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Investment Thesis: While Brighthouse Financial, Inc. (NASDAQ: BHF) has experienced significant growth in cash flow relative to long-term debt over the past five years, inflation and its effect on net investment income are expected to prove consideration for investors in the future.
In a previous article, I made the argument that Brighthouse Financial could still grow due to strong earnings growth in the Life segment, despite uncertainty due to the effect of inflation on annuity demand. .
So far this year, we’ve seen equities trade flat – having seen significant gains in the second half of 2020 and 2021.
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The purpose of this article is to determine whether the stock could see a further rise – with specific reference to the company’s projected earnings scenarios through 2025.
Performance
Looking at the company’s projected distributable earnings scenarios as announced in March, we can see that the proportion of non-capital value has increased significantly.
Brighthouse Financial Projected Distributable Earnings Scenarios
Given these projections and the impact on cash flow generation, investors will increasingly pay attention to free cash flow growth going forward to determine whether the stock has growth potential going forward. to come.
However, if we look at the price to free cash flow ratio over the past five years, we see that the stock has actually become more expensive on that basis, while free cash flow itself has declined. :
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When looking at cash to long-term debt, we see that this ratio has actually improved over the past five years despite the decline in free cash flow:
| 2017 | 2018 | 2019 | 2020 | 2021 | |
| Cash and cash equivalents | 1857 | 4145 | 2877 | 4108 | 4474 |
| long-term debt | 3612 | 3963 | 4365 | 3436 | 3157 |
| Cash to long-term debt | 51.41% | 104.59% | 65.91% | 119.56% | 141.72% |
Source: Figures from Brighthouse Annual Financial Reports (2017-2021). Cash to long-term debt ratio calculated by the author.
That being said, it is worth considering the nature of this cash flow growth. For example, here is an overview of the growth in premiums as well as net investment income compared to total expenses over the past five years.
| 2017 | 2018 | 2019 | 2020 | 2021 | |
| Premiums | 863 | 900 | 882 | 766 | 707 |
| Net investment income | 3078 | 3338 | 3579 | 3601 | 4881 |
| Total expenses | 7457 | 7976 | 7606 | 9922 | 7350 |
| Bonuses for total expenses | 11.57% | 11.28% | 11.60% | 7.72% | 9.62% |
| Net investment income to total expenses | 41.28% | 41.85% | 47.05% | 36.29% | 66.41% |
Source: Figures from Brighthouse Annual Financial Reports (2017-2021). Ratios calculated by the author.
Looking at the above, we can see that premiums relative to total expenses have actually declined over the past five years, while net investment income relative to total expenses has increased. In addition, when we look at the components of net investment income, we see that the majority is made up of fixed-maturity securities:
Brighthouse Annual Report 2021
In this regard, the growth trajectory of net investment income will significantly depend on inflation and the extent to which inflation might affect the value of fixed income securities, which the company itself points out as a risk in the latest annual report: “During periods of inflation, the value of fixed income investments may fall, which could increase realized and unrealized losses.”
Looking forward
Going forward, inflation will likely play a big role in determining how well Brighthouse Financial sees earnings and cash flow growth from here.
As mentioned, inflation could have a significant impact on net investment income if higher rates reduce the value of fixed-maturity securities (depending on the extent to which the company has hedged its portfolio to benefit from rising interest rates). ‘interest). Regarding premiums, it is also possible that customers will increasingly demand higher value annuity and life insurance products to accommodate the higher cost of living due to inflation. .
This is expected to significantly increase competition among insurance providers for these industries as customers increasingly seek out the best deals. In addition, inflation may also increase the cost of claims in the future and the premiums collected may not be sufficient to cover such claims. As such, growth in net investment income will be increasingly important to fund future claims.
Conclusion
To conclude, inflation is likely to be a significant concern for investors going forward. Specifically, cash flow growth as well as the company’s ability to have net investment income that tracks inflation are likely to be key determinants of the stock’s trajectory from here.
