Executive Summary / Key Takeaways

• Transformative Acquisition: Brighthouse Financial is set to be acquired by Aquarian Capital for $70.00 per share in an all-cash transaction, signaling a pivotal moment for the company and its shareholders.
• Capital Simplification & Efficiency: The company is actively simplifying its complex hedging strategy for variable annuity (VA) and Shield annuity blocks, transitioning to a standalone approach for new business and a revised strategy for the legacy book, aiming for reduced volatility and improved capital efficiency.
• Robust Sales Performance: Brighthouse Financial continues to demonstrate strong sales in its core annuity and life insurance products, with record Shield annuity sales and growth in life insurance, supported by its distribution franchise and product innovation.
• Solid Financials & Capital Position: Despite past capital strain, the company reported favorable adjusted earnings and maintained its estimated combined Risk-Based Capital (RBC) ratio within its target range, backed by substantial holding company liquidity and a commitment to shareholder returns.
• Competitive Evolution: Operating in a dynamic financial services landscape, Brighthouse Financial leverages its specialized product expertise and "state-of-the-art" technology to compete effectively, even against larger, more diversified rivals, while strategically addressing its scale and legacy liabilities.

A New Chapter for Brighthouse Financial

Brighthouse Financial, Inc. ($BHF), established in 2016 from MetLife's (MET) retail segment and publicly traded since 2017, has carved a niche as a prominent U.S. provider of annuity and life insurance products. The company's core business revolves around its Annuities, Life, and Run-off segments, offering solutions for wealth accumulation, transfer, and income security. This strategic focus has positioned Brighthouse Financial as a specialized player in a competitive industry, emphasizing tailored products and efficient risk management. The company's journey is now entering a transformative phase, highlighted by a definitive merger agreement with Aquarian Capital, announced on November 6, 2025, for $70.00 per share in an all-cash transaction. This acquisition underscores the market's recognition of Brighthouse Financial's underlying value and strategic evolution.

The competitive landscape for Brighthouse Financial is shaped by formidable players such as MetLife, Prudential Financial (PRU), Lincoln National Corporation (LNC), and American International Group (AIG). While these larger, more diversified entities often benefit from greater scale and broader global reach, Brighthouse Financial differentiates itself through a focused U.S. strategy and specialized product innovation. For instance, its Shield annuity product suite, a leader in the Registered Index-Linked Annuity (RILA) market, exemplifies its ability to develop competitive offerings. This specialized expertise, coupled with a strong distribution franchise and "state-of-the-art" operational and technological capabilities, forms a crucial competitive moat. The company's technology supports product innovation and efficient risk management, positioning it as a "premier carrier" capable of driving sales growth and aiming for reduced earnings volatility.

Strategic Evolution: Capital Efficiency and Hedging Innovation

Brighthouse Financial's strategic narrative is deeply intertwined with its ongoing efforts to enhance capital efficiency and simplify its operational complexities, particularly concerning its hedging strategies. Historically, the company managed its variable annuity (VA) and Shield annuity businesses under a combined hedging program. However, as the Shield annuity block grew to approximately 30% of total annuity account value by 2024, achieving a "balanced risk profile" between the two, this combined approach introduced increased complexity and capital strain.

In response, Brighthouse Financial initiated a significant strategic shift. Starting in July 2024, it began hedging new Shield product suite sales on a standalone basis, an approach expanded by year-end 2024 to cover all Shield annuity new business. The company is now developing a separate, revised hedging strategy for its in-force VA and first-generation Shield book, effectively treating it as a closed block. This transition is expected to be completed by the end of September 2025. The core benefits of this strategic refinement are anticipated to be simplification, increased transparency, and more effective management of the business, ultimately leading to "less volatility in our results over time" and better positioning for future regulatory changes, such as the new Economic Scenario Generator (ESG). Management emphasizes that this is a refinement, not a "wholesale change," and the unwavering focus remains on protecting the statutory balance sheet under adverse market scenarios, maintaining substantial protection against market movements.

Complementing its hedging strategy, Brighthouse Financial has also pursued reinsurance initiatives to further improve capital efficiency and unlock capital. In the third quarter of 2024, the company completed a reinsurance transaction for a legacy block of fixed and payout annuities. This was followed by another reinsurance agreement in the fourth quarter of 2024 for a legacy block of universal life and variable universal life products. These transactions are designed to reduce required capital and alleviate new business strain, which has been a significant factor impacting the RBC ratio. Management anticipates that new business strain will be "substantially improved" in future quarters due to the standalone hedging and potential for additional flow reinsurance deals in 2025.

Financial Performance: Resilience Amidst Transformation

Brighthouse Financial's recent financial performance reflects a company in active transformation, balancing growth initiatives with a disciplined focus on capital management. For the nine months ended September 30, 2025, total revenues surged to $5.077 billion, a notable increase from $3.519 billion in the prior year period. Net income available to common shareholders for the same period was $296 million, up from $283 million in 2024. Adjusted earnings, a key management metric, saw a substantial increase of $388 million, reaching $1.403 billion for the nine months ended September 30, 2025, compared to $1.015 billion in the prior year. This improvement was primarily driven by lower net costs associated with insurance-related activities, higher net fee income, and reduced other expenses.

The Annuities segment, a cornerstone of the business, reported adjusted earnings of $950 million for the nine months ended September 30, 2025, despite a slight decrease from $972 million in the prior year. Total annuity sales for the nine months ended September 30, 2025, were $7.8 billion, consistent with the same period in 2023. Shield Annuity sales remained a strong growth driver, reaching a record $5.8 billion year-to-date, a 15% increase over 2023. The Life segment also demonstrated growth, with adjusted earnings of $23 million for the nine months ended September 30, 2025, up from $19 million in 2024, and life insurance sales increasing by 19% to $87 million year-to-date. The Run-off segment experienced a significant increase in adjusted earnings, reaching $494 million for the nine months ended September 30, 2025, a substantial rise from $92 million in the prior year, largely benefiting from the 2025 Annual Actuarial Review (AAR) and related model refinements.

Profitability metrics highlight Brighthouse Financial's operational efficiency. The company's TTM Net Profit Margin stands at 16.11%, with an Operating Profit Margin of 9.55% and an EBITDA Margin of 11.44%. These figures, when compared to competitors, suggest a focused approach to profitability within its specialized segments. For instance, Brighthouse Financial's P/E ratio of 3.91 and P/B ratio of 0.59 are notably lower than those of larger, more diversified peers like MetLife (P/E 14.39, P/B 1.81) and Prudential (P/E 14.43, P/B 1.18), indicating a potential undervaluation relative to its earnings and book value.

The company's liquidity position remains robust, with holding company liquid assets at approximately $1.0 billion as of September 30, 2025. This strong liquidity supports its capital management strategy and its commitment to shareholder returns. Brighthouse Financial has a consistent history of returning capital to shareholders through common stock repurchases, having reduced shares outstanding by over 50% since August 2018. The company repurchased $102 million of common stock year-to-date through Q2 2025, with $441 million remaining under its Board-approved program.

Outlook and Guidance

Brighthouse Financial's forward-looking strategy is anchored in maintaining a strong capital position and driving profitable growth, even as it prepares for its acquisition. The company's target combined RBC ratio of 400% to 450% in normal market conditions remains a key financial objective. Management anticipates remaining within this range at year-end 2025 without requiring additional capital contributions to its insurance subsidiaries. Furthermore, the financial plan projects the combined RBC ratio to be "relatively stable over the next few years without additional support from the holding company" , assuming a moderate market scenario.

The ongoing simplification of the hedging strategy for the in-force VA and first-generation Shield block, expected to conclude by the end of September 2025, is a critical component of this outlook. This initiative is projected to reduce earnings volatility and enhance capital efficiency. Management also expects new business strain to be "substantially improved" in future quarters due to the standalone hedging of new Shield business and potential flow reinsurance deals in 2025.

In terms of sales, Brighthouse Financial expects overall flows and surrender activity in 2025 to be at or above 2024 levels, driven by fixed rate annuities coming out of surrender and continued Shield outflows. The company is committed to continuous product innovation and maintaining pricing discipline in competitive markets. Its partnership with BlackRock (BLK) on the LifePath Paycheck (LPP) product is expected to generate additional, albeit uneven, inflows in 2025, expanding its reach into the worksite channel.

Expense discipline remains a core operational focus. While Q1 2025 saw higher-than-run-rate corporate expenses due to non-trendable items, management anticipates expenses to normalize for the remainder of 2025, with a strategic aim to grow revenues faster than expense margins. The company's 3-year financial plan also anticipates cumulative dividends from operating companies to the holding company, reinforcing its commitment to shareholder value. However, the release of long-term statutory free cash flow projections has been delayed, as the completion of the revised hedging strategy for the legacy block is a prerequisite for providing a comprehensive and accurate outlook, with release "not likely to be in 2025" .

Risks and Competitive Headwinds

Despite a clear strategic direction and positive outlook, Brighthouse Financial faces several risks and competitive headwinds. The pending merger with Aquarian Capital introduces inherent uncertainties, including the satisfaction of customary closing conditions and regulatory approvals. Failure to complete the merger could adversely impact the business, potentially leading to a decline in stock price, significant transaction costs, and negative publicity. During the pendency of the merger, contractual restrictions may limit Brighthouse Financial's ability to pursue strategic transactions or other actions that might otherwise be beneficial.

Market risks remain a significant concern, particularly sensitivity to interest rate fluctuations and equity market prices. The company's financial instruments showed increased potential losses from both a 100 basis point increase in interest rates (to $4.80 billion from $4.40 billion) and a 10% decrease in equity prices (to $530 million from $322 million) between December 31, 2024, and September 30, 2025, primarily due to higher derivative balances. While hedging strategies aim to mitigate these, unexpected market movements or basis risk can still impact results. Litigation, including class action lawsuits related to cost of insurance (COI) rates and a data security incident, also presents potential financial and reputational risks, with reasonably possible losses from other contingencies (tax and reinsurance) estimated up to $100 million.

In the competitive landscape, Brighthouse Financial's relatively smaller scale compared to industry giants like MetLife and AIG can lead to higher customer acquisition costs and potentially limit its ability to compete on price in broader markets. While its "state-of-the-art" technology and product innovation in RILA are strengths, larger, more diversified competitors may possess greater resources for digital transformation and faster innovation cycles, potentially eroding market share in growth areas. The company's reliance on specialized distribution channels, while a moat, also presents a concentration risk. Regulatory changes, such as the Corporate Alternative Minimum Tax (CAMT) and California's climate disclosure acts, introduce compliance complexities, though the company does not currently expect a material impact from CAMT or the One Big Beautiful Bill Act (OBBBA).

Conclusion

Brighthouse Financial stands at a pivotal juncture, poised for acquisition by Aquarian Capital, which validates its strategic trajectory. The company's core investment thesis is rooted in its successful transformation from managing complex legacy liabilities to a more simplified, capital-efficient operating model. Through strategic initiatives like the refinement of its hedging program for VA and Shield annuities and targeted reinsurance deals, Brighthouse Financial is actively addressing historical capital strain and aiming for reduced earnings volatility. This operational discipline, combined with a robust distribution franchise and a commitment to product innovation, particularly in its leading Shield annuity suite and growing life insurance business, underpins its ability to generate value.

While competitive pressures and market risks persist, Brighthouse Financial's focused strategy, strong capital position, and disciplined expense management provide a resilient foundation. The anticipated completion of the hedging strategy transition and the outlook for stable RBC ratios, alongside continued shareholder returns, paint a picture of a company optimizing its structure for long-term value. The acquisition by Aquarian Capital serves as a testament to the potential unlocked by these strategic efforts, offering investors a clear path to realizing value from Brighthouse Financial's specialized market position and operational enhancements.