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Brighthouse Banks on Cost-Cutting Efforts, High Claims a Woe

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Brighthouse Financial, Inc. BHF is well-poised to benefit from stringent cost-control measures and heavy investments in technology, which in turn, have contributed to margin expansion.

The stock has a VGM Score of B. VGM Score helps to identify stocks with the most attractive value, best growth and the most promising momentum.

The company has a trailing four-quarter positive earnings surprise of 14.38%, on average. Notably, the Zacks Consensus Estimate for 2020 and 2021 earnings is pegged at $8.6 and $10.9 per share, indicating an improvement of 226.9% and 26.6%, respectively, from the year-ago reported figure.

Factors Driving Performance

Robust performance at its Annuities and Life segments continues to drive the life insurer’s top line. Evidently, the company’s revenues have improved 4.8% in first-quarter 2020. The Annuities segment has been benefiting from reduced amortization of deferred acquisition costs (DAC) and lower expenses. Similarly, the Life segment continues to perform well on the back of reduced costs and improved net investment income. We believe that solid performance of both the segments is likely to drive revenues in the days ahead as evident from the Zacks Consensus Estimate for 2020 revenues, which is pegged at $8.1billion, indicating an improvement of 23.5% from the prior-year figure.

Net investment income, which has been contributing significantly to the top line, witnessed a two-year CAGR of 7.8%. Despite the prevailing low interest rates, the momentum continued in first-quarter 2020, reflecting an improvement of 13.4% year over year courtesy of robust asset growth.

Moreover, the company’s cost control measures to boost margins bode well. Brighthouse has started exiting Transition Service Agreements (TSAs) in a bid to reduce costs and aims to exit the remaining TSAs by the next year. It has also been investing heavily in technology infrastructure, which has led to a decline in the company’s establishment costs for quite some time. Notably, this trend continued in the first quarter with establishment costs declining 48.1% year over year. All these initiatives have aided the company’s margins, which improved 3090 basis points (bps) year over year. It also compares favorably with the prior quarter’s negative margin of 11.3%.

Additionally, the company’s improved liquidity position has led to a strong balance sheet. This implies that Brighthouse has sufficient cash reserves to meet its debt obligations. Also, its total debt to total capital of 17.6% remains lower than the prior quarter’s figure of 21.2%.

However, shares of this Zacks Rank #3 (Hold) life insurer have lost 28.7% in a year compared with the industry’s decline of 18.1%. Despite strict cost-control measures, we remain concerned about its high costs related to policyholder benefits and claims, which resulted from increased claim incidence in the first quarter. The company has also temporarily repealed its share repurchase program owing to the COVID-19 pandemic induced market volatility.

Also the present volatility is likely to put the company’s annuity and life sales under pressure. Nevertheless, we believe that the company’s strong fundamentals are likely to drive shares going forward.

Stocks to Consider

Some better-ranked stocks in the insurance space include Fidelity National Financial, Inc. FNF, EverQuote, Inc. EVER and Kemper Corporation KMPR. While Fidelity National sports a Zacks Rank #1 (Strong Buy), EverQuote and Kemper carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Fidelity National is a leading provider of title insurance, specialty insurance and claims management services.It beat estimates in each of the trailing four quarters, with the average surprise being 21.13%.

EverQuote provides online marketplace for insurance shopping, primarily in the United States. It beat estimates in each of the trailing four quarters, with the average positive surprise being 86.7%.

Kemper specializes in property and casualty insurance, life and health insurance products for individuals, families, and small businesses. It beat estimates in each of the trailing four quarters, the average positive surprise being 16.25%.

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Fidelity National Financial, Inc. (FNF) : Free Stock Analysis Report
 
Kemper Corporation (KMPR) : Free Stock Analysis Report
 
EverQuote, Inc. (EVER) : Free Stock Analysis Report
 
Brighthouse Financial, Inc. (BHF) : Free Stock Analysis Report
 
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