.5 billion from $1.7 billion, while variable-annuity annualized new premium fell to $137 million from $231 million.
- Life annualized new premium, excluding universal life with secondary guarantees, fell to $36 million from $158 million. The company had suspended new sales of participating whole life and certain variable-life policies in 2017.
- Variable-annuity separate-account balances increased to $109.9 billion from $104.9 billion, primarily due to investment performance, despite negative net flows of $8.4 billion.
- The company changed its variable-annuity hedging approach to focus more on statutory capital protection, larger market moves and longer-dated instruments. It held $2.6 billion of assets above its CTE95 target at year-end.
Liquidity, capital and debt
- Combined statutory total adjusted capital was reported at $6.6 billion, with a combined risk-based capital ratio in excess of 600% at December 31, 2017. The filing also reports that each insurance subsidiary exceeded 400%; statutory measures and entity scope differ.
- Consolidated liquid assets were $38.3 billion; consolidated short-term liquidity was $1.6 billion. At the parent and certain non-insurance subsidiaries, liquid assets were $656 million, including $563 million held at the parent.
- Debt included $1.5 billion of 2027 senior notes at 3.70%, $1.5 billion of 2047 notes at 4.70%, and a $600 million term loan due 2019 at LIBOR plus 1.5%. The $2.0 billion revolving credit facility was undrawn at year-end. Book debt is distinct from the $6.305 billion contractual-obligations figure, which includes future interest and uses a different presentation.
- A separate $10.0 billion reserve-financing arrangement supports affiliated reinsurance; it had no drawdowns and $8.3 billion of funding available at year-end. It is not equivalent to unrestricted holding-company liquidity.
- Management’s stated objectives include a debt-to-capital ratio of approximately 25% and maintaining $2–$3 billion of assets above CTE95 in normal markets. The filing gives no formal earnings guidance. It does not anticipate regular common dividends in the near term.
Outlook, commentary, risks and unusual items
- Management is pursuing a simpler product range, independent distribution, expense reduction and outsourcing. It expects phased expense reductions from DXC administration arrangements over the next three to five years; successful execution and timing are uncertain.
- In 2017, the company recorded a $1.1 billion non-cash tax charge related to the separation, substantially offset by a $725 million tax benefit from the Tax Act and a $222 million reduction in its Tax Receivables Agreement liability. Tax accounting remained provisional at year-end. Management expected an adjusted-earnings effective tax rate in the high teens going forward.
- Variable-annuity guarantees expose results and statutory capital to equity markets, interest rates, volatility, policyholder behavior, actuarial assumptions and hedge effectiveness. The company estimated that its variable-annuity target funding level could peak around 2024 under its base case; this is a scenario, not a forecast guarantee.
- The company recorded a $38 million after-tax reserve increase in Q4 related to approximately 14,000 group annuitants who may be owed payments. MetLife administers the affected contracts, and Brighthouse depends on MetLife for information and process changes.
- Other significant exposures include insurer dividend restrictions, ratings downgrades, reinsurance recoverability and counterparty risk, separation and transition costs, dependence on distribution partners and service providers, and potential changes to insurance regulation and variable-annuity reserving rules.
- For litigation where a reasonably possible loss range could be estimated, the aggregate range above amounts accrued was $0–$10 million at year-end. The company could not estimate a range for other matters; it stated that adverse outcomes could affect particular quarterly or annual results.
Most important facts for investors to verify
- Reconcile GAAP losses and derivative-related volatility with adjusted earnings, including the exclusions in management’s non-GAAP measure.
- Review statutory capital and RBC ratios by insurance subsidiary, including the effect of reserve-financing arrangements and any regulatory changes.
- Assess parent-company liquidity and debt-service capacity, including restrictions on dividends from insurance subsidiaries and the terms of the Tax Receivables Agreement.
- Track variable-annuity hedge performance, CTE95 funding, policyholder behavior assumptions and the sensitivity of capital to adverse equity and interest-rate scenarios.
- Monitor sales trends, especially variable annuities and life products, distributor concentration, and whether Shield Annuity growth and planned expense savings are sustainable.
- Follow the resolution of the group-annuitant reserve review, MetLife transition dependencies, reinsurance recoverables and legal or regulatory matters.