Insurance and annuity provider Brighthouse Financial (NASDAQ: BHF) missed Wall Street’s revenue expectations in Q2 CY2025, with sales falling 2.9% year on year to $2.15 billion. Its non-GAAP profit of $3.43 per share was 21.8% below analysts’ consensus estimates.

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StockStory’s Take

Brighthouse Financial’s second quarter results were met with a negative market reaction, as both revenue and non-GAAP earnings fell short of Wall Street expectations. Management attributed the underperformance primarily to lower alternative investment income and a higher average severity of insurance claims, which reduced underwriting margins. CEO Eric Steigerwalt described the period as one of “continued focus and execution on our strategic priorities,” but acknowledged headwinds, particularly in the company’s alternative investment portfolio and fluctuating mortality experience. The company also emphasized ongoing efforts to manage expenses and maintain a strong capital position, with CFO Ed Spehar noting, “second quarter adjusted earnings were approximately $60 million below our quarterly average run rate expectations.”

Looking ahead, Brighthouse Financial’s guidance is shaped by the ongoing transition of its hedging strategy for variable annuities and Shield products, as well as continued attention to capital generation and risk management. Management described this shift as a move toward simplification and greater transparency, with expectations that the revised approach will reduce earnings volatility over time. CFO Ed Spehar cautioned that the impact of these changes on future results is still being evaluated, stating, “we need to complete these initiatives before we’re in a position to provide an outlook for future results.” The company also pointed to steady progress in expanding its distribution through partnerships like BlackRock’s LifePath Paycheck product and reiterated its commitment to disciplined expense management.

Key Insights from Management’s Remarks

Management pointed to a mix of operational factors impacting the quarter, with alternative investment returns and claims severity weighing on profits even as annuity sales remained solid. The company’s ongoing hedging transition and capital initiatives were also top of mind.

• Hedging strategy overhaul: Brighthouse made significant progress on separating its hedging approach for variable annuities and Shield products, aiming for greater transparency and more effective risk management. Management expects this to simplify financial reporting and reduce result volatility over time.

• Alternative investment drag: Weaker returns from the alternative investment portfolio led to a material shortfall in non-GAAP earnings, as the yield in the quarter was well below the company’s long-term expectations. Management reiterated its target return range of 9% to 11% per year, but noted that short-term fluctuations are to be expected.

• Claims severity increased: Higher average severity of insurance claims, particularly in the Life and Run-off segments, negatively impacted underwriting margins. CFO Ed Spehar noted severity was about 18% above normal, with two-thirds of the impact in Life and one-third in Run-off.

• Strong annuity and life sales: Despite profitability pressures, Brighthouse reported robust annuity sales, including $1.9 billion in Shield product sales and $33 million in life insurance sales for the quarter. Management highlighted continued demand and pricing discipline amid competitive market dynamics.

• Capital and liquidity focus: The company maintained its target risk-based capital (RBC) ratio and kept holding company liquid assets above $900 million, underscoring a continued emphasis on capital strength. Management also pointed to ongoing expense discipline and a cautious approach to shareholder returns, with buybacks paused after May pending further board action.

Drivers of Future Performance

Brighthouse’s outlook is anchored by its hedging transition, efforts to boost near-term capital generation, and ongoing product sales momentum, while acknowledging several industry headwinds.

• Hedging transition completion: The full implementation of separate hedging for variable annuities and Shield blocks is expected by the end of September. Management believes this will bring simplification, transparency, and help limit future earnings volatility, though the precise financial impact remains under review.

• Capital efficiency initiatives: The company is exploring reinsurance opportunities and other capital-focused strategies designed to enhance near-term capital generation, even if it means some tradeoff in long-term cash flows. Management emphasized protecting the “franchise value” of new business while seeking ways to unlock capital.

• Competitive and regulatory environment: Brighthouse continues to face strong competition in annuities and life insurance, as well as regulatory complexities around capital adequacy and dividend capacity. Management noted evolving frameworks for reserves and capital, with ongoing dialogue with regulators regarding extraordinary dividends and capital actions.

Catalysts in Upcoming Quarters

In the coming quarters, the StockStory team will closely watch (1) the completion and operational impact of Brighthouse’s revised hedging strategy for its major annuity lines, (2) progress on capital efficiency initiatives such as reinsurance and any resumed share buybacks, and (3) continued sales performance in annuity and life products amidst industry competition. Updates on regulatory developments and the company’s evolving approach to capital management will also be key markers of execution.

Brighthouse Financial currently trades at $45.20, down from $46.18 just before the earnings. Is there an opportunity in the stock?See for yourself in our full research report (it’s free).

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