Brighthouse Financial, Inc.

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 4/5

Brighthouse Financial is a major annuity and life insurance provider in the U.S., offering a variety of retirement income and life insurance products.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview: Brighthouse Financial (BHF), spun off from MetLife in 2017, primarily focuses on annuities and life insurance products. It operates as an independent, publicly traded company.

  • Revenue Distribution: Brighthouse operates through three main segments:
    • Annuities: This is their core business, accounting for the majority of their revenue, including fixed, variable, and index-linked annuities
    • Life Insurance: Traditional and universal life insurance products.
    • Corporate & Other: Includes the results of holding companies and non-operating activity and other activities.

*Key point: Insurance products have premiums. The longer duration of the policy leads to a longer stream of consistent payments which creates more predictability in revenue.

  • Industry Trends:
    • Aging Population: An aging population in the U.S. is increasing demand for retirement income solutions like annuities, benefiting Brighthouse.
    • Interest Rate Environment: Interest rates have increased over the last few years which has positively impacted profitability for insurance companies, since they earn a return on the investment of the premiums and can charge higher rates for fixed annuity policies.
      • However, a drop in interest rates can potentially hurt profitability of the company.
    • Regulatory Landscape: The financial services industry is heavily regulated, and changes in regulations can affect the cost of operating and their financial results.
    • Technological Advancements: Insurance industry is also being impacted by technology, with companies investing heavily in digitizing their processes to gain advantage in the market.
    • Economic uncertainty: Volatility and recessionary conditions can lead to reduced sales of products.
  • Competitive Landscape: BHF faces competition from other major insurance companies like Lincoln Financial, Prudential, and MetLife. The insurance market is also influenced by new entrants and fintech players. Competitive factors include:
    • Product Innovation: Innovation in products is essential to attract customers by providing differentiated and useful financial products.
      • Brighthouse is actively developing new products, including those designed for retirees.
    • Pricing: Competitive pricing is essential to attract and retain customers, as customers are sensitive to premiums. A price war can impact profitability.
    • Distribution Channels: Effective sales and distribution channels are essential to gain market share and reach the customers across different age group, preferences and location.
      • BHF sells policies both through financial advisors and independent distributors.
    • Brand perception: Creating a solid brand reputation and ensuring that customers believe in its products is an important factor.
      • BHF is a relative newcomer to the market so faces difficulty in building its brand trust in comparison to the old giants.
  • What Makes BHF Different?
    • Focus on Annuities: Unlike some competitors, BHF’s primary focus is on annuities, which means it can specialize in that area, giving them competitive edge through greater expertise.
    • Capital-Efficient Business Model: BHF employs a capital-efficient business model, by using reinsurance and other instruments, allowing it to generate higher returns and lower volatility.
    • Emphasis on Risk Management: BHF has also placed much emphasis on risk management and is therefore less exposed to fluctuations of the market.
  • Financials:
    • Net income: The company has been reporting profits consistently. For 2022, BHF reported net income attributable to common shareholders of $6.585 billion, an increase of 220% compared to the 2021 results, of which $5.191 billion was related to the divestiture of the third-party block of business.
      • For 2023, their Q1 results, while better than Q1 2022, have a decline in earnings ($735M) from 2022 ($1.17B) as interest rates have started to stabilize, thereby reducing profitability. However, the company is forecasting to increase its earnings, for the full year.
      • For Q2 2023, the company reported adjusted operating earnings of $202 million.
    • Revenues: Revenues have been volatile for BHF, especially due to the acquisition of the S&N business, which required extensive restructuring costs.
      • In 2022, revenue increased drastically to $46.2B as a result of the divestiture of the business.
      • For the first half of 2023, revenue was $5.48B which was lower than the $18.2B it saw last year.
    • Return on Capital (ROIC): The company is reporting declining ROIC, which indicates the company is finding it difficult to generate high return from capital. However, the return still is relatively stable and high for the insurance sector.
    • Margins: The company is enjoying good margins, as a result of increased interest rate. However, they are facing increased competition from other insurers and are having a difficult time maintaining their margins.
    • Cash Flows: As stated above, the company’s cash flow is volatile as a result of the nature of the business.

Moat Analysis:

BHF’s moat is 2/5.

  • Intangible Assets (Brands, Patents, Licenses): BHF is a relatively new company and does not have the brand strength compared to other incumbents in the industry. The company relies mostly on financial advisors rather than a known brand to attract customers. It also has very few products that are uniquely patented. As such, the business does not have any substantial moat in intangible assets.

  • Switching Costs: Switching insurance providers is hard for customers as it includes additional paperwork, administrative hassle and increased uncertainty. BHF’s switching costs are not strong, as they face competition from other prominent insurers. BHF does offer a more diverse range of financial products that competitors may not be offering. This creates a small switching cost in the form of customer loyalty which provides a relatively weak and narrow moat.
  • Network Effect: BHF does not benefit from network effects.
  • Cost Advantages: While BHF has been cutting costs to be more profitable, they have no particular cost advantage that is hard to replicate. Therefore, it does not have a cost-based moat.
  • Size Advantage: BHF has a large market cap and is among the top players of the US insurance industry, it is not the largest. Therefore the size-related moat is narrow. * The majority of value is concentrated into a few companies, with a long history in the industry.

Risks to Moat & Business Resilience:

  • Interest Rate Sensitivity: BHF’s profitability is highly susceptible to changes in interest rates. A sharp drop in rates could hurt future profitability. The interest rates have been stable lately after increasing for several months. However, future interest rates are hard to predict, so this remains an inherent risk.
  • Regulatory Risk: Changes in regulations could negatively affect its business model and profitability. Insurance is heavily regulated and is susceptible to new laws and regulations, which could hinder profitability. The company faces constant risks from changes in the regulatory landscape.
  • Economic Downturn: Economic downturns could lead to fewer sales of their products and more policy terminations. This risk applies for most insurance companies.
  • Competitive Pressure: Rising competition from newer and tech-enabled players in the insurance industry can erode market share and margins.
  • Mismanagement and Inefficient Allocation of Capital: Due to the complex nature of financial institutions, mismanagement of the business or bad allocation of capital can lead to a significant destruction in value and/or eventual bankruptcy.
    • The company has been criticized for the high cost structure, which negatively impacts profitability.
  • Financial Volatility: Since most assets are in marketable form, a financial crisis can result in rapid and unexpected drop in assets, which causes significant impact on the financial state of the company.
  • Longevity Risk: Life insurance is inherently exposed to death risk which can lead to reduced payout of claims.

Understandability: BHF’s business model, while not overly complicated, involves multiple financial products and investment strategies, which require a certain degree of financial and insurance knowledge to fully understand.

  • The business model is mostly driven by the value of the assets under management, while the liabilities are very complicated to assess, which is a complex dynamic.
  • Given all this, I will rate the business a 3/5, meaning that the business is complex to some extent.

Balance Sheet Health:

The balance sheet is relatively healthy.

  • Liquidity: BHF maintains strong liquidity, through cash and marketable securities, and is able to meet short-term financial obligations. The company’s available cash is about $7.6B, as of Dec 2022.
  • Capital Structure: Debt and equity are well-balanced, however, BHF uses various derivative instruments to reduce the risk of fluctuating interest rates.
  • Solvency: The company has more assets than liabilities, a positive indication of financial health.

Due to these points, the company receives a 4/5 for financial health.