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Analysts cautious as Brighthouse begins trading

Analysts had cautious outlooks for Brighthouse Financial Inc. on its first day on the market after its spinoff from MetLife Inc.

Four analysts initiated coverage of the stock with a "market perform" or "sector perform," while one initiated coverage with "neutral" and another with "sell."

Keefe Bruyette & Woods equity analyst Ryan Krueger initiated coverage of the company at "market perform" with a discounted valuation.

Krueger maintained in a research note that the company warrants a discounted valuation given its variable annuity-heavy business mix, modest near-term capital return, significant cash flow sensitivity to capital markets, below-average return on equity, run-off universal life secondary guarantees block and limited intermediate-term revenue growth.

Because Brighthouse's variable annuity business is its largest segment, representing 65% of its earnings, Krueger wrote that the company is "adequately capitalized" for its current ratings and is "well-hedged" to protect its variable annuity and universal life secondary guarantee blocks against immediate capital market shocks.

"However, the outlook for free cash flow generation and capital return to shareholders is far less certain and highly sensitive to external factors," Krueger wrote.

KBW projects Brighthouse's operating revenues to be roughly flat over the next few years, with annuity outflows offset by assumed market appreciation, a very gradual run-off of the universal life secondary guarantee block, and a slow build in ongoing life insurance production.

For now, Krueger wrote, most of the projected EPS growth is driven by saving costs, as the firm does not expect Brighthouse to repurchase shares until 2020.

Credit Suisse analyst John Nadel initiated the company with a "neutral" rating, writing that the company's upsides and downsides balance.

Nadel said in a research note that his firm believes Brighthouse will be a "highly capital market sensitive stock" that will have the highest beta in the firm's coverage. The company, Nadel wrote, will continue to build capital and will "lack a meaningful component of capital return" for the next few years.

"We believe [Brighthouse] will need to demonstrate the ability to expand its 9% [return on equity] target, which we believe will be below the company’s cost of equity capital," Nadel wrote.

The upside, Nadel wrote, is that Brighthouse's shares can re-rate higher if the company is able to return capital to shareholders prior to 2020. The downside, he wrote, is that negative equity market returns and lower interest rates could result in minimal distributable earnings for the foreseeable future.

In addition, Nadel wrote, the Department of Labor's fiduciary rule could have a negative impact on indexed annuity sales, currently one of the company’s only growth engines.

Credit Suisse's estimates for 2017, 2018 and 2019 EPS are $8.89, $8.70 and $9.15, respectively. Its price target is $71, offering a 10% upside from current levels.

FBR & Co. analyst Randy Binner also initiated coverage of Brighthouse at "market perform." Binner argued that the company's management team, financial disclosures and product developments are "ahead of many peers."

But, Binner wrote, Brighthouse's narrow annuity focus brings "inherent concentration risk" that will keep shares trading at a discount to book value, given his firm's forecast 7.8% operating return on equity in 2017 and 8.1% in 2018.

"If the company can build capital faster than we forecast through a more efficient run-off [or] divestitures, it may enable early buyback," Binner wrote. "This would be a key consideration for us in potentially taking a more favorable stance on the shares, outside of a dramatic move higher/steeper in the yield curve, which would be a huge tailwind."

The firm's price target is $72 based on 8.5x its 2018 EPS estimate of $8.50.

Aug. 7 marked the first day MetLife and Brighthouse traded as two separate companies on two different exchanges. Plans for the separation began in January 2016, in response to economic and regulatory pressure the company was receiving.

After regulatory, shareholder and board approvals, Brighthouse officially spun off, marking an "inflection point" for MetLife, President and CEO Steven Kandarian said in the company's second-quarter earnings call.

Shares of Brighthouse closed at $61.72, down about 4.4% for the day.