Brighthouse Financial Inc. (NGF: BHF). The stock has declined 6% year-to-date, in part reflecting the impact of the coronavirus. However, the shares have risen more than 125% since the market bottom in March. Ultimately, the company’s results are too inconsistent for us to recommend the shares. We are also less optimistic due to the company’s below-peer-average ROE. While we have a favorable view of the company’s plan to diversify its product offerings and reduce expenses, we are concerned about near-term challenges as it strives to offset the revenue lost from discontinued businesses with newer, more profitable products. We may look to move BHF back to our BUY list if ROE improves or the shares drop back to support near $25.
The beta on BHF is 1.63.
EPS came in well above the consensus forecast of $2.51. Revenue before investment and derivative gains and losses rose 3% to $2.2 billion.
During the quarter, COVID-19-related net claims were approximately $14 million pretax, down from $25 million in 2Q20.
EARNINGS & GROWTH ANALYSIS
Brighthouse reports adjusted earnings in two primary segments: Annuities (70% of 3Q20 adjusted earnings, less notable items), offering variable, fixed, index-linked and income annuities; and Life insurance (22%) offering term life and universal life policies without secondary guarantees. The company also has a Run-Off segment (8%), comprised of products that are no longer actively sold, including company-owned life insurance, bank-owned life insurance and funding agreements.
In the Annuities segment, adjusted earnings were up 66% from the prior year. The increase reflects lower expenses as well as a $102 million favorable note item in 3Q20. Sales of $2.3 billion were up 29%. Annuity net inflows rose 116% from the prior year to $174 million driven by continued strong sales as well as the current market environment in which fewer contract holders have surrendered their policies.
In the Life segment, adjusted earnings were up 81%. The company is committed to broadening its product offerings and increasing its distribution of life insurance products. It is sold through advisors at major financial institutions.
We note that the company reported 3Q adjusted earnings, less notable items, from Run-off business of $33 million. The Corporate & Other adjusted loss was $17 million.
BHF expects to reduce corporate expenses by $150 million on a run-rate basis by the end of 2020 and by an additional $25 million in 2021.
To generate our EPS estimates for the insurance industry, we focus on ROE, which is smoother and more predictable than items such as catastrophe losses and DAC amortization. Brighthouse’s ROE over the past three years has averaged around 8.0%. This is below the low-to-mid-teens rates we see in other insurance and diversified financial services companies. Our estimate implies an ROE of 8% for the year. We look for ROE to improve next year and are boosting our 2021 adjusted earnings, less notable items, estimate to $11.25 per share from $10.28 per share.
We note that Brighthouse Financial’s earnings are somewhat murky, like others in the insurance industry.
FINANCIAL STRENGTH & DIVIDEND
Debt accounted for 18% of total capitalization. BHF’s debt is rated investment grade, with a Baa3/stable rating from Moody’s and BBB+/stable ratings from S&P and Fitch.
The company had an estimated combined risk-based capital ratio between 525% and 545% at the end of 3Q.
We do not expect the company to pay a dividend in 2020 or 2021.
The company does have a share buyback program. On August 24, the company reinstated share repurchasing after suspending buybacks in May due to the pandemic. After the completion of the current repurchase authorization, the company will have purchased $1.1 billion of its common stock.
MANAGEMENT & RISKS
Eric Steigerwalt has served as BHF’s president and CEO since the spinoff in August 2017. Mr. Steigerwalt previously held a range of executive positions at MetLife, which he joined in 1998. Ed Spehar joined BHF as executive vice president and CFO in July 2019 from MetLife, where he most recently served as treasurer. Connor Murphy serves as COO, prior to this role, Mr. Murphy served as CFO for MetLife. C. Edward Chapin is the Chairman of the Board of Directors.
Management is working to diversify its offerings by deemphasizing capital-intensive products, with their greater exposure to equity market risk, in favor of cash flow-generating products. It will also continue to run off less profitable businesses. The company also plans to shift to an independent distribution network from a captive sales force.
It is also targeting mid- to high single-digit annual growth in adjusted EPS, and an 11% ROE by 2021.
BHF investors face risks related to new business strategies and the possibility that they may not achieve the company’s objectives.
BThe company has 1,330 employees. The BHF shares are a component of the S&P 400 Mid-Cap Index
The shares are trading at 0.25-times book value of $133, below the industry average of 1.5. Brighthouse does not pay a dividend, compared to the industry average yield of 2.0%. We believe that these valuation metrics adequately reflect the company’s prospects for solid growth in annuity sales, but also its low return on equity and some confusion on the Street over earnings and the earnings outlook. We may look to move BHF back to our BUY list if ROE improves or the shares drop back to support levels near $25.
On November 25, HOLD-rated BHF closed at $37.61, down $0.70.