Brighthouse Shows That Net Income Is Having Problems: Earnings

Brighthouse Financial Inc. posted a net loss over $1 billion late Monday — and its share price rose about 12% this morning, to close to $48.

The Charlotte, North Carolina-based life insurer showed that an accounting approach that's supposed to make financial services companies' strength easier to track has instead caused investors to pay less attention to net income.

Resources

The U.S. Securities and Exchange Commission's Fast Search company filing search tool is available here. Enter the company's stock symbol (such as, BHF, for Brighthouse) in the search form to see the official earnings filings.

Brighthouse uses financial instruments called derivatives to limit life insurance and annuity investment risk. Many accounting experts say that financial services companies that use derivatives should include changes in the value of the derivatives in the ultimate measure of how the companies are doing: their net income.

Brighthouse adds changes in the value of its derivatives to its net income every quarter.

The result: Brighthouse investors are now focusing mainly on adjusted revenue and income figures that leave out of the effects of short-term changes in the value of the derivatives.

Brighthouse controls individual life and annuity operations that were once part of MetLife Inc. MetLife spun Brighthouse off as a separate company in 2017.

Eric Steigerwalt, the chief executive officer of Brighthouse, said in a comment about the latest results that annuity sales have been strong, and that the company exceeded its targets for annuity deposits.

The company also launched its first new life insurance product as an independent public company, Steigerwalt said.

"Moving forward, I believe we are well-positioned to continue executing our strategy and further generate value for our shareholders, our distribution partners and the clients they serve," Steigerwalt said.

The Earnings

Brighthouse is reporting a $1.1 billion net loss for the fourth quarter of 2019 on $306 million in revenue, compared with $1.4 billion in net income on $4 billion in revenue for the fourth quarter of 2018.

Those results include $1.9 billion in derivatives losses, compared with a $2 billion gain on derivatives for the year-earlier quarter.

Brighthouse also provided a separate table of adjusted earnings, which excludes the effects of the derivative value swing.

Brighthouse is reporting $265 million in adjusted earnings for the latest quarter on $1.2 billion in adjusted revenue, up from $175 million in adjusted earnings on $1.1 billion in adjusted revenue for the year-earlier quarter.

The Derivatives

A derivative is an arrangement the a value that depends on the performance of some other product or benchmark, such as the S&P 500, or an interest rate benchmark. Some life insurers use derivatives to serve as a form of insurance against changes that could affect the value of investments supporting life insurance and annuity obligations.

Brighthouse has about $1.8 billion in derivatives that protect it and its customers against changes in interest rates, $921 million in derivatives that protect it and its customers against changes in stock prices, and $286 million that protect it and its customers against changes in currency exchange rates, according to a Brighthouse financial supplement for the fourth quarter.

In the latest quarter, most of the drop in the value of the company's derivatives was due to changes in the value of derivatives used to hedge against variable annuity risk.

The variable annuity hedging annuities lost $1.5 billion in value in the latest quarter, after gaining $1.8 billion in value in the fourth quarter of 2018.

Brighthouse said in its earnings release that the value of the variable annuity hedges fell for a good reason: stock prices and interest rates went up, and made the underlying assets inside the annuities do better.

"The value of our hedges, which the company uses to protect its balance sheet against adverse market conditions, decreased, as expected," the company said.

Sales

Here's what happened to some key Brighthouse sales indicators between the fourth quarter of 2018 and the latest quarter:

Total Annuity Sales: $1.6 billion (up from $1.2 billion)
Shield Annuity Sales: $1.2 billion (up from $924 million)
Life Insurance Sales: $12 million (up from $4 million)

Voya Financial Inc. (NYSE:VOYA)

Voya is reporting a $776 million net loss for the fourth quarter on $1.8 billion in revenue, compared with $121 million in net income on $1.9 billion in revenue for the fourth quarter of 2018.

The New York-based company's benefits unit is reporting $50 million in adjusted earnings before income taxes for the latest quarter on $500 million in adjusted revenue, up from $43 million in adjusted earnings before income taxes on $467 million in adjusted revenue for the year-earlier quarter.

The net loss was due mainly to a $1.1 bilion writedown of divested businesses, such as the company's old individual life business and closed blocks of annuities.

Rodney Martin Jr., Voya's chairman, said in a comment on the results that the moves to divest the life and annuity closed blocks will reduce costs, generate new free cash flow, reduce exposure to risk, and simplify the company's structure.

"As of the fourth quarter, we have successfully removed all of the stranded costs associated with the 2018 sale of the majority of our annuities businesses, and we remain on track to achieve run-rate cost savings of at least $250 million by the end of 2020," Martin said. "We will build upon our track record of reducing expenses to also effectively address stranded costs related to the individual life transaction."

Molina Healthcare Inc. (NYSE:MOH)

Molina is reporting $168 million in net income for the fourth quarter of 2019 on $4.3 billion in revenue, compared with $201 million in net income on $4.7 billion in revenue for the fourth quarter of 2018.

The Long Beach, California-based managed care company ended the year providing or administering health coverage for 3.3 million people, down from 3.8 million people a year earlier.

The company focuses mainly on running Medicaid plans and other government plans, but it also sells individual major medical coverage through the Affordable Care Act public exchange system.

The number of people covered by Molina's ACA exchange plans fell to 274,000 at the end of 2019, from 362,000 a year earlier.

— Read Prudential Aims to Cut Stock-Related Annuity Risk: Earnings, on ThinkAdvisor.

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