Brighthouse Financial Upsizes its Share Repurchase by $750 Million – Buyback Wednesdays

Brighthouse Financial, a Fortune 500 company with over 2 million customers and $230 billion in total assets, is one of the largest providers of annuities and life insurance in the U.S. The company is a buyback machine, repurchasing over 40% of its outstanding stock over the last 4 years.

Brighthouse Financial, Inc. (BHF): $52.34

Market Cap: $3.36B

EV: $10.16B

Key Insights

• Brighthouse Financial was spun out of MetLife (MET) in 2017 and has managed to grow revenue at a stable rate since then despite challenging market conditions.
• Post spin, BHF has been gradually shifting its product mix to offer simpler variable annuities, which are easier to manage and reduce complexity.
• The company’s management has significant industry experience and prefers share repurchases over dividends.
• Q3 adjusted earnings in the annuities segment were 58% higher than last year’s corresponding quarter.

In 2017, MetLife separated its U.S. retail business from its operations, creating the independent entity known as Brighthouse Financial. It began trading on the Nasdaq on August 7, 2017, under the symbol BHF. Upon completion of the separation, MetLife retained a 19.2% stake in the company. Eric Steigerwalt, who currently serves as BHF’s CEO, previously held the position of EVP in MetLife’s U.S. Retail segment.

BHF has 2 million plus annuity contracts and life insurance policies in force. Through its insurance company subsidiaries, BHF is licensed to issue life insurance and annuity products in all 50 states.

The company is organized into three segments: Annuities, Life and Run-off. The annuities segment is a crucial part of BHF’s business, constituting around 72% of the total Assets Under Management (AUM). Annuity products include variable annuities, index-linked annuities (shield), fixed deferred annuities, and income annuities. An indexed annuity is a type of annuity contract that provides returns linked to the performance of a particular market index. It has a greater potential upside than a traditional fixed contract, with less risk than a variable annuity. The value of a variable annuity is based on the performance of an underlying portfolio of sub-accounts selected by the annuity owner. Variable annuities offer possibility of higher returns and greater income than fixed annuities, but there’s also a risk that the account will fall in value.

Hedge funds and other institutional investors own 82.83% of the company’s stock. David Einhorn’s Greenlight Capital had a stake in the company and recently increased it to represent 8.74% of the portfolio.

Source: InsideArbitrage

Following its spinoff, Brighthouse Financial’s share price exhibited considerable volatility, hitting a low of approximately $16 per share in March 2020 before bouncing back. Over the past year, BHF’s stock price has been lagging in comparison to the S&P500, witnessing a decrease of 5.7% while the S&P500 saw an increase of approximately 15%.

Source: InsideArbitrage

Hedging Risk

Variable annuities, like those offered by BHF, are subject to market risks that impact their payouts. To mitigate this risk, BHF employs hedging strategies. These strategies involve utilizing various derivatives to counteract equity risk, interest rate fluctuations, and more. While these hedges are designed to offset market fluctuations, challenges may arise due to the customized nature of derivatives and potential timing mismatches. Hence, despite efforts to hedge every risk, uncertainties persist regarding the effectiveness of these strategies in the long term. BHF’s hedges could at some point not perform and leave the firm with a significant loss.

Shift Towards Less Capital Intensive Business

With many financial products, the variable annuities became more intricate, incorporating numerous options to introduce greater variability and customization. In retrospect, certain policies proved challenging to manage, fell short of expected profitability, and required significant capital. This was a key factor in MET spinning out BHF. Additionally, BHF has been taking a practical approach to streamline its product lines. Its main focus has been on its annuity business, and it’s shifting away from complex products, such as variable annuities, to simpler and more attractive options like index-linked annuities and fixed deferred annuities.

In 2016, shortly after the spin, over one-third of its business was capital-intensive variable annuity (VA). Today that is just under one-fourth. They are expected to fall further in 2027. Similarly, traditional VAs are declining from nearly half of the business to just over one-third today. This is because of its simpler annuity (“Shield”) gaining share. Shield is the company’s flagship registered indexed-linked annuity.

Source: BHF (Presentation)

Management

The CEO and CFO have significant industry experience and previously had long tenures at MetLife. We really like the CFO’s experience both as a sell-side equity analyst and in the operational role at MetLife.

Eric Steigerwalt has served as the president and chief executive officer of BHF since the company’s launch in 2016. Before joining BHF, Steigerwalt held multiple leadership roles at MetLife for over 18 years. Steigerwalt began his tenure at MetLife in 1998, managing many of the operational aspects of MetLife’s demutualization and IPO, and went on to become the company’s first head of investor relations.

Edward Spehar was appointed as BHF’s executive vice president and chief financial officer in July 2019. Before joining BHF, Spehar was executive vice president and treasurer of MetLife, where he was responsible for the strategic management of financial resources. Spehar joined MetLife in 2012 as senior vice president and head of investor relations and later served as the chief financial officer of MetLife’s EMEA (Europe, Middle East, and Africa) segment. Spehar had previously spent 23 years as an equity research analyst covering the life insurance industry focused on insurance companies, including 19 years as a sell-side equity research analyst at Bank of America Merrill Lynch.

RBC Ratio

The risk-based capital (RBC) ratio is a method of measuring an insurance company’s capital, taking into consideration its relative size and risk profile, to ensure compliance with minimum regulatory capital requirements set by the National Association of Insurance Commissioners. If the RBC ratio stands at or exceeds 200%, it signifies that no regulatory intervention is necessary. However, if the ratio falls below this threshold, interventions can vary, ranging from the submission of action plans to regulatory takeovers of company management.

BHF’s estimated combined RBC ratio was between 400% and 420% at the end of Q3 2023, which falls within its target range of 400% to 450%. This indicates a strong capital position for the company. To provide context, the average RBC ratio for publicly owned life insurers was 415% at the end of 2022.

Capital Allocation and Share Repurchases

BHF is a share repurchase machine. It has drastically repurchased its shares over the last 4 years, repurchasing around 42% of its outstanding stock over the period. It does not pay a dividend. By repurchasing shares instead of paying dividends, the company gains flexibility in capital allocation and reinvestment choices.

Source: InsideArbitrage

On November 16, 2023, BHF announced the repurchase of up to $750 million of its common stock. The stock repurchase program is in addition to the $1 billion stock repurchase authorization announced by the company in August 2021, under which $71 million remained as of November 15, 2023. This represents around one-fourth of its market cap at announcement. Year-to-date, BHF repurchased approximately $216 million of its common stock, which included $64 million of common stock repurchased in the third quarter.

Valuation

BHF appears undervalued, trading at a notably lower multiple compared to its sector peers. With a Price/Book ratio of 0.84 for the trailing twelve months (TTM), BHF is trading below the sector median’s average of 1.1.

Profitability

The company’s profitability and free cash flow have been volatile and FCF has been declining. Goldman Sachs downgraded BHF to “sell” after the insurer’s projections for long-term statutory free cash flow indicate a slower ramp-up in cash flow than Goldman anticipated. In a note to clients, Goldman analyst Alex Scott wrote, ” The projections indicate a greater growth rate on cash flow is unlikely before years 2029-2033.” 

Revenue has started to rebound after the pandemic to over $7 billion a year, with 2022 revenue reaching $8.4 billion. However, the estimated forward revenue growth is negative 3% which is a concern.

Source: InsideArbitrage

Insider Transactions

Insider transactions at BHF highlight insider’s confidence about the company’s future performance, which is in stark contrast to Wall Street sentiment. Insiders including the CEO and CFO have held the stock by exercising options. A bunch of insiders bought a significant number of BHF shares in March 2020. The last sale of the company shares was in September 2019 when insiders got rid of a small chunk of shares they acquired a month earlier. Click here to view all the insider transactions for the company.

Q3 2023 Results

• Revenue grew 4.5% year over year to $1.17 billion.
• Cash and liquid assets remain robust at $900 million as of September 30.
• RBC ratio was estimated to be between 400% and 420%, which was down from a range of 430% to 450% as of the end of the second quarter. Changes in interest rates and capital requirements associated with new business growth contributed to a reduction in the RBC ratio.
• The company reported adjusted earnings of $326 million, or $4.97 per diluted share, compared with adjusted earnings of $115 million, or $1.61 per diluted share, in the third quarter of 2022. This is mainly due to the combined improved earnings in the annuities and run-off segment.
• Net income for the quarter was $481 million, compared to $415 million in Q3 2022.
• Third quarter year-to-date total annuity sales decreased 30% compared with the same period in 2022, driven by lower fixed deferred annuities. Annuity sales increased 5% sequentially, driven by higher Shield Level annuity sales.
• The Life segment had an adjusted loss of $73 million in the current quarter, compared with an adjusted loss of $34 million in the third quarter of 2022 and adjusted earnings of $15 million in the second quarter of 2023.
• Adjusted earnings in the Run-off segment were $95 million in the current quarter, compared with an adjusted loss of $16 million in the third quarter of 2022 and an adjusted loss of $16 million in the second quarter of 2023.
• Adjusted net investment income was $1.23 billion which increased $327 million on a quarter-over-quarter basis and $8 million on a sequential basis, primarily driven by alternative investment income, asset growth and higher interest rates.
• Statutory combined total adjusted capital (TAC) decreased to approximately $7.3 billion, primarily driven by the impact of the interest rate environment in the third quarter, along with a reduction in admitted deferred tax assets.

Source: BHF (Investor Presentation)

Bottom Line

Brighthouse Financial is caught in a scenario where higher interest rates on bank deposits and treasuries mean retirees have other attractive options beyond annuities and this can be seen in the drop in revenue in the annuities division of the company. On the other hand, the company’s investments are also benefiting from the strong market rally this year and higher rates on fixed income assets. Despite the drop in annuities revenue, earnings are much stronger and this might be the reason management feels bullish about the company.

In addition to share repurchases and insiders not selling their shares, it was good to see that an external institutional investor like Greenlight Capital increased its stake in the company. I look forward to learning more about the company and its drivers for growth before deciding to commit any capital to it.

Welcome to edition 84 of Buyback Wednesdays, a monthly series that tracks the top stock buyback announcements during the prior month. The companies in the list below are the ones that announced the most significant buybacks as a percentage of their market caps. They are not the largest buybacks in absolute dollar terms. A word of caution. Some of these companies could be low-volume small-cap or micro-cap stocks with a market cap below $2 billion.

As third-quarter earnings reports came in, the number of buyback announcements has increased significantly. One hundred and forty companies declared buybacks this month, compared to fifty-five in the previous month.

Top 5 Stock Buyback Announcements 

1. Presidio Property Trust, Inc. (SQFT): $0.92

On November 17, 2023, the Board of Directors of this diversified REIT approved a new $6 million share repurchase program, equal to around 87% of its market cap at announcement.

2. Expedia Group, Inc.  (EXPE): $138.40

 On November 2, 2023, the Board of Directors of this online travel company authorized an additional $5 billion stock repurchase program, equal to around 37% of its market cap at announcement.

3. Aware, Inc. (AWRE): $1.62

On November 30, 2023, the Board of Directors of this authentication company approved an additional $10 million stock repurchase program, equal to around 29% of its market cap at announcement.

4. General Motors Company (GM): $32.68

On November 29, 2023, the Board of Directors of this automobile company announced that it had entered into a new $10 billion accelerated stock repurchase agreement. This represents around 25% of its market cap at announcement.

5. Brighthouse Financial, Inc. (BHF): $52.34

On November 16, 2023, the Board of Directors of this annuity and life insurance provider announced that it has approved an additional share repurchase program for up to $750 million, equal to around 24% of its market cap at announcement.

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