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What Brighthouse Told Investors About Distribution

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Brighthouse Financial Inc. came fully to life as an independent company Aug. 4, after the completion of an enormous, historic separation from MetLife Inc.

The Charlotte, North Carolina-based issuer of individual life and annuity products has a market cap, or total stock value, of about $6.8 billion.

It reached Sept. 30, the end of the third quarter, with $223 billion in assets.

It generated about $2 billion in revenue in the third quarter, and about $5 billion in revenue in the first three quarters of the year.

Its parent is 149 years old long. If Brighthouse lasts as long, until 2166, it could have policyholders on the Moon. It could invest some of its assets in construction projects that will create structures that will last for thousands of years.

(Related: SEC Clears MetLife to Complete Brighthouse Spinoff)

Brighthouse recently released the first Form 10-Q, or U.S. Securities and Exchange Commission quarterly report, that it has filed with the SEC since the spinoff from MetLife.

A copy of the full report is available here.

The SEC encourages a publicly traded company to use the reports to give investors details about operations, and thoughts about potential risks facing the company.

Here’s a look at some of the observations about financial services product distribution and related matters that Brighthouse made in the third-quarter 10-Q.

1. Brighthouse has one major financial services distribution unit.

Brighthouse Securities L.L.C. is a broker-dealer registered with the SEC, approved as a member of the Financial Industry Regulatory Authority, and licensed as an insurance agency in all required states.

Brighthouse is also the parent of Brighthouse Services L.L.C., an internal services and payroll company that might be involved with explaining various products to the company’s own employees.

2. Brighthouse is watching U.S. Department of Labor actions on the fiduciary rule carefully.

Although the DOL seems likely to postpone implementing the rule, and related guidance, Brightouse has put a long discussion of DOL and Employee Retirement Income Security Act considerations in the 10-Q.

“While we currently believe manufacturers do not have as much exposure to ERISA and the [Internal Revene] Code as distributors, certain activities are subject to the restrictions imposed by ERISA and the code, including the requirement under ERISA that fiduciaries must perform their duties solely in the interests of ERISA plan participants and beneficiaries, and those fiduciaries may not cause a covered plan to engage in certain prohibited transactions,” Brighthouse says.

Brighthouse notes that MetLife, its former parent, sold MetLife’s retail segment to MassMutal to move entirely to an independent, third-party distribution model.

SEC headquarters (Photo: Diego M. Radzinschi/ALM)

(Photo: Diego M. Radzinschi/ALM)

“We will not be engaging in direct distribution of retail products, including [individual retirement arrangement] and retail annuities sold into ERISA plans and IRAs,” Brighthouse says.

Brighthouse is hoping use of the independent distribution model will limit the company’s exposure to DOL regulations, Brighthouse says.

Brighthouse notes that uncertainty surrounding any delays in implementation of the DOL regulations, or about how the regulations might be rewritten or repealed, could create confusion among distribution partners, which could hurt sales.

3. Brighthouse may end up relying more on a relatively small number of big distributors.

The company cites reliance on a relatively small number of distributors as a potential risk.

“Furthermore, such distributions may be subject to differing commission structures depending on the product sold, and there can be no assurance that these new commission structures will be acceptable,” the company says.

The company notes that, in 2016, Fidelity, a company that had accounted for 36% of MetLife’s 2015 annuity sales premium, decided to break up with MetLife.

“Other distributors may elect to suspend, alter, reduce or terminate their distribution relationships with us for various reasons,” Brighthouse says.

If other insurers pay higher commissions or offer more attractive products, that could also hurt, Brighthouse says.

4. Brighthouse worries about the flu.

Brighthouse says a severe pandemic involving influenza or another serious disease could hurt the economy as a whole, and also its own operations.

“In addition, a pandemic that affected our employees or the employees of our distributors or of other companies with which we do business could disrupt our business operations,” the company says. “The effectiveness of external parties, including governmental and non-governmental organizations, in combating the spread and severity of such a pandemic could have a material impact on the losses we experience.”

5. Brighthouse worries about cyber problems.

The company says it relies on computers, including computers used in distribution, that are subject to cyber attacks and other disasters.

“Vendors, distributors, and other third parties, including MetLife, provide operational or information technology services to us,” the company says. “The failure of such third parties’ or MetLife’s computer systems and/or their disaster recovery plans for any reason might cause significant interruptions in our operations and result in a failure to maintain the security, confidentiality or privacy of sensitive data, including personal information relating to our customers.”

Brighthouse has cyber liability insurance that provides both third-party liability and first-party liability coverages, but “this insurance may not be sufficient to protect us against all losses,” the company says. 

—Read Brighthouse Seeks `Sleep-at-Night’ Calm in $79 Billion Portfolio on ThinkAdvisor.

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