BHF - Brighthouse Financial

[JRM]

I noticed Einhorn has BHF as a 14% position in his equity portfolio, so I gave it a closer look.  There are some good write-ups out there, but the basic premise is this:

 

-forced spinoff from MetLife to avoid SIFI designation (too big to fail)

-runoff annuities to be replaced by new products.

-discount P/B

-current price is lower than Einhorn's cost basis

-will return capital to shareholders starting in 2020 after building a larger cash buffer

 

It seems like they should also enjoy the advantages of rising interest rates that other financials will see.

 

Has anyone else taken a look at this?

[Spekulatius]

I actually think I would be more comfortable buying this stock, when Einhorn were short. His track record with life insurance is bad - he lost quite a bit of money in Delta Lloyd.  I don’t think he or his analysts understand the business very well.

 

BHF ticks some value boxes. Tangible book is 2x the current stock price (>$100/share), adjusted earnings are $8-9/ share according to management.  But I am not sure what these adjusted earnings are worth, because GAAP earnings so far were consistently very negative.

 

BHF should benefit from higher interest rates,  it they also have quality to a bit of interest rates hedges in place, so I am not sure when and how this works out. We could potentially looking at huge book value losses there, but I don’t understand their hedge book well. Their equity is ~$14.5 and their balance sheet it $225B total, so the notional leverage is 15.5x.

 

I have seen that they replace their traditional annuities with Shield annuities, which require less hedging and transfer more risk to the policy owners, but I also wonder how attractive these Shield annuities are in today’s enivonrment. Also, most of their book are still under the old structure and will take decades until they are run off.

 

My other concern is that MET actually knew what they were doing when they spun this off and created a toxic dump of undesirable assets, that will blow up when they are not liable any more for fraud-full conveyance.

[JRM]

I never like to look at adjusted EPS or EBITDA numbers, but I think it makes some sense with a spinoff that is experiencing one-off charges related to becoming a standalone company (establishment costs).  That's according to the CFO during the last conference call.

 

The fact that they are hoarding cash ($3 billion by 2020 above CTE95 levels) makes me think management feels less secure about their book than what they otherwise indicate.  Now is the time to manage it, though. 

 

Ultimately this is a spinoff and a company in transition.  I don't think its possible to understand the entire balance sheet for a large financial like this.  I guess that's where a margin of safety comes in if you can find a reason for why a margin of safety should exist at all.

[Lakesider]

My understanding is they are hoarding cash due to upcoming VA reform. I inferred they were eager to get that sorted and start returning capital.

 

 

[CorpRaider]

Ditto on that understanding.  I put it on watch list.  Mentioned it a little in one of my Einhorn posts.

[JRM]

The following was included in a recent MetLife press release:

 

MetLife intends to divest its shares of Brighthouse Financial, Inc. common stock as soon as practicable and is considering a variety of transactions to do so. The company expects to complete the divestiture prior to the end of 2018 and does not expect the structure of any such transaction to affect its plans to repurchase shares of MetLife, Inc. common stock in 2018.

[crastogi]

The following was included in a recent MetLife press release:

 

MetLife intends to divest its shares of Brighthouse Financial, Inc. common stock as soon as practicable and is considering a variety of transactions to do so. The company expects to complete the divestiture prior to the end of 2018 and does not expect the structure of any such transaction to affect its plans to repurchase shares of MetLife, Inc. common stock in 2018.

 

So one should be on the lookout for more selling pressure?

[CorpRaider]

Barron's article pitching LNC, which I used as the comp in my quick post about BHF.  BHF = ditto; even cheaper, probably a slicker product with the Shield Annuities...but more hair due to spin off financials, inability to return capital for a bit longer, and lack of clarity regarding MET's reserve disclosures of late.  Looked at LEAPs on BHF.  Premiums seem high.

 

Probably won't do anything....getting infected with this quality, high ROIC, moat stuff from watching all these Berkshire videos.  haha.

[Foreign Tuffett]

MET sure was in a hurry to offload its BHF shares, even with the shares at 52 week lows. I interpret this as either (1) MET being uninterested in maximizing shareholder value or (2) MET being convinced BHF is an absolute garbage barge of poorly underwritten variable annuities.

 

https://www.brighthousefinancial.com/newsroom/brighthouse-financial-inc-announces-secondary-common-stock-offering/

 

Here's a solid Seeking Alpha article that lays out some of the possible risks of their large variable annuity book (no affiliation with the author).

 

https://seekingalpha.com/article/4179284-brighthouse-financial-attractive-short-market-hedge

 

BHF is such a black box, and there are so many long tail risks....I've been unable to ascertain if it's a good deep value opportunity, or a disaster waiting to happen.

[JRM]

With so many companies buying back shares at 52 week highs it doesn't seem too surprising to see MetLife selling BHF at 52 week lows.  Perhaps they know something insightful, maybe they are just in a hurry to reduce debt and buy back shares.

 

With BHF raising $3 billion of cash above the required CTE95 level, my first thought was the book is garbage; at least for a little while.

[Spekulatius]

I don’t like current setup with BHF, where the seller (MET) knows much more than we do. Then there is Einhorn owning a position, which is basically a leper touch.

 

I have done well with NN.AS, which was a spinoff from ING, but forced from the Dutch government. That was a much better setup, since it means that very likely the book were clean. My contrary experience was Delta Lloyd (also owned by Einhorn), which was IPO’d from AV, similar to the BHF spinoff from MET.

[mwtorock]

this is in the too hard pile for me. it got my attention when greenlight disclosed large position. with my limited actuary knowledge and discussions with actuary analysts in the industry, i still dont have any confidence in whether the reserves are conservative enough to cover tail risks. only thing i achieved is probably to exclude it from my circle for all that time i put in.

[Spekulatius]

Pretty balanced article from someone who is short BHF

https://seekingalpha.com/article/4179284-brighthouse-financial-attractive-short-market-hedge

[JRM]

A short thesis on BHF has also popped up on my non-member version of VIC.  It looks like the authors could almost be the same based on the similarity of the content as the Seeking Alpha article.  The short thesis seems pretty simple:

 

1. Interest rate and 10-year market return assumptions are overly aggressive and will not be met if there is a recession.

2. MetLife was using this spin-off to dispose of toxic assets similar to GE's Genworth Financial.

 

If BHF was trading at 2X BV then I'd say this may make sense as a short.  I'm not sure how you short BHF at .4 P/B unless you expect this to be a 0 by 2020. 

 

As I read the press release closer I see that MetLife is transferring its 19% equity position in BHF for debt held by Goldman Sachs, Morgan Stanley, Wells Fargo, and JP Morgan.  To me this looks like the banks are the sophisticated party and are taking advantage of impatient management at MetLife.

 

I like the fact that management has flexibility because they are not committed to a capital return program. They should be able to maintain an adequate capital buffer unless things really get bad.

[bbarberayr]

Ratings Agencies believe BHF has Strong Ability to pay claims, so not likely going to be a 0 - https://www.brighthousefinancial.com/content/bhf/admin/microsites/bhf-events/financial-ratings.html?campaign=701f1000001ny8v

 

But ambest, for example, states "Brighthouse’s future operating performance is correlated highly to the equity markets and the level of interest rates", so weaker stock markets and low interest rates will hurt their performance, if you think that is a likely scenario.

 

You can read the details of these ratings by creating a free account at the ratings company web site.

[Spekulatius]

Ratings Agencies believe BHF has Strong Ability to pay claims, so not likely going to be a 0 - https://www.brighthousefinancial.com/content/bhf/admin/microsites/bhf-events/financial-ratings.html?campaign=701f1000001ny8v

 

But ambest, for example, states "Brighthouse’s future operating performance is correlated highly to the equity markets and the level of interest rates", so weaker stock markets and low interest rates will hurt their performance, if you think that is a likely scenario.

 

You can read the details of these ratings by creating a free account at the ratings company web site.

 

The question is if the rating agency’s know BHF really that well. The problem is not just weaker stock market, it is the issue that in a typical down market stock markets are weak and volatility goes up. Higher volatily can really hurt because  it makes it more expensive to hedge. They also cause interest rates to go down, which doesn’t help either.

[bbarberayr]

The ratings agencies are generally quite could at evaluating life and P&C companies and have been doing so for around 100 years - this is unlike the evaluations of the brand new products prior to the financial crisis.

 

from https://www.insurancejournal.com/magazines/mag-coverstory/2004/05/17/42616.htm

 

Both A.M. Best and S&P support the quality of their ratings with studies that calculate insolvency rates for insurers by rating level. S&P’s Dreyer pointed out that of 20 insolvencies among property/casualty insurers during 2003, 14 were unrated and the remaining six carried vulnerable ratings. Backing up another two years reveals that at the start of 2001 S&P rated nine of the failed insurers, six in the vulnerable range and three at BBB, the lowest secure rating.

 

At press time A.M. Best had another insolvency report in the works, and in March of this year published a slightly different study that looked at impairments of insurance companies. Because the definition of impairment is broader than insolvency or default, the study methodology may be better attuned to the needs of ratings users because it measures events that disrupt an insurer’s operations but do not necessarily result in failure to make timely payment on all financial obligations. The results indicate that 0.06 percent insurers in the highest rating group (A++ and A+) became impaired within one year. The impairment rate for this group does not reach 1percent until six years after the rating assignment, and is only 4.65 percent 15 years later. Comparable numbers for companies rated D are 7.2 percent at the end of one year, and 50.94 percent 15 years down the road.

[Spekulatius]

^ Great Data - thank you bbarberayr.

 

Also , an alternative to BHF is the recently IPo’d EQH, which also owns a majority stake in AB (asset manager). I think it may come with less baggage, but also has a lower discount to book value.

[Spekulatius]

With so many companies buying back shares at 52 week highs it doesn't seem too surprising to see MetLife selling BHF at 52 week lows.  Perhaps they know something insightful, maybe they are just in a hurry to reduce debt and buy back shares.

 

With BHF raising $3 billion of cash above the required CTE95 level, my first thought was the book is garbage; at least for a little while.

 

Well, the stock is now almost 10% lower than after the secondary. Looks like the banks are stuck with bad paper. At some point, this ought to become interesting. I wonder what Einhorn is thinking- just another blunder. He really doesn’t seem to be good with insurance, just look at GLRE.

[Foreign Tuffett]

With so many companies buying back shares at 52 week highs it doesn't seem too surprising to see MetLife selling BHF at 52 week lows.  Perhaps they know something insightful, maybe they are just in a hurry to reduce debt and buy back shares.

 

With BHF raising $3 billion of cash above the required CTE95 level, my first thought was the book is garbage; at least for a little while.

 

Well, the stock is now almost 10% lower than after the secondary. Looks like the banks are stuck with bad paper. At some point, this ought to become interesting. I wonder what Einhorn is thinking- just another blunder. He really doesn’t seem to be good with insurance, just look at GLRE.

 

I wouldn't compare the two situations. On a personal level, Einhorn has almost certainly benefited from the permanent capital GLRE has provided for his fund. 

[Lakesider]

Down to nearly $40. I've added a small amount to my position today.

 

Einhorn can't do anything right at the moment. listening to his rational when he opened the position it sounded like he was betting that the markets would do better than expected, Analysts focusing on the downside and ignoring the upside.

 

The market volatility should be good for VA sales, if yields keep trending upwards the expected ROE should increase. They are still in a transitional phase that so far seems to be going fine so far. I'm not losing sleep over my position yet, when they start to return capital the stock price might stabilise.

 

 

 

 

[Foreign Tuffett]

BHF is giving new life to the phrase "drop it like it's hot", as the market can't seem to sell it down fast enough.

[Lakesider]

I was way to eager to get into this at about $47, I defiantly accumulate my positions too quick and don't leave enough room to average down. I think i need to read read that section in margin of safety.

 

Bought a small bit at $40 

[walkie518]

I was way to eager to get into this at about $47, I defiantly accumulate my positions too quick and don't leave enough room to average down. I think i need to read read that section in margin of safety.

 

Bought a small bit at $40

 

If Metlife sold BHF only to avoid SIFI designation (as in there was no cherry-picking of assets to stay in or leave Met), the underlying value of the business will likely look like Met's and should trade at the same multiples

 

assuming the loans are good and there's nothing on the balance sheet to discount other than DAC, back-of-the-envelope, BHF could be trading with a $8B market cap

 

what I don't understand is why Met didn't find a better way to dump the assets at such a discount?

 

[Lakesider]

They have decided to start using some capital buying back stock. VA sales up 42%, reaffirmed full year guidance.

 

Looks cheap