Brighthouse Financial, Inc. — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. Unaudited consolidated results; dollar amounts below are in U.S. dollars.
Business context
Brighthouse provides annuity and life insurance products. It reports Annuities, Life and Run-off segments, plus Corporate & Other. Management uses adjusted earnings, a non-GAAP measure, to assess underlying performance; it excludes certain investment and derivative volatility and other items.
Financial performance and position
- Q3 revenue: $2.512 billion, versus $309 million in Q3 2020. Nine-month revenue: $5.126 billion, versus $8.372 billion. Period comparisons were heavily affected by derivative results.
- Net income available to common shareholders: Q3 profit of $361 million ($4.37 basic EPS), versus a $3.012 billion loss ($32.49 per share) a year earlier. Nine-month loss was $239 million ($2.80 per share), versus a $60 million loss.
- Adjusted earnings: $450 million in Q3 versus a $689 million loss; $1.270 billion for nine months versus a $467 million loss. Q3 adjusted earnings were broadly flat in Annuities ($385 million versus $387 million), higher in Life ($110 million versus $76 million) and Run-off ($38 million versus a $1.139 billion loss), and lower in Corporate & Other (loss of $83 million versus $13 million).
- Investment income: Net investment income was $1.281 billion in Q3 versus $996 million, and $3.680 billion for nine months versus $2.564 billion. Higher partnership returns and invested assets contributed; management also noted that reinvestment yields on fixed-income assets were lower than the portfolio average.
- Derivatives and investment gains: Net derivative gains were $56 million in Q3, compared with losses of $1.857 billion. For nine months, net derivative losses were $2.132 billion, versus gains of $2.392 billion. Net investment losses were $16 million in Q3 and $36 million for nine months. These market-sensitive items materially affected GAAP earnings.
- Cash flow: Operating activities provided $644 million for nine months, versus $515 million. Investing activities used $9.665 billion and financing activities provided $9.021 billion; cash and cash equivalents were $4.108 billion at both period-end and year-end 2020.
- Balance sheet and debt: Total assets were $254.691 billion, up from $247.869 billion at year-end 2020; total equity was $16.096 billion, down from $18.088 billion. Long-term debt was $3.436 billion, unchanged. Policyholder account balances rose to $63.748 billion from $54.508 billion.
- Liquidity and capital: Company-wide short-term liquidity was $3.8 billion and liquid assets were $55.2 billion at quarter-end. Parent and certain non-insurance subsidiaries reported $1.5 billion of short-term liquidity. Management targets debt-to-capital of approximately 25% and a combined RBC ratio of 400%–450% in normal markets. These are targets, not a specific earnings forecast.
- Margins: The filing does not present a single conventional operating margin measure; it reports segment adjusted earnings and investment yields. The nine-month adjusted net investment income yield was 5.12%, versus 3.91% in 2020.
Material changes and management commentary
- The 2021 annual actuarial review updated assumptions including policyholder behavior, mortality, expenses and earned rates, with the largest impact in universal life with secondary guarantees. The review reduced pre-tax income available to shareholders by $147 million for the nine months, including $105 million within adjusted earnings.
- Nine-month GAAP results were pressured by market-related changes in guaranteed minimum living benefit riders and interest-rate hedges. Management cited higher interest rates, favorable equity markets and narrowing credit spreads as drivers of unfavorable fair-value changes in several guarantees and hedges. Favorable adjusted earnings partly offset these items.
- Common-stock repurchases totaled $341 million for nine months. The company authorized an additional $1.0 billion program in August, on top of a prior $200 million authorization; $939 million remained at September 30. The filing says there were no current plans to pay common dividends.
- Management said it believed liquidity was sufficient for business needs in current conditions and certain stress scenarios, while cautioning that adverse markets could reduce access to liquidity or increase its cost. COVID-19’s duration and effects remained uncertain. No specific full-year earnings guidance is provided in the supplied filing text.
Risks, contingencies and unusual items
- Market, interest-rate, equity, credit-spread, liquidity and currency movements can materially affect investments, policy liabilities, derivatives and reported earnings. Variable-annuity guarantees and the effectiveness and cost of hedging are significant sources of volatility.
- The investment portfolio included $87.074 billion of available-for-sale fixed maturities; 95.3% were investment grade. Mortgage loans totaled $18.267 billion net of allowance, and more than 99% were classified as performing. Credit, commercial real estate and pandemic-related borrower risks remain relevant.
- Reasonably possible litigation losses, in excess of accruals, were estimated at up to approximately $10 million for matters that could be estimated. Certain other matters could not be estimated. For reinsurance-related non-litigation contingencies, the reasonably possible excess loss range was zero to approximately $250 million; some other reinsurance matters were not estimable.
- The company adopted no new accounting standards during the period. Long-duration contract guidance is scheduled to take effect for fiscal years beginning after January 1, 2023; management had not estimated the impact. It expects fair-value accounting for variable-annuity guarantees classified as market risk benefits to be a significant change.
- Cash collateral under securities lending was $4.539 billion at quarter-end, including $1.620 billion on open arrangements that could require next-business-day return. Management notes potential liquidity pressure if significant collateral must be returned in stressed or illiquid markets.
Most important facts for investors to verify
- How much of reported earnings and equity volatility reflects market-sensitive derivatives and guarantee valuations versus recurring adjusted earnings.
- The assumptions and future effects of the 2021 actuarial review, particularly for universal life secondary guarantees and variable-annuity benefits.
- Statutory capital and RBC levels, subsidiary dividend capacity, and the sustainability of reported liquidity under stress; the filing’s stated RBC range is a target.
- Developments in reinsurance disputes and other contingencies, including the disclosed possible loss range of up to $250 million for estimable reinsurance matters.
- Progress and funding of the share-repurchase authorization, and any change in the company’s common-dividend plans.