Brighthouse Financial(BHF) - 2022 Q2 - Quarterly Report

Part I — Financial Information Consolidated Financial Statements Brighthouse Financial's consolidated statements show total assets decreased to $228.2 billion by June 2022, with Q2 2022 net income rising to $983 million due to net derivative gains Consolidated Balance Sheet Highlights (in millions) | Account | June 30, 2022 | December 31, 2021 | | :--- | :--- | :--- | | Total Assets | $228,211 | $259,840 | | Total Investments | $110,435 | $118,225 | | Separate Account Assets | $88,843 | $114,464 | | Total Liabilities | $217,955 | $243,633 | | Future Policy Benefits | $41,142 | $43,807 | | Policyholder Account Balances | $68,293 | $66,851 | | Separate Account Liabilities | $88,843 | $114,464 | | Total Equity | $10,256 | $16,207 | Consolidated Statement of Operations Highlights (in millions, except per share data) | Metric | Q2 2022 | Q2 2021 | H1 2022 | H1 2021 | | :--- | :--- | :--- | :--- | :--- | | Total Revenues | $3,797 | $1,676 | $6,537 | $2,614 | | Net Derivative Gains (Losses) | $1,733 | $(684) | $2,246 | $(2,188) | | Net Investment Income | $1,061 | $1,212 | $2,212 | $2,399 | | Total Expenses | $2,584 | $1,655 | $4,517 | $3,361 | | Net Income (Loss) Available to Common Shareholders | $957 | $10 | $1,570 | $(600) | | Diluted EPS | $12.77 | $0.11 | $20.62 | $(6.93) | Consolidated Statement of Cash Flows Highlights (in millions) | Cash Flow Activity | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :--- | :--- | :--- | | Net Cash from Operating Activities | $18 | $69 | | Net Cash from Investing Activities | $(5,019) | $(4,412) | | Net Cash from Financing Activities | $5,598 | $5,117 | | Change in Cash and Cash Equivalents | $597 | $774 | Note 1 — Business, Basis of Presentation and Summary of Significant Accounting Policies Brighthouse Financial, a major U.S. annuities and life insurance provider, prepares statements under U.S. GAAP, with ASU 2018-12 expected to materially impact future financial reporting by requiring fair value measurement of variable annuity guarantees - The company operates through three segments: Annuities, Life, and Run-off, and is one of the largest providers of annuity and life insurance products in the U.S.[17] - The upcoming adoption of ASU 2018-12 is expected to have a significant impact, notably reclassifying variable annuity guarantees as market risk benefits (MRBs) measured at fair value. This is anticipated to cause a material decrease in stockholders' equity upon adoption, with the impact being highly sensitive to interest rates[21][23] Note 2 — Segment Information The company evaluates performance via three segments and Corporate & Other using adjusted earnings, which sharply declined to $24 million in Q2 2022, with Annuities remaining the largest segment despite overall asset decreases Adjusted Earnings by Segment (in millions) | Segment | Q2 2022 | Q2 2021 | H1 2022 | H1 2021 | | :--- | :--- | :--- | :--- | :--- | | Annuities | $204 | $338 | $515 | $674 | | Life | $23 | $68 | $49 | $110 | | Run-off | $(164) | $122 | $(148) | $198 | | Corporate & Other | $(39) | $(93) | $(98) | $(162) | | Total Adjusted Earnings | $24 | $435 | $318 | $820 | Total Assets by Segment (in millions) | Segment | June 30, 2022 | December 31, 2021 | | :--- | :--- | :--- | | Annuities | $153,186 | $178,700 | | Life | $21,854 | $24,514 | | Run-off | $30,888 | $37,055 | | Corporate & Other | $22,283 | $19,571 | | Total Assets | $228,211 | $259,840 | Note 3 — Insurance The company's insurance liabilities include significant variable annuity guarantees, with total account value decreasing to $86.4 billion and net amount at risk for death benefits increasing to $15.5 billion by June 2022 due to market downturns Variable Annuity Guarantee Exposure (in millions) | Metric | June 30, 2022 | December 31, 2021 | | :--- | :--- | :--- | | Total Account Value (Death Benefit) | $86,438 | $109,968 | | Net Amount at Risk (Death Benefit) | $15,537 | $6,361 | | Total Account Value (Annuitization) | $46,478 | $59,735 | | Net Amount at Risk (Annuitization) | $6,390 | $5,240 | Life Insurance Secondary Guarantee Exposure (in millions) | Contract Type | Metric | June 30, 2022 | December 31, 2021 | | :--- | :--- | :--- | :--- | | Universal Life | Total Account Value | $5,391 | $5,518 | | | Net Amount at Risk | $66,379 | $67,248 | | Variable Life | Total Account Value | $3,864 | $4,785 | | | Net Amount at Risk | $18,609 | $18,857 | Note 4 — Investments The investment portfolio decreased to $110.4 billion by June 2022, with fixed maturity securities experiencing $6.7 billion in unrealized losses due to rising rates, while net investment income declined from lower limited partnership returns Fixed Maturity Securities Available-for-Sale by Sector (Fair Value, in millions) | Sector | June 30, 2022 | December 31, 2021 | | :--- | :--- | :--- | | U.S. corporate | $33,472 | $39,081 | | Foreign corporate | $10,547 | $11,706 | | U.S. government and agency | $9,607 | $9,307 | | RMBS | $8,343 | $9,259 | | CMBS | $6,714 | $7,282 | | Other | $9,923 | $10,929 | | Total | $78,606 | $87,582 | - Fixed maturity securities had gross unrealized losses of $6.7 billion as of June 30, 2022, a significant increase from $0.5 billion at December 31, 2021, largely due to changes in interest rates and credit spreads[40][47] Mortgage Loans by Portfolio Segment (Carrying Value, in millions) | Segment | June 30, 2022 | December 31, 2021 | | :--- | :--- | :--- | | Commercial | $13,046 | $12,187 | | Agricultural | $4,144 | $4,163 | | Residential | $4,421 | $3,623 | | Total Mortgage Loans (Gross) | $21,611 | $19,973 | - The mortgage loan portfolio remains high-quality, with over 99% of all loans classified as performing at June 30, 2022[60] Components of Net Investment Income (in millions) | Source | Q2 2022 | Q2 2021 | H1 2022 | H1 2021 | | :--- | :--- | :--- | :--- | :--- | | Fixed maturity securities | $742 | $703 | $1,460 | $1,393 | | Mortgage loans | $205 | $167 | $408 | $331 | | Limited partnerships and LLCs | $122 | $350 | $363 | $688 | | Other | $42 | $22 | $71 | $54 | | Total Investment Income | $1,111 | $1,247 | $2,303 | $2,469 | | Less: Investment expenses | $(50) | $(35) | $(91) | $(70) | | Net Investment Income | $1,061 | $1,212 | $2,212 | $2,399 | Note 5 — Derivatives The company uses $98.9 billion in derivatives to manage market risks, generating $1.73 billion in net gains in Q2 2022, a significant reversal from prior-year losses, primarily due to embedded and equity market derivatives Derivative Fair Value by Risk Exposure (in millions) | Primary Underlying Risk | Assets (June 30, 2022) | Liabilities (June 30, 2022) | Assets (Dec 31, 2021) | Liabilities (Dec 31, 2021) | | :--- | :--- | :--- | :--- | :--- | | Interest Rate | $416 | $1,757 | $1,094 | $130 | | Foreign Currency | $697 | $6 | $328 | $47 | | Credit | $7 | $7 | $39 | $1 | | Equity Market | $1,975 | $1,664 | $1,665 | $1,466 | | Embedded Derivatives | $132 | $4,577 | $186 | $8,496 | | Total | $3,227 | $8,011 | $3,312 | $10,140 | - Net derivative gains were $1,733 million in Q2 2022, compared to net losses of $684 million in Q2 2021. The gain was primarily driven by a $2,582 million gain on embedded derivatives[9][90] Note 6 — Fair Value The company measures $171.7 billion in assets at fair value, with 95.6% as Level 2, while Level 3 assets were $2.3 billion and Level 3 liabilities, mainly embedded derivatives, decreased to $4.6 billion by June 2022 Assets and Liabilities Measured at Fair Value (in millions) | Category | Level 1 | Level 2 | Level 3 | Total Fair Value (June 30, 2022) | | :--- | :--- | :--- | :--- | :--- | | Assets | | | | | | Fixed maturity securities | $4,687 | $71,824 | $2,095 | $78,606 | | Separate account assets | $30 | $88,813 | $0 | $88,843 | | Derivative assets | $0 | $3,052 | $43 | $3,095 | | Other | $518 | $471 | $159 | $1,148 | | Total Assets | $5,235 | $164,160 | $2,297 | $171,692 | | Liabilities | | | | | | Derivative liabilities | $0 | $3,429 | $5 | $3,434 | | Embedded derivatives | $0 | $0 | $4,577 | $4,577 | | Total Liabilities | $0 | $3,429 | $4,582 | $8,011 | - The balance of Level 3 net embedded derivative liabilities decreased from $(8,310) million at the beginning of H1 2022 to $(4,445) million at June 30, 2022, primarily due to $3,911 million in total realized/unrealized gains included in net income[123] Note 8 — Equity Stockholders' equity decreased to $10.3 billion by June 2022, primarily due to a $7.2 billion AOCI reduction from unrealized investment losses, while the company repurchased 5.2 million shares for $259 million - The company repurchased 5,152,415 shares of its common stock for $259 million during the six months ended June 30, 2022[134] - As of June 30, 2022, $522 million remained available under the common stock repurchase program[134] - Accumulated Other Comprehensive Income (AOCI) decreased significantly from a gain of $4.2 billion at Dec 31, 2021 to a loss of $3.1 billion at June 30, 2022, mainly due to unrealized losses on investments[135][138] Note 11 — Contingencies, Commitments and Guarantees The company faces litigation with possible losses up to $10 million and other contingencies up to $125 million, while holding $2.4 billion in unfunded commitments for partnership investments and other facilities - The company faces several purported class action lawsuits related to cost of insurance (COI) charges on universal life policies, which it intends to vigorously defend[153] - As of June 30, 2022, the estimated aggregate range of reasonably possible losses for litigation contingencies is up to approximately $10 million[149] - The estimated range of reasonably possible losses for other contingencies, mainly reinsurance-related disputes, is up to approximately $125 million as of June 30, 2022. This is a reduction following a $140 million settlement of a reinsurance matter in Q2 2022[155] - The company had unfunded commitments of $2.4 billion at June 30, 2022, primarily to fund partnership investments, bank credit facilities, and private corporate bond investments[156] Management's Discussion and Analysis of Financial Condition and Results of Operations Management attributes Q2 2022 net income of $957 million to favorable GMLB rider fair value changes, despite adjusted earnings falling to $24 million due to market downturns, while maintaining strong liquidity and continuing share repurchases Executive Summary Brighthouse reported Q2 2022 net income of $957 million, driven by favorable GMLB rider fair value changes, while adjusted earnings decreased to $24 million due to lower equity markets and rising interest rates Financial Performance Summary (in millions) | Metric | Q2 2022 | Q2 2021 | H1 2022 | H1 2021 | | :--- | :--- | :--- | :--- | :--- | | Net Income (Loss) Available to Shareholders | $957 | $10 | $1,570 | $(600) | | Adjusted Earnings | $24 | $435 | $318 | $820 | - The increase in Q2 2022 net income was primarily driven by net favorable changes in the estimated fair value of GMLB Riders due to market factors, including lower equity markets and rising interest rates[167] Results of Operations Consolidated adjusted earnings for Q2 2022 fell to $24 million due to higher insurance costs, lower investment spread, and reduced fee income, with GMLB riders providing a $2.8 billion favorable pre-tax income impact - Q2 2022 adjusted earnings decreased by $411 million year-over-year, primarily due to higher net costs from insurance-related activities, lower net investment spread, and lower fee income[195] - The Annuities segment's adjusted earnings decreased by $134 million in Q2 2022, driven by higher GMDB costs, lower asset-based fees, and higher DAC amortization due to unfavorable market performance[204] - The Run-off segment's adjusted earnings decreased by $286 million in Q2 2022, swinging to a loss, mainly due to lower investment spread, a reinsurance settlement, and higher ULSG liabilities[212] - The performance of GMLB Riders resulted in a favorable pre-tax income impact of $1.8 billion in Q2 2022, a $2.8 billion positive swing from the $933 million loss in Q2 2021, mainly due to favorable changes in Shield liabilities from lower equity markets[220] Investments The company's investment strategy manages credit, interest rate, and market valuation risks, with 96% of its $78.6 billion fixed maturity securities portfolio being investment grade and the commercial mortgage loan portfolio remaining well-diversified - Primary investment risks include credit risk, interest rate risk, and market valuation risk, which are managed through diversification and ALM strategies[224][225] - As of June 30, 2022, 96.0% of the fixed maturity securities portfolio was rated investment grade, compared to 95.4% at year-end 2021[239] - The commercial mortgage loan portfolio had an average loan-to-value ratio of 58% and an average debt-service coverage ratio of 2.2x as of June 30, 2022, indicating a strong collateral position[256] Policyholder Liabilities Policyholder liabilities are significantly impacted by variable annuity guarantees, with the total Net Amount at Risk for death benefits increasing to $15.5 billion by June 2022, managed by a comprehensive derivatives hedging program Variable Annuity Net Amount at Risk (NAR) by Benefit Type (in millions) | Benefit Type | Death Benefit NAR (June 30, 2022) | Living Benefit NAR (June 30, 2022) | Death Benefit NAR (Dec 31, 2021) | Living Benefit NAR (Dec 31, 2021) | | :--- | :--- | :--- | :--- | :--- | | GMIB | $5,368 | $5,923 | $1,809 | $5,056 | | GMWB | $1,626 | $888 | $139 | $680 | | Other Guarantees | $8,543 | $401 | $4,413 | $185 | | Total | $15,537 | $7,296 | $6,361 | $5,921 | Variable Annuity Reserves by Type (in millions) | Benefit Type | June 30, 2022 | December 31, 2021 | | :--- | :--- | :--- | | GMIB | $5,147 | $5,161 | | GMIB Max | $1,158 | $931 | | GMWB | $335 | $424 | | GMDB | $1,712 | $1,535 | | Other | $(10) | $0 | | Total | $8,342 | $8,051 | Liquidity and Capital Resources Brighthouse maintains strong liquidity with $4.0 billion in short-term assets, targets a 25% debt-to-capital ratio and 400-450% RBC ratio, and continues share repurchases, with the parent company relying on subsidiary dividends - The company maintained a short-term liquidity position of $4.0 billion and total liquid assets of $46.1 billion at June 30, 2022[281] - Capital management targets include a debt-to-capital ratio of approximately 25% and a combined risk-based capital (RBC) ratio between 400% and 450% in normal market conditions[282][283] - Through August 2, 2022, the company has repurchased an additional $52 million of its common stock, subsequent to the $259 million repurchased in H1 2022[297] - The parent holding company, BHF, is largely dependent on cash flows from its insurance subsidiaries to meet its obligations. BHF held $1.2 billion in liquid assets at June 30, 2022[303] Quantitative and Qualitative Disclosures About Market Risk The company's market risk exposures remain consistent with prior disclosures, except for a $1.0 billion decrease in interest rate sensitivity to $7.9 billion by June 2022 due to higher prevailing rates - The company's sensitivity to a 100 basis point rise in interest rates decreased by $1.0 billion, from $8.9 billion at year-end 2021 to $7.9 billion at June 30, 2022[318] Controls and Procedures Management concluded disclosure controls were effective as of June 30, 2022, noting ongoing changes from the MetLife transition as material to internal control over financial reporting - The CEO and CFO concluded that disclosure controls and procedures were effective as of June 30, 2022[320] - Ongoing changes related to the separation from MetLife, including new systems and third-party arrangements, are considered material changes to internal control over financial reporting[321] Part II — Other Information Legal Proceedings The company is involved in various legal proceedings, with detailed information available in Note 11 of the financial statements - For details on legal proceedings, refer to Note 11 of the Notes to the Interim Condensed Consolidated Financial Statements[324] Risk Factors There have been no material changes to the company's risk factors since the 2021 Annual Report on Form 10-K - There have been no material changes to the company's risk factors from those disclosed in the 2021 Annual Report[325] Unregistered Sales of Equity Securities and Use of Proceeds During Q2 2022, Brighthouse Financial repurchased 2,753,779 common shares, with approximately $522 million remaining for future repurchases under the program Issuer Purchases of Equity Securities (Q2 2022) | Period | Total Shares Purchased | Average Price Paid per Share | Approx. Dollar Value Remaining (in millions) | | :--- | :--- | :--- | :--- | | April 2022 | 776,371 | $52.59 | $613 | | May 2022 | 881,749 | $48.50 | $570 | | June 2022 | 1,095,659 | $43.77 | $522 | | Total Q2 | 2,753,779 | N/A | $522 | Exhibits This section lists exhibits filed with the 10-Q report, including the new Revolving Credit Agreement, CEO and CFO certifications, and XBRL data files - Key exhibits filed include a new Revolving Credit Agreement from April 2022, Sarbanes-Oxley certifications by the CEO and CFO, and XBRL interactive data files[329]