The stock is off 12 percent from the “when-issued price,” KBW analyst Ryan Krueger said in an Aug. 11 podcast with clients.
He gave a number of reasons for the lag in stock price. They include a business mix that is heavy on variable annuities, no capital return expected until 2020, cash flow sensitivity to capital markets, a life business that is sensitive to runoff interest rates, and below-average return on equity.
Net income and cash flow generation are expected to “meaningfully lag” the company’s definition of operating earnings per share in the next few years as well, Krueger said.
It’s still early days in the life of the company, of course, and no one doubts the company has a solid business plan to secure future growth.
Going Their Separate Ways
Almost overnight, Brighthouse became one of the largest annuity distributors in the country following its separation from MetLife. The new company is backed by $219 billion in assets and is the owner of 2.7 million insurance policies and annuity contracts.
By contrast, MetLife charted an almost opposite story since the Brighthouse spinoff, according to Krueger.
MetLife has become a simpler company.
MetLife’s sensitivity to capital markets has declined, its cash flows appear more robust, its capital returns are expanding through lower expenses, and its “separation-related surprises” are fading into the rearview mirror, Krueger said.
Analysts and competitors are keeping close tabs on Brighthouse as the company takes flight on the wings of independence. What does all this mean for the new company?
Turning Up the Lights
Brighthouse's president and CEO, Eric Steigerwalt, led the company through 18 months of transition. Brighthouse acted decisively to capitalize on market trends.
On Monday, the company announced the launch of a pair of new index-linked, or buffered annuities, called Shield Level Select. This is a single premium deferred annuity with no annual fee.
The buffered annuity products, a hybrid between a variable annuity and a traditional fixed indexed annuity, include a death benefit but don’t come with income riders.
Simplicity is part of a market trend, Novarica consultants Chris Eberly and Harry Huberty wrote this month in a report on the annuity market.
Brighthouse also launched a new fee-based version of the index-linked annuity cousin – Shield Level Select Access Annuity. This product gives financial advisors the option of selling a fee-based version of the Shield Level Select family.
Shield Level Select targets a growing segment of the annuity market known as structured or buffered annuities. This segment is a rare bright spot in a turbulent annuity market that has seen variable annuity sales slump 21 percent in 2016 over 2015.
The Shield Level Select announcements followed on the heels of the July update to the company’s Premier Accumulator Universal Life (PAUL) product.
In May, when Brighthouse was still part of MetLife, the company launched Shield Level 10 annuity, an index-linked single premium deferred annuity distributed by Wells Fargo Advisors.
Shield products offer “market participation and protection,” Myles Lambert, chief distribution and marketing officer for Brighthouse Financial, said in a news release.
Laying Down an Early Marker
Expansion of the Shield line indicates that Steigerwalt and his lieutenants are prepared to lay down an early marker in Brighthouse Financial’s battle with other competitors in the buffered annuity market: Allianz Life and Axa.
Second-quarter sales of Shield portfolio products, meanwhile, rose 28 percent to $570 million compared with the year ago period, the company reported.
Brighthouse said it sold more than $1 billion worth of Shield annuities in the first half of this year. There’s every reason to believe company will want to grow that income stream.
Some insurers like buffered annuities because they don’t require the same reserving levels as traditional variable annuities. Buffered annuities also diversify an insurance company’s risks at a time when interest rates remain low.
Buffered annuities expose policyholders to losses beyond a protection buffer, or shield, offered by the insurer in exchange for higher participation in market gains.
Compared with traditional variable annuities, buffered annuities stick with index allocations, stay away from subaccounts, drop lifetime income riders and commit investors to shorter terms.
Burnishing the Shield
Shield Level Select comes in two flavors, one with a three-year surrender charge and another with a six-year surrender charge.
Surrender charges penalize the annuity holder for canceling the contract before a certain date. This allows the insurer to recoup the commissions paid upfront to advisors.
Analysts expect companies to issue more shorter-term surrender products as longer surrender charge products become harder to justify under a new fiduciary era.
Shield Level Select 3-Year Annuity levies a surrender charge of 6 percent in the first year, 6 percent in the second year and 5 percent in the third year, Brighthouse said.
Shield Level Select 6-Year Annuity charges 7 percent in the first year, 7 percent in the second year, 6 percent in the third year, 5 percent in the fourth year, 4 percent in the fifth year and 3 percent in the sixth year.