Brighthouse Buyout Comes Down to One Bidder and Plenty of Doubts

The lukewarm response reflects the challenges that would be inherited by any buyer of Brighthouse. The job would include turning around eroding finances at the company — a 2017 castoff from MetLife — while honoring its more than 2 million life insurance and annuities contracts.

That's a tall task for Aquarian — Brighthouse is more than nine times its size by assets — and some commercial partners that had stuck with Brighthouse since its spinoff are skeptical that the sale would be the best option.

"We wrote business with them when it was MetLife," said Larry Rybka, chief executive of brokerage firm Valmark that has helped place about $80 billion of life insurance with various carriers. "I think, very little business after the spinoff." When news broke that management was looking for a buyer, "we put them on a do-not-sell list."

Aquarian is in advanced talks with Mubadala Capital, Qatar Investment Authority and other investors to raise more than $3 billion to buy Brighthouse, the Financial Times reported. A final offer could come as early as this week.

Aquarian was founded in 2017 by Rudy Sahay, a Guggenheim Partners alum whose previous work was mostly outside the insurance industry. With $26 billion in assets, Sahay is aiming to replicate Apollo's success with Athene, the model for private equity firms that use in-house insurers as ready buyers for private credit products they originate.

Aquarian declined to comment for this article.

Brighthouse was created that same year when MetLife spun off part of its retail business, an effort to reduce its exposure to financial markets by shedding the majority of its variable annuities.

The complex, capital-intensive nature of these products — which saddled MetLife with massive charges — led to perceptions that Brighthouse was the insurer's "bad bank," Wall Street's epithet for poorly performing assets that ought to be divested.

At the time, JPMorgan Chase & Co.'s Jimmy Bhullar said modest growth and subpar profit prospects gave Brighthouse a not-so-bright outlook, which proved prescient. The stock never got a buy rating from more than 20% of analysts covering it at any one time, and the shares have lost almost a third of their value since their debut.

Concerns also arose when the for-sale sign went up and suitors got a closer look at Brighthouse's finances and liability profile, which deterred some from making an offer, according to people familiar with the sale process.

In particular, an actuary report showed that any buyer would have to increase the firm's reserves by potentially billions of dollars, said the people, who requested anonymity to discuss the private process.

Credit Downgrade

Debt grades have slipped, too. S&P Global Ratings cut Brighthouse's issuer credit grade one notch to BBB in July, and its core operating entities to A from A+. To be sure, S&P said Brighthouse's financial risk profile is "very strong," but the firm hasn't "been able to build its life insurance business to a meaningful size" and diversify its earnings base.

Brighthouse is led by Chief Executive Officer Eric Steigerwalt, a MetLife holdover with nearly three decades of experience who has emphasized protecting his firm's balance sheet in adverse markets.

Still, industry experts and Fitch Ratings have cited concern about deteriorating capital at Charlotte, North Carolina-based Brighthouse. Total adjusted capital, or the amount of money available to support the firm's risks, nearly halved in five years to $5.4 billion at year-end 2024.

This brought its combined risk-based capital ratio, a key measure of financial strength closely watched by regulators, to 402% — the low end of the firm's 400%-to-450% target range. Without a $100 million capital contribution from Brighthouse's holding company after the fiscal year ended, the insurance business would have missed its target.

The insurer, whose capital ratio is estimated to stand between 405% and 425% at the end of June, is "committed to prudently managing our balance sheet under a wide range of market scenarios," it said in a statement.

One reason for the capital ratio's erosion is rooted in the firm's book of variable annuities and life insurance policies, whose benefits for customers depend in part on how stock and bond markets perform. Some policies come with guaranteed minimums that cut the risk of significant investment losses for policyholders.

More Reserves

"To me it's gold," said Bruce Friedland, an actuary providing services through Graeme Group, an actuarial consulting firm, and who also owns a policy with Brighthouse. "It's got a reasonable premium and, you know, they're gonna be on the hook for a long time."

For Brighthouse, though, those products require additional reserves in market downturns, which gobbles up capital. Some of the pressure was eased with products that have offsetting risk profiles, and hedges against market gyrations.

But insurance is a long-term business where managers must deal with the impact of decisions made years ago. "It's been pretty complicated to manage," Steigerwalt allowed in an August earnings call.

The firm has been reviewing the way it hedges its policies to cut earnings volatility. To some observers, the moves came too late.

Brighthouse's high exposure to its consumer-friendly insurance policies, along with weak free cash flow and waning capital, "make it more vulnerable to deterioration in macro conditions and uncertain policyholder behavior than other life insurers," JPMorgan's Bhullar said in a note to clients.

This apparently hasn't deterred Sahay's Aquarian. Sahay is a Harvard graduate with a Wharton MBA who started his career as a consultant for the Boston Consulting Group, then worked at investment firms including Guggenheim before co-founding real estate private equity group 54 Madison Partners.

Aquarian previously bought into some smaller insurance firms, starting with Kentucky's Investors Heritage Life Insurance, and Sahay's firm received a $1.5 billion investment from investors including an arm of Mubadala.

The business includes a CLO manager and a private credit fund. There's also a joint venture with Raven Capital to buy $250 million in music rights to songs Sahay described as "underappreciated," such as Meghan Trainor's All About That Bass.

More Transparency

Aquarian's eagerness to clinch a deal in spite of its small size and Brighthouse's complex liabilities could make a merger harder to sustain. In the last stage of the bidding process, Aquarian's offer for Brighthouse surpassed the $3 billion mark, more than what most other suitors were ready to offer, people familiar with the process said.

If no deal emerges, there's a risk that Brighthouse is left independent and that second-half actuarial reviews result in material charges, Evercore analyst Thomas Gallagher wrote in a note.

While that would disappoint Brighthouse shareholders, it wouldn't be the worst-case scenario for policyholders because a listed company gives a bigger window into what's going on at their insurer, according to Rybka.

"When you're a public company, there's a level of transparency," he said. "Private equity-owned life insurance companies are the worst format."

(Credit: ThinkAdvisor)

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