AM Best Lowers Brighthouse Financial's Outlook to Negative

AM Best Adjusts Credit Rating Outlook for Brighthouse Financial

AM Best, a renowned credit rating agency, recently made significant updates regarding the outlook for Brighthouse Financial, Inc. and its subsidiaries. The agency has shifted the outlook from stable to negative for the Long-Term Issuer Credit Ratings (ICR), while maintaining the Financial Strength Rating (FSR) at an impressive A (Excellent). Among the rated entities involved are Brighthouse Life Insurance Company, New England Life Insurance Company, and Brighthouse Life Insurance Company of NY, all of which operate as subsidiaries under Brighthouse Financial.

Analysis of Rating Changes

This change in outlook is reflective of a decline in Brighthouse’s operating performance, which has been particularly influenced by the volatile performance of its variable annuity (VA) and registered index-linked annuity (RILA) lines. These segments saw a downturn, indirectly tied to the strong equity market conditions and the intricacies of the company's hedging strategies. This transition marks a shift in how new sales of RILA products are hedged separately from legacy VA products.

Impact of Financial Performance on Ratings

As of year-end 2023, Brighthouse reported a statutory net loss totaling $2.6 billion, worsening the financial landscape further with an additional loss of $1.3 billion by the third quarter of 2024. Such figures raise concerns about the firm's future profitability and stability, which can greatly influence stakeholder confidence.

The Structure of Brighthouse Financial

Brighthouse Financial showcases a diverse array of insurance products, thereby offering considerable geographic and distributional diversification. This broad spectrum is indicative of the company’s approach to risk management, where a comprehensive enterprise risk management (ERM) program is firmly in place. However, lingering negatives from the legacy products inherited from its previous association with MetLife also weigh heavily on its performance.

Capital Adequacy and Risk Management

Recent assessments revealed a significant decline in Brighthouse’s risk-adjusted capitalization, as measured by the Best’s Capital Adequacy Ratio (BCAR). The decline is attributed to adjustments reflecting the net losses suffered in 2023. The company’s total adjusted capital shrank to approximately $5.7 billion in the third quarter of 2024, down from $6.3 billion at year-end 2023. Despite these challenges, Brighthouse has actively expanded its hedging strategies for both new and existing Shield business to buttress its risk-based capital (RBC) ratio.

Long-Term Issuer Credit Ratings Overview

The following Long-Term ICRs have been affirmed with a revised negative outlook:

Brighthouse Financial, Inc.—
— “bbb+” for $1.5 billion 3.7% senior unsecured notes due 2027
— “bbb+” for $615 million 5.625% senior unsecured notes due 2030
— “bbb+” for $1.5 billion 4.7% senior unsecured notes due 2047
— “bbb+” for $400 million 3.85% senior unsecured notes due 2051
— “bbb-” for $375 million 6.25% junior subordinated debentures due 2058
— “bbb-” for $425 million 6.6% non-cumulative preferred stock, Series A
— “bbb-” for $402.5 million 6.75% non-cumulative preferred stock, Series B
— “bbb-” for $575 million 5.375% non-cumulative preferred stock, Series C
— “bbb-” for $350 million 4.625% non-cumulative preferred stock, Series D

Brighthouse Holdings, LLC—
— “bbb-” for $50 million fixed-rate cumulative preferred units, Series A

Brighthouse Financial Institutional Funding I, LLC—
— “a+” program rating

Brighthouse’s Future Prospects

Looking ahead, the strategies Brighthouse has implemented in recent times, such as engaging in reinsurance transactions and adapting its hedging operations, are pivotal to fortifying its balance sheet. This proactive approach aims to stabilize the RBC ratio and ensure a solid foundation in the evolving insurance landscape.

Frequently Asked Questions

What prompted AM Best to revise Brighthouse Financial's outlook?

The change from stable to negative was primarily due to a decline in the company's operating performance, particularly within its variable annuity and registered index-linked annuity segments.

How does Brighthouse Financial's credit rating affect its operations?

The credit rating impacts investor confidence, borrowing capacity, and interest rates on future debt, which are integral to the company's operational strength and growth potential.

What financial challenges is Brighthouse facing?

Brighthouse is grappling with significant net losses and declining capital adequacy, which impact its overall financial health and sustainability.

What risk management measures does Brighthouse have in place?

Brighthouse employs a comprehensive enterprise risk management (ERM) program designed to navigate risks associated with its diverse product offerings and market conditions.

What are the implications of the negative outlook for investors?

The negative outlook may lead to increased scrutiny from investors and tighter conditions around future financing as stakeholders assess the company's risk profile.

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