Fitch Downgrades Brighthouse Financial, Inc.; Outlook Stable
May 31, 2017 by Fitch Ratings
Fitch Ratings-Chicago-31 May 2017: Fitch Ratings has downgraded the Insurer Financial Strength (IFS) Ratings of Brighthouse Life Insurance Company (BLIC) and New England Life Insurance Company (NELIC) to ‘A’ from ‘A+’. Fitch has also downgraded the expected Issuer Default Ratings (IDRs) of Brighthouse Financial, Inc. (Brighthouse) and Brighthouse Holdings, LLC (Brighthouse Holdings) to ‘BBB+(EXP)’ from ‘A-(EXP)’. The Rating Outlook is Stable.
The downgrade of Brighthouse’s ratings reflects deterioration in the company’s projected capitalization metrics relative to Fitch’s expectations and management targets for such metrics as disclosed in registration documents filed by Brighthouse, specifically around the funding of assets in support the company’s variable annuity business, consolidated financial leverage and the overall levels of statutory capital. The company’s previous ratings reflected an expectation of more stability in these metrics under normal market conditions, particularly in light of changes in the company’s hedging strategy and a lack of operating history as a stand-alone company.
Brighthouse is a holding company recently formed to ultimately house a substantial portion of MetLife’s former Retail segment, which the company announced on Jan. 12, 2016, would likely be separated through public offering of shares in an independent, publicly traded company, a spin-off, or a sale. In a registration statement on Form 10 originally filed with the SEC on Oct. 5, 2016, Brighthouse disclosed that MetLife intends to distribute at least 80.1% of Brighthouse’s common shares to MetLife’s common shareholders in 2017.
Brighthouse Holdings is currently an intermediate holding company subsidiary of MetLife, Inc. (MetLife) but is expected to ultimately be a direct subsidiary of Brighthouse. BLIC and NELIC are expected to comprise the vast majority of Brighthouse’s operations upon completion of the separation transaction, and will be direct subsidiaries of Brighthouse Holdings.
KEY RATING DRIVERS
The expected IDRs assigned to Brighthouse and Brighthouse Holdings reflect standard notching under Fitch’s rating criteria. Fitch expects Brighthouse to manage consolidated financial leverage between 20% and 25%, interest coverage between 10x and 11x and holding company liquidity at approximately 18 months of interest and dividend expense. The expected IDR also relies heavily on an acceptable form of support such as a guarantee from MetLife prior to completion of the separation transaction.
BLIC and NELIC currently remain operating subsidiaries of MetLife but will be Brighthouse’s primary insurance operating companies upon separation. Their current ratings reflect recent operating performance and management targets related to capitalization upon completion of the separation, as well as changes in their overall business profile within Brighthouse.
Management targets related to run-rate capitalization included in an amendment to its registration statement on Form 10 filed with the SEC on April 17, 2017 include an intention to maintain financial leverage at approximately 25% and maintain certain levels of assets supporting Brighthouse’s variable annuity business, including a significant ‘buffer’ of approximately $2 to $3 billion in excess of CTE95. This level of buffer is designed to absorb higher capital volatility owing to modifications in the company’s hedging program relative to the program previously in place.
This level of financial leverage is moderately higher than, and the capital buffer is moderately lower than, Fitch’s original ratings expectations. The combined RBC ratio of the statutory entities that will operate within Brighthouse was approximately 525% at yearend 2016 and is expected to remain above that of similarly rated peers. Fitch expects the company to operate near this level under normal conditions for the foreseeable future.
Brighthouse’s ratings continue to reflect the company’s very strong operating scale and strong risk-management capabilities. The business that will be contained within Brighthouse represents approximately 25% of MetLife’s current total assets, which places Brighthouse as a top 12 U.S life insurer. The ratings also consider the company’s above-average exposure to market-sensitive variable annuity and universal life with secondary guarantee businesses, which could negatively impact risk-based capitalization and earnings in an adverse market scenario.
Fitch believes that further seasoning as a stand-alone company while maintaining a strong capitalization profile would ultimately reflect positively on the company’s credit profile.
RATING SENSITIVITIES
Brighthouse Financial’s expected IDR relies heavily on an acceptable form of support such as a guarantee from MetLife being in place prior to the company’s issuance of material indebtedness should it occur prior to the full legal separation.
The ratings of Brighthouse Holdings and its rated insurance operating subsidiaries, BLIC and NELIC, also assume a generally uneventful execution of Brighthouse Financial’s legal separation from MetLife. Significant adverse developments related to the separation could have negative implications for the ratings.
In the near term, a significant decline in management’s strategic target for its CTE 95 capital buffer at separation could lead to a downgrade.
Longer-term, Fitch will apply its Prism capital model to Brighthouse Financial when sufficient information becomes available, which is likely to be in 2017. A Prism capital score below ‘Strong’ could cause Fitch to reassess its view of Brighthouse Financial’s capital strength, which is supportive of the rating.
Additional downgrade sensitivities include a financial leverage ratio exceeding 28%, or a significant deterioration in profitability.
The primary upgrade sensitivity would include establishment of a track record of strong operating performance, risk management and reasonable stability in capitalization following the company’s separation from MetLife.
FULL LIST OF RATING ACTIONS
Fitch has downgraded the following ratings:
Brighthouse Financial, Inc.
–Expected IDR to ‘BBB+(EXP)’ from ‘A-(EXP)”.
Brighthouse Holdings, LLC
–Expected IDR to ‘BBB+(EXP)’ from ‘A-(EXP)’.
Brighthouse Life Insurance Company
New England Life Insurance Company
–IFS to ‘A’ from ‘A+’.
The Rating Outlook is Stable.
Contact:
Primary Analyst
Bradley Ellis, CFA
Director
+1-312-368-2089
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
Secondary Analyst
Douglas L. Meyer, CFA
Managing Director
+1-312-368-2061
Committee Chairperson
Keith M. Buckley, CFA
Managing Director
+1-312-368-3211
Media Relations: Hannah James, New York, Tel: + 1 646 582 4947, Email: hannah.james@fitchratings.com.
