Brighthouse Financial, Inc. — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021. Amounts are in U.S. dollars; financial statement amounts are in millions unless noted. Brighthouse is a U.S. life insurer and annuity provider, reporting Annuities, Life and Run-off segments, plus Corporate & Other.
Financial performance and position
| Metric | Q2 2021 | Q2 2020 | First half 2021 | First half 2020 |
|---|---|---|---|---|
| Total revenue | $1,676 | $(922) | $2,614 | $8,063 |
| Net income (loss) | $31 | $(1,991) | $(552) | $2,968 |
| Net income (loss) available to common shareholders | $10 | $(1,998) | $(600) | $2,952 |
| Adjusted earnings, non-GAAP | $435 | $11 | $820 | $222 |
| Operating cash flow | Not reported separately by quarter | $69 | $467 |
Q2 GAAP income before tax was $21 million; a $10 million tax benefit contributed to net income of $31 million. The quarter’s effective tax rate on pre-tax adjusted earnings was 19%. The filing does not present a conventional operating margin measure; GAAP results are significantly affected by market-sensitive derivative valuations.
- Revenue drivers: Q2 net investment income rose to $1,212 million from $652 million, reflecting, among other factors, stronger limited partnership returns. Net derivative losses were $684 million versus $2,653 million of losses a year earlier. For the first half, net derivative losses were $2,188 million versus $4,249 million of gains in 2020.
- Adjusted earnings by segment, Q2: Annuities $338 million; Life $68 million; Run-off $122 million; Corporate & Other loss of $93 million. First-half adjusted earnings were $674 million, $110 million, $198 million and a $162 million loss, respectively.
- Balance sheet at June 30: Total assets $253.9 billion; total liabilities $237.7 billion; total equity $16.2 billion, down from $18.1 billion at year-end 2020. Cash and cash equivalents were $4.9 billion; investments totaled $110.6 billion; long-term debt was $3.436 billion.
- Liquidity and capital: Management reported $3.8 billion of short-term liquidity and $53.3 billion of liquid assets, excluding pledged or committed assets. The company targets debt-to-capital of approximately 25% and a combined insurance-subsidiary RBC ratio of 400%–450% in normal markets. Actual RBC ratios are not stated in this filing excerpt.
Material changes versus comparable periods
- Q2 common-shareholder results improved substantially from the prior-year quarter’s large loss, while first-half common-shareholder results shifted from $2.952 billion of income in 2020 to a $600 million loss in 2021. The principal driver was volatility in guarantees and hedging derivatives, not a comparable change in underlying adjusted earnings.
- Adjusted earnings increased to $435 million in Q2 and $820 million for the first half. Management attributed the improvement chiefly to higher investment spread, including stronger limited partnership returns, and higher average invested assets; lower yields on reinvested fixed-income proceeds and higher insurance-related costs were offsets.
- Cash from operations declined to $69 million in the first half from $467 million. Investing activities used $4.412 billion, while financing activities provided $5.117 billion, largely reflecting policyholder account deposits and other financing flows.
- Stockholders’ equity fell during the first half, including a decline in accumulated other comprehensive income to $4.596 billion from $5.716 billion and $192 million of share repurchases. Common shares outstanding were 84.2 million at June 30, compared with 88.2 million at year-end.
Outlook, commentary, risks and unusual items
- No specific earnings or revenue guidance is provided. Management said uncertainty around the COVID-19 pandemic and its economic effects remained difficult to forecast, including potential effects on investments, liquidity, capitalization and business targets.
- Market movements can materially affect variable-annuity guarantees, hedges and reported earnings. Management cited equity-market and interest-rate changes, credit-spread movements, policyholder behavior and hedge effectiveness as key sources of volatility. First-half GMLB rider impacts were a $1.286 billion loss, versus a $1.906 billion gain in the prior-year period.
- Investment risks include credit, interest-rate, market-valuation, liquidity, real-estate, currency and external-manager risks. Fixed-maturity investments were 95.6% investment grade at June 30. Mortgage loans were more than 99% performing; $205 million of mortgage loans had debt-service forbearance with borrowers not making payments.
- Litigation reasonably possible losses were estimated at up to approximately $10 million, in addition to accruals. Certain non-litigation contingencies, primarily reinsurance matters, had estimated reasonably possible losses of up to approximately $125 million above accrued amounts; other matters could not be estimated. Unfunded partnership, bank-credit and private-bond commitments were $2.2 billion; mortgage-loan commitments were $646 million.
- Subsequent events: on August 2, 2021, the company authorized up to $1.0 billion of additional common-stock repurchases. A $600 million extraordinary dividend from Brighthouse Reinsurance Company of Delaware to Brighthouse Life Insurance Company received regulatory approval on July 26 but had not been paid as of August 6. The company also established a funding-agreement-backed commercial paper program with a $3.0 billion maximum; $1.7 billion had been deposited by August 4.
- The company expects significant accounting changes from the long-duration insurance contracts standard effective for fiscal years beginning after January 1, 2023, including fair-value measurement for market risk benefits; it had not yet estimated the financial-statement impact.
Important facts for investors to verify
- How much of adjusted-earnings growth is repeatable, given the contribution from limited partnership returns and lower fixed-income reinvestment yields?
- How do market movements and hedge performance affect variable-annuity and Shield liabilities, statutory capital and reported GAAP earnings?
- What are current statutory RBC ratios and the amount of capital available for dividends or repurchases, given the targets disclosed but no actual ratios in this excerpt?
- How are reinsurance disputes, class actions and other contingencies progressing, particularly the estimated losses of up to $125 million for certain non-litigation matters?
- How will the $1.0 billion repurchase authorization, approved $600 million subsidiary dividend and new funding programs affect liquidity, capital and policyholder protections?