Life insurance sales fell 88 to 3 million as

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Life insurance sales fell 88% to $3 million as Brighthouse discontinued sales of whole life and certain term life products. The company expects life insurance sales to remain at similar levels over the next 12 to 18 months as it restructures this business. On a GAAP basis, the company reported a net loss of $67 million or $0.56 per share due to derivative losses; however, this was an improvement from a loss of $349 million in 1Q17. Lastly, net investment income rose to $817 million from $782 million. However, on an adjusted basis, investment income declined by $33 million to $825 million due to the absence of derivative income in the current quarter. Along with earnings, management provided 2018 adjusted EPS guidance of $8.50-$9.00, below our prereporting estimate of $9.01. Management also expects mid- to high single-digit annual EPS growth going forward. BHF is a large variable annuity company and must hold sufficient assets to satisfy contracts in the event of severe market losses. In particular, it must have 95% confidence that the assets held will be sufficient to meet its annuity obligations in a worst- case scenario — what the industry terms a “conditional tail expectation 95” (CTE 95). BHF would like to have a buffer of $3.0 billion above the CTE95 level before it begins to return capital to shareholders.
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M ARKET D IGEST - 3 - During the quarter, BHF grew its variable annuity assets above CTE95 to $2.7 billion from $2.6 billion in the previous quarter due to effective hedging. On the 1Q call, CEO Steigerwalt stressed that satisfying the CTE95 threshold was not nearly as important as obtaining clarity on proposed variable annuity guidelines before buybacks could resume. He expects the National Association of Insurance Commissioners, the governing body for these rules, to reach a decision by the fall. Based on these factors, we believe that stock buybacks are more likely to begin in 2019 or 2020 than in 2018. Brighthouse Financial was spun off from MetLife in August 2017 through a distribution of 96.8 million BHF shares, which represented 80.8% of MetLife’s interest in the company. Under the terms of the transaction, MetLife shareholders received one Brighthouse share for each 11 MetLife shares held. In connection with the separation, in June 2017, the company issued $1.5 billion of 3.7% notes due 2027 and $1.5 billion of 4.7% notes due 2047. BHF distributed the proceeds to MetLife in partial payment for the assets transferred to Brighthouse by MetLife. Brighthouse plans to boost its operating results by focusing on particular market segments, including “secure seniors” (retirees or near retirees ages 55-70 with at least $500,000 in investable assets), “middle-aged strivers” (active workers focused on paying bills, reducing debt and protecting family wealth), and “diverse and protected,” (active purchasers of insurance products despite lower income and investible assets than the other two segments). It also plans to lower costs, simplify its product offerings, and shift to an independent distribution network from a captive sales force.
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