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BrightHouse Declines 46% YTD: Will Low Rates Continue to Hurt?

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Brighthouse Financial, Inc. BHF is being severely hit by high debt burden and slashed interest rates, following the coronavirus outbreak.

Shares of this Zacks Rank #3 (Hold) life insurer have lost 45.9% on a year-to-date basis compared with its industry’s decline of 34.5%. The Zacks Consensus Estimate for the company was revised 9.8% downward over the last 30 days for current-quarter earnings.

Will Low Interest Rates and High Debt Levels Create Headwinds?

The COVID-19 pandemic had compelled the Federal Reserve in the United States to slash interest rates to 0-0.25% to stimulate the economy. The low interest rate environment has been creating headwinds. Notably, lower interest rates often make life insurance products unattractive and result in lower premium generation.

The resortment to zero-interest rates is expected to dent top-line growth of most life insurance companies in the United States and Brighthouse is no exception. The company, being a life insurer, derives a substantial portion of its revenues in the form of premiums from its members.

Adding to the woes, its exposure to products like fixed deferred annuities, which guarantee a minimum return, is likely to hurt BrightHouse in the lower interest rate environment. When interest rates are lowered, it increases the value of the guaranteed liabilities for the company.

Moreover, net investment income has contributed to the company’s top-line growth. In 2019, adjusted net investment income moved up nearly 7% year over year. However, the current low interest rate environment is likely to keep investment yields under pressure, which would consequently weigh on the company’s overall investment income.

Additionally, the life insurer continues to suffer from high debt levels, which raise financial risks. Long-term debt increased 10.1% in 2019. Its debt-to-equity ratio of 26.9% also compares unfavorably with the industry’s 13.2%.

Notably, the life insurer’s trailing 12-month return on equity (ROE) of 6.6% is lower than the industry’s 15.1%. This reflects the company’s inability to utilize shareholders’ funds.

We believe that such headwinds are likely to dent the company’s growth prospects going forward.

Stocks to Consider

Some better-ranked stocks in the same space are American Equity Investment Life Holding Co. AEL, Primerica, Inc. PRI, and FGL Holdings FG. While American Equity Investment currently sports a Zacks Rank #1 (Strong Buy), Primerica and FGL Holdings carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

While American Equity Investment and Primerica surpassed earnings estimates in each of the trailing four quarters by 53.4% and 3.7%, respectively, FGL Holdings outpaced earnings estimates in three of the trailing four quarters by 15.7%.

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American Equity Investment Life Holding Company (AEL) : Free Stock Analysis Report
 
Primerica, Inc. (PRI) : Free Stock Analysis Report
 
Brighthouse Financial, Inc. (BHF) : Free Stock Analysis Report
 
FGL Holdings (FG) : Free Stock Analysis Report
 
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