Brighthouse Posts $1.3 Billion Q1 Net Derivatives Loss

(Image: Brighthouse)

Brighthouse Financial Inc. is reporting that its operations did well in the first quarter, and that its derivatives lost $1.3 billion in value.

The Charlotte, North Carolina-based company is reporting a net loss of $735 million for the quarter on $691 million in revenue, compared with a net loss of $65 million on $1.8 billion in revenue for the first quarter of 2018.

Brighthouse has reported big swings in derivatives value in the past. It recorded $334 million in net losses on its derivatives in the first quarter of 2018, but $2 billion in net derivatives gains in the fourth quarter of 2018.

Adjusted earnings, which exclude the effects of derivatives value fluctuations and some other gains and charges, fell to $259 million, from $288 million in the first quarter of 2018.

Adjusted earnings amounted to $2.21 per share on a diluted share basis, according to Brighthouse. Securities analysts were estimating that the company would report $2.12 per share in operating earnings, according to Morningstar Inc.

Excluding the effects of fluctuations in the value of investments and derivatives, revenue fell to $2 billion, from $2.2 billion in the year-earlier quarter.

Operations

Brighthouse sells individual annuities and also has large blocks of individual life insurance on its books.

The annuity unit is reporting $295 million in adjusted earnings for the latest quarter on $1.1 billion in adjusted revenue, up from $226 million in adjusted earnings on $1.1 billion in revenue for the year-earlier quarter.

Variable and Shield annuity deposits increased to $1.3 billion, from $1.1 billion.

Fixed annuity deposits increased to $416 million, from $205 million.

Sales of indexed annuities that are classified as fixed annuities increased to $281 million, from $173 million.

The life insurance company's unit is reporting $25 million in adjusted earnings for the latest quarter on $303 million in adjusted revenue, down from $66 million in adjusted earnings on $369 million in adjusted revenue.

What Executives Are Saying

Brighthouse will be holding a conference call Tuesday morning to go over the first-quarter results with securities analysts. Members of the public can listen to the call through the web or over the telephone.

In the earnings announcement, the company noted that it has authorized the repurchase of up to $400 million in Brighthouse common stock, on top of $200 million in stock repurchase capacity created in August.

Eric Steigerwalt, the company's president, said in a statement that Brighthouse delivered solid results in the first quarter, driven by strong annuity sales and favorable market conditions.

"We remain focused on executing our strategy, which we continue to believe will generate long-term value for our customers, partners and shareholders," Steigerwalt said in the statement.

Derivatives

A derivative is a financial security with a value that depends on changes in the value of another asset, pool of assets or financial indicator.

Brighthouse, like many other life insurers, uses derivatives to hedge against the effects of changes in stock prices on the performance of the variable annuities it has issued.

Here's how the S&P 500 stock index has performed in the past five quarters, according to Morningstar, and what happened to the value of Brighthouse derivatives in those quarters, according to figures from the Brighthouse financial supplement:

Q1 2018

S&P 500: -1.2%
Brighthouse derivatives: -$334 million

Q2 2018:

S&P 500: +2.9%
Brighthouse derivatives: -$312 million

Q3 2018:

S&P 500: +7.2%
Brighthouse derivatives: -$691 million

Q4 2018:

S&P 500: -14%
Brighthouse derivatives: +$2 billion

Q1 2019:

S&P 500: 13%
Brighthouse derivatives: -$1.3 billion

Variable annuity derivatives have accounted for most of the derivatives value fluctuations since mid-2018. Brighthouse also uses derivatives to hedge universal life policies with secondary guarantees, according to the company's financial supplement.

Brighthouse does not give details about the reasons behind the recent fluctuations in the value of its derivatives in its earnings announcement press release, its earnings release financial supplement or the advance copy of its earnings call slidedeck posted today on its website.

Life insurers have told regulators in the past that the current accounting rules for derivatives may make the finances of companies using derivatives-based hedging in an effective way look more volatile than they really are. The root of the problem is that, in many cases, users of derivatives must reflect the effects of changes in derivatives value immediately, or "mark them to market," but can reflect the effects of changes in annuity obligations and other liabilities only over time, as the company handles the payments related to those obligations.

Resources

Links to information about the latest Brighthouse earnings, and information about how to listen to the company's earnings call, are available here.

Brighthouse has scheduled its earnings call to start at 8 a.m. Eastern Daylight Time Tuesday. The company plans to stream the call live on the web and post a recording of the call on the web after the call is over.

— Read Brighthouse Posts Variable Annuity Strength Analysis, on ThinkAdvisor.

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